Banco Santander Chile (BSAC) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q3 2012 Banco Santander Chile earnings conference call. My name is Sheney and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today, Mr. Raimundo Monge, Corporate Director of Strategic Planning. Please proceed, sir.

Thank you very much and good morning to all of you ladies and gentlemen. Welcome to Banco Santander Chile's third quarter 2012 results conference call. My name is Raimundo Monge and I'm joined today by Robert Moreno, Manager of Investor Relations.

Thank you for attending today's conference call in which we will discuss our performance in 3Q '12. For all of you living or working in the eastern part of the US, we hope things are well and normality will come back soon.

Following a brief webcast presentation, we will be happy to answer your questions. Our 3Q 2012 results are well-detailed in our earnings report published yesterday, and many of the analysts on today's call have already published a report about them.

So we will focus our time mainly on two things, first in explaining the trends and challenges currently being faced by the Chilean banking system and secondly on how Santander Chile is facing them in order to strengthen its position within the market and the sustainability of the performance going forward.

Unlike the deflationary environment which we expect will normalize quickly, there are other issues that are going to have a longer-lasting impact on the system's profitability and growth potential. These new market conditions have been at the center of some key changes Banco Santander Chile has been going through in the last 12 months.

The effect of this changing environment are reflected not only in our results, but also in the year-to-date performance of the whole banking industry. The Superintendency of Banks published today the results for September which are not included in the presentation that you are seeing, but that don't change the general trends we'll discuss.

As you see, with the figures as of August, the system net income fell 17.2% year-on-year, mainly following a contraction in margins and an increase in provision expenses and operating expenses as well. Net interest margins have shrunk 39 basis points as a consequence of low inflation especially during the third quarter, as well as high competition from other banks, retailers, and non-traditional lenders as well.

Provision expenses increased 23.4% due to the rise in delinquency levels after La Polar case and the DICOM law which was enacted in February contracted within medium, small-income individuals, and SMEs.

Operating expenses have risen 9.1% as the banking industry has continued to accommodate the high regulation and expansion plan. In the case of Banco Santander Chile, performance has been in-line with the system and weaker than in 2011, especially in the third quarter.

Net income for the first nine months dropped 17.5% as a result of high provision expense and operating expenses and lower inflation. Net interest margin showed a slight increase of 4 basis points on a year-on-year basis, as the Bank has concentrated in maintaining spreads in light of high delinquency levels.

Net provision expense is up 41% year-on-year, as the tightening in the Bank's risk policies both admission and recovery enacted during the year has translated into higher charge-offs. Also during the third Q of 2012, the Bank proactively strengthened its consumer provisioning models to account for the change in the overall risk scenario following the La Polar case and the DICOM law.

This implied recognizing a one-off in additional provisions of CLP24,753 million during the quarter. Operating expenses increased 8.1% year-on-year as the Bank has continued to invest in the development of its new CRM improving -- improvements in alternative distribution channels and overall client service quality.

During the year, volumes have been growing roughly in-line with the rest of the industry. Between December 2011 and August 2012, total deposits including demand and time deposit are at 13.6% on an analysis basis compared to 9.6% of the competition which is the system-led Banco Santander.

This implies that the Bank has gained 36 basis points in market-sharing total deposits. This has been a consequence of the Bank's focus on increasing its core deposit base. This has also allowed the Bank to continue improving its funding mix and contributing to maintaining net interest margin.

On the asset side, total loans increased 10.5% on an annualized basis during the first eight months, while the competition is up 12.4%. Even though the Bank has seen a loss of 19 basis point in its market share for loans, our net interest income is growing at a more rapid pace given our strong focus on client spreads.

The Bank has also been keen on not following aggressive pricing strategies in the residential mortgage market that some of our competitors have been following.

Going to the core of the presentation, the challenge the banking industry has faced in the last two to three years, we think that they include changes in at least four main area. First of all, as a consequence of the international financial crisis of 2008-2009, and most recently the secondary effect of the La Polar case in Chile, banking supervision has strengthened and is in the course of being extended towards non-bank financial players.

New regulation has also been enacted over the last two years which has affected among other things fee income growth and provisions. Next year mortgage-related insurance fees will also be affected.

Regulation to reduce maximum interest rate will also have an impact in interest income growth. We are also expecting a pay (inaudible) loan market to be liberalized and this will give us access to an attractive market of which we have no market share today.

The Prochile Trade Bureau should also extend making the banking system safer. Additional capital demands will also be applicable as Chile eventually adapts Basel III guidelines which will -- should be gradually introduced over the next few years.

Secondly, consumer attitudes have evolved as the country continues to grow and develop. Clients are now much more informed and sophisticated and are demanding better service quality standards.

Thirdly, technology is playing a fundamental role in order for banks to continue growing and attracting more clients, as well as improving overall client satisfaction. High transaction processing capabilities together with alternative distribution channels available 24/7 for prevention and private financial data protection are now minimum standards.

Finally, competition has increased both from within the traditional banking industry as well as from non-traditional players seeking to enter the financial business by issuing credit cards, or alternative point of service networks.

Despite this more difficult banking landscape, Chile has a sound macroeconomic outlook with GDP expected to continue growing at around 4% to 4.5% levels over the next year. Growth is a consequence of strong private demand on the back of strong LIBOR market that currently shows near-full employment level.

On top of all, inflation expectations continue to be back within the Central Bank's target range with a 2.1% expected figure for 2012 and 3% expected figure for 2013.

Loan demand and non-lending product use therefore should remain healthy. All this combined result in new challenges for the industry, but at the same time open big opportunities for banks as long as they react in a decisive way and transport the way -- transform the way they operate and interact with customers.

And this is precisely what Santander Chile has been doing in the last 12 to 18 months as we will see in a minute. As we have stated in previous calls, our strategy has been evolving to cope with this new environment.

Simply stated, we remain committed to deepening our focus on retail banking, and strengthening client relationship with a steady growth of our balance sheet, solid levels of capital, and high liquidity.

We expect to expand our business with improved efficiencies, improved productivity gains, and managing risk conservatively. These three strategic points are being attacked through the Bank's transformation plan. This is the largest overhaul and reorganization of the Bank's retail banking activities for almost a decade. We believe this initiative should place us ahead of the pack when dealing with the changes that are coming.

At the centre of the transformation project is the installation of the new CRM. Today, Santander Chile has some weaknesses in retail banking. Among them, we are a many-channel Bank, which means that we have a leading distribution network where the different channels are poorly integrated.

We also have branches that are cluttered with non-value added tasks. We have client, bank relations are still to center around the account executive availability. And finally, we have too much centralized processing that can be removed from the branches.

With the transformation project, we aim to reposition Santander Chile into a multi-channel banking, which all channels are smartly interconnected, empowering client. A banking which at the centre of the client relations is not the account executive, but any channel of the bank 24/7 a week, a bank with intelligent branches that will allow branch employees to focus more time on value-added interaction, and finally, front-ended automatic processing that will eliminate significantly back-office centralized processing.

We have been working for at least one year in the implementation of these changes and we are beginning to see some encouraging improvements in various indicators.

For example, the amount of pre-approved sales has more than doubled since the beginning of this year. Today more than 50% of our sales are pre-approved, instead of one-on-one sales generated through cold calls or client visiting by themselves the branches.

This means that we are reaching the clients that are credit-scoring and admission systems have chosen. This implies more stable prices and better risk.

Quality of service has also steadily been improving at our branches, as our branches became less burdened with administrative tasks and more time is dedicated to our clients. According to the latest information published by the Superintendency of Banks, the amount of complaint received by our regulator per 10,000 debtors has fallen from 4.2 to 3.7 and now we are the Bank with the least complaints among our peers.

The amount of transactions done outside the traditional branch is also improving. Today almost 72% of our transactions are done outside the branch.

Finally, the time it takes us to approve and disburse a consumer loan has fallen from 124 hours to 95 hours. Speed is one of the key competitive drivers that the Bank is developing to maintain our leadership in retail business. These are just a few example of what we're aiming for.

A similar process is being carried out with our credit-risk model. While we recognized that this process has been longer than expected, we believe that with all the recent events that have affected the consumer loan market in Chile, it would be imprudent not to strengthen our provisioning models.

The changes in our scoring models are not just limited to (inaudible) more traditions, but involve a deeper transformation. For example, we have lowered the debt servicing costs and loan-to-value that we are willing to work with.

We have radically changed our collection models and results are shown quickly. For these reasons, we still maintain our outlook for the cost of credit hovering around 1.8%, up to 2% of loans for the whole 2013.

Our coverage levels are also comfortable. Those loans that are unsecured such as consumer loans have ample loan-loss allowances coverage, and secured loans are well covered with a combination of both provisions and collateral.

All these transformation process is expected to reinforce the quality of our franchise. Other pillars of these have been maintaining a robust capital base.

We have not issued shares in 10 years and have been gradually preparing the Bank for any changes in capital requirement in order not to surprise the market with large diluted transactions.

We have capital to grow and absorb most impact related to Basel III and any unforeseen changes can be absorbed by tinkering on our payout ratio if necessary.

We have also been working heavily on improving our funding mix. Two years ago, we were one of the banks with the highest funding cost among peers. Since then we shifted our focus not just on loan growth, but funding, and today we have a funding cost below our main competitors.

These has been achieved by shifting the deposit mix away from institutional investors more into individuals and corporate clients.

Our loans-over-deposit ratio, excluding mortgages, which are not funded with short-term deposit has been systematically below 100% and core deposit have grown 12% in the last 12 months and today represent 76% of our total deposits.

Finally, a review; banks around the world had been downgraded and today we are together with other Chilean banks among the best-rated entities in the banking world.

In summary, the Chilean economy is in good health which should lead to continuous volume growth, but at the same time we are confronting a change in retail banking environment.

Our results and volume so far this year has moved in-line with the systems. Our 3Q results, which were not positive, were affected by deflation and extraordinary provisions. Despite this, we believe we are well-advanced in a major transformation of our retail banking activities that should allow us to confront the challenges the banking industry will be facing next year with confidence.

(inaudible) results achieved are as we saw fairly encouraging.

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

(Operator Instructions) Daniel Abut.

Daniel Abut from Citi. Couple of questions; one, just to make sure that I understood one of your statements. I think you said that when it comes to Basel III adoption you feel that you are well-capitalized and equity offering would not be needed.

And it's a relevant question, because as you are aware, some of your peers have been announcing initiatives to increase equity. And I think you said that you don't foresee that you will need to do an equity offering to be in compliance and if anything you have your dividend payout ratio to play with that you will be prepared to lower if you need it in the future.

I want to make sure I understood that correctly. That's question number one. And question number two, I think you explained very well that what has affected the profitability of the system as a whole and Santander Chile included partly has to do with temporary factors such as inflation being too low and that would normalize, but others are more structural and permanent in nature.

So when and where do you think your ROE will eventually rebound, given what you know of the environment and the measures that you have been taking? It seems to me that it shouldn't be as low as this year, but you are probably not going to go back to the number that you used to have in the past precisely because of a more permanent and structural changes.

So what is the more realistic target for your ROE to come back to when things normalize particularly on the inflation front?

Okay. Well, thank you for your question and the two tend to relate. And first of all in terms of Basel III, as you know Basel III is a recommendation by the Basel Committee to the local regulators, and up to now the Superintendency has not been very -- has given hints of which type of Basel III implementation and guidelines we'll be using, but according to the internal -- (inaudible) follow the Spanish Basel III criteria and you use it with the -- with our figures, we think we don't need any capital increase, but of course if the Chilean regulator devices are more demanding, we will have to lower the dividend eventually.

But remember that in Chile, core capital ratios, which we have today close to 10.6% is a 100% tangible common equity. That means that our leverage in both the --- and the second thing is that so the leverage is close to 10% and second thing is that the weight that it's applying are very, very small.

And in Chile we don't have relevant off balance sheet activity. So that's why we believe that the non-capital increases should be expected, except in a very demanding Basel III implementation, yes.

And the second part is, what are our expectation in terms of ROE going forward. And again, we think that -- given that we will have to maintain higher core capital ratios going forward, and therefore leveraging less than it was the case, that will have an impact in ROE and that the rest of the changes -- as we mentioned in the previous call we see that there are negative and positive regulation.

The problem is that they won't be enacted at the same time. We still think that if all the regulations are under discussion, will be applicable in the same moment, the effect will be relatively small if not relatively -- slightly beneficial for banks vis-a-vis other players, because at the end you will have a level playing field which in theory should open a relatively large market that today was very difficult for banks given the regulatory burden to go for.

And secondly we will have better information about clients. Those are key ingredients you have in a sound retail banking activity. But the problem is that we will see bounces especially next year because some of the regulations will be negative for clients and accordingly negative for banks and non-banks as well, followed by good news et cetera.

So -- but to address your point, the fact that we will be more leveraged and the fact that this regulation will be impacting our short-term performance make us believe that 2013, the profitability will be much lower than the historical average. And then the permanent level, difficult to know, but probably not 25%, closer to 21%, 22% given that we will be less geared than what we use in this leverage, our balance sheet, yes.

And then once things normalize, we can go to a more -- increase our leverage and go back to high levels, but probably not in the year 2013 as we see it today.

Very clear. Thank you Raimundo.

Marcello Telles.

I have two questions, the first one on asset quality and provisions. If we exclude the extraordinary provisions in the quarter, you would still have about provisions for average loan of around 2.1%. And I remember I think in the previous call you indicated that about -- we should see roughly 1.8% kind of the recurring level going forward. So what is your expectation regarding your provisions for next year? Do you think this 1.8% still stands?

And my second question, I think kind of related to that same question. Do you think this -- it seemed that this process of calibrating provisions and all decision on the consumer side, it seems that it's taking longer than expected.

So my question to you is at what point in the cycle do you think we are regarding the calibration of provisions this, the duration in asset quality? Do you think we're in the middle of cycle approach at the end of that? If you could elaborate on that, I would appreciate. Thank you.

Okay. Well, in terms of our cost of credit or provisions over loan level, we still maintain that at an average in 2013 we should be moving between 1.8%, 2%. September was kind of a noisy end of the quarter, because we have a very long national holiday that took like one week people out of -- and that results in a short-term deterioration because you kind of reach those clients after almost 15 days out of being reachable.

That process to a large extent has been normalized in October, yes. So we are not concerned about delinquencies in the consumer side. All the processes that we have been doing -- we believe -- make us believe that in the next two or three quarters we'll have probably not a reduction in the absolute level of provisions, but we don't foresee a further increase in provisioning level. And in the corporate side, we have especially the mid-sized companies and the smaller middle-sized companies we have seen some deterioration, and there the explanation is two-fold.

First on the SMEs, to a large extent the bulk of our lending is backed by a government guarantees and therefore although you might have delinquency levels increasing, we don't foresee losses because we have the additional backing of the state guarantee. And so you have non-performing loans where you don't expect to lose money.

And then in the more mid-sized company, there are different realities of course. And in a general favorable picture, there are many non-commodity exporter that has been facing some pressure because there the peso has been appreciating and the local cost has been rising given that the job market is really tight and they had also been complying with regulations.

So the combination is that the operating margins has been under pressure and accordingly we have taken some further steps to strengthen our criteria there on a company-by-company basis. The end of the story is that we think that there's no fundamental concern because the macro situation is solid and secondly we don't have concerns about our balance sheet because it's probably covered once you include provisions and collateral as we state in the call.

So end of the story, we at this moment of course can change, but given the central scenario that we are using, we don't have fundamentals concern about asset quality, but we don't expect provisions going drastically down next year. So really we will maintain and not increase the level of provision and they will be going down in time.

The only -- the other relevant change is as we mentioned in the call, we are finishing the number of initiatives that have -- make us lose momentum, no doubt, in terms of commercial aggressiveness because you are doing a lot of changes simultaneously at the branch level.

I would expect growth to resume and that of course will be diluting also our asset quality indicators given that we have been growing not at full throttle especially in the 3rd Q. Once you resume growth as we expect, the asset quality indicators tend to improve because the new business originated is healthier than the older portfolio.

Thanks for answers. Just -- I have one follow-up question, but this one more related to margin performance. In this quarter, it seems that you were able to improve your funding mix quite a bit and that led you to have like a lower cost of funding, which seems to have offset even leaving -- of course the inflation discussion aside.

So adjusted for deflation impact that might have compensated for say lower margins required there because of mix effect or you going towards -- or moving towards like a low-risk segments within each type of product; at what stage do you think we are in terms of improvement in funding mix?

Do you think we -- is there any sort of room for you to improve your cost of funding? And kind of tied to that, I mean, do you think there could be some pressure on your margin arising from a change in mix or maybe a competitive pressure? Thank you.

Okay. Well, we think that there is room of course in the sense that the fact that the sovereign risk of Chile has been steadily going down. Last week there was an issue by the government, by the state actually, that was a price that -- record low rate. And that of course helps and serves as the benchmark for international bond issues.

And therefore we think that today Chile is in a relatively small cluster of nations that have good macro foundations and therefore the cost of borrowing abroad given our ratings and given the fact that Chile is perceived as a sound economy in a relatively shaky global environment, will facilitate borrowing abroad at convenient terms.

And then, locally, we still have access to pools of savings which are -- today the structure of deposits in our case is that it's still relatively concentrated in institutional money, and at the same time relatively large [deposit-takers], yes, and we have been putting incentives as we state in our press release to have more retail-type of deposits, deposits raised at the branch level which are much cheaper and also much stable.

And we think that our big opportunity in the next two-three years come from that part, because we have market shares in the lending sides close 20%, a little bit higher in consumer lending, and mortgage is a little bit lower in corporate, but on the funding side we still have the market sharing deposits of around 17%, in terms of mutual funds of 17% and therefore we think we have room to naturally grow on that segment which should -- beneficial for our margin as well.

Thank you very much. That's very clear.

Jose Barria.

Two questions. One is just a follow-up on the margins. Given the readings that we've already seen for US inflation in September and October and given some of the funding release that you're getting from the funding side, is it possible that we can see your NIM already rebounding in the fourth quarter? Do you expect that to happen? If you can comment on that.

And the second thing is with regards to your loan growth. You talked about the difficulties in the system and you talked about your posture this year, and this has led to a very tepid loan growth of around 5% year-on-year for you, whereas the system is growing slightly faster than that.

Can you give us some indication as to what your expectation is for loan growth in 2013, if we should continue to see you growing at a PEG rate below the system or do you think that you can start catching up given your change in posture? Thank you.

Okay. Well, in terms of margin, no doubt that with what we know about inflation in the fourth Q that will be fairly supportive to our margin. However, again, as well as you shouldn't be -- or we shouldn't be depressed because of the margins we saw in 3Q due to the deflation.

We should be kind of very proud because at the end what creates value for our shareholders is client activity. And that's why these kind of inflation mismatches has had impact in a quarter-by-quarter basis, but tend to neutralize on a year-year basis.

You adapt your asset and liability policies thinking in the year-on-year inflation. And that's why we think that inflation will be for the whole 2013 a support in our margin because this year we ended our inflation with around 2%, next year probably close to 3%.

That will be supported, but of course you shouldn't count -- I mean you shouldn't be celebrating the fourth Q quarter because it's based on an abnormally high inflation, as you shouldn't be depressed by 3Q figures because it comes on a negative inflation that is very uncommon. So -- but at the end of the story we think that inflation next year for the whole year will be definitely be supportive of our margin.

In terms of what to expect in terms of loan growth, we have been steadily catching up with the market despite the fact that we have on purpose give up lending to a large extent in the mortgage market because the spreads are too thin, yes, and working capital with the uncertainty about Basel III implementation for 20 years. At spreads below 60 basis points we think it's at least not worthwhile for our shareholders.

And secondly we have been very conservative in the consumer-lending in the low end and to some extent the middle market because of the uncertainties coming from regulations. So today as we stated in the conference call we are growing slightly below -- on an annualized basis on the start of the year, 10% in our case, 12% on annualized basis for the rest of the system.

So we have been to some extent closing the gap because we had been, again, on a moving average rate accelerating our growth despite we are not very active in the low end of the consumer market and the mortgage, and the system has been slowing down to some extent.

We think that next year we should be growing roughly in-line with the market, and that the market should be moving between 10% and 12%. We don't see forces to decelerate the system any further, and catalyst for growth will be related to some extent with relations, which is uncertain at this time.

Okay, very clear. Actually on that point with regards to the regulatory environment, can you tell us about the developments on the setting of a new data (inaudible) calculations, what those are, and when do you expect that to start impacting your results?

Our best guess -- but actually it's only a guess is that these will be enacted early 2013 and applicable between April-May, so probably we'll have some marginal impact in second Q and then the full impact on 3Q going on.

As the way -- it's something that has not been fully finished discussion is that you will have a 6% -- close to 6% growth in -- tenuously between April-May followed by a second drop of 6% more or less six months from then because the government I think in -- it makes sense, they will try to evaluate if they see that the degree of banking penetration or the degree of lending to the low end of the consumer market and the smaller companies, if it comes to too low they will probably -- will try to reverse.

They don't want to squeeze that market, but unfortunately if you bring rates too low, you will have an impact and that is the thing that they are trying to kind of take into consideration. So -- but it's very likely that in 2Q, either at the end or mid-2Q we will see the first impact of that.

Nicolas Chialva.

Just a kind of a follow-on question on mutual funds, and your strategy to increasing core deposits, how are you expecting to achieve that? I mean, if we look for example at loan growth we see that except for SMEs, loan growth is being quite low, even though in some segment in which you are focusing now for individuals; therefore it's kind of cumbersome for me to come out with a clear strategy of how are you going to address an increase in mutual funds or core deposits if you are not increasing that much funding to this segment?

No, what happened is that our branches are very sensible to -- we have accounted and therefore we have some -- a big chunk of their compensation is linked to whatever you are hinting then to sell, yes. So simply changing the way both mutual funds and deposits account in this kind of performance-incentive compensation.

And secondly that as I mentioned before we are finishing a number of things, among them changes in the way the implementation of the CRM is changing a lot the way the day-to-day activities of the branches. And then of course you need to retrain et cetera.

That explains to some extent why our growth has been a little bit lower than the rest of the market, yes. And that process we think is not fully finished, but is very much advanced and therefore we should see next time consumer-retraining and learning the new tools and actually using them. And that's why the early symptoms are encouraging, but of course you will take time to see the full benefits of these massive investment and changes that we've been doing.

So -- but at the end of the day the sales force is very disciplined and they will be selling whatever you are intending to sell. And that's why it's simply a matter of changing the incentives away from, for example lending in the low end of the consumer market or lending mortgages and much more into deposits, mutual funds, selling shares and things like that which contributed to your margins and to also to your fee income.

Actually the other thing is we just launched a large campaign to increase the number of clients because up to now we have been counting on the clients we know and as you mentioned -- excuse me, sorry? And what we are trying now is to increase the number of clients, and more than client -- increase the number, the amount of business we do with the current client-base. So we expect that also to fuel a growth going forward.

Thank you. Raimundo, just a follow-on question. You just mentioned that you are trying tackle a new client, but you are not trying to tackle unbanked (inaudible) segments of the population.

So I believe that you are trying to take away some clients from competitors even though not through mortgage lending. So again I'm wondering about your strategy to tackle these new clients and the campaign you just talked about?

Yes. Well, that's basically linked to two things that we are trying to do over time. Number one is quality of service and that's why all the efforts we've been doing is to improve our service and we have some partial indications that that is starting to happen.

And secondly is speed. And that's why all the processing capabilities and all the integration that the CRM is facilitating will we expect to allow us to be quicker and address the needs of the client.

Remember that up to now banks -- and Santander has been no exception -- have been to some extent waiting till clients show up and waiting until the client express that they need something. Today we think that with tools, both in the credit scoring and the CRM, we are in a position to go, to look for the clients who want to be operating with other players or clients that are not operating (inaudible).

Today, we have a number of -- I think we have a market share of clients of around 20%, something we have room for improving.

Okay. Thank you very much Raimundo.

Okay.

Fabio Zagatti.

I have two questions. First one is just to make sure we all understand this clearly, why are you guiding for credit cost to be between 1.8% and 2% in 2013, when we would expect asset quality issues to have been fully addressed? I'm just trying to understand why would credit cost still remain high after five consecutive quarters of overhauling your credit risk models which would have implied in that your (inaudible) has turned stricter? And then I'll have a second question. Thank you.

No, it's simply that at the end what we're seeing is that there has been a change in terms of the -- example, there was a law that eliminated a number of -- close to 2.5 million clients were out of the credit bureau and therefore we foresee uncertainty.

And the other thing -- uncertainty because we today -- although we expect better information at some moment of time today we have less information about clients than before. So that of course has an impact.

And the second thing is that we have changed our credit scoring models, but of course you have all the portfolio that will have a different profile and takes time to be fully visible. For example, in the consumer lending business, the duration of our loans is 20-something months, yes, and of course the impact of all the changes we have seen will have an impact and that's why in order to be conservative we think that the provision levels will be stable going forward for two or three quarters and the level of credit risk will be also relatively stable.

Remember that in order to -- this is not black or white. Our focus going forward will be again not only the upper-end of the market, but also we have to go into the lower-margin market which represent the larger amount of client. The segments are growing more [faster].

Simply that today those segments until we have more clarity about the regulation et cetera will be a little bit riskier and that's why we needed better tools to assess the risk.

But already given the changes we've seen in the market, there are clients that were approved under the old systems that will face the difficulties as some of them have been facing in the last 12 months. So it's simply -- of course, if things are going better it would be good news, but we prefer to play safe and that's why our pricing models and our provision models have been -- is something more conservative than not, and we think that is the way to proceed going forward.

Okay, Raimundo. In that sense, given that you just mentioned that the Bank should be exploring new frontiers in consumer segment, can you please share with us what makes you feel confident that the new credit risk models of Santander Chile are appropriately capturing the risks of these new segment where you want to gain more exposure to?

Well, basically is because of the following. These are the difficult loans that you need to feed them long-time series of data, yes. And secondly, so we have longer-time series with the clients that we know, including the ups and downs of at least one last cycle. If you have only models that take good years, of course, the forecast will be biased towards understanding the [true risks] you are assuming. So having longer time series is relevant. And the second is that apart from having longer time series, we have included other dimensions that make us believe you will have a more robust prediction.

For example, typically banks use behavior as one of the key elements. So if you are paying, implicitly you assume that you will be paying going forward. Secondly what we have been adding is extra layers of information to the fine clusters that are more thinly defined, so we include dimensions, demographic, whether for example, you are married or you are single, if you have kids or you don't have kids, et cetera, which also allows to discriminate.

And remember that the environment produces prices that have a certain cap and therefore you have to be very -- pricing very thinly because otherwise you don't grow if you are too good or you grow too risky and that's why it's a delicate equilibrium.

And the other dimension is -- are in terms of working conditions; how long have you been in your current employment? There are number of dimensions that if you back-tested and these are very statistical complex tools, allows you to have a better predictions that simply wait until the client face some difficulties and you set provisions.

So these are statistical process that are quite complex to develop, but once you have it, they are behavioral in -- they tend to learn on the past mistakes and the more data you have then the sounder the predictions are. And of course the behavior is part of the component, but it's not the sole component of your forecast.

Okay, I understand. So my last question is on the guidance for 2013. I understand that the Bank's budget for next year may still be under analysis, but may I ask you for more granularity on the main assumptions and earnings drivers behind your ROE expectation of 22% to 23% in 2013 if I understood this number correct? Thank you.

Okay. Well, actually our focus are lower than 22%, 23% -- probably closer to 21%, 22%, but anyway, and again the second caveat is that kind of --- it's not the firm forecast because as you correctly point we are in the process of budgeting. It's simply that we think that the level of profitability that we're seeing today are abnormally low and in the new environment, the levels of 25%, 26% that historically we had for some years is too high, yes, so something in between.

But the fact here is the following; we are expecting the economy to be growing between 4.4%, 4.5%, yes. That -- and with an inflation approaching 3% more or less. With that in mind, the system should be growing at around 10% to 12%.

In our case, keeping pace with that growth, we'll expand the net interest margin around in the upper single digit, approaching 10% or something like that.

And then in terms of fees, we don't see big increases except for the new clients that we'll be bringing and that's why we put in a lot of effort to start with hopefully a big increase in the client-base by the end of the year, early 2013, because at the end the medium-term growth of fees are linked to the medium-term growth of the number of clients, yes.

Then fees will be subdued except we're successful in terms of bringing new clients. And then cost also, we expect them to decelerate as we are concluding a number of initiatives that impacted our profitability. We expect the headcount to be relatively flattish and therefore cost going down from the current 8% to 5% or 6% or something like that.

And that at the end of the day will result in a bottom-line (inaudible), but again I don't want to be giving you a three-month line, because we're in the early stages of our budget. That's something of the ideas that we've been thinking about.

That's perfect, Raimundo. Thank you.

Saul Martinez.

This is Saul from JP Morgan. I just have a very broad question related to competition in the consumer finance business. You've obviously highlighted very clearly I think for a while now why you're -- why you've become more risk-averse in the lower and middle-income segment and fully realizing that your mix is very -- is different in terms of consumers and some of your peers in terms of income levels.

When I look at the system date -- and correct me if I'm wrong -- I think consumer loans are growing in double-digits. You're obviously growing much lower than that. My question is just more broadly how you see the competitive landscape in the consumer finance business now, if you can comment a little bit on lower income, middle-income, higher-come segments?

And whether some of your -- whether you feel that your competitors share your pretty cautious view of the industry landscape right now at the lower and middle-income levels of the population?

Okay. Well, we think that -- just two or three things. Number one is that the banks tend to be macro play, so the fact that we are operating in a strong economy is good news for banks and is good news for companies and for individuals as well.

However, given the changes that we've seen in regulation, and to some extent consumer behavior because in -- we have seen some hint about people outside the industry hinting that, well, it's not that bad (inaudible) because you are kind of victims, yes, which is very bad because in Chile the moral of clients has historically been very sound, yes, and people have been good players in there.

So this sense that debtors are abused because they receive a loan and there's no duty to pay them back, of course it produces noises in the marginal borrower. So that's why in our case we think that the upper end of the -- if you take the workforce we think that one-third of the workforce, around 3 million clients are sound and shouldn't have any problem increasing our penetration with them on the lending side, on the services, on the savings side et cetera.

Then from the -- and this is something that is not exactly true, but in between the 30% and the 50%, the upper rates between the 30% and 50% of the working population, our focus will be to have very selective lending, reducing the number, the exposure we want on each client, and putting a lot of effort on the savings part and in the transactionality of the client, having a debit card, having insurance as some form of savings et cetera, because this is the lower part of the middle-class that today is having ability to save and to invest and then -- and you're taking care of the future, yes.

And there we think there is a big opportunity on the service side and on the savings side, yes. And then the remaining 50% of the working population is feeling very difficult to get there because regulations and the risks are too high.

In the corporate side, we think it's more or less the same. We have the upper -- out of a universe of close to 700,000 companies, there are 20,000 that are very sound and well, and we want to extend our penetration both on the asset and the liability side. And then you have a bunch of a SMEs and mid-size companies where you want to increase, but more selectively, and more at the beginning, especially on the services and in the investment, because again these are companies that need to handle their cash et cetera.

So it's typically pattern of an economy that is doing fine, but where we have seen micro-reforms that are producing noise at the mid to low end of both the corporate side and the consumer side, and we expect that again, this uncertainty will last hopefully not more than 18 months or so. And when all of the reforms are enacted, we think that the scenario will be a slightly neutral or slightly positive to bank, yes, that we don't see a big mess or we don't see a dramatic change. But we don't see it as a big threat.

What are you seeing -- what are you competitors doing on the consumer side of the lower end of the market?

Well, they are different. Some of them are being fairly prudent and probably active in the way we have been doing wait -- in a kind of wait-and-see-attitude in the low end or the middle to low-end of the consumer market.

Others are trying to gain market share at the cost of spreads for example, the fact that the industry spreads are down 40 basis point, that is like 40 basis points out of 3-point-something. So it's a big dent in the margins of the -- to some extent show that -- them being some operators that have increased their capital base, and they are deploying that capital as well as the low profitability.

So -- but I would say the larger players are playing a rational game waiting until the dust settles of all these changes and try to do the banking. We don't have any concerns about the larger players.

Okay, that's helpful. Thank you, Raimundo.

[Carlos Macero].

I have one question really. It's broad much like Saul's. You mentioned regulation and payroll lending in Chile, and we know that in Mexico and Brazil, there has been a very strong level for growth in consumer lending for banks; could you please elaborate a little bit more on what could that be and exactly how Santander would go about in targeting that market and what impact that could have on your overall lending book? Thanks.

Yes. Well, that is a good opportunity with a good regulation because up to now there were some non-banks that have the ability to lend and collect the money back from the employer directly. So you receive your salary after the payment you have agreed with the bank.

So at the end of the day the risk of that consumer lending is the risk of the employer, yes. And we know very well the majority of the good companies that are in Chile, we do a lot of payments of the salaries through our credit card service, through our debit card, and through our checking account.

So we know -- and we have a very [fluent] relationship with companies. So at the end of the day if banks are able to go and to have the same terms that are offered to some non-bank, it will be leveling the playing field. And given that we have a good to fluent relationship with employers and customers who want operate with us, it will be a nice feat and the risk and therefore the terms that you can offer are completely different if you have to wait until the clients show up in the branch to pay you.

So instead of having the risk of the borrower, at the end of the day you have the risk of the company which is something that we know very well. And that's why it's a nice feat for banks that can be used on offering better terms to employees.

What -- do you have any idea of -- that market already exists, so there are non-banks that lend there. Could you give us an idea of the size of the market and what it could develop to once banks are involved?

No, what happened is that, today -- when I mentioned that some non-banks have the facility, it's limited to the very low-end, and with a lot of limit. The idea is to open that possibility because the government has been concerned about the relatively high cost of consumer lending, yes, and therefore one of the idea to lower the cost of lending is precisely to lower the risk of the debtor.

I mean, at the end of the day you are paying banks first and disposing that money and spending in other things. Of course the risk are much lower and that will be a natural compensation to the lower maximum rates. And that's why, as I mentioned before, if both were linked, you would have very little impact in terms of the number of clients or the banking penetration because you reduce the top rate, but at the same time you reduce a lot of the risk of the client.

Okay. Do you have -- you were talking before how -- the maximum rate will come into effect second quarter, third quarter next year. Is there any visibility as to when this new regulation of payroll loans might come into effect?

Yes -- well, it's difficult to know because it's out of control. But apparently close to April-May if what the government is trying to do, because the law has to be with -- probably will be enacted by the end of this year, early 2013, and then you have some legal delay, yes. But probably will be in full application in April-May.

And would you be commercially and operationally ready to take advantage of the new product?

No, because that is moving at a lower pace, so --

But when it comes around you will be though?

Sure. It's very straightforward because remember that we already pay the salaries of the majority of the workers of the company that we would like to get involved in payroll lending. So it's simply deducting from that salary that is deposited in accounts that they maintain in Banco Santander, deduct the installment of the consumer lending or whatever. It's very straight --

Great. That's good. Do you have any market share data on how many payrolls you manage in Mexico just for us to get an idea of what the potential is?

No, no.

Okay.

But it seems to be --

No.

Sorry?

Sorry, we're asking -- no, we don't have any permission about Mexico. We're --

Sorry, no, in Chile, sorry in Chile.

No, in Chile.

No, no, I mentioned it wrong, just because I was thinking that this is going in Mexico as well, I'm sorry.

No, no, in Chile it's difficult to know. As I mentioned it's still very little because it's aimed at the very low-end of the workers, yes. So it's not meaningful.

Okay, perfect. Thank you, Raimundo.

There are no additional questions at this time.

Okay. Well, thank you all very much for taking the time to participate in today's call. We look forward to speaking with you again soon. Have a good day.

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