Banco Santander Chile (BSAC) 2004 Q2 法說會逐字稿

Good day everyone. Welcome to the Banco Santander second 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.

For introductions and opening remarks I will like to turn the conference over to Mr. Raimundo Monge. Please go ahead.

Thank you very much. Good morning ladies and gentlemen. Welcome to Banco Santander Santiago’s second quarter results conference call. I'm Raimundo Monge, Director of Strategic Planning and I'm joined today by Robert Moreno, Manager of Investor Relations.

Thank you for joining us to discuss the Bank's second quarter 2004 results. Afterwards we will be happy to answer your questions.

Chile's macro economic environment continues to be a positive factor for the banking industry. As of May 2004, Chile's economy was running close to 5% on a yearly basis as predicted at the beginning of the year.

This strong growth of GDP has led to a greater demand for loans, especially in higher yielding segments. As of June 2004, total loans were increasing by 9.2% in nominal terms and consumer loans were increasing by 18.6%.

The Bank's result reflects this strong commercial growth, especially since the beginning of 2004 when growth began to gather momentum following the successful conclusion of all merger related activities.

Total loans as of June 2004 increased at an annualized rate of more than 15% in second quarter of 2004 and grew 7.6% year-on-year. With this growth, the Bank captured 36.7% of the increase in Chile's banking system loans in the first 6 months of 2004. This growth was concentrated in various products. The Bank's market share rose 1 percentage point from 22.6% as of December 31, 2003 to 23.6% as of June 2004. The Bank's market share also rose in commercial loans, consumer loans, foreign trade operations and mortgage loans in this period.

Apart from increasing market share, the Bank's asset mix also improved. Loan growth in high yield retail segments and products steadily rose in the quarter. Loans to individuals increased 6.8% between the end of first quarter 2004 and the second quarter of 2004. Represented an annualized rate of more than 27%.

The higher economic growth and low interest rate environment has pushed the demand for consumer credit and residential mortgage loans. In the quarter, the Bank launched an attractive mortgage loan with a mixed variable fixed rate pricing structure that was well received by the market.

The Bank is in the process of reinforcing its mortgage lending unit in order to gain market share and with this product improve cross-selling ratios. High yielding consumer lending at the same time also continued to expand at a rapid pace, increasing 3.5% between June 30 and March 31, 2004 and 18.2% in 12 months.

Lending to small and middle sized companies rose 3% in the same period. High yielding leasing operations led growth, rising 14.2% in this segment during the same quarter.

The stronger market outlook has led to a larger demand for capital goods finance with leasing.

The Bank is also placing a larger emphasis on expanding its presence among small and middle sized companies due to the low penetration and attractive profitability levels of this market segment.

The funding mix also continued to improve. The average balance of demand deposit has continued to steadily increase compared to a decrease in average interest bearing deposits. The average amount of non-interest bearing demand deposit increased 4% between March 31 and June 30, 2004. This rise in average balances, despite the higher inflation rate, we think reflects the Bank's commercial focus on strengthening client relationships.

The Bank also continued to proactively encourage clients to invest in mutual funds instead of short-term deposits as mutual funds offer better yields. The Bank generates fee income and removes more expensive funding from the balance sheet.

Mutual funds under management increased 10.6% compared to the end of first quarter 2004 and 68.2% year-on-year.

The Bank is also preparing its balance sheet for an expected rise in short-term rates in order to minimize the initial negative impact this might have on margins. As a result, the Bank sold financial investment in the quarter to lower the duration of its financial investment and simultaneously reduce more expensive time deposits from its balance sheet.

With this growth, the Bank has continued to gain market share in higher yielding client funds. The Bank's market share in demand deposit rose from 22.1% as of December 2003 to 24.3% as of June. Our market share in mutual funds increased from 20.3% to 21.2% in the same period.

In the second quarter 2004, net income totaled Ch$40,067m. That is Ch$0.21 per share and 35 cents per ADR, decreasing 21.8% when compared to the second quarter 2003.

With this result, net income in the first half of 2004 totaled Ch$91,344m and was flat compared to the first half of 2003.

The net interest margin reached 4.8% in second quarter 2004. Margins in the quarter remain strong despite the lower interest rate environment, which has tightened the spread earned over the reinvestment of non-interest bearing liabilities and capital.

The lower gap between inflation indexed assets and nominal Chilean pesos instrument also placed pressure on margins in the quarter. That should be a stabilizing factor for margins going forward as interest rates are expected to rise.

The improvement in the asset mix continued to gain momentum in the second quarter 2004. The Bank has been steadily improving its asset mix, which has helped to stabilize its net interest margin.

As we saw, the loan portfolio increased 6.9% in 12 months, while consumer loans increased 18.2% and leasing operations expanded by around 9% in the same period.

The better funding mix also helped support margins. The ratio of average non-interest bearing demand deposit and equities to average interest earning assets improved to 23.4% in the second quarter 2004 compared to 20.2% in the same period last year.

The Bank's success in defending its net interest margin is also apparent when compared to the net interest margin of the Chilean banking sector. As of May 2004, the Bank's margin continued to outperform the industry, reflecting the active management of balancing growth and profitability.

Asset quality improved in the quarter. Total provision for loan losses net of loan loss recoveries increased 4.1% compared to second quarter 2003. This rise was due to the increase in total loans, especially consumer loans. These loans obtain a higher spread, but also have a higher charge off level.

The increase in charge offs was also a result of the implementation of the new provisioning guidelines established by the Bank under the superintendency of Bank at the beginning of this year. The increase in charge offs was offset by the 33.3% increase in loan loss recoveries, led by a rise in recoveries in consumer lending.

The rise in loan loss recoveries also reflect in part the Bank's reorganization of its collection department. As a result, the net charge off ratio improved from 1.01% of total loans in the second quarter of 2003 compared to 0.99% in the second quarter of this year.

Past due loans at June 30, 2004 decreased 4.8% compared to March 31, 2004 and 21.5% compared to June 30, 2003. As a result of this decrease in past due loans, the coverage ratio improved to 110.7%.

In the quarter, the Bank continued to focus on increasing the usage of fee intensive products. The Bank's net income decreased 2% compared to the second quarter of 2003. The Bank has adopted a promotional policy regarding checking account maintenance fees as an incentive to improve client relationship, product usage and cross-selling ratios.

Checking accounts are considered the cornerstone of a profitable banking relationship. Customers with a checking account have 6 times more products than clients without one.

As a result of the effort the Bank has been pursuing, cross-selling ratios and product usage have begun to improve. The Bank cross-selling ratio for retail clients has risen from 3.1 products per client as of December 2003 to 3.21 in June 2004.

The usage of other products continued to rise strongly. Mutual fund fees increased 51.4% compared to second quarter 2003. This rise is directly related to the increase in funds under management. At the same time, the insurance brokerage fees rose 37% in second quarter 2004 compared to the same period last year. More than 80% of our clients do not have mutual funds or insurance products with us, reflecting the high growth potential we see in that business.

Gains from trading and mark to market of securities were impacted by a more stable interest rate environment and a one-time pre-tax loss of Ch$6,307m due to the repayment of around $170m US dollar bonds in various senior bonds. These operations should have a positive effect on margins in the future.

Operating expenses increased 6.6% in second quarter 2004 compared to second quarter 2003. This rise was mainly due to the investment in various growth oriented projects being carried out in order to improve operating income and growth in retail banking.

In the second quarter 2004, total operating costs included Ch$2,847m in administrative expenses directly related to this project. Excluding this expense, administrative expenses would have increased 1.7% and total operating costs 2.1% compared to second quarter 2003.

The Bank has begun to invest in a number of projects to expand its presence in retail banking. These investment projects fall in line with the Bank's strategy of shifting the asset mix towards higher yielding segments. All of these projects have been thoroughly analyzed and have a rapid payback period of less than 2 years on average.

In conclusion, we think the second quarter was a period of important initiatives to sustain growth and profitability going forward. For these reasons, we believe the outlook is positive.

Regarding margins and net interest income, the aggressive commercial growth should continue going forward. As a result, the average balance of earning assets will also begin to reflect this growth pushing forward net interest income in the future. Margins should remain relatively high reflecting the Bank's effort to improve its asset and funding mix. These include increasing the loan portfolio, but also a very active asset and liability management, especially in light of future interest rate hikes.

Fee income growth was sluggish in the first half of the year. Part of this is due to the efforts being made to improve client relationship and improve cross-selling ratios. This way we expect to foment a sustainable rise in fee income based on usage and not necessarily in maintenance related charges.

The growth of fee income from mutual funds and insurance brokerage remains strong and [create profits] should begin to contribute more significantly in line with the heavy investment we made in this product.

Asset quality remains stable in line with the higher economic growth and [indiscernible] operations should remain stable going forward.

Finally, the Bank is also investing strongly to maintain the pace of loan growth observed in the first half in high yielding segments.

For all these reasons we are confident that Santander Chile is well positioned for growth in the coming quarters.

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

Thank you very much. [Operator instructions]. Our first question today will come from Jason Mollin with Bear Stearns.

Good morning everyone, Raimundo, Robert. I have 2 questions. The first is related to your level of expenses and what you just highlighted in your presentation about investing in growth and in your infrastructure. If you could quantify how much more you expect to continue to invest in these type of expansion projects and how you're amortizing this cost? If you're taking the full cost of that upfront, or if you're amortizing these investments over time?

My second question is related to your trading income line and in fact the losses we saw. As you mentioned the impact of the prepayment of high cost, or high coupon bonds, if you could tell us if you expect more of these? I believe we saw them in April and June. Should we expect more prepayments going forward, or is this behind us?

And in general if you could just comment on your expectations for profitability given that the reported return on equity in this quarter was one of the lower that we've seen in many, many quarters?

Okay, regarding expenses, of the amount that we are investing everything is fully reflected because we are not counting as an asset and to be amortized in the future. So what you see is we have already spent it. It is there. They are a mixture of mostly marketing campaigns etc., which should be not of a recurring nature. But also they are especially in the expenses in human resources, some are more recurring.

The point should you (ph) follow in that, and that relates to both the prepayment of bonds and these projects. We have announced already the profit that is coming from the sale of Santiago Express and this strengthening of our alliance with Almacenes Paris. So basically we knew that and that's why especially given the momentum that the system that the loans and the liabilities of the system are showing, we thought this was the proper time to start investing for the future in order to capitalize on that growth. That's why we are basically withdrawing from that profit in order to finance these new incentives, initiatives, which should sustain our growth.

So in terms of costs looking forward, it will depend. The only thing we can assure you is that we are investing in things that payback relatively soon. So they should be accretive very soon in our profit and loss account.

And secondly, regarding the prepayment of bonds, it will depend on the market conditions. We expect to do something in August. Probably not as large as we saw before and that's about it. It is simply that this is good for margins because you are basically refinancing more expensive liabilities, taking advantage of what we think are record low interest rates. Given that most of the market is anticipating some increase in rates going forward, it is time to do that kind of investment, especially because we have these profits coming from the closure of our alliance with Almacenes Paris.

So it is simply we think this is the time to invest for the future because growth is in the table and we plan to take advantage of that much more bullish environment that we are seeing. Not only for the rest of the system, but especially because Santander Santiago we think is in an increasingly good shape to capitalize on these opportunities.

Raimundo, that was helpful. One follow up. Maybe to put it in a different context. Would you suggest that this is the time to make those kinds of investments because competition is quite tough right now and following the merger, the combined entity had lost some share? So this is an effort to regain some of the share that was lost and in this kind of competitive environment you need to refinance high cost funding because otherwise your margin will be under pressure if you're offering loans at very competitive rates? And perhaps on the expense side this is the time to spend on marketing to enhance your position?

No, it is simply that we're seeing a much more stronger demand for loans coming not only for individuals, but also from smaller middle sized companies. And given the Bank has the largest client base in those 2 segments, combined with the fact that we have the largest distribution network, we think it is the proper time to invest.

What we have seen in the last 5 years or so was relatively no growth environment and that's why the Bank was mainly focused on optimizing its cost base, its branch network etc. It was much of an optimizing game. Now that growth is coming and we are looking for 2 or 3 years at least of relatively strong growth, we think it is time to do investment to capitalize on that opportunity. We are seeing, as usual, very intense competition coming from everywhere, but we think that we have enough capabilities and enough competitive advantage to be successful in this environment. Simply that we think this is the time to start investing for the future and changing slightly the focus from optimizing and efficiency and more into revenue growth, top line growth and capitalizing on that opportunity.

Thank you again Raimundo.

[Operator instructions]. Next we will hear from Andre Bergoeing with Larrain Vial.

Hello Raimundo. Good morning. Congrats on the results for this quarter. I believe Jason has covered all the questions I had for the moment, so no more questions. Thanks.

Okay, thanks.

At this time there are no further questions in the queue. [Operator instructions]. Felipe Cruz with Merrill Lynch has a question.

Hello everyone. I just have a question regarding fee income. We have seen in the last couple of quarters slower growth than at least I anticipated due to, as you know, some promotional activities. What can you tell us in terms of the outcome for fee income going forward? Is the environment becoming much more competitive that you have to resort to some of these strategies and not be able to at least maintain prices? What can we expect in terms of fee income growth going forward?

Okay. What happened here there are mainly 2 facts. One is that as we mentioned before, the Bank has been growing very rapidly and that results in the short-term into a certain trade off. Because margins, as you saw, are very high. So you waive a lot of the most unpleasant type of fees, especially maintenance related fees, in order to jumpstart a number of dormant accounts that we have. Remember that we are coming from a merger and in that period many clients they don't leave the Bank, but reduce their activity until you are finished with the merger. So what we have seen is that many dormant accounts can to some extent be jumpstarted by means of proactively -- what we do is basically we contact the client and say okay, if you do a number of deposit etc. you will be waived your maintenance fees. That is explaining why we have been jumpstarting these accounts, to some extent has been unused. That is very productive because it is precisely the number of accounts, or the number of active clients that you have was resulting in a higher stream of usage type of fees.

So they are basically we have been growing in the usage type of fees such as insurance or mutual funds. But in the other fees there are 2 mixtures. One is the flat or the maintenance fees are going slightly down and the other are increasing. Combine that with a market reality that the competition to some extent, is also waiving a lot of fees. That has impacted the overall growth of the system because this is not something that is happening to Santander Santiago, but throughout the market.

Once we said that we think that looking forward the prospect should be increasingly better because a number of initiatives should start to yield their revenues and the results and that's why we are basically comfortable with.

Remember that at the end what you are trying to do is to increase your revenue coming from the client. Sometimes you rely more heavily in fees. Sometimes you rely more heavily in growth or volume growth. In this first half, at least in our case, that has been the case and that's why we have been able to increase in a sequential basis our net interest margin, our net interest income etc.

So fees, you have to fine tune a little bit in order not to be out of line with what the rest of the market is doing. But we are optimistic about the growth of fee income, especially usage type of fees where we have been putting our emphasis in the last 2 years or so.

When do you foresee that greater usage, i.e. higher volume will more than offset some of the fees being waived? Is this something that you expect to happen rather soon, or is more of a--?

Difficult to predict because at the end what you are trying to do is to jumpstart these relatively inactive clients and that we think we have early symptoms that is happening. But we will expect to be probably more by the end of the year. Something like that. So it's difficult to predict exactly figures.

What we are firmly committed is to jumpstart these accounts. We have a number of our cross-selling standards on the total client customer base is less than 2 products per client and we think we have a lot of room to improve in that. Then what you try to do is to increase the profitability on a client by client basis. Whether you have to wait in order for that client to start using his credit card we think is something that will be paying off very quickly, and that is starting to happen.

So we don't have a clear view of how soon we can get that, but it happens. We have increased the number of checking accounts. We have increased the usage of many of these dormant accounts. We have increased the usage type of fees in mutual funds, in insurance etc. So it's kind of a fine tuning approach that we are doing.

The good news is that we have information about the clients, how they are behaving, how they are using the products and that allows us to be confident looking forward that we can do a good job in this equation. That is margin versus fees vis-à-vis growth. Given that the Bank is growing, given that we are sustaining margins in a very low interest rate environment, we think that fees will come as a by product in the coming quarters. How soon is something that is difficult to predict. But because the bottom line growth we are looking in the second quarter, will be mainly coming from margins and volumes.

Perfect Raimundo. That was great. If I may ask another, just 1 final question related to this. This is regarding market share. We've seen tremendous gains in market share. Particularly from January to June overall you gained 1 percentage point. Sort of getting back what you had voluntarily and also due to the merger let go in the period between 2002 and 2003. How do you see market share at this point given that your overriding focus has always been profitability? Do you believe you will be continuing to grow more than the system, or do you see your market share stabilizing where it is?

Well first of all, that our main focus is profitability. Is simply that when the system was not growing, or when we were in the middle of the merger, that changed a little bit to efficiency and to internal hold (ph) etc. Now we still have the guiding focus is profitability is simply that now the system is growing and when the tide rises, all the boats grow. Why we are growing a little bit faster? Probably because we had better opportunities after the merger was successfully concluded.

So we still don't have any target in terms of market share. It's the same strategy that we have been pursuing focused on volume growth in retail where profitability and size go hand in hand. But for something in corporate lending, we don't have any target for loan growth at all. It's mainly due to profitability. It's simply that we think that overall the market is starting to expand and that's why we're putting these selective projects in order to capitalize on the growth. But still if the cost of your increasing (ph) market share is reducing our profitability, we will be passing on that in that situation.

We are focusing in shareholder value, growth of profitability, exactly the same as before. It is simply that we are doing things given that we have these extraordinary profits coming from the Almacenes Paris deal. We're using it for doing extraordinary things that should allow us to sustain and hopefully to improve our performance in the next 2 or 3 years.

Perfect Raimundo. That's fine from my end.

Next we will hear from Jeff Dawson with Federal Reserve Bank of New York.

Thanks, my question has been answered.

Thank you very much. At this time we have no further questions in the queue. I will now turn the conference back over to Raimundo Monge for any closing or additional remarks.

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

And that does conclude today's conference call. Thank you very much for joining us. You may now disconnect.