Banco Santander Chile (BSAC) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 Banco Santander Chile earnings conference call. My name is Clinton, and I will be your operator for today. At this time, all lines are on listen-only. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I'd now like to hand the call over to Raimundo Monge, Corporate Director of Strategic Planning. Please proceed, sir.

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

Thank you for attending today's conference call in which we will discuss our performance in fourth Q 2012. Following the webcast presentation, we will be happy to answer your questions.

Results for the Chilean banking system decreased 5.1% in 2012. Net interest income rose 7.7% compared to the 12.4% arise in total loans. Provisions increased 27.5% due to the rise in delinquency levels after the [Lapolara] case and had become low concentrated within medium- and lower-income individuals.

At the same time, operating expenses have risen 10.3% as the banking industry has continued to accommodate the higher regulation and expansion plans.

Total ROE for the banking system reached [14.5%] compared to [17.4%] in 2011.

Concerning Santander Chile, we finished the year with positive results. In the fourth quarter of 2012, net income attributable to shareholders totaled [CLP113,402,000,000]. Compared to Q3 2012, net income increased 124.3%, and compared to fourth-quarter 2011, net income increased 11%.

During the quarter, the bank saw an important improvement in profitability as loan growth accelerated, the funding mix improved, the margins rows in line with higher inflation, while provision expenses declined. Following the nonrecurring charges recognized in Q3 2012, ROE in the quarter reached 21.6% and 18.9% for the full-year 2012.

The bank also finished the year with solid capital levels. Core capital reached 10.7% as of December 31, 2012, and the bank Basel ratio reached 13.7% at the same date, maintaining one of the best risk return relationships within the largest banks that we compete with in Chile.

Our strategy reflects our positive outlook of Chile's and its financial systems performance and takes into account the different challenges retail banking is facing. We remain committed to deepening our focus in retail banking by strengthening client relationships with a sound growth in our balance sheet, solid levels of capital, and high liquidity.

We will continue to expand our business while improving efficiency through productivity gains and manage risk conservatively at all times. These three strategic objectives are being tackled through the bank's transformation plan. This is the largest overhaul and reorganization of the bank's retail banking business.

It is important to understand that our 2012 results reflect in part the short-term cost of implementing this program, which affected our loan growth, provision expenses and costs. At the same time, we are beginning to see problems in various areas as we will see in the rest of this presentation.

In terms of loan growth, fourth-quarter 2012 saw a relevant acceleration, especially in those segments we are currently targeting. That is high-income individuals, small-and medium-sized companies, and the middle-market of corporate. While total loans increased 2% q-on-q, loan growth in this segment increased at an annualized rate of 12%. These segments have shown steady pricing and risk trends, which bodes well for margins and provisioning going forward.

The evolution of our funding base was also positive in 2012. Even though total deposits were flat q-on-q, it is important to point out that during the year the bank focused strongly on core deposits and utilized strong liquidity levels to reduce the level of dependence on more expensive and traditional funding. As a result, at year-end 2012, total noninterest bearing demand deposit increased 8% q-on-q and 12% year on year, and our funding costs evolved positively. We expect to continue with this strategy on focusing on core deposits in 2013. Therefore, and as a result of the acceleration of loan growth, a better funding mix and higher quarter's core utilization, net interest income reached a record level in Q4 2012. The net interest margin reached 5.5% compared to 4.7% in Q3 2012 and 5% in Q4 2011.

In order to understand the evolution of margins, we have divided the analysis between client interest income, which is the net interest income generating from loans and deposits by our clients, and non-client net interest income, which is mainly derived from our liquidity position and our inflation balance sheet sensibility.

The volatility of our net interest margin and income is mainly due to the quarterly fluctuations of Chile's inflation rate since the bank has more assets than liability linked to inflation. Therefore, margins tend to have a positive sensitivity to variations in inflation.

In Q4 2012 the variation of the (spoken in Spanish) and inflation index currency units was 1.11% compared to the deflation of 0.16% in Q3 2012 and a positive inflation of 1.28% in Q4 2011. Therefore, the q-on-q rising inflation is among the key drivers of the sharp rise in non-client net interest income in 4Q 2012 compared to 3Q 2012. Inflation in 2013 is expected to reach around 3%, which is positive for margins, but inflation in 1Q 2013 should be considerably lower than in 4Q 2012 and 3Q in 2012 due to specific elements of this first quarter.

In Q4 2012 client net interest margins reached 5.9% compared to 5.9% in 4Q 2012 and 6% in 4Q 2011. As can be seen in the slide you're seeing, client margins have remained very constant, reflecting our stable pricing policies and improved funding mix.

Net provision for loan losses in the quarter decreased 24.3% q-on-q and increased 4.4% year on year. As a reminder, in 3Q 2012, the Bank readily graded the consumer loan provision model that increased the minimum provisions set aside for re-negotiated consumer loans.

As a result, gross provision expenses in 3Q 2012 includes a nonrecurring provision expense of [CLP24,753,000,000]. Excluding this charge, the q-on-q decline in provision expense was 4.6%. In 2012 the bank implemented a series of measures to stabilize provision expense and the cost upgrading going forward.

The most important changes were, number one, tightening of admission and approval policies in consumer lending. This mainly consisted of implementing minium debt service levels or loan approvals and restricting growth with clients with no history of positive credit bureau information. This has resulted in a positive evolution of consumer loan vintage rates. Despite the rise in nonperforming loans and consumer loans in 4Q compared to 3Q, maybe due to seasonality, given the year-end holiday, the credit quality of the loans originated under the stricter admission policies is beginning to have a positive impact on asset quality.

The second change was restricting re-negotiation policies and strengthening our collection efforts. These, on the one hand, resulted in an increase in charge-offs and nonperforming loans,but at the same time, a rise in consumer loans loss recoveries. These have increased 6.1% q-on-q and 140% year on year compared to Q4 2011.

Although the nonperforming loans ratio grew from 2.95% of loans in Q4 2011 to 3.17% in Q4 2012, the risk index that measures the percentage that banks must provision for has been relatively stable in the last 12 months and was 2.91% by 2012 year-end. The main difference between both risk metrics is the guarantees that back those loans, including those collaterals, the ratio of nonperforming loans. The coverage ratio of nonperforming loans was 142% by year end. At the same time, the cost of credit, or provision expense divided by total loans, reached 1.9%, within the range mentioned in previous calls and close to its historical levels.

Due to our new created models and policies, we expect to keep the cost of credit stable at around 1.8% up to 1.9% of loans.

As part of the transformation project, the Bank has also been implementing a series of changes in the front office system that has affected the growth of fee income and the client base in the short term, but which should lead to a more private usage and gross selling in the future.

As a result, net fee income decreased 0.3% q-on-q and 2.3% year on year. The Bank continues to increase its client base and gross selling indicator, especially in the middle- and upper-income segments while limiting client growth in the mass consumer segment.

The Bank's total client base has increased 4.1% in the past 12 months, and the amount of [cross-over] clients in all segments, excluding financing, has reached 5.2% year on year. This was offset by a 20% decline in bank clients as the Bank reduced its exposure to clients with unhealthy financial behavior.

This also had a short-term impact in certain fees in the quarter, especially credit card, checking accounts, and lines of credit fees. The following collection fees was mainly due to lower growth in the mortgage loans.

In January 2013, the new fee structure for residential mortgage loans insurance becomes effective, which should lower collection fees for mortgage insurance in 2013. The major project and a new CRM -- customer relationship management -- platform should gradually reverse these trends as we will be focusing on reversing some weaknesses in our rebill banking.

As you can see on the charts, up to very recently we were mainly a mini channel bank. This means we had a solid distribution network that was poorly integrated. At the same time, we had branches that were cluttered with loan value-added tasks. Thirdly, the client-bank relationship was too centered around the account executive's availability, and finally, too much centralized processing was done that could be removed to the front end. We --

Excuse me for interrupting, ladies and gentlemen. We seem to have lost our speak are. We will try to reconnect as soon as possible. And sorry for the inconvenience, ladies and gentlemen. We do seem to have lost our speaker. Hopefully they will rejoin shortly. Apologies for the delay.

Again, apologies, ladies and gentlemen, we have lost our speaker. Hopefully they will redial in shortly.

You are now back in the call, Raimundo.

Okay. Thank you. Sorry for the inconvenience. Apparently we were off-line for some minutes.

I was starting slide 13. So, as we mentioned, we are positive about the performance of the economy, and we expect GDP to rise close to 4.8% in 2013. This is going to be driven by an increase in private investment and consumption. Inflation is expected to rise as well to something close to 3%, but remain under control, and accordingly, this should lead to a steady interest rate environment. Again, this should lead to a good loan growth in the Chilean financial system, which we expect to reach between 10% to 12% growth this year.

The profitability of the system should remain the same depending on the final outcome of various logistic initiatives currently being discussed in Congress. Therefore, it is important for banks not only to be concerned about excelling in the short-term, but also to adapt quickly to the challenges the system will be facing in terms of regulations, prices, capital levels and so on.

In summary, the Chilean economy is in good health, which should lead to continued volume growth, but at the same time we are confronting a change in retail banking environment. We think we are well advanced in the major transformation of our retail banking business, and this should lead to healthier growth of our loan book, resulting in better margins net of provisions, partially offset by future regulations regarding maximum rates.

We should also experience a better evolution of our client base and cross selling due to the new CRM. Operating costs should grow at a slower pace, and efficiency, accordingly, should improve gradually in time.

Finally, as a reminder, the income tax rate in Chile will rise in 2013 for all companies, and therefore, our focus should be kept on pretax earnings.

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

(Operator Instructions). Tito Labarta.

Just a main question in terms of your outlook for a net interest income, could you maybe just give a little bit more color in terms of how you see loan growth this year, particularly in the different types of segments? Like do you think you can grow faster than the system this year, or in line, or are you growing in certain segments more than others compared to the system?

And then also in terms of your outlook for net interest margin, I know you are concerned a little bit about the maximum rate legislation, although that has been delayed. So if that does not happen, how do you think net interest margin would move? And then I know you may expect some negative impact because of that, but if you can maybe give a little bit more color on that? Thank you.

Okay. If I can reverse them, in terms of the outlook for loan growth, if you see the evolution in the year, that gradually started growing, especially in the second half, and those -- the three targets segments that we will put more of our strength in the year, which are high income individuals, SMEs and the middle-market. Remember, as we talked in the last call that the mortgage business in Chile is -- the prices are -- they seem too low to commit capital for 20 years. And secondly, the middle to low end of the consumer market is under great uncertainty. And that's why our focus is basically the upper end of the consumer market and the middle-market where this 4Q will improve at an annualized rate of around 12%. Which means -- we can maintain in those three targets segments growth of 12%, 14% a little bit ahead of the rest. However, given that our growth in mortgage and large corporations will be low -- probably at the end, we will be growing in line with the rest of the market all-in.

So in terms of loans, good growth in the segments we are targeting, and similar to the market in 10%, 12% in the overall loan book.

In terms of margins, as you correctly point, the regulation concerning perhaps to a large extent has been delayed. Yet to date, the implementation has been -- it is at least -- the maximum will be probably second half because of technicalities of the [general fee] process, and hopefully that will give time for further discussion. Because the more people that get into the nitty-gritty of the project, they realize they will probably be hurting as the industry has been very, very outspoken. We've heard precisely those that want to be protected by regulators and authorities from here. So hopefully the final version will be more sensible to the real needs of those customers.

So if not for -- if you exclude that effect, we think that our net interest income can grow in line with margins -- low double digits. And if you have that implementation, which would have an impact on the last three or two months of the year, the average will come to high single digit or very low double digits, something like that. Yes? We think that margins can be maintained because we are very -- we have been most selective in the growth, and we are not allocating capital in low-yielding activities as we have never done. And secondly, we will see a boost throughout the year of high inflation. And that is why our basic scenario is in constant net interest margins of around 5%, 5.1% as an average for the year. I think they will be lower in the first quarter, higher for the remaining two quarters.

Great. Thanks a lot, Raimundo. That was very hopeful.

[Jose Baria].

Just two very quick questions. With regards to the provisioning, I understand the guidance that you gave for provisions to average loans at 1.8%, 1.9% for the next year. I wanted to understand what happened in the fourth quarter with provisions for the mortgage book, which seem to have gone up significantly, if you guys are seeing any pressures in that book? That is the first question.

And the second is, with regards to fee income, I wanted to know what drove the decline in collection fees in the quarter, which was pretty large, as well. Thank you.

Okay. In terms of the provisions, remember that this year-end was a little bit abnormal because we had two very long weekends -- the weekends of Christmas and the weekends on the year-end. And that resulted in people in the short-term unable or unwilling to go to branches to pay. It is a dead end. So that is why as we stated in our press release, we think it's basically a seasonal effect that happened both in consumer lending and in mortgage, in the more massive markets. And it will be reversed gradually in the first Q. So we don't have any -- going back to the core of your question -- we don't have big concerns in the mortgage market. The mortgage market is doing very well. It's simply that we think that profitability-wise, it is not sensible to allocate capital as such those spreads.

In the consumer market, two realities, the upper end of the consumer market was doing very well. Salaries have grown, and generally people are almost full employees, etc. The market is sound and growing very well. And then the more massive market, still some concerns about lack of good information to evaluate clients and some delinquencies still happening due to people after the [Lapolara] miss have been always stretched to pay to every lender that is trying to collect their money back.

So generally speaking, we don't have today a solid or large concerns about asset quality, and we think that to a large extent were due to seasonality things. And we,in turn, we think that at the low-end of the consumer market things will normalize throughout the year 2013. And the mortgage market, no concerns at all. I don't think that we think it's not profitable to allocate capital.

In terms of fee income, basically as we had stated in the conference call and in the press release, there was a change in the way that -- typically banks in the mortgage business were offering clients insurance for earthquake protection, fire, etc., etc. And they had it marked up that was accounted in that line that you mentioned before. And starting the end of last year and especially will be seen throughout 2013, the spreads that you can charge are limited because now it is a billing process, etc. So it has a lot to do with that change of regulations. (multiple speakers). And also, a lower growth in the mortgage business because those insurance are linked to loan origination, yes, so it is an effect.

However, again, in time those are regulations that can be to a large extent compensated given that you are -- you can offer other, alternative insurance, which are more attractive to -- this is kind of plain vanilla insurance, which is the one that the margins will go down, but you can offer value-added products so the clients can choose from it.

I see. Just to clarify, I was referring to the collection fees. You are saying that some of the fees linked to the insurance product are reflected in that line?

Yes, to a large extent, the fees that you collect are reflected in that line.

For the mortgage product, there are collection fees because they are done directly by the Bank and not by the insurance brokers, okay? It's all going to be in that line.

Okay. I see. Okay. So what would be your guidance? Given this change in the regulatory environment, what would be your -- for the insurance product, what would be your guidance for fee income growth in 2013?

We mentioned in the last quarter call, we expect this year to be low single digit. Because in the medium term the growth of fees are very linked with the number of clients you have. And the fact that we started just by the end of this year to increase the number of clients, we said it's unlikely that those clients will be profitable -- new clients will be profitable or generating asset fees. So for the whole year, we think that fees will be growing in the low single digits, and we should have better news in 2014.

Got it. Okay. Thank you very much.

[Christopher Delgot].

Just two what questions. First, I know what you mentioned about loan growth, but I wanted to get a sense of what it would take for loan growth to really re-accelerate? What we get you comfortable above system-level growth?

And then second, I know you mentioned a little bit about the interest cap legislation. But could you also just elaborate more on the status of that and where it will be going forward?

Okay. In terms of loan growth, as a reminder, Banco Santander for many years, seven, eight years has been focusing to a large extent on profitability. So our loan growth is to some extent the result of implementation of that profitability during the strategy. If scripts are sounds, we can outpace the market because we have more branches, more clients than the rest. It is simply that in order to maintain a high profitability and in order to allocate capital rationally, we prefer not to grow faster than the rest. The splits are not worthwhile or high enough to compensate for the location of table. That is why we think that with the new origination models, creating models that we have and with the new CRM, etc., we can at the current prices grow softer in the market in the three segment targets that we have mentioned in the call.

In relation to that, we see good news in mortgages or in the high end of the corporate market would be great. But we don't combat, but expect for the year, given that many banks have new risk capital to burn in the meantime, and we prefer not to get involved in a low-yielding data.

In terms of the interest cap revaluation, the closest has been coming to a halt because this is a holiday season in the southern hemisphere. So in March, the Congress will be deciding on some further changes, and adjustments have been done to the project. And there are some -- what do you call it --

Amendment?

(multiple speakers) So the end of the story, if everything is approved in March, it's very likely that this will be enacted starting August or September. But the point is, again, this is something that will be bad for clients, and we hope that all the technical agents, including the central bank and other think tanks that have been claiming this will be bad for the poor and for the small companies will bring more light and more color in the discussion, which up to now has been centering how to reduce the rate. But we have taken into consideration other issues.

The add thing is that, again, although this is a thread for clients and it is a threat at the end for growing the low end of the consumer market, if you add this measure with the integration of the information of our clients and the ability to do payroll lending, which simultaneously will be under discussion in the Congress, we see that the net effect of the three measures will be relatively neutral. If you add that for now, banks and non-banks will be basically competing under the same rules and the same regulations. We think that the status of banks in the consumer market will be strengthened in one and a half or two years from now when all of the kind of short-term dust is settled. And that's why we continue to be optimistic, even in the lower end of the consumer market. In the meantime, we prefer to be proven and not to overexpose ourselves given the uncertainties regarding this legislative process.

Okay. And then one last question, given the headwinds that you are facing, what do you see then as a retainable ROE? Because inflation was pretty good this past quarter, and just given the full year, it is expected to slow down, and where do you see that ROE falling out?

Yes, we think that -- what happened is the following. To a large extent, our lower ROEs have more to do with lower leverage that we have been operating than the other elements. Of course, regulation has to have an impact; lower inflation has an impact. But remember that historically we have operated with the leverage that we are much higher to what we see today. Today our core ratio, which is 100% tangible common equity, is 10.7%, which is much higher than historically. That reduces the leverage.

So the impact in ROE has been much more higher than the impact in ROA, yes? And that is a conscious decision to be prepared for eventual changes in capital regulations and to be more prudent given the uncertainty coming still from our books.

So that explains why with the current level of leverage, our achievable ROE should be in the low [20s] as we have spoken in other calls.

Eventually, when things are more clear about capital rules and the situation in the foreign market, we come back to higher year and increase our stated ROE.

The good thing is that given that we are operating under low leverage, of course, our cost of equity is also reduced. And that is why we think that the GAAP, which is put in shareholder pockets at the end of the day, has not meaningfully changed compared to the, well, the days where we have higher cost of capital, higher leverage and higher ROEs.

Okay. Great. Thank you.

Thank you. We currently have no more questions left in the queue. So I'd now like to turn the call back over to Raimundo for closing remarks.

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 joining today's conference. This concludes your presentation. You may now disconnect, and have a good day.