Banco Santander Chile (BSAC) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Banco Santander Chile Second Quarter 2011 Earnings Conference Call. My name is Onika, and I'll be your Operator for today. At this time, all participants are in listen-only mode. We will have a question and answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes. At this time, I would now like to turn the call over to Raimundo Monge, Corporate Director of Strategic Planning. Please proceed.

Thank you very much. Good morning, ladies and gentlemen, welcome to Banco Santander Chile's Second Quarter 2011 Results Conference Call. My name is Raimundo Monge, and I'm Director of Strategic Planning of the Bank 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 second q of the year. Following the webcast presentation, we will be happy to answer any questions you might have.

In the second quarter of this year, net income attributable to shareholders totaled CLP141,512 million. This is CLP0.75 per share and $1.66 per ADR. These represented a 21.7% increase compared to our results in the first q of '11 and a 1.9% year-on-year rise in profits.

Earnings in the quarter reached one of the highest levels in the bank's history and were driven mainly by recurring operating trends. As reflected by the growth of 2.8% q-on-q and 6.8% year-on-year, of our operating income, net of provisions and costs.

With these results, the Bank's ROE reached 30.5% in second Q of '11 and 27.9% in average in the -- during the first half of this year, similar to the average of the last six quarters. The Bank has consistently generated high ROEs and one of the largest gap between ROE and the cost of capital among banks in the emerging markets.

This strong return was achieved while maintaining one of the highest capitalization levels in the Chilean financial system. Voting common shareholders' equity is the sole component of our tier one capital and represents 9.8% of our risk-weighted assets at the end of June. These Basel ratios reached -- the Bank's Basel ratio reached 13.4% as of June 30th, 2011.

The Bank also continued to be one of the highest rated entities in the region. In July, Moody's affirmed the Bank's credit rating. With this background, we remain committed to our strategic plan for the 2011, 2013 period, which has been designed to generate high levels of growth and profitability, while maintaining a proactive and conservative approach to our risks.

As we have mentioned in previous calls, the Bank's activity has 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 plans.

Regarding the first objective, high growth of our retail business, our loan portfolio continued to expand at a healthy pace. In the second quarter of 2011, total loans increased 3.9% q-on-q and 19.5% year-on-year. In the second quarter, the Chilean economy continued to show robust growth rates, led by increases in private consumption and investments.

These continue to be an important driver for loan demand. And employment figures have also been better than expected, as well as wage growth. This has boosted the Bank credit activity in all segments.

Higher yielding loans to individuals, which includes consumers, mortgage and commercial loans to high-income individuals led loan growth with an increase of 4.3% q-on-q in the second quarter. Consumer loans increased 2.8% q-on-q and 20.3% year-on-year. This positive evolution was driven by credit card loans that expanded 4.2% q-on-q and 37.8% year-on-year, as the Bank's market share in the credit card business continues to rise.

Credit cards are among the Bank's highest yielding products as they also generate fee income and save costs by lowering the amounts of check written. The Bank's strategy of forming joint ventures and comprehensive alliances for its credit card products has driven the growth of our credit card business.

Lending to SMEs decreased 0.5% q-on-q. Loan growth in this segment decelerated in the quarter as the Bank focused on smaller SMEs, which generate higher spreads. This lowered loan growth, but should have above these internal margins and profitability going forward. This strategy also lowered credit growth in the middle markets during the quarter.

Corporate lending increased 11% q-on-q. The Bank's international funding costs are currently lower than many European and US banks, allowing us to participate more actively in this segment. This should allow the bank not only to increase its lending business, but also to enhance its profitable non-lending businesses with these companies.

Core deposits continued to grow at a rapid pace in the quarter, increasing 4.5% q-on-q and 36.5% year-on-year. 74% of the banks are core deposits that is excluding institutional investors. Our short-term interest rate went up in the quarter. The bank proactively increased its cheaper core deposit base. The Bank's market share in total deposits has increased 60 basis points in the last 12 months to 19.1%.

The Bank's loan-to-deposit ratio, measured as loans minus marketable securities that fund our mortgage portfolio over total deposits has also improved in the quarter to 96.8% as of June 2011.

At the same time, the Central Bank will continue to increase its short-term interest rate in the quarter. The Bank's liabilities have a shorter duration than assets and therefore reprice more quickly in our rising interest rate environment. This has increased funding costs. At the same time, inflation measured as the variation of the US and inflation-linked index increased to 1.44% in the quarter.

This tends to be a positive force for net interest margins in the short term, as the bank has more assets than liabilities linked to inflation.

Going forward, we expect inflation levels to normalize and the velocity of the interest ratio hikes to moderate. This should be positive for spreads, as assets continue to incorporate the higher rate environment and funding costs increases subsidize.

All of these have resulted in an improvement in margins and interest income during the quarter. Net interest income reached a higher level in the past six quarters and reached 8.2% q-on-q. Net interest margins, after provision expense, have also remained relatively stable for the last six quarters in a row, as the higher funding cost has been offset by improvement in asset quality.

The Bank's net interest margins are, after provision expense, reached 4.0% in the second Q of '11. Asset quality in the quarter evolved in line with loan growth. The risk index, which measures the percentage of all loans that banks must -- that the Bank must provision, given their internal model and the superintendency of bank guidelines, remains stable q-on-q at 2.9%. The non-performing ratio as of June 2001 reached 2.6%, compared to 2.47% as of March 2011 and 2.85% as of June 2010.

The rise in non-performing loans was mainly due to increasing non-performing loans in consumer lending that has been -- that have been growing at a faster rate than the average loan book. Coverage ratio of non-performing loans reached a healthy 112%.

Provision for loan losses in the quarter increased 16.8% q-on-q and decreased 3.8% year-on-year. The q-on-q increase was mainly due to the strengthening of the residential mortgage provisioning model. In the second q of '11, the Bank improved its provision and model for residential mortgage lending, these in line with our strategic objective of accelerating retail lending growth, while maintaining a proactive stance regarding risk.

This strengthening of our model signifies an additional CLP3.3 billion provisions for our mortgage portfolio in the quarter. The bank is migrating to a model with more parameters to determine the risk level of a client with a mortgage. The total impact of this change in loan loss reserves is expected to be CLP16.3 billion, or 0.3% of the Bank's total mortgage portfolio.

Of this total, CLP11 billion are related to higher reserves for the Bank's performing portion of the residential mortgage portfolio and CLP5.3 billion are higher reserves for impaired portion of residential mortgage loans. The full impact of this change will be recognized in 2011, mostly in the third quarter.

Regarding Chilean retailer, La Polar, the Bank has a total exposure of CLP6.8 billion and has set aside CLP1.9 billion in provisions for business loan positioning in the second quarter. Excluding the factors just mentioned about the growth of gross provision and charge offs was mainly due to the growth of our consumer loan portfolio, a trend that should continue in the coming quarters.

Our third strategic objective is to increase the income by expanding product use and cross-selling. Our results show important progress in this area, especially our credit card business. Total clients have increased 9% year-on-year, and totaling 3.4 million as of June 2011. The number of clients are cross-sold increased 11.2% in the same period.

Product growth was less by the 18.6% year-on-year increase in debit cards, mainly in benefits, and 17.9% year-on-year increase in the number of credit cards.

The Bank's strategy of forming alliances for corporate credit cards is driving our greater usage of bank cards. This strategy of having more clients, with more products each, and creating then incentives for using our products is having a positive impact on fees.

Fees were up 10.6% year-on-year and 0.9% q-on-q. Fees from credit, debit and ATM cards increased 8.7% q-on-q and 20.4% year-on-year. This positive evolution of fees in the quarter was partially offset by the negative impacts of a weaker stock market in the quarter, that affected our asset management and stock brokerage businesses.

Finally, and in line with our forward strategy objectives, 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 significantly update our core systems. These factors and the greater commercial activity and higher value incentive are linked, have been the main driver of the rise in our cost base in the quarter.

Headcount also increased in the quarter, as the Bank strengthened even further its commercial team and added personnel to the main technological projects under development. The higher inflation also fueled, partially, the cost growth of administrative expenses, given that two-thirds of operating expenses are linked to inflation.

Branch rent expenses also increased as the Bank, in 2010, sold 43 branches, which it now rents. To offset this, in the second quarter of '11, the Bank closed 20 branches that were solely used for collection purposes. The efficiency ratio, in any case, improved 100 basis points q-on-q and reached 36.5% as income growth outstripped cost growth.

In summary, the second quarter was a positive one. The Bank achieved an ROE of 30% plus, with a solid core capital level. Loans and deposits continued to expand at a healthy pace and the outlook for margins continued to improve. Asset quality in the second quarter and going forward should continue to evolve in line with consumer -- in line with consumer loan growth.

Fee income has also been positive, especially in the credit card business, which is reaching regular growth level at loan with client base growth and cross-selling indicators. For these reasons, going forward, we are relatively optimistic about the Bank's growth outlook and profitability levels. At this time, we will gladly answer any questions you might have.

(Operator Instructions). Your first question comes from the line of Tito Labarta with Deutsche Bank. Please proceed.

Hi, good morning, Raimundo. Thanks for the call. Just a question, particularly with regards to asset quality. There was a little bit of a deterioration in the quarter. I just wanted to maybe get some more color on what you see going forward? Is this -- do you think you hit a bottom in the first quarter and now you can maybe expect to see some gradual deterioration going forward? Or was this just a one-time thing and there will be some improvement?

And then also on -- in terms of provisions, you mentioned you provisioned around CLP2 billion related to La Polar. I just wanted to get a sense if you expect there to be any more provisions related to La Polar going forward? Or is this what you expect to provision for now? If you could maybe give us some more color in regards to that? Thank you.

Okay. In terms of our overall asset quality indicators, here there have been basically two forces that have been cancelling out in the recent quarters.

Number one is the overall improvement in the operational conditions of companies that had been coming down and, as we mentioned, in our press release, the provisions set in the corporate side have been going down pretty -- very rapidly.

And secondly, it's our higher growth in retail activities, which moved that the mix seems to be higher -- of a higher risk, simply because of the weighted -- because of the higher weight that retail activities are starting to have.

So all in all, we think that going forward, the -- our non-performing loans should be stable or with a slight increase as we continue growing faster in retail activities vis-a-vis the corporate activities. But, of course, in a general environment, where we have investments and the growth of the economy will be containing any dramatic deterioration of asset quality.

So the focus -- the outlook is that you will have higher non-performing loans, but at the same time, your margins should be, hopefully, compensating for that. Because the mix in the margin is positive, also. You have higher -- you are entering into clients that have higher risk levels, but at the same time, higher spreads.

And at the end, that's why, as we put in the press release, we are targeting our clients in terms of net interest margin, adjusted by provisions. Because at the beginning of this negative cycle, we increased prices, before the risk, because we were expecting asset quality duration, which at the end happened.

Now we are expecting the cycle is reversing and we are seeing gross margins coming down because provisions are coming down. And now, going forward, in the next 12 months, probably, a more flattish environment, where margins start picking up because of the mix effect and at the same time, risk index or asset quality indicators in general all start picking up because of the mix effect.

In terms of your second question, our exposure to La Polar, as you well know, this is a retailer that has been facing big difficulties. In our case, our exposure was relatively low. Much lower than our market share in the Chilean system. We took our strategic provision in June, and as we mentioned in the call, we plan a further CLP800 provision going forward.

Today, there are negotiations going on with debtors and, therefore, we expect that rationality will prevail and we shouldn't expect further losses. But, it's an ongoing negotiation and it's complicated because it's a very high profile situation. But, up to now, we think we have -- the majority of our exposure was due to credit -- yes, trade loans and the like.

So, we think we have a chance of losing -- are relatively contained. And, that's why we have provision only around one third of the total position. But, again, the uncertainties, whether the final situation is apprised by our provisioning levels or should be increase. But, in any case, the total exposure were immaterial for our total loan book.

Okay, great. So, just to clarify, you say you expect to provision, maybe, another CLP800 million. And, would you do that in July or when?

July, mostly.

Okay. Alright, thank you very much.

Your next question comes from the line of Jose Barria with Bank of America. Please proceed.

Hi, thank you, gentlemen. Just following up on Tito's questions. I just want to get your thoughts on the coverage level. Like, did it come down a little bit in the quarter? I would like to know if you guys are comfortable here, or if you think that there's room for this come down a little bit more for 2011?

Okay. What happened is that according to the Chilean banking regulation, where you do have to cover at all times, is the expected loss in the loan portfolio, measured by the risk index. So, in all times, you have had 100% coverage of those expected losses. And, no performing loans, although are correlated with expected losses, are not the only element to take into consideration.

And, in addition, in the non-performing loans metric, you don't include guarantees or collateral that you might have. And, that's why -- there are two metrics that tend to move in line, but you don't necessarily have to cover 100% non-performing loans. What you do have to cover at all times is 100% of your expected losses, measured by your internal model and recommendations by our regulators, yes?

Yes.

So, that metric, they move in tandem, usually. But, eventually, you can have, for example, if you go faster in our mortgage loan portfolio, given that we have good collateral for that, in our case, most of mortgage are first houses. You don't need to cover 100% of the loan because you have the collateral for, say, you know, to take in your insurance.

So, in other terms, we have had in the recent quarters a coverage higher than 100%, we expected to maintain it, but it's not a number that needs to increase on time. As long as you have -- what you do need to cover 100% is the expected losses, as mentioned by the risk index, which was fairly stable in the quarter.

Okay, great. Thank you.

Your next question comes from the line of Alonso Aramburu with BTG Pactual. Please proceed.

Hi, thank you. A couple of questions. The first one regarding your financial investments and where you have any more flexibility to be moving some of this cash into central bank bonds. And, what are the effects on these moves was already seen completely in the second quarter, or if we should see some more of a NIM positive effect in the third quarter?

And, my second question is regarding expenses. If we look at expenses, the absolute level of expenses and giving your plans for CRM investments and opening of branches, should we see this expense figure accelerating growth over the next couple of quarters?

Okay, regarding the change of our liquidity model, this is something that you are doing on an ongoing basis. Liquidity, it's among our key elements, together with the handling of -- or having a strong capital base. And, what has been done is, simply, to change the way you were maintaining your liquidity. And, instead of having very low yielding assets, now we can maintain it in central bank, over 90% plus of our liquidity is maintained in central bank short-term loans and bonds.

So, it's a relatively low yielding asset, although today, it's a little bit higher yielding asset. But, it's a very sound investment.

The bank has maintained, in the ups and downs of the cycle, a relative -- a much higher than normal levels of liquidity because although in Chilean liquidity has never been under stress, we know that outside, there are some concerns. And, it's a situation that we're monitoring on a daily basis.

The only -- the side effect that is good, from the net interest income standpoint, had a detriment of 20 basis points in our stated net interest margin because, you added more assets to the denominator of the ratio. And, the contribution of these assets that you were including is much lower than a consumer lending or corporate lending, et cetera.

So, it was our adjusted net interest margin would have been much higher around 5.4% instead of 5.2%. This is a one-time change and should have no impact from now on going forward, except that it will boost our net interest income, as we stated, in something close to CLP2.5 billion in a year-on-year basis.

Concerning expenses, what happened is that once you're out of the negative part of the cycle, and given the fact that we expect a good three-four years growth cycle in the Chilean economy, we have been preparing since mid last year to capitalize on this growth opportunity.

And therefore, we have invested and we have increased our client based, our completed platform and other distribution capabilities, to be prepared for a capitalize in that growth opportunities as we foresee. That was better rated our efficiency ratio because, first, you have to invest, and then you start reaping the benefits once those investments pay enough. So, what we are seeing and we have some hints in this second Q, is that the growth of revenue start accelerating faster than the growth of cost.

But, all in all, we don't expect our cost to grow much faster than 8%, 9%, because we have, also, plans for reducing cost in other less profitable activities. And, let's say, we're changing the technology and we're changing the way we relate and the way -- our client's transactions. We're moving transactions away from the branches and more into renew channels, et cetera.

So, we're invested, but, at the same time, we don't expect to compromise our solid cost income ratio going forward. It's not as we expected to come in continuously down, but we don't see it jumping and going too high.

So, it's, simply, a cycle change of rhythm, where you start spending more to capitalize on future growth, and then revenue streams increases as a consequence of those investments. And, then, you put the breaks in terms of expenses, and you fully benefit from the growth because all the costs are being already assumed.

Thank you.

(Operator Instructions). The next question comes from the line of Federico Rey with Raymond James. Please proceed.

Hi, good morning, gentlemen. My question is regarding the loan growth. I would like to -- if you can give us a guidance or an idea of if you expect or not an acceleration in loan growth in the coming quarters. And, if you can expand more on the vis--vis scenario in order to accelerate the retail business, especially, considering that in the beginning of last quarter, we saw a strong increase, for example, in corporate lending. Thanks.

Yes. Well, basically, to simplify things, two types of strategy that we have been pursuing. In the case of retail, the bulk of our commercial effort comes from the lending side, where the majority of the revenue comes, simply, by increasing your lending base.

So, in retail, our preferred strategy has been to join forces with retailers and key market players that manage a high database of clients to issue products on, kind of, a joint venture. It's not legally a joint venture, but it's an alliance that you set with them. That explains why we have been growing very fast in the credit card business, as we have already talked.

In terms of growth, we are growing, consumer lending at a year-on-year rate of 20%. We think that in the next 12 months, we should maintain or it would be very similar to that 18% or, in some period, a little bit higher than that. 18%, up to 22%, with a central growth of around 20%.

In mortgage, it's less clear, because mortgage has been under big margin compressions and mortgage per sale are not very profitable, but we grant mortgages because it's a good way to bring profitable customers.

In our case, a client with a mortgage is around two times more profitable than a client without a mortgage. Not because the mortgage is profitable, but because you have other businesses that can benefit the clients as the insurance, having your checking account with us, et cetera.

So, it's more of a way to cross sell the client and have a more profitable relation in a, kind of, integration because, the client also concentrates all the financial activities in one single entity.

Contrary to what we talked on the quarter side, our focus is on the non-lending business. We are generating today roughly 70% of the gross revenues. Cash management, advisory services, derivative, et cetera, which tends to use zero capital and, therefore, although the absolute margins on the lending side are very thin, the profitability on a risk adjusted and capital consumption basis can be very high.

And, that is, clearly, why although we have been, historically, reducing our exposure to the corporate side, we have been expanding our profitability with those segments.

Lately, there has been a window of opportunity that because of the problems of many foreign banks that were lending directly to good Chilean borrowers, today we're competitive, not only on the non-lending business, but also on the lending business as well. And, accordingly, we have taken advantage of that opportunity of our lower cost of funding to increase the bondings that we have with those clients.

But, at the end, our main -- our final efforts is to increase our penetration in the non-lending business. And, the lending business is a way to go for the more profitable non-lending business. It's not part of the core strategy that we're following in corporations. So, in corporations, lending volumes is the result of duplication of our profitability driven strategy and not the other way around. In consumer, it's more the focal point that we center.

So, to make a long -- to give this long answer, it's, basically, that loan growth in the consumer side, we expect it to be around 20% going forward. A little bit lower in mortgage, because of marketing compressions. And, in the corporate side, it's an open issue, because it will depend on the pricing behavior on the rest of our [project]. But, our focus is the non-lending business with those corporate clients.

Okay, thank you very much.

At this time, there are no further questions.

Okay. 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 the presentation, and you may now disconnect. Thank you, and have a great day.