Banco Santander Chile (BSAC) 2008 Q1 法說會逐字稿

Good day everyone and welcome to our First Quarter 2008 Earnings Release Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Raimundo Monge. Please go ahead.

Thank you very much. Good morning, ladies and gentlemen. Welcome to Banco Santander-Chile's First Quarter 2008 Results Conference Call. I am Raimundo Monge, Director of Strategic Planning and I'm joined today by Robert Moreno, Manager of Investor Relations and Strategy.

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 in the webcast, you should be on page three. In the first Quarter of 2008, the bank continued to show strong operating performance. Net income totaled CLP75.643 million, that is $0.40 - CLP0.40 per share and USD $0.95 per ADR. Increasing 6.9% q-on-q and 0.8% year-on-year. The bank's ROE reached 21.3% in the quarter compared to 21.6% in the first Q of '07 and 19.4% in the fourth quarter of '07. The cost-to-income ratio was 39%, the best by far among the larger banks in Chile.

As mentioned in previous calls, the bank has been focusing on increasing the quality of its earnings and maximizing recurring earnings growth. The results achieved this first Quarter were in line with this goal. Net operating income increased 13% on a year-on-year basis, led by strong growth of core revenues. That is net interest income plus fees, which increased 28.5% year-on-year, as a consequence mainly of solid results in the retail banking business.

The negative effect of the abnormally high inflation over our costs, and especially the expense related to the price level restatement of our figures partially offset this solid operating performance.

First Q '08 figures show our continued focused on high growth in the most profitable segments and the determination to transform this growth in high and sustainable ROEs. Our basic strategy is centered on four main drivers. First, we're focusing on practically managing our balance sheet by allocating our capital to its most productive uses. At the same time, the market has been rocked by the subprime crisis, we have been more cautious than ever with our funding mix, liquidity levels and capitalization ratios.

The recent events in international financial markets reaffirms our decision to focus on profitable growth, with a pricing strategy that supercedes its necessary market share goals vis-a-vis either return over allocated capital or net operating income growth targets.

As the largest bank in Chile, our strong banking franchise is also a plus, as increases in client base, core city [embracios] and product usage will continue to fuel the recurrent growth of our fee income. This we believe is a safe and efficient mechanism to fuel growth, especially in a bank with around 2.9 million clients. Gross selling ratios will also improve as more people develop deeper relationships with the bank.

Finally, creating incentives for our customers to prefer and use our products has been at the center of our marketing efforts. At the same time, we have been proactively managing asset quality in order to balance solid growth in retail banking with a normalization of provision levels. We believe that in order to maintain a successful long-term presence in retail banking, it is necessary to have sound and predictable asset quality and to adequately price the risks involved.

Lastly, we continue our leadership in cost control and efficiency. We expect to continue growing at the 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, our results have been in line with this long-term strategic focus.

Next slide. In the first Q of 2008, the posted growth of straight loan growth, reflecting the bank's focus on liquidity and funding. Given still a strong market fundamentals, liquidity has remained ample in the market, fueling deposit growth. In the first Quarter, customer funds increased 3.4% q-on-q and 14.9% year-on-year.

At the same time, deposits grew 6.6% q-on-q and 15.5% year-on-year. The average balance of non-interest bearing checking accounts increased 5.6% q-on-q and 12.5% year-on-year. The positive performance of checking account balance reflects our strong growth in checking account holders and the bank's solid position in the cash management business. These also help to reduce the negative impact of rising rates on funding costs as the yield on checking accounts rises with rate hikes.

The bank, in line with its conservative liquidity requirements, has also increased the maturity of its funding over the last 12 months. The duration of deposits has been increased and the amount of long-term marketable securities issued by the bank rose 39.6% year-on-year as the bank has been issuing bonds at an attractive rate, as long-term yields have continued to fall. As a result of this effort, today the bank has enough liquidity to finance more than 12 months of the expected loan growth without renewing a single deposit.

Next slide, you should be on page six of the webcast. The price advantages of the balance sheet is also apparent in our capitalization ratios. The bank [BASLE] ratio is, as of March 31st, 2008, reached 13.3% with a tier one, or core ratio, or capital ratio of 10.3%. On April 23rd, 2008, the bank paid a dividend of approximately USD $2.37 per ADR, equivalent to CLP1.065 per share. This is 21.4% higher in dollar terms than the dividend paid last year. These correspond to a dividend yield of 4.5% based on local share price on the record date.

Immediately following the payment of the dividend, the bank's BASEL ratio should be approximately 11.9% and the tier one ratio 8.9%, with ample room for issuing tier two capital. These figures reflect that shareholders are obtaining an attractive dividend yield while the bank maintains strong capital ratios to fuel future loan growth. As a consequence, the bank has Latin America's best risk ratings, which have been recently either confirmed or increased.

Next slide. On the asset side, the bank continues with its policy of focusing on profitable loan growth. While total loans increased 1.4% q-on-q and 12.5 year-on-year, retain lending expanded 3.5% quarter-on-quarter and 16.5% year-on-year. On the other hand, commercial loans decreased 0.1% q-on-q and increased 10.1% year-on-year, effected in part by translation losses over loans denominated in U.S. dollars, as the Chilean peso has appreciated in the quarter. However, lending to high yielding small and mid-sized companies, SMEs, was up 3.5% q-on-q and 18% year-on-year.

Next slide. The price advantagement of the bank asset and funding mix, with a special focus on profitable loan growth, has resulted in a strong and continuous growth of net interest income. In the first Q of 2008, net interest income increased 33.1% year-on-year. The net interest margin increased 70 basis points in the same period, while average interest earning assets were up 16.9%.

The high inflation rates in first Q '08 compared to first Q '07 also helped to expand the net interest margin between these two periods. As discussed, the positive effect of higher inflation over the bank's margins are partially offset by the loss from price level restatement and higher operating costs, which to a large extent, are indexed to inflation.

In the second half of the year, the bank expects a slowdown in inflation rates, which should reverse this positive effect on spreads, but could possibly affect economic and loan growth. For this reason, management has remained focused on improving the asset and lending mix to sustain margins going forward.

Next slide. You should be on page nine of the webcast. Going forward, we are optimistic on future loan growth prospects in the Chilean market, despite an expected rise in risk levels in line with retail banking activities, we believe the potential for growth of this market remains high. Chilean families' average indebtedness levels are still at around 50% of the levels seen in developed countries and two-thirds of the household debt is mortgage lending.

Contrary to other developed markets, the price of houses has not increased significantly in the last ten years in real terms in Chile and (inaudible) levels in mortgage lending has been consistently below 0.5%. On the other hand, consumer lending, including non-bank participants, is less than 15% of GDP, similar to levels seen in countries such as Brazil and Mexico, despite Chile's lower risk and higher wage levels.

Next slide. The same is true when analyzing penetration rates in terms of the amount of products as a percentage of the workforce. For example, only 31% of the Chilean workforce has a checking account and only 12% has a mortgage loan. In more developed markets, the penetration is above 60% to 70%.

In the credit card business, the market registered high penetration rates in terms of plastics outstanding, but in terms of usage, it is still very low, less than 15% of the total transactions in the Chilean market are done using a bank or retail credit card. This is also lower or similar to other countries, such as Brazil and Mexico. So we think the market has ample room for further expansion.

Next slide. As the results accomplished in our -- as for the results accomplished in our second strategic goal, growth in the client base and usage, as another means of achieving high and sustainable growth rates, the results have been also encouraging. We believe that a key competitive advantage of Santander-Chile is the strength of its banking franchise, which is, we believe, difficult to replicate. The total number of clients increased 12.6% year-on-year, to 2.9 million in the first quarter of this year, the largest for a private bank in Chile. In the last three years, our client base has expanded more than 41%, giving us a relevant growth opportunity.

Our commercial focus on client relationships and product usage, combined with continuous improvements in client service has led to higher cross selling ratios. The amount of clients that are cross-sold increased 12.8% year-on-year as March 2008 and has more than doubled in the last three years.

However, less than 30% of our clients have two or more products, reflecting the high cross-selling potential of the bank's current client base. Another area of growth continues to be credit card business. According to information published by Transbank, the industry credit card processor, as of March 2008, purchases with Santander credit cards in monetary terms grew 17.2% year-on-year. Nevertheless, including department stores, we estimate our market share in credit card billing business to be at 14.6% of the market.

Next slide. Future growth in the bank will also be sustained by the record investment made in distribution in the last three years. In this period, the number of branches has increased 41%, while the number of ATMs jumped 68%. In 2008, we expect the growth rate of our network to recede compared to the previous year as the bank will focus on increasing the profitability of existing networks, as many of these client contact points are close to their break even point and should be having a positive contribution starting this year.

As of March 2008, the bank distribution network totaled 466 offices, increasing 10.4% year-on-year. And we have close to 2,000 ATMs, representing an increase of 21.7% compared to March 2007. These represent Chile's largest banking distribution network in the market. Next slide. You should be on page 13 of the webcast.

Net fee income increased 14.4% year-on-year in the first Quarter of '08. Fees from credit, debit and ATM cards increased 40.7% year-on-year. The uses of electronic means of payment continues to steadily grow in Chile, and bank penetration and cross-selling ratios improved. Asset management has been also an important contributor to fee income in the first Q of 2008, growing 16.9% on a year-on-year basis.

Despite more unfavorable market conditions, assets under management in our mutual fund subsidiary increased 16.4% on a year-on-year basis. The weaker stock market hurt equity funds, but long-term fixed income were positively impacted by hairy -- higher inflation and lower long-term rates.

Finally, as the bank market share in the checking account market continues to grow, fees from these products also continued to rise. Going forward, especially in 2009, fee income from lines of credit may be hampered by regulatory changes that will limit amounts charged for unauthorized overdrafts.

Next slide. Going forward, improvements in cross-selling will continue to be fueled by checking accounts and credit cards, but other financial products also show low penetration levels in Chile. The mutual fund industry is still underdeveloped, especially considering that fixed income funds represent more than 75% of the volumes under management. Insurance products also have been lagging when compared to more developed markets, especially considering the high growth level of insurable products, such as automobile and houses in the local market. We believe these products will continue to fuel fee income in the local market in the coming years.

Next slide. Concerning our third strategic goal for active management of asset quality, we saw this quarter the same trends than in the previous releases. The bank net provision expense increased 2.5% year-on-year. However, provision expenses in the first quarter of 2007 included a one-time provision expense related to the implementation of an improved provisioning model for consumer loans.

Excluding this one-time item, net provision expense in the first Quarter of 2008 rose 32.3% year-on-year. This rising provision expense was mainly due to an increase in net provisions in retail banking, in line with loan growth in this business segment. Net interest income, after provision, increased 33.5% year-on-year, reflecting that despite the increase in provision expense, the growth of the bank's retail activity has positively contributed to its overall profitability.

The cost of credit, defined as the analyzed net provision expense over total loans, reached 1.96% in the first Quarter '08, increasing from 1.79% in 4Q '07. Going forward, we expect that the cost of credit should rise in line with a shift in asset mix toward retail banking and the foreseen lower economic growth. [Busting] loans should also continue to rise as the asset mix shifts toward high-yield assets.

Next slide. Efficiency continues to be a differentiating factor for Santander-Chile, but higher inflation has negatively impacted cost growth. Operating expenses increased 14% year-on-year, mainly as a result of the 18.2% year-on-year increase in personnel expenses. This growth was due to the 5.8% increase in headcount and the higher inflation, as most salaries are indexed to variations of the CPI index.

This rise in the bank's workforce has been mainly focused in front office positions as the bank expands its distribution network. In the first Q '08, the efficiency ratio reached 39%. Santander has the best efficiency ratio among the top banks in Chile. We expect the growth rate of costs to slow down in the -- throughout the year as inflation grades are expected to normalize. Next slide.

In summary, the first Quarter of '08 results were, we think, quality results, especially considering the adverse environment that effected the global financial industry and the local market as well. This has been an ongoing trend and we continue to outperform our main peers. Our high margins, ample liquidity, improving funding mix, conservative asset quality policies, sold fee income growth and world-class efficiency give us, we believe, a clear competitive advantage in the local market. Going forward, we will continue to focus strongly on profitability, by maintaining a strict control over spreads and growing in high-yielding segments.

We also still see room for important expansion of cross-selling ratios. These should boost our interest income and fees. We expect asset quality to remain healthy, but as mentioned, cost upgrades and loan loss provisions should grow in line with the rise of retail banking activities. Finally, we will continue to moderately invest in our distribution capabilities throughout 2008 and, as inflation recedes, costs should remain under control. At this time, we will gladly answer any questions you might have.

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We'll go to our first Question from Juan Partida, JJP Morgan.

Hi. Good morning. My question has to do with the outlook for operating expenses in 2008. You mentioned in your presentation that you don't plan to open additional branches. Does that include [Baneta] as well? And just how much you're expecting operating expenses to grow?

Okay. No. What I mentioned is that we will be reducing the growth rate of our branch network, but still we think we'll be opening something between 20, 25 branches for this year. Most of those branches will not be open in Baneta, as Baneta branch network is the one that has grown the most in the last three years, Baneta's branches have doubled to 100 offices.

Yes. And that's why the focus will be first on reducing the breaking in point of many of those new branches, in order to make them contribute to our profit line, bottom line performance. And secondly, open the remaining new branches, mostly in the middle to upper end of the retail segment.

So Baneta won't be opening a relevant number of branches this year because it has doubled in the last three years and the focus will be on middle to high-end of the consumer market, where we still have a relatively low market share, given the relative size of the volume we do in that segment.

So all in all, as I was mentioning in the release, we expect growth to grow -- to decelerate going forward as long as inflation, of course, moves in the line of what the consensus market is expecting, to end the year approaching 4.5%, something around that year-on-year level. If that is the case, our cost base should be growing probably below the -- 10%.

Okay. Thank you very much. If I could quickly follow-up with another question regarding the accounting changes, that we understand that the regulators have not completed the changes they want to make. Could you give us any indication as to what we should expect? What changes are there still to come? Are there any related to the way you account for past due loans on your balance sheet?

Okay. The superintendent is correctly pushing IFRS standards for the Chilean banks and for the Chilean companies as a whole. This process has been done in different stages. This is starting January the first, the -- one of the stages that happened was that the way that results and balance sheet items are presented was changed, more in line towards international standards and that is what has been affecting the figures of the bank, this first Quarter.

Unfortunately, up to now, the super-intendency has not given pro forma figures on an industry-wide basis. We know that they're working in that line in order to have pro forma figures for comparison purposes because otherwise really the market is a little bit less transparent. We have made a big effort to present the comparable figures for the bank, but we don't have comparable figures for the rest of the system, but we understand that is something that will be the super-intendency publishing in the near future, comparable figures for 2007.

The second large step in this process will happen in 2009, where because today is mostly a matter of representation, the bottom line does not change, it (inaudible) present things that formerly were in the margin, now you present the fee or costs that were in other lines are presented in the cost line. So we -- in our annex one, we have tried to do a brief summary of the more relevant changes, we hope that might be helpful for you.

In 2009, we will see more stronger because the process of accruing and the evaluation of some assets will be fair value type of assets, so we think that we'll be moving much more in line to U.S. GAAP or international standards. So the gap that sometimes you see between Chilean GAAP and say U.S. GAAP or IFRS will be very reduced and important for Chile -- Chilean accounting, you won't have the price level restatement, which has been affecting our performance this quarter because you won't have to adjust your capital due to the effect of inflation. So we expect our profitability could have a positive effect because of that accounting rule.

So this year has been mostly a matter of how you present the figures in the balance sheet and the profit and loss statement. Next year, you have a change in the way you accrue some figures and how you value your assets, especially assets, because you don't value liabilities instead of using costs -- historical costs for all you -- what you register in your assets.

You will have a fair value type of valuations, yes? So that would be a major change. And of course the industry has been requesting the super-intendency to also provide the comparable figures. So banks should hopefully very soon start compiling figures using both formats, the current form -- the current format, so the current accounting principles and the IFRS accounting principles in order to have a comparable 2008. Because otherwise, we will be, again, having the lack of comparable information.

So it's something that it will be good. Because it will make our figures more comparable to international standards. But in the meantime, I know that for many people it's hard -- it's difficult to -- because you lose all the comparable figures, including ourselves as we try to compare with our main peers.

Thank you very much.

(OPERATOR INSTRUCTIONS). We'll move to our next question from Tito Labarta, Deutsche Bank.

Yes. Hi. Good morning. Could you just comment, how do you expect the lower inflation to impact your loan growth and as well as net interest income? What do you see for the full year? Thanks.

Okay. Inflation in general terms is negative for loan growth because although the Chilean economies is very much indexed, there are some buckets within our clients that are not fully protected towards inflation, especially the middle, low-income segments are less protected because most -- many times they work -- they are self-employed, et cetera. The people in the -- that work for a salary are usually protected for inflation because you have indexation clauses in your labor contracts. But self-employed people, basically, have no protection over inflation.

So we think that as long as the government is successful in bringing down inflation, which up to now, to be fair, is mostly important inflation due to high energy prices, high food prices and the like, it's not a reflection of an overheating economy, but anyway, headline inflation is affecting this middle to low end of the consumer market.

So as long as this segment is less effected by inflation, we think that they can start having a more created demand and in the margin, less increase in the link we deliver because we have seen some deterioration of asset quality, very much concentrated in that -- in those segments.

So net debt, we think is good for the market, to have lower inflation. Because it means that more people have the higher earning capacity. As you know, inflation is to some extent a tax over the poor because they receive most of their income in monetary terms. So they're not fully protected against inflation as the more -- the people are working the more as having the received salary each month are usually protected.

In the case of the bank, it's good because we should see some pick up in loan growth. It will have an effect on our overall margins, but at the same time, we'll be positive because of this price level restatement that usually is a drag over our bottom line as it was the case this first Quarter, where we have fairly strong top line growth and at the end of the day, because of impacting costs and in this monetary restatement, the bottom line performance was less good than it could have been in a less inflationary environment.

Alright. Again, just to follow-up, what type of growth would you expect then for the year? And what type of impact on margin, if you can quantify that. Thank you.

In lending? Sorry. Growth of what?

Yes. Sorry, what type of growth would you then expect in loans?

Well, in loans, as we have talked in other conferences, we don't have a specific target because our targets are expressed in terms of operational income growth and return on capital goals, yes? So we think that, to try to answer your concern, that in retail we should be growing slightly above the market in retail, the consumer lending, to some extent -- to a lesser extent, the mortgage. Because sometimes prices in mortgage are way below our return on capital demand. In credit card as well, we should be outpacing the market as we have been doing lately.

And in terms of corporate lending, it's kind of an open issue, because it will depend on how the rest of the market is pricing their capital. If the market is pricing their capital below us -- ours, they are a reflection of the market having on average half of the ROE that we get, we think we won't be following that game. We prefer to speak to our return on capital targets and our net operating income targets in the future. So groups are trying not to lose market share, but only as long as we're not losing the profitability.

Great. And then just a follow-up, sorry, on the -- what type of impact do you expect on net interest margin?

Our net interest margin is at peak levels. Yes? 5.7 is probably the highest that we have seen and the gap that we have generated vis-a-vis the rest of the market is also the highest in three or four years.

So we expect some deterioration. It's difficult to give you a firm figure, but the average -- because of the change of the IFRS is -- we don't have a long time serious, but on the old figures, our average margin has been around 4.5% and was up to 5.5%, so there has been an impact of 70, 80 basis points due to the high inflation.

So we think that something, we should expect a drop to make things a little bit more complex to explain in the press release, we have been taking actions to defend that high margins. But taking some assurance. So we think that a drop of 40, 50 basis points on average for the remaining two years, coming from now, could be a good bet.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). And it appears that at this time, we have no further 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.

And that concludes our conference for today. We thank you for your attendance and have a nice day.