Banco Santander Chile (BSAC) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth-quarter 2010 Banco Santander Chile earnings conference call. My name is Marcella and I will 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 your host for today, Mr. Raimundo Monge, Director of Corporate Strategy. Please proceed.

Thank you very much. Good morning, ladies and gentlemen. Welcome to Banco Santander Chile's fourth-quarter 2010 results conference call. My name is Raimundo Monge and I'm Director of Corporate Strategy at Banco Santander, and I'm joined today by Robert Moreno, manager of Investor Relations.

Thank you for attending today's conference call in which we will discuss our performance in fourth Q. Afterwards, we will be happy to answer your questions.

In fourth Q of 2010, Santander Chile sustained their performance in previous quarters, which have allowed us to achieve record high results in 2010.

Net income attributable to shareholders totaled CLP93,872 million. This is CLP0.50 per share and $1.11 per ADR. Excluding a one-time provision expense of CLP39,800 million recognized in the quarter as a result of new regulatory provision standards for commercial loans, adjusted net income totaled CLP133,672 million, and increased 6.6% compared to the third quarter of 2010.

For the full year 2010, net income attributable to shareholders totaled CLP477,155 million, and increased 10.6% compared to 2009. The Bank's net interest margin reached 5.8% -- that is 30 basis point above the margins, the average margins reached in 2009. The efficiency ratio in 2010 reached 35.3% and the ROAE was 27.9%.

With this result, the Bank ROAE, excluding the one-time provision expense, reached 29.7% in fourth Q, maintaining the high level of profitability seen throughout the year. The Bank currently has one of the highest ROEs and capitalization levels in the Chilean financial system.

The Bank has consistently produced high ROEs in the years, and has one of the largest gaps between ROE and the cost of capital among banks in the emerging markets. We believe this reflects a thorough execution of Santander Chile's profitability-driven strategy.

In summary, we believe that 2010 was the year in which Santander Chile led the rebound in growth of retail banking activity. At the same time, the Bank, in anticipation of a more positive economic environment expected for the coming years, continued to improve its credit scoring models, resumed investing in technology and distribution capabilities while successfully overcoming one of the largest earthquake in recent history.

Before getting into further detail of the Bank results, a brief review on our outlook for the Chilean economy. We remain optimistic about economic growth for the coming years in Chile. We are expecting GDP growth greater than 6% this year and approximately 5% in 2012.

This is being led by a strong rise of internal demand that is consumption plus investments, which are expected -- which is expected to grow 8.6% on real terms in 2011 with a 14.1% real rise in private sector investments and a 7% real increase in consumption.

These issues drive upwards employment levels and wage, as reflected in our 5.1% growth forecast for salary pool growth; that is the number of people actually employed times the average wage, which is a key metric for consumer lending. At the same time, we expect interest rates to continue to rise and inflation to increase to around 4.1% in 2011.

But many economists are expecting even higher levels due to food prices increases, which have a high weight on Chile's consumer price index. This favorable outlook for Chile's economy in the coming years should be beneficial for loan growth across the banking industry.

We expect loans to grow 16% in nominal terms in 2011, led by retail banking activity, which should be growing even higher than that 16%. This growth is consistent to what has happened in previous cycles as seen in chart in page 6.

With this background, we remain committed to our strategic plan for the period 2010-2012 which has been designed to generate high levels of growth and profitability. As we have mentioned in previous conference calls, the Bank's activity has been and will be focused mainly around four strategic objectives to improve our future performance.

The first objective is achieving high retail growth and to continue expanding banking penetration levels in Chile, where important growth potential exists, and in many banks and Bank's client segments. As we'll see shortly, Santander led the growth in retail banking activities during 2010.

Our second strategic objective is to increase fee income by expanding product use and cross-selling. We believe there is still plenty of room not only for increasing the total client base where alliances are becoming a key element in achieving greater usage of our products, especially credit cards. In 2010, we signed a number of alliances with key providers of various consumer [intents] and services, as well as small and mid-sized retailers and Chile's leading universities.

We plan even further advancement in 2011. This should help us to boost fee income and counterbalance any negative effect of further regulatory restrictions on fees.

The third strategic objective is to continue to improve and invest in our credit risk management system. Apart from retail growth, this was a central focus in 2010. Most importantly was the improvement made of our consumer loan credit scoring model, especially in Santander Banefe, our banking unit for mid-low income individuals and micro-businesses.

In 2011, we will be making similar investment in a credit scoring system for mid-sized companies, SMEs and residential mortgage loans, all of these with the aim to help the expansion of our growth in loan volumes to riskier retail segments.

Finally, and in line with our fourth strategic objective, in 2010 we made important investments in improving productivity and preparing the Bank for a greater growth area even though these plans were slightly delayed by more urgent needs as a result of February 27th earthquake.

We have already initiated our plan to revamp our client relationship management systems and improve our complementary distribution channels such as Internet, mobile banking, ATM and the like. In 2011, we expect to continue this trend with a focus on client service; concluding our new CRM models, further investing in our complementary channels, and opening around 20 physical branches.

We expect this will improve efficiency going forward. In all, we expect to invest around $380 million in the next three years to improve our productivity and efficiency levels.

Regarding the first goal of our strategic plan -- high retail growth, loan growth remains strong in the fourth quarter. High-yielding retail loans which include loans granted to individuals and small and middle-sized companies, increased 4.3% q on q, and 14.9% year on year. This was led by a 5.7% q-on-q increase in consumer loans, especially credit cards, which expanded 12.3%, q on q.

This positive evolution was driven by a strong Christmas shopping season and a greater client preference of purchasing goods with bank cards instead of other means of payment. Residential mortgage increased 3.4%, q on q, as long-term rates remained attractive, and demand for purchasing houses continues to rise.

Lending to SMEs increased 3.2% q on q, 13.2% year on year, reflecting the strength of the economy and the Bank's focus on this high yielding segment. As a consequence of this strong commercial activity, our business mix improved while the Bank's market share continued to rise.

The most important rise in market share has been in consumer and credit card loans, which increased 119 basis points since the beginning of the year. The Bank's funding mix also improved in 2010. Customer funds increased 1.6% q on q, led by a 3.1% rise in total deposits.

Demand deposits outpaced the growth of total deposits, growing 6.1% q on q, and time deposits were up 1.4% in the same period, mostly retail deposits. As of year-end 2010, 73.1% of the Bank deposits were core deposits; that is demand deposits plus non-institutional time deposits.

The Bank's leading position in the Chilean market, its strong profitability, conservative credit risk policies, and strong capital base has also led to a continuous improving in our credit risk ratings.

In October 2010, Fitch increased our foreign currency deposit rating to AA minus, two notches above the sovereign ceiling. In December 2010, Standard & Poor's placed the Bank's foreign currency time deposits on outlook positive. These consolidate an upward trend in our credit ratings seen during the last years as shown in page 10.

The Bank's capital ratio also remained strong and well above regulatory minimum as the Bank's strategy on focusing on profitability has resulted in a optimal mix between return on equity and leverage. As of December 31 (sic), 2010, the Bank Basel ratio reached 14.5%, and its core capital ratio stood at 10.6%.

Voting common shareholders' equity is the sole component of our Tier I capital. Our internal capital growth allow us to keep high core capital ratio, while at the same time offer an attractive dividend to shareholders.

Despite the Bank's strong commercial drive seen in the quarter, which has allowed it to improve its funding and asset mix, inflation trends in 4Q 2010 were below expectation. Actually, the inflation -- the quarterly inflation rate was down 11 basis points compared to 3Q '10, while the Central Bank at the same time increased short-term interest rate 75 basis points to 3.25% in the quarter.

The Bank has a positive sensitivity to inflation, but our liabilities have a shorter duration than assets, and therefore re-price more quickly in a rising interest rate environment. Interest rate increases usually follow higher inflation which didn't happen this quarter.

As a result, net interest income decreased 1.6% q on q, while growing 2.9% year on year. Net of provision expense, net interest income was up 7.7%, compared to the last quarter of the year 2009.

Going forward, we expect rates to continue to rise. However, this negative effect on spread should be partially or fully compensated by number one, increasing asset yield as they fully incorporate the rising interest environment, number two, the higher yielding loan mix, and number three, the positive impact of higher inflation forecasted for 2011.

In line with our second strategic objective, improved client relationship, the Bank has expanded its client base at a high rate while cross-selling is also improving. The Bank's checking account base grew 8.4% in 2010. The amount of clients that are cross-sold among our middle to high-income client segment increased 16.6% in 2010, while in Banefe, our unit for mass consumer lending, the amount of clients cross-sold increased 20.2%.

However, less than 25% of our current customers fulfill our cross-selling standards represented what we believe is a relevant growth source for the future.

The credit card business continues to grow strongly, reflecting the success of the Bank's co-branding programs and alliances. The number of clients with a credit card expanded 16.7% in 2010. Credit card loans grew 35% last year, and monetary purchases with Santander Chile's card was up 28.7% in the year.

As a consequence of having more clients, which are demanding and using more intensively our products, net fee income was up 4.8% q on q. Fees from credit cards and debit cards, insurance brokerage, stock brokerage collection and asset management, all experienced important increases as product usage and cross-selling indicators continued to improve in the quarter.

Asset quality was stable in 4Q '10. The non-performing loan ratio reached 2.66% at the end of the year, compared to 2.68% as of September 30, 2010 and 2.98% at the year-end 2009. The 9% q-on-q increase in provision expense in the quarter was mainly driven by loan growth and our more conservative provision standards for consumer loans introduced in 3Q '10.

The coverage ratio of nonperforming loans reached 106.1% as of December 31, 2010, compared to 85.4% at the year-end 2009. By product, coverage ratios improved across the board in 2010 as shown in the adjacent graphic. Notable was the rise in coverage of consumer nonperforming loans by almost 8,000 basis points by year-end 2010. This clearly reflects our effort to improve our credit model as retail banking activities gather momentum.

Operating expenses increased 2.5% q on q, in line with the increase in business activity. Total headcount and compensation did not vary significantly in the quarter. Administrative expenses were flat. The efficiency ratio, excluding the one-time provisions already mentioned, reached 34.9% in 4Q '10.

As told before, the Bank has started to invest in technology and distribution capabilities to take advantage of the growing financial market we foresee for the coming year. This should compensate in future quarters with stronger revenue growth.

In summary, in the fourth quarter the Bank continued to obtain high ROEs in-line with our strategic objectives and the positive evolution of the economy. We also improved our funding. Loan growth continues to expand at a rapid pace led by retail banking. This growth in retail activities was also reflected in our results, which were driven by retail banking activities, especially consumer loans.

Net interest income was negatively affected by rising funding cost, but we have taken the measures to push forward net interest income growth, and we still have the highest net interest margin in the system. Our 4Q results were also fueled by strong fee growth, steady cost, and healthy asset quality indicators.

For the whole year, our ROE and efficiency levels were much stronger than those of our competition, that is all the banking industry, less Santander. We foresee a relatively positive macro environment going forward.

This should give a further boost to the financial system and bank penetration level, and we expect Santander Chile to deliver solid performance by leveraging on its strength of its franchise and growth strategy. For these reasons, going forward, we are increasingly optimistic about the Bank's growth outlook and profitability level.

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

(Operator Instructions) Saul Martinez, JPMorgan.

Hi, Raimundo, good morning. A question on your net interest income. You talked about the cross current that you face with higher interest rate and your liabilities, re-pricing more quickly, but at the same time you also have inflation picking up. You have the loan mix shifting, you have the positive impact of re-pricing from past interest rate hike on your asset base.

Can you give us a sense of what your outlook though is for net interest income growth, because obviously even if I look quarter -- this quarter or last year's fourth quarter, inflation wasn't meaningfully different. But you only had only something like 3% NII growth with 14% double-digit loan growth.

What -- should we be thinking net interest income growth this year should be commensurate with asset growth or with loan growth? How should we think about the dynamic between your loan growth, asset growth, and your net interest income growth this year?

Okay, well, as we point in the press release, what we saw this fourth quarter is relatively unusual because usually inflation and interest rate hikes tend to go hand in hand, which didn't happen this year. But we expect that situation to prevail in 2011. As an average, as a [trailing] trend, usually it is true that the Central Bank increases rate when inflation is picking up. So that's why this quarter was a relatively unusual situation where we saw inflation coming down mostly because of the appreciation of the Chilean peso. But the Central Bank still puts the brakes in terms of increasing the interest rate.

But in order to answer your question, and trying to think more for the full view of 2011 and getting out of this kind of short-term oddity, we think that spreads are probably peaked in this cycle and we should expect them to come down. Which is mostly a reflection -- and that's why we tend to look at the two lines combined -- mostly, a reflection of a better asset quality environment.

Clients were willing to pay a relatively higher spread one year, two year ago, and that's why we have seen many operations that were granted at relatively high spread being renewed at much lower spread. But the other side of the coin is that provision levels also are stable or slightly coming down. And that's why we expressed that our net interest income, adjusted by provision, is growing at a 7%,8% range which we still think has room to improve going forward, because again provisions have a number of a one-time change in our models, et cetera.

But so, in order to clarify we think that absolute spread probably has peaked, and they should start on a 12-month basis average, slightly coming down, but we don't see any reason for them to fall dramatically. And at the same time that will allow us to maintain a solid growth, and at the same time, given the provisions, we don't foresee them to grow permanently at the same level of loans. We should see some relief in terms of net interest income adjusted by provisions.

So we are optimistic. We think that the increase in market share, increase in lending volumes will have an impact on net interest income. It's simply that short-term [noises] which have nothing to do with client relationship, but more with the asset and liability structure of the Bank, have blurred that process which we expect to be more visible throughout 2011.

To put you on the spot a little bit, Raimundo, you gave a loan growth of 16% for the year. Do you think it is reasonable to expect that net interest income can grow -- pre-provision can grow in the double-digit range this year?

Yes, I think that in 2011 we should see net interest income approaching two-digit levels, in the low two-digit levels, and that's why if you combine that with provisions, that should be growing a little bit less. In normal times they should be supportive of our bottom-line growth.

Great, that's very helpful. Thank you.

Tito Labarta, Deutsche Bank.

Hi, good morning, Raimundo. Thanks for the call. So a couple of questions. Just first, could you just give us an update on Santander Bank's sale of your shares, is that -- the timing of that? And also some of your peers have been raising capital just -- you may have a pretty strong capital ratio, but just kind of expectations on if and/or when you may need to raise capital in the future?

And then just a second question just in terms of expense growth and just what you see for this year? Thanks.

Okay. In terms of the intention of Santander Bank to sell and to increase the float of our shares, well, I'm not the one to address that question. My understanding is that they have the clear intention to do it and they're simply waiting until the price is correct, but I'm not the relevant speaker for that transaction.

In terms of capital, as we mentioned in our press release, our growth model is focused on profitability and not focused on size or market share or other kind of metrics. And that's why we tend to grow or -- our capital requirements are not that high, because we're mostly focusing our growth in the high-yielding activities. So to make simple, if you achieve ROEs in the upper 20s, and you retain, as we have been doing, 40% more or less of the profits, that gives you an increase on the capital, the absolute capital of 13%, 14% per year which is not very different of what we are expecting to grow in our risk-weighted assets.

So that's why we don't expect to need capital and the fact that we're starting the year 2011 with a relatively high capital standard 10% -- 10.6% core ratio, 14.5% Basel ratio, we think we have no need of raising capital, except if we start growing even more faster then what we have been anticipating for this and the coming year.

In terms of expenses, Santander has been expanding its cost base, especially in the second half of 2010, mostly because of two things. Number one is higher commercial activities that our remuneration is linked to productivity and to sales. And that's why when you pick up growth levels and you pick up rates in new clients, et cetera, that variable part of the remuneration also rises in line, but should be followed in the coming quarters by higher revenues.

And secondly, inflation also increases our cost base because roughly two-thirds of our costs are linked to inflation. And the third term is that we're spending more because we're anticipating three, four years of good growth, going forward. So net-net, we don't expect cost to grow up -- cost at maximum should be growing in the upper single digits.

But we will be growing much rapidly than say 2008 or 2009 where costs were basically flat. So we're spending more because we think it's the time to spend, as we thought two years ago that it was the time to freeze expenditure.

All right, thank you very much.

(Operator Instructions) We have no questions at this time.

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 today's conference. Thank you for your participation. You may now disconnect. Have a great day.