Banco Santander Chile (BSAC) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2009 Banco Santander-Chile Earnings Conference Call. My name is Geri and I will be your coordinator today.

At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Raimundo Monge, Corporate Director of Strategic Planning.

Please proceed, sir.

Thank you very much.

Good morning, ladies and gentlemen, welcome to Banco Santander Chile's Third Quarter 2009 Results Conference Call. My name is Raimundo Monge, Director of Corporate Strategy and with me today, Robert Morano, Manager of Investor Relations. Thank you for attending today's conference call.

As you see on slide number three, in this conference, we will focus in three main points -- number one, the recent evolution of the Chilean economy and its fast recovery; the Bank's 3Q '09 results and its strategy, where retail growth has rebounded and the Bank achieved an ROE close to 29% during the quarter; and some insights regarding future growth opportunities in the Chilean banking industry, which we hope will allow us to maintain a relatively strong performance going forward. Afterwards, we will be happy to answer your questions.

Regarding the first point of this presentation, in the third quarter, the Chilean economy showed a number of signs of improvement. As the world economy is starting to emerge from its recession, the price of commodities, most notably copper, which is Chile's main export, have been rising. With the rebound in world activity, consumer and investor sentiment in Chile has also been gradually improving, which is a leading indicator of future growth of internal demand.

At the same time, the Central Bank has pushed forward an expansionary monetary policy and the central government has boosted spending in order to encourage the recovery of the economy. We expect that these and other macroeconomic trends should continue to fuel growth in 4Q '09 and in 2010.

Next year, we're expecting the economy to expand 4.5%, with inflation of approximately 3%. This growth of GDP should be led by a recovery in internal demand, which is expected to grow between 6% and 7% in 2010. Interest rates should rise, but gradually. And unemployment, which is a lagging indicator, should stabilize and begin to fall in the second half of next year.

This recovery of the economy is visible in the recent economic data provided by the Central Bank, which shows that on a sequential, seasonally adjusted basis, the economy is turning around since last May.

Now we will briefly comment on our 3Q results, where the Bank showed renewed retail growth and reached an ROE of 28.8%, in line with our overall profitability driven strategy.

In 3Q '09, net income attributable to shareholders totaled CLP109,901 million. This is CLP0.58 per share and USD1.11 per IDR. These results, with the certain increase of 2.3% compared to second Q '09 figures and a decrease of 16.9% compared to restated 3Q '08 figures.

As you might recall, in 2009, banks in Chile adopted new accounting standards in line with international standards, IFRS. For comparison purposes, 2008 figures have been restated. The main difference, compared to our previous accounting standards was the elimination of the price level restatement, a non-cash item that was added back to our operating results.

Compared to 3Q '08 figures net income attributable to shareholders increased 13.9% year-on-year in 3Q '09. This growth is relevant for shareholders because dividends should grow accordingly as long as they are -- as long as the pay-out-ratio is kept constant in 2010.

On a quarter-on-quarter basis, the rising net income was driven by gross income, net of provisions and costs. A proxy of recurring earnings, which jumped 10.4% Q-on-Q in 3Q '09, reflecting the higher quality of results in this period.

With these results, the Bank's ROE in the quarter reached 28.8%, as mentioned. the Bank has currently the highest ROE among the Banks operating in Chile. This strong profitability has been achieved despite having one of the highest levels of capitalization in the Chilean financial system.

The positive performance reflects the thorough execution of the Bank's strategy, designed to maintain solid profitability even in a weaker operational environment. As mentioned in previous earnings releases, our strategy has been centered around four main objectives to achieve this goal.

The first one is to actively manage our balance sheet. We have kept high levels of liquidity and capital at all times. We have been managing our spreads to compensate for the higher risks and lower inflation we have been facing and we have been selectively growing on the lending side.

Our second strategic objective is to proactively manage our risks, especially credit risks. The Bank has taken a number of actions in order to curb the provision expense growth in the coming quarters. As we'll show later in this presentation, there are some early signs that asset quality has begun to turn around.

The third strategic goal is to increase cross selling and product use to boost fees. The usage of our product continues to increase, despite a less favorable macroenvironment. In line with our last strategic focus, the growth rate of operating expenses was effectively curbed in the quarter and the Bank is achieving a very high level of efficiency. Cost controls and increasing productivity continue to be one of our main competitive advantages.

In the quarter, retail loan growth began to rebound, as the Bank began gradually to shift gears as economic growth strengthened. The Bank launched, in the quarter, its reactivity, Reactivate program, with a pre-approval of around USD7 billion in loans for our retail clients. This program was focused on individuals and SMEs, small and medium-sized enterprises, following the extensive credit review the Bank has performed over its entire loan book.

As a result, in 3Q '09, total loans increased 1.4% Q-on-Q, led by retail banking activities, which increased 2% Q-on-Q.

In the middle markets and corporate lending, loan volumes decreased 0.2% and 3.2%, Q-on-Q, respectively.

Despite a brighter economic outlook, the Bank maintained its strategy of focusing on profitability over market share concerns. Accordingly, we have been focusing our commercial efforts in the large corporate markets, on long-lending activities, which generate a great pool of revenues from these clients. This is reflected in our fee income gained from financial transactions and the evolution of non-interest bearing liabilities.

Regarding net interest income, for the first consecutive quarter, the Chilean economy experienced deflation, which impacted net interest margins. Inflation was negative 0.47% in 3Q '09 compared to negative 0.13% in 2Q '09 and positive 3.63% in 3Q '08.

the Bank maintains long-term assets, mainly medium and long-term financial investments, that are denominated in Unidades de Fomento, or, UFs, and inflation indexed units, which are partially funded with nominal or non-interest bearing peso short-term deposits.

As a result, in 3Q '09, net interest income was down 4.1% Q-on-Q and 13.7% year-on-year.

The Bank net interest margin still reached a healthy level of 5.7%, but was down 30 and 115 basis points, compared to the same quarter of last year. It is important to point out that 3Q '08 inflation reached a three -- a 10-year peak, following the strong surge in oil prices last year and this explains the high net interest margins in the period.

Going forward, as inflation normalizes and rates rise, the Bank's margin should evolve favorably, especially when factoring in the improvements of the asset quality.

In 3Q '09, and in line with our second strategic goal, asset quality management, the Bank's net provision expense decreased 17.6% Q-on-Q. Asset quality indicators also began to show signs of improvement, especially among individuals. Non-performing loans increased 7.7% Q-on-Q, and from their peak in April, non-performing loans have fallen 16.6%. Coverage has also improved and the coverage of non-performing loans rose from 75.7% in 2Q '09 to 88.2% in 2Q '09.

Notable is the coverage ratio from non-performing consumer loans, where most of the deterioration has been seen in this contracted cycle, which reached 253% as of September 2009.

As a result of this improvement in asset quality, net interest income, net of provisions, was up 5.8% Q-on-Q in 3Q '09.

The Bank continues to focus on expanding cross selling and product use, our third strategic objective. Net fee income increased 2.6% Q-on-Q and 6% year-on-year in 3Q '09. The Bank implemented various strategies to promote fee growth in the quarter, despite some adverse regulatory changes. Strong fee growth from credit card fees and asset management were the main drivers of fee income growth. Fees from credit, debit and ATM cards increased 14.7% Q-on-Q and 32.7% year-on-year. Santander is now the market leader in the credit card business in Chile. As of September 2009, the Bank reached 33% of all bank credit cards, generated close to 38% of all monetary purchases.

Purchases were up 17% in real terms in our cash year-on-year compared to 3.9% for the rest of the market. Excluding non-banking issuers, -- sorry, including non-banking issuers, the Bank also reached the top position in terms of credit card usage in 3Q '09, surpassing the largest Chilean retailers.

The Bank continued to control costs in the quarter, and the efficiency ratio reached 32.6%. Operating expenses increased 1.3% Q-on-Q and 7.2% year-on-year in 3Q '09.

The evolution of operating efficiency was due to general cost control and the increasing usage of alternative channels, especially Internet transactions that are growing 12% to 15% in 2009.

In summary, 3Q '09 results were positive, especially considering the adverse environment we face. And Santander was able to outperform the rest of the market. Our better earnings mix, stable fee income growth, improvement in asset quality and world-class efficiency gave us a clear competitive advantage, permitting the Banks to more than double the return on capital of the rest of our competitors, despite lower leverage.

Going forward, we believe the Chilean market offers solid growth potential and Santander-Chile is in a unique position to benefit from this higher growth environment.

In 2010, as economic growth gains momentum, loan growth also should pick up. In real terms, loans have tended to increase at a rate of 1.8 times GDP growth in Chile and very much in line with the expansion of internal demand.

We believe three important forces will fuel the growth of the Chilean financial system in the coming years. First of all, as the economy managed to grow at the medium term growth rate of 4.5% up to 5.5%, more consumers in the middle and in the middle lower income segments will be demanding financial services.

Secondly, this increase in banking penetration should be accompanied by greater product penetration, especially since banks are emerging on a relatively stronger position from the current economic contraction compared to several non-bank players.

Finally, the usage of products will also continue to rise as clients switch to more efficient banking products for their financial needs.

Given the low rates of bank penetration, especially among individuals and SMEs, we expect these high-yielding segments to yield the growth in the coming years. As shown in slide 18, the Chilean population over the past three decades has gone through a profound transformation in which more than 67% of the population now belongs to an emerging middle class, whose purchasing power has been greatly increased.

At the same time, consumer lending represents less than 15% of GDP, similar to the levels seen in countries such as Brazil or Mexico.

The average Chilean household is not over in debt as the average household owes around six months of disposable income, half the level of more developed markets.

This leverage is mostly mortgage, which represents two-thirds of the lending to individuals. At the same time, the average Chilean household dedicates 12% of their disposable income to pay for financial obligations, a relatively low figure. Therefore, as a unemployment improves and wages rises, there is a large growth potential for retail lending to expand and the outlook for non-lending products is also high as penetrating levels are again, relatively low.

Furthermore, in Chile banks represent only 55% of total consumer lending. Of this total middle and low-income individuals represent 80% of borrowers but only 31% of the loans. At the same time, only 28% of the Chilean workforce have a checking account and usage of credit card is still low.

A similar situation is seen in the high-yielding SMEs market. First, banks only represented 53% of the total lended to companies, among this lending SMEs, although represent 95% of the borrowers, have a mere 8.3% of the total amount of spending.

A similar trend is seen in other banking services where SMEs are underrepresented especially in terms of the amount of cash management and pressure of service, day's use.

With this background we believe Santander Chile is in the best position to benefit from this stronger outlook. We have the largest banking franchise in Chile with a leading the position in retail banking, client base and distribution capabilities.

We are not only number one in retail banking but have some considerable distance over our closest competitors. We also have the strongest capital base with a Basel ratio of 50.2% as of September, 2009 among that core capital represents 11.2% which gives us ample capital to support future growth.

In addition we see ample room for exploiting and growing the revenue potential of our current client base and we have been developing strategies and products that increase the use of our products and services and benefit at the same time, our clients.

Growth will also come from alliances we have already set, that we believe will be a cost effective way to increase our client base. For example, our recent alliance with Movistar, Chile's leading cell phone operator gives us access to 7 million potential clients.

Our ample branch network will also allow us to grow without needing intensive additional investments. Nevertheless, we will invest as needed in high-growth opportunities such as our client banking targeted for our high income individuals where we have been very successful in the last two or three years.

We will continue to push alternative channels which are rapidly becoming the Bank's fastest growing distribution channel.

Finally, our efforts to control asset quality should result, in the short-term, in a reduction in provision expense that will also help to foster EPS growth. This is our roadmap for the coming year. We believe Santander Chile is closing a very difficult period with a solid record of consistency and performance and we look forward to this higher growth period that we are starting to enter.

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

(Operator Instructions).

Your first question comes from the line of Tito Labarta with Deutsche Bank.

Please proceed.

Hi, good morning Raimundo.

I just had a question regarding this bill that's going to Congress, MK-3 Capital Markets Bill. I just wondered if I could get your thoughts on the likelihood that it will be approved by the Senate, the timing of that and then the potential impact to the financial system and to Santander in particular? If you have any thoughts on that I appreciate it.

Thanks.

Well, there are many things that are coming, that the new bill, that are positive in general terms for the capital markets and some of them are for the banks.

In terms of the banks, we think that they are -- the authorities are correctly trying to increase competition. Competition, as a Grupo Santander we like it because it's the best way to be really on your feet and acting quickly. We think that this is a very competitive market but any efforts to increase the level of competitiveness, is well regarded.

We have a fairly strong position within the market and the good news about increasing competition is that the -- nobody will claim that this is a closed market now that the competition has been encouraged. New licenses are being granted by the Superintendancy.

So all in all, although we think it's a competitive and open market we think that the efforts to deliver the message to the other constituencies that have they have the feeling that this is not a competitive market, will be possibly for the Bank operations.

Remember that in our case, our main focus has been to expand the market, to expand the size of the market by bringing in new clients, tapping new segments, opening new products etcetera. More than increasing our market share within the market and that's why if you bring new ideas and you bring new players to expand the size of the market, increasing financial penetration, going to the SMEs where they are very much under penetrated, which we saw in the presentation, or increasing the level of use of our products is more encouraged because that is our main focus more than kind of a feel some gain where we gain market share and the market is not expanding.

There are different measures. Most of them are -- in the case related with banks, trying to encourage transparency, which again is good and is part of our competitive effort to be competitive and to be transparent.

And secondly, to encourage competition by allowing other credit providers to participate in the market. So there will be more competition, but we believe that it's a very competitive market and that's why it shouldn't make a big difference, at least in our case.

Okay. Thank you very much.

And do you know any sense of the timing to go through Senate?

Not at all. This process usually takes some time and now we're entering an electionary process and so probably again, no idea at all but probably not in the very short term.

All right. Thanks, Raimundo.

(Operator Instructions).

Your next question comes from the line of Jorg Friedman from Merrill Lynch.

Please proceed.

Thank you very much.

Hello, Raimundo, Robert. I have two questions actually.

The first one, according to Central Bank minutes, the Central Bank expects to keep benchmarking interest rates at record low for several months. I would just like to understand if you believe that this gradual change in the mix origination towards retail and the rebound of inflation expected next year, could sustain interest margins going forward or if you believe that it will keep under pressure for the upcoming quarters?

My second question is related to I know you are more stringent asset quality origination, as you mentioned in the presentation. I would just like to understand if the approval of USD7 billion as you mentioned, in loans for special individual clients could have consequences in an increase in delinquency? Just how do you see this factor playing out?

Thank you.

Okay. In terms of the first part of your question which is how the low interest rate environment and the low inflation environment could change going forward? We're very much in agreement with the Central Bank forecast that rates should -- will remain relatively low until we enter the first half of next year. And that of course will put pressure over our margins as they have been putting pressure throughout 2009.

We think that on relative terms, especially compared to first-half figures, we will see some slight improvement in the inflation outlook.

The other side of the coin is that this is precisely fueling growth on retail activities which are very profitable. And that's why although we think that margins will be under pressure and we will be taking actions to work and to defend that relatively high margins that we have been able to get here, the positive news should come for an increasingly higher growth rate.

We have seen consumers coming back to -- because again, remember that here you have supply and demand conditions. Banks were more reluctant to lend, but people also were less reluctant to borrow and that is something that we have seen a change for good. We have seen stronger retail demand coming from individuals, from -- to some extent SMEs and the large companies have been very active any way. Yes.

So negative news in terms that margins will be under pressure because of low interest rate and low inflation. In relative terms, some relaxation of inflation pressures because we expect inflation to start normalizing gradually in 2010 but higher growth will be able to compensate part of that pressure and that means that net interest income should be growing hopefully in the higher, one-digit-range.

In terms of the second part, what we have been doing throughout this contraction period is to slice and dice our current client base very thoroughly. First to understand, which were the most likely to face difficulties and we were trying to anticipate delinquency problems, not waiting until the client is not already paying you. But trying to anticipate, and that effort has been producing two side products, one is to anticipate better and give some relief to clients that although were paying you today might face difficulties going forward.

And the second, to realize that the largest chunk of our client base is sounding well. With those clients each -- on a one-by-one basis we have been is doing this Reactivate plan so here we are tapping the safe part of our client base.

So by means of working with our client base we have realized which are the clients that might be facing difficulties and we are giving some relief to them and to the rest, which is the majority, we are now offering pre-approved credit lines and so on and so forth. So that's why we think that we shouldn't face a major deterioration of delinquencies because of this program going forward.

But of course we will see a mixed situation because we are targeting the SMEs and the middle classes, to some extent, which have higher delinquency levels. So that's why we think that we will have a relief in terms of macro conditions, but at the same time we will be growing faster in those segments that on a structural basis, have higher risk.

The good news is that of course net interest margins also are much higher and the net interest margin net of provisions should go lower as was the case this third quarter.

Okay, thank you very much.

And there are no additional audio questions at this time, sir.

Okay. Well thank you very much for participating in this call and we look forward to speak with you again soon. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation you may now disconnect and have a great day.