Banco Santander Chile (BSAC) 2004 Q1 法說會逐字稿

Welcome to the Banco Santander First Quarter 2004 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. Once again that number is 011-562-647-6474. For opening remarks and introductions, I will now turn the call over to Mr. Raimundo Monge. Please go ahead sir.

Okay good morning ladies and gentlemen. Welcome to Banco Santander-Santiago's first quarter results conference call. I am Raimundo Monge, Director of Strategic and Financial Planning. I am joined today by Robert Moreno, Manager of Investor Relations. Thank you for joining us to discuss the bank's first quarter results. Afterwards we will be happy to answer your questions.

In first Q 2004, net income totaled 51,277 million Chilean pesos, increasing 26.6% when compared to first Q 2003. The bank's ROE increased to 20.1% in first Q 2004 compared to 17% in first Q 2003. In the same period the ROE for the Chilean financial system reached 18.1%. The bank's results in the first quarter reflect the shift of the bank away from merger related activities to commercial growth. This was also aided by the recovery of the economy which has fuelled demand for bank products. Loan growth increased significantly in the first Q 2004 with growth in all products and business segments. As of March 31, 2004, total loans, excluding interbank loans, increased 6.5% compared to year-end 2003.

The bank's market share rose from 22.6%, as of December 31, 2003, to 23.3%, a 0.6% gain in the period. This represent that Santander-Santiago was able to capture 57% of the systems new loans during the quarter. Loan growth in high yielding retail segments and products steadily rose in the quarter. Loans in retail banking increased 3.7% since year-end 2003, almost a 16% annualized growth rate with a 4.7% rise in lending to smaller middle size companies. 3.1% increased in loans to middle upper income individuals and 2% increase in the lending of Banefe. Demand for loans by individuals continues to pick up as interest rates have become more attractive and unemployment levels have shown some improvement. The conclusion of the merger related distractions has also led to an improvement in the productivity in the branch network as our commercial team has been able to fully focus on selling and after selling activities. In terms of products, high yield loans grew significantly in the quarter. Consumer loans grew 5.6% between March 31, 2004, and year-end 2003, and 13.3% in 12 months. High yield in leasing operations also grew 6.5% since the beginning of the year and 7.5% in 12 months. This better mix is helping to sustain margins in a negative inflation and low interest rate environment. Corporate loans increased 9.9% between the end of the year 2003 and the first quarter of this year. This growth in corporate lending was led by a 28.3% rise in foreign trade related business. Santander-Santiago, a part of Banco Santander Central Hispano, has developed strong competitive advantage in foreign trade business as a result of its international network. The strong growth rate of Chile's export sector has also fuelled growth in the bank's foreign trade business. Total customer funds increased 13% between 4Q 2003 and first Q 2004. Time deposits increased 8.5% since the beginning of the year. The bank is taking advantage of the lower interest rate environment and is increasing the duration of its time deposits with institutional investors, which are also denominated in the Unidad de Fomento U.S. or inflation linked pesos.

Non-interest bearing liabilities grew 15.4% in the quarter. Negative inflation and low interest rates positively impacted the balance of non-interest bearing deposits as clients kept excess liquidity in checking account, especially in retail segments. Mutual funds under management increased 23.4% compared to the end of 4Q 2003 and 50.8% year-on-year. The bank has been proactively encouraging clients to invest in mutual funds instead of short term deposits as mutual funds offer better yields and the bank generate fee income.

Net financial income in first Q 2004 decreased 4.8% compared to first Q 2003. In this same period average earning assets also decreased 4.8%. Net interest margin remained stable at 4.3% despite the unusual negative inflation reported in first Q 2004. As we mentioned before the bank has been actively improving both its assets and liability mix, which has helped to stabilize its net interest margin. As market conditions improve, it is very likely that inflation and interest rate should go back to a more sustainable trend. The bank's success in supporting its net interest margin is also apparent when compared to the net interest margin of the Chilean banking sector. As of March 2004, the bank has increased to 30 basis points the positive differential in net interest margin as compared to the rest of the market. This positive GAAP is higher as compared to the bank's main competitors. Asset quality improved in the quarter. Positive loans at March 31, 2004, decreased 10.6% compared to December 31, 2003. As a result the coverage ratio improved to a 104.8% compared to 99.1% at the end of last year.

The evolution of total provision expense net of loan loss recoveries reflected the improvement in asset quality. Decreasing 41% compared to first Q 2003. The decrease in loan provisions was also due to the higher level of provisions recognized in that quarter as a result of the amortization of credit risk criteria carried out last year as part of the merger integration process. The 25.2% rise in loan loss recoveries reflects the bank's effort to improve its collections procedures. As we mentioned in our last press release the bank recognized, reorganized, and reconsolidate its recovery departments. The bank's net fee income rose 4.1% compared to first Q 2003. The bank has been focusing in usage fees during the last year. As a consequence mutual funds increased 27% compared to first Q 2003, while insurance brokerage fees rose 82.9%. The launching of new products and innovative marketing campaigns have positively impacted the sale of these two [lines] of products. Approximately 84% of the bank's retail clients do not have insurance product and even [inaudible] percentage so that we have a mutual funds indicating a strong growth potential for these products and loans in our current client base. In the first Q 2004 fees from contingent loans operations increased above 30% compared to first Q 2003 in line with our renewed focus in this operation.

Operating expenses decreased 2.9% in first Q 2004 compared to first Q 2003. Personnel expenses decreased 1.4% and administrative expenses fell 6.5%. The main driver of this positive evolution of the Bank's costs are the savings and synergies produced by the merger. The efficiency ratio improved to 43.2% in first Q 2004 compared to 45.8% in first Q 2003. The bank is in the process of externalizing certain functions of its systems management to Altec, Grupo Santander’s in [inaudible] systems management company for Latin America located in Chile. These new contracts will benefit the bank in various ways, especially by generating further cost savings compared to standalone situation due to larger economies of scale and improving our quality of service and the time to market of our products. In first Q 2004, the bank also has been increasing its leading distribution capabilities in order to sustain future growth. In 2004 the bank expects to open up to 13 new branches in Banefe, and up to 15 new braches in the bank. At the same time, has hired a 120 new account officers for their system branch network as well as a 150 more people in Banefe's sales force, and is doing a major overhaul, of its call center to increase its selling functions.

In conclusion, the first quarter 2004 marked change of pace for the bank. The renewed focus on commercial activities and the stronger economy has positively impacted the bank's commercial activity. Loan growth in retail business has been steadily rising and should continue to be moderate for the growth in coming quarters. The bank has continued to devise ways to increase the profitability of its corporate and retail banking business through innovative ideas and strong competitive advantage in those segments. This growth has been achieved without sacrificing our asset quality standard which should -- which should be improved in the quarter leading to lower provision expense. The bank continue to keep costs under control, but without sacrifice future growth opportunities and it is also investing in expanding the distribution network at the same time we continue to improve the productivity of our back offices. This has lead -- the bank to begin outsourcing part of the system management, which should allow the bank to grow more efficiently in the future. For these reasons we are confident that Santander Santiago is well positioned for growth in the coming quarters. At this time, we will gladly answer any questions you might have. Thank you.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please signal by pressing "*" "1" on your touchtone telephone. If you are on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again to ask a question, press "*" "1" now. Our first question will come from Juan Partida of Bear Stearns.

Good morning. This is Jason Mollin from Bear Stearns. Juan is sitting here with me. Our first question is related to the loan growth we saw in the quarter and the fact that you stated very clearly that there was a reclassification by the SBIF from lines of credit to consumer or commercial loans. Can you help us by quantifying how much -- what was the amount of lines of credit that was reclassified, so we can actually measure the true consumer loan growth let say quarter-over-quarter that you are showing here at 25% quarter-over-quarter growth; what would that have been excluding the impact of this reclassification? And the second question is related to provisioning, if you can just -- how that we saw I believe provisions down significantly; and if you can give us some guidance as what provoked this, and I mean, not, I guess not versus the fourth quarter, but obviously year-over-year. Is this a good run rate that we should expect in loan loss provisions going forward?

Okay, relating to the first part of your question, we -- as we put in page 4 of our earnings release, there we have adjusted the stated fee growth for these change in the classification of these over draft lines of credit. So depending if you measure on a quarter-on-quarter basis; for example, between March 2004 and the year-end last year commercial loans grew adjusted 1.2% whereas consumer loans grew 5.6%. So it’s in a chart on page number.4.

I see that chart here, so this -- so basically where you have the 25% growth in reported consumer loans that would actually -- we can back into the amount that we should exclude by saying that growth was only 5.6. So if we take the number from December of 773 billion consolidated --.

I think it is --.

And multiple that by 1.056, that would be the growth of the consumer loans -- that would be the amount of consumer loans on a apples-to-apples basis?

That’s right and the rest is simply the overdraft lines that were reclassified by the Superintendency.

And those overdraft lines, I mean, it's just a new reclassification that did I think result, if I understood correctly, in some more -- in some significant charge-offs, is that correct?

In a one-time provision and charge-off situation, in the sense that previous to these reclassification they were treated as commercial lending and accordingly you didn’t have to apply the provision in criteria of consumer lending, which are more stringent in many cases. Accordingly, there was a one-time change and that has an impact in our charge-offs in the first quarter. But we have provisions set for that specific purpose because this was anticipated by the Superintendency or indeed that came into affect in this first quarter. So, it didn’t have an impact in the bottom-line during the first quarter, simply a higher level of charge-offs on a release of our specific provision set for this purpose.

And okay that’s great, and just to follow up, I am just running the numbers here in front of me. So the 5.6%, let's say, apples-to-apples growth in consumer loans means that approximately 150.5 billion Chilean pesos were reclassified. That sound like a reasonable estimate of that number. Because that way -- basically, what I have done is I have just grown the 773 billion in consumer loans at the end of December by 5.6% and then subtracted that from the number you have listed on March 31, [indiscernible].

Punching very rapidly the keys of our calculator it's very similar to your number.

Okay, thank you very much.

And the second part of your question regarding provision, we are actually mentioning, we think that the bank is entering a more normal provision period. There are two forces that are struggling; one is a positive trend because as the bank has been renewing its growth, usually that results in an improvement of your level of delinquencies especially because you are lending to [sound] counters parties. Secondly, positive force is that the economy is starting to grow and that usually improves the outlook and the performance capabilities of our client. And the negative force is that we are growing on relative terms a more heavily in retail loans, which of course carry a high level of risk in it. So at the end of the day, we think still a net charge-off ratio of around 1.1, 1.2% of total loans is a good -- is a good hint of what to expect in the future.

Thank you.

And the absolute amount of provision would be more or less determined by how fast you are growing in the rest of the year.

And any comment on that at this point in time, is it 10% kind of growth target for your loan book, your total loan book a reasonable-- or still your expectation?

I would say that the pace of the first quarter is too fast and we should go to something probably close to a two-digit growth figure but not as high as 25% that we saw on an annualized base in the first quarter.

Thank you.

The point is that the market is growing and Santander is free to start growing again. As we mentioned before last year we were in the merger process and just to give you some gross idea of how time consuming this process can be, we did some time analysis on the account offices and by mid 2003 they were dedicating more than 70% of their time to non-commercial activities. And now at the end of the year that figure was close to 60% commercial activities and 40% non-commercial activities, we think, we haven't computed the figures for the first Q, is that that ratio would be more close to the normal 17% commercial time 30% non-commercial time. That means that on simple terms we are dabbling our ability to -- or the time likely to be used in commercial activities in the last 12 months. So that’s showing in the numbers.

Thanks again.

We'll now go to Lisa Vayman (ph.)of Credit Suisse First Boston.

Hi. Good morning. I have two questions; the first one concerning the rise in administrative expenses by 13.2%. I was wondering approximately what share of these expenses could we consider as now recurring? And the second one is if you could please comment on the non-operating loss of 8.3 billion? It seems to be off the historical range for this line. Thank you.

Okay. Regarding administrative expense the fact is that due to this contract with Altec we are substituting human resources expense with the direct hiring of people in that area to an external provider and that’s why there's merely a change in the line where you recognize the expense. We are having some savings but it simply -- so probably it's better to take the two figures on a consolidated basis because it has been [simply] that instead of paying directly salaries to the people in this area that has been moved to Altec, now we are paying a check to an external company and accordingly is the change in the composition with the small savings at the beginning increase in the future. The second fact that has affected or has resulted in some increase of our administrative expenses has to do with the opening of the new branches and higher marketing expenses because we have launched a number of initiatives to support this strong growth especially in consumer lending. So, it's difficult to say how -- I would say that it's a part of the story of why we are growing so fast in consumer lending and the like, and secondly why we think we are improving our medium churn efficiency by outsourcing some non-critical [monitoring] of our [all four] systems.

And regarding the other income; there the -- the story is the following last year -- when we finished the merger, we did a lot of -- we released some provisions that were considerate for merger purposes and our servicing was finished. We released our -- those provisions. Secondly, we had some good profits by selling repossessed assets as the market was starting to pick up and that’s why we have -- and an addition sorry -- by moving to Altec we reverse some provisions related to IT projects that now will be carried out by Altec this company owned by Grupo Santander [inaudible]. So, that resulted in a relatively high non-operating income last quarter. This quarter the situation has changed in the sense that in the first quarter, for example, the ability to sell repossessed assets is much lower because people are in holidays etc and accordingly we have to provision a lot of this property. There is a flow of property coming and you have to sell it. We think that throughout the year that situation will be revert, it’s simply that for conservative purposes you have to provision whatever difference between the value that you get those [repossessed] assets and the market value. But again we think it's simply conservative accounting that real estate market has been improving very rapidly and that’s why we think it’s simply kind of a seasonal factor. We are relatively sure that by the end of the year that situation should revert and we should have either [zero] profits on that portfolio but we don’t expect big losses. Yeah, it simply that in the first quarter, the speed of getting rid of those property is stalls to some extent because of the holidays and throughout the year that start moving. It’s what happened last year, as a matter of fact that we recognize in those line the provisions and then by the end of the year, once you finished your selling efforts and that is something that takes time to start materializing, you simply release the provision or get some premium.

And the other is that we report that we conceded some non-trade related provisions simply because of a legal provisions that's part of the ongoing basis of the bank. It's simply that the first level of last year was abnormally low and the fourth quarter last year was abnormally high. So, there are basically non-recurring items that sometimes tend to grow faster or smaller grower. But there is no major consideration. There is -- this part of -- the majority are related with repossessed assets and particularly for this quarter some legal provisions that you simply take for cautious situations and then you release it when you have more confidence that no losses should be expected. Things like that but as to our knowledge, the bulk are in a repossessed assets and charge-offs of that. In Chile the Superintendency is very strict in forcing banks to get rid very quickly of foreclosed assets and that’s why after our [amortization] of process last year and especially taking in consideration a number of loans coming from [indiscernible] Santiago were backed by property well you have to get rid of those properties very rapidly and it's not you have to start taking provisions and mostly that has been the effect.

But just going back quickly to administrative expenses in percentage terms how much of these marketing expenses corresponded to this increase? And do you expect the same share for the next couple of quarters because from our understanding, the bank has retained a lot of -- carrying out a lot of special projects to increase profitability and should we expect these extra marketing expenses due to these special projects to be recurring?

Okay. Just to give you some general comments I will just -- remember that in the first quarter there are some seasonality we have take into consideration and that’s why you see, for example, decrease in a -- it is more fair to compare a first quarter versus first quarter figures. Secondly, that the bank is investing selectively in new brands, in new brands -- in new branches, and in some marketing can [inaudible] critical. How that will impact the future? We think that this is the moment to start investing because the market is starting to grow again and the bank is in good shape to capitalize on that growth. So, looking forward, we think there is a space to improve our cost income ratio but from now on the bulk of that improvement should come more on the income side than on the cost side. So, the administrative expense excluding the change in composition paying more to Altec less few months of salaries directly paid to those personnel moving to Altec. It should be -- our target is to grow 0% in the recurring cost base, excluding new projects and those new projects, we're taking very carefully a look to it and our target again is those projects opening new branches over whole of the call center must be paying off during the first year. So we think that cost will be growing very moderately if at all, but of course this the time to start investing selectively on growth-oriented activities because otherwise it would be difficult to capitalize on the growth opportunities that we are seeing in, -- on the loan side.

Okay, thank you very much.

We'll move next to Adrian Huerta of J.P. Morgan.

Hi Raimundo, how are you? My question has to do with margins. Given that basically you are expecting inflation to pick-up during the rest of this year and also were expecting rates [inaudible] to increase as well and also given the better loan mix and funding mix that is how you are presenting what can we expect in terms of net interest margins for this year? Don’t you think that they could be flat or slightly higher this year?

I would say that -- again there are positive forces and negative forces. Our bet is to keep it -- our net interest margin -- at our year average because remember that inflation tends to have seasonality and that happened right in our monthly figures and in our quarterly figures. But in more, -- four quarters moving average standpoint we expect to keep it probably close to what last year's 4.5, yeah and there the positive forces as you mentioned is that inflation is very likely to start increasing because the economy is gathering momentum and it is very unlikely that we'll be seeing a negative inflation for the future. Secondly, because we are growing on a relative terms more rapidly in retail and there the margins that you get in retail loans is -- could be say in Benefe up to 15% higher than in corporate lending. Yeah, so that’s why simply change in the mix of your loan portfolio has a very healthy impact in your margins. But at the same time we have seen some increased competition especially in the consumer side, bright competition by many of our competitors and also in mortgage. And that’s why the bank has been slightly moving away from mortgage, because -- although we have launched in the quarter some initiatives in order to be present, but we are starting to move more into a smaller middle size companies and [inaudible] Banefe segment which we think has a high growth potential and then keep an eye on a consumer lending and credit cards, but we are slightly moving more into corporate lending and especially middle-to-small companies where we think the next opportunities should be coming. Because if everybody is trying to slash prices and in consumer lending, especially mortgage lending which has been the bulk of the competition in this quarter, we don’t want to follow that value destroying strategy. We have launched a very attractive mortgage product and it was copied the very next day and it is literally. Yeah so we think that we are not going to get involved in aggressive cost price slashing and that’s why we are tapping other opportunities especially middle-sized companies where the bank has a strong client base, I mean like entrepreneurs were Banefe is almost running alone together with one or two banks in Chile. So margins should be our best -- bet is to keep them stable on a year-on-year basis, on an average for the year. On a quarterly basis it has a lot to do with inflation and there the news should be positive looking forward.

And, thank you Raimundo and just lastly on a comparable basis by how much did the income grow this quarter year-over-year. Because I understand that in the first quarter of '03 you still included the fees from the subsidiary that you sold in the fourth quarter, right?

You mean first quarter versus first quarter or --?

Yes on a comparable basis. I mean excluding the 1Q03, the fees coming from over that fiscal.

: No, that subsidiary was really not very relevant.

Okay.

I would say that it will -- the basic calculation depends on how much of the provisions you thought were required or were kind of voluntary. So I would say that probably 26% is too high, the figure should be two-digit and probably, I don’t have the calculation but something in between.

[Indiscernible]

Okay thank you very much.

And once again to ask a question press "*", "1" now. We'll move next to Rusty Johnson of Harding Loevner

Hi I was wondering if you could help me with a couple of structural issues. One regards your changing and some of your foreign -- basically loans for foreign trade and acting as a guarantor, collecting fees, obviously committing less capital as -- on a guaranteed basis. I just wonder what type of risk you entail there. It seems like a greater option to just be a guarantor, not commit funds, grab the fees, but is there a free lunch in this? And was this a new opportunity, and how do we think about this in terms of what problems might arise and how much of that loan you actually assess to credit on?

Okay the point is the following that, see [indiscernible] commercial I mean foreign trade loans are very, very [indiscernible] dependant on the type of clients there. So what we are doing is by relying in a -- of the four largest banks in Chile we are the only one with a foreign branch network or an alliance with the other banks of Grupo Santander. So you can do more, sophisticated deals where competition is much less -- price competition is much less intense, and what you do is simply in order to improve the return on your capital of bad operations you use other units of the group to fund local exporters or importers but you are keeping the credit risk because this is a contingent loan, if the client doesn't pay, well you simply pay on behalf of that client. So for credit risk sake, it's exactly same as if you fund directly the operation. So it's no free lunch there; but what we have discovered is that competition in more sophisticated deals that includes this type of, -- because remember that we are funding much cheaply by using other companies of the group and splitting there, to some extent the arbitrage in a funding costs with the client. And secondly you can do more sophisticated deals by including swaps and some kind of derivative in order to hedge, for example, currency risk etc. So at the end you give the client a much more complete deal and at the same time you can charge fees and optimize the use of your capital. So it's simply that, it's what we think an innovative way to get more revenue or more bank for your capital, but of course we are assuming the full risk. If the client doesn't pay we'll have to pay exactly the same as if the client doesn’t pay directly funded loan. But that the type of operations are done with more of a top-notch of the corporate client because they are the ones that need more several deals [Indiscernible] so on credit -- their credit risks are very controlled -- very limited. So this is simply our way to increase our return on capital on operations that if you follow the traditional path you will get a very low profitability and this is helping us to increase the profitability of this business as a whole.

Okay, one thing I missed is which part of the group is actually doing the financing and committing the capital? Is it within the group or is it competing banks that actually do the plain vanilla, and you do the derivative and the complex side, so whose balance sheet actually carries the actual funding loan?

It depends on the, for example, if you are exporting to Europe it would be a unit in Europe or in the U.S. it depends. This is something that can be done by local banks by using their branches in New York or Miami. It is simply that we are a little bit more efficient and get better funding costs than some of our competitors because of the higher risks or a risk rating of the group. What we do is simply we Santander’s -- Santander's [indiscernible] policy is to make units compete and so we make our -- the other units of the group whether in New York or in France or wherever to compete among themselves and we give the deals to whoever has the cheapest cost of fund for us.

Okay, thank you. The second question pertains to your successful move of getting people to move out of high cost deposits within the bank and buy the mutual funds. I was just wondering if inflation picks up, do you think you will be able to still post your sort of term deposit rates at a discount to these mutual fund. Is this the structural and permanent relationship, or a temporary one where you can actually tease these deposits out and into the mutual funds? Is it sustainable?

I would say, that yes, what happened is the following, that we have been doing our analysis and we discovered that from the financial wealth allocation of our client up to 90% of the total financial wealth of our clients, -- of our clients, not of the system as a whole because we don’t have the figures for them -- a 90% is in time deposits or savings deposits and so, people still are very conservative in how they allocate the financial wealth. So what we are doing is try to teach our clients that it is in their behalf to diversify to have a little bit of share, equity funds in the wealth and also -- there are some benefits in terms of liquidity because the time deposit, for example are limited, you have some, -- you have to keep them for 90 days or more in some cases where in mutual funds you can get liquidity overnight. And the other thing is that you have to have some tax advantages, so what we are doing is basically trying to teach our clients that it's on their direct benefit to keep a more diversify a wealth allocation including a long-term bonds or equities to some extent. So, I would say that it’s a mixture of short-term opportunities and or a more cyclic trend because still people are too conservative in how they behave and you can have additional benefit, especially because of this tax rate. Secondly because Santander has been the first in launching a mutual funds that have a guarantee returns by using swaps and on forwards etc. you can anticipate that this -- you can guarantee the principal and some part of the profitability. So it’s simply, I would say that a trend to innovate and help our clients allocate their financial wealth. So that’s why our goal has been in the short-term quite obvious for clients as a spectacular trend we think is sustainable and we have a lot of room to improve in that sense.

Excellent. Thank you very much.

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

Okay, 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 good day.

And that concludes today’s conference. We thank you all for your participation, you may now disconnect.