Banco Santander Chile (BSAC) 2006 Q3 法說會逐字稿

Good day and welcome to the Banco Santander Third Quarter 2006 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 your host, Mr. Raimundo Monge. Please go ahead, sir.

Thank you very much and good morning ladies and gentlemen. Welcome to Banco Santander Santiago's Third Quarter 2006 Results Conference Call. I am Raimundo Monge, Director of Strategic Planning at the bank and I am joined today by Robert Moreno, Investor Relations manager. 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. Next slide.

You should be now on Slide Number 3. Net income increased 23.1% in the first nine months of 2006 compared to the same period of 2005 and totaled 224,713 million Chilean pesos. That is 1.19 Chilean pesos per share and US$2.26 per ADR. Growth was led by a 20.4% increase in core revenues, that is, net interest income and fees. The bank's ROA in this period reached 27.0% compared to 24.3% in the first nine months of 2005. The efficiency ratio improved to 36.6%, compared to 40.2% in the same period last year. The ROA for the Chilean banking system in the same period was 17.9% and the efficiency ratio for the system reached 51.8%.

The bank's net income growth was around two times that of its competitors in the Chilean financial system in the aggregate in the nine-month period ended in September, compared to the same period last year. Next slide.

Net income increased 20.3% in the third quarter 2006 compared to the third quarter 2005, and totaled 79,934 million Chilean pesos. That is 0.42 Chilean pesos per share and US$0.81 per ADR. ROE in the quarter reached 27.5% compared to 26.8% in 3Q 2005. Core revenues increased 20.5% year-on-year as the bank continued to gain market share in key products and services. Next slide.

The first nine months of 2006 were characterized by a further strengthening of our leadership in retail banking, as we continued to successfully accomplish our main strategic objectives for the 2006-2008 period. Our goal has been to achieve high growth rates, especially in the retail business, and at the same time sustain high ROEs. Accordingly, we expect to grow at a higher rate than our main competitors in the retail banking. As the largest bank in Chile with the largest distribution network and client base, the bank has a strong competitive advantage in the retail segment. In addition, given the good outlook of the Chilean economy and especially the high potential for bank penetration of its emerging segments, including individual, SMEs and micro entrepreneurs, we are increasingly optimistic about the growth of the financial industry.

Secondly, with over 2.4 million clients, we envision strong cross-selling potential by improving client services and expanding the distribution network. We are also leading the process of increasing bank penetration in Chile so that our client base can continue growth at a rapid pace. Cross-selling ratios should also improve as greater amounts of people develop profounder relationship with the bank. These should be critical drivers for achieving high growth in the future.

At the same time, in order to sustain high ROE, we are also focusing on our risks and costs. As a consequence, we have continued to be strongly focused on proactively managing asset quality in order to balance growth in retail banking with a normalization of provisioning levels. Finally, we are the most efficient bank in Chile. We expect to continue growing at a strong pace, investing in expanding our distribution capabilities. Part of this growth has been and is going to be financed with productivity gains, which should allow us to maintain our world-class efficiency levels. As we will see in the rest of the presentation, the bank has made important inroads in achieving these goals during the first nine months of this year. Next slide.

As we said, driver number one was to grow faster than the competition in the retail segment. In the third quarter, we saw robust growth in terms of loans and especially in retail banking. In the third quarter 2006, total loans increased 2.4% quarter-on-quarter and 17.1% year-on-year, with strong growth in higher-yielding products. Total retail lending increased 5.3% q-on-q and 23.6% year-on-year, led by good growth in lending to individuals and SMEs. Consumer loans expanded 6.4% q-on-q and 29.5% year-on-year. Residential mortgage lending increased 5.8% q-on-q and 23.9% year-on-year. At the same time, loans to SMEs, small and middle-sized corporations increased 4.8% q-on-q and 27.6% year-on-year. Next slide.

You should be on Slide Number 7. Market share in lending to individuals increased 10 basis points q-on-q and 80 basis points year-on-year to 25.9%. Market share in consumer lending was 26.5% as of September 2006, increasing 20 basis points in the quarter and 60 basis points in the year. Market share in residential mortgage lending reached 25.4% as of September 2006, increasing 10 basis points since June 2006 and 90 basis points in 12 months. Next slide.

As a result of this solid growth and the bank's better earning mix, in the third quarter 2006, net interest income increased 21.3% compared to the third quarter 2005. This rise was mainly driven by the 19% increase in average interest-earning assets and a 10 basis point year-on-year rise in net interest margins, that reached 5% in the third quarter 2006.

The rise in margins was mainly driven by client activities. Client net interest income increased 25.7% year-on-year and 10.8% quarter-on-quarter, led by a 40 basis point increase in client spreads and higher average loans. The average value of consumer loans, the highest-yielding asset, increased 32.7% year-on-year. The bank has also experienced a rise in spreads in lending to SMEs, corporate and non-interest-bearing demand deposits, due to the rising interest rate environment.

Non-client net interest income decreased 7.9% year-on-year. Inflation expectations on real interest rates decreased in the quarter, negatively affecting non-client interest revenues. At the same time, the bank significantly lowered its net inflation index asset gap in order to minimize the financial impact for expected lower rates in the coming quarters, a reflection on the bank's proactive management of its balance sheet in order to protect client-generated margins and income. Next slide.

Apart from rise in volumes and the stronger margins, the quarter also stood out for the continued rise in our client base and cross-selling ratios, especially in retail banking. The total number of clients increased 8.9% since the beginning of the year to 2.4 million clients. The amount of middle upper-income individual clients that are cross-sold increased 23.1%. The amount of SMEs clients that are cross-sold increased 24% in 2006, in terms of [Banefe], cross-selling clients grew 12.1% in the same period. Next slide.

As the chart reflects, the bank has been increasing its market share in terms of clients and product usage. Market share in checking accounts reached 26.2% as of May 2006, the latest figure available, compared to 24.3% as of May 2005. Santander Santiago has increased its checking account base by 18.2%, twice the rate of growth of the banking system as a whole.

Santander Santiago's client base in terms of debtors increased 16.9% in the twelve-month period ended April 2006, the latest available figure. These compare to the 10.2% increase for the market as a whole in the same period. In addition, the bank's market share in the debit card usage increased from 21.2% as of September 2005 to 23% 12 months later. Purchases with Santander debit cards are increasing 39.3% year-on-year compared to 28.5% for the market. More clients and greater product usage has boosted fee income as can be observed in the next slide.

Next slide, Page 11. Net fee income increased 17.3% year-on-year in 3Q 2006, driven by a rise in clients and product usage. In 3Q 2006, fees from checking accounts increased 17.8% and fees from lines of credit rose 30.4% year-on-year. Credit card fees increased 25.2% year-on-year, while ATM fees increased 20.7% year-on-year. Usage of our debit ATM cards has grown at a rapid pace as seen. As of September 2006, the bank has installed 1,479 ATMs, which represents an increase of 12% year-on-year. Insurance brokerage fees increased 59.4% year-on-year.

In order to strengthen its position within this market, Santander Group created a property and casualty insurance company, which distributes its products through the bank's insurance brokerage subsidiary and the bank branch network. Fees for mutual fund management decreased 6.6% year-on-year, reflecting intense competition in this market. Total assets under management increased 8.7% year-on-year and 5% quarter-on-quarter. The 36.2% year-on-year increase in fees -- in other fees was mainly driven by the rise in fees from other advisory services to large corporate clients and a rise in fees from the sale and purchase of foreign currencies. Next slide.

As mentioned in our previous conference call, the bank's asset quality is expected to remain sound but as the retail banking portfolio increases, provision expense should rise in line with this better performance. Past due loans decreased 22.1% year-on-year in 3Q 2006 and were flat on a quarter-on-quarter basis. The ratio of past due loans to total loans improved to 0.78% in 3Q 2006, compared to 1.17% in 3Q 2005. The coverage ratio of past due loans reached almost 180% as of September 2006, compared to 129.4% as of September 2005. Finally, despite the growth of the loan portfolio, the ratio of required loan loss reserves over total loans, reached 1.38% as of September 2006, increasing 8 basis points compared to June 2006 and lower than the levels seen as of September 2005, which was 1.51.

During 2006, the bank improved its credit scoring system for consumer loans, which in addition to non-performance takes into account additional warning signals of negative credit behavior when calculating individual risk levels. This should allow the bank to continue growing in retail banking while maintaining our conservative approach to credit risk and the soundness of the loan portfolio. This and the overall growth of lending to retail segments, explain the 56.9% year-on-year increase in gross provisions and charge-offs. Charge-offs in the quarter were in line with the level of charge-off recognized in the previous past three quarters.

Going forward, and as stated in our last quarterly earnings report, the bank expects asset quality to remain sound, but as the retail banking portfolio increases, the ratio of provision expenses to total loans and the risk index should rise in line.

Loan loss recoveries showed a sluggish growth in the quarter. In this period, the bank finished a complete overhaul of Santander Banefe's systems, fully integrating them in the bank's computer platform. This should have a positive effect on efficiency levels and overall service going forward at Banefe, but temporarily affected the recovery process at that unit, a key element in Santander Banefe's credit cycle. The bank is also reorganizing the recovery department in anticipation of higher retail lending activity and to boost this unit's performance. More collecting agents are being hired and a senior commercial officer was placed at the head of this division. Next slide.

Costs remain under control and the banks continue to be a reference in terms of efficiency levels. Operating expenses increased 5.6% year-on-year in 3Q 2006. Despite the increase in commercial activity, the banks continue to improve productivity, which has helped to fund part of the increase in the investment branch network. In 3Q 2006, the efficiency ratio reached 35.9%. The bank has the best efficiency ratio among the leading banks in Chile and Latin America. Personnel expenses increased 10.9% year-on-year. This rise can be explained by the 8% year-on-year increase of the headcount in the same period.

This headcount growth has been focused in the front office to further boost growth in retail banking activities and maintain client service standards. The increase in personnel expense was also due in part to an increase in variable income, due to the bank's positive commercial performance in 2006. The 2.4% year-on-year increase in administrative expense was directly linked to the higher commercial activities and the larger distribution network, as can be observed in the following slide. Next slide.

You should be on Page 14. In 2006, the bank has continued expanding its distribution network. 33 branches have been opened in the last 12 months, bringing the total to 368 branches, representing a year-on-year increase of 10%. Santander Santiago has the largest branch and ATM network in Chile. Next slide.

With these good results, the bank showed the strongest growth of both net income and profitability among the major players in the Chilean financial system. ROE in the nine-month period -- in the first nine months of 2006 reached 27%, and increase of 270 basis points compared to the first nine months of 2005.

These solid operation trends, we think are a good reflection of the thorough execution of our business strategy. This was driven -- this has driven strong growth of retail lending and client-generated revenues coupled with record efficiency levels, even though we continue to invest in future growth. Asset quality remains sound and our profitability has not come at the expense of lower provisioning that could hurt future earnings prospects. Finally, our proactive management of balance sheet risks has shielded shareholder value from the volatility of international market and inflation risk in the quarter.

In summary, with these positive results in the quarter, we reached various milestones in terms of growth and financial performance, and we outperformed the highly competitive Chilean market. Next slide.

Going forward, we have a positive outlook for the bank. We believe this growth momentum should continue in 2007. We are bullish on the Chilean economy and expecting GDP growth rate greater than 5% in 2005, with a higher rate of expansion of internal demand. This should lead to a 10 to 15% real increase in total loans for the whole financial system, led by stronger growth in retail sectors.

We are also placing a stronger focus on higher-yielding non-lending activities in corporate segments. This should boost our net interest income and fees revenue-based. We will continue to invest in our distribution capabilities throughout 2007, but costs should remain under control as was the case in 2006. Finally, we expect asset quality to remain healthy. But as mentioned, risk premium and loan loss provisions should increase in line with the rate of retail banking activities.

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

Thank you.. [OPERATOR INSTRUCTIONS] And our first question comes from Paulo Ribeiro from Bear Stearns.

Good morning. I have a couple of questions. I would like to talk a little bit more about your increase in provisions and you went through the explanation of increased exposure to retail, more risk. Can you be more specific if you -- and since you said you improved your credit monitoring system, do you see a lot of deterioration in asset quality? You said it will remain sound, but so why did you increase provisions to potentially end the quarter? What your numbers are telling you that it can share with us, maybe?

And second question is on the non-operating income. You stated here you reversed some provisions to non-credit-related contingencies. I want to know what was the drive behind this? Why could you reverse this and why you decided to do this quarter? And more specifically too, how you -- that does not explain the full swing from a loss last quarter in 2Q to a gain of 6.3 billion in 3Q? So if you could explain, what else in there? Thank you.

Okay. Regarding provisions, as we mentioned, overall the assessment of the asset quality, we think is sound. And once you go into the retail world, you have to do an ongoing cleansing effort. Every single quarter you have to clean your loan portfolio, because otherwise problems could arise in the future. So that is why it is not incompatible to have high provisioning levels and a sound loan portfolio. As a matter of fact, this is basically because you are on a permanent way cleaning your loan portfolio if you have a sound portfolio at the end of the day, yes? So the further you go into the retail world, the higher the cleansing effort you have to have. Because it is part of the other side of the coin.

So that is why we think we have been fairly proactive in cleaning whatever has to be cleansed, and at the same time keeping fairly strong asset quality indicators. So if the process is the other side of the coin, in order to have a sound balance sheet, you need to be cleaning on a permanent basis. There was, to some extent, an extraordinary event this quarter that was the type that Santander Banefe, our unit aimed at the low end of the consumer market, went through integration of the systems. That is good news for Banefe's client in terms of better services and the computer [platform] that came from Banefe was to some extent, limiting the growth of that unit. So it is good in terms that they will have a much more powerful computer platform to grow. This is a very massive business and therefore systems are critical.

But of course, when you go through a full-blown merger, which was the case in 3Q, you have tradeoffs and one of the tradeoffs that we saw was a lower level of recoveries. Remember that in Banefe, recoveries are part of the cycle of business. You need to be actively cleaning and be very close to your clients, because otherwise you are going to have quality problems. So that was, to some extent, the extraordinary event that happened, which is good news going forward because you have a much more powerful platform to grow in Banefe. It could have some positive impact in efficiency and client service as well. But the tradeoff in the short term was that the people in Banefe and the branches was more concerned about the integration issues than following up and there client having some kind of results.

And that is why recoveries were relatively flat, despite we have been growing in Banefe in the meantime. So they grew, but they did not have enough focus to concentrate also on recoveries at situations that we expect in the fourth quarter to be normalized and go back to normal activities.

So in terms of provision, I would say that as we have been anticipating in the last three or four quarters, we should have a relatively sound asset quality. But after a higher cleaning effort, because we are growing very fast in segments which have more risk in debt but of course that also is explaining our solid top-line growth.

Regarding non-operating income, as we have mentioned in our press release, these provisions are basically set for contingencies related to non-credit risk, including some non-specific contingencies, tax contingency, legal contingency and other general non-credit impairments, yes? This line is very difficult to model to some extent, or to predict, because it is also an ongoing effort that the bank must be doing in order to have a sound operational environment. For example, in this quarter, part of the reverse was done because we have taken some provisions in anticipation of the merger, of the system merger at Banefe.

Once the merger is finished and there are no major problems or situations that come in those processes, you think we will release the provision, the remaining provision. The same happens with other legal concerns that we have. So here, it is very much when you have a relatively large operation, you are usually facing some kind of contingencies and for conservative's sake, you tried to provision in anticipation of those contingencies.

Whenever you have more information, for example, when you finished the process of consolidating this computer platform at Banefe, you simply release the provision that is remaining. In the second quarter, we took other provisions because of other things that we thought could be concerning. And then probably in the future, whenever we think that contingency has passed, we will be releasing them, as today we released the provisions related to contingencies that were no longer.

So I know it is difficult to anticipate the evolution of that line, but it is part of the ongoing process of reviewing every single line that you -- remember that the bank is very much advanced in terms of Basel II to compliance and therefore for the first time, we have much powerful tools for modeling contingencies and other kinds of situations that could arise.

So, I would say it is part of the ongoing business of running the bank. To be fair, it is very difficult to predict. But, in absolute terms, if you add them, they are not that relevant for the bottom line - for the level of the bottom line. And if at all, they have been negative, because here we also include many things related to the repossessed assets, et cetera, et cetera. So once the market is going up, the price of property is going up, you tend to reevaluate the price of properties and things like that. So it is difficult to anticipate what to expect in the future.

But probably, this was relatively a normal period because in general, usually you have a relatively negative bottom -- adding all up, you should have a negative impact in this line. But this year -- I mean, this quarter was -- so, it is difficult to predict, but it is part of the ongoing process of having a sound balance sheet and a sound operational environment.

Perfect. Raimundo, to allow a quick follow-up, on the provisions again, I was too very surprised with the jump. I understand you have been gradually increasing your presence in the consumer retail segment. But the jump in the quarter was way above what was expected. But, did the integration of Banefe have any impact on that? I mean, did you go to Banefe, put your systems in place and kind of apply your criteria, and you found more problems than you expected? Will you foresee in the future more problems coming down the line with the new system monitoring things? That is one. And two, can we expect this level of provisions being at the percentage of average loans, I think it was 1.7% this quarter, compared to 1.2, 1.3 you had in the previous quarter. Do we expect this to be the normal level now?

Okay. Relating to Banefe, with the explanation that there was a short-term or a temporary trade-off to be paid for the integration of the system, which is reflecting in lower recoveries and to some extent, high provisions. Did you see the figures? We maintained, more or less, the same charge-off that we have been seeing in the last two or three quarters, and what we increased was basically provisions, which is primarily an anticipation of bad news.

And secondly, recoveries, which is basically that you cannot put on an outstanding -- clients that had some kind of difficulty, you cannot contact them in the short-term. Those are what explain the increase of provision. What we said that, to some extent, explains some of the jump that we saw in provisions, we have the idea at this moment that given that the economy is managing very soundly, given that unemployment has been going down. Last week, there were published the latest unemployment figures and it was the best level in four years. It is still high, or higher than could be expected, but has been evolving quite positively.

We think that there should not be, at this moment, any concern. The change of criteria are simply because, given the environment, we have been envisioning a growth stage for the next two or three or four years and therefore we are, to some extent, preparing the bank for a growth stage in retail. And that is why we have been changing the computer platform in Banefe. We have been strengthening our recovery area because we want to be prepared and get the rewards of going to a more larger or larger-penetrating market without any [aspects] of prices. So we think that it should be steadily evolving. Probably we got as high we could expect as a proportion of loans at this stage of the cycle.

But we are prepared to put more provisions in order to have a sound portfolio. Net-net, it is a very positive business, because you are getting high rewards in terms of the income and spreads in the top line, and that explains our solid top-line growth. But of course, it is a more costly segment to reach and provisions should be higher.

All right, great. Thank you very much.

[OPERATOR INSTRUCTIONS] And it appears there are no further questions at this time. Mr. Monge, I would like to turn the conference back over to you for additional or closing remarks.

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. Have a good day.

And that does conclude today's conference. We would like to thank you for your participation in today's conference. Everybody have a great day.