Banco Santander Chile (BSAC) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Banco Santander Chile Earnings Conference Call. My name is Alicia and I will be your coordinator today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). I would now like to turn the call to Mr. Raimundo Monge. Please proceed.

Thank you very much and welcome to all of you to this conference call. My name is Raimundo Monge, the Director of Strategic Planning 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 the first Q of 2011. Following the webcast presentation we will be happy to answer your questions.

In the first quarter of 2011 net income attributable to shareholders totaled CLP116,298 million. This is CLP0.62 per share and $1.33 per ADR. On a pre-tax basis net income increased 2.6% compared to the first quarter of 2010. Compared to -- for the first quarter '10 pretax net income was up 25.6% mainly as a result of a onetime charge of CLP39,800 million recognized in Q4 '10.

Operating income, net operations and costs, an indicator of recurring revenue generation increased 14.1% q-on-q and 11% year-on year in the first quarter. With these results, the bank ROAE, reached 25% in the first quarter 2011 or 27.6% using the second quarters' ex-dividend equity level. The bank has consistently generated high ROEs and one of the largest gaps between ROEs and cost of capital among banks in the emerging markets. Going forward as we will explain in the rest of this presentation we believe ROEs should continue to rise as the year progresses.

First of all the economy has been performing strongly. GDP is expected to grow more than 10% in the first quarter and we're expecting it to expand between 6% and 6.5% this year. This has been led by a strong rise of some key macro elements for the banking business. Among them private consumption, investment and wage growth. Internal demand is expected to grow 8.6% in 2011 with a 14.1% rise in the private sector investment and a 7% increase in consumption.

This should drive up employment levels and wages as reflected in our 5.1% forecast for salary pool growth that is employment times average salary a leading indicator for retail long growth. At the same time we expect interest rates to continue to rise to a level close to 6% by year end and inflation rates should be between 4.5% and 4.7% in 2011.

All this bodes well for long growth in the Chilean financial system which we expect is likely to increase between 15% and 17% in nominal terms led by retail banking activities. This implies that the Chilean banks will lend more than CLP24 billion in 2011 of which Santander expects to capture around a quarter of the total. With this back ground we remain committed to our strategic plan for the period 2011, 2013 which has been designed to generate high levels of growth and profitability.

As we have mentioned in previous calls the bank's activity will have been and will be focused in four main strategic objectives to fuel its future performance. In the rest of this call we will cover the main results related to each of the four drivers included in our plan. The first objective is achieving high retail growth and to continue expanding banking penetration levels in Chile where important growth potential still exists.

In the first Q of 2011 total loans increased a record 7.1% q-on-q and 19.4% year-on-year. Higher yielding retail loans which include loans to individuals and small and middle size companies increased 3.1% q-on-q and 16.4% year-on-year in the first quarter. Consumer loans increased 4.2% q-on-q and 22.2% year-on-year. Our total loan market share reached 21.6% in March 2011 and has increased 130 basis points in the last 12 months.

Among the highest increases in market share in this period has been in our consumer loan market share that was up 140 basis points in the last 12 months up to May -- up to March, sorry. Strong economic growth is also pushing demand for our client segments. In the middle market loans increased 8.3% q-on-q and 22.5% year-on-year. Corporate lending increased 35.9% q-on-q and 37.3% year-on-year.

The bank acquired around $1 billion in Chilean corporate loans from units of Grupo Santander at market prices. The bank's international funding costs are -- is currently lower than many high grade European and US banks allowing us to participate more actively in this segment. This should permit the bank to improve its competitive stance with these large clients with respect to our main Chilean competitors and as well as enhancing even further our profitable loan lending business with these companies.

Strong economic growth is also pushing demand for other client segments. In the middle market loans increased 8.3% q-on-q and 22.3% year-on-year. Sorry -- sorry the growth of deposits was another key result of the quarter. Customer deposits increased 10.7% in the first q of '11 led by a record 12.1% q-on-q and 40.7% year-on-year rise in core deposits which excludes institutional deposits. In the quarter the bank focused on increasing its core deposit base in line with growth of the long book.

The bank's loan to deposit ratio measured as loans minus marketable securities that fund mortgage portfolio over total deposits improved to 96.9% as of March 2011 up from -- improving from 99.8% as of December 2010 and 104.3% as of March 2010. As of March 2011 74% of the bank's deposits were core. Capitalization ratios remained strong which should allow us for further expansion of our long book. Growth in commercial holder's equity is the sole component of our Tier One capital and represented 10.2% of risk weighted assets. The Basel ratio reached 13.9% as of March 31st, 2011.

On April 27, 2011 the bank paid its annual dividends of CFP1.52 per share, 10.6% more than in 2010, an equivalent 60% of 2010 earnings attributable to shareholders. At the record date in Chile the dividend yield was 3.7%. The bank has not issued shares since 2002 and dividend per share has increased for the last five years in a row totaling an increase of 83.1%.

The stable market fundamentals, the bank's leading position in the Chilean market, strong profitability, conservative credit risk policies and strong capital base also led to continuous improvement in our credit risk ratings. Additionally our ratings have been unaffected by the events in Europe and the US. Currently Moody's and Fitch have their outlook as stable on our ratings and Standard & Poor's recently replaced the bank's foreign currency long term rating on a positive outlook.

The net interest margin has continued to normalize in line with Chile's better asset quality outlook and the higher interest rate environment. In the first quarter of '11 the central bank increased short term interest rates 75 basis points to 4%, a level that is 350 basis points higher than 12 months ago. The bank's liabilities have a shorter duration than assets and therefore we price more quickly in the rising interest rate environment.

Inflation on the other hand remains stable q-on-q due to a seasonally low 1Q level. As a consequence net interest income was flat year-on-year and decreased 1.4% q-on-q. The net interest margin Q1 '11 reached 5.1% compared to 5.4% in Q4 '10 and 5.8% in the first quarter of 2010. However, net interest margin adjusted for provision was flat at 4% year-on-year and increased ten basis points since the end of 2010. As a result, the increasing funding costs have been more than offset by the decrease in provision expense due to an improved macro outlook.

Going forward we expect rates to continue to rise. However, this negative effect on spreads should be to a large extent compensated by various federal favorable trends. First of all better asset quality which will support the bank's asset provision net interest margins. Secondly, we expect the stabilization of the bank's funding cost. The bank cost of funds increased 100 basis points year on year to 3.2% in the first quarter. And the bank's cost of funds remains stable on a quarter-on-quarter basis.

In the quarter the bank increase is cheaper core deposit base and continued to extend the duration of its institutional funding base in order to minimize negative impact of rising short term rates on our net interest margin. Thirdly long growth and yield should push forward net interest income. The bank's interest earning assets yields have been gradually rising. In the first quarter interest earning asset yields increased 40 basis points year-on-year to 8.5% as our interest earning assets are gradually incorporating the rising interest rates.

Finally, the positive impact on margins of higher inflation forecasted for the rest of 2011 will contribute as the bank has more assets than liabilities linked to inflation. As you've seen, the gradual normalization of credit margins to pre-crisis levels have been a consequence of asset quality improving across the board in the Chilean market.

During the first Q of 2011 the bank's non-performing loans ratio improved to 2.47% of total loans from 2.66% by the end of 2010 and 2.74% in the first quarter of 2010. The coverage ratio of non-performing loans that is long loans in reserves over non-performing loans also improved and reached 118.2% as of March 31st, 2011.

At the same time provision expense in the quarter decreased 22.5% on an adjusted q-on-q basis and 31.9% on year-on-year basis. Accordingly net interest income net of provisions expense increased 6.5% q-on-q and 13.1% year-on-year. In line with the bank's second strategic objective we have maintained ongoing efforts of improving credit scoring models, boosting coverage and improving collection efforts of early non-performers at the branch level. These efforts have been a key driver of the lower provision expense and higher coverage ratios seen in the quarter.

Our third strategic objective is to increase the 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 the quarter the number of checking accounts increased 13.2% year-on-year, credit cards were up 18.1% year-on-year and debit cards grew 9.8% in 12 months. Purchases with Santander Chile's credit cards increased 31.6% year-on-year in monetary terms.

This strategy of having more clients with more products each and creating the incentive for them using our products is having a positive impact on fees which were up 14.5% year-on-year and 2.5% q-on-q especially in insurance brokerage, stock brokerage, asset management and fees from credit and debit cards.

Finally, and in line with our fourth strategic objective, improved efficiency, we are investing heavily to improve productivity and prepare the bank for a greater growth. We have already initiated our plans to revamp our client relationship management systems and improve our complementary distribution channels such as internet, mobile banking, ATMs and so on. Additionally in 2011 the bank expects to open approximately 25 branches and new credit scoring models for SMEs will be also in place.

These projects should provide stronger revenue growth, while increasing productivity. These factors, and the greater commercial activity, and variable incentives, have been the main driver of the 11.2% year-on-year increase in costs during the quarter. Q-on-q, costs decreased 0.6%. Headcount, as of March 31st, 2011, totaled 11,115 persons, and did not change significantly, neither year-on-year nor q-on-q.

In summary, in the first quarter, the bank continued to obtain high ROEs, in line with our strategic objectives and the positive evolution of the economy. Loans and deposits grew at a record pace. Net interest income continued normalizing as asset quality has improved at a more rapid pace and we have taken the measures to push forward net interest margin in the coming quarters. Our first Q results were also fueled by strong growth and steady q-on-q evolution of costs. For these reasons, going forward, we are optimistic about the bank's growth outlook and profitability levels. At this time, we will gladly answer any questions you might have.

(Operator Instructions). And the first question comes from the line of Daniel Abut with Citi. Please proceed.

Raimundo, a couple of questions. The title of your presentation was High Profitability, Strong Loan Growth, which has, I think, sums up not only the quarter, but what we believe is the outlook. So let me ask you two things. On the loan growth side, if I understood your presentation correctly, you talked about 15% to 17% for the system as a whole. I would imagine that you're expecting to gain some market share, at least in some products. So what would be a reasonable expectation for loan growth for Santander Chile in particular, for this year? Particular after the very strong performance that we saw in the first quarter, where the loan growth was still to 20% year-on-year?

And second, when you talk about your ROE and your expectations that the ROE will continue to improve because you are very optimistic on the outlook for the economy, it seems to me that that assumes some important recovery in the NIM if you're going to assume that the ROE that improves further from here. So the -- given that you cited very well the factors that could offset the effects on margin coming from potential more interest rate increases, but there is a -- it is possible that more interest rate increases are not in the cards. How should we expect the NIM to evolve in the next few quarters? Is the expectation for a recovery more in the second half of the year? Or could that happen as early as the second quarter?

Okay. Concerning loan growth, as you correctly point, we are expecting to increase slightly our market share in, probably, not in the corporate side, which we already have increased our exposure to that segment in the lines that we talked during the call. We think that in retail, contrary to that, and especially in SMEs, there we are gaining momentum and we think that the growth rate should be higher. So probably stable growth from now on or relatively low growth on the high-end of the corporate markets and an increasing level of growth in the SMEs, where we have been lagging, to some extent, the rest of the areas of the bank.

Consumer and mortgages, more or less, in line of what has been our current performance in the upper teens, lower 20s. So net-net, that will be a compound growth of between 18%, 19% more or less for the bank compared to 15%, 17% for the system, yes. In terms of net interest margins, as we stated in the conference, we think that the normalization process has -- is very close to be concluded.

Historically, Santander has had net interest margins of around 4.8%, 5%. Now we're very much back to those levels and that's why that, as we also tried to point out, a number of elements are -- have affected the level of net interest margins this third quarter that, according to our best expectations, should be partially reverted going forward. Especially we expect higher inflation, we expect in -- the other thing is that the mix effect will be compensating for that. We also expect that our -- we are doing things in the funding side that are not completely visible because the -- as you know, deposits repriced much more rapidly than loans.

And then there is accumulated effect of the repricing on the loan side, yes. We have been growing very rapidly on the lending side, but that has been blurred by higher funding costs, a process, that as you point, we think will prevail, but probably we shouldn't see the drag or the flat level of net interest income. At some moment of time, the cumulative effect of the higher rates on the lending side, plus high inflation, plus the mix effect should be more than compensating the other negative trends.

And once the economy reaches the new steady state level of rates, the process sustained because you have to reprice all the assets and the majority of the liabilities have already been repriced. And that produced a momentum in your net interest, but it's quite beneficial. How soon will that process happen? Probably with -- we already know that inflation has been very high in March and that should fuel positively our net interest income in the second Q. And from then on, it is more of a combination of higher inflation, the mix effect and the repricing of liability -- sorry, of assets pushing the cards.

So is it fair to say, Raimundo, that the first quarter NIM of 5.1%, with what you know already, should be the low point of the year?

I would say so. And then on average, it should be a little bit higher than first Q and probably somehow lower to the average that we saw last year. So something in between.

Thank you, Raimundo. That's helpful.

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

Hi, good afternoon, Raimundo. Thanks for the call. Just a couple of questions, first on provisions, you did say you were somewhat able to offset the decline in margins with lower provisions and you also mentioned you expect asset quality to continue to improve. So, just maybe want to get a sense in terms of how much further could asset quality improve? Or do you expect it more to be relatively stable? And then what would then be the outlook for provision charges? Should they remain around the level we saw in the first quarter? Or could they go even lower? Or maybe could you give a little bit more color on that? And then just --

Yes.

One final question. Just in terms of ROE, right? It still remains high around 25%. But it is below, say, the level we saw last year, where it was closer to 30%. I just want to get a sense of what do you think is a sustainable level of ROE going forward? Thanks.

Okay. Thank you very much. In terms of provision, and as we said, last conference call, we think that during first Q, you will have a soft growth of provisions, if at all, followed by a more stronger growth in the second half, which is mostly in line with the accumulated growth in retail activity. Yes. So we expect provisions, to some extent, to support our bottom-line performance in the first half and then from second half on, it will be growing in line with volumes a little bit lower than that. But we should expect some positive growth of our provisions level.

And there -- the point is that, which is a combination, the good provision levels and the relatively low net interest margins also have some flavor of one-time because we added loans that previously were granted in other units of Banco Santander. Those are very low-risk loans, and therefore, there is a minimal 0.5% that you have to provision, but of course the volume effect is much, much higher and that reduces the cost of credit or -- and to some extent, the markets. So that's why the figures for the first quarters are a little bit biased downwards, because of that element.

From now on, we will see a more, quote-unquote, normal pattern, where the more you grow in the lower end of the market and the consumer side, et cetera, you should expect higher and stronger margins, but at the same time, and certainly during the second half, more provisions to be kept. In terms of the ROE, as you mentioned, this is the lowest level that we have seen. There, there are a number of things.

One is this net interest margin compression that we saw. And at the same time that we kept -- remember that we paid the dividend in April, so in the first Q, you have much more equity than in the remaining quarters, yes. And that's why we tried to put in the call that if you will keep, in first Q, the same level of equity that you will keep in the second, once the dividend is paid, as it has already been paid, the equivalent ROE will be around 27.5% or something like that. And that's why we think that going forward, our target is to have ROE in the upper 20s level, 27%, 28%, which we are very close to have achieved in the first quarter.

It's simply that because of the higher level of equity that the effect is mixed. But to make things simple, we expect profitability to go back to the levels we have seen in the last five or six years, if you adjust for IFRS comparison, which has been always between 27%, 28%.

Okay. And the next question comes from the line of Saul Martinez with JPMorgan. Please proceed.

Hi. Good afternoon, guys. I guess I'll ask something of a related question, and maybe it's unfair to ask about specific monthly results, but we do get them from La Superintendencia, and it's a -- January and February were obviously tough because of some of the things that you mentioned that really hit your net interest margins. March was very, very strong. Your net interest revenue increased substantially as inflation came back and your provision charges declined substantially. And I think your earnings, just in March alone, were CLP52 billion and well over a 30% ROE. So I'm just curious whether you think that that kind of level -- whether March, there was something unusual in those numbers or whether that kind of level of profitability in earnings is achievable and sustainable, especially if we continue to have higher inflation readings?

And then secondly, on credit quality, just kind of a follow-up to Tito's question, I wasn't really sure I followed whether you expect provisions -- I get that you expect provisions to increase, but I didn't get whether you expect provisions to increase as a percentage of average loans, especially as your retail loan book increases? Is that -- do you expect provisions to increase as a percentage of average loans? Or more or less in line with your loan book, if you can just clarify that point?

Okay. Perfect. Well, as you rightly point, it's very difficult to manage the bank for a monthly figure, yes? We try -- usually we have a budget for the year and we take, especially in terms of the assets and liability mismatches, as much as -- and the like, you take positions vis-a-vis the full year, yes? And sometimes it happens that in a one-month basis, because inflation goes one side or the other or short-term interest rates are going to one side or the other, you get a more kind of noisy bottom line.

But if you think in terms of two or three quarters average, we think that -- and I'm linking with the asset quality question as well, we think that provisions have -- are already close to the minimum levels you expect to see in terms of provisions over loans, yes. So from now on, provisions, absolute provisions, should move in -- should start to move in line of absolute loans, especially in the second half. In the first half, we think there are some positions that probably, because of the better -- especially in the corporate side, of the better outlook will still -- will be able to set provisions at a lower pace of the -- than the growth we have seen.

But eventually, and probably that will happen in the second half, you will see provisions as a proportion of loans stabilized, slightly increasing by the end of the year, yes. That means that absolute provision growth probably will be negative throughout the first half, and start to increase in time and arriving by the end of the year a level that, for the full year, is relatively low, but positive, yes?

Okay.

And the same happens with the -- with profitability, with the net interest margins, and net interest income. That you will see -- because again, what has been affecting our stated net interest margin has more to do with the mismatches and with the imbalances that you have in your book than with pure commercial activities. If you could split the mix between client spreads and the -- and non-client spreads, in the non-client spreads is where we are facing most of the deterioration this quarter.

This gain between inflation and interest rate affect mostly non-client activities. In the client activities, we have been growing very rapidly and spreads in the margins, especially in March, are expanding, yes? It's simply that because of these kind of cat and mice dilemma that rates follow higher inflation and the Central Bank's start raising inflation rates whenever inflation is getting out of hand. Sometimes those mismatches produce undesirable effects, especially on a monthly basis.

And on a quarterly basis, sometimes you get that. But I'm sure that on a year-on-year basis, those non-client situations will be smooth out a lot and then the full picture coming from client activities will be more visible and that's why we expect this year to have a good year with solid ROEs and good growth of the client revenues.

Are you worried at all that there has been some discussion, including from your Central Bank President, that consumer lending rates are too high?

No, I would say that the good news is here that for the first time, we're seeing regulators and authorities to slow down and to really start thinking thoroughly about what drives levels of rates, et cetera. And that discussion is done at the technical level, which I'm convinced it will happen, it should be good news. Because remember that the challenge in Chile is more of how to increase the access of the middle masses and the small and middle-sized companies, than of costs, if you compare the cost of borrowing in Chile, for equivalent segments, because again in Chile, in consumer lending, you can [arrive] until you -- we have been reaching half of the population, more or less.

So, sure, the rate that we charge the marginal borrowers is very different than if you are tapping the top 10% of the market. Yes. So the point was, and that is core for Santander's strategy, how to reach those in other banks or people that have very good relationships? And if we have a good discussion about how to integrate positive information about borrowers, how to eliminate some [affinities] about how -- what retailers or what non-banks are doing, I think it would be positive for the clients and therefore positive for us, which are -- we are first in line to tap into that market.

Okay. Great. Thank you. Helpful as always.

(Operator Instructions). Okay. And there are no audio 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.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.