Banco Santander Chile (BSAC) 2005 Q4 法說會逐字稿

Welcome to the Banco Santander fourth 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 Robert Moreno at 011-562-320-8284. For opening remarks and introductions, I will now turn the call over to Mr. Raimundo Monge. Please go ahead, sir.

Thank you very much. Good morning, ladies and gentlemen. Welcome to Banco Santander Santiago's fourth quarter and year end 2005 results conference call. I am 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 results and recent operating trends. Afterwards, we will be happy to answer your questions. Next two slides, please.

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 in 2006. According to the latest data published by the Central Bank, Chile’s GDP has expanded at rates between 5% and 6%. The outlook for 2006 seems equally positive. This expansion will be driven by a strong growth of internal investment and consumption, which is a very relevant factor for the banking activity.

Consumption is growing above the rate of growth of GDP as unemployment levels have continued to decline, and consumer confidence remains high. All of this is very positive news for banks, as consumers and companies continue to demand loans in a very sound economic environment. Next slide.

In 2005 the Bank’s primary focus was to increase its profitability by expanding loan growth in the high yielding retail segments. The Bank is currently the leader in almost all categories of retail banking, and is also among the fastest growing in this highly profitable market. In fourth quarter 2005, the Bank’s total loans increased 17.7% year-on-year and 4% quarter-on-quarter.

Total retail loans, which include loans to individuals and smaller, middle sized companies, increased 26.4% year-on-year and 5.8% quarter-on-quarter. Loans to individuals grew 24.9% year-on-year and 5.6% quarter-on-quarter, reflecting the increase in consumer spending and the acquisition of homes. The highlight of the quarter was a record 7.1% quarter-on-quarter growth in Santander Banefe.

Lending to SMEs increased 31% year-on-year and 6.4% quarter-on-quarter. The Bank is placing a larger emphasis in expanding its presence among SMEs, due to the strong economic indicators that favor growth in this attractive segment. Lending to middle market and the real estate sector increased 14.1% year-on-year and 1% quarter-on-quarter.

In 2005 the construction sector expanded strongly, as the sale of new homes increased. Growth in this sector was partially offset in the quarter by translation losses produced by the appreciation of the Chilean peso in the quarter.

Total loans in corporate banking decreased -- increased 4% year-on-year, and decreased 0.4% quarter-on-quarter. 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. Next slide.

With this high growth rate, market share continues to rise in key products. Market share in consumer lending increased 80 basis points in 2005, while market share in residential mortgage loans expanded by 140 basis points. 2005 was also a successful year in terms of checking accounts. A total -- The total market share in checking accounts increased 250 basis points, and the Bank reached, for the first time, the leading position in this product.

There were also increases in many other key retail products, as it can be seen in the slide in page number 5. Next slide.

Our client base is also growing at a rapid rate and is becoming more profitable. Since the beginning of the year, the total number of clients has increased 11.9%. The amount of clients with a checking account, which tend to be more loyal and profitable, increased 18.9% in 2005. The amount of cross-sold clients, that is clients with a checking account, and have used three or more products, has increased 35.9% in the same period.

These are the clients explaining a big proportion of our retail revenues and the growth seen in 2005. while the other categories are likely to be profitable in the coming year, helping us to sustain our earnings momentum. Next slide.

In order to sustain high growth level in retail banking, the Bank continue to invest strongly. In 2005 the Bank opened 41 new branches, represented a year-on-year increase of 13.2%. 17 of these new branches were opened in fourth quarter 2005. The Bank’s branch network now totals 352 branches, the largest private network in Chile. In addition, a total of 232 new ATMs were installed during 2005 - an increase of 19.5% in the year. Of these, 100 ATMs were installed in the fourth quarter 2005.

Going forward, the Bank expects to continue to open up to 40 branches a year, half in the Bank and half in Banefe, to ensure a strong business growth in retail banking. The Bank has also greatly strengthened its [complimentary] channel, which are becoming a key factor in explaining the high growth level being obtained. The number of clients banking through Internet has increased 40% in 12 months, compared to a 19% growth for the rest of the banking industry.

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. Next slide.

In summary, in 2005 we consolidate even further our strong competitive position in the Chilean market. We’re currently number one in almost every market we participate in, and we are also gaining market share. We believe to be well-positioned to support high growth in 2006. Next slide.

Now we will review our financial performance in the quarter and in 2005. Next slide. We should be in slide number 10.

Strong fourth quarter and year end results reflect the positive evolution of the economy, and what we believe is a clean execution of our strategy. In 2005 net income reached a record high level of CLP239,710m, that is CLP1.27 per share or $2.57 per ADR, increasing 20.6% on a year-on-year basis. Earning growth in 2005 was driven by a 15% core revenue growth and better asset quality.

Results in the fourth quarter of this year were also positive, especially on a core revenue basis. In the fourth quarter of 2005 net income totaled CLP57,216m, that is CLP0.30 per share or $0.61 per ADR, increasing 6.1% compared to the last quarter of the year 2004. Core revenues reached a record high level during the fourth quarter of 2005, increasing 16.4% year-on-year and 9.5% compared to the third quarter of 2005. Next slide.

These positive operating trends in fourth quarter 2005 was partially offset by the mark-to-market of our securities portfolio, as a result of our rising long-term rates. The yield on the Central Bank’s 10 year bond went up 86 basis points in the quarter, following various quarter of continuous decline. These had a direct impact on the result from trading and mark-to-market of securities, which totaled a one-time loss of CLP16,597m in the fourth quarter of last year.

This rapid increase in long-term rates have been partially reversed during the first two months of 2006, as it can be seen in the chart in page 11. Next slide.

Recurring income continued to grow at healthy levels in 2005. The strength of the retail banking business is positively impacting net interest income and margins. In 2005 net financial income increased 15.3%. In fourth quarter 2005 net financial income increased 17.9% compared to the same quarter of 2004. The net interest margin increased from 4.7% in fourth -- in the fourth quarter 2004 to 4.9% in the fourth quarter 2005.

In the fourth quarter, average interest earning asset increased 13.3% year-on-year, led by a 25.8% rise in average retail loans in the year. The higher inflation rate in fourth quarter 2005, compared to fourth quarter 2004, also has been a positive factor for margins. This was partially offset by the increase of short-term interest rate in the quarter. The rise in short-term rates has increased deposit costs. The Bank has been minimizing this impact by extending the duration of its liability. Next slide.

As a result of the focus on improving the asset mix and proactively managing our [family] mix, the Bank has been -- has shown equilibrium between asset growth and net financial income. In 2005 the Bank is one of the leaders, in terms of net financial income growth, within the industry, reflecting our stance that volume growth effectively translates into higher profitability and return on equity. Next slide.

The Bank’s margin has evolved more favorably compared to the Chilean financial system. On an unconsolidated basis, and including price level restatement, the positive gap between the Bank’s net interest margin and the banking industry as a whole, increased to 66 basis points at the end of 2005. Next slide.

Fee income has been another driver of profitability for the Bank in 2005. This growth was driven by the rise in client base and [conciliatory] ratios discussed later -- earlier. This, in 2005, increased 13.8% and 11% on the fourth quarter of last year compared to the fourth quarter of 2004. Fees from retail banking increased 24.8% in the fourth quarter 2005 compared to the fourth quarter 2004. The ratio of fees over cost reached a record level of 22 -- 52.3% in the quarter. Next slide.

Asset quality improved throughout 2005, resulting in lower loan loss provisions in the Bank and in the financial industry as a whole. Total provisions, net of recoveries in the year, decreased 21.3% in 2005. The ratio of required reserves over total loans ratio, which measures the expected loss of the loan portfolio, reach 1.42% as of December 2005 - down from 1.96% in the fourth quarter of 2005 -- 2004, sorry.

Past due loans at the year end 2005 decreased 18.7% year-on-year and 6.7% quarter-on-quarter. The coverage ratio improved to 135.3% at the year end 2005. Next slide.

It’s important to point out that, even though we believe to have a conservative approach to risk and we are operating in a sound financial system, going forward, as the retail banking portfolio increases, provision should expand in line. In 2005 the net charge-off ratio, provisions, and charge-offs net of recoveries, reached 0.65%, compared to 0.55% for the Chilean banking system. We believe that this ratio should increase in the future. Next slide.

Costs remain under control. As previously stated, the Bank expanded its retail distribution capability. Despite this, efficiency levels remain high, reflecting productivity gains and tight cost control. In the fourth quarter 2005 the efficiency ratio reached 45.6%, compared to 46% in fourth quarter 2004. Excluding market related income, the ratio of operating expenses to core revenues continued to improve.

In fourth quarter 2005 this ratio reached 39.7%, compared to 41.2% in the third quarter 2005, and 42.8% in the fourth quarter of 2004, reflecting the gains and profitability and higher growth rate of referring income compared to costs. For the whole 2005, efficiency improved to a record low of 41.5%, placing us among the world leaders in efficiency for our universal Bank. Next slide.

The evolution of our efficiency levels also outperformed our main competitors and the financial system as a whole, on an unconsolidated basis. A reflection, we think, that the Bank is 100% focused on growing in order to improve profitability for our shareholders. Next slide.

In summary, with this positive result in the quarter and 2005, we not only reach record profits but also outperform the highly competitive Chilean market, in terms of net income growth and the evolution of our ROE, which reached 23.6% in the year. Next two slides, please. We should be in slide 22.

We believe this growth momentum should continue in 2006. We are bullish on the Chilean economy and are expecting GDP growth greater than 5% in the year, with a higher rate of expansion of internal demand. This should lead to a 15% to 17% increase in total loans, nominal term, led by a stronger growth in retail sectors. This should boost our net interest income and fees. Margins should remain stable.

The better asset mix should be partially offset by a lower inflation rate. We will continue to invest in our distribution capabilities throughout 2006 but costs should remain under control. Finally, we expect asset quality to remain healthy but, as mentioned, risk premiums and low loss provisions should increase in line with a rise of retail banking activity.

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

Thank you. [OPERATOR INSTRUCTIONS]. And our first question comes from Jason Mollin with Bear Stearns.

Good morning everyone. My question is related to the very strong growth we've seen in your retail business, in your retail franchise, including -- We saw you increase the number of branches by 13% and, with very good success, increase the number of retail checking accounts by almost 19%, and the number of clients by almost 12%. Can you characterize what kind of clients you're getting -- you're increasing? Are these related to the new branches? Are you taking clients from the competition? What acquisition costs are there in growing your client base this quickly? And, given your expected branch openings, you state in the presentation Bank branches 15 to 20, and Banefe branches another 15 to 20. Should we continue to expect this growth in clients in ’06?

Okay. The answer is yes and no. Yes, in the sense that we expect growth in clients. Probably in terms of total of clients we should remain at levels similar to the ones we saw in 2005, basically, because Banefe is making big inroads in, what we call, bank [realization]. It’s bringing new clients to the system, by means of being more efficient and having better scoring process, you can reach those clients, despite some regulations that are applicable in Chile, that -- some caps over rate and over the fees you can charge. If you are very efficient and you have better scoring processes, so can get a very good profitability despite those caps. So Banefe should be bringing, we think, a number of clients.

When you go into retail, it takes a lag to start seeing the results of the application of your strategy. And that’s why we think there is a kind of a momentum that we should expect, at least for 2006, to remain, because we are seeing now things that were, to some extent, -- the fees were put back in 2003, 2004. And, therefore, you get an inertia in your commercial activity that is very health. In any case, we’re also expanding branches and other distribution capabilities to support that inertia.

In terms of checking accounts, probably we had -- we should see some deceleration. We have been very active in that process and growing 19%, probably we should expect something lower in 2005. The good news about the new client is that, in our case at least, a new client breaks even something between 18 to 36 months, depends on the product mix that they have.

That means that the clients we incorporate in 2005 will be breaking even probably in 2007, 2008. That means that we are now putting the seeds of a future growth that will see in the next two or three years.

Contrary to that, the cross-sold clients - those that have been clients with the Bank - but are increasing their usage and the number of products that they have those yield very rapidly profitability. And that’s why during 2005, I would said and it’s a guesstimation, over 80% or 85% of our increasing revenues came from new clients.

And, therefore, those are the clients , the ones that are having more activity with the Bank, that you have the bulk of the increase in revenues in 2006. And then from then on are, basically, the new clients that you bring, which start breaking even and contributing to your bottom line. So it’s a combination. We should see more like the same level of growth of total clients, probably some deceleration in checking accounts. And in terms of cross-selling, we think we have -- still should be a very high rate in the upper 20s, or mid-20s range.

Raimundo, just maybe a follow-up. You mentioned the Banefe clients. Would you say here that 1m -- I'm not sure if this is that the end of ’05, are there approximately 1m Banefe clients?

Yes. 1m Banefe clients, that’s approximate.

So what was that at the beginning of -- at the end of ’04? So what percentage of that increase came from Banefe, which would be new client – may be new clients to the system while the remainder of the increase would probably be -- would also be clients of other banks or past clients of other banks. Is that an accurate statement?

Yes. I would say the new Banefe clients were -- at the -- they had 900,000 clients at the end of 2004, 1m at the end of 2005. Those are basically newcomers and the rest come from other banking activities.

And are you competing on price to get these clients into the Bank? Are your products positioning themselves by -- to take clients away in terms of pricing? Is it service?

No. It’s mostly to be there. Distribution here is critical because these are clients that don’t come, how you call it, voluntarily to a bank. You have to reach them where they work or -- and so, for example, we have been very active in -- For example, you do the salary payment for large clients or big companies. And therefore, once you start doing the cash management of those companies, you pay the salaries in debit accounts.

And, therefore, you have a way to reach those clients and then you start cross-selling them, things like that. The -- Our ability this year has been to reach clients that, otherwise, would be probably operating either on a cash basis, or very simple with a retailer card or things like that.

So it’s a matter of distribution capabilities and having the right sales force, and the right product mix and pricing scheme. But we are not competing in prices in that segment because, given the caps that I mentioned before, the -- In order to get a good return on your capital you don’t have too much space. It’s simply matter of reaching those clients in a cost effective way.

Could you share any of those payroll account numbers? For example, how did that perform this year, in terms of number payroll accounts that you're bank is managing?

I would say that a big chunk of the increase is coming from there. Because in this segment especially, and now I'm talking about the Santander Banefe segment, in this segment, it varies the starting point of the relationship. Once you get the payroll, and with two or three months of history that you see how the client evolve and how they're using their debit card, you can have a better view of how they're performing.

And with that information your scoring process and other information - demographic information, behavior, etc. Then you can start doing, giving a simple credit card with a very small line of credit and -- So it’s like you have to understand the behavior that -- the likely behavior of the client, by an indirect way, because these are persons that don’t have financial records, etc., etc. So I would say the bulk of the growth in clients in that segment comes from the salary payment.

Thank you very much.

[OPERATOR INSTRUCTIONS]. We now take our next question from Juan Partida with Bear Stearns. Please go ahead.

My questions were answered, thank you.

[OPERATOR INSTRUCTIONS]. Mr. Monge, it appears that there are no further questions at this time. I’d like to turn the conference back over to you for any additional or final comments. And thank you, that does conclude today’s teleconference. We thank you for your participation and we thank you again. Have a nice day.