Banco Santander Chile (BSAC) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter Banco Santander-Chile earnings conference call. My name is Melissa and I will be your lead operator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn this presentation over to your host for today's call Mr. Raimundo Monge. You may proceed, sir.

Thank you very much. Good morning, ladies and gentlemen. Welcome to Banco Santander-Chile's second quarter 2009 results conference call. This is Raimundo Monge, Director of Strategic Planning of the Bank, and with me is Robert Moreno, Manager of Investor Relations.

Thank you very much 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 your questions.

In 2Q '09, net income attributable to shareholders totaled CLP107,391 million. That is CLP0.57 per share and $1.12 per ADR. These results represent an increase of 40.1% Q-on-Q and 4.1% year-on-year. Compared to historical figures, which are not adjusted for the new accounting standards, net income attributable to shareholders increased 36.9% year-on-year.

With these results the Bank's ROAE, return on average equity, in the quarter reached 28.7%. The Bank currently has the highest ROE among all banks operating in Chile. At the same time our efficiency got to new heights as the cost-to-income ratio reached a record 31.5% in the quarter. This performance was led by the growth of our net operating income which grew 36.2% Q-on-Q and 10.8% year-on-year in the second quarter of 2009.

The strategy of focusing in selective loan growth, improving the funding mix, higher spreads, increasing product usage, and controlling costs offsets the negative effects of rising credit risks.

In the first half of 2009, net income attributable to the shareholders decreased 2.7% year-on-year and totaled CLP184,043 million. Net income compared to non-restated one -- first half '08 increased 19.4%. This is relevant because dividends are --- will be paid according to --- will be increasing as compared to the non-stated figures of last year. The efficiency ratio reached 32.9% and the ROAE reached 24.5% in the first half of 2009.

In 2Q '09, the Bank continued to face a challenging operating environment as the economy has been impacted by the effect of the global economic crisis. Growth is expected to be down year-on-year, short-term interest rates declined sharply, and the economy saw a slight deflation in the period, although at a lower pace compared to the abnormally low levels observed in the first quarter. As a result, the Bank continued to be focused on strengthening measures to increase our profitability even under this challenging operational environment.

Although we expect the macro conditions to be difficult throughout the rest of 2009, there are some early symptoms that make us believe that growth could be resuming in the second half of the year. The prices of Chile's main export products have bounced from the relative low levels seen by the end of 2008. Consumer confidence has been steadily improving while the economy is starting to benefit from the low interest rate environment and the fiscal stimulus package launched throughout 2009. These elements should be fueling the expected turnaround in the second half of the year.

As mentioned in previous releases, the Bank continues to be focused on increasing profitability and our strategy is centered on four main objectives to achieve this goal. The first one is to actively manage our balance sheet. The Bank ended the first half with a strong capitalization ratio, a sound liquidity position, and core deposit base, and has been selectively growing in lower risk segments. We have also been increasing our spreads in order to absorb higher provision expense.

Our second strategic objective is to increase cross-selling and product use to boost fees. We believe we have two very important advantages to succeed in this goal. First of all, Santander-Chile has the largest client base in the country among private banks. Secondly, we have IT systems that are unparalleled in Chile and that allow us -- our account executives to cross-sell more easily their client base.

The third strategic goal is to proactively manage all of our risks especially credit risks and recoveries. The Bank has taken a number of actions in order to curb the provision expense growth in the coming quarters. As will we show -- as we will show later in this presentation, there are some early signs that asset quality has to begun to turn out -- to turn around, sorry.

In line with our last strategic objective, the growth rate of operating expenses has been effectively curbed in the quarter, and the Bank achieved a record high level of efficiency. Cost control and increasing productivity should continue to be a key driver for the Bank's performance in two-half of 2009 as well.

Santander-Chile ended the first half of 2009 with strong capital ratios. As of June 2009, the Basel ratio or BIS ratio reached 15.1% with a tier I ratio equal to 11.1% of risk-weighted assets. Growth in common shareholder's equity is the sole component of our tier I capital.

The Basel ratio has increased 129 basis points since yearend 2008. This positive evolution of capitalization ratios is the direct result of the high income generation of the Bank and the careful management of our risk-weighted assets. This has allowed us to maintain our high dividend payout and at the same time keep a strong capital base while maximizing the return on capital.

In the quarter, the Bank maintained its strategy of focusing on selective loan growth and profitability over market share concerns. In the second quarter of '09 total loans decreased 4.2% Q-on-Q and have increased 1.5% year-on-year. This was a result of several factors. First of all, the more difficult economic environment has negatively affected demand for credit in all bank segments. This has especially affected lending towards to SMEs and the middle markets, in which loan volumes decreased 0.7% and 9.3% Q-on-Q respectively.

Secondly, the Bank has continued to grow prudently especially among individuals in order to maintain sound asset quality indicators. Total loans to individuals decreased 0.4% Q-on-Q, and increased 4.3% year-on-year as a whole, but lending to middle-upper income segments increased 4% Q-on-Q and 19.5% year-on-year. (Inaudible) in the middle-income segment volumes decreased 4.3% Q-on-Q and 7.2% year-on-year, while in the mass consumer market which has been the most affected by the current operational conditions, loan volumes decreased 6.4% Q-on-Q and 14.8% year-on-year.

Finally, the globalization of cross-border liquidity flows and the active local bond market has also resulted in lower loan growth. This is reflected in the 11.8% Q-on-Q falls in loans in the corporate segment. Given our consistent focus on profitability, we have kept our spreads strategy intact, while focusing our commercial efforts in the non-lending activity would generate a substantial part of the revenues we earn from these corporate clients.

The Bank's global banking and market business has been actively participating in some of the largest local M&A's, project finance, bond issues, and financial advisories in 2009. These results are reflected in gain from financial transactions and fee income.

During the second quarter of 2009 loan spreads increased in all product categories. The focus on loan spreads was also an important measure to counterbalance the negative effects of rising provision expense and lower loan growth.

Going forward, the Bank is working on several strategies and closely following key economic indicators in order to begin accelerating loan growth, and employment is expected to remain high. But the number of people actually employed, which is relevant for banks, has been fairly resilient, dropping by just 1% year-on-year based -- year-on-year as of June 2009.

At the same time, other indicators such as the total balance of household debt over disposable income and the total financial cost of servicing the household debt over disposable income has begun to decline. The average Chilean household's stock of debt is equivalent to 61% of the yearly income of the family, of which two-thirds is residential mortgage loans. The loan-to-value ratio of the mortgage portfolio is 75%. The cost of financing total debt is 12% of disposable household income.

As a result the net worth of the average Chilean household with employed members has improved since the beginning of the year. Accordingly, the Bank is designing strategies in order to reignite loan growth in the short term among our clients and throughout 2009 among those clients which show steady employment and income levels.

Among other initiatives, the Bank has launched three new credit card products in 2009. These are the World Member Card which is co-branded with LAN Airlines, for the mid-upper income segment; secondly, Santander Financial LANPASS, again with LAN Airlines, which is the first credit card for the middle-lower income segment that is co-branded with an airline and allows the accumulation of mileage with purchase; and thirdly, a credit card co-branded with Movistar, Chile's largest cell phone operator that permits the accumulation of cell phone minutes and other benefits. Movistar has 7 million clients that can be approached under this new alignment.

Customer funds remained stable Q-on-Q, and year-on-year in 2Q '09 despite a sharp decline in interest rates as the Central Bank loosened its monetary policy. As a result, the Bank let its more expensive time deposits to expire and funneled those funds to mutual funds, which are more profitable. As a consequence, total customer deposits decreased 2.9% Q-on-Q and mutual funds under management increased 8.4% Q-on-Q. The loan-to-deposit ratio improved to 94.3% from 9.6% (sic - see Press Release) in first Q '09 and 93.2% as of 2Q '08.

At the same time, core funds, defined as retail deposits, long-term institutional deposit, and loans and equity represented 89% of total liability. This in line with our goal of maintaining a healthy liquidity position and a strong funding base.

Net interest income grew 21% during Q-on-Q and 2.9% year-on-year. The Bank's net interest margin reached 6% in the quarter compared to 4.8% in first Q '09 and 6.2% in 2Q '08. This result was mainly a consequence of the Bank focusing on actively managing the balance sheet in order to extract greater revenue without taking on additional risks.

The mix of higher loan spreads, a steeper yield curve, a lower deflationary environment, a lower funding costs grow the strong growth rate in net interest income and has been one of the key drivers of the Bank's high profitability reached in the quarter.

The lower interest rate and the deflationary environment seen in 2Q '09 continue to benefit the Bank's net gains from financial transactions. These results increased 3.3 -- 4.2% year-on-year in the quarter, were mainly due to higher realized gains from available-for-sale fixed-income portfolio and better results from our proprietary trading which in 2Q '08 had losses.

The Bank continues to focus on expanding cross-selling and product use, our second strategic objective. Net fee income increased 2.5% during Q-on-Q and 3% year-on-year in 2Q '09. Despite lower economic growth and regulatory changes, the Bank has been implementing several strategies to promote the growth as reflected in the strong Q-on-Q rise in fees from credit cards, asset management, and insurance brokerage.

As stated in previous earning reports, fee income from lines of credit is expected to decline throughout 2009 due to regulatory changes that prohibits fees charged from unauthorized overdrafts. In 2Q '09, the Bank's net provision expense increase 5.6% Q-on-Q and 36.3% year-on-year, sustaining a downward trend in year-on-year growth rate started by the end of 2008.

The evolution of net provision expense is directly related to the negative effect of the economic downturn on asset quality and expected loan loss ratios. This indicator increased from 2.01% as of March 2009 to 2.34% as of June 2009.

This higher provision expense in the quarter resulted in an increase in the coverage ratio as well. The coverage of five new loans reached a 172.8% as of June 2009 and improved from 166.2% as of March 2009. Similar movements were seen in other risk metrics.

Despite the weakening of asset quality in two quarter '09, there have been signs that the velocity of deterioration has subsidized. In 2Q '09 the Bank continued to focus loan growth in lower risk categories in order to contain asset quality deterioration. At the same time, commercial executives at the Bank's branch network continued to dedicate an important percentage of their time to asset quality issues and recovery.

As a result of these measures, total charge-offs decreased 6.8% Q-on-Q, loan loss recoveries increased 20.9% Q-on-Q and non-performing loans have decreased 9.6% since their peak in April 2009.

The monthly increase of the substandard loans measured as the monthly change of both NPLs and other deteriorative loans, plus charge-offs, minus recoveries has also fallen sharply since 2009 as it can be seen in the chart. This is a key indicator for future performance of non-performing loans and provision expense. Despite these measures and results, we still believe there is a risk that asset quality could further deteriorate going forward.

The growth rate of operating expenses was curbed in the quarter. In 2Q '09 the efficiency ratio reached a record low level of 31.5%. This positive evolution of efficiency was mainly due to general cost-saving measures, our strategy of increasing the profitability of existing branch network and the increase in use of alternative channels, especially the Internet. According to the latest information published by the Superintendency of Banks Santander-Chile had a 28% market share in terms of clients using online services.

The usage of Bank's remote channels, call centers, ATMs and others, has also been increasing in line with investment made in 2008 in this area, and is an important contributor to sustained improvement in our productivity levels.

In summary, net operating income increased 36.2% Q-on-Q and 10.8% year-on-year in second quarter '09. The strategy of focusing on selective loan growth, rising spreads, improving funding mix and rising productivity offset the negative effect of rising credit risks in the quarter. Despite the challenging environment the Bank has been facing, we have been able to sustain a fairly resilient client revenue generation.

We believe 2Q '09 results were positive in absolute terms, especially considering the adverse environment we faced, and we clearly outperformed the rest of the market. Our high client margins, ample capital and liquidity position, improving funding mix, conservative asset quality policies, solid fee income growth, and world-class efficiency give us a clear competitive advantage in the local market, allowing the Bank to more than double the return on capital of the rest of our competitors despite our lower leverage.

Going forward, we will continue to focus on our strategy centered on profitability as detailed throughout this presentation. At the same time, we are well prepared to resume loan growth once we feel comfortable that economic and asset quality indicators are truly and sustainably improving.

The Bank's improved knowledge about our clients, the fact that we have more customers than any other private bank in Chile, combined with our strong distribution capabilities and robust capitalization ratios should permit a rapid rebound of the growth as the recession finally [weakens].

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

(Operator Instructions) And you have your first question from the line of Tito Labarta from Deutsche Bank. Please proceed.

Hi, good morning, Raimundo. Couple of questions. This first --- we saw the other expense line, a big reversal in terms of some expenses, especially compared to the first quarter we had pretty high expenses here. I just wanted to get a sense of your outlook going forward. Could there be any more reversals of any expenses or do you see that normalizing to historical levels? That's the first question.

Then the second question, just in terms of the asset quality, you mentioned that the velocity of deterioration is declining. But do you think you could see an improvement later on this year or it will just be a further deterioration but less than we've seen in the past? And then how would you -- how would that affect your provision levels? Thank you.

Okay. Concerning the first part of your question, as we stated in our first Q press release, we took some non-specific credit and non-credit contingencies in that first Q, given the difficult economic environment we were foreseeing and the potential for further deterioration of the economic downturn. In this quarter, what we have been doing is reversing part of those non-specific credit provisions and allocating to some specific cases that we were able to identify.

Going forward, it's something that we think will be done throughout the year because precisely we are identifying those credit positions, especially in the -- (inaudible) in this quarter. The [carbon] industry, we took specific provisions to cover expected losses that we might face in that sector that is facing some constraint.

Regarding the second part, it is related. It's difficult to predict because it will depend on the market conditions. The non-performing usually have been lagging to some extent the deterioration of the economy. So, given that the economy in the second quarter, among the consensus, belief is that should be bottoming, it's likely that with some lag of one quarter, one quarter and a half, we should see asset quality figures starting to be close to that point.

So that the -- as we stated in the conference and in our press release, we have seen that the early non-performing stages, the moment that a client doesn't --- they stop paying through (inaudible) we have seen some improvement since more or less favorably, but especially since April on, that will have an impact in our provision levels and charge-off levels and that will start to be fully visible in Q2.

Yes, that's why we have good news and bad news. The final outcome will be a pretty much based on and according to the actual market movement. But it seems that the [worst] is very close to be achieved if we do not achieve it in this quarter.

Great, thanks. And just to follow-up a bit further on that, then how do you see outlook in terms of your provisions going forward? Do you expect that now to remain stable with what we saw this quarter or could that actually start to slow down in terms of your provision charges for the rest of year? Thanks.

I would say that the -- in the third quarter we should see some stabilization in the level of provisions and in the levels of asset quality deterioration (technical difficulty), in the fourth Q, some actual drop. And what is increasingly clear is that if the economy [rising] up loan provisions, the drop in loans provisions will be a key driver of our bottom-line performance in 2010.

Great. Thank you very much, Raimundo.

Okay.

(Operator Instructions) And I show that you don't have no more question at this time, sir.

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.

Ladies and gentlemen, this concludes the presentation. Thank you for your participation in today's conference. You may now disconnect. Have a great day.