Banco Santander Chile (BSAC) 2007 Q3 法說會逐字稿

Welcome to the Banco Santander third 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. For opening remarks and introductions I will now turn the call over to Mr. Raimundo Monge, please go ahead sir.

Good morning ladies and gentlemen and welcome to Banco Santander-Chile's third quarter 2007 results conference call. I am Raimundo Monge the Director of Strategic Planning and I am joined today by Robert Moreno, Manager of Investor Relations and Strategy. Thank you for joining us to discuss the stronger -- thank you for joining us to discuss the Bank's results and the macro outlook for the Bank. Afterwards we will be happy to answer your questions.

Next two slides. Before we begin analyzing the Bank's third quarter results a brief commentary on a recent event affecting the Chilean economy and the Bank's general outlook. In the third quarter of 2007 inflation jumped well above market expectations fuelling a rise in short term interest rates, while long term rates descended. The overnight reference rate set by the Central Bank increased 75 basis points to 5.75% during the quarter. At the same time long term rates descended and the exchange rate appreciated. This inflationary shock was mainly due to the rise in international fuel prices and a harsher than normal winter which caused a strong rise in food prices. We expect inflation to remain relatively high in the fourth quarter of 2007, but slowing down in 2008.

Next slide, at the same time the world financial markets were rocked by the subprime crisis. It is important to remind the investor community of Chile's strong market fundamentals as reflected in the strong growth of international reserves, the ample surplus and low government debt, the relatively low foreign debt compared to exports and the high current account surplus. Most analysts expect that the subprime crisis should have a relatively small direct impact on the local financial markets if at all.

Next slide, you should be on page five of the webcast. Given the solid fundamentals of the Chilean economy we remain optimistic about growth prospects for 2008 and 2009. The expansion of the economy is being driven mainly by the increased internal demand along with the export sector. In 2007 internal demand is expected to grow around 7.8% in real terms, followed by an expansion of 7% in 2008 and 6.5% in 2009. The main drivers of the internal demand are prices, consumption and investments. We think this growth -- with this growth GDP is expected to expand between 5% and 5.5% in the next two years.

Next slide. This growth in internal demand and the expansion of employment levels should help to sustain loan growth. Consumption and investment are the main drivers of loan growth in the Chilean financial system. In the last seven years the elasticity of real loan growth versus internal demand has been 1.4 times on average with a high elasticity for individual lending, that is 2.2 times.

In simple terms, and given the current growth conditions, the size of the Chilean financial market as a whole is expected to double in nominal terms during the next seven years, while the retail lending market should double in the next five years. These provide an attractive operational environment for the Bank. With this positive outlook in mind we will now review our strategic objective for the period 2007 to 2009 and discuss our three quarters 2007 results in detail.

Next slide. Three quarter 2007 figures reflect Santander-Chile's continuous focus on profitability and its determination to have sustainable ROEs going forward. In this period the Bank obtained its highest ever quarterly income which totaled CLP85,196 million. That is CLP0.45 per share and $0.92 per ADR. In line with first call consensus these represent an increase of 24% on an annualized basis compared to the previous quarter. The Bank's ROE in the quarter reached 26.1% the highest among Chile's top banks.

As we will detail in the rest of the presentation the positive three quarter results were mainly driven by strong operating trends which make them outstand in terms of the quality. We believe this quality is a direct consequence of the thorough implementation of our corporate strategy.

Next slide. We should be on page eight of the webcast. As we have discussed in previous calls, our strategy is centered on four basic drivers. First we are focusing on profitable growth, allocating our capital to its most productive uses, which during the last four years has meant expanding our retail banking activities. As the largest bank in Chile with the largest distribution network and client base we believe the Bank has a strong competitive advantage in the retail segment. At the same time, we're conscious that retail banking is a risky business and as a consequence we are focusing on risk adjusted profitability targets with a pricing strategy that takes into consideration the different risk levels of the segments appended as a way to maintain high margins.

Secondly, we have been developing a number of actions to have more clients to increase cross-selling and expand product useage. With over 2.7 million clients we envisage strong cross-selling potential by improving client services and more segmented commercial approaches. We are also leading the process of increasing the banking penetration in Chile so our client base should continue to expand at a rapid pace.

Cross-selling ratios should also improve as more people develop deeper relationship with the Bank. Finally, creating incentives to our customers to prefer 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 provisioning levels. We believe that in order to maintain a successful long term presence in retail banking it is necessary to have solid asset quality, advanced model for correctly determining risk levels and an effective collection process.

Finally, we maintain our leadership in cost control and efficiency. We expect to continue growing at a solid pace, investing in expanding our distribution capability. Part of this growth has been and is going to be financed with productivity gains which should allow us to sustain our world class efficiency levels.

Next slide. As mentioned before, the surge in inflation resulted in rising short term rates and falling long term rates. Despite this fact, our funding mix improved reflecting the proactive management of our balance sheet in order to expand margins. Time deposit decreased 1% q-on-q, but the Bank issued $460 million in long term local senior bonds in the quarter to lengthen the duration of liabilities in light of rising short term rates and falling long term real rates. At the same time, the ratio of average non-interest bearing liabilities to interest earning assets reached 24.5% in the third quarter 2007 compared to 21% in the same period of 2006. These rising free funds counterbalanced in part the negative impact of rising short term rates on funding costs.

Next slide. In 3Q '07 the Bank remained steadily focused on expanding the loan portfolio in those areas that contribute to expanding ROEs. Total loans increased 2.1% q-on-q and 12.1% year-on-year. Retail lending expanded 4.2% q-on-q and 15.9% year-on-year. In the quarter the Bank focused on the strengthening risk adjusted margins in this segment which had some impact on growth rates, especially in consumer loans. Loans to individuals increased 3.7% quarter-on-quarter and 14.6% year-on-year driven mainly by residential mortgage loans.

The Bank has been working throughout the year on developing a retail banking model that gives sustainable and adequate profitability to shareholders in the short and long term. Lending to individuals continues to be a strategic priority for the Bank. The modifications introduced in the pricing of risk models should allow the Bank to grow at a healthy rate with stronger margins. Going forward we also expect a rebound in growth in the corporate and middle market segment and market share should rise not only in lending to individuals, but in other segments as well.

Next slide; you should be in page 11 of the webcast. The Bank continued to focus on increasing margins and profitability. As a result in the third quarter 2007 net interest income, adjusted for inflation hedge, increased 22.7% quarter-on-quarter, and 34.2% year-on-year, reaching a record level of CLP223 billion in the quarter. In order to neutralize the impact of the margins of abnormally high levels of inflation, the Bank hedged part of this inflation index -- part of its inflation index asset and liability gap with derivatives. The result of this hedge is included in the net gain from trading and mark-to-market.

To have a more recurrent view of the Bank's net interest income and margins, the result of this hedge is subtracted from the net income figures. The record high adjusted net interest income was driven by a combination of solid margin expansion, the improved asset mix, the high inflation rate in the quarter, and the positive evolution of non-interest-bearing liabilities as seen.

Next slide. With this growth of net interest income, the net interest margin reached a record level of 6.2% in the third quarter 2007, increasing 100 basis points quarter-on-quarter, and 150 basis points year-on-year. These margins are also adjusted for inflation hedge.

Next slide. Our focus on profitability is also reflected in the evolution of our net interest income compared to the rest of the Chilean financial system. In the past three years, Santander-Chile has continuously outperformed the market in terms of the growth of net interest income compared to the growth of loans. These reflect the Bank's pricing and growth discipline, which has meant putting profitability targets over market share per se. As of September 2007, our net interest income growth continues to outpace that of the Chilean financial system as a whole, as can be seen in the slide.

Next slide. The Bank is also getting solid results in it's second strategic driver, client base, cross-selling and product usage. The total number of clients increased 15.2% year-on-year to 2.7%. This rise in client base has been driven by the growth in our retail checking account base. Market share in checking accounts reached 27.8% as of August 2007, the latest figure available, compared to 26.7% as of August 2007. In this 12 month period, the bank has been able to open 50% of all new accounts opened in the Chilean market. A greater amount of clients with checking accounts, coupled with continuous improvements in client service, has led to better cross-selling ratios. The amount of middle-upper income clients that use at least three other products increased 19.7% year-on-year as of September 2007.

Next slide, page 15. The Bank also continued to invest in expanding its distribution network to support client activity. As of September 2007, the Bank's distribution network totaled 425 branches and 1,800 ATMs, increasing 15.5% and 22.2% year-on-year respectively. We expect similar expansion of the distribution network in 2008. One third of the Bank branches have been opened in the last three years, so we are just starting to have a positive impact in our revenue base.

Next slide; you should be in page 16 of the webcast. The larger client base, higher cross-selling, and product use standards, and the broader distribution network, were important drivers for fee income growth. Net fee income increased 5.6% quarter-on-quarter, and 17.8% year-on-year in the third quarter of 2007, with a strong and sustainable growth in most of the Bank's products and services. Notable has been the increasing key product, such as checking account, credit card, and mutual funds asset management fees.

Next slide. The Bank's risk premium is stabilizing, as can be observed in this slide. In the third quarter, the Bank's net provision expense increased 1.8% quarter-on-quarter. This slight rise in provision expense was mainly due to an increase in net provisions in retail banking in line with loan growth in this business segment. As mentioned in previous releases, provisions are expected to increase due to the growth of lending to higher yielding and riskier retail segments which, although have more risk than other line of businesses, have been also pushing our core revenues and margins to new highs.

The Bank's continued to display sound asset quality indicators as a result of the proactive management of asset quality, and the strengthening of the credit policies and processes. Coverage of past due loans reached 197% at September 2007. The past due loan ratio as of September 30, 2007, reached 0.88%. The ratio of net provision expense over total loans remain steady, quarter-on-quarter at 1.4% in the third quarter 2007.

Next slide. The Bank's continued to have a world-class efficiency ratio, which reached a record low of 34.7% in the third quarter 2007. In the same period, operating expense increased 6.9% q-on-q, and 18.4% year-on-year. Personnel expenses increased 6.9% q-on-q, and 19.1% year-on-year in the same period, mainly as a result of the 12.8% year-on-year rise in headcount. This increase was mainly focused on front office positions as the Bank expands its distribution network. Santander SuperCaja and the merger of the stock brokerage also added approximately 200 new employees to headcount. Additionally in the quarter, the spurt in inflation triggered an automatic increase in personnel wages. For the nine-month period ended September 30, 2007, the efficiency ratio reached 36.1% compared to 36.6% in the same period in 2006.

Next slide. In summary, 3Q '07 figures show high quality results and strong operating trends, reflecting our strategic focus on profitability, cross-selling, control of asset quality, and efficiency. Core revenues increased 19.2% q-on-q, and 30.9% year-on-year as the Bank continued to show strong results in its retail banking business and a continued focus on maximizing risk-adjusted profitability. At the same time, net operating income increased 18.8% q-on-q and 24.5% year-on-year, and also reached a record level of CLP123 billion. This strong performance was partially offset by some non-operating items.

Going forward, we have a positive outlook for the Bank. We are optimistic for the Chilean economy and expect a relatively high expansion of internal demand. We are keeping our focus on profitability while 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, loan loss provision could increase in line with the rise of retail banking activities. Finally, we will continue to invest in our distribution capabilities through 2007 and 2008, while the efficiency ratio should improve.

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

(OPERATOR INSTRUCTIONS) It appears there are no questions.

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.

That does conclude today's program. We appreciate your participation, have a wonderful day.