Banco Santander Chile (BSAC) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2013 Banco Santander-Chile earnings conference call. My name is Dominique and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Raimundo Monge, Director of Strategic Planning. Please proceed, sir.

Thank you very much, and good morning, ladies and gentlemen. Once again, welcome to Banco Santander-Chile's second-quarter 2013 results conference call. My name is Raimundo Monge, Director of Strategic Planning, and I am joined today by Robert Moreno, Manager of Investor Relations.

Thank you for attending today's conference call in which we will discuss our performance in the second quarter of 2013. Following the webcast presentation, we will be happy to answer your questions.

Before we get into more details regarding our results, we will briefly give you our latest update on the outlook for the Chilean economy in 2013. We continue to be optimistic on the performance of the economy, but we have adjusted downward our growth expectations for 2013 and 2014 due to lower growth of investment and consumption. As a consequence, we now expect GDP growth to exceed 4.5% this year and to be close to 4.2% through 2014.

Our outlook for rate has also been modified. We are now expecting the central bank to begin cutting rates in the second half, as well in 2014. Inflation is expected to rise slightly, but remains under control.

News on deposit growth has also been following the recent economic trends with a slight deterioration. In any case, we are still expecting for this year, 2013, loan and deposit growth of around 10%.

As of May 2013, the results of the Chilean banking industry fell 7% due to higher costs and provisions. The second half of the year, despite the slight downward correction in the current economic growth, we are expecting the banking system [deposits] to rebound as the higher inflation increases asset yields and lower rates reduce funding costs.

We will now review our strategy and performance in the second quarter of the year. Our strategy has been built taking into consideration both the positive outlook we foresee for the Chilean economy in the coming years, but at the same time, the different changes in consumer behavior and the regulations that have been reshaping the consumer lending industry. We believe that we are slightly ahead of the rest of the system in making the necessary changes that will allow us to have increasing profitability in a more challenging and competitive environment.

We remain fully committed to deepening our focus on retail banking by conforming our commercial banking unit, a process we began in 2011, strengthening client relationships with a [sound close] of our balance sheet, solid levels of capital, and high liquidity. We will continue to expand our business, while improving efficiency through 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 business that will significantly improve the customer experience with the bank while improving [currency] risk indicators. It is important to understand that our recent results reflect in part the short-term costs of implementing this strategy, which affected last year our loan-growth provision expenses and costs.

The good news is that this year, especially 2000- -- in the second quarter of this year, we are beginning to see improvement in various areas, especially in loan and deposit growth, as well as asset quality and consumer lending. We expect these trends to continue in the second half of the year.

I'll start with this transformation process. In Q2 2013, the bank loans between Santander's Select business model for the mid to upper income segment. Previously, this segment was serviced through three temporary brand components, which were united in a single segment.

Santander Select has a unique product mix, 44 specialized branches, as well as a dedicated full banking and Internet service for these specific segments. Each [level] will be the cornerstone of our growth in the mid- to high-income banking segment.

The transformation initiative is also beginning to produce positive results in the improvement being made to the client experience of banking with Santander-Chile. A key aspect of this project is to address different opportunities we found in reviewing our retail banking model, and readapt the bank to the changing regulatory environment.

Our distribution models will continue to be modernized, which should lead to a flatter and simpler bank to do business with.

Let me give you some examples. First, the percentage of consumer loans that were sold by the Bank's new CRM preapproval system compared to our direct one-on-one sales, has improved from 35% in 2011 to 46% in the Q2 of 2013. This means relationship managers are selling to clients that have been analyzed and approved. Among other benefits of this approach is that the provision expense associated with the preapproved consumer loans is almost half of that of our loans sold through our one-on-one process.

Second, the Bank's Internet and phone banking activity are also growing at a strong rate. The percentage of consumer loans sold through these and other virtual channels has increased to 36% from 20% in 2011, with a lot of room for further improvement. These loans, apart from requiring a lower provision expense, cost half to originate than (sic) through a branch.

All of that is translated into a switch in the mix of the Bank's loan portfolio as loans to meet higher income segments have increased 10.7% year on year.

The Bank has also been investing in improving client service by improving internal processes and back-office functions. The results of these initiatives are also beginning to appear. According to the latest information made public by the superintendent of (inaudible), we are now among the top large banks in Chile with fewer complaints and fastest response times.

As I mentioned, regarding client-satisfaction published by the Chile consumer protection agency for financial services, Sernac Financiero, we have also shown continuous improvement, but we still have upside potential in this area. Moreover, all of our distribution channels are receiving good grades from our clients, especially phone and Internet banking, which are a priority for us. In the quarter, we redesigned our award-winning website and launched specialized phone banking services for the Santander Select segment.

Finally, as further proof that our strategy is evolving out as planned, consumer loan asset quality has improved. Consumer nonperforming loans decreased 14.3% QonQ, and the coverage of consumer nonperforming loans reached 294%. At the same time, the amount of impaired consumer loans, defined as consumer nonperforming loans less renegotiated consumer loans, has evolved favorably. These tend to be a leading indication for the evolution of future charge-offs.

The thrift collection effort had also led to important [light] in loan loss recoveries, especially in consumer lending. This should be an added driver of our profitability going forward.

Our overall business activity from results are also starting to reflect this improvement. In the second quarter of 2013, total loans increased 3.5% QonQ, which represents an analyzed rate of 14% for the period.

In the quarter, loan growth continued to accelerate in the market the Bank is targeting, mid- to high-income individuals, SMEs, and middle market of companies. Loans in this combined market increased 4.9% QonQ, or 20% on an annualized basis. This is in line with the Bank's strategy of expanding loan volumes with a clear focus on spreads, net of provision.

The evolution of our funding bank was also positive in Q2 2013. Total deposits also grew 3.5% QonQ, 14% on an annual basis.

In the quarter the Bank's funding strategy continued to be focused on increasing core deposits while lowering deposits for more expensive short-term institutional sources. Core deposits, defined as demand and time deposit from our retail and corporate clients, expanded 2.2% QonQ and 16.4% year on year. Among core deposits, the bulk growth came from our retail and middle market segments.

The bank's margins are also beginning to benefit from the Bank's strategy. The net interest margin in 2013 Q2 reached 4.7, compared to 4.7 in the first Q of this year, despite a negative inflation rate that happened in the quarter. Client net interest margin, defined as client net interest income divided by average loans, reached 5.8% in the second quarter, compared to 5.7% in the first quarter of this year.

Higher growth of consumer loans, a stable pricing policy, and an improved funding mix has kept [our] margins relatively unchanged since the end of last year.

A central strategic focus of the Bank is to gradually achieve higher client margins net of provision expenses, even though this could result in slightly lower gross client margins moving forward, due to more conservative origination policies.

For the remainder of 2013, we are optimistic on the evolution of margin. In addition to the welcome recent trends of client margin, we expect US inflation to normalize at an annual rate of approximately 2%, or roughly 1% the remaining quarters.

In addition, market expectation for interest rates also reversed in the quarter, and the Chilean Central Bank is expected to begin loosening its monetary policy shortly. This should also be positive -- also be a positive factor for margins, given the shorter duration of the Bank's liabilities compared to interest-earning assets.

The Bank's operating revenues, as measured by our operating profit before provision for loan losses, were up 4.1% QonQ. Aside from the positive evolution of client margins and income, the Bank also benefitted in the quarter from the decrease of long-term rates and the increase in client [tertiary] services.

These helped offset the already mentioned impact of lower inflation on margins and the lackluster evolution of fees are still being affected by regulatory changes.

Net provision for loan losses in the quarter decreased 6.7% QonQ. The Bank's cost of credit, provisions over loans, reached 1.8% in the quarter, in line with our previous guidance. The QonQ evolution of provisions and asset quality was mainly due to improvement in asset quality in consumer lending, as mentioned before in this call.

Total coverage of provision -- with provisions of nonperforming loans reached 91% in the second quarter. Including the collateral that backed many of these operations, especially mortgages, the coverage ratio of nonperforming loans increased to 143%. As a result of this improvement on asset quality, our operating profit after provisions for loan losses was up 8.2% QonQ.

Those are also going (inaudible). Operating expenses in consulting in Q2 2013 increased 6.8% QonQ, mostly due to seasonal factors and 4.9% year to year. Efficiency ratio reached 42.9% in the second quarter. The QonQ rise in costs was mainly due to seasonal factors related to the summer vacation in Q1 2013.

Overall headcount remains stable, deflating low pressures on personnel expenses. The 4.9% year-on-year increases in operational expenses was mainly due to the 9.2% increase in administrative expenses. The Bank continued with its transformation project which had to [require] more administrative expenses in the short term, but it should begin to produce greater efficiencies going forward.

In the quarter, the Bank also launched its Santander Select business model for the mid- to high-income client segment. The Bank has closed 21 Santander Banefe branches in the past 12 months, which now total 77. No more branch closures are expected in this segment, covering the low end of the consumer market, and some branches will be reformatted as traditional Santander ones.

Moving forward, administrative expenses should grow at a slower pace as many of these initiatives are finalized and efficiencies begin to kick in.

In summary, the Chilean economy is in good health with a moderate slowdown approaching. On the other hand, our lower rate environment and an uptick in inflation should actually lead to better results in the banking system.

When [value] analyzed, this quarter had many positive aspects. If we normalize the inflation rate at, say, 0.6% a quarter, in line with the Street consensus for the next 18 months, our ROE is already reaching 19%, 20% levels. Our loan growth is beginning to accelerate, especially in the segments we are targeting due to their attractive risk-adjusted returns.

The funding mix continued to improve, and our transformation initiatives are beginning to sprout healthy green shoots. Net interest margin should rebound as the year progresses, especially net of provisions, as attractive quality and consumer lending improves. Cost growth should also continue to decelerate and efficiency should improve.

Finally, as a reminder, the income tax rate in Chile will have risen in 2013 for all companies, and therefore focus should be kept on pretax earnings. In fact, in the second Q of the year, our pretax net income was up 11.2% QonQ, reflecting the solid earnings generation potential of the Bank.

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

(Operator Instructions). Thiago Batista, Itau BBA.

Good morning. Thanks for the opportunity. I have two questions. The first one is regarding the [service-]fee income. The performance of this line was weak in the first half of the year, mainly because of regulation, but you comment in the press release that this line is likely to rebound in the second half and especially in 2014. Could you elaborate a little more about this positive view on fees? This is my first question.

And the second question is regarding asset quality, especially on mortgage. Despite the steady performance of the consumer segment asset quality, you comment that the provision on mortgages could expand in the future. Could we have additional -- some additional color on this provision expectation for mortgage?

Okay. First of all, regarding fee income, we have commented in other previous calls, we didn't expect this year to be a driver, and that was partly because of the new regulations that have been applied and especially in terms of the insurance are affecting the growth of that line of income.

At the same time, we have also been -- we view in all the different fees that we are connected in the line of the new regulation and in the line of the new awareness that clients have. And as a Bank, we don't want to be quarreling with our clients about the fees going forward.

So when we have been transforming our fee structure away from flat fees and moving into usage type of fees, which are -- people don't complain about paying a usage type of fee and now they do complain many times because of the flat fee. So we have been streamlining our fee structure, simplifying it, making it more clear, and therefore it is part of the natural process of adjusting to this new consumer behavior and the new regulations.

And thirdly, last year because of these changes in the macro environment, we reduced our client base, especially in the low end or the more [massive] market, which tends to be proportionately paying more fees than the upper segment. That cost of [capital stock]. Last year, we were increasing our checking account clients by roughly 1,000 clients a month. Today, in the last three months, we have been increasing our checking account clients by 3,500 clients. So that level of activity make us believe that fees will bounce probably by the end of this year and definitely in 2014. So we tend to be optimistic.

However, this year it will be, on a year-on-year view, a major contributor -- actually, it could be a small [target] on a year-on-year basis. But next year, we expect that fee -- actually, if you take a long time, two years, fees tend to move in line with a number of clients, and that's why the fact that we have been going back to previous -- the growth of clients at previous levels because we believe that that is a good predictor of what we can expect this year.

In terms of asset quality, I would say the news are positive. As you have seen, our level of provision has been normalizing, going back to previous, where our cost of credit was around 1.8, which has been very close to historical average, and we think that given the new models that we implemented one year-and-a-half or two years ago, the new business is generated in much better conditions and therefore we could be having pleasant surprises on asset quality.

Now, of course, every once in a while you have surprises. Especially in the corporate side, we saw this quarter one or two positions that we'd prefer to strengthen. And in the mortgage business, it is simply that the levels were so low that at some moment of time they have to normalize.

But as we stated in our earnings release, we don't have any supplemental concern about the mortgages and the level of actual losses are very low. And that's what [lets us see clear] on the normalization after an extremely low period of mortgage and income fee levels. So we don't have concerns over there.

We think that asset quality concerns are finally behind us, and of course, it is an issue that you have to monitor every single day. But we think that now we are in a much better position to address them, even that we have better tools for evaluating and follow-up on clients. And it's expected, we see finally a law to integrate information about customers in the [few] databases, the central tribunals. That would definitely be agree[some] (sic), and we think that regulation is moving back and hopefully to be enacted if not this year, then hopefully 2014.

Okay. Thanks for the answers.

Carlos Macedo, Goldman Sachs.

I have a couple of questions. The first one is, as you mentioned, Raimundo, during the call, if you normalize the net interest income for inflation, say, go back to second quarter last year levels, your ROE would be close to 20% -- 19%, 20%. So that would be a normalized level now.

Of course, with winding down the investments that you are making for the transformation project and all that, I think it's reasonable to believe that ROE could go even higher. What is the view that you have for ROE in the medium term? Should we expect higher than what the normalized ROE of 19% you have now?

And I think the second question goes in line with that. You mentioned in the release that there is still discussion regarding how the interest rate cap in Chile will be determined. If you could give us an update in that and the Bank's view on it, and if you have any sensitivity on what kind of impact that could have on your net interest income over the next -- well, whenever it is implemented. Thank you.

Okay. Regarding our medium-term view about the ROE, as we have mentioned in previous calls, we think that -- inflation is -- unfortunately after the Chilean banks moved to IFRS, the [relativity] of our bottom line is very linked to the relativity of inter-quarter inflation levels, yes?

And if you take inflation on a year-on-year basis or in a moving average of, say, six, seven quarters, the effect of inflation tends to cancel out because sometimes you will have higher-than-average inflation, lower-than-average inflation, et cetera.

So at the end, we think that the source of value that the Bank is able to create is linked to client activity. And that's why the fact that both deposit and the loans grew at 3.5% or close to 14% on an annualized basis this quarter. The fact that we are growing much faster than that in both segments, that we have targeted on a risk -- that deliver much higher risk-adjusted or after-provision margins.

Because again, if you take a look, the area where we have been lagging the most compared to our peers is in mortgages. Mortgages today yields absurdly low level of profitability, especially in an environment where capital probably will be tight and property values will be constrained for the future.

So allocating capital in low-yielding mortgages for 20 years, we think that that doesn't fulfill our performance criteria. And that's why we are lagging mostly on mortgages and in large corporations, where if we don't get enough revenues on the loan lending side, we tend not to allocate capital as well.

That's why the good news is that in those targets, those segments that are delivering good risk-adjusted returns, we're growing faster than the market. And in the overall picture, we are starting to catch up with the market and probably this first half we will gain market share.

But again, we still focus on revenues and on value more than on size. Size has never been and today's not any change.

So with that in mind, we think ROEs of 20% can be a achiever as on average, moving average of, say, six, seven quarters, and sometimes will be higher. Probably in the second half we will see higher levels because of abnormally high -- well, sorry, at 1% inflation, which is not very high for, when you study Santander. But if we see inflation normalizing or being a little higher than what we saw in the first half, you will see our profitability bouncing.

But again, [what] will make us comfortable with moving the banking to levels of -- again, with a moving average of 20% -- is the fact that client activity is resuming, the number of clients with the cost-[setting] standards center are moving in line, that make us believe that we could be delivering that kind of return.

Why that return is not expected to go higher than that, is simply a reflection that, first, inflation is not expected to be going higher than 2.5% or something like that; and secondly, because we are operating with much higher capital levels that (sic) what we have been historically. And that is simply in anticipation of some changes that, up to now are not very clear what to expect, about Chile moving into a possibly 3 or possibly 2.-something standard.

So that's why -- again, we think that ROE in the 19%, 20% range could be achieved, not in every single quarter, but at the moving average of six, seven quarters because client activity is already growing at a healthy level.

In terms of the interest rate caps, we don't have any information. The logistic -- the process is -- (inaudible) have gone back to their two chambers, and there is an integrated chamber to discuss issues, including Congressmen and Senators. But we think that probably the year would be likely to be approved, and the good news is that apparently the intention would be to join the two banking regulations, the one to consolidate all information in a single [credit] bureau, and reducing the rate.

That would imply that the final effect will be much less, but it would seem to reduce the caps and you don't have that information about timing.

So we expect the level of exposure, retailers on the low end of the consumer market both by banks and nonbanks have been barely coming down. It probably is an alert that if you simply reduce prices, what many people would be -- seek out of the formal market, which is something that probably nobody wants. And that's why the good news is that probably the two branches will be moving in line, or -- but it's impossible to have a guess of when this process will be finished. But probably fairly late this year, if that is at all.

The election will probably have an impact on that, correct?

That's right.

Okay. Just going back to the first question, then. If we don't look at ROE specifically, but look at ROA -- and ROA has been fluctuating with inflation -- ROA for this quarter specifically was 1.4%, which isn't particularly bad. It's better than the first quarter, but it is weaker than it was last year. Do you think that ROA could migrate back to the 2% level where you've seen, and then the leverage can take care of itself? But is that something that you see happening?

Well, going back to 2% in the short term is very unlikely, but I am sure that we would be started increasing, given that we used to have -- we still have a very liquid balance sheet. We have been on purpose maintaining high levels of liquidity, especially short-term Central Bank loans and short-term -- mainly Central Bank loans, and that, again, will eventually start. We have already been reducing that excess liquidity, but still it's -- are still analyzing our ROE.

So the point is that we think that we can leverage a little bit more the balance sheet and, in addition, improve the underlying profitability with clients, which is at the end where value is created. But 2%, probably not this year by far.

Okay. Thank you, Raimundo.

Tito Labarta, Deutsche Bank.

Good morning. Raimundo, thank you for the call. A couple of follow-up questions. Just first in terms of your net interest margin, clearly you should benefit in the second half of the year from higher inflation. You also mentioned you expect rates to begin to get cut in the second half, which should also affect your margin. But how much do you think the rates will fall and what type of benefit do you think that would be to your margin?

And then, the second question, just going back to asset quality and provisions, given that you saw an improvement in the quarter, do you think this improvement will continue for the rest of the year? And how much more can NPLs come down, and how would that impact that provisioning levels? As you mentioned -- you know, provisioning about 1.8%, on average, like a historical average? Is that where we should consider going forward or could that come down further as asset quality improves? Thank you.

Okay. Well, in terms of the really good margin, this quarter was very low because of a negative inflation, something that's very unlikely to happen in many economies, especially an economy that is growing at 4.5% or 4.6% as we foresee for this year. So that's why we think that in the second half, if we have a more normal inflation -- remember that the June inflation, which is relevant for July results, has already been published. It was 4.6% and very likely that July inflation also is higher. So 1% would be short of where -- what are the end results of the relevant (indication) for the quarter.

But again, even with much higher inflation than we have seen in the period, the Bank has been able to have net interest margin of around 5% on a moving average of six, seven quarters. We think that that is our basic scenario.

When inflation is lower, we have been growing in the more profitable segments. We don't think that the NIM is to be higher simply because we -- after all the creative models that we did, we are targeting the middle to high end of the consumer market. In the domestic market, the more low end of the consumer market, we are seeing much less activity than before, and that's why we don't expect the margins to go beyond that 5%. Again, that's an average.

And even with your -- the second question, how we proceed after quality indicators, we think that again unless we see a brisk cooling of the economy, which now is -- we don't have an indicator. Actually, yesterday the unemployment figures were released and we still see a very robust job market. Unemployment at 6.2, and is to a large extent because the growth of the number of people employed has been increasing. Nobody -- people are quitting the job market. So we see still a very robust job market.

The fact that inflation is negative also increases the real purchasing power of those salaries, and that's why we think that with some cooling, we'll see a stronger growth of internal expenditures in the second half, as well.

So we think that the basic [mass] market will be supported, and in that case, our provision levels should be flattish or -- we think that for the year, it will be flattish or a little bit down, especially because last year we had an extraordinary item that won't be repeated here.

And therefore, given that we're growing at levels of higher than 10%, 11%, but (sic) we believe our cost of credit to something lower, to 1.7% or something like that, by the end of the year.

So in terms of asset quality, we have to monitor on a single date but we think the news are found with, of course, we could see surprises in positions on the corporate type, but underneath -- which is more predictable or at least you have more way to predict it -- we think that most of the troubles that came after the [avalartes] and the elimination of so many records and the credit bureaus, are far behind us. That is good news.

Great. Thanks, Raimundo. Just following up on the net interest margin. What is the sensitivity to interest rates? Because you did mention you expect rates to come down, so how much do you think rates would come down and how would that impact your margin?

Hi, Tito. This is Robert. Today, as we mentioned in the release, we've been growing a lot in core deposits, okay, which -- individuals, companies. That also has another particularity that they tend to be more sensitive to the short-term interest rate. So they are much more stable, achievable, but they have also increased a bit the sensitivity to rates.

So in taking that 12-month period, like 100 basis-point decrease in the short-term rates benefits our margin at around $50 million to $60 million. Unlike inflation, which is directly to the bottom line instantaneously, this is over a one-year period. So I think with the growth of core deposits and the falling rates, if rates do fall, that is actually good in the next six months for margins.

Actually, with this strategy of increasing core deposits, and we've also increased, to a certain extent, the sensitivity to the short-term rates on the funding side.

Great. Thanks, Robert. So then, just looking at the second half of the year with inflation picking up, rates coming down, and I know Raimundo, you mentioned about a 5% net interest margin. But could that maybe be even higher just in the second half from the short-term movements in rates, or is it like the 5%, more or less, where you expect that to be, given all of these variables?

It should be more or less that and maybe a little bit higher, depending on inflation, but when you discount the provision, the cost of credit also coming down, the evolution of margins net of our provision should be higher.

In the fourth quarter of last year when we had inflations of 1%, we actually reached a net interest margin of 5.5%. So that's definitely in the range. I mean, we could have net interest margins of 5.5%, for example, in the third quarter.

Once again, that's, I think, what Raimundo was trying to say that if you take the average for the year, it's going to be closer to 5% and not the 4.7% that we are seeing today. So it's 4.7% the first half, between 5.2% and 5.5% in the second half. And the average will be 5%.

Okay. Excellent. Thank you very much.

Jose Barria, Bank of America.

Hello, Raimundo and Robert, and congratulations on the results. Definitely seeing some positive signs.

I just want to go back to some of your comments on the macro and your expectations for loan growth this year. I'm just having a hard time reconciling the fact that we have a decelerating economy, or at least slightly decelerating, even based on how you guys have brought down your expectations for growth this year. But you are looking at loan growth to accelerate from roughly 7.5% to 10%. So just sort of trying to wrap my hands around that, and if you can just give us some color, that would help us understand how that's happening.

The second question is with regards to trading [or] treasury results. I noticed that they were very high in the quarter. You noted that there was some profits on the repurchase of bonds that were trading at a discount. If you could tell us exactly how much was coming from that -- because I expect that not to be a recurring level of trading, or at least of that particular portion. If you could comment on that as well, that would be great. Thank you.

Okay. Going back to the macro outlook, when we adjust our expectations for the remaining part of this year and next, we were basically thinking in terms of investment. Remember that Chile went through a big earthquake in the year 2010, which has resulted in extremely high investment levels in 2011 and 2012. And of course, many of these projects are finishing. So that has an impact in investment[s].

In the case of internal demand consumption, basically, reduce the -- it's not so related with the financial activity -- the news that we are seeing in the job market make us believe that, although consensus is moving down, the economy is still being very robust, and our concerns are more in terms of the expectations going forward than the realities that we are seeing today. And expectation, pictures change very rapidly, as you see in the case of the world that things have changed very quickly from a negative view to a very positive view.

In the case of the Chilean economy, we have seen a drop in this consumer confidence surveys, and that is why many economists are reducing consumption going forward. But it is something that up to now is not fully visible. So it's an open issue -- report, and for some of the purposes we are adjusting our macro assumptions, but we don't see a clear change in internal consumption.

And the first and foremost, which is the external outlook, is there are good news and bad news as well. The Asian (inaudible) quality, weaker than was expected; the US is stronger, and Europe kind of flattish, which is good news.

That's why we think that we were expecting for mid-year something close to 5%, 5.1%, and we drove it to 4.7% or so. It's not a big change. It is simply a reflection of these kind of minuses and plusses. But we don't have any clear -- crystal ball to predict.

In terms of trading, there are two components. Roughly two-thirds -- or, on average, it's like 75%, 80% of our trading gains are client-related. Remember that since 2012, Santander-Chile has not cut [proprietary] trading back. We had eliminated our proprietary trading activities, so the bulk of the trading gains are with clients, market-making and things like that. Or the positions we have with -- of Central Bank notes for the sake of liquidity, yes? So this year, we saw an increase in that part, mostly due to the drop-off of long-term rates, there on the one hand.

And secondly, we bought back bonds. But that is not very meaningful. The bulk was marked-to-market of the bonds that we keep for liquidity's sake. And a very stable or a slightly increasing level of client activity which represents, this quarter, two-thirds but historically close to 80.

And that's why in our case, trading gains shouldn't be seen as volatile trading-related revenues. In our case, our client agreement and the element that moves that line has to be visible at least in the markets -- exchange rates, inflation, and things like that -- which is precisely the risks that clients are looking to close with us. So that's why, for us, that is our commercial line; it is linked to clients, and that's why it's similar to (inaudible). It tends to be very stable.

Okay. Raimundo, I am looking at the annual release at the line that says nonclient treasury income. That was like 12.2 trillion in the quarter versus (multiple speakers) 5.7.

Yes. That is to a large extent due to normal long-term rates and the mark-to-market of these bonds when you keep for liquidity's sake.

Going forward, that line usually fluctuates between 20 billion to 25 billion.

The total?

The total.

I see.

(Multiple speakers) nonclient.

And do you know -- in this line, do you know the amount of gains that were related to your repurchase of bonds that were (multiple speakers)-?

That was probably around -- in marked-to-market, it was like $10 million, 5 billion in pesos, more or less.

And the repurchase must've been like $1 million or $2 million.

I see. Okay. Thank you.

And then, just finally, very quickly, on your effective tax rate -- obviously, rates -- the tax rate should go up toward the end of the year. What should we expect on a quarterly basis and for the year, for 2013, for the effective tax rate?

In this call, we tried to explain how wide the difference between the statutory rate and the effective rate, and again it has a lot to do with inflation.

So this first half, we had an effective rate of 17% more or less, which is higher because inflation was low, which is a little bit puzzling. So that's why in the second half -- although for conservative purposes we state that the effective rate closer to 17%, 18% level should be expected -- globally [conflation] is effectively higher, the effective rate could be lower than 17%. And -- which is a little bit puzzling but if you follow the math of the charts we're building in the slide -- sorry, on page 16 of the press release, you understand why the higher the inflation, the lower the effective rate, but (inaudible) okay. But for practical purpose, our [target] is built with 17%, 18% for the year.

Okay. Perfect. Thank you very much.

(Operator Instructions). Christopher DiSalvatore, Credicorp Capital.

Thank you for the question. I just wanted to follow up with loan growth. It sounds to me that in this quarter, it looks like the trend had changed a bit and you guys have become a little bit more, I guess you could say, aggressive, particularly on the segments that are returning a bit more margin.

My question, looking forward into 2014, is if indeed the appetite for the Bank has expanded and you see potentially more aggressivity in the middle consumer and SME going forward, and how that can relate to potentially even higher potential risk that we have seen in the commercial segment -- which I am assuming is coming from the focus more on the SMEs. And generally, that; I mean, compensating the uncertainty, which seems like a lot of market participants seem to have today, if you as a Bank, the appetite, you feel that it can be sustained and looking into 2014, potentially a bit more aggressive on those two fronts.

First, in terms -- as a reminder, once the market changed because of consumer behavior, because of the [Napolarea] affair, because of the different regulations, we decided a couple of years ago to do two things.

Number one is to change our creative risk models to take into consideration these changes, on the first hand. And secondly, we have been working through them in this transformation initiative that precisely tried to cope with these new rules. And the way to do that is to have more robust tools for evaluating and follow-up of creative (decision), and at the same time, you have a more efficient and a more intelligent way to tackle the relationship with clients.

What we are seeing in this second quarter with respect -- to hopefully to sustain going forward is a new way to manage the bank with this link with -- on a client-by-client basis, taking into consideration the risks that we're assuming, the profit -- the potential that the client had, the level of transactionality that keeps with that, and accordingly, you have a relatively tailor-made suit for everything the client. Of course, that is not 100% deployed in today, but gradually it will be more visible in our results. And that's why we have sticked (sic) to segment where we're complying with those new requirements in terms of risk-adjusted returns. And then, hopefully, growth eventually will come to that area, mainly to large corporations.

But in the short term, given that we don't see those levels, we prefer to lose market share because, again, we are in the business of creating value for shareholders more than expanding our size or reducing.

And that's why in the case of mortgages [braided] activity, there's a big drive as we have vis-a-vis the market, and, secondly, in terms of large corporate lending, sometimes you grow and sometimes you don't grow. It is simply a reflection that we get in the full view of the client, enough revenues to compensate for the capital allocated.

So we think that, again, our new -- if you combine the two tools, the different risk models, plus the CRM and the different activities of the transformation project, it's not that we're changing our risk appetite. It is simply that more and more clients will be profitable if you really understand what is going on with them.

Up to now, you were simply saying, okay, if I want to have a profitable client I need to increase prices. But that process today is increasingly difficult, and that's why you need at a certain kind of market price, how can you be more efficient than the rest and more quick in addressing the needs of the client, and at the same time, have stronger tools for evaluating and following up on the client behavior.

And that's why we think that the levels of growth, as the ones we have been showing, could be sustained. They let us know that you have a good market with good profitability on the other side. If rates go down again, probably it wasn't sustainable.

Great. Okay. And then, just looking at the commercial side, I mean, if we sustain -- which I would assume SME is leading this growth -- if we were to sustain this level, let's say, going into the next six or 12 months, how much more -- or where do you see the NPLs -- how much more growth do you see in the NPLs? Or do you see this level, more or less, is a good photo of the risk-adjusted reward that you are seeing?

Yes. We think that in time, you will see lower levels. But again, we are growing -- we are not growing in the very upper part of consumer lending and we are growing very fast on SME, which tend to have higher loan-performing levels, which are backed by the state guarantee.

So at the end, the way you try to grow is by -- A, okay, which are my expected losses and how I can connect different sources of revenue for the client, to compensate for the risk and capital consumption we are allocating to that specific client? Now, that's why, at the end of the story that we expect spreads to be flattish or slightly down in gross terms; but at the same time, given that we expect provisions to be lower than before, to have spreads adjusted by commissions, which are tighter than historically.

Okay. Thank you.

There are no additional questions at this time. And I would like to hand the call back over to Mr. Monge for any closing remarks.

Okay. Thank you all very much for taking the time to participate in today's call and we look forward to speaking to you again soon. Have a good day.

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