Banco Santander Chile (BSAC) 2005 Q1 法說會逐字稿

Good day everyone and welcome to today's Banco Santander First Quarter 2005 Earnings Release Conference Call. As a remainder, 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, if you have not received a copy of today's release, please call Desiree Soulodre at 011-562-647-6474. And now, for opening remarks and introductions, I would like to turn the conference over Mr. Raimundo Monge. Please go ahead, sir.

Thank you very much. Good morning ladies and gentleman. Welcome to Banco Santander Santiago's first quarter 2005 results conference call webcast. I am Raimundo Monge, Director of Strategic Planning and I am joined today by Robert Moreno, Manager of Investor Relations. Thank you for joining us to discuss the bank's first quarter results and recent operating trends. Afterwards, we will be happy to answer your questions. Please forward next two slides.

In 2004, the bank experienced an important shift of its strategic focus from an inward looking strategy standard on concluding the merger in a record time frame to an outward looking strategy refocused on commercial growth, concluding with the improved economic outlook. These also imply that in 2004, the bank made certain investments in order to sustain growth rates above the market, especially in retail markets. In 2005, our focus is to continue growing at a rapid pace and to conform this growth into higher profitability for our shareholders, and to consolidate our leading position within the market.

Next slide. In order to do this, we have set various strategic priorities for this year as we discussed in our last conference call. One of them is to sustain strong loan growth with a special focus on retail banking in order to improve our profitability. The bank will also focus on its funding mix. The bank expects to exploit its competitive advantage in terms of distribution in order to obtain the cheapest funding mix as possible to sustain net interest margins, despite increase competition and higher deposit costs. Fee income should also be another driver in 2005 given our strategy of relying on client relationship to increase this source of income. These should also be helped by the investments made in 2004 to increase our distribution capabilities in order to reach more clients efficiently, increase product usage, and expand cross-selling in our large customer base. Finally, the bank as always will continue to focus on a strict control of cost and minimizing all risks as much as possible.

In 2004, the bank invested heavily that the evolution of cost in 2005 should be more subdued. Asset quality has evolved in line with the recovery of the economy, but we remain conservative regarding our trade risk policies and our provisioning on charge-off policies reflecting these conservative stands regarding risk.

Next slide. The results achieved in the first quarter of 2005 are fully consistent with these strategic priorities set for the year. Net income totaled 53,960 Chilean pesos million, increasing 5.2% compared to first quarter of 2004. The bank's ROE in the quarter reached 21% compared to 20.1% in the first quarter of 2004, and 17.8% for the Chilean banking industry as a whole during this first quarter. Core revenues, that is, net financial income plus fees, increased 12.1% in the first quarter compared to the same period of last year.

Next slide. In the first quarter of 2005, the bank continued to show strong loan growth in high-yielding products and segments. As of March 31, 2005, total loans increased 5.7% quarter-on-quarter and 14.3% year-on-year. Consumer loans grew 7.1% quarter-on-quarter and 19.5% year-on-year. Residential mortgage lending was up 5.8% on a sequential quarterly basis and 36% on year-on-year done. While the commercial loans rose 5.2% quarter-on-quarter and 21.7% year-on-year driven mainly by loans granted to high yielding small and mid size company.

Next slide. In terms of business segment retail loans increased 5.7% quarter-on-quarter and 25.5% year-on-year, with a strong loan growth to individuals and small and mid-sized companies. Loans to individuals increased 5.1% quarter-on-quarter and 25.9% year-on-year, while lending to small and mid-sized companies, SMEs, increased 6.7% quarter-on-quarter and 24.8% year-on-year.

Next slide. These increases were mainly driven by the higher economic activity, low interest rates, and the investment made throughout 2004 to expand market share in this segment. Total loans in the corporate banking segment increased 4.6% quarter-on-quarter and we are down 1.7% on a year-in-year basis. As you know, corporate banking follows a strict hold profitability driven strategy, which is focused mainly on increasing its share in loan lending activities such as cash management, treasury service, corporate finance, and advisory services.

As a result of this growth, the bank market share of total loans increased 40 basis point during the first quarter to 23.1% of the market. In this same period, our market share in terms of consumer lending increased 40 basis point reaching 25.2%. In terms of residential mortgage lending market share was up 70 basis point to 23.5% of the market and the share of commercial loans grew 20 basis point to 20.5%, as you will see in the slide.

Next slide please. In the first quarter 2005, the funding mix continued to improve and the bank's deposit base continued to grow at a solid pace. Management has been focusing on improving the funding needs in order to minimize the initial negative impact of margins produced by rising short-term interest rates. Since interest-bearing liabilities have a shorter duration liabilities have a short aggression that interest are inactive. The bank's strong retail franchise and cash management business have played a key role in the growth of non-interest bearing deposit.

The balance of total customer deposits, which includes signed deposits, savings deposits, and a demand deposit increased 4.3% quarter-on-quarter and 21.1% year-on-year. Assets under management increased 7.8% quarter-on-quarter and 15.5% year-on-year. With this growth rate, the banks market share in terms of total customer fund increased 30 basis point from 20.6% at the yearend 2004 to 20.9% as of March 31, 2005.

Next slide please. The illusion of margins in the last quarters is reflecting the bank's strategy of expanded balance sheet, but without losing control of margins and spread. Main financial income in the first quarter 2005 increased 12.1% compared to the first quarter of 2004. This was mainly driven by the 14.7% increase in average into its earning asset in the same period. The banks net interest margin reached 4.2% this quarter compared to 4.3% in the first quarter of 2004. The bank was able to maintain stable spreads despite the negative quarterly inflation rate in first quarter 2005. These had a negative effect over margins due to the negative gap between assets and liabilities denominated in and inflation link guarantee. At the same time, during the first quarter 2005, the average over and adding to this rate was 2.65% compared to 1.78% in the first quarter of 2004. These placed short-term pressure on margins in the quarter, as interest bearing liabilities have a shorter duration than interest-earning assets, and therefore, repriced at a faster rate. These negative effects were partly offset by the improved asset mix. Loans, as a percentage of assets, increased to 70.8% in the first quarter 2005 compared to 68.7% of the first quarter 2004, led basically by retail lending as we saw before. As a result of this active management spread, by improving the funding and asset mix, the bank's margin has evolved more favorably compared to Chile's financial system. The gap between the bank's net interest margin and the banking industry as a whole was 42 basis points at the end of this first quarter compared to 28 basis points twelve months ago.

Next slide. Net fee income increased 12.4% compared to the first quarter 2004. This growth was led by an increase in various fee income lines and segments. This rise in fee income was driven mainly by an increase in the client base, improvement of cross-selling ratios and higher quality of services standard. In the first quarter 2005, total retail client base rose 8.4 % quarter-on-quarter and the number of total taken accounts rose 3.4% in the same period. This is very important given that in the first quarter, we have a banking holiday. So, these rates are very high for a seasonally low period of activity. The amount of retail clients that use four or more products also grew 8.8% quarter-on-quarter. Detrition rates, that is, client loss divided by total clients have also descended to 7.8% as of March 2005, down from 9.2% at year-end 2004.

Next slide. Costs are under control. In the first quarter 2005, operating expenses increased 4.1% compared to the first quarter 2004. And the efficiency ratio improved to 41.8% compared to $43.2% in the first quarter of 2004. The efficiency ratio for the Chilean banking industry as of March 2005 was 54.8%, so we have a lead of around 1,500 basis points.

Next slide. Asset quality continues to improve. Gross provisions on charge-offs increased 10.1% year-on-year. This rise was mainly due to the increase in the bank's loan portfolio that increased 14.3% in the same period. Past-due loans at March 31, 2005 decreased 4.3% compared to December 31, 2004 and 16.9% year-on-year. While the coverage ratio that is reserved for loan losses over past-due loans improved to 139% compared to 102% at the end of the first quarter of last year.

Next slide. In summary, we believe that the Bank's first quarter operating results are hinting the positive trends we expect to see for the rest of the year. As the economy continues to show a strong performance, this should translate into higher loan growth. Santander-Santiago expects to lead this expansion of the banking system, increasing its market share in the most profitable lines of businesses. These should have a beneficial effect in the growth of its net interest income. At the same time, the renewed focus on fee income through greater product usage and expansion of our client base has also given us a push to the income growth. Costs should remain under control and the efficiency ratio should improve, while asset quality has been improving consistently, which should translate into a controlled growth of provision and charge-off expenses. 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.

[OPERATOR INSTRUCTIONS]. Juan Partida, Bear Stearns.

I have two questions. The first is regarding the guidelines that you follow for the provisioning and write down of repossessed assets? Are there guidelines from the regulators or is there an element of your own decision to carry out this provisioning in write down? And the second question is, why are the variable costs associated with the retail strategy booked as other operating rather than personnel? Is it because there it's a separate company and non-consolidated company? If you could, help me with those two?

Okay, regarding the first part of your question, which is guideline for a provisioning of repossessed assets, there the instruction by the Superintendency is to start provisioning those, foreclosed assets as soon as you receive them and to completely write them off after 12 months of being foreclosed. So, in general terms you have to start provisioning at the very moment you will receive back those assets when the client is having difficulties. There was a recent change, I am not sure whether it was at the end of last year or beginning of this year, that to some extent produced a one-time acceleration of the provisioning guidelines, I can call you by then and confirm you that information, but that is the general norms that to the best of my understanding there has been some kind of acceleration lately. I am not sure whether it was at the end of last year or the beginning of this. So, we should have to some extent a relatively, at normally high level for one time. But I am not sure whether it was at the end of last year or beginning of this year. And then it's a matter of provisioning as soon as you have a knowledge that you will be receiving back those assets. Regarding the expenses related to the sales forces, it is classified, going for steel and gas in deadline because as you mention it's done by separate companies that can try outsource basically then to other companies, and therefore they should be over there and they tend to move very much inline with retail activities. You basically pay them a fee for this process or I suspect you paid expenses for these process and that has a lot to do with the number of clients that have been captured for the bank loans and the like. That's why they usually tend to move more or less in line with overall commercial activities.

Okay, just to clarify with the repossessed assets. In general outside of this change in the rules as a one-time impact. It should be automatic in the sense that you wouldn't have a lot of discretion as to when to provision and write down after 12 months it should be fully--?

That's right. That is something that is established by the Superintendency of Banks and you have very little margin to move within those guidelines.

Very good, thanks very much.

Okay.

[OPERATOR INSTRUCTIONS] Paulo , Citigroup

Good morning. We saw that, everything seems to be going well in terms of efficiency, loan growth and so forth.

So, what level of ROE can we expect for 2005? Where do you think you are going from here? How far up can all those positive

trends translate into the bottom line?

Well, we have not given specific guidelines regarding bottom line growth or profitability, but to give you a sense of where we think we are moving. Last year was a year in which we did a number of extraordinary things to expand our distribution capabilities. This last quarter of 2004 and the first quarter of this year, we are seeing a good pick up in the growth of toplines. Therefore, we expect the ROE to increase in the coming quarters. Most of those extraordinary things were already finished and they are paying off. Remember that, probably we had talked of this before, when we open a branch we have a way to open it that they start paying off very quickly because instead of opening the branch and hoping that clients will show, up we first tend to capture a certain amount of business and then you open a branch with half of the total workforce in place. And then when you achieve a certain target of gross revenues close to breakeven point, then you put the remaining employees. The same happens in other activities and therefore, we think that with cost relatively controlled, cost relatively and moving in line more or less with the growth of the total lending activity. We should leverage on that growth on the topline and be more visible in the bottom line in the coming quarters.

Great, thank you.

[OPERATOR INSTRUCTIONS] Juan Partida.

Thanks very much. I have a follow-up question, if I may. If I understand correctly, there was a flattening of the yield curve in the quarter with short-term interest rates increasing and long-term interest rates coming down. Could you give me your outlook for the rest of the year as to the shape of the yield curve? Thank you.

Well, this used to be a relatively easy question to answer, but the point is that many economies don't understand what is going on. If you see, in the US also rates are -- longer term rates are going down, short-term rates are going up. So, prior to this kind of an unexpected movement in the rates, our best guess was that you should see a flattening but coming mostly from an increase in the short-term rate. It was rather unusual to see this movement or flattening of the yield curve coming both from the short-term increase -- the increase in the short-term's rates and the decrease of the long-term rates. We think that all in all in this year, given that the economy is gathering momentum, given that there is always a concern about the headline inflations, especially given the high oil prices, we should see in the remaining quarters a relatively -- long term is going back to the beginning of the year levels or something like that and short-term increase a further 100 or 155 basis points for the remainder of the year. So, there has been a relatively unexpected downturn pressure on long-term rates, which are basically due to a very liquid market both here in Chile and abroad, which was a little bit unexpected, but the medium concerns are that the long-term rates should remain probably a little bit higher than what we have seen nowadays and the short-term rates increasing in line with more or less inflation plus something.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS] And gentlemen it appears there are no further questions. At this time, I will turn the call back over to you for any additional and closing comments.

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

[OPERATOR INSTRUCTIONS] That concludes today's teleconference. Thank you all for your participation. You may now disconnect.