Banco Santander Chile (BSAC) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2010 Banco Santander Chile earnings conference call. My name is Veronica and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of today's 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, Mr. Raimundo Monge, Corporate Director of Strategy. Please proceed.

Thank you very much. Good morning ladies and gentlemen, welcome to Banco Santander Chile's second quarter 2010 results conference call. I am Raimundo Monge, Director of Corporate Strategic Planning and I am joined today by Robert Moreno, Manager of Investor Relations.

Thank you for attending today's conference call in which we will discuss recent developments of the Chilean economy as well as our performance in the second quarter. Afterwards, we will be happy to answer your questions.

The Chilean economy showed positive trends in the second quarter, the effect of the earthquake has been lower than expected and the rest of the economy has been rebounding. Our expectations for GDP's growth this year have increased to 4.9% and to 6.2% in 2011.

The growth of GDP has been led by internal demand, which is expected to grow 12.2% each year with a 31.6% rise in total investments and a 6.8% growth in internal consumption.

The salary pool defined as the average wage times the number of people employed which is a key indicator for retail activities and asset quality issues is expected to grow around 6.5% both this and the next year in real terms. Led by better than expected trends in unemployment and to a lesser extent wages.

Finally, inflation is normalizing after the deflation recorded in 2009 and we expect it to be around 3.7% in 2010 while the short term Banco Central reference rate should stand at around 3% by the end of the year.

During the quarter Moody's upgraded Chile's sovereign rating from A1 to Aa3. We believe this reflects the country's solid fundamentals due to prudent macroeconomic policies and the positive outlook we foresee once the impact due to the recession of 2009 and the earthquake are fully absorbed.

Yesterday for example, a $1.5 billion sovereign bond was issued at the lowest spread ever confirming Chile's solid position. This positive [macro picture] should benefit both loan demand and asset quality in 2010 and 2011.

As seen on the slide in page six of the webcast, loan growth is highly correlated with GDP growth. If historical patterns follow, we expect loan growth for the financial system to be around 14% -- growing around 14% on nominal terms this year. The same levels seen in 2003 at the beginning of the last expansive cycle of the financial system. As of June, nominal loans are growing at around 10%.

Page seven, now we will review the results the bank obtained in -- in the second quarter '10 and our strategic objectives for the coming year. In the second quarter of this year, net income attributable to shareholders totaled CLP138,823 million which represents CLP0.74 per share and $1.41 per ADR.

These results represent an increase of 29.3% compared to 2Q '09 and 16.6% compared to the first Q of the year. The acceleration of growth in our main business line combined with a better economic environment and the normalization of inflation levels has resulted in solid recurring earnings growth in the quarter.

Gross income net of provision and costs a proxy for recurring earnings jumped 33.3% year-on-year and 8.1% Q-on-Q. As a result, in the first half of 2010, net income attributable to shareholders totaled CLP257,927 million an increase 40.1% compared to the first half of '09.

Gross income net of provisions and costs increased 23.6% year-on-year, led by a 14.1% rise in the net interest revenue and a 32.5% decrease in provision expense.

The banks return on equity continued to show a positive trend. In the second quarter, the ROE reached 33.8% accumulating a return of 31.2% in the first half of the year, among the highest for any bank in Chile and Latin America.

At the same time, Santander Chile has one of the widest margins between return on equity and cost of capital in the emerging markets, which when we consider among the key performance metrics to follow.

These solid results were achieved while maintaining high capitalization ratios, out of June 2010, the bank's BIS ratio reached 14.1% with core capital standing at a healthy 10.3% of risk weighted assets, one of the highest among Chile's largest banks.

This strong capital base should permit us to support high loan growth in retail segments which is a key point of our strategy going forward.

The positive outlook for the Chilean economy and the bank's solid and consistent performance has led to a rise in the bank's foreign currency deposit ratings on behalf of Moody's.

The bank's rating has been consistently increased in the last two years, which is notable considering many problems affecting other banks, banking markets around the globe. Santander Chile has been for several years the highest rated company in Latin America and now ranked relatively high among the world's banking sector.

As a consequence we have been able to access in convenient terms the international bond market in order to maintain strong liquidity levels and to minimize the risks, rate risks, the interest rate risk by adequately funding the longer duration portion of the loan book with funding of similar characteristics. For these reasons, bonds have increased 13% Q-on-Q and 23.8% year-on-year.

In April 2010, the bank issued a $500 million three year floating rate senior note with an all in cost equivalent to Chile's sovereign risks plus zero basis point.

As stated we are increasingly optimistic about the outlook for the Chilean economy and the growth prospects of the banking sector. Taking into consideration the bank's strong starting point and positioning within the market, we have been adjusting our strategy since the end of 2009 to take advantage of this growing environment.

Accordingly, the bank's activity has been and will be focused on four main strategic objectives to fuel our future growth and profitability.

The first objective is to achieve high retail growth and to continue expanding banking penetration levels in Chile. This should help us to 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. These will be done by investing 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 be providing most of our new clients but also getting current clients to use more intensively their products.

The third strategic objective is to consolidate the improvements to our credit risk management system made during the downturn in 2009. These will help us to support a healthy expansion of our [growth] -- in loan volumes to riskier retail segment.

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 increasing our alternative channels and branch network to fuel growth and improving systems and processes. Part of this investment will be quote unquote funded with productivity gains and lowering both the cost of bringing new clients through alliances and reducing our delivery and professional costs relying more on our low cost [renewed] channels such as Internet, phone banking, mobile banking and ATM.

In the second quarter of '10 and in line with our first strategic objective, total loans increased 3.8% Q-on-Q with high yielding retail loans growing 3.9% in the same period. The bank's market share increased in various products especially in consumer banking, where we saw an increase of 100 basis points since the beginning of the year.

In the quarter, the bank also improved its funding mix. Total deposit increased 6.1% Q-on-Q. This was led by a 7.2% Q-on-Q and 35.2% year-on-year increase in demand deposits.

Clients also began to increase their savings in time deposits as interest rates and inflation began to rise. The ratio of loans to deposit also improved to 99.8% as of June 2010 compared to 104.3% as of March 2010.

The Bank's net interest margin reached 6.1% in the quarter improving 30 basis points compared to first Q 2010 and 10 basis points compared to second Q, 2009. The better loan and funding mix, coupled with higher inflation in the quarter also resulted in the 5.8% Q-on-Q and 7.1% year-on-year increase in net interest income.

Going forward, we expect the central bank to continue rising rates which should increase funding costs and produce margin compression. This should be partially or totally compensated by the combined effect of (a) higher revenues from the reinvestment of the bank's non-interest bearing funds mostly demand deposit and ROA equity which represents 36.4% of our average interest earning assets as of June 2010, (b) high inflation which is what has been figuring the interest rates high and (c) and includes loan and funding mix. In line with our second strategic objective cross selling is also improving.

The bank's checking accounts base grew at an annualized rate of 7.4% in the first half. Credit card also are expanding at an annualized rate of 14.2% in the quarter as the bank increasingly relied on its alliances with key corporate partners as an efficient way to gain access to a large number of potential clients.

In the second Q of '10, the bank signed a core branding agreement with Chilectra, Chile's largest electricity distributor. These new cards specially defined for small businesses and individuals allows its holder to save money on the electricity bill when used. This agreement along with the bank's other accord allow us to act with more than 7 million potential new clients.

Currently, the bank has 3 million customers. As a result the amount of clients that are cross sold among our middle to high income clients has increased 10.7% on an annualized basis in the first half while in Santander Banefe our unit aimed at mass consumer lending, the client cross sold has increased 28.2% in the same period.

However, only around 20% of our current customers fulfill our cross selling standard representing a relevant growth source for the future.

The rise in cross selling and product usage continued to drive fee income which increased 3.2% year-on-year and 4.5% Q-on-Q. Fees from asset management increased 28% year-on-year as more client invest in equity funds that have a more profitable fee schedule.

A similar trend was seen in brokerage related fees. Fees from insurance brokerage increased 89.9% year-on-year. The bank's success in selling insurance online coupled with an increased premiums on behalf of insurance underwriter has driven insurance brokerage fees which grew -- fees from securities brokerage grew 18.8% year-on-year. These fees have been driven by the bank's new Internet platform for stock trading and a greater demand for investing in the local market.

In line with our third strategic goal, during the quarter the bank continued consolidating the improvements in credit risk management and collection procedures that was started in 2008 and 2009, these combined with a much solid operational environment resulted in the bank's provision expense decreasing 20.3% Q-on-Q and 41.7% year-on-year.

Asset quality has been improving especially among individuals. The non-performing loan ratio of consumer loans decreased from 3.08% as of March 2010 to 2.99% as of June 2010. Since beginning in the second Q of '09 consumer non-performance loans have consistently declined as the economy has improved and also as a result of the bank's effort in improving its follow up and recovery procedures.

The earthquake also had a lower effect than expected on asset quality of consumer loans. Improvements in asset quality among individuals was partially offset by a rise in risk in other segments mainly due to the earthquake.

Non-performing loans, total non-performing loans increased 7.9% Q-on-Q. This was mainly due to the expiration in May 2010 of temporary regulations applicable during March and April 2010 that allowed banks to report non-performing loans as performing to the extent such loans were performing the day of the earthquake, and that the bank doesn't mind that the borrower missed payments due to these events.

Operating expenses in the second Q of '10 increased 13.5% Q-on-Q and 13.3% year-on-year. This was due in part to impairment charges on fixed asset directly related to the earthquake. Excluding impairment charge, the bank costs increased 9.9% Q-on-Q and 9.8% year-on-year. The year-on-year rise in cost was mainly due to our rise in personnel expenses that are directly related to an increase in commercial activity and a higher level of inflation.

As seen in this presentation, the bank's commercial activity has been growing at an accelerated pace and as a result variable incentives to commercial teams have increased.

This should of course be compensating in future quarters with a stronger core revenue growth. Headcount did not vary significantly in the quarter. The efficiency ratio reached 35.2% in 2Q '10 adjusting for earthquake related charges and in income, the efficiency ratio reached 34.4% in the second Q of '10.

In summary, second quarter '10 results were positive in line with our strategic objectives and the positive evolution of the economy.

Our high client margin increased market share in retail lending, the improvement in cross-selling and product use, conservative asset quality policies and solid efficiency give us a sustainable competitive advantage in the local market.

As a result the bank consistently delivered solid returns and better financial ratios compared to our main competitors. Going forward, we believe the Chilean market offers strong growth potential and we are increasingly optimistic about the bank's outlook.

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

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

Hi, good morning guys and congratulations on the results again. But I guess more of a big picture question in -- I would like for you guys to comment on the sustainability of the profitability that you've been generating in the first half, your ROEs have been in the neighborhood of 30% and it seems like the macro environment is very positive, loan growth returning inflations helping the margin and asset quality in provisioning is fairly low right now 1 -- I think 1.6% of average loans.

Can you just, I mean is there any reason why you shouldn't be able to sustain this type of ROE which is in the high 20%, 30% range which obviously on a -- from a global standpoint as you pointed out in your presentation is very, very high? I was just wondering if you could just comment as you look out over the next year to how you see your profitability evolution, I guess on a more normalized basis.

Okay, well, first of all about the macro picture we believe that still we are in the recovery stage of this cycle, yes in terms of overall macro activity and in terms also of -- well the sentiment of people and the growth of the industry as you see in a chart that was included in the webcast.

In the previous cycle we saw growth of 23%, 24% and this cycle we expect to grow this year [have a system] to expand 14% but currently we are growing at 10% on a year-on-year basis. So we think that we haven't seen all of the macro recovery. That's element number one. And element number two and given that you mentioned the fundamentals, at the end is related with client activity. As in many businesses, we rely on our customers and therefore, what you have to start looking more closely today is clients, how they are growing, how they are using your products, and that's why we think we are optimistic, because we have a relatively large client base.

But as we comment in the presentation, it's still relatively untapped. According to our cross selling standards, which are related with use, more than having the product. You can have many products, but if you don't use it, it's useless. So in terms of actual use of products, only 20% of our clients will [feel] with this standard. So therefore we need to do internal homework to allure our clients and to offer incentives for them to use and be preferring our products as compared to other competitors that we have, many of them they are very good.

So, going forward, at the end, the fundamental of any business is how your clients are coming. And as we have seen, we have increased the growth of the number of clients. There we think we have another source of opportunities. One is to -- alluring your current clients to use more heavily your product.

The second is to attract new clients in a cost effective way and that's why, as we point in the presentation, we think that a branch intensive and an account officer intensive model, probably is not suitable for maintaining growth and attracting new clients. And therefore we are relying on alliances, alliances with the LAN, the largest -- among the largest airlines in Latin America, with the largest newspaper, with movie stars, with Chilectra as we pointed in the presentation, which is a very cost effective way to bring a new client and from then on, when to cross sell it and to increase the usage.

And those new clients will be benefited by a better growth outlook and a better employment outlook that we are foreseeing.

The new government among the campaign promises that [brought] is to increase the number of people actually employed by around 15% in the next four years, which is a big jump, and secondly to manage to grow the economy at around 6% real rate, which is a level that probably we'll be seeing this second half and throughout 2011. So the combination of our growing economy, plus internal homework and our client base and plus bringing clients in a very cost effective way through alliances, make us believe that we can support ROEs in the upper 20s, going forward.

If inflation normalizes, [straightaway] we'll have some extra support, but (inaudible) at the end, the medium term growth of any company is linked with client and client activity and that is where we are putting most of our effort.

Okay, great. Thank you for that. And just one follow-up question. Where do we stand on the provisioning roles for commercial credit that I think were -- they were delayed until 2011. I think initially they were expected to be put into place in July? Where do we stand on that and do we have any sense of what that might mean for your provisioning levels?

Yes. The decision took by the superintendancy is to delay any decision until the early 2011. The only thing that they are requesting banks is to have kind of a countercyclical policy of 0.5% of all corporate positions. So we will have to, as all banks, we will have to have a minimum 0.5% provision levels for all the corporate book, which in our case will mean, a minor one time adjustment, because we have lower than that.

And going forward, we think that well, given that the government is fully involved in a -- jump start or promoting SMEs which are of course the more risky and therefore the ones that provisions are more required. Probably there will be a provision scheme, that take into consideration the macro outlook, which is much more optimistic and therefore provisions should be less demanding and secondly, the fact that the higher the provision standard you set, the smaller the chances that the new SMEs companies can tap the market.

So it would be something in, remember that in this downturn, Chile banking sector went very well and secondly that most of the deterioration was on the consumer side and on the corporate side not even in the SME you see very little of the durations. So we respect the superintendancy taking into consideration those elements will bring sensible regulation. We don't foresee unpleasant surprises.

Thank you. And the minor one-time adjustment, can you give us a sense of when and how much that?

It would be reflected throughout 2Q, but it won't be meaningful. That's a general trend. We are expecting total provisions to go down simply that this will put the drop in the lower amount but we expect the provisions to follow a relatively healthy pattern that we have been following in the last three quarters.

Great. Thank you very much.

We still believe that provisions have space to go lower. These will be a partial reversal, but we don't expect provisions to jump because of this element and they will be recognized throughout the second half.

Do you think provisions as a percentage of average loans have room to fall in the second half still?

I would say that to some extent, yes because for example, in terms of absolute provision levels, we are still much higher than say pre-crisis deals, pre-crisis levels we saw in 2007, both in absolute terms, our gross provisions and as a proportion of loans. And the fact that we think we have better knowledge about the asset quality issues especially in the low end which most of the deterioration usually happen and the fact that we will be growing in a -- probably in a different way in many aspects make us believe that there is still room for improving.

And the other thing is that remember that asset quality usually lag the recovery of the economy especially in the corporate side usually we have a lag of two, three four quarters because companies that were struggling to survive even though the macro picture is better, it starts getting in more difficulties because the income recovery is not quick enough to allow them to recover. So usually when you see better macro picture, retail activities start benefiting very quickly because of better job outlook, better salaries, but corporate it tends to lag a little bit. So you have some room there too and that's why for example in the first Q and the second Q we have seen levels of provisioning in corporate [that] are higher than what we saw for example in many quarters of 2009. It's not that the macro picture is improving, yes it's simply that you see a lag until they start recovering.

Great. Thank you very much for that.

(Operator Instructions). And your next question comes from the line of Claudia Benavente from Banchile Brazil. Please proceed.

Hi, I would like to know how do you expect your loans are going to grow in this year and next year in the individual level?

I beg your pardon. I didn't understand the first part of the question.

How do you expect your loans are going to perform and are going to be like a rate for in individual levels for consumer mortgage and commercial loans for this year and next year?

Okay, well, we expect that as we pointed in the presentation, the overall growth of the system to be around 14% by the end of the year and a little bit high 16%, 17% next year. Among them, consumer lending and after some period of time, mortgage lending should be abating and also SMEs should be abating. And what should be dragging the overall growth should be corporate lending.

In our case, we don't have specific targets for loan growth because our loan growth is a result of achieving the targets in terms of profitability. So a growth in our case is a consequence of the implementation of the strategy and not the other way around. That's why having target we don't have specific targets for loan growth, because again when the conditions are sound as we have seen it in the first half for example consumer lending we can accelerate very rapidly and that's why we have been gaining market share.

We have been gaining also market share in the corporate side simply because the terms are correct, but if we see price, the margin compressions going forward we tend to change the speed. So but to make a long story short, we expect the system consumer lending to be growing this year approaching 15%, 16% by the end of year, probably a little bit high next year, in our case, growing a little faster than the system as a whole.

In mortgage, it's more an open issue, because prices are being too low according to our capital requirement and the return we don't see -- in effect we are only growing in mortgages in those clients that because of other products are profitable but not because the mortgage itself is profitable, and in corporate side, probably stronger than the market in SME, growing above 15% or 16%. And then in corporate, it's an open question, because sometimes prices are too low and we're prepared to give up business in that. And remember that in our corporate business, around 60% of our revenues come from non lending activity. So lending is only again a consequence of implementation of the strategy of having higher profitability with corporate clients.

And this in nominal rates -- in terms?

Yes well, all our terms are nominal.

Okay, thank you very much.

Your next question comes from the line of Tito Labarta from Deutsche Bank. Please proceed.

Hi, good morning Raimundo. Just a couple of questions, first just a follow up on the provision question from before, I just want to get a sense of, you said they could come down a bit further. I just want to get a sense of how much more they can come down and I guess also in terms of asset quality, are all the issues from the earthquake already done with? So you don't think there will be any more impact from that and how much more could asset quality then improve from current levels? And then a second question, just in the quarter you had some -- the sale of some branches, so I just want to get a sense is that just a one-time thing, do you think there will be any more sale of branches and any other gains actually come from that? Thanks.

Okay, well in terms of asset quality, again we think that we are in the early stages of the recovery of this cycle and, therefore we see room for further improvements in terms of lower provisioning levels and lower asset quality indicators. There will be some lag, as I mentioned in the corporate side but then on the retail part, which is for us where we are putting more effort to grow, we have seen very healthy news and we are relatively optimistic. How low you can get, it will be -- the affect is on one side of the other because the old portfolio to some extent or the older positions will be improving as compared to say last year.

But, of course we plan and we have been doing that in the first half. We are growing much rapidly in consumer lending, credit cards and SME lending, which of course have more risk but they are much more than compensated by higher expense. And that's why we cannot -- our goal is to have a high enough risk adjusted margins going forward and to try to -- we are targeting to maintain risk adjusted margins at a level such that are accretive in terms of capital consumption and profitability.

So again, you cannot see the two sides of the story separate. It's better to -- at least we try to look them combined. In terms of the sale of branches, this is something that we do, we have planned it opportunistically. It simply is not our core and it's not something that we have in mind to follow on the future. But sometimes you are approached by real estate funds et cetera given that we have very low risk, because of what we do -- what we have with these, we just say branches is a sale back [a leased and sale back] you sell it and then you rent it from them, so you are generating kind of a bond that for us is cheaper than to allocate capital.

Remember that when you have a return on capital approaching 30%, well every penny counts and you have to be very, very efficient and that's why -- but it is not something that we have in mind, it's simply that sometimes you are approached by a fund that needs real estate assets and branches are very attractive, they are good commercial property and if you rent it to Santander Chile your risk is very low, so but it is something not of our core and I mean simply something that happens every once in a while.

Okay, great. Thanks Raimundo. And if I could then just follow up you mentioned your margin -- because you look at risk adjusted margins, but you mentioned earlier with higher rates coming out that could lead to some pressure, but I'm -- and I guess also as inflation picks up that could benefit. So on a net-net basis do you think that net interest margin will decline from current levels given the higher rates, or do you think there could be some expansion in margin as inflation picks up? What do you think the net impact would be?

No, I would say that going forward margins probably are peaking at what we should expect. Remember that when the overall macro picture start improving and when clients realized that their risk in it is much lower than say 12 months ago, they start demanding a lower spread and the competition forces spreads to come down because if you are not lending at that level somebody else would probably do. So there is a trade off which we have to be very careful in handling the lowering spreads when you see (inaudible) loan demand, and therefore, at the end what you are trying is to maximize the growth of a client and net interest income by slashing prices selectively and expanding loans. So we are -- again we are not targeting margins by themselves, we are trying to target growth, healthy growth on the net interest income coming from client activity.

Okay, great. But net do you think this is kind of like a peak in your policy a bit of pressure going on just from competition and higher rates?

That's right.

Great. Thank you.

Your next question comes from the line of Fabio Zagatti from Barclays Capital. Please proceed.

Hi good morning, Raimundo, Robert. Following up on the question related to the macro picture, competitive environment and sustainability of profits, are you concerned with competitors in Chile, how they are gearing up in the search for yields maybe from those institutions that are now more focused on corporate segment and they would be putting efforts in expanding their consumer credit book, so that they keep on sustaining the high ROEs and maybe if you could give us some color also on the possible competitive position of the retailers in Chile. Thanks.

Yes, well of course the Chilean competitive environment is highly competitive, and I would say that one of the few advantages of being to some extent having a dominant position in any market is that to some extent you can choose the fights you want to concentrate on. And as we have mentioned, we are concentrating today mostly on expanding banking penetration and increasing product use on our clients in the retail part. And on the corporate side, mostly on non-lending activities, the advisory services, cash management and the like.

So that means that for example on the corporate side, the lending business is only a consequence of trying to grab other more profitable chunks of the business. So in order to fulfill that focus you have to take care what competitors are doing but as we have tried to give the sense in the presentation we have a lot of internal homework to do first, and the fact that you have an expanding economy and expanding financial market allows you to not touch prices to call it some way, but to focus on features of your product to allure your clients. And that's why in the retail alliances has been very powerful as a source of alluring clients.

Today, if you use our co-branded credit card you can get rebates and your phone bill, your electricity bill, you can have exclusive promotions with El Mercurio, which is the largest newspaper in Chile. So I think that people value and have nothing to do with prices or fee you can charge. So we -- although competition is expected to increase, we think that even the market is bringing new opportunities. We can maintain relatively high profitable levels and at the same time, grow simply that the obvious thing that is to slash prices to increase your market share is something that we have not done and probably won't be doing in the coming years especially because the market is expanding. And we are taking a number of actions to expand the size of the market especially among the second 20%, 25% of the working population and the second 3,000, 5,000 companies from the corporate side which are the companies that should be benefit by the effort brought by the government to increase the productivity and technology and innovation within those midsize companies.

So once we have fully tapped on that opportunity probably it's the time to start looking okay what's next, but we think we have enough homework to do with our current planning and with that opening focus in the market in the next two or three years.

Clearly understood. Thanks Raimundo.

There are no further questions. I will now hand it back to Mr. Raimundo Monge for closing remarks.

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, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.