Banco Santander Chile (BSAC) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2013 Banco Santander-Chile earnings conference call. My name is Towanda and I will be your coordinator 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 Raimondo Monge, 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 2013 results conference call. My name is Raimondo Monge, and I am the Director of Strategic Planning of the Bank, 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 third Q of 2013. Following the webcast presentation, we will be happy to answer your questions.

Before we get into more detail regarding our results, we will briefly give our latest update and the outlook for the Chilean economy in 2013 and 2014. We continue to be positive on the performance of the economy, but we have adjusted downward our growth expectations for 2013 and 2014 due to lower growth of investments.

We expect GDP growth to be around 4.2% up to 4.4% this year and to be close to 4% next year.

As expected, the Central Bank has begun lowering interest rates, cutting them 25 basis points in October. We expect one or two more rate cuts of around 25 basis points in 2013.

Inflation, also expected, has begun to rebound this quarter and reach 1%. For 2014 we expect U.S. inflation to be closer to 3%.

Loan and deposit growth has also been following the recent economic trends. Loan growth accelerated slightly in the quarter as consumer spending remained strong, but expect this to slow down in 2014. Corporate lending also accelerated as companies look to the local market for financial needs, as external sources for loans became more expensive.

For 2014 we expect loan growth to be closer to 10% for the financial system as a whole. Now we will review how the Bank continues to move forward in its strategic objectives. During the quarter, the Bank saw important advances in all of its strategic objectives.

We have seen throughout 2013 acceleration of our loan growth, core deposit growth, and more recently, client base growth. All of these have been fueled by the important transformation we are implementing in our rebid banking business, led by the Bank's new customer relationship management platform or CRM, and [mobile boss] credit tools.

We believe we are ahead of the rest of the financial system in making the necessary changes in our business model and processes that should allow us to have a better performance than our main peers in a slightly more challenging economic, regulatory and competitive environment.

As part of this transformation project, in 2012 we launched a new CRM that gradually has been showing positive results. Today 100% of our branch employees are using this new platform. And results are encouraging.

For example, those employees who are heavy users of CRM tools and capabilities are currently granting [50%] more consumer loans, both in terms of number of corporations and volume. And those account officers are still low users of CRM. The same is true for checking accounts, where intended users are opening [60%] more banking checking accounts than low users. At the same time, the claims being brought our less risky, but with similar spreads.

These commercial tool activity increases are starting to be visible in different volume growth rates. For example, in operating income segments, total loans are growing 12% year on year despite our lack of focus on mortgages. And deposits are up 26% year on year.

Apart from the CRM, that launching of the Santander Select business model has been well received by clients. These platforms should be the cornerstone of our growth in high income banking segments going forward.

The transformation project is also beginning to produce positive results in quality of service and client satisfaction, which is our second strategic objective. The number of clients entering the Bank has nearly doubled since the beginning of the year. We have also reduced client churn rate.

As a result, [mid] client growth, which in the first quarter averaged close to zero, has risen to approximately 25,000 clients per month by the end of the third Q of 2013. This should lead to a 7% to 8% client base growth in 2014 and it should be a key driver in the growth of fees going forward.

Finally, as part of our [third] strategic goal, managing risk conservatively, our different risk metrics are evolving now as planned. Consumer loan asset quality has improved again in the quarter. Consumer nonperforming loans decreased 111% Q-on-Q, and 25.6% year on year.

The coverage of nonperforming loans with reserves reached 339% in the third quarter. At the same time, the amount of impaired consumer loans [has evolved] favorably.

The ratio of impaired to consumer loans to total consumer loans reached 10.3% as of September 2013, compared to 13.1% as of September 2012. These tend to be a leading indicator for the evolution of future charge-offs in this product.

Better collection efforts led to an important rise in consumer loans loss recoveries. Fees increased 80.7% in 2013. This should be another driver of our profitability going forward.

Our overall business activity and results are also starting to reflect this improvement. In the third Q of 2013, total loans increased 2.8% Q-on-Q, an annualized rate of 11%, and close to 10% year on year, in line with our estimates.

In the quarter, loan growth remained strong in the market the Bank is targeting -- high income individuals; small and medium-sized enterprises, SMEs; and middle market of companies. Loans in this combined market increased 3.1% Q-on-Q and 14.4% year on year.

By subsegment, loans to high income individuals led growth and increased 3.7% Q-on-Q and 12.4% year on year. These, in line with the bank strategy of expanding loan volumes collectively and with a relentless focus on strength that of net provisions.

The evolution of our funding base was also positive in the third quarter. Total deposits grew 2.3% Q-on-Q, and 6.1% year on year. 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 expanded 4.2% Q-on-Q and 18% year on year. Among our deposits, the bulk of growth came from individuals. These deposits increased 3.5% Q-on-Q and 21.8% year on year. Core deposits now represent 85% of the Bank's total deposit base.

It is important to note that as the Central Bank continues to cut interest rates, our core deposits should help support net interest margin. Core deposits tend to be cheaper than institutional deposits and generally have a shorter contractual duration. Therefore, as rates decline, our interest-bearing liabilities will [replace] quicker than our interest-earning assets.

The Bank's margins are also beginning to benefit from the Bank's strategy. In the third quarter, net interest income increased [15.7%] Q-on-Q and 20.5% year on year. Loan growth, a better funding mix and higher inflation rates drove this rise in net interest income.

The net interest margin, NIM, in 3Q 2013, reached 5.3% compared to 4.7% in both 2Q 2013 and 3Q 2012.

With the liability of our total net interest margin and income, it may be due to the quarterly inflation -- fluctuations of inflation. In the third quarter 2013, the variation of the Unidad de Fomento, an inflation indexed currency unit, was 1% compared to negative 0.1% in the second Q of 2013, and negative 0.2% in the third Q of 2012.

The Bank has more assets than liability linked inflation, and as a result, margins have a positive sensitivity to variations in inflation. The gap between assets and liabilities indexed with the UF average approximating CLP3.4 trillion in 3Q 2013. This implies that for every 100 basis point change in inflation, our net interest income increases or decreases by [CLP13.4 billion], all other factors being equal.

Client net interest margin, defined as client net interest income divided by average loans, reached 5.6% in 3Q, decreasing 20 basis points from previous quarters. This lower client margin was mainly due to the higher growth of corporate loans and lower growth in the low-end of the consumer market this period. Nevertheless, it has been mentioned in previous calls, a key goal of the Bank is to gradually achieve a higher client margin net of [operational] expense, even though this could result in lower gross client margin.

In consumer lending, for example, gross spreads are down 190 basis points in the last year. But spreads net of provision expense have increased 60 basis points in the same period.

For the remainder of 2013 and 2014, the evolution of margins should reflect various factors. First, we expect US inflation to normalize at the quarterly rate of approximately 0.7%, 0.8% per quarter with seasonal fluctuations.

In addition, the Central Bank reduced interest rates by 25 basis points to 4.75%. As the Central Bank continues to cut rates, our focus on core deposits should help support net interest margins, since our liabilities reprice faster, therefore increasing our margin.

The stronger operating trends we have described were partially offset by the reduction in fees which are still being affected by changes in regulations. The good news is that, as we just showed, the client base and commercial activities are all trending upwards, which we believe will lead to fee growth in 2014.

The other counterbalancing effect has been the 17% drop Q-on-Q in the amount of financial transaction net earnings due to lower market volatility. All of the above resulted in operating profits increasing 7.8% Q-on-Q and 13.6 year on year, reaching the highest level in the last eight quarters.

The Bank's nonperforming loans ratio fell from 3.1% in the second Q of 2013 to 3% in the second -- in the third Q of 2013. And the risk index was stable at 2.9%.

Total coverage of nonperforming loans in Q3 2013 reached 94.8% compared to 91.3% in the second Q and 98.3% in the third quarter of 2012. Despite these positive trends, net provision for loan losses in the quarter increased 11.3% Q-on-Q while decreasing 19.2% year on year.

At the same time, cost of credit increased 10 basis points, reaching 1.9% in the third Q of 2013. The rising provision expense was mainly due to one-time events in commercial lending.

During the quarter, the Bank lowered the risk rating of various clients in the middle market segment, which signified approximately CLP4 billion in higher provisions. This was not a sector-specific phenomenon, but occurred among clients in various sectors.

The second driving force was stronger loan growth that led to higher loan-loss provisions as the Bank internal provisioning models recognize provisions once the loan is granted. Those are also evolving as planned.

Operating expenses were flat Q-on-Q as the bank continues to wrap up its investment program in the transformation project. The 10.9% year on year increase in administrative expenses was mainly due to higher investment in technology and systems, and higher client service costs in retail banking. As a consequence, the efficiency ratio reached 39.8% in 3Q 2013 compared to 42.5% in 2Q 2013 and 41.9% in 3Q 2012.

Despite a larger loss in the other income and expenses line compared to both 2Q 2013 and 3Q 2012, net income attributable to shareholders totaled CLP101 billion in the third quarter, increasing 17.8% compared to the second quarter 2013. These resulted in our ROE close to 19% in the quarter.

In summary, the Chilean economy, we believe, is in good health, with a moderate slowdown approaching. On the other hand, a lower rate environment and an uptick in inflation are helping to boost profitability.

Loan growth and asset quality trends remain positive. The funding mix continued to improve and core deposit growth has been solid. Net interest margin rebounded with higher inflation, asset quality trends are encouraging and cost growth was flat.

Fees are a [trending matter] but the positive evolution of our client base should boost the growth in 2014. That is why we believe the Bank's medium-term outlook is solid, as the transformation process should help to support our growth and efficiency going forward.

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

(Operator Instructions) Thiago Batista, Itau BBA.

I have basically two questions. The first one I got into the impact of the reduction in (inaudible) rate. I know that this is positive (inaudible) for Chile, but could you give us some additional details or some additional color on the impact of this reduction in the (inaudible) policy rate? This is the first question.

The second question about the ROE. During the last conference call, your comments that ROE would probably be around 20% in the medium-term. When you compare it with [the Q] of 18.6%, what do you believe will be the main drivers of this increase in profitability?

Would it be lower provisions, better efficiency, higher fees? What do you believe will be the main drivers of this increase in profitability?

Okay. In terms of the impact of lower rates, Robert?

Okay. Basically, to make it more [or less] simple, (inaudible) roughly 100 basis points fall in the short-term interest rates in a period of about one year. Unlike inflation when the impact is immediate, this takes longer as things reprice and the liabilities reprice.

The benefit for net interest income is roughly around CLP50 million, CLP60 million in a 12-month period. So if rates fall 100 basis points on average in a year, the impact is roughly CLP50 million to CLP60 million for a full year.

Then, in terms of the ROE, we still believe that the -- it's a moving average of seven, eight quarters, we can achieve ROEs approaching [20%].

And the main driving force there would be two or three. Number one, technically provisions should trend down as a proportion of loans because we are coming from an abnormally high period of provision expense due to the different changes in the market conditions. And secondly because we have been moving upward in terms of growing faster in the lower categories, which should have an impact.

Remember that as we mentioned the call, our target is to increase our net interest margin after provisions, a process that is starting to be very clear in consumer lending and we expect should be clear also in mortgage and commercial lending going forward.

The second driving force is volume. We have been growing for some time in the target market at the rates of 13%, 14% and we think it can be sustained in 2014. And in terms of total growth of lending, which includes (inaudible) the target segments -- mortgages and lending to large corporations and lending to the lower end of consumer market, it will depend upon the prices that we see in the market. But we are today growing in line with the rest of the market. And our expectation for 2014 is [grossly] to maintain our market share, but increase it in those segments that we are targeting the most.

And the third driving force will be a fee income because this year has been very sluggish. And actually we have been reducing our total fee income in part due to regulation, in part due to we are eliminating fees that can be perceived as a controversial from the standpoint of the client. Remember, when you are growing fast, it is better to waive fees that are a little bit only from the standpoint of the client.

And that is why at the end at, as we tried to say in the call, there is a clear link between client base and fee growth. The more clients you get, the higher after a lag of eight, nine months, the fees you can collect.

That is why it is encouraging that we are seeing growth in the client base approaching [35,000] clients per month, which is roughly an annualized rate of 7%, 8%, which we think can be sustained in the next year. And that will be definitely with a driving force.

And lastly among the drivers of growth is the full implementation, and that we are able to squeeze all the capabilities of this transformation process, especially CRM and the different changes we have been doing in the commercial areas. As we tried to put in the call, in the webcast, we have encouraging figures and we have encouraging trends that, if sustained, we think will allow us to maintain higher than average profitability.

And probably a place in the market and those segments are relevant to growth because we think, combined with the new tools we have (inaudible) our approval, it will give the Bank the ability to withstand a more challenging economic, regulatory, and competitive environment. Because we have done our homework, we think we are in a better position to cope with that more challenging environment.

Tito Labarta, Deutsche Bank.

Just, I guess, a bit of a follow-up to the previous question on return on equity. Just in terms of timing and how soon you think you can get to that 20% or so ROE.

And just to be maybe a little more specific, I think, take today in terms of particularly in terms of provisioning levels coming down a bit, we saw they were still a bit elevated in the quarter. I understand part of it was due to the middle-market segment. But when do you think you will see the provisioning levels come down a bit? Particularly in this quarter we saw asset quality improve, so I am surprised that the provisions were still a little bit high.

And then also in terms of the fee income, I understand regulation is impacting that, but it looks like fees dropped quite a bit this quarter and are definitely not growing in line with clients. If you can maybe just give some more color and why the big drop this quarter, if there is anything kind of extraordinary you did, or why the fees fell this more quarter than they have in previous quarters. Thank you.

Although it is difficult to give you a precise timeline, remember that this quarter the ROE was benefited by higher than normal inflation, but also we think higher than normal provisions. And at the same time lower than normal financial [pressure] regulated activity with clients.

So that is why all-in we think we are very close, if not [20], very close to reaching that level. And going forward, as we commented in the previous question, the good points are that this transformation process is delivering results and we are outpacing the market and those segments that we wanted. We are increasing the number of clients, etc.

The only two uncertainties that we have going forward are, number one, the caps -- the maximum rate that is very close to be approved by Congress, which will make a dent in our net interest margin we put in the press release of around 15 basis points in our [American this market] going forward. But we still have no clarity because apparently the implementation will be phased out in stages. And, secondly, the government realizes that these lower rates are [decreasing] the banking penetration that could eventually reverse at the level of rates.

So that is why it is simply a preliminary estimation. But that being said, I will say the -- one of the concerns we have going forward.

The second is that the -- it is very likely that whomever takes power in Chile, we have elections by the end of the year, it's very likely that he will be increasing corporate taxes. And so that is why we will be more -- definitely [be intense] of approaching ROEs in the close to 20%, because the commercial bank is doing well and because the transformation process is doing well and delivering results even faster than what we were anticipating.

And the two caveats are, number one, probably higher taxes. Number two, the implementation of these maximum caps that will have an impact in our margins going forward.

Okay. Thanks. And just a (multiple speakers)

In terms of asset quality, asset quality has been improving, yes. But usually what happened is the impact in your prices are moving to safer segments is quicker than the impact in terms of your provisions because you have to -- to some extent, the changing mix lags. Provision lags a little bit the change in the mix.

But we are comfortable. Our concerns were basically the consumer side, and there, we are seeing positive signs. In this quarter we think we have extraordinary items related to midsize companies that were, to a large extent, one-off because the economy is doing well. The investment levels are doing well, sales are doing well.

But there were some specific companies that we thought it was pertinent to strengthen our provision levels. And so we think that it should be a blip in the radar, but we have comfort that the going-forward asset quality should be stable or improving. And as a consequence, provision levels should be stable, or at least not growing, in line with the growth of the net interest income.

Remember that the -- since we changed our models, it grows if linked with provisions, because we are [saving] provisions up front and not waiting until clients say I'm kind of [threatened]. And that is why the relevant metric is not absolute provisions, but the provisions of the proportion of the loans was a proportion of net interest income.

In terms of fees, again, given that we are having strong growth in the lending lines and the deposit lines, et cetera, today fees are very much in the spotlight. And nobody wants to be perceived as the more fee-intensive guy in town, and that is why we have been preventive, trying to comply with those new regulations, but at the same time take into consideration that the fees are sensitive point in the customer relationship that we have with our clients.

That is why we are focusing much more in usage cycle fee and in even our clients, value for the money. And that is why once we settle into the new parameters of fees, we are certain that we will start seeing growth in that line especially by second half of next year.

We don't count them as being a possible growth driver for 2014. But at least we don't count them to be a drag [as how it] indicates in 2013.

Okay. Thank you. Just a couple of follow-ups. In terms of -- you mentioned there is a lag in the provisioning levels. How long would you say a lag is? Is it a month, a quarter? Just want to get a sense of when we can see improvements there.

And then, also on the fees, would you also say there is a bit of a lag as kind of first you get the clients and then you can start to see the growth in fees? So as the client base grows, then the fee growth will follow after that? Just to clarify that.

In the case of provision, well, actually, it depends on the mix and the trend and the type of customer. But if you [see] the one-time provisions we did this quarter, it is already happening.

In terms of fee, usually clients they like nine up to 12 months to be contributing on a net basis on the provision side. And that is why it should be good news probably by the end of 2014, not before.

Fred Moritz, UBS.

Thank you. A couple of follow-ups on the theme of asset quality. On the first one, you mentioned that provisions remained quite high in the quarter and that was mostly because of SMEs and middle markets. And in your press release you mentioned it was across the board. There was no specific sector.

Could you just give a bit more color in terms of why you think the provisions were high? Is it something in your origination that was wrong? Is it something you have to change with the loan officers? Just to get a little bit of color on this.

And on the same theme of asset quality, we are seeing obviously some large retailers -- one big retailer in Chile, in particular, having some issues. And I wanted to know if this could cause an uptick in provisions as well if you have exposure.

And the second follow-up is really on the previous question on provisions. Just wanted to make sure I heard properly. Are you expecting provisions to come down in the fourth quarter already? Or do you think this could take a bit longer? Thank you.

Okay. No, in terms of fees -- sorry. In terms of specific positions, we are coming from a very low level in provisioning in commercial lending. In companies lending at -- [being] almost zero, the level of provision that we have been taking in the last, I would say, 12 months or so. And that is why it shows as a jump.

But actually, I would say it is more kind of a normalization of the level -- coming from a very low level in absolute terms anyway. Remember that, again, if you have zero provisions, it is simply because you are lending to -- you are leaving part of your business out. This is a risky business and there is nothing wrong as long as you charge at the correct prices, which we think we are trying to do that. And that's why these provisions don't concern us very much.

Part of it is some specific clients as you point, where we have exposures. Unfortunately we cannot comment on particular terms with particular clients, but there have been a number of stories of companies. And that's why we prefer to take precautions before the situation is more concerning.

So, a relatively relaxed view about how the market is evolving, but of course when you set pure provisions against a big part of your loan portfolio, whenever you start setting provisions it shows as a jump.

Nevertheless, if you take a 12-month forward-looking view that the fact that provisions on the consumer side have been set and coming down, and the fact that we expect commercial lending to start picking up because we are growing faster. And because of course in time, some of the specific positions can deteriorate, make us believe that the total provisioning will be relatively stable and moving a little bit lower than the growth of our own loan book.

And that is why at the end our metric that we follow is provisions over loans, which should be going down because loan growth should be accelerating as we saw before compared to the previous 24 months, and at the same time provisions being more flattish or at least growing, but less rapidly than [not]. And, therefore, the ratio coming down, which is what you should expect given that we are entering into less with fee segment.

Jose Barria, Bank of America.

Most of my questions have been answered, but just wanted to look into loan growth specifically. Obviously, we are seeing some acceleration in this quarter, but you have mentioned that we are expecting a moderate slowdown in the economy in Chile in the quarters ahead.

Given these two diverging paths, do you think that we can continue to see loan growth trending close to above 10% or are you preparing for a slight deceleration from there, given what is happening in the economy?

In terms of the target segments, we think we can maintain growth rates faster than 10% -- say 12%, 13% going forward. And so the remaining part of the loan portfolio is a little bit uncertain because there we have been on purpose pumping the brakes in the case of mortgages, in the case of lending to large corporations, because of the low profitability that we can get.

If you simply lend money to a large corporation it's unlikely to maintain ROEs in the higher fees as we have been delivering. And something similar with mortgages, because today the prices that we see in the market with mortgages is very low. And that is why it is not a focus for us.

And therefore the total loan book, although we think it could be growing at 10%, 11%, if we see prices very tight and very -- and we think that that makes sense to allocate capital [to those given] activities, we [seem to still] growing in those segments. And that is why the total loan growth it is a little bit uncertain, because we depend on the price and the (inaudible) of the rest.

But where we do have the power to -- and the focus is on the target segments, and that's where we think -- and there are other segments where maybe in that income net of spreads are much higher. That is why at the end it is a strategy that is pursuing profitability over time, which is something that we have been doing in the last seven, eight years quite profoundly.

Okay. And with regards to the NIM, understanding that you are growing in more sort of higher yielding segments, but we have also seen a very strong quarter in terms of UF inflation positively affecting your margins. Would you say that the level that we saw -- the overall NIM level that we saw in 3Q was probably a peak for you based on how strong UF inflation was?

Yes. Of course, if you believe as we do that the next year inflation should be moving closer to 2.9%, 3%, that means that 0.7%, 0.8% inflation per quarter. And this is quarter it was around 1%. So it was quote, unquote, abnormally high inflation supporting for our margins.

But again, we expect our net interest margin to be -- at the end, the inflation is beyond our control. And although most people believe that inflation is picking up, we don't count that as a source of [valid rate]. It seems to be a fact of life and is supporting for margin the higher the better.

What we are really putting focusing is on client margins, and there, what we expect is some trending down in the client net interest margin that would be more than compensated through lower provisions. And that process is starting to time to be more clear on the consumer side, is the one that was more concerning area one year or two years ago. And we expect it to be visible also in the rest of the business of the Bank in the near future.

Perfect. That's great (multiple speakers).

(multiple speakers) net interest margin probably coming down from 5.3%, but at the moment more stable.

Got it. Specifically on NIM, after provisions, what was it this quarter and where do you think we can get as we see these dynamics playing out?

This year, this quarter, the net interest margin, net of provision, might have been close to 3.4%, 3.5%. We think that can be trending up in time, especially if we support the trends in consumer lending and we are able to be more selective in the commercial side.

Remember that we have been changing our credit approval tools and the way we evaluate and follow-up on clients. And that's why we think it can be increasing in time. If you have delivered that -- if you maintain growth of 13%, 12%, 13% in the target segments, and you maintain provisions under control, it can be fairly accretive at the bottom line.

Great.

Saul Martinez, JPMorgan.

I am going to play devil's advocate a little bit, and I hope this doesn't come across as overly confrontational, but I am having a hard time reconciling the numbers with the optimism. And when I look at the -- I mean, the ROE was fine this quarter, but it was done with, as you mentioned, a fairly elevated level of inflation.

Net interest income from client activity is hardly growing at all, in spite of the fact that you are kind of well into your way in terms of your strategy targeting selected business segments. In spite of that, and in spite of presumably these segments having a better risk (inaudible) profile, the cost of risk -- and I know there are transitory factors involved, but the cost of risk seemingly remain very elevated.

Which would all seem to imply that you are marginal ROEs in your credit business have been fairly poor lately. Can you just help me understand why -- what you are seeing?

And I know you have addressed it a little bit, but what you are seeing in that gives you optimism that your risk-adjusted return will indeed begin to improve in terms of your credit business. And if my analysis and my thought process is wrong, let me know why it is that way.

Okay. Well, I will try to do my best with the question. What we see is the following, that there were major changes in the overall operational environment for Chilean banks.

After going through many years in which the prevailing model was to go down market, both in the [quoted] side and in the individual side, for a number of reasons good and bad there have been major changes. And that has resulted in margin compression compared to the levels that we saw.

Because in the previous days, you see that the lower you went, the higher the prices you charge and you were covered of the incremental risks and the incremental (technical difficulty) by going down market. That situation today is more difficult to do because of regulations and because of changes in consumer behavior etc.

And that is why we thought that we needed a major transformation in our business model (inaudible). And now our decision was to change our business model to take into consideration this new environment and to increase our commercial productivity by means of [given] tools, because I think what we did with the brick and mortar base, a model would be very unlikely to maintain higher than average performance.

That process has resulted in the last [two] years or two years and a half in a slowdown of the Bank, because we were taking care of many activities in order to change the way you do business. And at the same time, we saw lower inflation. So it was that combination that of course affected our performance, and affected outperformance a little bit more than the rest because we were the most retail bank in Chile.

Now, why we are increasingly encouraged is because we have finished those transformation efforts. They are starting to deliver results and those results are starting to be visible in the commercial line.

Of course, this is a process that cannot be measured on a quarter by quarter basis. But the fact that we are increasing the level of lending in the target segments, the fact that we are increasing clients, the fact that we are increasing core deposits make us believe that going forward we should achieve a higher level of performance compared to the last two or three years.

And then on the riskier side, kind of the how you calculate the economic value, this discount rate also we think is lower because we are operating with much higher capital base than historically, and therefore with much less leverage than before. And also we are moving into higher risk -- into lower risk categories.

And that is why, from our [evaluation] standpoint, we think that we are in the process of delivering increasingly higher ROEs, but at the same time operating with much lower riskiness for our shareholders. Just to give you a further example, apart from the change in the mix, we are not doing currently since we last -- when we have more profit (inaudible) activities.

100% of our rating income from client activity and that is why the nature of the revenues are better quality than, say, [what we use if it would] depend that most of the Bank on treasury type of activities to compensate or to fuel our profitability.

So it is simply the optimism that we are trying to convey is simply our reflection that we are seeing the ending of this process of transformation. And the early result of it is still in different figures that the Bank produces, including not only financial figures, but also client attrition, the quality of service, employee morale and things like that. We (inaudible) on a quarter by quarter basis, but at the end results higher value creation for shareholders.

Why is NII from client activities not growing, even on a year on year basis, even though your growth in your targeted portfolio is growing roughly 14%, 15%?

Basically a reflection that you are growing in the safer categories we are seeing in your clients. And that is why it is starting to be visible in the consumer side. You are absolutely -- or your gross spreads are trending down, but at the same time your provision expense have already started to go down.

If you apply that philosophy and that expected result to the rest of the loan book, we expect that probably with lower gross spreads we can achieve higher profitability than before, simply because the amount of provisions, even though we are moving to the more safer pieces of the market, would be lower than before.

And that is simply a reflection that we are growing the safer categories off of generating the [regular with the] safe category [supplying], which should have an effect on the delinquency side, as we see already starting to happen.

Could you remind me, Raimondo, how much of your loan book is represented by your target segments?

It is -- give me one second to see it. The risk is -- while we do the calculations, the rest is not under enough focus. It's simply that in mortgages we're putting effort, but we don't want to leave the market in large corporate lending, staying in the low end of the consumer market the same.

So those things, the growth there would be zero, negative. Simply that we don't want to put too much effort in that and keeping our commercial effort on the rest of the category.

The target segments were (inaudible) roughly 60% of the loan book. (multiple speakers) the corrected by the provisions tend to be higher than the rest. (multiple speakers)

Okay. So it's a higher proportion of after-provision NII than 60%.

Yes. That's right. And the same thing -- at the same time, is that what we are seeing is that trend of a higher provision adjusted within the net interest income, net interest margin.

Timothy Pools, Morningstar.

I just had two questions for you, kind of going back to the loan and loan mix. Just kind of wondering how long you expect to see much stronger growth in these targeted segments. And really what I'm wondering is when can we see more balanced growth throughout the entire portfolio.

And then my second question is regarding your loan to deposit ratio. It is now standing at 104%. I guess I am wondering where you think that might level off over the long-term or if you have a range or a goal for that number? Thanks.

Okay. In terms of loan growth, the gap will narrow assume as soon as we see good prices in the market for those activities that today have relatively low yields. So we think that reflection that the Bank has been pursuing a profitability-driven strategy for many years, focusing on its capital -- allocating capital only where you see good profitability at the other side.

That means that you mark the total market share balances simply as a reflection that your focus is on the more profitable categories we see in the total market. So it is something that we have been doing for many years.

Size is relevant when you don't have it. When you have a small (inaudible) it makes sense to rush things a little bit. But once you have, as we have, a market say of [18%], we think it is better to move to another level when you try to optimize the use of capital and try to grow as profitable as you can.

In terms of loans, also deposits [as a relative] point, we say it is ahead of 100%. But that is basically because in Chile, mortgages are funded, even though they are 20-, 25-year mortgages, you'd never fund it by that short-term deposit. So what you do is you issue bonds to match the duration and the sensitivity of your mortgage portfolio.

And, therefore, if you exclude mortgages from the loans, the loan mortgage lending over the course of this has been very close to 100% on balance historically, and it is a feature of the market. Most of the time you have more loans then deposits. It's simply a reflection that mortgages are rarely funded by deposits because they are 20-year fixed rate mortgages, and therefore the interest rates [really] could be very high. You can fund it using short-term deposits.

So it is a feature of the market. At the end where it is relevant is that our kind of floating loans are very similar, very close to 100% our floating deposits. And the fixed mortgages are funded with fixed bonds.

Okay. I guess just a follow up. Do you see it kind of stabilizing right here, or which direction do you expect it to go, if any?

Very similar to or very close, moving around 100%, especially now that the authorities are launching a new -- the [covered bond] market is [open] for Chilean banks, which will add extra layers of flexibility to the balance sheet management and to the funding of mortgages. So it tends to be very stable.

In Chile, the other feature is that the -- we have a very high savings rate, close to [33%, 34%] of GDP. And therefore it is a very liquid market. We are funding -- at the end, it is not a matter of -- it is not a big concern of the Bank. The [value is] that you make very little money on the deposit side because of the very high liquidity that you have.

Thiago Batista, Itau BBA.

Just follow up regarding the fees. When you said that the fees will not drive the results next year, are you already considering the sales of the asset management? And when do you believe this transaction will be concluded?

What happened is that the -- if the sale proceeds, you will have an impact because instead of getting 100% of the fees, the bank will be getting, depending on the fulfillment of some safe target, close to 75%. So that will have a -- but, of course, it is part of the price that you are paid by this group of companies that are joining forces to have a large asset manager.

In terms of the timing of the sale, is uncertain as we put in our press release. The board has approved or found convenient the transaction as is the sale, and the offer that the Bank received was received also positive by two external consultants that we hired to give an opinion about the transaction.

But the timing -- at the end, it will be through our shareholder meeting that perhaps will approve the transaction. But the timing isn't certain because this is a global transaction (inaudible) and therefore we are pending what happens with the rest of the units that will be involved in these transactions.

And at this time, there are no further questions.

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

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a great day.