Banco Santander Chile (BSAC) 2005 Q3 法說會逐字稿

Good day, everyone. Welcome to today's Banco Santander Third Quarter 2005 Earnings Release 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. And now for opening remarks and introductions, I would like to turn the conference over to Mr. Raimundo Monge. Please go ahead, sir.

Thank you, very much. Good morning, ladies and gentlemen. Welcome to Banco Santander Santiago's Third Quarter 2005 Results Conference Call. 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 third quarter results and recent operating trends. Afterwards, we will be happy to answer your questions.

Let's go to slide number three. In this call, we will focus on three main ideas. First, the group performance and the outlook of the Chilean economy; two, how Santander Santiago is leveraging on its leading retail capabilities to take advantage of this robust operational environment; and lastly, a brief review of our 3Q results. Next slide.

As already mentioned, the Chilean economy is going through an expansive cycle that should continue into the year 2006. According to the latest data published by the Central Bank, GDP is expanded at rate close to 6% a year. This expansion has been led by a strong growth of internal demand which is growing more than 11%, led by a 25% expansion of total investment. Consumption is also growing about the rate of growth of GDP, and unemployment levels have continued to decline and consumer confidence remains high.

All of this is positive news for banks as consumers and companies continue to demand loans and other financial services in a very sound economic environment. Next slide. These positive economic factors are also reflected in the evolution of interest rates and exchange rate. In the third quarter of 2005, the Chilean peso appreciated 8% quarter on quarter. The Central Bank has continued to increase the overnight rate which is currently at 4.25% in number of (ph) terms per year. In the third quarter, long-term rates continued to decrease, but this situation started to reverse in October.

The yield of -- on the benchmark ten-year government bonds have increased 80 basis points in October. This rise in the slope of the yield curve will impact the mark to market gains of banks fixed-income portfolio in the very short term, but should be positive for margins and spreads going forward. At the same time, the positive effect of a recent higher inflation rate is likely to continue to benefit earnings in the future. Please go to page seven.

Although the Chilean market is the most developed and stable in Latin America, there is still great potential for growth, especially on its retail market. Currently, total loans to individuals represent only 32% of total lending. The usage and penetration of key bank products such as checking accounts and credit cards are low even compared to other Latin American countries such as Mexico and Brazil. Only one out of every four working Chilean has a checking account, and less than 45% have any form of transactional relationship with a finance system.

As you know, the profitability of our clients with a checking account is three times higher than that of our client without one. Next slide. During the third quarter, the bank continued its solid growth in retail banking, consolidating its leading position in this market. The bank is currently the leader in almost all categories of retail banking, and it's also among the fastest growing in this profitable segment. Next slide.

This good performance, led us to anticipate in the third quarter of 2005, part of our 2006 investment plan in order to sustain current commercial growth levels, especially in retail banking. During the year 2005, the bank has opened 24 new branches of which eight were opened in the third quarter 2005, increasing our total to 335 branches. The bank also installed 97 ATMs in the quarter, representing an increase of 11% since the beginning of the year.

The bank has also greatly strengthened its complimentary (ph) channels which are becoming a key factor in explaining the high growth levels being obtained. The number of clients banking through the Internet has increased 40% in 2005, compared to 18% growth for the industry as a whole. Our new call center is the most modern in Chile and Santander's most technologically advanced in Latin America. The call center can receive up to 120,000 calls per day, and its focus is on selling and cross-selling products.

Taking into consideration this untapped potential in the Chilean retail market, our current strength in distribution and the significant additional investment being made, we believe there is room to support important volume and client growth in the coming quarters. Next slide. Q3 2005 figures support this view. Since the beginning of the year, the total number of clients has increased 8.2%. The profitability of the client base is also rising.

The amount of clients with a checking account has increased 16.8% since the beginning of the year, while the amount of cross-sold clients, that is clients that use four or more products, has increased by 28.8% since December 2004. And 9.5% this last quarter. The bank checking account base is growing among -- is the fastest growing among the regular players in the banking sector, increasing our market share 200 basis points in the last 12 months. Next slide.

The bank has also outperformed the market in the profitable credit card business. Currently, bank credit card transactions represent only 6% of total transactions, and are outpacing the growth rate for all other types of transactions. This is very positive for the banking industry given the fact that credit card generate fee income on cheaper transactions compared to checks. Santander is not only leader in this market, but it's also among the fastest growing.

According to the latest information published by Transbank, the credit card processor -- the industry credit card possessor, as of September 2005, total credit card increased 21.6% in the case of Santander Santiago, compared to a 16.6% year to year growth for the industry, and 13% for our main competitors. With this growth, market share in terms of total credit card increased 155 basis points in the last 12 months, while our market share in terms of credit card purchases also increased 127 basis points in the same period. Next slide.

In terms of loan growth, the positive economic figures, the success of the bank's strategy and the result of an investment being made can be clearly visualized. Loans in the profitable retail sector increased 6.7% on a quarter on quarter basis, and 28.3% on a year on year basis. Loans to individuals increased 6.4 on a quarter on quarter basis, and 28.3% year on year, excluding the sale of Santiago Express. Lending to SMEs, small and middle sized companies, increased 7.7% quarter on quarter, and 29% year on year.

Lending to the middle market and real estate financing, increased 14.6%, while lending to the large corporate -- decreased 6.1% year on year. As you recall, corporate banking follows a strict profitability driven strategy, which is focused mainly on increasing its share of non-lending activities such as cash management, treasury services, corporate finance and advisory services, where competition is less intense, and therefore profitability is much higher. Next slide.

With this growth rate, market share continues to rise in key products. Total loans market share has gone up 20 basis points for Santander Santiago since the beginning of the year, led by 100% basis points rise in consumer lending market share and 110 basis point market share rise in mortgage lending market share. Please go to slide number 15.

The positive evolution of the economy and our strategy, has resulted in strong third quarter and 9-month results. In the 9 months period ended September 30th, 2005, net income was up 26% year on year. In the same period, core revenues, that is net financial income plus fees, grew 14.4%. Return on average equity reach 24.3, compared to 19.9 in the first 9 months of the year 2004, while the efficiency ratio improved to 40.2% compared to 43.1% in the same period the year before.

In the third quarter of 2005, net income totaled 66,000 -- 400 -- 333 Chilean million pesos, increasing 24.1% compared to third Q 2004. Return on average equity in the quarter, reached 26.8% increasing from the level obtained the same quarter of last year that was 22.7%. Earning growth was mainly driven by retail banking activities, reflected in the rise of core revenues that increased 16.1% year on year. Next slide, please.

Apart from high loan growth, margin remained strong and stable in the quarter. Net financial income was up 15.5% and the net interest margin increased slightly from 4.5 in the third quarter 2004, to 4.6 in the third quarter of this year. The strength of the retail banking business has positively impacted net interest margins. This has been partially offset by the movement of interest rates and inflation in the quarter. The higher inflation rate in 3Q 2005, compared to 3Q 2004 has been a positive factor for margins. The movements in interest rates, on the other hand, has been a negative factor.

The rise in short-term rates has increased deposit costs, while lower long-term rates have put downward pressures on the yield earned over financial investments. The bank has been minimized in this impact by extending the duration of liabilities, a process we started the end of last year. As mentioned in the previous quarter earnings report, the average duration of time deposit has been implemented, locking in low rates. In the first week of October, 225 U.S. million in local ten-year senior bonds were issued, lowering the duration gap of the bank. Next slide.

As a result of the focus on improving the asset mix and proactively managing our funding, the bank has shown equilibrium between asset growth and net financial income. As of September 2005, the bank is one of the leader in terms of net financial income growth, reflecting our stance that volume growth effectively translates into higher return on equity. Next slide.

The bank's margin has evolved more favorably, compared to the Chilean financial system. On an unconsolidated basis and impending (ph) price level restatement, the positive gap between the bank's net interest margin and the banking industry as a whole was 92 basis points this last quarter, compared to 48 basis points as of September 2004. Next slide.

Net fee income increased 18.6% year on year. This growth was driven by the rise in client base and cross-selling ratios discussed earlier. The ratio of fees over costs surpassed 50% for the first time, rising 550 basis points, compared to third quarter 2004. Next slide. Asset quality continued to improve in the quarter. Total (inaudible) provisions and charge-offs decreased 15% year on year.

The ratio of required reserves over total loan ratio, which measures the expected loss of the low portfolio, reached a record low level of 1.51 as of September 30, 2005, down from 1.78 in the second quarter and 1.9 in the third quarter of 2004. (Inaudible) loans as of September 30 decreased 16.4% year on year and 6.3% quarter on quarter. The gross charge-off ratio improved from 1.68 in 3Q 2004 to 1.26 in 3Q 2005.

In the third quarter, the bank also realized (inaudible) charge-offs of substandard loans in the middle and corporate loan market that had already been in part provisioned for. This explained the 89.3% rise year on year in charge-offs. and the reversal in provision expenses in the period. These loans were mainly bullet (ph) operations that the bank proactively charged-off. This is in line with our conservative stance regarding risk in order to maintain our optimal credit quality indicators going forward. Next slide.

Costs remained under control. In the third quarter of 2005, the bank anticipated part of its 2006 investment plan in order to sustain current commercial growth levels, especially in retail banking. In this period, operating expenses increased 5.7% year on year and 6.7% quarter on quarter. In the third quarter 2005, the bank's efficiency ratio remained among the lowest in the region at 39.9%. Let it be said that the efficiency ratio for the Chilean Banking System was 53.5% -- that is, 1,400 basis points higher than ours as of September 2005. Next slide, please.

With these strong operating results in the quarter and in the year, the bank leads its main competitor in terms of net income growth, which almost doubled the growth rate for the Chilean Financial System as a whole. And as you see in the next slide, we also have the most significant increase in profitability during the year. Next slide.

In summary, we believe that the third quarter results reflect the type of growth and profitability the bank has been searching for. The economy continues to show a strong performance with sound fundamentals and a very positive outlook. This should help to sustain the solid commercial growth in retail banking observed in the present period. At the same time, the expansion of our distribution network and client base, as well as improving our cross-selling ratios, should be a major factor driving net interest income and (inaudible) growth in the future.

Costs should remain under control, consolidating our world class efficiency ratio. Asset quality is also under control, which should translate in a controlled growth of provisions and charge-off expenses. All of these together should help sustain the levels of profitability observed so far in the year 2005. At this time, we will gladly answer any questions you might have.

Thank you.

(Operator Instructions)

And we'll first hear from Jason Mollin of Bear Stearns.

Morning, everyone. Raimundo and Roberto -- my question is a follow-up on what you were discussing related to asset quality. You mentioned, and we highlighted this in our write-up, that your charge-offs increased substantially -- you said 89% year over year. We saw over 100% increase versus the prior quarter.

This 50 billion Chilean peso charge-offs were a surprise to us, particularly because we didn't see the past due loan portfolio fall significantly. It only fell about 6.5 billion Chilean pesos. So you mention the substandard SME loans and I'm not -- maybe you could go into a little bit more detail, but were those classified as past due? And therefore, if that's the case, when you charged them off, you must have had a huge inflow of past due loans this quarter.

Okay. No, the situation is the following. That the bank has some long-term contracts -- especially bullet type of operations that on time, you see them deteriorate. The quality of the debtor, the quality of the operations start to deteriorate, and therefore you start provisioning. Although they are not considered as past due loans -- and that's where you have to follow not only the past due level, also you have to follow the non-performance or the expected loss figure that we published. Because if you see the -- in this case for some, these operations are - remember they are mostly bullet, they are not behind payments, because no payment should be expected until the end of operations.

So, what you start to release (ph) -- although they're not considered past due, because you have expectations that the client will be having any -- some kind of difficulty, you start provisioning. So, in the case of the loans that we charge-off this quarter that was a one-time cleaning up of the loan portfolio, the provision that we have set was a 90% for the average loans. These loans will be set around 18,000 Chilean -- million Chilean pesos.

So, the bulk of -- the increased both in the charge-off and the reversal (ph) of provision, because what we do is we charge-off 100% of the loan, but you release the provisions that you have set -- for this specific loans, we (inaudible) 90% of the amount they charge-off. So, the net impact in terms of provisions and charge-off was about 2,000 million Chilean pesos. Yes, so it -- that's why you see no movement on the past due loans because they were never behind payment.

But because we have the feeling that client will have a difficulty, you seem to charge-off 100%, release 90% of the provision due before taking off, and you have a net-net impact on your profit and loss account of the 10% that is around 2,000 Chilean pesos million.

So, Raimundo, what's been happening with the non-performing ratio, because we've been tracking this past due? What then -- has that been increasing?

No. The ratio that probably is more relevant to follow is what we call respective (ph) loss ratio. The one that -- remember that in Chile was a change in the way to set the provisions instead of having provisions sometimes of a voluntary nature, et cetera, now you have to set provision according to the expected loss. So, I would say the most relevant ratio to follow is the reserves over total loans ratio. That gives you a more clear indication of the expected losses. Because remember that sometimes you have past due that you won't have any loss because there is a guarantee or something like that. And otherwise, you have loans that are performing but you expect a loss.

So on these loans that you charged-off, what kind of losses did you write -- did you lose these -- the full amount of these loans that you wrote off here?

No. No. No. These are loans that were granted a long time ago, the situation of the debtor has been deteriorated. The bank has been taking provision up to 90% on average for the position that were clean. So, the only thing that we did now is to accelerate the cleaning of that loan portfolio, and the net-net impact was a charge-off of 18 million -- 18,000 Chilean pesos and a release of 90% of that. So, the net-net impact on the profit and loss this quarter was 2,000 -- around 2,000 Chilean pesos million.

And so --

So think of that-- instead of keeping the positions until the end, and increase the provision on a steady base up to 100%, you accelerate that process because you had the convention (ph) that you won't be able to recover millions -- of that 10%. And that'll basically explain why loans that were bullet, and therefore not past due loans -- even though you have the expectation that the client won't be paying you, you seem to accelerate the process and you did that in the third quarter.

Are these -- are there more of these coming? Or --?

No. No, this was a one-time operation that you usually -- you do these on an ongoing basis, and therefore we think -- we review our current portfolio once -- every once in a while. It was a one time operation and it's gone. There was no -- actually there was no need to do any other thing with this. But we think that it's better to do a cleaning when you have to do it, and not to wait until you realize that a client is not paying you. So at the end, it seems to accelerating (ph) the recognition of a loss that you had previously recognized at 90% more or less you have been -- realized that 100% of the provision is gone. You charge-off 100% of the provision and you release the provision that you have set before time.

Thanks again, Raimundo.

Next we'll hear from Luis Avime (ph) of Credit Suisse First Boston.

Hi. Good morning. You've had a very successful strategy in the retail segment. Your gains in market share are proof of that. How much more room do you see for gains in market share going forward? Do you think that you've already grew enough and you -- have you seen any stronger movements from your competitors in the sense of trying to grow in the retail market in the same pace that you guys are growing? Anything like that?

I would say that there is a combination. We have seen our main competitors -- as you know, the Chilean market is quite competitive and we have very good players in the market that we compete with. The thing is, that given that the economy is expanding at rates of around 6%, the fact that internal consumption is growing at twice that level, and the fact that the economy is in the process of increasing the total intimidation (ph) especially of retail banking, explains why retail activity has been growing at rates of around 20%.

So we think that given that the tide is rising, we have been simply capitalizing on our good starting point, and probably we had some advantage over the rest of our clients because we make the bulk of our investments last year. The market is catching up, but still it's expanding very rapidly. So looking forward, I'm not sure how much market share we will be able to gain. But what I'm sure is that we should be growing at relatively fast rate.

Our internal challenge is to grow faster than the market. But of course, that is with our risk levels that we like, and secondly, with our profitability levels that we like. So in some specific niches, if we see prices going down or risks going high, probably we won't be looking for goals above the market.

But up to now that is not happening. We see a much more rational pricing in -- among many of our competitors, especially in retail activities. Corporate is another story. So, we expect that the bank should be able to grow faster given that we're opening new branches, putting more people in certain areas. Then the market, how fast is difficult to know, but the market is expanding and we're simply taking advantage of that process.

But you see the investment process that your peers are making -- do you see it coming to an end or, you think it's still going to take a little time for it to be concluded and would that leave you some room still for growth?

No. What happened is that one thing is to do the investment. The other is to have a profitable investment. In our case, as we had mentioned before, we tried to open branches only when we have a certain critical mass of business already in that area. Therefore, the breaking even point of our branches -- we have been able to almost reduce it to half of the levels of say, 5 years ago.

And how successful are our competitors, which most of them are announcing expansion plans -- it's difficult to know and to answer at this moment. What we're doing is to basically sustain the level of investment we have been doing in the last 2 years, and hopefully they will be as profitable as the ones we have been doing in the year 2003 and 2004.

All right. That's great. Thank you, very much.

(Operator Instructions).

We'll now hear from Juan Partida of Bear Stearns.

Hi. Good morning. I have two questions. The first is related to market-related income. We saw a significant increase in gains in that item this quarter. I understand part of it was driven by the lower interest rates -- the lower long-term interest rates. Are there any other factors that we should consider, because according to my estimate, the rates were only down 12 basis points?

What happened here is the following. That our treasury area -- actually our -- what we call -- we have integrated all the business of investment banking, corporate banking and treasury. And that area has then generated a number of products on behalf of corporate borrowers, which technically are the gains that you do in those products, which is basically structured products, are reflected as a trading gain and that -- according to the Chilean accounting rules.

But on average for the year, not in this specific quarter, about 50% of those lines are a client-driven conception. Not proprietary trading. And that's why those lines came to -- in part because of the movement of interest rates, especially long-term interest rates, but in an increasing part by activities done with clients.

When you do forward operations or structured interest rates swaps et cetera, et cetera, on behalf of client and closing gaps that the client have, those are technically reflected in that line, blurring to some extent the real impact of movement of interest rates on our proprietary trading desk. That's why, although we expect going forward that long-term rates should be increasing, we expect that those trading gains should be smaller probably than what the level we have seen in the last 2 or 3 years. But not necessarily zero because we have -- as I mentioned before -- a big chunk of them coming from client (inaudible) activities which are -- should be technical -- it's more kind of a fee, but for technical reasons is considered a price difference, and therefore it's included in that account line.

I see. So even if you -- if we now see -- assuming that the rates stay as high as they are right now, with an increase of 80 basis points, we shouldn't see losses. You're saying we should still see positive market-related income?

It's difficult to know because the impact that we have seen in October-- I don't have the final figures. But as a trend, the fact that line -- that two things coming into play. One is that the bank has been closing its interest rate gaps. As we mentioned last year, we issued bonds. This year, we have been raising mostly long-term deposit -- higher than one year. And we did this senior bond issue this coming October. So, we have been closing the gap. Therefore, our balance sheet is much less vulnerable to higher rate.

Secondly, a big chunk our client -- is structured finance type of deals. Therefore -- but all in all, banks usually are a long -- because you have long-term rates, long-term loans, et cetera, and funding with a short-term deposit. So in -- a rise in interest rate in the short term as we mentioned in the release, you have a short-term impact. So the net-net is difficult to anticipate because in some cases, it should be -- for example, specifically in October, probably the net-net should be negative. Because it's very unexpected and very unusual to have long-term rates increasing 18 -- or -- 18 basis points, the 10-year benchmark rate is very unusual.

But in a more trailing quarter basis, we think that the wave (ph) of proprietary trading should be much lower going forward, and the wave of client driven operations, much higher. So it's difficult to give you a specific figure. It is very likely that in October it would be probably negative, but nothing certainly for the rest of the quarter or even for the remainder of the year.

I see. So you're seeing increasing levels of transactions on behalf of clients and --?

Very actively, and it's something that we have been pushing. In Chile, traditionally banks were aiming to the top 150 clients. Now we have the ability to go much lower to the next 1,000 or so companies. We have been trying to push investment banking products on more structured type of finance, and probably we are leading in -- I mean, for sure we are leading in that area. And that's why net -- gains from trading should be much more stable going forward, combined with the fact that the bank is less -- has closed to a large extent its interest rate gap.

If I could, follow with an non-related question. The item of other operating expenses I understand includes expenses for temporary employees -- I guess, sales people in the retail effort. Do you expect those expenses to be maintained or increase in the next few quarters? Or --?

Well, it should be growing in line with the higher commercial activity that we are seeing, especially in credit card and in consumer. Up to now, our sales -- extended sales force has been increasing lower because of gains of productivity. So, that line -- it goes very, very straight or very, very in line with the growth of consumer credit cards and checking accounts.

And therefore, as we are foreseeing good growth in those products it is likely to see that expense moving in line. We don't expect it to be coming down, nor to soar in the coming quarters probably. Depending on how fast we are able to grow in those retail activities, that line should be moving probably vis-a-vis.

Excellent. Thank you, very much.

(Operator Instructions)

Mr. Monge, it appears there are no further questions at this time. I'll turn the conference back over to you for any additional or closing comments.

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.

That does conclude today's teleconference. Thank you all for your participation. You may now disconnect.