Banco Santander Chile (BSAC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Banco Santander Chile First Quarter 2010 Conference Call. My name is Chris and I'll be your operator for today.

At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to our host for today, Mr. Robert Moreno. Please proceed.

Thank you. Good afternoon, ladies and gentlemen. We apologize for the earlier inconveniences and we are going now to review again the webcast presentation.

Now beginning on page three of our webcast, thank you for attending today's call in which we will discuss recent developments in the Chilean economy, some details on our performance in the first quarter and some thoughts on our views of our strategic objectives for this year.

As everyone might know, part of Chile was affected by an 8.8 magnitude earthquake in February. We expect the earthquake to have a negative impact on economic growth in the first half of 2010, especially in such sectors as forestry, fishing, wine and manufacturing. We also believe that the reconstruction efforts launched by the government will help to compensate this impact in the following 12 or 18 months and that there should be a positive impact on both investment and employment going forward.

The most likely pattern for the growth of the economy will be a J-curve recovery, starting somewhere between the second and third quarter of this year and gaining momentum throughout 2011. As a consequence, we believe that the earthquake's impact to the Chilean economy is manageable.

Regarding our total exposure to the most effective zones, regions 6 through 8, this represents approximately 12% of our loan portfolio. As a result, we expect some impact on loan growth in these regions in the coming quarters, especially among middle market and SME clients. We do not have significant US debt exposure and over 95% of our mortgage portfolio was insured.

We also launched a special plan to lower the impact in the effective zones by visiting clients door-to-door in order to assess the impact of the earthquake and seeing further growth opportunities. A preliminary analysis concludes that the earthquake impact for the Bank is also manageable. Despite some adverse short-term impacts on loan growth and provisions, the stronger job market, higher loan demand due to reconstruction efforts and the fact that inflation is expected to higher than what we expected before the quake, makes us believe that the impact on the Bank's bottom line should be limited, if at all.

Given the economic fundamentals, the outlook remains solid, due to prudent macroeconomic policies. Chile has more than $11 billion saved in sovereign funds and has the best ratings in the region. Therefore the reconstruction effort should not be difficult to finance for the public sector.

We are still expecting GDP growth of around 4.7% in 2010 and 5.5% in 2011, although this figure has been reviewed upward continuously. In addition to a much stronger external scenario for Chile's main trading partners, especially Asian countries, the 19% expected increase in investment and the low unemployment rate should give an important boost to the economy in the second half of this year and in 2011.

We also expecting a reversal of the deflationary environment we saw in 2009, with 3.7% inflation in 2010. Interest rates should begin to rise in the second half, but remain at relatively low levels, which is a further incentive for investment.

As economic growth regains momentum, loan growth should also pick up. In real terms, loans in Chile [tend to] increase at a rate of 1.8 to 2 times GDP growth and very much in line with expansion of internal demand. As a consequence, this year we expect the system's real loan growth to be around 10%, which translates into a nominal loan growth rate of 13% to 14%.

Now we will review the positive results in the first quarter 2010 and our strategic objectives for the next three years, with respect to the positive outlook for the economy, the Banking sector and Santander Chile's operations.

In the first quarter '10, net income attributable to shareholders totaled CLP119,104. That is CLP53 per -- CLP63.10 per share and $0.25 per ADR. These results represent an increase of 55.4% compared to first quarter '09. Core revenues, that is interest income plus fees, was up 17.7% year-over-year. The Bank's return on average equity in the quarter reached 28.6%, improving from 20.2% in the same period of 2009.

In April 2010, the Bank paid its annual dividend of CLP1.37 per share, 21.2% higher than the dividend paid in 2009. This is equivalent to 60% of 2009 earnings and the highest dividend ever paid by the Bank.

This strong profitability and record dividend was achievable, having one of the highest levels of capitalization in the Chilean financial system. As of March 31st, 2010, the Bank's EPS ratio reached 14.7% and the tier one ratio stood at 10.8%. The strong capital base will permit us to support high loan growth in retail segments, which is a key point of our strategy going forward.

As we said, the Bank is increasing positive about the outlook for the Chilean economy and the growth prospects of its banking sector. Taking into consideration the Bank's strong starting point and position within the market, we have redefined our strategy to take advantage of this growing environment.

The Bank has defined four main strategic objectives for the 2010, 2012 period to sustain its growth and profitability. Even on a very short term, there may be some disruption of our strategic focus due to the earthquake. In those areas unaffected, we are moving ahead with our original plans for 2010.

The first objective is achieving high retail growth and to continue expanding bank financial penetration levels in Chile, which should help us maintain our net interest margins and boost our net interest income.

Our second strategic objective is to increase fee income by expanding product use and cross selling. This will be done by investing heavily in our IT systems to further improve our leading client relationship processes. We believe there is still plenty of room not only for increasing the total client base, where alliances will provide most of our new clients, but also getting current clients to use more intensively our current products.

The third strategic objective is to consolidation the improvements to our credit risk management system, made during the downturn in 2009. This will help support a healthy expansion of our growth in loan volumes through riskier retail segments.

Our last strategic goal is to continue an effective efficiency management. We are planning to expand our capacity during the next three years and the Bank expects to invest $376 million in expanding our alternative channels, the traditional branch network and improving systems and profits. Part of these investments will be funded by productivity gains and lowering both the cost of bringing new clients to alliances and reducing our delivery and transactional costs, relying more on low-cost remote channels, such as Internet, home banking and ATMs.

In the first quarter, and in line with our first objective, total loans increased 2.3% quarter-on-quarter. The pick up in economic growth has led to a rebound in loan volumes, especially in high-yielding retail banking activities. The Bank continues to see loan growth even after the recent earthquake in the majority of its products. The lower interest rate environment also continued to boost loan demand.

In the quarter, the Bank also improved its funding mix. The ratio of loans to deposits reached 104.3% compared to 109% in March -- in December 2009. Customer funds increased 1.5% quarter-on-quarter, with a 10.1% quarter-on-quarter increase in demand deposits in the quarter.

The better loan and funding mix, coupled with higher inflation rates in the quarter, led to a 22.5% increase in net interest income. [Advanced] net interest margin reached 5.8% in the quarter, compared to 4.8% in one quarter '09 and 5.8% in fourth quarter '09.

In the period, the Bank's net provisions decreased 22.8% year-over-year. This was mainly due to an improvement in asset quality, especially among individuals, which resulted in a 44.4% year-on-year decrease in total charge-offs and a 42.5% year-on-year decrease in net provision expense to consumer loans.

This was mainly due to the improvement of both the economy and the Bank's strategic focus in 2009 in keeping asset quality under control, by growing selectively and by increasing the time commercial executives dedicate to asset quality issues.

Non-performing consumer loans decreased 38.6% year-on-year and the coverage of consumer NPLs reached 247% at the end of March. Total NPLs increased 5.8% year-on-year and 1.9% quarter-on-quarter, reflecting improvement in asset quality in individuals, as commented above. The coverage of total NPLs reached 97% compared to 85.5% at year-end 2009.

This positive trend in charge-offs among individuals was partially offset by a rise in net provision expense of commercial loans that increased 79.5% year-over-year. This growth was mainly due to a rise in the expected loss in the middle market and SME segment as a consequence of a specific loan position and some initial impacts of the ongoing asset quality review after the earthquake.

Going forward, the Bank expects that in second quarter, and to some extent in the third quarter, asset quality in the segments could be impacted by the earthquake.

Net fee income increased 1.2% year-over-year. Some products were negatively affected by the earthquake, but this was offset by high growth in key products, in line with our strategic objective, increasing product usage. Fees from credit cards continued to -- fees -- to lead fee growth and increased 19.5% year-over-year. The rise in fees from this business reflects the higher use of bank cards.

At the end of March, the Bank -- 32.7% of all bank credit cards generated 38.5% of all monetary purchases year-to-date compared to 35.8% in the same period in the first quarter of '09. Billing, or purchases using our cards, was up 35.7% in real terms compared to 20.7% for the rest of the market, excluding Santander.

[Interim] asset management increased 52.8% and fees from insurance, brokerage, 53.4% year-over-year in the first quarter. The Bank's success in selling insurance online, especially auto insurance, probably with a greater demand for fraud insurance, has driven brokerage fees. The Bank continued to control costs in the first quarter and the (inaudible) ratio reached 33% in the quarter.

Operating expenses increased 1.2% quarter-on-quarter and 5.8% year-over-year, mainly due to the growth of administrator expenses, which were impacted by earthquake-related costs. The Bank's (inaudible) [relations] are insured, but the additional expenses were incurred in order to restore full functionality following the quake. These are rental expenses, travel, aid donations, etcetera. We expect around $6 million in costs in the second quarter related to this.

98% of the Bank's branches and ATMs are functioning normally. The first business day after the quake, the Bank's systems were up and running normally, including all remote channels, Internet, ATM and phone banking.

In summary, first quarter results were positive, especially considering the impact of the earthquake, which has not deterred us from continuing to grow and push ahead with our plan to resume strong retail growth in Chilean markets. The high client margins, conservative asset quality policies, fee income and world class efficiency builds a clear competitive advantage in the local markets, allowing the Bank to consistently deliver solid returns and better financial ratios compared to our main competitors.

Going forward, we still believe the Chilean market offers strong growth potential and we are increasingly optimistic about the Bank's outlook.

Okay. Now we will be happy to answer any questions.

(Operator Instructions). Your first question comes from the line of Saul Martinez. Please proceed.

Hi. How are you?

I mean, I got on a little late and and I realize that there were some technical problems, so I don't know if you went through your presentation, if you addressed any of the questions, but I'll ask them anyways. First, on the new loan loss provisioning requirements that are going to come into effect in the second half of the year.

Do you have any color in terms of what the potential impact might be there, and whether the earthquake itself, and the policy authorities wanting to promote healthy recovery, might have any impact in terms of how that is implemented? If you can just give us a little bit of color in terms of where that stands and what's the impact might be, that would be helpful?

And then just, I guess, just so I can barely -- kind of what's your expectations over the next -- again, about the impact of the earthquake and what it could do specifically, more in the near-term in terms of asset quality trends, growth, and your margin especially as inflation might pick up a little bit, and credit quality trends might suffer, and in terms of volume, I know you indicated that March was a pretty good month, but just kind of what you're thinking -- what your most recent thinking is there in terms of the financial impact that the earthquake might have, and more from a short-term perspective I guess.

Okay. Well, in terms of the first part of your question, regarding new loan loss provisions, a part of it was implemented in the 1Q, that the -- was an adjustment done against equity. The second part is due to be implemented in -- starting in the third quarter of this year. Today, we don't have a [firm] appraisal of how much an impact that will mean, because there's still discussions between the bank and association -- banking association of all the bank. Here there are two forces that we are trying to balance. One is the need to grow and to increase the lending to SMEs and small companies, which with the new guidelines will be more difficult to achieve, and the other is to grow in a healthy way.

And that's why, through the banking association, there are some discussions with the regulatory authorities. So, we are not sure at this moment which will be the final indications coming from the regulator. The good news here is that in that segment we saw very little deterioration of the asset quality, and therefore there's really no urgent need to rush things. And we understand that those talks could be getting into a redefined proposal very soon. So, again, these are provisions that have a short-term effect, but once you get used to them, you start simply including in your normal pricing -- the normal pricing conditions, and that's why it's something that could have an impact, but they can be recovered.

In terms of the second part, about the earthquake, I would say that the net effect of the earthquake will be very limited. Yes, as we stated in the conference call, there are negative elements, for example higher provisions because of -- especially in the SMEs, which have a single factory, and if that is under -- it has to be repaired et cetera they will be -- those companies will be facing some difficulty.

But in general terms, we haven't seen a big deterioration, and to compensate for that, is the high loan demand that we are expecting and it's starting to happen due to the construction efforts, on the one hand. Second, a stronger job market, because new jobs, on a net basis, will be created due to these reconstruction efforts in the affected zones, and thirdly, higher inflation, yes, as you know, the Chilean bank balance sheet is inflation sensitive. So, the higher the inflation, other things being equal, it tends to be positive.

So, we think that net, net, if we have an impact, it will be fully recovered in the next 12 to 18 months, but hopefully it could be even shorter term. So, we expect some slowdown. In the previous earthquake that is -- in Santiago in 1985, it was very clearly a J-shaped recovery. We saw a deterioration in the first quarter following the earthquake, followed by a brisk recovery, and that could be the case, a lower growth in second Q followed by a stronger 3Q and 4Q and especially in 2011, once the full throttle of the recovery effort is in place, it could be fairly equated for the growth rate of the economy. So, in terms of provisioning, in general terms the outlook is positive with some negative news coming from the earthquake zone, which again represent a relatively minor part of our portfolio.

Great, that's helpful. And just a follow-up and I apologize if you addressed it, because I did get on a little late. The difference, the divergence that you've had recently between your risk index, which is based on your expected losses and your NPL ratio, your NPL ratio is trending down and your risk index is trending up. Can you just talk a little bit about that, what that represents?

Okay. The non-performing loans is a measure of loans that have not been paid for 90 days or more, yes. That is part of the asset quality picture. The other is how much respect to lose on that position going forward. Sometimes they might diverge, in general terms, they tend to move in tandem, yes.

The main difference is that sometimes you have positions that might be performing today, where you expect a loss going forward, and therefore you take the provision right away, or otherwise positions that today might not be performing, but that you know that at the end of the day you won't be losing money, for example, because you have a collateral or because you know the company is going through a short term difficulty.

So, that's why although they too tend to move in line, sometimes you can see a small divergence, when you expect things to deteriorate in a performing loan, or when a non-performing loan you know that at the end of the day you won't be losing, because you have some way to cover for those losses. So, in general terms, they tend to move in tandem, but sometimes they can diverge slightly as we have seen in this quarter.

Okay, great, thank you.

(Operator Instructions). And your next question comes from the line of Tito Labarta with Deutsche Bank. Please proceed.

Hi, good morning Raimundo. Sorry, we couldn't hear the presentation, so I'm sorry you covered this already. But in the press release you had mentioned that there were some impacts from the earthquake, just like in fees and expenses. I was wondering if you could quantify what those impacts were.

And then also if you kind of -- what are you seeing now for loan and fee income growth for the full year, given that the impacts of the earthquake are not this changed, they are not -- I just want to get an update on that. Thanks.

Okay, in terms of the impact, the marginal impact on costs, it's at something around US$6 million, so, CLP1,200 million, yes.

(inaudible microphone - inaccessible)

Excuse me? Sorry, CLP3 billion, yes, because of higher expenses. There are some in -- although our facilities were insured, you have to pay the deductible, you have to pay deductible, and there were expenses. We sent food to our people in the affected zones. We sent medicine et cetera, and there's been a rebuilding effort that explains most of that expense.

In terms of fees, in fees there are basically two realities. One is checking account fees, we have been impacted because of a change in the regulation for leading banks to charge some specific fees regarding the checking accounts. And the other are the more usage type of fees, the ones that Santander has been pushing a lot.

As you saw in the press release, those fees related with use, for example debit and credit cards, insurance and also asset management, for example, had been growing very rapidly in the -- and in the case of the fees, well, the bank has been trying to compensate for the (inaudible) interest charging for other services, and especially increasing the level of use of our product. And that's why, going forward, these should start growing faster than what we have seen this first [Q] approaching levels of 10%, 11%, by the end of the year.

Okay, great, and how about in terms of your loan growth?

Loan growth, we think that -- again, as Santander has been, for many years, following profitability during a strategy, loan growth is the result of the implementation of our strategy. So, we expect the market to be growing between 13%, 14% in total lending this year. We can maintain or slightly increase our market share this year, but it will depend at the end of the day of the prevailing spread that we can achieve. In general terms, we think that the total loan is not paid at relevant metric at this [rate], but we are sure that in retail loans, we should be outpacing the market.

Alright thanks, that's very helpful. And just the 13% or 14%, is that in nominal terms.

In nominal terms, yes, for the market.

Great, thanks Raimundo.

(Operator Instructions). At this time, we have no more questions 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, that concludes today's conference. Thank you for your participation, you may now disconnect. Have a great day.