Banco Santander Chile (BSAC) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2011 Banco Santander-Chile earnings conference call. My name is Jeff and I will be your coordinator for today.

At this time all participants are in a listen-only mode. Later we will facilitate 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, Corporate Director of Strategic Planning. And you have the floor, sir.

Okay, thank you very much. And good morning, ladies and gentlemen. Thank you for attending today's conference call in which we will discuss our performance in the fourth quarter of 2011. Following the webcast presentation, we will be happy to answer your questions.

During the fourth quarter of '11, market condition continued to be affected by the problems in the eurozone. Despite this, the Chilean economy should continue to grow at a healthy rate of around 4% in 2012, led by rises in private consumption.

At the same time, inflation remains under control and the Central Bank could begin to relax monetary policy if the situation deteriorates further to boost the economy. Recent unemployment figures have also been better than expected.

For these reasons, we have not altered our general strategy for the next two years. We remain committed to deepening our focus on retail banking by strengthening client relationship with a sound growth of our balance sheet, solid levels of capital and liquidity.

We will continue to expand our business while improving efficiency through productivity gains and managing risk conservatively at all times, all these with the final goal of sustaining high growth rate and sustainable ROEs.

Accordingly, the Bank has been taking actions on four main points during the second half of 2011 in order to maintain sustainable levels of high profitability and efficiency in 2012 even if the external situation worsens from our central scenario.

The four action stages are number one, selective loan growth and spread, number two prudent risk policies, number three high liquidity and finally strong core capital levels. As a result, fourth Q '11 profits and operating trends rebounded. In the fourth quarter of '11, net income attributable to shareholders totaled CLP102,121 million increasing 35.9% Q on Q and 8.8% year on year.

Gross income net of provisions and costs, a good proxy for recurrent earning growth, increased 27.1% Q on Q and 24.6% year on year in the fourth quarter. ROE in the period reached 20.8% compared to 15.8% in the previous quarter.

Net income in 2011 totaled CLP435,084 million, decreasing 8.8% compared to the net income achieved in 2010. In 2011, Santander Chile's ROE reached 23% with an efficiency ratio of 38.4% and net interest margin of 5.1%. They (technical difficulty) among the best in the Chilean banking system.

Regarding deposit and liquidity, we should like to point out that core deposits, which are deposits from non-institutional sources and therefore a cheaper and more stable funding source, increased 2.8% Q on Q and 29.2% year on year. As of December 2011, core deposits represented 74.6% of our total deposits compared to 67% as of December 2010.

During the fourth quarter of '11, local market rate for deposit increased as some of our competitors increased their liquidity buffers in light of the financial situation in Europe. As explained in our 3Q '11 earnings report, Santander Chile has previously increased its own structural liquidity thus allowing it to avoid paying higher deposit rates to institutional investors.

In fact the Bank, in December, brought back in the secondary market approximately $400 million of its own deposits given our solid liquidity position. This explains largely the fall in total time deposit seen in the fourth Q of '11.

This focus on improving the cost and mix of our funding was combined with some selective approach regarding loan growth to improve our net financial income and margin. In the fourth quarter of '11, total loans decreased 1.9% Q on Q which allowed the banks to close the year with a 10.8% loan growth.

In the quarter, the Bank focused on expanding its high yielding credit card loan portfolio that increased 1.6% Q on Q and 15.9% year on year. Lending to small and mid-sized companies, SMEs, led growth in the total book and expanded 1.5% Q on Q. Relatively low yielding corporate loans decreased 21.5% Q on Q as the Bank focused more on non-lending activities with these corporate clients as we'll see in a minute.

Higher loan spreads also helped to boost the Bank's net interest margin in the quarter. Loan spreads in the quarter went up following the stricter pricing policy implemented in 3Q '11 by the Bank. The rising spread coupled with higher quarterly inflation benefited our net interest income and margins in the period. Net interest income increased 13.8% Q on Q and 13.9% year on year in the fourth quarter of '11.

The net interest margin reached 5.3%, increasing 70 basis points compared to the level reached in 3Q '11 and similar to the one achieved in fourth Q 2010. In 2012, the evolution of margins will depend upon various factors. One of it -- on the one hand, the Bank will continue to focus on profitability over market share in order to support higher spreads.

Loan growth to individuals and SMEs is expected to be sound in 2012 and to outpace other low-yielding asset growth. At the same time, the loan market is expected to grow between 10% and 11% next year, which will also be supportive.

Funding costs should continue to stabilize or eventually fall in line with the outlook for short-term interest rates given that the repricing of our liabilities is much faster than that of our assets. On the other hand, the uncertain evolution of inflation and the negative effect of possible regulations regarding maximum rates that can be charged on loans may have a negative impact on margins.

Net fee income was up 3.7% Q on Q and decreased 1.8% year on year. The amount of household clients increased 12.2% in 2011 and this was an important driver of fee income throughout 2011. This trend was partially offset by the weaker market that negatively affected asset management and stock brokerage fees especially in the second half of the year.

On the other hand, fees from corporate bank and middle market increased 32.7% and 20.3% in 2011 respectively reflecting our focus in non-lending businesses in this segment. The strength of our non-lending business with companies is also apparent in our treasury services. As can be observed in slide 10, the income from client related treasury services, which is mainly derived from the selling of treasury products to our corporate customers and market making, remained steady throughout 2011 despite a weaker market in the second part of 2011.

This solid performance was partially offset by CLP11 billion one-time charge related to the change in valuation methodologies of derivates, which now include an estimate of counterparty credit risks.

The Bank's efficiency ratio also improved Q on Q as the growth of rate, of course, began to decelerate. Operating expenses in the fourth Q of '11 increased 2.7% Q on Q. The efficiency ratio improved in the quarter to 38.5% in the fourth quarter compared to 41.3% in 3Q'11.

Personnel expenses decreased 0.9% Q on Q as headcount decreased 1.2% materially. Administrative expenses increased 9% Q on Q as the Bank continued with its project of investing in a new client relationship management system and other IT projects to enhance productivity in future periods.

This project should drive revenue growth going forward, while increasing productivity. The Bank also opened five branches and 28 ATMs in the quarter.

Provision for loan losses in the quarter decreased 4.2% Q on Q and 13.8% year on year. For the full year, net provision expense was flat, compared to a 10.8% rise in loans.

The risk index, which measures the percentage of loans for which the Bank must set aside loans -- loan loss allowances based on our internal models and the superintendency of Bank's guidelines, remained stable at approximately 3% throughout 2011.

The Bank's non-performing loans ratio increased from 2.8% in 3Q'11 to 2.95% in 4Q'11. This was mainly due to a fall in large corporate loans and higher growth on the Bank's retail activities.

Regarding asset quality and provision expense, during the quarter the Bank concluded upgrading its provision models for loans to SMEs and mortgage loans. This signify a one-time charge of CLP16.6 billion in fourth Q'11. This concluded a process that started in 2010 of overhauling our credit risk models.

Now, all retail loans are provisioned using statistical models that assign provisions to all clients performing or non-performing based on historical loss levels. This should allow the credit risk area to increase feedback regarding potential growth opportunities to commercial teams and to allocate capital more efficiently.

In total, in 2011 the Bank recognized CLP32 billion in one-time provision expenses directly related to the change in provisioning models. This allowed the Bank to enter 2012 with a strong coverage and robust grading models that will support our strategic objective of continued growth in retail banking with a prudent risk profile.

Finally, the Bank implemented a series of measure to boost core capital ratios by optimizing and lowering the growth rate of risk weighted assets. As a result, the Basel ratio reached 14.7% as of December 31, 2011 and the core capital ratio reached 11%. Growth in common shareholders' equity is the sole component of our Tier 1 capital.

Today, Santander Chile has a strong capital --- has a stronger capital base than its main peers, which dilutes ROEs in the short term. Assuming the same capital structure than the average player, our ROE would be in the middle to over 20s range as it has been the case for several years.

This solid capital base should allow us to grow in the future and absorb potential changes to regulatory capital requirements as those adapted by many other banking system worldwide.

In conclusion, in 2011 we completed a series of tasks that leads the Bank in a good position to sustain relatively high ROEs in the future without modifying our general strategy of maintaining a leading position in retail banking.

We placed effort in improving our core capital levels in our funding mix, controlling our cost of funds, bolstering liquidity levels, investing significantly in technology and brand image, increasing the spreads and enforcing more prudent credit standards.

For this reason, going forward we believe the Bank is capable of returning to a high-growth mood and is also prepared for a potentially more challenging environment.

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

Thank you. (Operator Instructions)

Chris Delgado, JP Morgan.

This is actually Saul, Saul Martinez. So I have a couple of questions. First is more of a high-level question on your ROE. And I appreciate that the fourth quarter was much better than the third quarter, which was obviously bit of a disappointment. And I also appreciate that there is a lot of one-offs going in a lot of different direction, a lot of noise this quarter, but the ROE was below 21%, which is the lowest it's been really since the first part of 2009.

How quickly do you think that could rebound back to a level in the 23% to 25% range, which is what I think the -- what we're kind of expecting and what I think the market, if I look at consensus numbers, is kind of baking in? Is that something that will occur gradually or do you think that that is something that could happen fairly quickly in the coming quarters?

And then secondly just another higher level question on growth and strategy, it seems like you've been pretty cautious with regards to growth. Again I --- very clear that you are focusing on higher margin segments, but you contracted your credit portfolio as a whole. Even if I exclude corporate, the growth was not that strong and slower than some of your competitors. How are you -- I mean do you think that -- you kind of hinted that you think the growth will come back to market levels, but why is that? Why are you comfortable that the growth is going to accelerate in the coming quarters and you guys start --- and for you guys to start maintaining share at the very least?

Okay. Well thank you for your question. The two -- the answer of the two questions is related. As we stated in our 3Q earnings release, the Bank has adapted a more prudent approach given the uncertainties that we're seeing are broadened although we expect the central scenario for the Chilean economy to be sound and probably improving in the recent weeks or months.

We think that still there is a lot of noise and a lot of retail risks to be taken into consideration. And given the fact that we're trying to deliver good results not only in the short term, but in the medium term and in the -- given the fact that we're trying to maintain the quality of our franchise, we have been driving in the second half the Bank with certain -- with the feet in the race to call it some way, yes.

However, going to your question when we think that the ROEs will be in the 23%, 25% range, well, if you adjust by the capital ratios of our main peers, we are probably there. It simply that we're keeping a very high level of core capital. Historically we have never been at such a high level of capital.

And secondly, which is related to the second part, we have been very conservative in terms of loan growth. When that mood will change, the very moment that we have more clarity of what to expect and that's why it's encouraging the noise -- the news that we have been hearing lately, yes, that that changing mood could be happening hopefully sooner than later.

But again, the fact that our ROE has been -- sales, to some extent, sales were inflicted that is the lower level as compared to our underlying capabilities and the growth also has been in a most subdued way. It's mostly a reflection of our conservative approach and that can be very easily reversed, yes. The good news is that we have been able to increase profitability and to increase especially top line growth even with this more conservative mood.

If that change and again it's encouraging what we have heard in the first month of this year, we think that that position can be reversed. So how soon we will go back to state that -- to meet the 20s ROEs and to maintaining or slightly increasing our retail market share will be dependent upon those news that we are listening from away.

But the other good news is that the franchise is intact. We have been increasing 12% our household client. We have been increasing our net interest margin. Remember that -- and that's a more structural thing, the short-term concerns are related to the eurozone and how can that impact our cost of funding and generally speaking the overall status of the Chilean economy.

But from a more medium-term perspective, we have been adjusting our pricing model to reflect long-term risk and to reflect the long-term cost of capital that we think has increased in a rather permanent way.

And that's why we needed to jump -- to have an increase in our prices to reflect the changing banking landscape. That is probably very close to be finished and that's why from now on, as soon as the rest of the competition take note of the new environment that we will be facing in the coming years, we will be very -- among the first to benefit of doing the homework a little in advance.

In terms of liquidity, for example, we saw that in the fourth Q when the rest of the season had to catch up and they had to pay hefty prices for the liquidity that we have accumulated in a completely different market environment. So this is something that if you want to be in the game for many years you have to adapt, sometimes you have to anticipate the trends of the rate it would be much easier to show the 25%, 26% ROE that we could if we had less capital, et cetera.

But we think from a shareholders' perspective, you have to take care of the short and the medium term. And that's what we are trying to do. So how soon we can go to state the ROE in the mid 20s or how soon we can maintain or increase our market share will be very directly linked to the news that we hear from abroad. And again, the early symptoms in the 2012 have been encouraging.

Okay. And that's helpful. Just more a clarification follow-up. You mentioned, Raimundo, the 10% to 11% loan growth number. That was for the system that you expect that number?

Yes, obviously.

And you expect to be something -- you would guess that you would be something similar comparable to that with the mixed shift growing in the higher margin segments as opposed to corporate lending. Is that --?

That's right. Certainly we are more comfortable saying that we should be growing in line effective with the system in retail, SMEs and individuals. And in the corporate side this is simply a reflection of the pricing decisions of our competitors. If the prices are sound as we saw in the first half, we can grow very rapidly because we have very good relationship with our customers as seen by the non-lending business growth that we hinted in the call.

If the prices are not according to the capital allocation, as we saw in the second half, we simply let that market share and go and keep -- and speak to the profitable chunks of the business we do with those large corporate clients.

Our strategy again is focused on the corporate segments mostly on the non-lending business, where you really can create a lot of value. In the lending side with large corporations, it's simply a matter of how low the return on capital you want to go, the amount of growth you can achieve.

Okay. Great. Thank you very much.

Tito Labarta, Deutsche Bank.

A couple of questions. First, in terms of asset quality, we did see some deterioration in the year and you kind of been preparing for that with higher provisions. So just want to get a sense of what do you think about asset quality going into 2012 particularly as the economy kind of [thrust] and decelerates. Do you think there could be some more deterioration and then how is that going to impact provision charges? Will these adjusting of provision charges you did this year, is that going to kind of offset the growth in provisions for 2012 or will provisions continue to grow?

And then just a second question, in terms of margin and your outlook for inflation for this year and how you think that is going to impact your margin in 2012? Thanks.

Okay. In terms of provision, if you look from a little bit apart than on a quarter-quarter view, our total provision expense was flat on a year-on-year basis despite the fact that our loans grew close to 11%. So, actually, our provision in our loans ratio was slightly better in 2011 than in 2010.

I agree that we have been doing a number of things that to some extent made more difficult to understand the underlying trends but that's why we put our chart in the presentation that it takes a more medium-term view that unfortunately is the only way to kind of prove that we don't have up to now any concerns about asset quality. In the margin as we talked in the last conference call, we have seen some deterioration in the very low end of the consumer market. And that's why we have put in the brakes there in terms of growth and in terms of refinancing activities. But the rest of the portfolio is performing in a completely normal way.

The risk index, which at the end of the day is the perception of the loans that have problems, has been flat throughout the year, yes. Non-performing loans, as you know, is simply a reflection of whether the client is paying or not, but sometimes you have -- that's a reflection of how willing are you to give breathing space to clients, which during the second half were less reluctant, yes.

But to answer you, directly your concern, we think that the asset quality shouldn't be a concern in the central scenario of growth of 4%, et cetera, to a large extent because the companies are in good shape. Employment figures have been very robust in terms of unemployment and in terms of wages, what we call the salary pool that is the number of people like to be employed times the average salary has been growing in line with private consumption.

So we don't have concerns, but of course if the situation deteriorates, we prefer to be in a more conservative mood. But we don't expect -- probably the mix of course is what has been dragging the increase in non-performing loans because we have reduced our corporate lending by 21% in the quarter of by definition or very likely those are loans with zero non-performing status and that's why they were paid and that's why there is kind of a mix effect here.

But the underlying trends are comfortable and going forward we think that we don't see any big in the central scenario big clouds. And given the fact that now we will have to (inaudible), a big chunk of our provision is done in the retail side. We have more robust models. We have a -- we think we have a clear view that the asset quality shouldn't be a concern going forward.

In terms of provision as I mentioned we were flat on a year-on-year basis. Next year probably we could be having similar levels of provision because the new model take provisions for clients that are performing. So to some extent you have been anticipating part of the provision expense vis-a-vis the way we set provisions before. That was simply whenever the client was facing difficulties you took the provision.

Today, we are taking provisions upfront assuming that all clients have some patterns of behavior which we think that at the end will be the case. So going forward, we don't see -- we think that provisions should be a contributor to our bottom line performance, not a drag.

In terms of the margins, historically we have had margins of around 5% to 5.1%, yes, which is very similar to what we saw as an average in 2011. Going forward we think that with all the caveats that we put in the release and we have discussed in this conference we think that -- again not on a quarter-by-quarter basis because that sometimes you have movement due to inflation or interest -- short-term interest rate movement that your -- then the underlying trends for the 2011 we think are more supported than not although inflation will probably come down.

And there are some caps that eventually will start applying. Those apply to a very small fraction of our portfolio, less than 3%. So it should have a relevant impact in our medium-term net interest margin.

And of course, you have -- you can adjust to that situation. And the supportive elements are that we expect that Central Bank will start reducing rates. It already reduce it in January and given the repricing of the liabilities being much faster than the repricing of assets, that will be supportive.

And secondly, we will maintain our focus on core deposit, the ones that are more cheaper rate through branches more than with institutional investors. So we expect the cost of funding to come down or to slightly improve. And secondly, we have grown this year 10% and we expect next year to hopefully to grow in line with the market.

Jose Barria, Bank of America.

Just a sort of follow up to the previous questions on asset quality. Given your new provisioning guidelines on the retail and consumer portfolios, I would have expected to see your coverage ratio increasing. But that's not the case. It dropped slightly in the fourth quarter but if we could just give us some indication on how we should think of that going forward given that you are provisioning more even for loan that are performing.

And then the second question is with regards to the competitive environment for commercial loans other players have continued to lend, but I just wanted to know if you are seeing other players being more aggressive in terms of pricing or is it more that you have been more restrictive in terms of your own willingness to provide loans? What are the drivers here in terms of the competitive environment for the commercial loans if you could tell us a little bit about that?

Okay. Thank you. Well, in terms of a asset quality, first remember that in Chile provisions are set according to the risk index, which is according to internal models and the guidance by the superintendency of bank you set provisions on a case-by-case situation. Remember that for example sometimes you have clients are not performing, but where you don't expect any loss going forward, for example an exporter that they have some papers that are not -- and therefore the buyer of the good has not send their money, things like that. At the end, you will have no losses there and therefore although it's non-performing you don't expect a loss.

Contrary to that, there are many cases in which although the client might be paying you to date, you set provisions, yes, and now in retail we set provisions for clients that -- where you see any kind of distress.

Yes.

That's why non-performing loans and the coverage of non-performing loans, although in middle-term tend to move in line with the risk index, not necessarily it has to be -- they need to be in line but not in the short term. What happened in our case is that we provision and the coverage of risk index need to be 100% at all time, which has been at all time. It's simply that the coverage of non-performing loans swings depending on the mix of our loan book. But to give you a rule of thumb they should be moving in line as an average in a 18-month period or something like that.

In the short term, they can diverge, for example if you are less willing to refinance consumer lenders in the low end, of course you -- losses that you have already provisioned and merged, yes, as non-performing but it was something that you knew and that's why you took the provision beforehand.

So that's why -- again, we don't have any concern today in terms of asset quality, the amount of provisioning, the evolution of our risk index in a medium --- in a long --- in a one-year series are normal. And we think that, again, the outlook for the Chilean economy, if you exclude the risk [failed] that have been already taking care by other means is supportive. So that is the front of a concern that in our case is not very relevant, yes.

In terms of the market for commercial lending, the basic approach of Santander Chile has been to maximize the profitability and not necessarily to maximize the volumes or the market share with those clients, yes. And that strategy is well -- has been well executed. However, in the short term, it produces bounces in our market shares in the commercial lending area.

As I mentioned before, in the first half we saw good prices and we saw a good compensations with those clients and that's why we increased both the revenues we were collecting and the volumes that we were lending. In the second half, because we started changing our -- the cost of capital calculations that were embed in our systems and because the margin started decreasing because of market force, the opposite was the truth; we maintained our contributions from non-lending businesses, but we let part of our market change in terms of lending, yes.

And that is a game that we have been playing for many years. Remember that upon the consummation of the merger between Banco Santiago and Santander Chile in 2003, we had 27% market share in total lending. Today, we have 20% market share and we have more than doubled our profitability. It's simply that when you stick to a profitability doing strategy in the short term, you let go pieces of it that are not profitable.

What we have seen here is that other market players have been more eager to increase their allocation of capital to low-yielding activities which is sound, which is good for them. In our case, we prefer to allocate capital only to more high-yielding activities. And that's why, as we mentioned in the presentation, we have the highest core ratio among the largest bank players. And we have been the only one not in need of coming to the market to ask for more capital, because we tend to allocate capital only where we see profitability. And we're not pursing in that segment size by it's own sake, it's simply we prefer to stick to our profitability goals and be very stubborn in that position.

Okay, that's great color. Thank you very much. Just so that I make sure I understood correctly. So what are you seeing from your competitors is not necessarily that they are being conservative as you are and they are actually they've remained very competitive in terms of pricing on the commercial side even in light of the deterioration in the macro environment?

Well, it's difficult to know how --- what are their thoughts, but the prices that we have seen in the second half make us believe that they are not sound enough for us given our higher profitability requirements, yes. It's difficult to speak on behalf of somebody else, but we are being probably a little bit more conservative than the rest and that mood will remain, as I mentioned before, as long as the situation deteriorates and the signs that we have seen at the beginning of the year are encouraging but still we are not completely out of the wood.

Okay, that's perfect. Thank you very much.

Federico Rey, Raymond James.

My question is regarding fees. I can see that during the quarter there was a meaningful reduction, in fact it's year on year in the reduction in the insurance brokerage line. I'd like to understand more what's going on there. And I would like to know if you can provide us like a guidance or an idea of what should be the level of growth in the fee income line. Thank you.

Okay. Well, in terms of fees regarding the sale of insurance, last year it was a very solid year, because we had the large earthquake in Chile and people get did lot of catch up in terms of assuring properties and other things in both retail and wholesale. This year was -- that trend has not repeated and secondly in the second half we have been more conservative in terms of loan origination. And in our case a big proportion of our insurance is linked to loans, yes. If you take -- you buy a mortgage, for example, usually we require to have earthquake protection, fire protection and so on.

So the combination of a change on the consumers first and second, the more conservative mood that we have following the second half has resulted in lower fees from -- for insurance. But as you know, Grupo Santander set an alliance with Zurich that we think will allow us to be very competitive going forward. They are expert in products, we're good in distribution and that those capabilities are intact. And that's why we think that the insurance definitely will be a -- if not the largest contributor to fee income, a very large contributor in 2012 and on.

In terms of growth of that line, here we have to take into consideration that what fees us in many parts has been under big scrutiny by regulators and generally the public opinion and that's why our pricing has to be careful in the sense that there are some fees that are very visible from the clients' standpoint and that's why we have been moving away from kind of flat fees and into usage type of fees.

People don't care to pay a fee if you receive a product or a service on the other side. For example, when you use a credit card people don't realize that they are paying a card when -- the credit card when the merchant is paying us a fee or when you maintain money in asset management you are generating fees without -- many times without even noticing. So that's why we have been moving into a more usage type of fees, fees are generated with the sole use of the product. That shift would have taken and probably will take some long -- to some extent obscure the growth of usage type of fees. And today a big proportion of our fees are linked to use, which are more recurrent than if you had a charging fees kind of flat fees which are less -- in this scenario less likely to maintain in the future.

So in terms of guidance, historically fees are very linked to the growth of the client base, yes. Our client base has been growing at around 7%, 8%. Our cross-sold client base is growing at 12%, 13%. So something between is a good bet -- for a new turn in the first few who knows it simply as a medium secular trend for kind of model purposes, yes.

But that is a line that at the same time we've been -- given that the spreads still are very high in Chile you don't promote too much fees because fees is something that many clients don't like to be charged but they are willing only if they receive a service and that's why we've been careful in that line.

Thank you very much.

Fabio Zagatti, Barclays Capital.

I've a more industry related question to make. Can you please share your thoughts related to the regulatory changes in Chile, the change in cap rates in forcing retailers to have to share a positive credit data? I would have thought that these regulatory changes would likely create new opportunities for banks to gain some market share from retailers. But it seems that you don't expect it to happen as you've guided for Santander to grow exactly in line with the industry. Can you please elaborate a little bit more on that? Thanks.

Okay. Well, first of all there are number of changes that are affecting the consumer market especially the more massive market, yes, the middle --- the market in the middle market --- the middle classes, yes. Number one is the consolidation of information in a single [trade] bureau. That has been moving very slowly. It's a difficult task especially because of concerns about the privacy and things like that. And some market players, the non-banks market players have been trying -- kind of dragging their feet and trying to avoid that information, which we think at the end is good for clients. So that's why the government is correctly pushing that kind of reform.

Secondly, there are some caps for the low end of the consumer market that they probably going in the other direction. They're instead expanding the market puts the cap in the size of the potential market you can tap. The two effect then to cancel out to some extent because you'll have better information but at the same time it'll be difficult to raise new clients because the rates out are set at a level that's below what you expect to -- in order to have a good profitability. Given the risk that you are assuming and the cost you're assuming, you won't be making the effort, yes.

So the first is good news for the client and therefore for the financial system. The second is more uncertain. We have seen that even the government is trying to change the initial proposals because they're now realizing that probably the effect in terms of a limit in the access of SMEs, especially the smaller and indigenous, is much larger than what at the beginning they thought. And that's why we think that the project that has been moved to, for discussions, to March --- next March will be watered down to some extent compared to the first drafts, yes.

This is a very complex matter. Here you're trying to protect and therefore you've to act very prudently, and discussion has to be technical oriented, which we think is how it is starting to be addressing and that's why we're less concerned that, say three months ago, of what to expect.

End of the story, we think that the banks will gain on a relative position vis-a-vis other financiers, retailers, trade unions, et cetera and we think that Santander also will be in a good position because we know the market, et cetera. When I mentioned that we plan to grow faster than the market, it's the banking market, but I'm sure that the banking market as a whole will be growing faster than the non-banking market.

So the banks in general will outpace the growth of the non-banks and within the banks Santander probably should be outpacing that segment but that -- in consumer lending as well.

Okay. And on competition still, if I may ask another question, why wouldn't you expect your competitors to follow your strategy to focus on more profitable segments of the retail --- I mean, which -- and if they do, I mean that would very likely reduce your ability to charge higher than the industry spreads?

Yes. What happened is that if you see the statements but most of the other players, they're all trying to do basically the same and for many years. The question is to have a retail franchise is very difficult. You need products, you need systems, you need personnel, branches, and clients, et cetera.

So that's why although one thing is to claim that you want to do something and the other is to do it. The same with efficiency, 100% of the companies try to be efficient and proactive. Why so many are not able to do that is simply because it's very difficult, yes. So we think we have a good franchise, we think we have -- what, we've the largest distribution network, the most number of clients, we've the Internet capability that are second to none in Chile, et cetera, et cetera.

Those get -- and we've 3 million clients, which is something that takes a lot of time to raise and to evaluate and to know them increasingly well.

So it's not that we're completely finishing the races, it's something that you've to work every single day. That's why we've been revamping our credit risk model. We're launching a new CRM capability that'll probably allow us to do a number of things in terms of market segmentation and the general knowledge of our client, et cetera. So this is something that you've to work every time.

In the corporate market contrary, it's simply how low you want to get your return on capital, how fast you can grow. In the retail, you need to set a number of things before and of course if the rest are trying they're -- that I think that sometimes people think that this is kind of a fearsome gain that whatever you gain is because you're taking that business to somebody else.

With an economy expanding 4% and a financial system expanding 10%, 11%, there is a lot room to follow strategies that not necessarily mean poaching somebody else's business, yes, and that's very relevant and probably that's where sometimes they have been doing the biggest advancements, yes, because at the end of the day if you want to grab somebody else's market share, the easiest way is to slash prices, which in our case we don't do it.

And that's why I would say that it is counterintuitive. We better prefer to have strong players to allow us to expand the size of the market more than grabbing somebody else's market share. And that process, you need strong players and you need committed players to long term --- building long-term franchises. We saw that very clear in the retail industry that was very fragmented and once you've five, six large players the size of the industry increase very much because you need to do investment, you need to think long term as we're doing.

So end of the story, we think that we're looking forward to a good 2012, especially in the retail side and the only thing is that this short-term mood of being more conservative than the rest which you know that there are two ways to run a bank, the prudent and the wrong. And we prefer to be within the first group.

Great. Thanks a lot, Raimundo.

Chris Delgado, JP Morgan.

This is Saul once again. I just have a couple of more -- couple of follow ups or just clarification types of questions on some of the guidance that you have given. I think, Raimundo, forgive me if I missed it, but I think you mentioned that you expect loan loss provision in '12 to be flat versus '11.

I'm not sure I understand what that means. Do you mean the absolute level of loan loss provisions, the 280, I think CLP2 billion flat versus '11 because obviously you had a lot of one-offs in the first half of the year -- the second half of the year? But in the first half of the year, you had arguably unsustainably low levels of credit losses, about one, two; one, three. How should we think about that in terms of, for example, loan loss provisions as a percentage of average loans? I'm just trying to understand what exactly that entails.

And secondly on fees, I think you mentioned, and again forgive me if I missed it, I think sort of a low teen kind of normalized, a low-double digit normalized level in the medium term. But what does that mean for '12? Is it because obviously fees have been under some pressure? I'm not really sure I caught -- I get what a normalized rate is, but in the short term is it going to be something different than that?

Okay. Now in terms of provisions, historically, we have said between 1.5%, 1.6% of loans. That ratio this year was high because of what you correctly mentioned, we have been doing a number of extraordinary things. So that's why we think that absolute provisions will be kind of flattish or if we grow much faster than our central scenario, of course, you have to set more provisions.

But we expect that ratio to be going -- to be normalizing given that today we haven't finished the revamping of the model. So it's more than the absolute level of provision to be kind of flattish than having -- in terms of loans also going down at the end because we plan to keep on growing.

This year remember that absolute fees were flat and we grew 10%. That means that the ratio of provisions of our loans came down. We expect that situation to sustain slightly next year. And the only change or the only caveat is that if things improve, which we hope they will do, we could be growing much faster in retail and there the mixed effect which is beneficial on the margin side, will probably be negative on the provision side because you have set for provisions but in a general environment of controlled level of risks.

In terms of fees, no our guidance is more in the -- between 5% and 10% which is in line of the growth of total clients. But I mentioned the 12% cross-sold client is simply to give the medium-term outlook. Once all this noises about fees that you cannot collect, et cetera, eventually vanish.

Perfect. That clarifies it. Thank you very much.

[Michael Kranzler, Metzrehi].

I would like to focus for a moment -- mostly we are focused on the income statement. I would like to focus for a moment, if I can, on the balance sheet. Could you tell us as of recent date, as of today what your total foreign currency borrowings are in terms of bank loans and bonds? And what your maturities are in 2012 and how you will meet them?

Today we have around -- here with us is [Mendez Torres], who is in charge of asset and liability management.

Our total borrowings from abroad is like roughly $7 billion and $4 billion coming from -- almost $4 billion from the banks and the other from bonds. And we have $1.8 billion of bonds maturing in 2012.

And I did say that we have almost 100% of the Bank's lines maturing because all of them are taken up to one year tenure. So in 12 months, we have almost 100% of that maturing expect in some syndicated loans coming from Asia that they are like two years tenure that's mainly the picture.

Okay. And how much of the bonds are coming due? And how will you be --

1.8.

1.8? And how will you be -- what's your strategy for covering those maturities? And also if you could just elaborate a little bit --

Actually our strategy was to build a structural liquidity position just to be able not to go to the market. So in our base case funding plan for this year, we will be able to keep a structural liquidity above $2 billion without tapping the market, not even in the domestic nor the latter market. That because there was the same strategy of growing fast in the (inaudible) and having also a selective approach on loan growth.

But we will definitely take advantage of any kind of window of opportunity we see in the market that reasonable prices and we are exploring some alternatives with dates that even without any chance or any reasonable price to tap the market we will be able to keep our structural position in terms of liquidity above $2 billion.

That means you will pay off the $1.8 billion and still retain a structural liquidity buffer of $2 billion without going to the market?

Yes, basically because by the end of 2011 we have $3 billion of structural liquidity. And during the year, we are expecting to have deposits growing above loans. So that will create some kind of positive liquidity gap from the retail activity. And then we will also have liquidity coming from net income. I mean, even after dividends we retain roughly $5 billion -- $500 million of liquidity.

So it started at $3 billion. Let's say we have $1.8 billion of maturities. And then we have roughly $800 million of liquidity created through commercial activity or earnings retention.

Okay. And I presume in that scenario you are assuming all the banks or replacement banks will take -- who will take their place, will keep the $4 billion in bank lines in place?

Yes, yes. Because, I mean, actually in the best case scenario we are assuming like 90% of well over of that. We are assuming a sort of conservative buffer of 10% of reduction in that line because in the case of that market we have been working hard opening new geographies like Asia.

I mean, two years ago we did not have any borrowing from Asia. Now we have roughly 15% to 20% of that number coming from Asia. So we have been working hard to diversify the geographical base of that. And in many cases like some American or British banks we have a broader relationship with them and not just borrowing. So let's say that those borrowings have -- are a little bit more sticky and not so market or price sensitive.

Okay. And one last question, sir. Your hedging of these dollar liabilities and particularly the bonds, are they hedged to maturity or are they match funded to maturity in like currency or how -- what is your hedging strategy in that respect?

Yes, that's basically everything is up to maturity because we have to apply accounting hedge principles for all our derivatives portfolio in the ALM area. And in order to have a reasonable accounting efficiency in terms of accounting treatment, we have to do that up to maturity.

So we take like a sort of (inaudible) match hedge on the foreign exchange leg. And then we swap that into locally currency either pesos or either inflation indexed depending on the mismatch we are trying to get.

So all the -- so all your foreign currency, the longer ranged obligations are match hedged or matched -- they have been all converted or there is a currency hedge in place?

Yes, all of them, yes. With regards because we have -- then we have a liquidity buffer in terms of dollars. I mean we have dollar cash. But we also have domestic dollar deposits. And so let's say like we use this domestic dollar deposits to fund this kind of dollar cash. And then all the medium- to long-term foreign exchange borrowing is used to swap to domestic currency, the local currency and in all cases we do cash flow match on the derivative.

Through derivatives?

Excuse me?

I'm sorry, you do the -- you are hedging them through derivatives, the longer-term obligations?

Yes. We use cross currency swaps to swap that into local currency. And the dollar leg is the mirror of the borrowing.

And you are able to match maturities? One swap?

Yes. And we have a -- you can find a visible deep market in the gross currency swap up to five years. I would say it's a little bit tougher, longer than that. But actually in 2010 we were able to place the first global peso bond in the international market. So we have been able even to get local currency funding from the international market without the need of going to the derivative market to swap it.

So in other words your actual net dollar position is -- or your exposure position is very low. Is that what you are telling us?

Yes, absolutely. I mean we don't have any kind of mismatch in terms of foreign currency.

Thank you.

[Nathan Genie], Moneta Asset Management.

I have a question about the sales of the branches. Which month did you sell the eight branches and why did you sell these branches?

I didn't understand the question.

Yes. Did you sell eight branches this quarter? If you can tell me which month did you do that? And what was the reason of doing that?

Okay. It was simply -- it was done in December. And it's part of the process of optimizing our capital base to have less capital allocated in fixed asset and more capital allocated in projects or in profitable loans.

Okay. And I have -- my last question is about the ROE. I know that you can't forecast an ROE for this 2012 but you can say to me there's a possibility of improvement like the last year wasn't a very good year in terms of ROE. Do you think 2012 looking this year as an conservative year, do you think there's possibility of improvement of ROEs?

Well, first of all 22% ROE for the year is relatively high by any standards, both local and in the international market. Secondly, going forward it will actually depend, as I mentioned before, on our view about the problems in the eurozone. If that situation clears, we can accelerate our loan growth and our (technical difficulty) in general and therefore expanding our ROE and going to -- especially if that is the case, we will also -- we know that ROE is a mix of income and capital. Today, we have an abnormally high level of capital, which has in the short term affected our stated ROE. Our actual ROEs -- we have the same capital structure as the rest of the players -- would be much higher than that, in the upper 20s.

So as soon as we see more clarity of what to expect with [retail]risks, we can increase our stated ROE in line with the higher activities with our clients. But it's difficult to predict when that will happen because it will depend very much of how we are seeing the situation in the eurozone.

Okay. Thank you very much.

All right. There are no more further questions.

Okay. Well, thank you very much for all of you for participating in this call. We look forward to speaking with you again soon. Have a good day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.