Banco Santander Chile (BSAC) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Q4 2013 Bank Santander Chile Earnings Conference call. My name is Alison and I'll be your operator for today.

At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Raimundo Monge, Corporate Director of Strategic Planning. Please proceed, sir.

Good morning, ladies and gentlemen. Once again, welcome to Banco Santander Chile's 4Quarter 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 4Q 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 of the outlook for the Chilean economy in 2014, while introducing our initial forecast for 2015.

We continue to be positive on the performance of the economy, although we expect a lower growth compared to 2013. This will be mainly the consequence of first, a reduction in investment in the government's reconstruction efforts after the 2010 earthquake. At the same time, investment in the mining sector should decelerate as various large projects to increase output and productivity are finishing.

As we'll explain in a moment, these are two activities where banks had little involvement and were funded mainly through their own resources.

At the same time, consumption should remain at relatively high levels, given the tight job market. And we foresee a relatively supportive external sectors, given the recovery of the US and other relevant trading partners and a higher mining output.

We expect GDP growth to reach between 3.8% and 4% in 2014, and to reach close to 4.2% growth in 2015. We forecast internal demand to expand by around 4.4% in 2014, and a little bit below 4% in 2015.

The Chilean Central Bank should continue to lower interest rates, which should fall to 4% by the end of the year, leading to a weaker exchange rate. The depreciation of the peso should also lead to slightly higher levels of inflation and good export growth.

The inflation rate measured by the variation of the US and inflation-linked unit, which is the most relevant indicator for the Bank, should rise from 2.1% in 2013 to 2.6% in 2014. All these should lead to what we think is a supportive macro environment for banks.

Regarding the economy, one of the main concerns is if there is a slow-down in the Chinese economy, the Chilean economy could enter a low growth phase. Part of this risk is already accounted in our previous forecast. However, as it can be observed in slide number four, copper, although being an important part of the Chilean economy representing almost 6% of exports and around 12% to 15% of GDP, has not been the driver of the Chilean economy in the recent years.

Copper exports have been mostly flat in the last two years as prices are trending down and volumes were lower, a situation that could change going forward after some large new projects will come into full production.

At the same time, non-copper exports, which had been growing at approximately 10% a year since 2010, should continue to do well as the US and Euro zone economies tend to gather momentum. And the competitiveness of exports is increased following our weaker Chilean peso.

In fact, the weighted average of Chile's GDP growth -- the weighted average of GDP growth of Chile's main trading partner is actually expected to rise in the next two years, as you can see in the slide.

On the other hand, the government dependence on copper revenue has been declining since [2016], representing today roughly 7% of the government revenue as the government has successfully diversified its income base. For this reason, loan growth should continue to be strong in the Chilean market.

Also, in 2014, we are expecting loan growth for the whole financial system to reach between 9% and 10%.

The profitability of the Chilean Banking system is also stabilizing due to a more normalized inflation and rate environment.

The Chilean financial system has an additional strength, which is a high level of savings and liquidity. In recent weeks, there has been a great deal of concern regarding the possible effects of the debt tapering program.

We would like to remind investors that the Chilean economy has strong liquidity levels. For example, if we were to sum the amount of money saved in banks plus the amount saved in the Central Bank as foreign resource, Chile's foreign funds, mutual funds and other institutional investors, we have a total stock of savings representing 1.8 times total GDP. And exceeding all of the deposit funds currently held.

At the same time, the (technical difficulty) foreign ownership in the local fixed income market is low, representing less than 5% of the total.

Therefore, the effects of the tapering on the Chilean banking system should be limited, given the supply of funding, the low penetration of foreign investors in the local fixed income, the high credit risk rating of Chilean banks, and the strong core deposit base of the larger market players.

Now, we will review how the Bank continues to move forward in its strategic objective. During the quarter, the Bank saw relevant advantage in several of its strategic objectives, fueled by its transformation project.

The evolution of our quarterly results demonstrate that our retail banking is well ahead in adapting the new strategy with a strong expansion of loans and deposits in the segments we have targeted for growth. This has been achieved with an important improvement of our CRM and quality of service, and by radically changing the risk profile of our retail loan book.

We believe that we are slightly ahead of the rest of the banking system in making the necessary changes that will allow us to continue to achieve an optimal balance between our return on equity and our cost of capital. By maximizing this relationship, we should be able to expand shareholder value.

In 4Q 2013, total loans increased 3% Q-on-Q, and 10.9% year-on-year. In the quarter, loan growth continued to accelerate in the markets the Bank has targeted. These are high income individuals, SMEs, and the middle market of [companies]. Loans in this combined market increased 3.4% Q-on-Q, and 14.6% year-on-year.

In terms of products, consumer loans led growth and increased 5.4% Q-on-Q, and 15.8% year-on-year. The evolution of our funding base was also positive in 4Q 2013. Total deposit grew 2.3% Q-on-Q, and 8.6% year-on-year. Non-interest bearing Bank deposits increased 6.9% Q-on-Q, and 13.1% year-on-year.

In the quarter, the Bank's fund strategy continued to be focused on increasing core deposits, while lowering deposits from more expensive short-term institutional sources.

Client deposits, that is demand and time deposits from our retail and corporate clients, expanded 3.2% Q-on-Q, and 19.8% year-on-year. Client deposit now represents 86% of the Bank's total deposit (technical difficulty).

The transformation initiative is also beginning to produce positive results in terms of quality of service and client satisfaction. This will launch Santander Select. And with more intense use of the new CRM capabilities, the impact in our client base has been very positive. The amount of new clients entering the Bank increased 44% in 2013, mostly on the second half.

This should lead to a 7% to 8% client base growth in 2014, which should help to drive the income going forward.

The transformation project is (technical difficulty) evolution of consumer loan asset quality, which is a key cornerstone of our strategy to obtain higher margins net of provisions.

This is due to various initiatives the Bank has been carrying out since 2011. First, the portfolio mix changed focusing on loan growth in the higher end of the consumer market. Second, improvements of our risk models. Third, the revamping of the collection processes. And, lastly, the focus on growing via pre-approved loans.

As a result, in 2013, consumer low performing loans decreased 21%. And impaired consumer loans, which [add] were negotiated in loans, fell 11% in the same period. Better collection efforts led to an important rise in consumer loan loss recoveries. This increased 63.5% in 2013.

The Bank also concluded 2013 with strong capital ratios. Our core capital ratio reached 10.6% at year-end 2013, and the total BIS ratio reached 13.8% at the same time.

The ultimate goal for our strategy is to maximize the difference between our ROE and cost of equity. Today, we have the highest core capital among our local peers, which allows us to grow with a solid balance sheet. On a global basis, our cost of equity is also significantly lower and can be derived from our strong credit rating.

Now we will explain the evolution of our results, which also shows favorable trends. In 4Q 2013, net interest income continued its upward trend and increased 2.2% Q-on-Q, and 3.9% year-on-year.

The 2.8% Q-on-Q growth of average loans and a better funding mix drove this rise in net interest income. The net interest margin in 4Q 2013 reached 5.2% compared to 5.3% in 3Q 2013, and 5.5% in 4Q 2012.

In order to improve the explanation of margins, we have divided the analysis of net interest income between client and non-client interest income.

The slight reduction in net interest margins in the quarter was mainly due to the lower inflation rate. In 4Q, the variation of the Unidad de Fomento, UF, an inflation index (inaudible) unit, was 0.95%, compared to 1.4% in 3Q 2013, and 1.11% in 4Q 2012.

As explained in other calls, the Bank has more assets than liabilities linked to inflation. And, as a result, margins seem to have a positive sensitivity to variations in inflation.

Regarding client net interest income margins, defined as client net interest income divided by average loans, in 4Q 2013 they reached 5.6%, compared to 5.6% in 3Q 2013, and 5.9% in 4Q 2012. The stable margin compares with Q3 2013, mainly due to the higher growth of consumer loans in the quarter compared to other products.

The lower client margin on a year-on-year basis was mainly due to higher growth among operating income individuals, compared to a decrease in loans in the low income consumer segment, which being riskier, has a higher spread.

Since the Bank's strategy is to gradually achieve a higher net interest margin, net of provision expenses, by focusing its growth in the middle market, SMEs and the high end consumer market, even though this will result in lower gross margin.

Most asset quality metrics improved during -- for the 4Q 2013. Net provision for loan losses decreased 8.7% Q-on-Q, and 2.6% year-on-year, despite a one-off provision set against a specific line in the corporate segment.

The cost of credit reached 1.7% in 4Q 2013, compared to 1.9% in both 3Q 2013 and 4Q 2012. Key in this lower expense was the reduction in consumer lending, which decreased 19.8% Q-on-Q, and 37.5% year-on-year as a result of the various actions taken to improve credit risk in consumer lending.

The Bank's total non-performing loans ratio reached 2.9% in 4Q 2013, improving 10 basis points compared to 3Q 2013, and 30 basis points compared to 4Q 2012.

The risk index remained stable at 2.9%. The total coverage of non-performing loans with provisions in 4Q 2013 reached 99.2%, compared to 94.8% in 3Q 2013, and 92% in 4Q 2012.

With this evolution of margins and credit risk, the Bank has experienced a steady rise in net interest margins, net of provisions -- as you can see in the slide -- reaching 3.7% in 4Q 2013, compared to 3.5% in 3Q 2013, and flat year-on-year. This rise was led by the higher inflation and the improvement in margins, net of credit risk in consumer lending.

The net interest margin of consumer lending, net of credit risk, increased from 9.1% in 4Q 2012, to 10.4% in 4Q 2013, despite the fact that gross margins were down in the same period.

Going forward, the evolution of margins, net of provisions, reflect various factors. First, we expect inflation to remain at levels of up 0.7% up to 0.8% per quarter, on average, with occasional fluctuations. In addition, the Central Bank should continue reducing interest rates, which should help support NIMs as our interest bearing liabilities tend to re-price faster than our interest earning assets.

The Chilean Congress also approved the Maximum Rate Cap Law in December 2013. The Bank estimates that in 2014 this bill could lower our net interest margin by around 15 basis points, all else being equal. This estimate is only preliminary as it is difficult to estimate the speed of implementation of the reduction and the effect of loan volumes.

Finally, we expect provisions of the (inaudible) of loans to decline to levels of around 1.4% up to 1.5%, depending on the evolution of the economy.

Costs are also evolving as planned. Operating expenses in 4Q 2013 increased 2.1% Q-on-Q, and increased just 1.4% year-on-year, as the transformation project is beginning to deliver not only higher commercial activity with clients, but also increasing our productivity as well.

The Bank increased its loans and deposits at a greater rate than the market without increasing the number of branches and headcount. This has been achieved with the higher use of the CRM and a strong competitive advantage that we have in the Internet, mobile and phone banking. The efficiency ratio reached 38.2% in 4Q 2013, compared to 39.8% in 3Q 2013, and 39.5% in 4Q 2012.

All of the above has resulted in strong operating income in the quarter that reached the highest level in two years.

The ROE in the quarter was 30.7%. Excluding the sale of the asset managing subsidiary, the recurring ROE reached 19.7%, in line with the guidance given to analysts in previous calls.

In summary, the Chilean economy and financial system are in good health. The lower rate environment and the uptick in inflation will also help to boost profitability in the financial system. We achieved an ROE of around 20% in the quarter. And our outlook for 2014 is sound.

Although the new caps in lending and eventually higher corporate taxes will impact our results, loan growth and asset quality trends are encouraging. The funding mix continues to improve. And client deposits growth has been solid. NIMs, net of provisions, expense are rising. These are beginning to rebound, led by promising trends in client growth. The Bank productivity and efficiency is improving.

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

(Operator instructions). The next question comes from the line of Thiago Batista from ITAU BBA. Please proceed.

Hi, guys. Good morning. Thanks for the opportunity. I have two questions. The first one is regarding the banking margins. As you commented, Raimundo, two main factors affected the margins during this year. The first is inflation, the second, the lower interest rate cap.

Do you believe the potential of higher in US variation allied with the lower bank interest rates, you will be able to offset the impact of the lower caps? That is the first question.

The second question is about the efficiency ratio. In the last quarter, Chile improved its efficiency ratio. Do you believe this is possible to see this trend continue during this year? And if yes, what is your ratio target in the medium term?

Okay. Thank you very much for your question. Concerning margins, as you rightly point, there will be many moving parts and it's difficult to give you a firm guidance. But if you reconcile the three or four moving parts, we think that margins, because of this kind of external forces, especially caps, interest rate movement and inflation, will, to a large extent, cancel out. There will be a slight negative impact of the three things if you combine them. Yes?

And the rest of the growth of the net interest income will come mostly from client activities, especially growth in the segmented areas, and our intention to see net interest margin on the client part to be trending down, but probably very close to bottom. Yes?

That's why we are optimistic. The only concern -- and to give you all the information -- is that the caps are already enforced and the other are simply expectations that we have that US inflation will be higher and that rates will come down.

So that's why we prefer to be conservative and say, okay. We will have an impact of around 15 basis points and the rest is up to inflation and rates interest to compensate.

But, as you correctly point, there will be compensated forces. It's difficult to say whether they will be full to a large extent. However, we think that the growth of the net interest income will be coming mostly from client activities, given that non-controllable forces will be very much cancelling down between themselves.

In terms of efficiency, we are today maintaining levels slightly below 40% of our cost income ratio. We think that the transformation project, which has been at the center of the changes that the Bank has been doing in the last two or three years will deliver stronger results, and at the same time, will allow us to increase our efficiency. And that's why we think that that ratio should trend down in the medium term the next two or three years, probably arriving to 37%, 36%.

Probably not lower than that because we have had experiences with the lower cost income ratio and you start seeing side effects, which are better to -- in a commercial bank, especially retail bank as we are, having too low cost income ratios has [size big] consequence.

So we think that in the medium term, and after the full impact of this (inaudible) transformation project is visible, levels of 36%, 37% can be sustained.

Okay. Thanks.

The next question comes from the line of Carolina Hashimoto. Please proceed.

Hi, Raimundo, Robert. Good morning. Congratulations for the results.

I have a couple of questions as well. The first one is on tax rates. So I wanted to get a sense from you on what your expectations are regarding when the increase in corporate tax rates could take place in Chile, both in terms of timing and the scope. We've heard people saying about 30% instead of 25%. And I was just wondering what are your thoughts are on that?

And my second question is on competition. I know now that the transformational process is over. And you've been recently focusing on higher income segments. So I'm assuming that most of the other banks have also moved in the same direction as you did. So just wanted to get a sense on how the competition is in that segment? And what have the main challenges been so far? Thanks.

Okay. Well, concerning tax rates, we don't have still a very clear view because, to be honest, the new government will come into power next March.

However, among the first, kind of, promises that the new government has come is to act rapidly in passing the tax reform, which up to now, the central (inaudible) of increasing in four years the taxes up to 25%. We haven't heard about 30% by any official source. Yes?

That means that for 2014, the effective rate for the Bank should be around 18% -- a little bit higher.

Remember that what happened is that when you increase -- and we tried to explain in the press release -- when you increase the corporate tax rate, there are some tax breaks you get at the beginning because of the deferred taxes. Yes? And that's why the effect in 2014 will be minimum because of all the corporate taxes increases close to 1.25% -- if central (inaudible) happens.

What happened last year that we had, for example, 4Q of 2012 was an outlier because the actual -- the effective rate was below 5% simply because you recognize the benefit of the deferred taxes up front and then you pay the higher effective rate. And that's why the taxes will impact our profitability going forward.

But specifically in 2014, depending on the timing, it could be very minor because of this one-time benefit coming from the deferral of taxes. So this year we finish with a corporate tax rate of 17.5%. Next year, it could be 18%, 18.5%, something like that.

And then in terms of competition, what happened is that the Bank is a matter of influxes. The Bank was emphasizing in the last five to six years the middle to low end of the consumer market. It's not that we were completely out of the high end. It's simply that our market share in the high end was close to 15% and in the middle to low end, it was higher than 20%.

Now we have the capabilities to serve the different brackets of clients with what we think are superior tools, especially in terms of greater origination and terms of how we handle the client relations. Yes?

So today, given that prices are increasingly similar with the different market players and there's very little room for discriminating prices and for pricing differently because people have more information and more empowered, our competitive position has been to increase the speed in delivering and the speed of how we are attacking the needs of the client.

And that's why, regardless -- everybody, of course, is trying to go to more or less the same client, as is happening in 100% of the market -- we think we have the ability to grow faster than the rest in the target segments because we are quicker in addressing their needs.

And that's why, at the end, we have moved from a scenario where price competition was to some extent the way to gain market share or to lose market share if you didn't validate the prices. Now we're moving into a scenario where, at a given price, whomever is faster to get closer to the client, could be in a position to win. And that is what is starting to happen with the Bank because the rest of the competitors are doing very well. But we think we have tools now that allow us to do the trick a little bit faster than the rest.

All right. Thank you very much.

The next question comes from the line of Fred de Mariz from UBS. Please proceed.

Thank you. Good morning, Raimundo, Robert. Thank you for the conference.

Two quick questions on my side. The first one the cost of risk. We were at 1.7% in the quarter. And you mentioned during your remarks that we could get to 1.5%-ish percent. Just wanted to get -- and maybe you mentioned it and I missed it. But when do you think we can get to that level? And what exactly are you guys doing to reduce the cost of risk? Are you reducing the rates of approval, or is it just because of the change in the loan mix? So just a bit more color on the provisions.

And then the second question is very much in line or a follow-up to the previous question on competition. Are you expecting or are you seeing any changes in the behavior of Core Bank and ITAU now that we have the deal signed between the two banks? Do you think that would change the situation in the coming quarters for your clients? Thank you.

Okay. Thank you. In terms of provisions, generally speaking, the cost of risk provisions of our loans, we think that they could trend down to 1.5% throughout the year. Yes? Not every single quarter, but as a general trend, as a moving average.

And that is basically because of the changes we've been doing, especially on the retail side, stronger credit origination processes, stronger recovery process. And the way we originating today roughly half of our consumer lending is originating via pre-approved operations where we take the decision to go after a client and we offer them pre-approved terms. And, therefore, in terms of the quality tend to be much higher quality.

There was an uptick in the non-performing levels of consumer lending in the quarter. That is simply because we are fine tuning continuously our approval process. And going to zero in non-performing loans is bad business because at the end, you're leaving a lot of business out on the table.

So that's why that number shouldn't be expected to go down and down forever, because at the end, we will be lending only to the very, very wealthy and your margins will suffer.

That's why our purpose has been, for some time, to maximize not the gross spread, nor to minimize the cost of risk. It has been to maximize the gap between the two to get a risk -- a net interest margin, net of provisions, that is supporting and, hopefully, increasing in time. And that, in the consumer side, we think we have been, up to now, quite successful.

In terms of competition, of course the competition -- the proposed merger of ITAU and Core Bank has not happened. And that's why, in reality, nothing has changed.

But in terms of our view, we think that it is good news to have stronger competitors because, at the end, this is an industry that relies on the trust of our clients and having a very good bank as ITAU coming is always good news, especially in this (inaudible) process of increasing banking penetration in Chile, which must be done by solid players.

In terms of whether this will increase or decrease competition, it's difficult to know. But ITAU has been in Chile for six years or some -- somewhere around that. And it's a player that we know them, they have been doing sensible things and doing good business, etc.

And that's why the moment you get a little bit concerned is when somebody completely out of the blue comes and acquires a competitor. Because that means that either could be poaching prices and bringing things to crazy levels, or otherwise bring in clever ideas and outgrow you.

When you see inter-market mergers, the concerns are less because size doesn't necessarily change the competitive focus of institutions. And our view is that, both Core Bank and ITAU are doing a very good job today. Probably they will keep it going forward and it's good to have sound competitors in the market.

Okay. Thank you very much. That's very clear. If I may follow up just for the final question, can you remind me again, as for ROE for this year and maybe the following years?

The ROE, as we have mentioned, has a moving average of five or six quarters to be moving at around 20%. We achieved that in 4Q. But, again, the idea is to have it as a moving trend.

The actual ROE in 2013 was closer to 17.5% for the whole year, excluding the sale of the asset management. And that is the one that we would like to see approaching the 20% on a recurring rate.

So it's encouraging what we saw in 4Q 2013. But, of course, the challenge is still to maintain it as a moving average of many quarters.

Okay. That's great. Thank you very much.

Thank you. The next question comes from Tito Labarta from Deutsche Bank. Please proceed.

Hi. Good morning, Raimundo. Thanks for the call. I have two questions. Just first, a follow-up question to Fred's question on ROE. You mentioned over five to six quarters. But I'm just kind of looking at 2014, do you think that ROE of 20% will be achievable for this year, just given some of the pressure you're seeing on margins a bit, also fees are still under pressure from regulation.

And with the higher tax rate -- or potentially higher tax rate -- do you think that that would offset some of the benefits we're seeing on the expense and asset quality side? I just want to get a sense of do you think that 20% is achievable for this year?

And then the second question, just in terms of your loan growth, you mentioned about 9% to 10% for the system. If you could maybe kind of break that down for what you're expecting for you guys. I know that in the mid to high income in the SME segment, do you still expect to grow faster than the market? And what would that mean for your total loan growth for this year? Thanks.

Okay. Well, in terms of ROE, more or less, the same idea that probably not at the beginning of next year achieving ROEs of 20% will be more difficult because we will be facing the full impact of the caps coming and eventually higher rate. But in time, going more into the second half, it's more likely because we will taking actions to compensate for that. And inflation could -- US inflation could increase. And at the same time, the Central Bank cut rates.

And that's why, if you think on a year-on-year basis, we think that the ROE could be -- if not 20%, close to that. Yes?

But then moving forward -- that's why we prefer to talk about trends and about the moving averages than give precise -- I know you need to have precise forecast, but in our case, we think that we are very close to 20%. It could be a little bit lower, a little bit higher.

But as a moving average, we think it can be achievable, especially in 2015 on, once we adjust to the new cap rates and once the inflation normalizes, given the depreciation of the Chilean peso. But it's difficult to give you an exact metric, but very close to 20% on a moving average. Actually, in 2013, we already had an ROE of 20%, but it was supported by the sale of the asset management.

In terms of loan growth, we believe that the market will be growing between 9% to 10%. And in our case, in the target segments, growth is 13%, 14%. A little bit lower than this year but not meaningfully lower.

And in terms of the rest, which means corporate lending, and lending to the middle low end of the consumer market, which are the -- and mortgages -- which are today known targets for us. It's difficult to say because it will depend on the pricing decisions of the rest. If we see sensible prices, we can grow very fast. If we see prices that we think are dilutive, it probably will not follow up the market and not validate those prices.

And that's why what we can feel today is that in the target segments -- SMEs, middle markets of corporate and middle to high end of the consumer market -- we think we can outpace the market. The rest is up to the pricing decision of the rest, given that we are focusing on profitability more than size.

All right. That's very clear. Thank you, Raimundo.

The next question comes from the line of Jose Barria from Bank of America. Please proceed.

Good morning, Raimundo. Thanks for taking my question. Most of my doubts have been answered, but if I could just follow up on two things. One, asset quality, and two, on fee income.

On your guidance of provisions to average loans of reaching 1.5% over the course of the year, what does that imply for your reserved coverage ratio? That's the first one.

And the second question is given some of the changes we've seen in the regulatory environment affecting fee income, what are you expecting for growth in that line this year? Thanks.

Okay. In terms of asset quality and the fact that provisions as a proportion of loans are expected to trend down, in terms of coverage, we will maintain coverage very close and slightly ahead of 100%, which not necessarily has to be. Remember that in Chile, provisions are set according to the expected losses that you had and not necessarily according to non-performing loans. Sometimes they can diverge.

But as a general rule of thumb, probably coverage ratios a little bit ahead of 100% of non-performing loans.

In terms of fees, fees definitely were affected this year and the year before by two elements. One, were different pieces and regulations that make more difficult to collect fees. And, secondly, the fact that -- especially in our case -- we were getting out of -- reducing our exposure to the low end of the consumer market, which typically our clients that tend to pay more fees than the upper end of the consumer market.

That resulted in a drop of fees. Probably that bottom in the 3Q because, apart from that, we took a proactive stance and eliminated any fees that could be controversial. We didn't want it to be having reputation problems with fees, etc.

Once we finished that process -- and it can be seen -- the figures on the 4Q -- higher client activity, which is the side products of the increased use of the CRMs, is starting to deliver higher fees. And at the end, it's a matter of how many clients you start raising. And that's why, although we don't expect fees to be a definite driver of 2014 profit, we don't see fees becoming as a drag next year. And probably close to (inaudible) or single low digit is a good bet.

Especially due to the fact that taking into consideration, as we stated in our press release, that one-fourth of the asset management fees won't be recognized by the bank, even that we sold the asset management company. Now we are recognizing around 75% of the fees, contrary to what we saw in 2013 that we recognize 100%.

But, of course, the intention is that after today, we will have better products and the growth of that line will be higher. Probably in 18 months, we will be compensating that foregone 25% by higher volumes and better quality and a better mix of funds.

So end of the line, we think that the fees probably won't be contributing too much on a year-on-year basis. But definitely in the second half, contributing more because we have been growing our client base since the second half of the year at around 7%, 8% on an annualized basis. And that should fuel fee growth, especially visible in the second half of next year.

Okay. Thank you very much.

The next call comes from the line of [Mayara Riddlebauer]. Please proceed.

Hi. Good morning. My question was on the fees, which was just answered.

And I was just wondering now is what is your expectations with regards to regulation? Is this something that they will be capped for the total 2014 and generate more losses in your known interest income? And there is also talk about a regulation on the interest rates. What is your expectation for that for 2014?

Okay. In terms of regulations, I would say to a large extent, most of them are already -- the changes that were announced in the previous government and in discussions before the election, has been already implemented.

And we said that the only pieces that are pending should be positive for the system, for the clients, and especially for banks, which means to have a consolidated credit bureau would be good news for banks vis-a-vis say other market players; and then the possibility of banks to do payroll lending, which, up to now, has been limited to non-banks.

And then, back to the ratio recommendations in terms of capital controls, which is something that, given the high levels of capital that most banks have in Chile, shouldn't be a major concern.

In terms of new negative regulation, in the program of the new government, we didn't see big changes. Mostly it's to implement the things that have been announced and approved in the last five years. So it's more to execute on consumer protection issues and things like that.

But I would say that, generally speaking, the negative reforms have already been eliminated or implemented. And we see that on the regulatory side we can see good news coming forward.

But it's something, of course, as in any market, you always have changes in regulations. And in regulating industry, it's how quick you adapt is the name of the game because changes will happen every time.

But we don't see major changes except for the [Gray] Bureau and eventually a Basel ratio implementation.

All right. Thank you very much.

We have no further questions.

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

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.