Banco Santander Chile (BSAC) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Banco Santander Fourth 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 011-562-320-824. Now for opening remarks, I would like to turn the call over to Mr. Raimundo Monge. Please go ahead, sir.

Thank you very much. Good morning, ladies and gentlemen, and welcome to Banco Santander-Chile's Fourth Quarter and Year End 2006 Results Conference Call. I am Raimundo Monge, Director of Strategic Planning, and I am joined today by Robert Moreno, Investor Relations Manager. Thank you for joining us to discuss the bank's fourth quarter and 2006 results and recent operating trends. Afterwards, we will be happy to answer your questions.

Next two slides, you should be now on Page 3 of the webcast. Net income increased 19.1% in 2006 compared to 2005 and reached a record high level of Ch$285,582 million. That is Ch$1.52 per share and US$2.95 per ADR. The bank's ROAE in this period reached 24.1% and the efficiency ratio improved to 79% compared to 41.5% in 2005. The ROAE for the Chilean banking system in the same period was 18.6% and efficiency ratio reached 53.2%. The bank's net income growth was 50% higher than that of its main competitors in the financial system. Net income increased 6.4% in the quarter, in the fourth quarter compared to the fourth quarter of 2005 and totaled Ch$60,868 million. That is Ch$0.32 per share and US$0.63 per ADR. Strong commercial growth especially in retail lending was partially offset by the impact of negative inflation rates and one-time personnel expenses. Next slide.

2006 as the previous two years was characterized by a further strengthening of our leadership in retail banking as we continue to successfully accomplish our main strategic objectives for the period 2006-2008. 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 strong competitive advantage in the retail segments. In addition, given the good outlook of the Chilean economy and especially the high potential of bank penetration of its emerging segments, including individuals, SMEs and micro entrepreneurs, we are increasingly optimistic about the growth of the financial industry going forward.

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 banking penetration in Chile so that our client base can continue to grow at a rapid pace. Cross selling ratios should also improve as greater amounts of people develop a profound relationship with banks. These should be the critical drivers for achieving high growth in the future.

At the same time, in order to sustain high ROEs, we are also focusing on risks and costs. As a consequence, we have continued to be strongly focused on proactively managing asset quality issues 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 and 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 level. As we will see in the rest of the presentation, the bank has paved important inroads in achieving this goals during the last year.

Next slide. As we said, driver number one was to grow faster than the competition in the retail segment. The fourth quarter was robust in terms of loan growth, especially in retail banking. In the fourth quarter, total loans increased 3.3% on a quarter-over-quarter basis and 16.2% year-on-year with a strong growth in high-yielding products. Total retail lending was up 4.6% quarter-on-quarter and 22.3% year-on-year, led by good growth in lending to individuals and SMEs, small and middle-sized companies. Consumer loans expanded 6.4% quarter-on-quarter and 29.3% year-on-year. Residential mortgage lending increased 4.4% quarter-on-quarter and 21.8% year-on-year. And loans to SMEs increased 6.1% quarter-on-quarter and 27.2% year-on-year.

Next slide. As a consequence of this solid growth, the bank's market share in lending to individuals increased 30 basis points in the quarter and 106 basis points year-on-year. Market share in consumer lending as of December '06 increased 30 basis points compared to the previous quarter and 111 basis points during the year. Market share in residential mortgage lending reached 25.9%, increasing 40 basis points in the quarter and 101 basis points on 2006.

Contrary to that, commercial loans decreased 0.8% quarter-on-quarter, led by a decreasing loans to the large corporate segment, partially offset by increasing lending to higher-yielding SMEs. Market share in lending to companies as defined by the supreme tendency of banks decreased 60 basis points quarter-on- quarter to 20.3% while total loan market share decreased 30 basis points quarter-on-quarter as of the end of the year 2006. This reflects the bank's effort to improve the asset mix and to maximize profitability by adequately allocating its capital to the most profitable uses.

Next slide. You should be on Page 7. As a result of this solid growth and the bank's better earning mix, in 2006 net interest income increased 12% compared to 2005. These rise was mainly driven by the increase in average interest earning assets and stable net interest margins. Client net interest income, referring to revenues derived from our commercial lending and deposit activities, increased 18% in 2006 and 4.8% on a quarter-on-quarter basis in the last quarter of 2006. The growth of retail lending activities and the positive evolution of non-interest bank liabilities are the main factors that explain this solid evolution.

Non-client net interest income, that is the net interest income mainly generated by our treasury area, totaled a loss of Ch$16,681 million compared to a gain of around Ch$19,000 million in the fourth quarter of 2005 and around Ch$30,000 million in the third quarter 2006. The main reason for this decline in margins was a negative inflation rate in the quarter which reached 0.35% in the fourth quarter compared to 1.45% in the fourth quarter of 2005 and 1.38% in the third quarter of 2006.

As we anticipate in our last earnings release, inflation decreased substantially in the local market in line with the decline in the price of oil. In order to defend profitability, the bank lowered its net inflation index as of GAAP mainly through the issuance of bonds in 2006 and the selling of long term financial investments. At the same time, the bank hedged part of the inflation gap. The results of these sales and the partial hedging of inflation gap are reflected in the results from financial transactions compensating partially the loss of non-client interest income.

Negative inflation is regarded as a transitory event as the year-on-year inflation rate for 2007 is expected to reach between 2.5 and 3%. Nevertheless, inflation rates in the first quarter of this year are usually low or negative. Therefore, non-client net interest margins will probably continue to be under pressure until the second quarter of 2007. The Central Bank in response to this reduction of inflation reduced interest rates to 5% in January 2007. This bodes well for loan growth, funding costs and client margins in 2007.

Next slide. Apart from rise in volumes and strong margins, 2006 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 8.8% since the beginning of the year. The amount of middle upper income individuals clients that are cross sold increased 30.8% in the same period.

This rise has been driven by the growth in our retail checking account base. The total number of retail clients with a checking account has increased 23% year-on-year in 2006. Santander has increased its sole checking account base by 18.6% year-on-year as of August 2006, the latest available figure, more than twice the rate of growth than the rest of the system. At the same time, the amount of SMEs clients that are cross sold increased 24% in 2006 while Santander benefits the banks, lower to middle lower income segment units, cross sold clients grew 18.1% in the same period.

Next slide. As a consequence of having more clients and increased cross selling standards, net fee income increased 17.5% in 2006 driven mainly by retail fees. Fees from checking accounts increased 25.4% while the fees collected on lines of credit were up 45%. Credit card fees increased 34.9% year-on-year. The same happened with fees in the insurance and mutual funds business. This strong growth of retail-driven fee activities was partially offset by the 4.1% year-on year-decline in other fees. This was mainly due to a decrease in fees from corporate clients.

Next slide. The good implementation of drivers one and two of our strategy has resulted in a growth of 17.9% in client revenues in 2006, including client net interest income and fees. This strong performance has been partially compensated by the 41.6% decrease in non-client net interest income, a result, as we mentioned, of lower inflation and a flatter yield curve. Core revenues, that is net interest income plus fees, grew 13.1% in the year and has been the main driver of our net income growth.

Next slide. As mentioned in previous conference call, the bank 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 13.1% year-on-year in 2006 with a slight increase in the second half. The ratio of past due loans to total loans improved to 0.79% by the end of 2006 compared to 1.05% in 2005. The coverage ratio of past due loans reached 188.1% as of December 2006 compared to 138.8% at the end of 2005. Finally, the expected loss of the loan portfolio, that is the ratio of the retired loan loss reserve over total loans, reached 1.45% as of December 2006, increasing slightly compared to December 2005.

During 2006, the bank improved its credit scoring system for consumer loans with an addition--which in addition to known performance also takes into account additional warning signals of negative credit behavior when calculating individual risk levels. This should allow the bank to continue growing 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 segment explained the 93.6% year-on-year increase in growth provisions and charge-offs. Going forward, the bank expects asset quality to remain sound but as the retail banking portfolio increases, provision expenses should increase as well.

Next slide. Costs remain under control and the banks continue to be a reference in terms of the efficiencies levels. Operating expenses increased 10.8% in 2006. In November 2006, we concluded the anticipated negotiations of the new collective bargaining agreement that was going to expire in 2007. This new collective bargaining agreement enters into effect in 2007 and expires in 2011. As part of this process an end of negotiation bond was paid. This bond note implied a cost of Ch$11,780 million. Excluding this one time event, costs were up 6.6% in the year.

Despite the increase in commercial activity, the bank continues to improve productivity which has helped to fund part of an increasing investments in the branch network. Despite this effect, the efficiency ratio improved to 39% compared to 41.5% in 2005. The bank has the best efficiency ratio among the leading banks in Chile and Latin America.

Personnel expenses increased 14.7% in 2006, 6.3% on an adjusted basis. This rise can be explained by the 9.4% year-on-year headcount growth in the same period. These new personnel have been focused in the front office to further boost growth in retail banking 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 10.3% year-on-year increase in administrative expenses was directly linked to the higher commercial activities on the large distribution network as it can be seen on the next slide.

You should be on Page 13. In 2006, the bank has continued expanding its distribution network. 45 branches have been opened in the last 12 months, bringing the total to 397 branches representing a year-on-year increase of 12.8%. In the fourth quarter 2006, the bank established a new subsidiary, Santander Servicios de Recaudacion y Pagos, also called Santander SuperCaja, whose main function will be to open and operate special payment centers where non-clients can become clients, deposit checks, and cashier checks, and pay all types of services. These payment centers will operate seven days a week. In the fourth quarter, this subsidiary opened 22 new payment centers.

The bank continues in 2006 expanding its ATM networks as well in order to increase banking penetration levels, especially in the middle and middle lower income segments. As of December 2006, the banks had a network of 1,588 ATMs and installed 106 in fourth Q 2006. An extensive ATM network is key for bank penetration purposes. Usage of our debit ATM cards has grown at a rapid pace. Purchases with Santander's debit card increased 38.8% year-on-year compared to 28.3% for the industry as a whole. As a consequence of these new investments, Santander Chile has expanded its leadership in terms of distribution capabilities, having the largest branch and ATM network in Chile.

Next slide. With these good results, the bank shows the strongest growth of both net income and profitability among the major players in the Chilean financial system. ROE in 2006 reached 28.5% as reported by the Superintendene banks, an increase of 130 base compared to 2005. These solid operating trends were we think are a good reflection of the thorough execution of our business strategy. This has been -- this has driven a strong growth of retail lending and client-generated revenues coupled with record efficiency levels even though we continue to invest heavily in the future. Asset quality remains sound and our profitability has not come at the expense of lower provisioning that could hurt future earning prospects. Finally, our proactive management of balance sheet risks has shielded shareholder value from the volatility of international markets in the year.

In summary, with this positive results in the year we reached various milestones in terms of growth and financial performance and we have performed via 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 increasingly optimistic on the Chilean economy and expecting GDP growth greater than 5% on 2007 with higher rate of expansion of internal demand. This should lead to an 11 or 14% real increase in total loans for the whole industry -- for the whole industry, led by stronger growth in retail activities.

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. We will continue to invest in our distribution capabilities throughout 2007, but costs should remain under control as it was the case in 2006. Finally, we expect asset quality to remain healthy but as mentioned, risk premiums and loan loss provisions should move in line with the rise of retail banking activities.

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

Thank you. The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] And we will turn to Carlos Gomez with Legg Mason.

If you could give us some indication about what you expect in terms of credit losses for the next year or two years? Are we close to the end of the credit track and we expect long growth to maintain the current momentum in next two years as well? Thank you.

Okay. The second part, loan growth, we think that given the growth that most economists expect for the economy going forward which is something between 5, 5.5% and given the increased number of clients that are entering the market, especially in the low-end micro entrepreneurs and small and middle-sized companies, we think that the growth momentum that we have seen could be sustainable in the next two years, probably with some cooling off of the growth rate. But we are still looking for a growth rate in the retail activities in the upper teens. That poses a good growth prospect for the banking industry as well, especially in our case that we are very well positioned to take advantage of that growth.

And going to the first part of your question is asset quality, we think that provisions should be moving in line. In this business, I promise--is the time to explain a little bit. In the corporate area, when you have a client that has difficulties and is not paying its loans, you have a problem because those companies usually pay it unless they have severe difficulties.

In the retail segment, contrary to that, it is part of the ongoing process and it is part of the normal cycle of business to have clients that are not fully paying their debts because they have some transitory problems or because they have not been able to reach the branch, whatever the explanation is. So it is part of the process to have a very lean recovery effort in order to get very quickly to that client and to understand what is going on. That explained why although you have high provision levels, you also have relatively high recovery level in this segment, something that in the corporate segment for example is not that usual. That is why you should expect provisions to increase. How much probably will depend on the dynamic of the growth and on consumer lending and credit cards and the like which are usually more risky, especially in this segment.

So but net net, it is a very accretive process for the bank to go to this retail segment as long as you have a well-oiled machinery of recovery and you have a good scoring process to monitor all the processes. I think that in the last two or three years, the bank has been able to increase very rapidly its market share. We have been among the largest players the only one that consistently has been increasing its market share in retail activities and at the same time, we have increased our provisioning levels, but at the same time supporting a relatively higher ROEs. So provision is the other side of the coin of high growth in the top line. It shouldn't be expected to only see good growth in top lines with no growth in provisioning and the real challenge, and the real ability of outperform or having strong results is to combine both issues in a good way.

Thank you.

[OPERATOR INSTRUCTIONS] And gentlemen, no one else has signaled that they have a question.

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

And with that, we will conclude today's conference. Thank you everyone for joining us.