Banco Santander Chile (BSAC) 2008 Q2 法說會逐字稿

Please standby. Good day, everyone, and welcome to our second 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 Mr. Robert Moreno. Please go ahead, sir.

Good morning, ladies and gentlemen. Welcome to Banco Santander-Chile second quarter 2008 results conference call. This is Robert Moreno, Manager, Investor Relations and Raimundo Monge, Director of Strategic Planning who is joining us from New York.

Thank you for attending today's conference call in which we will discuss the bank's recent results and strategy. Afterwards, we will be happy to answer any questions you may have.

If you're following along on the webcast, please go to page three. In the second quarter net income attributable to shareholders totaled CLP78,440 million; this is CLP0.42 per share and $0.83 per ADR, decreasing 2.5% year-over-year and increasing 3.7% quarter-on-quarter.

The bank continues to show a solid expansion of operating income in the quarter. Core revenues increased 14.4% quarter-on-quarter and 24.3% year-over-year. Net operating income increased 14.7% quarter-on-quarter and 6.1% year-on-year. These strong operating trends were offset by s larger loss from price [level] restatement and higher operating costs. Despite the rising costs the efficiency ratio continued to improve reaching 38.8% in the quarter. Return on equity in the quarter reached 23.2%. We have the highest ROE in the Chilean financial system.

Next slide. During the quarter markets continue to be shaken by the international financial crisis. While this situation had no direct effect on the Chilean financial markets, we do expect some slowdown of economic growth. As a result our strategy has been fine-tuned in order to align it with this new reality.

First of all we plan to deepen our focus on balance sheet management as a way to continue extracting value and to drive net interest income and margins. This will be done through a more selective growth of the loan portfolio with higher growth in middle and (inaudible - technical difficulty), along with a continued focus on spreads.

At the same time, we have placed special focus on liquidity and funding. Deposit growth continues to outpace lending and the funding mix has improved. Finally we plan to maintain strong capitalization ratios.

On the next slide on page five of the webcast the shift in focus on loan growth can be observed. In the second quarter total loans increased 6.3% quarter-on-quarter and 19.1% year-over-year. Corporate lending increased 3.2% quarter-on-quarter and 14.2% year-on-year and lending to the middle market increased 7.4% quarter-on-quarter and 17.4% year-on-year. High spread retail lending continued to outpace the rest of the portfolio, increasing by 5.6% quarter-on-quarter and 19.7% year-on-year.

But as can be observed in the next slide on page 6 of the webcast, all loan growth in retail banking came from middle and upper income clients. Lending to lower income individuals decreased 15.2% quarter-on-quarter and 10.3% year-on-year.

Next slide, page seven of the webcast. The funding mix also continued to improve. In the second quarter, customer funds increased 5.5% quarter-on-quarter and 16.8% year-over-year. Noteworthy was the 15.2% quarter-on-quarter and 23.2% year-on-year increase in the balance of non-interest bearing checking accounts. During the quarter as inflation continued to exceed market expectations the Central Bank has continued increasing short-term rates. This has pressured the bank's margins by increasing deposit costs.

Two factors have contributed to counter-balance this effect. First of all the bank's balance sheet has a slightly positive sensitivity to rising short term rates and secondly as short-term rates rise the yield obtained over non-interest bearing deposits and capital goes up.

Next page, page eight. Another key differentiating factor for the bank is its strong capital base. Santander is the least leveraged bank amongst its main competitors but has probably the highest ROE. The bank's BIS ratio as of June 30, 2008 reached 12.9% with a tier I ratio of 9.6%. In July 2008, the bank issued in the local markets approximately $117 million in a 25 years subordinated bond to further strengthen capital ratios. The bond was issued at an attractive yield of 70 basis points over the 30-year Chilean Central Bank rate. Following this issue the bank's BIS ratio reached a solid level of around 13.3%.

Next page. As a result of the proactive management of the asset and funding mix coupled with rising spreads and higher inflation, in the second quarter, net interest income was up 17.2% quarter-on-quarter and 27.1% year-on-year. The net interest margin reached 6.2%, rising 60 basis points quarter-on-quarter and 40 basis points year-on-year.

Next slide. Our second strategic objective is the proactive management of risks. The bank has taken a number of actions in order to stabilize provision expense, growth in the coming quarters, following the increase in provisions in the first half of the year.

As can be seen on the next slide in the second quarter 2008 the bank's net provision expense increased 15.5% quarter-on-quarter and 56.7% year-over-year. This rise was mainly driven by the year-on-year loan growth in retail banking and higher charge-offs in consumer loans due to the economic slowdown. It is important to point out that despite this rise in provision expense net interest income including provision expense increased 18% quarter-on-quarter and 16.8% year-on-year, reflecting that the increase in spreads, the higher inflations rate and improved funding mix has more than offset the rise in risks.

In the first half of 2008, net interest revenue net of provision expense increased more than 30%. Asset quality indicators remain healthy in the quarter. The expected loan loss ratio, which is loan loss allowances over total loans, which is a ratio that measures how much of the bank's loan portfolio is at risk remains steady at 1.4 -- 1.94% due to the bank's conservative charge-off policies.

The past due loan ratio as of June 2008 reached a healthy level of only 1.12% of loans. Coverage of capital loans reached a healthy 173.2% as of June 2008.

Going forward there is still a risk -- still a risk of an increase in expected loan loss and past due loan ratios, given the expected lower economic growth.

But as can be observed in slide 12 of the webcast, in the second quarter of 2008 the bank tightened [admission] standards in the middle and lower income segments in order to contain the growth of provision expense. As a result of these measures the growth rate of new non-performing loans, this is measured as all loans that are more than 90 days overdue, including the performing portion, plus charge-offs and minus recoveries, has been descending, especially among individuals. This should help to contain the expansion of provision expenses in the coming quarters.

Next slide, page 13. The third strategic objective is to increase cross- selling. This is obviously a strategy many banks seek. We have two very important advantages compared to our competitors. First of all Santander-Chile has the largest client base in Chile. Secondly we have excellent IT systems that are unparalleled in Chile and will permit our account executives to more easily cross-sell their client base.

In the next page of the webcast we show the continued growth in the client base. The total number of clients increased 11.6% year-over-year to 2.95 million in the second quarter. The amount of cross-sold clients increased 13.4%. Despite this improvement, only 30% of our clients have two or more products, reflecting the high cross-selling potential of the bank's client base.

Next slide, as a result, net fee income increased 4.4% quarter-on-quarter and 14.4 -- 14.5% year-over-year with growth in various products, the most important being credit cards. Fees in credit cards, debit cards and ATM cards increased 29.1% year-over-year. The usage of electronic means of payment continues to steadily grow in Chile as bank penetration and cross-selling ratios improve.

Santander-Chile's market share in bank cards reached 36% in June, reflecting an increase of 10.7% in the total number of credit card accounts. Purchases with Santander credit cards in monetary terms grew more than 20% year-over-year on the same period, double the rate in the growth of accounts.

Next slide. Given the pressure on costs provoked by the high inflation rate the bank has instituted a policy of tight cost control for the coming quarters. At the same time greater focus will be given to maximizing the profitability of the existing branch networks through cross-selling versus further branch expansion.

On page 17, you can see that the bank's distribution network totaled 468 offices at the end of the second quarter, the largest branch network in Chile. But we only increased the branches by two in the quarter. As of June 2008 the bank had -- also had 2,016 ATMs, representing an increase of 15.6% year-over-year. Since one-third of our bank's branches have been opened in the past three years there is still ample room to sustain growth by maximizing profitability of the newly opened offices.

Next slide, efficiency continues to be a differentiating factor for Santander-Chile. Efficiency ratios continue to improve despite rising costs. In the second quarter the efficiency ratio reached 38.8%, improving from 39.1% in the same quarter of 2007 and 39% in the first quarter, as operating income continues to outstrip cost growth. Total operating expenses increased 14.2% quarter-on-quarter and 19.4% year-over-year. Personnel expenses increased 16.8% quarter-on-quarter and 21.2% year-over-year. The rise in personnel expenses was due in part to the annual increase in wages by CPI in April.

The bank's average headcount also increased 5.5% year-over-year. The increase in administrative expenses was also directly linked to greater commercial activities, the larger distribution network and higher inflation. We expect the growth rate of costs to slow down, given our cost control plan, and as inflation rates normalize.

Next slide, in summary, second-quarter results were of high quality, especially considering the adverse environment that affected the global financial industry. Our high margins, ample liquidity, improving funding mix, conservative asset quality for policies, solid fee income growth and world class efficiency gives us a clear competitive advantage in the local market.

Going forward we will continue to focus strongly on profitability as detailed throughout this presentation. This should continue to boost our net interest income and fees. We expect asset quality to remain healthy and actions have already been taken to stabilize provision expense.

Finally we will moderate our investments in the distribution network and control costs. At this time, Raimundo Monge will gladly answer any questions you may have.

Thank you, the question and the answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). If you are on the speakerphone please make sure that mute function is tuned off to allow your signal to reach our equipment. (OPERATOR INSTRUCTIONS).

We'll take our first question from Tito Labarta with Deutsche Bank.

Hi, good morning. Just want to -- in terms of the expenses just given that the large increase in the quarter and the high inflation in the country, indeed, what do you kind of expect going forward, do you think you would be able to meet your guidance of less than 12% growth for the year. Is that something that could be higher than that, sort of to get your thoughts on that.

Okay, good morning to everybody. As we mentioned in the call, our intention is to slow down our extension in the branch network and our extension in terms of bringing new clients, because we have already a big amount of clients that are not fully exploited. And secondly one-third of our branches have been opened quite recently, so they are not in their breakeven point and our idea is to rush things in order to bring them into positive numbers very soon.

That factor should reduce the growth of costs in the second half. And in addition there is a more mathematical situation that in the second half of last year is when we opened most of the branch on 2007 and where we have to adjust salaries according to inflation. So the base that we will be comparing with will be higher. Those two factors make us believe that we should reduce the growth rate of costs to a level lower than two digits.

In terms of guidance we are actually not giving any strong guidance as to the second half. But as Robert was mentioning we have had a very strong top-line growth this quarter, which we think we can sustain probably at a moderate expansion rate but a high rate anyway. And if we control the costs -- second if the good news that we are seeing in the early delinquency levels as pointed in the presentation.

And thirdly if we control the trading or we stabilize the level of trading gains because as is clear in our press release, that is also a big drag in our bottom line performance. Trading gains were down almost 50% on a year-on-year comparisons and in the second half we will be comparing to a much more subdued outlook in terms of the trading gains on second half of 2007, we are also very slow because already the sub-prime crisis was showing up.

So those three factors, cost control, the provision control and hopefully trading gains being stable or slightly higher, combined with fairly strong top line growth, we think we can have a better second half than it was the case in first half.

All right, thank you.

(OPERATOR INSTRUCTIONS).

We appear to have no further questions. Mr. Moreno I will like to turn the call back over to you for any additional remarks.

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

That does conclude today's presentation. Thank you for joining us and have a great day.

Thank you.