Banco Santander Chile (BSAC) 2012 Q2 法說會逐字稿

Welcome to the quarter two 2012 Banco Santander Chile earnings conference call. My name is Yvette and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Raimundo Monge. Mr. Monge, you may begin.

Thank you very much, and good morning, ladies and gentlemen. Welcome to Banco Santander Chile's second-quarter 2012 results conference call. This is Raimundo Monge, the Director of Strategic Planning of the Bank, and I am joined today by Robert Moreno, manager of Investor Relations.

Thank you for attending this conference call, in which we will discuss our performance in the second quarter of 2012. Following the webcast presentation, we will be happy to answer your questions.

During the second quarter of 2012, market conditions deteriorated after a promising start at the beginning of the year. The concerns about the medium-term outlook of the Euro Zone we believe have validated the more conservative approach the Bank has been following since the second half of 2011 and maintained during this quarter. This has been a conscious management decision that has reduced our potential growth rate and profitability in the short term, but we think allows us to be prepared for more stressful market conditions.

We hope the recent development themes in the Euro Zone will make our short-term preventive measures unnecessary for the rest of the year, allowing us to resume full growth and profitability, especially as the Chilean economy has continued to show positive growth and solid employment figures.

In our central scenario, we have kept and changed our GDP forecast for this year to be around 4.5% and close to 5% in 2013, even though we expect the second half of the year to be softer than the first. An indicator [that this] changed in relation to our initial forecast was inflation, which is expected to rise no more than 2.5%, 2.6% this year. This could open room for interest-rate cuts on behalf of the Central Bank in the second half of the year. All in all, we expect a relatively supportive operational environment for the Bank for the rest of the year and 2013.

For this reason, we have not altered our loan growth outlook for the system or for us, even though, as we will see later in this presentation, the focus will be more balanced between retail and wholesale banking activities in the short term.

In the second Q of 2012, net income attributable to shareholders totaled CLP105,695 million. Compared to the first quarter of 2012, net income decreased 10.7% and 25.3% compared to the second Q of 2011, our highest quarter ever. Net income in the first half of 2012 totaled CLP224,002 million.

In second Q 2012, our results followed the general economic trend. Loan growth remained strong, but the lower inflation hurt margins. Return on average equity in the second quarter of 2012 reached 21% and 22.2% for the first half of the year.

The higher level of core capital maintained compared to our recent history has reduced our stated ROE. If we have today the same capital structure that we have maintained in the last two years, our ROE will be higher than 27% and above our medium-term goal. But of course, we are not in normal times.

Net interest income decreased 4.2% during Q. The net interest margin in the second quarter reached 5% compared to 5.3% in the first quarter of this year and 5.2% in the second quarter of last year. Compared to the second quarter of 2011, the lower net interest margin was mainly due to the lower inflation rate since the Bank has more assets than liability linked to inflation.

Inflation, measured as the variation of the Unidad de Fomento, an inflation-indexed currency unit, reached 0.4% in the second quarter of 2012, 1/3 of the level seen in 2Q11, which was 1.4%. For every 100 basis point change in inflation, net interest income varies by approximately CLP30 billion on an annual basis.

Despite this short-term impact, net interest income grew 3% year-on-year in the second quarter. This is a direct result of the solid growth of deposit and an improved funding mix. Total deposit increased 8.6% Q-on-Q and 9.3% year-on-year, outstripping loan growth. In the quarter, pension funds and core deposits fueled deposit growth. Core deposits, defined as demand deposits and time deposits from non-institutional sources, grew 1.5% Q-on-Q and 17.6% year-on-year. Core deposits as a percentage of the total deposits reached 73.3% compared to 69.8% 12 months ago.

The Bank took advantage of this influx of deposits and of our relatively high structural liquidity to prepay more expensive foreign bank lines and bonds. This improved the bank funding mix, as deposits tend to be cheaper and more stable than other sources of funding.

Loan growth also accelerated. In the second quarter of 2012, total loans increased 3.3% Q-on-Q, or 13% on an annualized basis. Even though the general scenario has worsened, the supported local economic environment continues to push loan demand. Loans to individuals increased 1.7% Q-on-Q and 5.6% year-on-year in the second quarter.

Loans to high-income individuals led growth and increased 2.7% Q-on-Q in comparison to a decrease of 1.1% in the mass consumer market. Lending to SMEs expanded 2.1% Q-on-Q, reflecting the Bank's consistent focus on this expanding and profitable segment.

Simultaneously, demand for loans on behalf of the middle market and corporate clients increased as external funding sources for companies became more expensive. Additionally, the Bank's non-lending businesses with those clients, such as cash management, brokerage and treasury services, continued to thrive. As a result, lending in the middle market increased 4.2% Q-on-Q and corporate lending loans increased 6.6% Q-on-Q.

Regarding asset quality and provision expense, general trends were favorable. The Bank's nonperforming loans ratio reached 2.82% as of June 2012 compared to 2.94% as of March 2012. The Risk Index, which measures the percentage of loans for which the Bank must set aside loan-loss allowances, based on our internal models and Superintendency of Banks guidelines, decreased to 2.82% as of June 2012 compared to 2.94% in March 2012. Net provision for loan losses in the quarter was flat Q-on-Q.

Since the third quarter of 2011, the Bank has implemented more prudent (inaudible) policies on (technical difficulty, number one, a possible deterioration of the macro environment, especially during the second half; second, an increase in expected loss of the mass consumer market following the La Polar case; and third, the new regulations that temporally reduce the effectiveness of the negative credit bureau.

Following this event, the Bank has been redesigning its credit risk processes in the mass consumer market, including, number one, restricting renegotiations. In the short-term, this affects nonperforming loans and charge-offs, while lowering loan growth in the segment. That should lead to a healthier consumer loan book in the medium-term.

It is important to point out that Q-on-Q, the nonperforming loans ratio of the consumer loan book has been stable. The coverage ratio of consumer loans, nonperforming loans, reached 242% as of June 2012.

Secondly, we have been improving the recovery process. The Bank has overhauled its recovery unit and increased the amount of recovery agents by 30% year-on-year. This has led to an 82% year-on-year increase in consumer loan loss recoveries in the second quarter. This pushed total recoveries up 52.5% Q-on-Q and 61.8% year-on-year.

And number three, we have been tightening the consumer risk provision loan parameters. Furthermore, the Bank in the third quarter of 2012 will recalibrate its expected loss model for consumer loans launched two years ago by increasing the upfront provision recognized at the moment a consumer loan is originated. We calculate the impact of this recalibration to our consumer model to be approximately CLP25 billion to CLP26 billion, which will be fully recognized in the third quarter. These will be partially offset by the expected decrease in charge-offs and the rise in recoveries going forward.

Going forward, as mentioned in previous earnings calls, provision levels measures as the cost of credit or provision expense over total loans should continue to normalize at levels between 1.7% up to 1.9% of total loans, in line with our historical levels. Operator?

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Daniel Abut.

Raimundo, I am not sure you have finished your remarks, because I think you stopped in the asset quality comment. And if I follow your presentation, you probably have some additional (inaudible) you wanted to cover, or do you want me to go to my question?

Hello? Operator, I think we lost the folks in Chile.

Please stand by. One moment.

All participants, please continue to stand by for your host reconnect. One moment.

All participants, please continue to stand by until your host reconnects. Thank you for your patience.

Mr. Monge, your line is back on with the conference.

Yes, do you recall where I was?

I'm not showing your presentation. I did instruct participants to queue up for questions. Did you want to take questions or did you want to keep going with your presentation?

I would prefer to keep the presentation.

Okay. Please proceed, sir.

Okay. Sorry for the interruption. As I was mentioning, we are taking a number of actions to follow in the new environment we foresee in the mass market. I was mentioning first they are expecting renegotiations; secondly, improving the recovery process; and third, tightening of consumer risk provision in loan parameters. In the second quarter of this year, we will recalibrate the effective loss model for consumer loans launched two years ago by increasing the upfront provision recognized at the moment our consumer loans originated.

We calculate the impact of this recalibration of our consumer model to be approximately CLP26 billion, which will be fully recognized in the third quarter of 2012. This will be partially offset by the expected decrease in charge-offs and the rise in recoveries going forward.

Going forward, as mentioned in previous earnings calls, provision levels measured as the cost of credit or provision expenses over total loans should continue to normalize at levels between 1.7% up to 1.9% of total loans, a little bit lower than our historical levels.

Net fee income decreased 1% Q-on-Q. Fee income growth in the quarter decelerated as our asset management business was affected by the market downturn. At the same time, the Bank continued to increase its client base and cross-sell [indicators], especially in the middle upper income segment.

The amount of cross-sold clients in all segments, excluding [domestic], has reached 12.7% year on year. This was offset by a decline in total Banefe clients and cross-sold clients as the Bank reduced its exposure to those clients that showed unhealthy financial behavior. This also had a short-term impact on certain fees in the quarter, especially credit cards, line of credit and insurance brokerage fees.

To reverse the trend in the fee income, the Bank is in the midst of the transformation plan and the complete installation of a new CRM system, customer relation management system. This is the largest overhaul and reorganization of the Bank's middle and lower income business segments in the last decade.

As shown in slide 11, this project entails various reforms to our segmentation strategy, our distribution channels, client attention models and back-office functions. Once completed, this should allow us a more efficient and rapid growth of the client base cross-selling indicators, and accordingly, fee income.

The initial trials of the new CRM have been encouraging, and the Bank continues to invest heavily in this project. A pilot program has been installed for 400 commercial (technical difficulty). So far, (inaudible) is considerably greater. Client (inaudible) is higher. Marketing (inaudible) is more effectively used, measured by the percentage of sales while are preapproved over the total, and the cost of credit is lower. We are still at a 40% to 50% completion of this project, which should be fully operational throughout 2013.

These projects also explain the year-on-year rise in the Bank's operating expenses in the quarter. As can be seen in slide 13, there is room for improvement in the Bank's efficiency ratio in some units, especially in the middle income segments of the Bank retail business. The bank is currently tackling this indicator by investing in IT and, more importantly, reformulating the manner in which this important client segment is attended.

Finally, the Bank ended the quarter with a BIS ratio of 13.7 and a core capital ratio of 10.4%, the highest among our main peers in Chile. We believe this gives us an adequate relationship between returns and risks, as measured by a relatively high capital level within the Chilean banking system.

If we were to leverage the bank to leverage similar to our peers, then our ROE would be greater than 27%. Our solid capital levels and high internal generation of profits also permitted the Bank to pay a dividend of 60% of 2011 profit in April, which implied a dividend yield of 3.5%.

This solid capital base will permit us to grow healthily going forward and allow us to be prepared for any change in capital requirements that might be required for Chilean banks in the next few years.

In summary, second Q 2012 results reflect the combination of Santander Chile's prudent approach to the high uncertainties coming from abroad, resulting in high capital and liquidity levels and loan growth focused on less risky segments, and Chile's overall positive macro environment, which continued to fuel loan demand.

Deposit growth also continued to be strong, outpacing loan growth, and the funding mix continued to improve. Our sales, banking and other income retail segments have performed well and have achieved solid results. While we recognize there will still be market volatility coming from abroad, we continue to be optimistic on the positives of the Chilean economy, where 100% of Banco Santander Chile's business is located.

The Bank is also attacking those areas where profitability levels can be improved going forward, especially asset quality in the mass consumer market, which in second Q 2012 already began to show signs of improvement; and secondly, the need to improve the attention model and front-office in our middle income banking segment in order to improve growth and efficiency in this business segment.

For these reasons, going forward, we believe the Bank is capable of sustaining relatively high levels of profitability. At this time, we will gladly answer any questions you might have.

[Carlos Macero.]

Good morning, Raimundo. Good morning, gentlemen. A quick question regarding the last slide that you have here, regarding the regulations and tax reforms. What do you expect can happen in the near term that would have an impact, and what kind of impact it would have? I mean, in the past, we've seen regulations on provisioning, on consumer loans, on the rate cap. Is there something else that will come from that angle, given the relatively benign inflation and growth environment that Chile is in now? Or should we expect something more similar to what we saw in the past or actually nothing at all? And then I will ask a second question. Thank you.

A terrific point there. The project (inaudible) that are under discussion in government, that we think in the next two years we will see a big change, especially in the lower end of the consumer market, the segment attended by stores and by (inaudible), our low end of the consumer market business.

We think that in the transition, we might be affected. Because if you take all the measures combined, we think it will be in relative terms good news for banks, because it would basically level the playing field, first. Second, it will provide better information for our sales and asset quality issues, as the idea of the government is to integrate all the financial information of clients. Third, if we allow banks to have some deduction from the workers' salaries to pay for debt, which today some market players benefit from that feature.

So if you take all the changes combined, and of course the lower maximum rate. So there will be good news and bad news and that is why we think the timing is uncertain. The final (inaudible) will be supported for the bank activity, and no doubt this is an area where we want to be and we want to maintain our leadership, as we have indicated for many years. It's simply that in the meantime, given that laws will be enacted with different timings, it will have an impact.

However, the discussions, what at the beginning were trying to rush things a little bit too fast, especially after the term that came after La Polar (inaudible), we think that now the positions are quite more rational and trying to reconcile the need to have better consumer protection, but at the same time a more dynamic environment, especially for the low end of the consumer market and the small companies.

And that is why the government and Congress people are realizing that there are trade-offs to face, and that is why we are relatively optimistic that the final outcome will be supportive for the bank activity.

But of course, in the meantime, especially if, for example, the maximum rates come up before the integration of the financial information of clients, it will be detrimental for that segment. And that is why we and banks in general, and probably retailers as well, have been putting kind of a more (inaudible) approach to that segment. I think we have more clarity (inaudible). But I am sure that the final -- the final scenario will be good for clients and accordingly should be [fair] in relative terms of bank.

And this you expect for the next 18 to 24 months or is it a little bit closer?

It is difficult to know, because the project had been moving at a relatively slow pace for about 9, 10 months. And there are many priorities in Congress, so it is difficult to know, but I am sure that the government is trying to do a good job and trying to give something that is supportive of consumer protection concerns, but at the same time not detrimental in terms of closing the formal market for the small guys. So it is difficult to know. I'm not sure whether it will be a matter of one year or -- but two years probably is too much. I would say 12 months or something like that.

Okay, thank you. The second question is related to your growth to consumers. There has been -- it has been somewhat timid over the last 12 months, 3.5% year-over-year growth. And I think if I heard you well in the call, you said that still the focus will probably be stronger on the corporate side, which was already fairly strong this quarter.

What do you see in the consumer market that is prompting this slow growth? Is it concerns regarding NPLs, or is it because you are restructuring your CRM and you are waiting until that is done before you go out? And what are you seeing there and what are your expectations for the growth in consumer loans through the end of the year?

All participants, please continue to stand by. Your host's line just disconnected. We will wait for him to join. Thank you for your patience.

Hello, this is Raimundo Monge joining the call again. Hello, operator?

I will go ahead then with the next question. One moment. I have [Tito Lombardo].

Good morning, Raimundo. My question was in terms of expenses, we saw an increase in expenses in the quarter, you said partially due to some seasonality. But how much do you think you continue to spend in terms of renovating your CRM systems, and how do you see the growth in expenses going forward? Thank you.

It is a very good point. We had been -- our growth -- the cost growth had been at around 10% more or less, which will be decelerating going forward because some activities related to changing the CRM and the Transformation Project I talked to you have already been accomplished.

So going forward, we expect costs to be growing more in the close to 8%, 7.5% on an annualized basis. Probably by the end of the year, we should see that kind of growth.

All right. Thank you.

[Carlos Macero.]

Sorry we got cut off. The question is regarding the loan growth for consumers. We've seen fairly timid loan growth on this side, losing a little bit of market share. The year-over-year growth at a little bit more than 3%.

What do you see in this market, and what do you expect will be your appetite for consumer lending, again, given that the conditions in Chile are fairly favorable, despite La Polar and all everything that came out of that?

Well, as we pointed the press release, there are two realities. One is the reality of the middle upper income individual segment, where we are increasing our penetration and growing a little bit faster than the market. And the other is the middle to low end of the consumer market, where we are, as we talk in your first question, a little bit more in a wait-and-see attitude, until all the changes in the (inaudible) are cleared out and to understand whether it will be a neutral or slightly positive environment, as we talked before.

So we prefer to be cautious in the low end of the consumer market. After La Polar, most current suppliers (inaudible) in terms of new loan growth renegotiations, et cetera. And then as the rules of the game changed and it emerged from delinquency levels which had been affecting not only us, but the system probably, we are a little bit ahead of the rest in getting out of a one-time change.

But the rules of that market have changed and have been affected the rest of the banks and probably the rest of the retailers as well. So we prefer to be prudent until we have more clarity of what to expect.

In the middle to high end of the consumer market, we have a green light. And actually part of the transformation process is precisely to be more active in that segment, which to some extent we are underrepresented. Our market share in terms of consumer lending for all the consumer markets here is 23%, 24%. In the upper end and the middle upper end segment, we calculate to be having that lower market share. And that is why we want to work to keep pace and to see solid growth.

Net-net, given that today we have much more clarity about the external conditions, we are more supportive about generally growing in every segment, except probably the low end of the consumer market. The rest is business as usual and probably picking up once all these new CRM capabilities and the transformation that we have been doing at the branch and at the channels of the Bank are fully implemented, probably gathering momentum in time.

So it is possible that we see an acceleration in the annual growth rate, particularly as we reach the end of the year? Okay, thank you.

That's right. We expect that as well.

[Chris Delgado].

I just wanted to get a sense of kind of the net interest income evolution kind of going forward, especially given that you have revised your inflation outlook. So I just want to get a sense of how you see growth coming out for NII at the year-end and kind of net interest margin as well. Thanks.

As we state also in the press release, generally speaking, we are realistic. Our commercial areas are growing two digits their net interest income. But of course, given the banks have this structural loan position to (inaudible) inflation, whatever inflation this accelerates, it (inaudible). And that is why typically our targets are expressed not on a quarter-by-quarter basis, because of the volatility of interest rate -- of inflation rates, but in terms of the kind of 5, 6 quarters moving average.

And we are confident that we can maintain net interest margin at an average in the range of 5%, 5.1%, plus or minus inflation. Remember that inflation in the quarter was 0.4, so we are talking annualized inflation of 1.6%. That is very low by historical standards and it is not what the market expects for the next 2, 3 years. That is why we consider the drag that the low inflation happened in the second Q of something extraordinary, because it is a very robust economy, where many economists believe we are running out of capacity. The job market is [to almost improve] employment, and that is why typically that should result, again in 12 months, 18 months, in higher inflation more than lower inflation. And that is why we are not concerned about the short-term deceleration of inflation.

So going forward, the fact that we expect to grow faster in approaching the growth of the market -- in the second quarter, we roughly grew in line with the rest of market. The year-on-year figures are still affected by the decrease that we saw in the second half. And now that we have more clarity about what to expect about the external conditions, we think we can keep pace with the market, growing by the end of the year at that annualized rate of 12%, 13%.

And in terms of net interest margin, again, we are (inaudible) stable, because again, our prices are in the middle upper part of the range. And if you exclude the volatility of inflation, the commercial areas' growth should be in the two digit line.

With inflation there -- as we point in our press release, there are uncertainties because there are some changes. There is a tax bill under discussion that would eliminate some taxes, and that of course will have the (inaudible) inflation coming down and probably negative in some months.

But at the end, even though this is a structured position, we think that in 18 months, inflation will be a contributor to our performance. Probably in the short term it will be a drag, but again, (inaudible) to believe that inflation will remain at 1% a year, we think we are in the right direction to leave that gap open, given that the -- even the Central Bank targets are more closer to 2%, 3%, and not 1% as a result this quarter.

Okay, great. Thank you.

[Jose Maria] Hi, Raimundo and team. I have two questions. Following up on the NIM question, do you see your NIM from loans improving from here? Obviously, you have spoken about a pickup in the consumer side, and this should benefit your NIM from loans. Looking here at your release, it looks like the yield on your interest earning assets dropped about 1% in the quarter, so I want to see how that evolves.

And also, do you think that there is any more room on the cost of funds to improve going forward, given that we saw a big improvement in the quarter? And then I have a follow-up question after that.

Yes, we have been trying to tackle all the elements that affect NIM. In terms of growth, we have been accelerating compared to the low growth we saw in the second half. Now we are growing, as I mentioned before, in line with the market, with a relatively balanced structure high-end at the consumer market and corporate loans.

We think that in order to support our margins, we will be growing faster in SMEs, which is effective, but still we have not achieved steady-state growth. We are very active in that segment, but that is a segment we need to improve our offer and -- because it is effective -- all the growth of jobs that has been very relevant in the economy are generating mostly in these midsize companies. And that is why one of the focal points of the Bank is precisely to streamline our offer to those segments and take advantage of that relatively high growth.

So in terms of NIM, our focus is to kind of maintain more than to expand it, because on the other side, we don't want to lose the certain advantage (inaudible) of a provision (inaudible) that we have seen in the last two or three quarters.

So the idea is to -- what we are targeting is basically risk-adjusted net interest margins of roughly 3.2%, 3.4%, which is the net interest margin minus the cost of creating the continuing expense. If we can give roughly that kind of net -- adjusted net interest margin, given our efficiency, which we expect should be improving going forward and given our leverage of around 9.5, 10, we think we can go back to our mid-20s ROEs very comfortably, even with our higher capital structure that we have today.

So the math is relatively straightforward. It is simply more growth, which we are now in kind of a more confident approach given what we are listening from the Euro Zone; maintaining the mix in order not to affect our delinquency levels; and being very active in terms of efficiency. Which is precisely all this transformation efforts and all these tools that we have been implementing are aimed at trying to do the same job, but with a leaner structure and a more responsive structure. If we are successful, we think we can have the next three or four years a very sound performance.

Okay. Thank you for that very complete answer. And I have a follow-up question on asset quality. Going back to the guidance or the expectation that you provided for provisions to average loans reaching or stabilizing at somewhere between 1.7% and 1.9%, do you think that you can get there by year end? In other words, for the year, for 2012, this could be maintained, even with the provisions that you are expecting to book in the third quarter as you optimize your risk rating parameters in the consumer side?

Yes, because the underlying -- if you take out the low end of the mass market or the low end of the consumer market, the rest of the segments have been moving in a relatively comfortable way, especially mortgages and commercial lending in general. And that is why it is difficult to know -- probably it will be closer to the high end of the range, 1.85%, 1.9%, et cetera, and it will maintain the trend to be even lower than that.

Okay -- for 2012, right?

Remember that probably will also start growing faster in 3Q and 4Q than what we have grown in first and second Q.

Okay, got it. Thank you very much.

Daniel Abut.

Raimundo, just a follow-up on your last comment on the ROE, that you said that once the cost income ratio starts to improve again, you should be able to go back to something in the mid-20s. I know that it is difficult to put in timing for that, but it also will require not just an improvement in the cost income. It will require you to feel comfortable taking some (inaudible) kind of risk of measures that you adopted out of the equation.

For example, you mentioned that you are now running the Bank which much lower levels than before. And I don't know when you would have to be much more comfortable running the Bank more with the historical patterns of capital. Do you think that will start to happen towards next year? It may take longer than that? How early do you think we can go back to the mid-20s in terms of ROE?

All participants, please continue to stand by for your host to reconnect. Thank you for your patience.

Mr. Monge, your line is now reconnected.

Okay, thank you very much. Daniel, could you please repeat the full question because today is not the day of the telcos.

(Operator Instructions) Daniel, go ahead with your question.

Raimundo, was that a follow-up on your comment on the ROE, when you said that once inflation and therefore your market normalizes and the works of this investment for the CRM are behind and therefore your cost income ratio (inaudible), you can go back to an ROE more in the mid-20s.

I was trying to get a better sense of the timing for that. Because my sense is that it would not be only that. It would also require a normalization of the ROE, that you feel more comfortable taking risk and running the Bank with higher leverage and so on.

So is this something that may take several quarters to play out? We may see this as early as 2013, or you think it may take longer than that? I know it is difficult because it has many moving pieces and a lot of the external environment that you don't control. But can you give us some sense at least of when and how this would play out timing-wise?

It is a very good question, and unfortunately, I don't have a very good answer. It's simply that today, although we see positive news coming from the Euro Zone, still the agreement is difficult to implement. It will take some time. And that is why we are -- if you ask me today, we are very confident that all the pieces are moving in the right direction within Europe.

But if you give us that because we think that we will have volatility for many years, we internally are in a more optimistic mood. Because the Chilean economy has fully decoupled, something that in 2008, it didn't happen fully in the economy in that period, decreased 2%. Inflation was negative. Today, we are seeing a completely different environment. The economy probably is growing close to 5.3%, 5.4% in this first half, which is very high by historical standards. And we see a job market that is very close to full employment.

So we think that the uncertainties will remain, but we are more bullish than the last half, last year and the early, at the beginning of this quarter.

So how soon? It will be a combination of more robust growth and the implementation of these transformation projects and the new tools we are implementing, because they will tackle efficiency issues and productivity issues, and growth will provide the top-line growth. Today, as I mentioned before, the commercial area's net income is growing at two digits. It is simply that we have the drag of short-term inflation being too low. But once inflation normalizes to 2.5%, 3% or something like that, we think we can achieve it.

It is uncertain, because we depend on more clarity about the external environment and also the pattern of inflation. But the commercial areas are doing a good job, and we hope to see much better growth in 3Q and 4Q, and hopefully also more -- much more diversified, including the small and medium-sized companies with the more robust growth and the middle income individuals, not only the upper end of the consumer (inaudible).

Thank you, Raimundo.

[Arrico Tre].

Okay, thank you for taking my questions. In fact, I have three questions. The first one is if you can comment on the potential modification in the corporate tax rate, and if that would affect your results this year.

The second question is regarding the NIM. As far as I know, you would benefit from higher inflation or a lower Central Bank rate. What is your course here if you expect there is more feasible a reduction in the Central Bank rate or a cut in inflation for the rest of the year?

And finally, a follow-up question on credit quality. According to what you said, you expect some stabilization in the cost of credit going forward. But going to one of your slides -- I think it is number nine -- the current cost of credit is 1.7% and the normalized level would be around 2%. So my question is if you are expecting an increasing cost of credit going forward or not. Thank you.

Okay. In terms of the corporate tax, the corporate tax, the intention of the government is to maintain it at 20%, which is, from the Bank's standpoint, kind of neutral. And from an investor's standpoint is relatively neutral, because the tax structure in Chile makes that whenever the Bank pays a dividend, that higher tax is used as a credit for the investor. So for example, somebody that buys shares in the Bank, the total --especially a foreigner -- the total tax burden doesn't change. It's simply that you receive a high credit from the Bank, which is paying a high statutory rate, and a lower out-of-pocket tax -- retained tax. So it should be neutral.

For the bank, the actual tax burden in Chile is relatively small, and as that allows to have a more stable kind of social conditions is good for the Bank at the end of the day as well. Last year, we saw some sort of social unrest, which this year has been nonexistent, and as you see the economy has benefited from that. So there is a trade-off here, but for the normal activities of the Bank, it is not very damaging.

In terms of inventory margins --

(multiple speakers) Congress today, the bill?

Yes, but this is -- there is a very heated debate and there is not too much clarity of what to expect. The government probably is trying to have more agreed terms, and that is why we think the outlook is uncertain and probably the corporate tax will be maintained at 20%.

The other components of the tax bills are the ones that are under review with the opposition parties. So it's very likely that we will have 20% going forward tax rate, and the rest are things that affect mostly individuals more than companies.

Okay, thank you.

Concerning the net interest margin, yes, we expect that given the relatively low inflation that we are seeing, eventually the Central Bank will slash rates, and that tends to be supported. But however again, these short-term movements between inflation and rates that usually move line in line, for our calculations of profitability we tend not to consider it, because they don't create a recurring source of profitability.

Usually when you have higher inflation, you have higher rates and you have kind of a hedge, because higher inflation is beneficial for our net interest margin, but rates are detrimental, because we have -- liabilities tend to reprice faster. And the opposite, what we are seeing today, is that when you have low inflation for markets, but at the same time usually rates go down and have -- which is beneficial.

At the end, the sources of growth and the source of value that we have are related to clients. And that is why our margins, the ones that we look most, are the margins generated with clients in the commercial areas. So there are things make sometimes short-term noises, as we saw in second Q, but we don't -- we try to manage that situation.

So again, if rates start coming down, it will be beneficial to margins. But our concern is what margins are we getting with clients, and that is why there is a combination of the prices we charge times the growth that we can achieve, which we are expecting to be accelerating and moving more in line with the growth of the rest of the margin.

In terms of credit quality, we think that today sits 1.7% in second Q because of the recalibration of this consumer model for the low end of the consumer market, we will have a blip in 3Q. And that is also a figure that is better to take as a moving average, because sometimes -- for example, last year, the big driver of our abnormally high profitability that we saw in the first half, record high levels of profitability, was because, as you see in that chart, the level of provision was abnormally low. That is why it is better to follow the kind of moving average and you can achieve net interest margin of 5%, 5.1%. And a cost of credit of 1.7%, 1.8%, we think will be very close to achieving ROEs in the mid-20s.

[Nicolas Guildo.]

Thank you for the conference call. My question is on something I am not sure I got correct. I think I heard you say that you expect softer activity in the second half of the year. But at the same time, you said that you are expecting stronger loan growth in the second half of the year. So if I'm right and you are expecting softer activity, how could you please reconcile those two views?

It is simply kind of the different growth patterns that the system (inaudible) had followed in the last 12 months. The system today is growing at around 16%, 17% on nominal terms, and we expect it to be decelerating to something close to 12%, 13% by the end of the year, in line of lower economic activity, et cetera.

Contrary to that, we (inaudible) now that we are in a more confident mood have been accelerating our growth level, and that is why we expect to be growing by the end of the year, on a year-to-year basis at a very similar level than the rest. And that is why -- it's simply that we were dragging the market because we were more prudent and we were putting -- (inaudible) the brake, as we have discussed in the previous call.

Today, we are more following a more active growth pattern. That is why we think we will be catching up the year-on-year growth of the market by the end of the year, and that the market at the same time will maintain the deceleration that we have seen in the last five or six months.

Thank you very much. Something I could not hear okay was the reason behind the change in the tightening in the provision model on the consumer segment. Would you please briefly sum it up for me? And that is my last question. Thank you.

Yes, what happened is we changed that model in the third Q of 2010. And in the meantime came the La Polar case and came all these settled new regulations and new changes. Some of them, as we talked before, should be beneficial; some will be detrimental. And the net effect of all these changes is relatively uncertain.

In order to have a safe position, we have tightened some screws of the model to be recognizing the reality that 24 months ago was not existent. So this is something not only we enter kind of the normal cycle adjustment you need to do in any bank to have a safe operation. Remember that banks need to follow three basic indicators -- growth, profitability and risk. That is why sometimes you need to do these adjustments. And again, it worked -- we proved (inaudible) that provisions have already been taken. And remember that all the changes we have been doing in our models, including mortgages, SMEs, et cetera, the idea is to take the provision upfront. What we are doing in 3Q is basically to set more provisions in front in anticipation of a softer low end of the consumer market in the next 18, 24 months.

If the new rules and the new laws and the new regulations are enacted sooner, well, we can easily revert that kind of parameters.

And 1.7%, 1.9% of loan-loss expense to total loans should be achieved towards the end of the year, without considering this adjustment, if that is right.

Yes, it is difficult to know because we will see a blip in the third Q, and given that the underlying asset quality indicators have been improving, I'm not sure what it will be exactly compensating. That is why we should be moving between the range of 1.7%, 1.9%, probably higher in 3Q and more closer to 1.7%, 1.8% in 4Q.

Okay. Thank you very much.

Fabio Zagatti.

Hi. Good morning, gentlemen. On asset quality, it has been already four quarters in a row that Santander Chile has been working on its credit risk models for consumer loans. So may I ask you if you could please elaborate more on the reasons for this overhauling process to have less -- maybe longer than what you had previously expected?

And assuming that the Bank's credit recognition policies are now arguably stricter, how does it reconcile with your big growth expectations for consumer credit going forward? And then I'll have a second question. Thank you.

It is simply that the medium-term vision of the Bank is fairly supported. We think that Chile is in the process of generating growth of 4.5%, 5%. We have [three wins] coming from commodity -- high commodity price, et cetera. So it is an environment where we expect the middle class to thrive, and that is why we need to adjust.

If you see the structure of the market today, you see that a majority of activity is done with the upper 15%, 20% of the working population and the top 3000 companies. So it is a market that is very concentrated on the top. And that is why we think that with stable growth, the rule of the law and all the kind of institutional changes that this government and the previous government have has been trying to do, we will see good, solid growth in the middle market, both at the corporate side and at the retail side.

And accordingly, we needed to adjust our models to realize that we are entering a different segment with different needs and different things to be taken into consideration. So the changes are big time. These are statistical models that are very complex to develop. You need a lot of data, et cetera. Typical events use models that they wait until the clients face difficulties to start taking provisions. What we are trying to do is to take the provision upfront, according to the classes that we define the client to belong in. That is more complex to do, and that is why it takes some time.

But at the same time, we think it will allow the Bank to be in a better position to start taking segments that are different, not necessarily worse, but different for what you have been used. And that is why with that new model plus the changes we are doing with this CRM and the transformation of the office, especially the midsize segment that we are pushing forward, we think the Bank will be in a good position to accomplish stable growth and relatively high profitability in the next five years.

So this has nothing to do with the short-term concerns about the Euro Zone, et cetera, but it was something that the Bank was already planning to do in any case. So it is simply -- and today, it is simply a matter of executing what we have been trying to bring. And we expect that the market will be supportive and that is why it will be a neat fit between having better tools for tackling different segments; at the same time, doing it in a more rigorous way. We hope to do it in a more rigorous way to accomplish higher-than-average returns.

Thanks, Raimundo. And my second question is on the regulatory risks. May I ask you to please provide us with a more in-detail update on each one of the several regulatory issues currently being discussed in Congress and with regulators, such as -- I know the cap rate positive rule, unregulated credit card operators going below the Superintendencia's umbrella, banks being allowed in [two-payer] loans. I mean, this is just you name it feel.

I wonder if you could give us some sort of timeline for each one of these proposals should be implemented. I know that you mentioned one or two years, but would you expect all of these to be eventually enacted, and how would you expect (inaudible) bank's (inaudible) conditions? Thank you.

As I pointed before, it is very difficult to predict the timings in Congress, because sometimes we see very heated debates. These are issues that affect a large proportion of the population. That is why it is something that must be done carefully.

So I would say the government is clear that they would like to reconcile consumer protection issues with -- at the same time with fueling a robust growth of the midsize market and the low end of the consumer market. But of course, those two kind of basic claims clash, because the more you protect the ones that are currently used in the formal credit market, well, the more difficult it is for banks and for any credit supplier to address the needs of the customers, because you need to pay higher taxes -- higher prices in terms of more provisions and more consumer concerns, et cetera.

So in terms of timing, it is difficult to know, because, for example, in terms of caps, there is a new kind of agreed terms within the government and Congress that is less strict than the first field, but it still would have an impact in terms of closing the market to many newcomers. And the Central Bank has been very clear that this is -- that there would be a negative of these projects, and that is why it has been taken care of.

End of the story, I would say that probably in the next 18 months we will see the completion of this cycle, but in the meantime, we will see uncertainty. And that is why we prefer to play it safe and to tighten a little bit the belts of our credit models for the low end of the consumer market.

So in general, as a wrapup, would you expect the new regulation to be harmful of the banks or should be -- there will be negatives that will be offset by some sort of positives in terms of leveling the competitive environment between banks and retailers?

I would say that net-net, if you take them all combined and assuming that all are passing Congress at the same time, it will be neutral to slightly positive for banks. Because today, retailers have done a very good job historically and other non-banks also. But of course, they were playing with a completely different set of regulations, especially in terms of provisioning, in terms of charge-offs, et cetera. And of course in reality, some retailers are very different. But in average, we think that they were playing under softer rules in terms of capitalization and provisions, things like that.

So from now on, it is very likely that everybody will be playing the same game. We at Santander are very good at competing with any market player, but it was difficult to compete with somebody whose provisioning policies or pricing policies were completely different.

The other thing is that having a fully-integrated positive and negative [trade] euro also will be beneficial for long-term players as we are. Because again, the worst thing you can do is to overleverage a client, because at the end, he will be a short-term gain, but you will have difficulties along the way. So that would be beneficial for customers and beneficial for suppliers.

And then the other is the possibility of have direct debit in your salary, which reduces a lot of the risk of the operation. That is something that kind of credit unions can do today -- you have direct debit in your salary, and therefore your pocket salary is lower, because you -- first you pay their lender money and then you can get the extra cash for your general expenses. That is something that will be applicable to any credit supply, which is good news.

And the (inaudible) come from the caps, but the caps, the final draft -- or the draft that is now under discussion is increasingly making more sense, because it is more flexible, et cetera. But at the end, the industry has been very outspoken that it would be better to leave the market forces to determine the prices. If you try to set them by decree, you will produce frictions and making the system more rigid. And you need a more flexible (inaudible).

In any case, what we are seeing today in terms of the caps we think are much better than the initial draft that were under discussion.

That's excellent. Raimundo, thank you.

We have no further questions at this time. Do you have any concluding remarks?

No. Thank you all very much for taking the time to participate in today's call. We look forward to speaking to you again soon. Have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.