Banco Santander Chile (BSAC) 2007 Q1 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone, and welcome to this Banco Santander-Chile first quarter 2007 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. 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-Chile's first quarter 2007 results conference call. I am Raimundo Monge, Director of Strategic Planning and I'm joined today by Robert Moreno, Investor Relations Manager. 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, you should be on slide number three. In the first quarter of 2007, net income totaled CLP72,189m, that is CLP38 per share and CLP0.74 per ADR, increasing 12% compared to the first quarter 2006 and 18.6% compared to the fourth quarter of 2006.

Core revenues, that is net financial income and fees, increased 22.4% year on year and 12.2% quarter on quarter as the Bank continued to show strong results in its Retail Banking business. Next slide.

First quarter figures show Santander Chile's continued focus on profitability on high growth in the most profitable segments and a determination to transform this growth in sustainable ROEs going forward. Accordingly, our strategies center around four basic drivers. First, we're taking actions to grow at a solid rate in Retail Banking with a strong focus on profitability.

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 bank penetration of this -- of its emergent segments, we are increasingly optimistic about the growth of the financial industry. At the same time, we're conscious that Retail Banking is a risky business and, as a consequence, we're strongly focused on profitability by maintaining high margins.

Secondly, we have been developing a number of actions to have more clients, each one having more products and using them more frequently. With over 2.5m clients, we envision strong cross selling potential by improving client services on more segmented commercial approaches. We're also leading the process of increasing banking penetration in Chile so that our client base can continue to grow at a rapid pace.

Finally, creating incentives for our customers to be fair and use our products has been at the center of our marketing efforts. Simultaneously, we have continued to be focused on proactively managing asset quality in order to balance growth in Retail Banking with a normalization of provision levels. In the quarter, we introduced further improvements to our provisioning models. We believe that in order to maintain a successful long term presence in retail banking, it is necessary to have solid asset quality and ongoing provisioning effort and effective collection processes.

Finally, we maintain our leadership in cost control and efficiency. We expect to continue growing at a solid pace, investing and expanding our distribution capabilities. Part of this growth has been, and it's going to be financed with productivity gains which should allow us to sustain our world-class efficiency levels. As we will see in the rest of the presentation, our result in this first quarter, as it has indicated the last three years, have been in line with this long-term strategic focus. Next slide.

The first quarter was robust in terms of loan growth, especially in Retail Banking. In that period, total loans increased 3.6% quarter on quarter with continued growth in high yielding segments. Loans to individuals increased 2.9% Q-on-Q and 19.3% year on year.

Retail Lending increased 3.3% quarter on quarter and 20.7% year on year, led by solid growth of lending to individuals and SME's.

Loans to SME's increased 6.1% quarter on quarter and 27.2% year on year.

Consumer Lending expanded 3.8% Q-on-Q and 26.3% year on year, while residential mortgage lending increased 4.1% Q-on-Q and 21.5% year on year. Next slide.

You should be on page six. This growth in retail activities was in line with the rest of the market during the first quarter. In this period the Bank improved its pricing structure in line with our profitability focus in order to benefit client margins, to offset margin pressures seen since the second quarter of 2006 and to reflect the higher credit risk of some specific segments. This position was taken to ensure that our strong growth in retail activities transformed into long term shareholder value.

Total loan market share decreased 10 basis points quarter on quarter and reached 22.2% as of March 2007, reflecting the stable market share in lending to individuals and the slight decline in market share among companies. This also reflects the Bank's efforts to improve the asset mix in order to maximize profitability by adequately allocating its capital to the most profitable uses. Next slide.

As mentioned, our focus on profitability in the quarter is reflected in the evolution of our net interest margin compared to our main competitors. After a decline in margins in the second half of 2006, which was mainly due to lower inflation, but also to more intense competition, we implemented the plan to increase our spreads. As a consequence of this action, we increased the margin gap with our main competitors from 101 basis points at year end 2006 to 133 basis points on a quarter on quarter basis during this first quarter. Next slide.

As a result of this combination of solid retail growth and our focus on profitability, net interest income increased 23.8% year on year and 13.9% quarter on quarter. The Bank's net interest margin reached 4.4% in the first quarter compared to 3.9% in the first quarter 2006 and 4% in the fourth quarter, 2006. This rise was mainly driven by the increase in Retail Banking activities and higher inflation rates.

Client interest income, referring to revenues derived from our commercial lending and deposit activities, increased 20.5% on a year on year basis and 5.8% on a quarter on quarter basis. The growth of retail activities and the positive evolution of non-interest bearing liabilities are the main factors that explain the good evolution of client net interest income margins.

Non-client net interest income, that is basically the net interest income generated by our treasury, rose as a consequence of the high inflation rate in the quarter as this source of income is very correlated with the seasonality of the CDI. Non-client margins also benefit in the quarter from the reduction of short term interest rates, which lowered funding costs. Next slide.

The results of driver number two, client activity, were also encouraging. Total clients increased 12% year on year to 2.5m. The amount of retail clients with a checking account increased 21% year on year. A greater amount of clients with checking accounts, coupled with continuous improvement in client services as reflected by Santander winning the National Quality Award in January, has led to better cross selling ratios.

The amount of middle upper income individual clients that are cross sold increased 277% year on year during the first quarter, while in Santander Banefe, our unit aimed at the middle to lower middle income segments, the amount of cross sold clients rose 17.5% year on year. Next slide.

The larger and more profitable client base was an important driver for fee income growth in the quarter. Fee income grew 17.7% year on year and 6.9% quarter on quarter. Fees from checking accounts increased 8% year on year. Credit card increased 8.9% year on year and fees from our insurance broker subsidiary increased 35.1% year on year in this period. Mutual funds under management -- mutual funds asset management fees increased 36.4% year on year in the first quarter 2007. Assets under management increased 30.3% in the same period, fueling asset management fee growth.

In the first quarter, the merger between Santiago Corredores de Bolsa Ltd., a subsidiary of the Bank and Santander Investment Corredores de Bolsa, was ended. The Bank now owns 50.6% of the merger entity. Based on this, the brokerage unit increased 407.4% year on year in the first quarter 2007.

Finally, our new subsidiary, SuperCaja, generated fees of CLP505m in the first quarter; its first quarter in full operation. Next slide. You should be on slide 11.

In summary, the solid growth in Retail Banking, the focus on profitability and the rise in fee income has been a key factor in driving net income growth as reflected in the 19.8% year on year increase of client revenue and the 22.4% year on year increase of core revenues. Next slide.

As mentioned in previous conference calls, the Bank has been continuously improving its provisioning models. These should allow the Bank to continue growing Retail Banking while maintaining our conservative approach to credit risk and the soundness of the loan portfolio. Additional innovations were implemented in the first quarter 2007.

Firstly, the Bank now differentiates between old and new clients when data mining a client's risk profile. New clients will start their relation with an assigned position dependent on various demographic factors and graded history. These modifications should result in no significant change in provision expense in the middle term but reduces the monthly volatility of provisions and charge offs.

Secondly, the banking deposits will be implementing additional charges, the most important being an increase in the period of back testing for data mining a client's risk profile. The Bank recognized in the quarter additional reserves of around $32m to prepare for the implementation of this new model. The actual amount may vary when this change is fully implemented.

In the quarter, the Bank also took important steps in improving its collection process. More collecting agents have been hired and a Senior Commercial Officer has been placed at the head of this division. Moreover, in the first quarter 2007, the Bank started a process of selling charge off loans. In the quarter the Bank sold charge off loans dating from the early '80s up to 2004, recording a gain of approximately $43m. Excluding this gain, recoveries increased 35.3% quarter -- year on year, reflecting the stronger performance of this unit. As a result, in the first Q 2007, the Bank's net provision expense increased 42.6% year on year and decreased 8.1% quarter on quarter.

As a consequence, the Bank continues to display sound asset quality indicators. The past due loan ratio as of March 2007 reached 0.8%, down from 0.93% as of March 2006 and flat compared to the end of 2006. The coverage ratio of past due loans rose to 204.2% as of March 2007, compared to 188.1% as of December 2006 and 145.2% as of March 2006. Next slide.

After peaking at the end of the second quarter, the Bank's risk premium has stabilized while the risk premium of our peer group continues its upward trend. Going forward, the Bank expects asset quality indicators to remain sound but as the Retail Banking portfolio increases, provision expenses and the risk index could continue to rise. Next slide.

Costs remained under control in the first quarter of 2007 and the Bank continued to be a reference in terms of efficiency levels. The efficiency ratio reached 37.9% in the first quarter 2007 compared to 38.3% in the first quarter 2006 and 46.5% in Q2 '06. The Bank has the best efficiency ratio among the leading banks in Chile and Latin America. Next slide.

The expansion of our distribution network is a key part of our strategy to continue to increase the client base and cost selling by having more points of sale. We have the largest distribution network in Chile. In the first quarter 2007, the Bank opened 13 new branches totaling 410. The Bank continues to expand also its ATM network in order to increase the Bank penetration level and to ensure that greater product penetration is combined with greater product usage, especially in emergent sectors of the population. Next slide.

With these good results, the Bank was the best performing in terms of net income growth among its main competitors in the Chilean financial system. ROE in the first quarter reached 22.4% compared to 16.9% for our peer group and 15.8% for the Chilean financial system as a whole. We believe these solid operating trends are a good reflection of the thorough execution of our business strategy. This has driven a strong growth of Retail Lending and client generated revenues.

Asset quality remained sound and our profitability has not come at the expense of lower provisioning that could hurt future earnings prospects. Finally, our proactive management of costs with world class efficiency levels clearly benefits shareholders even though we continue to invest heavily for the future. Next slide.

Going forward, we have a positive outlook for the Bank. We believe this growth momentum should continue in 2007. We are optimistic of the Chilean economy and expecting GDP growth levels of greater than 5% in 2007 with a higher rate of expansion of the general demand. This should lead to a 12 to 14% real increase in total loans for the whole system led by stronger growth in retail segments.

We are placing a stronger focus on profitability by maintaining a strict control over spreads. We also expect cross selling to grow at current levels. This should boost our net interest income and fees. We expect asset quality to remain sound but, as mentioned, risk premium and loan loss provisions should increase in line with the rise of Retail Banking activities. Finally, we will continue to invest in our distribution capabilities throughout 2007, but costs should remain under control.

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

Thank you. The question and answer session will be conducted electronically today. [OPERATOR INSTRUCTIONS] And we'll first hear from Paulo Ribiero of Bear Stearns.

I have a couple of questions. First, I would like to talk a little bit about the provisions. We see here on the net basis that it starts to decline after being -- going up for most of last year. Is this a trend we should see next -- going forward? You mentioned that maybe because of the focus on retail it might not happen. But I want to understand how you see that in a little more detail.

And also, actually if you back out this previous charge off loans that you sold, I want to understand if you have more to sell of those kind of loans. Is this a one time gain that you registered? If we can see more and how that will affect provisions going forward because we saw a huge increase in provisions.

And next question is actually related to fee income. Two points there. I want to talk a little bit about the checking account fees. You said you're prohibited from charging certain fees. If you could quantify that or explain it better? And, second, you mentioned in your press release that you had the positive impact in this quarter of the merger between Santiago Corredores and Santander Investment Corredores. I want to hear more about that transaction and the impact of it. Thank you.

Okay. Regarding provisions, as we have mentioned in our press release and in previous calls, given that we're growing very fast in retail activities, you should expect provisions to go up more or less in line or slightly higher than the growth of that activity because we're going into more -- as we're expanding the market we're going to more riskier segments which, of course, carry higher yields and high profitability.

So one side of the coin is that provisions should be growing in line with your growth and in the penetration on retail activities. The other side of the coin is that because of this cleaning -- ongoing cleaning effort, you have relatively sound asset quality indicators. So going forward, we think that provisions should be growing in line with our retail activities, but at the same time, we think we can sustain sound asset quality indicators. In the retail worlds, provisions are a consequence of your growth. The more you grow the more provisions you have to set aside.

We saw in 2005 a very unique situation in which we were growing and provisions were going down. But that had most to do with the fact that we were, because of the better economic cycle, we were reversing provisions in the corporate side. If you seem to follow the pattern of provisions in the retail activities, they have been moving basically in line.

So answer number one is that provisions should move more or less in line and that's why it's very relevant to keep on updating your model -- keep updating the knowledge that you have about your customers and that is something that we have been doing and that's why we have been making several adjustments to our models in order to have a sound asset quality. But again, there is no way to grow in this segment, in Consumer Lending especially, without having a growth of provisions. The good news is that we also have a much more high growth in pesos. The spreads are very high as well.

Related with that improvement of our whole credit cycle is that we have been improving our recollection process, which includes the clients that are in the early days of non-performing. For example, people that are before 90 days, well we have -- our branch network is much more involved in that early efforts to recover a client because especially when you go into new segments in the small companies and also individuals, many times people don't pay you, not because they don't have the ability to pay you, but because they didn't receive information or they couldn't get out of their jobs to pay the installment or many anecdotal reasons.

So what now is being done is that in the early stages of people being behind their payments, the branch network is very much involved and then you trust that client to more specialized units. And the very end of the process is what we have started this quarter, that is selling those charge off loans because the Bank is not very efficient to fully commit themselves to that process. So there are people in the market that are willing to pay you a much higher price than what you would recover. It's a very time consuming process to collect the old debts, etcetera.

So we did sell, this year we have been working for a number of months to do it and we think that it could eventually be an ongoing business. It's simply that in that late close and being charged off for a number of months or years in your book it's very time consuming to get some money back and that's why it's better to sell it market prices. We did that billing process for this sale and at the end we think that we can get more money back, but by selling to a third party than by focusing our resources in that effort.

So we think it should be a line to develop in the future, but of course you have to accumulate, but the basic -- as you see in our press release, our charge offs are very high every quarter, reflecting that many clients are, for some reason, not paying you and that is the basic thing that you either start to collect for yourself or you sell to third parties.

Going to the income part, what we mentioned in our press release is that the Superintendency prohibited banks to charge some specific fees related with services. Specifically when you had a check that was bounced, you had a fee that could be collected. From now on, and this started on January 1st, you are not allowed to charge that type of fee. That has an impact of around CLP400 to CLP500m per month. So it's a fairly relevant impact and we are in the process of trying to bring other sources of revenue to compensate for that, but it has an impact in the growth rate in the first quarter and probably in the next two or three quarters it should have an effect as well.

Relating the merger, what happened is that Grupo Santander had two stock brokerage units. One was part of the Bank, Santander de -- sorry, Santander de Santiago Corredores and the other was a sister company of the Bank and now there is a single entity and the Bank has 50% of that single entity. This is good because from now on we will have more. We will be expanding our penetration in that business which we're lagging as compared to other businesses in -- where we usually are number one, number two. In stock brokerage we have been lagging and we were number five or six. And our intention is to be among the top two or three players in the next two or three years.

So just quickly on that, how -- what are the terms of that? Santander just -- how that -- was that a negotiation with your parent company?

[Inaudible].

You just merged it? How it happened?

It was a merger of equals. We valued both companies at independent auditors. They valued the two companies and they merged as a merger of equals.

Okay. And just -- sorry I take so much time, but on the loans that you sold, do you have an idea of how much charge off loans you have out there that you could potentially package and sell back to the market?

At this time we prefer not to give that many information in order to not dilute the price that we can collect. But remember that we are charging off every quarter, like $80m or $90m. So it's -- we are continuously creating the resource to sell it.

Perfect. Thank you very much.

This is not a core business for the Bank. It's simply that in order to maximize our profitability, we think it's a good idea to get rid of those loans that are very difficult to collect.

And it's through a third party. It's not some other company owned by Santander Spain or something?

No, no. It was sold to a completely independent party in an open bidding process.

Perfect, thanks.

Next we'll here from Juan Partida of JP Morgan.

Hi. Good morning. My question has to do with the operating expenses. If you -- what is the trend that you see if you exclude the extraordinary expenses that you had in the fourth quarter? Was there a seasonal decline? It looks like there was a seasonal decline. What should we expect in the rest of the year?

Okay. As you correctly mentioned, in the first quarter there is usually a seasonal effect because during the year you set up specific provisions for holidays. In the Southern Cone most people take their vacation, their summer vacation in -- between January and February. So in January and February usually you reverse that provision that you set in the remainder of the year. And that's why usually in the first quarter, the personnel expenses are fairly low.

Going forward, and here I'm talking about the year on year growth, we should expect growth of around 8, up to 10%. And that is variable because it will depend on how many branches we will be finally opening. We have mentioned in other calls the model for opening branches has a lot to do with how much revenue we can get. So we try to open smaller branches and then once we have enough revenue, we open the full branches. And that's why 8 to 10% growth on a year on year basis is a good estimation.

Okay, thank you. And then, going back to provisions, you already gave an explanation about this. But in terms of what we should expect in provisions before -- gross provisions not net provisions. There wasn't an adjustment there to account for the new methodology that you are using. Is there an element of a one off charge there that we should expect, gross provisions to the client in future quarters?

No doubt because as we mentioned, we took a specific provision of around $31m in order to be prepared for the strengthening of our provisioning level. That leaves the stock of our clients with the new provision standards and from then on you go back to kind of normal provisioning. And so, as you mentioned, we had an extraordinary provision of $31m that was taken in the first quarter to anticipate that process. That process that has to be approved by the regulator and by our Board. So we took the provisioning in January and it will be fully implemented we expect, something around the second or the third quarter.

And any chance, because the economy, yes, it has decelerated a little bit from the peak two years ago, but any chance -- it's still very strong. So is there any chance that you may find yourself reversing some of these strong provisions that you have created or not?

Probably not, in the sense that we have taken these adjustments of our provisioning models because we expect that the contrary might happen. We think that the trends are very sound in the Chilean economy but our loan portfolio is much more -- has more percentage of Retail Lending and therefore you have to prepare. What we could expect is a deceleration of the growth rate of provision going forward, but in absolute terms, provision should be growing in line with retail activities.

It's, as I mentioned before, you cannot couple the growth on the income side with the growth in the provision. Our part of it -- it's the cost of doing business with this segment. In the corporate world when a client calls you that he is having some kind of difficulties you have a problem because usually they will make their best effort to pay you and only when they run out of ideas or cash they don't pay you. In the retail world, it's part of the cost of doing business and you have to be aware of that. That you have to have a cleaning effort, an ongoing cleaning effort, because otherwise you're simply postponing difficulties.

In our case we started this process primarily because we think that although by international comparison the indebtedness of the Chilean population is still very low, it has been increasing and also the rates are very low, so we have a number of reasons to be anticipating an increase in the risk profile of our loan portfolio. So it is better to take actions before they really blow over your face.

Perfect. One last quick thing. Is there a target coverage ratio that you have? It's been increasing. Would you expect that to decline over time as the -- you see some normal deterioration in the portfolio as you continue to grow?

What happened, really, is that that the past due loans is one of the measurements that you have to take into consideration in order to well cover your expected losses. There is another indicator, which is the one that, according to the Chilean regulations, you have to comply with. That is what we call expected loss ratio. That is research over loans.

The Superintendency has devised guidelines for provisioning according to, not the past due loans, but are going to expected losses that you foresee with a specific client or group of clients. And that's why it -- coverage looks high but we don't have the so-called voluntary provisions. It's simply that with exception of this $31m provision that we have said that is in anticipation of a change of model that has to be approved by our Board and the Superintendency.

So in general terms, provision coverage is simply a number that is useful for people outside the Bank to follow our asset policy indicators, but it's not the critical way to establish provisions. The critical way is how much are your expected losses and, therefore, at those moments you have to have 100% coverage. If you have, or if you want to have more than 100% coverage of the expected losses, not of the past due loans, then you have to have approval of your Board and, in some cases, of the Board and the Superintendency.

Okay. Thank you very much.

They are not a reflection of a kind of voluntary provision. It's what we really think that in time we will be losing in our asset quality and therefore, it's what we should keep in the moment which, again, it has nothing to do with the past dues, which many times reflects the people not paying you, but sometimes people not paying you but at the end you won't be losing money because you have a provision, etcetera. Sorry, you have collateral paper.

[OPERATOR INSTRUCTIONS] We'll now hear from Mario Pierry of Deutsche Bank.

Hi. Good morning. This is Tito, actually. Just a question, what are your expectations for interest rates for the year and how do you see that it will impact your net interest margin? Thank you.

Okay. We think that the long term interest rates should, at some moment of time, start increasing because the economy is gathering momentum to some extent. After growing 4%, most of the economists agree that it should be growing at around 5.3, 5.4% or some of them even higher than that. And therefore, that should have pressure over long term rates.

Regarding short term rates, probably something in line with that, but we don't foresee for any of those rates a big increase for the remainder of the year. But if at all, the trend should be upward and not downward. That means that for our spread, it should be semi-positive or neutral but not very relevant because of the expected movement. As we have mentioned before, short term rates are very important for the profitability of our non-interest bearing liabilities and long-term rates are important for the mark to market purposes.

So in this moment, the Bank has a relatively shorter net position in long term securities because of the expectation of higher rates and we have benefited in the short term of this one time reduction of the short term rate, which is not fully reflected because of the re-pricing of the liabilities takes much longer than one quarter to be fully reflected. But in all, I would say that's not very relevant for margin purposes and, if at all, a slight increase is expected for the remaining of the -- of 2007 in both long and short term rates.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] We'll now hear from [Antonio Merino] of Santander Investments.

Hi. Good morning. My question is regarding consumption loans. This segment has been ostensibly growing at strong growth rates in the past years. However, we saw a small deceleration in the last two months with growth rates below 20%. Do you expect further deceleration of this segment or do you think that growth rates will recover going forward? Thank you.

Okay. First of all, take into consideration that it was mostly out of history was the growth rate that we saw in 2005/2006. Usually consumer lending growth is at two, up to three times GDP growth and it was growing much faster than that. So what we're seeing is a normalization of growth. But we think that going forward, the good news that we're seeing in the labor market with both the actual number of people employed and the solid growth has been growing at good rates.

Secondly, the scenario of relatively stable rates are very low by historical standards and the competition among the banks guarantee that for consumers, this should be a very good year in order to have consumer lending.

Other things for some -- in the margin for banks because of price pressures that we saw in the second half as we mentioned in our press release, in our case, we are growing only as long as we have risk adjusted return on capital that is adequate. We are not for growing for its own sake, but we need to grow in order to create shareholder value and that's why, in our case at least, we -- on purpose we reduce slightly our growth rate because we want to achieve some specific risk adjusted rate of return on capital and that's why we think that some other clients -- customers -- sorry, banks might be doing something the same.

So we don't see any fundamental reason for a big deceleration on consumer lending because the macro conditions are good. But probably given the increase in provisions and the decrease in growth spread that has been the case of this for the second half on the margin side our competitors are reduced in their growth rate. But that situation tends to cancel at some moment of time and probably we should see good growth with adequate profitability.

Okay. Thank you very much.

And we'll take a follow up question from Paulo Ribiero of Bear Stearns.

Raimundo, actually it's a suggestion. We followed this discussion about provisions. It would be interesting if, in the future, you could provide a breakdown of the provisions by retail versus wholesale lending and more specifically in retail, if you could break by the main product lines, by the mortgage, the Banefe, things like that would be helpful.

Okay. We will take your suggestion. Thank you very much.

Thank you.

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

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

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