Banco Santander Chile (BSAC) 2005 Q2 法說會逐字稿

Good day and welcome to the Banco Santander second quarter 2005 earnings release conference call. As a reminder, today's conference is being recorded. [OPERATOR INSTRUCTIONS]. For opening remarks and introductions I would like to turn the conference over to Mr Raimundo Monge, Corporate Director of Strategic Planning. Please go ahead sir.

Thank you very much. Welcome to Banco Santander Santiago second quarter 2005 results conference call. I am Raimundo Monge and I am joined today by Robert Moreno, manager of Investor Relations. Thank you for joining us to discuss the Bank's second quarter results and recent operating trends. Afterwards we will be happy to answer your questions. Next two slides.

Before we begin reviewing our results, we will briefly review recent economic trends. The Chilean economy is currently going through an expansive cycle that should continue. According to the latest data published by the Central Bank, [inaudible] has expanded at a rate close to 6% a year. It is important to point out that the economy is not just going through a commodity boom, but that return on investments and the non-tradable sectors are also growing at high rate. According the latest available data, total investment was growing at a 25% annual rate.

Consumption was also growing at [inaudible] rate of growth of GDP as employment levels have continued to decline and consumer confidence remains high.

Finally, the contribution of export to GDP growth is still very significant as commodity prices and non-traditional exports boom. Next slide.

As a result, we are forecasting strong growth of GDP for the rest of the year, lower unemployment, and inflation should be under control. Therefore, the outlook for the banking industry remains positive. Next slide.

This positive micro-scenario is apparent in our recent results. In the first half of 2005, net income totaled 116,061 million Chilean pesos, increasing 27.1% compared to the first half of 2002. This growth was led by a 34.8% increase in net operating income. The Bank's return on equity in this period reached 23.2% and the efficiency ratio improved to 40.4%. The ROE for the Chilean Bank in the industry in the same period was 17.6% and efficiency ratio reached 53.8%. Next slide.

Results in the second quarter of this year were also very positive. Net income totaled 62,101 million Chilean pesos, increasing in 55% compared to the second quarter of 2004. ROE in the quarter reached 25.7% compared to 17.1% in the second quarter of 2004. Earnings growth was driven by the 66.7% increase in net operating income, compared to the second quarter of last year. Next slide.

These good results are in line with the strategic objectives we have established for the year which were reviewed in our two last conference calls. One of these strategic objectives 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 funding links in order to sustain net interest margin despite increased competition and higher deposit costs.

Fee income should also be another driver in 2005, given our strategy of reliance on client relationship to increase the income. This should also be helped by the investment made since 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 will continue to focus on a strict control of costs and minimizing all risks as much as possible. In 2004 the Bank invested heavily, but the evolution of costs in 2005 should be more subdued. Asset quality has evolved in line with economy, but we remain conservative regarding our credit risk policy and our provision and charge-off policies reflect this conservative stance regarding risk. Next slide.

Loan growth. In the second quarter of 2005, the Bank continued its steady process of improving its earning needs by growing strongly in retail segments. As of the end of June, total loans increased 3.5 on a quarter-on-quarter basis, and 12.3% year-on-year. However retail loans increased 5.9% quarter-on-quarter and 26.5% year-on-year. This increase was mainly driven by the higher economic activity in the investment and the investment made throughout 2004 to expand market share in this segment. Next slide.

Lending to individuals was up 5.5% on a quarter-on-quarter basis and 26.5% on a year-on-year basis. At the same time, lending to small and medium sized enterprises, SMEs, increased 7% quarter-on-quarter and 26.6% year-on-year. Loan growth in this segment was driven by a 13.3% q-on-q growth on high yielding leasing operations. Consumer lending in this segment also increased 9.8% quarter-on-quarter, driven by a rise in the loans through credit cards, overdraft lines, and insolvent consumer loans. The Bank is placing a large emphasis on expanding its presence among SMEs due to the strong economic indicators that favor growth in this locally traded and highly profitable segment.

These strong growth rates were partially offset by lower growth in relatively lower yielding middle market and corporate segments. Corporate banking follows a strict profitability driven strategy which is focused mainly on the increasing of its share of non-lending activities such as cash management, treasury services, corporate finance and advisory services, areas where the Bank gets the largest part of its revenue with its larger clients. Next slide.

With this high growth rate, market share continues to rise in key products. Market share in consumer lending increased 80 basis points since the beginning of the year, reaching 25.6% by June 2005. In mortgage lending, market share reached 24.6% at the end of the quarter compared to 23.5% at the beginning of the year. Regarding customer funds, which include time and savings deposit, [inaudible] assets and mutual funds, the Bank's market share increased 80 basis points since the beginning of the year to 21.4% as of June 2005. Next slide.

Customer funds grew at a rapid pace in the second quarter 2005 led by a 14.5% quarter-on-quarter increase of time deposits. The yield curve continues to flatten in the quarter; as a result the Bank increased the balance and duration of its time deposit in order to take advantage of the attractive medium term interest rate, and to stabilize to the extent possible margins going forward as the short term interest rates are expected to rise. Next slide.

Apart from high loan growth, margins remain strong and stable in the quarter. Net financial income in the second quarter 2005 increased 15% compared to second quarter 2004. This rise was mainly driven by the 15.9% increase in the average interest earning asset in the same period. The net interest margin reached 4.8% in the second quarter of the year. This evolution was mainly due to improved asset mix as mentioned previously. At the same time, the higher quarter inflation rate favored margins due to the [inaudible] between inflation adjusted assets and liabilities.

The high interest rate environment and the funding mix also affected margins. During the second quarter, the average overnight inter-bank rate was 3.2% compared to 1.75% in the second quarter of 2004. Interest bearing liabilities have a shorter duration that interest earning assets and therefore [inaudible] at a factor rate. This results in a downward pressure on margins in the short term when interest rates begin to increase. But that is minimized in this impact by increasing the duration of time deposits as mentioned before. This was also partially offset by the rise in spreads earned over three funds that [inaudible] with short term interest rates.

Margins have evolved more favorably compared to the Chilean financial system. On an unconsolidated basis, the gap between the Bank's net interest margin and the banking industry as a whole, was 78 basis points in this second quarter 2005, compared to 19 basis points as of June 2004. Next slide.

The growth of the income also reflected the standing commercial activity in retail banking. Net income increased 13.4% compared to the second quarter 2004. Checking account fees grew 30.7% year-on-year. This rise is directly related to the increase in client base and lower attrition rates. Credit card fees increased 31.4% year-on-year, driven by an investment and promotion made in 2004 to improve credit card usage. ATM related fees increased 30.2% year-on-year. In the past 12 months the Bank has installed 175 new ATMs as part of an investment made primarily in 2004 to extend its distribution network for retail banking. Insurance product fees increased 42.2% reflecting stronger sales of insurance products. Next slide.

The growth of fees was also driven by the increase in retail client base. The improvement of processing [inaudible] and better quality of service standard. Since the beginning of the year the total number of retail checking accounts has increased 11% and the amount of retail clients that used four or more products has grown 17.6%. The official rate, that is client loss divided by total client base, also descended from 8.6% at the beginning of the year to 6.5% as of June 2005. Next slide.

The Bank has also outperformed the market in the checking account and credit card market. According to the latest data published by the superintendent of banks, Santander Santiago reached the number one spot in total number of checking accounts for the first time ever. Santander Santiago's checking account base is the fastest growing in the market, increasing 15.6% year-on-year, compared to 5.4% for the market at the whole. Market share in total checking accounts reached 24.3% and increased 140 basis points since November 2004, and 220 basis points in the last 12 months.

In the credit card market the Bank is also consolidating its leading position. According to the latest information published by Transbank, the industry credit card processor, saw the credit cards increase 29.4% year-on-year, compared to 15.7% growth for the industry. With this growth, market share in terms of total credit card accounts increased 213 basis points since the beginning of the year, and 383 basis points in the last 12 months. In terms of credit card usage, market share also increased. Total invoices as of May 2005 increased 22.8% year-on-year, compared to 16.8% year-on-year growth for the industry as a whole. Total market share in credit card invoices increased 130 basis points since the beginning of the year, and 176 basis points in the last 12 months. Next slide please.

Despite this high commercial activity in the quarter, costs remain contained. In the second quarter 2005, efficiency ratio reached a record low level of 39.1%. This is the lowest among the largest players in the Chilean banking industry. Efficiency ratio for the Chilean banking system reached 53.8% as of June 2005. Next slide.

Expanding economy and improving employment figures have possibly reimpacted provision expenses, recoveries and asset quality indicators. The required research of the total loans ratio as defined by the superintendency of banks, which measures the effective loss of a loan portfolio, reached 1.78% as of June 30, down from 1.86% in the first quarter 2005. [Inaudible] loans at June 30, 2005 decreased 16.3% year-on-year and 2.8% quarter-on-quarter. As a result, total growth provision and charge-off decreased 26% compared to the second quarter 2004, and loan loss recoveries increased 6.6% year-on-year resulting in a 41.9% decline in total provision, net of recoveries. Next slide.

In summary, we believe that the second quarter results are starting to reflect the Bank's performance, given its strong position in the retail market and the better macro-economic outlook. This should help to sustain the solid commercial growth in the retail bank observed in the present [inaudible]. At the same time, the expansion of the client base and cross-selling should be a major factor driving the income growth in the future. Costs should remain under control, consolidating our world-class efficiency ratio. As the quality is expected to be sound, which should translate into a controlled growth of provisions and charge-off expenses. All of these together should help to sustain the high levels of recurring profitability observed in the first half of this year.

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

[OPERATOR INSTRUCTIONS]. Our first question will come from Luis Adaime with Credit Suisse First Boston.

Hi, good morning. I had a question concerning your growth in market share on the retail side. If you can pass to us, if you have any targets, specific targets for market share or for growth for this year, next year? And when do you expect your competition to catch up to you or for this gross trend to stabilize? Thank you.

Okay in terms of market share targets or loan growth in that segment, our only objective is to outperform the market and grow faster than the market. So it basically depends on how the system, how rapidly it's expanding.

Regarding the competition let it be said that we have very strong competitors that are doing a very good job and this quarter has been no exception. However we are basically relying on competitive advantage that we created some periods ago, for example through the merger, through having the largest distribution network, having the largest customer base in Chile, and throughout some selected investments we did last year. So this is something that takes a little time to develop and that's why we are in this moment benefiting from competitive advantage that took some to develop and some expertise of the market that again takes time to develop. That's why we think that there are still good chances that we should be outperforming the market in the future quarters, but we have to be very active and very focused on these segments. And that means innovation, customer service and trying to make things easier for our clients should be a must in order to sustain that performance.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question will come from Paulo Ribiero with Citigroup.

Good morning. My question is related to the previous one. In order to sustain this level of growth, do you forecast new investments be it in products or in infrastructure and would they be of some magnitude? Because you mentioned the previous investments have brought you so far. Or do you think you still have more to go on the basis of those investments or you need to [table] money into advertising or further extension of the network?

And second question, the second point to my question, is regarding your efficiency ratio. You certainly have a very strong number this quarter and do you think that's sustainable in the near term? Or we should expect maybe you to settle with a slightly higher level? Thank you.

Okay. Well actually both the questions are related in the sense that the operational leverage that we have got at least in this first half is basically because we're growing in the top line at around 14/15% and in the cost side we're basically flat.

Going forward we think that our ultimate goal is to create shareholder value and that means investing when you have to but we don't foresee major increases in expenses, it's simply that you always have space to improve. We are continuously transforming our processes, we are externalizing non-core activities and the like. And that's why, although we plan to open new branches and new ATMs and expanding things in the future, we think that that shouldn't translate fully on growth on the cost side. So that's why we think that the costs should be growing slightly above inflation in the coming quarters, and the bulk of the effort will be internal.

You always have space to improve your efficiency by giving better technology. When it comes to technology it's something that we finished two years ago and we are just starting to scratch the benefits of that new computer platform which is increasing productivity very dramatically in the front line. And therefore there's always space to improve efficiency and productivity by changing slightly things and leveraging on that [exchange]. So therefore we think efficiency should continue to improve in the future mostly because the growth rate of costs is much smaller than the growth rate of income.

Perfect. So you mentioned new branches but do you have any target for this year? [inaudible].

We haven't really expanded [limit] especially in Banefe but this is -- they are -- you were saying a new form of the branches which is very small and therefore the other thing that you do is to open branches only when you have some threshold -- critical mass to expand. And that's why usually it doesn't have a diluted impact in efficiency.

Regarding the number, we are basically -- we're viewing the different cities and so we don't have a specific number but we have already opened like 20 branches most of them in Banefe which is at the lower end of the consumer market where growth is mostly focused. But again the number of branches is something that follows your strategy and not the opposite because once we get critical mass in terms of business then we start opening more branches.

So we don't have a specific [table] for the year; most of the system is expanding in this segment. We already are approaching around 80 branches at Santander Banefe which is by far the largest and we are approaching 1 million clients which is again by far the largest in this segment. So we plan to continue investing in terms of making things simpler for our clients and focusing on our relationship with them. But with no clear -- with no specific number of branches. But again they shouldn't have a major or a relevant insight into our cost growth.

Perfect. Thank you very much.

Our next question will come from Jorge Kuri with Morgan Stanley.

Hi good morning. Can you remind us your guidance for 2005 and forward for 2006 in terms of growth in credits, net income, ROI and some of the main variables? Thank you.

Okay, hi Jorge. We are basically not giving any specific guidance but I would say that the underlying trends should be more or less in line with what we saw in the first half. That means growth in the mid teens of the top line, 13, 14% more or less, what we have seen in the first half; both of the margin and [fees]. And then cost growing slightly above inflation because most of the wages are linked to inflation in the Chilean economy. And then in terms of provision [extends] normalizing to around a gross [inaudible] ratio of around 1%, similar to the one we saw in the second quarter. And therefore at the bottom line you should see sustained growth. And the negative part comes from let's say profitability of fixed income securities as long grades are expected to grow.

So therefore we should see strength for the rest of the future pretty much in line with what we have seen at least in the first two quarters.

Thank you.

Our next question will come from Andre Bergoeing with Larrain Vial.

Yes good morning Raimundo my question is very simple. How long will the new SBIF capitalization requirements take to be in effect? And what will be the impact on the new requirements of capitalization and on your payout ratio for for dividends going on?

Okay the Superintendency has stated that these new Basel requirements would be in place by next -- the [inaudible] has been applied on an industry wide basis and means that they know -- depending on how intense are the [inaudible] you should be having a slight increase on capital if at all in the sense that the industrials as an average has about a ratio of like 13.5/14% nowadays. Therefore what we will see is a change in the composition of the capital allocated meaning lesser capital supporting credit related risks, more capital supporting an [inaudible], it's called operational risks. And so therefore we should more or less the same levels for the industry as a whole, as an average.

We're not sure if some individual banks might have some level of further requirement in terms of capital but the average is very similar to what we see now. In the case of Santander Santiago we have about a ratio of 14% at the end of June which is much higher than the minimum -- not only required for the [inaudible] but also our internal guidelines which usually is stronger than what is required by the Superintendency or the other rating agencies. And therefore we think that our dividend policy should remain high. How high depending on the prospects of growth, but as we have discussed in this conference we are growing very strongly in retail activities but of course, on the corporate, we're basically not only not growing in the last 18 months but we are actually decreasing.

So you can sustain high dividend policies by switching the composition of your asset mix. Remember that with the rates going forward or increasing going forward, that means that you can also reduce your investment in short term securities and the like in order to finance growth. So that's why without assuring any level of payout we think it should be high going forward because the growth is focused on retail and you can increase very much your bottom line by switching the composition without any further increase in your capital consumption.

So I would say it's kind of a neutral effect in our case but it is of course very positive because now the banks will be following not only the credit risk as it happens with Basel I but also market risks and operational risks as well.

So it's a positive news through the system, probably neutral in terms of capitalization in our case and very likely having no relevant impact in our dividend policy going forward.

It appears there are no further questions however I would like to give the audience one final reminder. [OPERATOR INSTRUCTIONS]. And it appears there are no further questions Mr Monge I'll turn the conference to you for closing remarks.

Okay 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.