Banco Santander Chile (BSAC) 2014 Q2 法說會逐字稿

Ladies and gentlemen, welcome and thank you for joining the second-quarter 2014 Banco Santander-Chile earnings call. My name is Ryan, I'll be the operator on the event and all participants are in listen-only mode. (Operator Instructions). As a reminder, we are recording the event for replay. Now I'll pass the call to your host for today, Mr. Raimundo Monge.

Thank you very much and good morning ladies and gentlemen. Once again, welcome to Banco Santander-Chile second-quarter 2014 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 2014. 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 on the outlook for the Chilean economy in 2014 and 2015.

In mid-2013 economy had shown signs of deceleration driven by lower investment levels. For 2014 we are expecting GDP growth of around 2.9% with internal demand decelerating to around 2.5%. The inflation rate, measured by the variation of the US, an inflation linked unit, and the most relevant indicator for the Bank, should rise to levels above 4% in 2014 and return to around 3% in 2015.

As a result we expect the Central Bank to cut interest rates an additional 25 basis points this year to 3.5 despite the higher inflation and to start increasing them in 2015. We also continue to expect a rebound of the economy in late 2014 or early 2015 with the GDP growth reaching approximately 4% in 2015.

This rebound in the economy is going to be driven by a combination of various factors. First of all, the outlook of growth of Chile's main trading partners, China, the US, and the euro zone, continues to strengthen. In fact, the weighted average GDP growth of Chile's main trading partners continues to be revised upward. This should be positive for the contribution of Chile exports growth to GDP. Export growth, as mentioned in GDP figures, should expand at around 6% in both 2014 and 2015.

Regarding investment, which represents 25% of GDP, in 2014 we are expecting a contraction of 2.6% followed by a recovery of close to 4% in 2015. This will be driven by two main elements. First of all is the strong investments that are expected in infrastructure and in the energy sectors. Second, we believe that the various reforms being discussed in Congress, such as tax reform, will be resolved via broad-based compromises resulting in a rebound in investor confidence.

Finally, [conception] will continue to grow at around 4% in 2014 and 2015 as the salary pool, that is the number of people actually working times the average salary, is expected to keep growing and the government expenses will increase with the additional resources collected with the tax reform. All in, this should represent a relatively supportive macro environment for banks. For this reason loan growth should continue to be growing between 8% or 9% in 2014 and 2015.

The positive growth has slowed as the high inflation and low interest rate environment has led to a greater flow of funds to money market funds. The profitability of the Chilean banking system is also stabilizing to a more normalized inflation and interest rate environment.

Now we will review how the Bank continues to move forward in its strategic objectives of -- and the main commercial results achieved in the quarter.

During the quarter the Bank saw relevant advances in several of its strategic objectives, fueled by its transformation project. The evolution of our quarterly results reflects the high inflation rate but also solid recurring results in various business segments. These have been achieved with an increased use of our customer relationship management platform, CRM, improved quality of service, strong growth of corporate transactional services such as cash management, and by reaping the full benefits of our revolver credit models.

The evolution of our asset quality indicators also show that we are slightly ahead of the rest of the finance system in making the necessary adjustments to confront, on better footing, the short-term slowdown of the economic growth. At the same time our capital levels remain robust.

All of the above should allow us to continue to achieve an optimal balance between our medium-term return on equity and our cost of capital. By maximizing these relations we will be able to expand shareholder value.

In the second quarter of 2014 total loans increased 1.5% Q-on-Q and 10.2% year on year. In the quarter the Bank continued to expand the loan book among those clients and segments with the highest risk-adjusted return in an economic environment that remains healthy but with growth decelerating.

Lending to individuals increased 2% Q-on-Q and 11.7% year on year. The Bank focused on expanding its loan portfolio in the higher income segments while remaining more selective in the lower income segments. Loans in the high income segment, which are mainly distributed through the Santander Select network, increased 2.4% Q-on-Q and 15.9% year on year.

In the lower income segment the Bank loan portfolio decreased 3.2% Q-on-Q and 11% year on year, continuing the loan mix shift started several quarters ago.

Lending to small and middle size enterprises, SMEs, expanded -- it was almost flat Q-on-Q in the quarter. In this period the Bank proactively decelerated loan growth in this segment stressing growth among SME clients backed by strong levels of collateral, including state guarantees, and/or clients with a high level of cash management and transactional businesses, which generate higher levels of revenue for the Bank with a lower risk profile. These allow us to generate ROEs in the mid-20s range in this segment.

In the second Q of 2014 the middle market segment loans increased 1.1% Q-on-Q and 7.1% year on year. In this segment growth rate remained positive, but the Bank did experience a slight reduction in loan demand in line with the lower growth of investment in the economy. This segment is still generating increasingly higher levels of business volumes in other areas such as cash management which has helped to drive the rise in client deposits.

In the large corporate segment loans increased 6.7% Q-on-Q and 16.2% year on year. This segment has a relatively volatile evolution of loan growth due in part to large transactions that are not recurring between one quarter and the next. Spreads in this segment have also been rising as can be observed in the 29% year-on-year increase in net interest income in the quarter.

The funding mix continued to improve. Total deposits fell 1.8% Q-on-Q and increased 2.5% year on year. In the quarter the Bank continued to focus on increasing cheaper retail deposits and lower end deposits from wholesale sources. This was reflected in the 1% Q-on-Q on 9.2% year on year increase in non-interest-bearing demand deposits compared to a decrease of 3.4% Q-on-Q on 1.2% year-on-year in-time deposits.

We continue to increase the proportion of core deposits, that is checking account plus retail and middle market time deposits, and to maintain a stable level of long-term wholesale deposits. Since the beginning of the year core deposits have gone from representing 76% of our deposits to 79% of them.

The bank is also gradually adapting the liquidity standards being required by local regulators in line with Basel III, which should be implemented by banks in the next two years. Specifically in 2014 the Bank has eliminated time deposits from short-term wholesale sources which have decreased 16.8% since the beginning of the year.

These deposits will have a low weighting under the new stable funding ratio and liquidity coverage ratios that will be gradually adopted by banks like Chilean banks. This change in mix also has a positive effect in our cost of funds and net interest margin. These short-term core deposits were [brokeraged] to our asset management partners also benefiting fee income.

As of June 2014 the Bank had 3.5 million clients which increased 5% compared to June 2013. Despite the ongoing reduction in the client base in the lower end of the consumer market, the clients entering the Bank are also of a better risk return profile given the effectiveness of the CRM at pre-approving clients and cross-selling them more rapidly. Our select client segment, basically the high end of our (inaudible) of customers, has grown more than 9% in the same period.

In the second Q of 2014 the Bank also renewed its co-branding agreement with Chile's main airline, LAN, until August 2020 which benefits more than 600,000 credit card holders. As the year progresses we expect this to gradually improve the results from fee income.

The transformation project is also resulting in a favorable evolution of consumer loan asset quality, which is a key element of our strategy to obtain higher margins net of provisions. This is due to various initiatives the Bank has been carrying out since 2011 -- the portfolio mix exchange, improvements in credit risk models, the focus on growing via preapproved loans, and, finally, the revamping of our collection process.

The results of these efforts are reflected in the evolution of impaired consumer loans -- consumer loans, nonperforming loans plus renegotiated consumer loans, especially when compared to our competitors. Since June 2012 impaired consumer loans in the Chilean banking system, excluding Santander-Chile, have increased 50% compared to a decrease of 15% in the case of Santander-Chile.

The Bank also concluded the second quarter of 2014 with strong capital ratios. Our full capital ratio reached 10.7%, one of the highest among our main peers with a Basel I ratio of 13.9%.

The ultimate goal for our strategy is to maximize the difference between our ROE and the cost of equity. Today we calculate to have one of the best relationships between core capital and recurring ROE among our main peers and one of the highest credit ratings in the banking world.

Now we will explain the evolution of results was also show favorable trends. In the second Q of 2014 net interest income increased 11% Q-on-Q and 40% year on year. The net interest margin, NIM, in the second Q 2014 reached 6%. This high-margin level was fueled by a higher inflation rate as the Bank has more assets than liabilities linked to inflation and also due to an expansion of client NIMs which exclude the impact of inflation.

Client NIMs reached 5.5% in second Q 2014 compared to 5.4% in the first Q of 2014. This was mainly due to attractive license spreads in various segments, the improvement in the Banking structure -- funding structure, sorry, and the fall in the short-term interest rate that also lowered funding costs since deposits have a shorter duration than loans.

Asset quality was relatively stable in the quarter. Net provision for loan losses increased 3.4% Q-on-Q and decreased 3% year on year in the second quarter. The Bank's total nonperformance loan ratio reached 2.9% and the coverage ratio reached 102.3% by the end of June this year. The cost of credit reached 1.55% in the second quarter compared to 1.53% in the first Q and 1.79% in the second Q 2013.

Net provision and consumer loans, which represents half of the total provision expense, decreased 3.7% Q-on-Q and 11.2% year on year. Direct charge-off of consumer loans decreased 32% year on year. At the same time net provision in residential mortgage loans increased 13% Q-on-Q and decreased 65.9% year on year in the quarter.

The nonperforming loans ratio in mortgage lending has remained relatively stable for an extended period. Growth in this product has been centered on mortgages with loan-to-value ratios below 80%. The Q-on-Q rise in mortgage nonperforming loans is mainly due to the Bank's stricter stance on renegotiating overdue mortgage loans and not at the deterioration of asset quality in this product.

As a result the evolution of the impaired mortgage loans ratio improved from 5.73% to 5.56% in the second quarter. The impaired mortgage loans ratio is a broader measure of asset quality and mainly includes nonperforming and renegotiated residential mortgage loans.

Provision expenses in commercial loans increased 11.5% Q-on-Q and 28.2% year on year. The increase in net provision expense in commercial loans was mainly due to, number one, stronger loan growth that led to higher loan-loss provision as the Bank's internal provision model recognize provisions when a loan is granted; and number two, higher provision expense in the SME segment due to a slight deterioration in asset quality as economic growth decelerated in the quarter.

The Bank has brought proactively lower growth in SME segment and is focusing loan growth in the short-term in the corporate and middle-market segment in which risks are lower, margins are rising and funding is improving. As a result of all the points described above the Bank is achieving a central aspect of our strategy, to obtain higher net interest margin net of provision expenses.

In the second Q of 2014 the Bank's net interest margin net of provision reached 4.5% compared to 4% in the first quarter and 3.1% in second quarter 2013.

In terms of costs, productivity continues to rise as usage of complementary channels such as Internet, home banking, POS payment and automatic bill payment continue to increase with minimal duration in personnel and the branch network.

In the second Q of 2014 the efficiency ratio reached 36.4%. Income fell 0.6% Q-on-Q and 1.5% year on year. An 11.6% Q-on-Q rise in expenses was mainly due to: number one, seasonally lower expenses in the first Q; and number two, the effect of a higher inflation rate over expenses.

On a year-on-year basis operating expenses increased 8.1% with personal expenses rising 8.8%. This rise was mainly due to higher consumer inflation adjustment in salaries mentioned above and the increasing variable incentives due to the positive operating results recorded by the Bank's different business segments.

The 10% year-on-year increasing of administrative expenses was mainly due to: number one, greater business activity that has resulted in higher system and data processing costs; and number two, the effect of higher inflation rates over costs which are indexed to inflation such as rents and others. At the same time the Bank closed five payment centers as part of the ongoing process of seeking greater efficiencies in the brick-and-mortar distribution network.

The Bank also continued to optimize the ATM network in order to adjust to new security procedures and to remove unprofitable machines. All of the above has resulted in a record high net income and ROE fueled in part by higher inflation, but also reflecting the strong operating income from our business unit which has no relation with inflation.

The total operating contribution for our business segments increased at an annualized rate of 16% Q-on-Q and 10% year on year in the second quarter of 2014. Net income reached a record quarterly level of CLP159 billion and ROE was 26.7% in the quarter, one of the highest in the last three years. If we were to exclude the impact of inflation we calculate that our normalized ROE with an inflation scenario of 3% a year is in the range of 19%-20%.

To conclude, we think the Bank's performance reflects the higher inflation plus positive performance in most business segments. The transformation project is boosting our commercial activity, loan growth has been solid and the funding mix continues to improve.

Net interest margin net of provision expense continues to rise as asset quality is relatively stable, especially in consumer lending. Fees are bottoming out led by promising trends in client growth. The Bank's productivity and efficiency is also improving. At this time we will gladly answer any questions you might have.

(Operator Instructions). Thiago Batista, ITAU.

Hi, Raimundo and Robert. Thanks for the opportunity and congratulations for the results, very good results. I have two questions. The first one regarding the asset quality.

We saw during this quarter some (inaudible) ratio of increase Santander-Chile especially in mortgage and also commercial loans. Are already explained a little about it, but what are your expectations regarding the overall delinquency ratio going forward? With the go down in the Chilean economy, how do you expect your delinquency ratio to be going forward?

And my second question is regarding your loan growth, specifically on the SME and the middle market. We saw that these two portfolios posted a very small loan growth. So my question is this was more Santander-Chile's strategy to become more restricted in the credit origination segment or it was an issue of a smaller demand from those companies?

Okay, well, regarding the first part -- or the first question, asset quality. As we stated in the call, we haven't seen delinquency levels deteriorating except for some slight deterioration in SMEs, which is something that you would expect given that those segments are the most -- the ones that most rapidly reflect the weaker operational environment.

However, there are many realities among SMEs and we have been focusing our activity in those SMEs that have either collateral or high levels of [transactionality]. Because remember that at the end of the day we are focusing our metrics in terms of results, in terms of profitability. So although you could be growing less than before, profitability in that segment has still maintained in the mid-20s range as we put in the call.

So up to now we haven't seen the asset quality deteriorating across the board. And the only exception is in some of the SMEs that we operate. In the case of mortgages with just the other one that grew, as we put in the call, we are basically being more strict in terms of renegotiating those clients that have some delay in the payment. But the total figures have been very stable for many months.

Prices of houses have kept on rising. Even secondary houses are starting to increase at a faster pace. That is why we don't expect losses to change in a meaningful way.

And then on the consumer side, which also is the element that typically it moves more rapidly or deteriorating in a weaker operational environment, we have seen actually an improvement in asset quality, which is probably a reflection of the changes we have been done in our origination process, follow-up process, etc. And also a reflection of the improved mix that we have been -- as you might recollect, we have been growing to a large extent in the safer segments.

The other element is more macro that although the economy is growing closer to 3% today, we haven't seen job [distraction] and the salary pool there is a metric that we follow. There is the number of people actually employed times salaries growth -- this is still having a relatively positive growth.

So that is why we think that up to now there is no room to believe that the asset quality should decelerate in a meaningful way for the end of the year. And if it is accurate, the expectation of the market, that the economy will rebound by early 2015, we think we are relatively comfortable with asset quality levels being similar or not meaningfully worse than today.

In terms of loan growth is the other side of the coin. Except for SMEs where we are putting to some extent the outbreaks and we are being more careful and more focused on SMEs. In the case of SMEs is to a large extent our decision to be more prudent. In the case of Middle Market I would say that has been more a demand condition.

Companies are in a wait and see attitude. Given that different reforms are under discussion many of them are saying, okay, let's wait and see what is going on. And that is why the fact that we are very close to finishing the tax reform or at least the final draft of the tax reform that will eliminate we think a source of concern that has been in the last three, four months going on and companies will go back to normality in terms of expectations given that you will have new rules but at least the rules will be known.

Up to now the discussion has been producing a lot of noise. Today that there is a pre-agreement between the different parties things will settle down and that is why the general consensus is that the economy, once the tax reform is fully addressed, the consensus is that the economy should be balancing by the end of the year, early 2015.

So we expect a renewed demand on the middle market by the end of the year. And in the case of SMEs, we'll depend on asset quality and whether we can grow with the good quality clients. And that is basically it.

Okay, thanks a lot.

Tito Labarta, Deutsche Bank.

A couple questions, just first in terms of expenses. You saw a pickup in the quarter, you mentioned a little bit related to just the impact of inflation. But I just want to get a sense how much did that kind of impact expenses and how should we think about this going forward? Is it just kind of a one-time spike this quarter and then kind of slow down for the rest of the year? Just want to get a little bit more color on that.

And then a second question on fee income -- you mentioned should be bottoming soon. The growth rates have been negative. But just when do you think you see the growth there again and how much growth can you expect in fees going forward? Thanks.

Yes. In terms of expenses the basic guidance between (technical difficulty) or cost of growth of 5% or something around 5% we think it can be maintained throughout the year. This quarter was abnormally high because we have the full impact of a salary adjustment that you adjusted once a year and a relatively low comparison base compared to the second Q and the first Q of the year where there are some seasonal elements.

So if you take the year-on-year growth 2013 vis-a-vis 2014 closer to 5% or something like that. We don't have plans to expand expenses this year because we are basically taking advantage of the synergies and economies of scale to be reaped by the transformation project and that is why this should be seen as a short-term blip and we don't expect the cost to increase at the levels we saw this quarter.

In terms of a fee income, again the basic advice we have been given is that this year fee income shouldn't be -- nor a drag -- not a drag but also not a driver. However, by the end of the year, given that we are increasing, especially in the retail part, the use of product you can see that in terms of asset management in terms of credit card fees that are advancing. We expect fees to be marginally positive and definitely be a driver for 2015 once all the different changes that we -- in the regulations that we have seen are completely taken into account.

Today the only pending element which is common to all banks is some changes in the insurance part and that is why you see the recollection line is going down like 15% or so, which is simply a onetime charge again. The rest of the lines, if you look them one by one, you'll see some rebalancing of the growth because product usage is increasing and the cross-selling of clients has also been increasing.

And that is why if not for that we will see relatively healthy growth on a sequential quarter basis, but it makes -- because of this implementation of insurance [guidance], yes. So this year we don't expect fees to be a definite driver but shouldn't be a drag. And next year growth of upper single-digits, something like that -- in line with client growth which is a good proxy of growth of fees in time].

Great, thanks, that is very helpful. Thanks, Raimundo.

[Fred Mariz], UBS.

A couple of questions on my side. On the first question it is more about inflation which obviously had a big impact on the margin. And you mentioned in your press release that you expected inflation to come down in the third and fourth quarter. Can you tell us a bit more about why you expect this sharp deceleration? Is there any specific driver for this trend?

Second question is on the regulatory side. You mentioned the negative side on the regulations, but obviously we heard about potential changes in the credit bureaus in Chile. And I wanted to hear from you if you think this could have a positive impact for Santander for the banks in the country and if it is relevant in the short term? Thank you.

Okay, in terms of inflation our view is that it will decelerate basically because the economy is growing less rapidly and also because the elements that fueled inflation the first half, which was mainly the depreciation of the peso and oil price, etc., are stable or trending down. And that is why we expect inflation to come down to a more normalized level in the second half.

The only surprise or in terms of having high levels inflation will come if the peso keeps on depreciating. Lately it has been depreciating again basically because of the perception that in the US rates will come higher because of the elimination of the (inaudible), etc. And also because in Chile rates are coming down. So the interest rate arbitrage or difference has broadened and that is depressing the currency. That can have a second effect in inflation.

And the other is that with the implementation of the tax reform there can be passed through of the higher taxes to the final products of the companies and services, etc. So although the central scenario is a slower inflation, we could see surprises depending on how fast is the pass through of the depreciation of the currency and the pass-through of the higher taxes in prices. But it is difficult to know for sure at this moment that is why for planning purposes we prefer to use lower inflation in the second half compared to the first.

In terms of changes of regulation, as you correctly point, there are good news and bad news. I would say that most of the more or less technical changes in regulation have already passed and are to a large extent price.

I would say the only pending implementation of non-technical or partly thought regulation is the final implantation of the maximum rate which still has like 18 months to go. As you might remember, the idea is to bring rates to a level between 35% and 38%, today is closer to [42%] the maximum rate?

(Inaudible) 42%.

Like 42%, so we still have room to tighten the rate. That has been less binding as we originally thought because we have been reducing the exposure to the low end a little bit faster than we were expecting and that is why have not been fully visible, but it's a negative measure of our overall margin.

And then the remaining reforms are neutral or positive. Basel III recommendations we think brings the positive banking practices to the Chile market, there we are probably one of the most advanced banks in terms of implementation. The other is the implementation of the credit bureau, which has been dragging for some time because of the different elements that are to be taken in consideration. But technically is good news for all the providers.

So we would say that going forward if you take the plus and minuses we don't foresee an impact as what we have seen in the last three or four years concerning regulation, there will be good pieces of regulations and others -- that list is good. But all in all shouldn't be as negative as what we have seen in the last two or three years.

And there has been an alert of banks to be very concerned about efficiency, etc. That is what triggered our effort to improve our performance and improve our -- the nitty-gritty of the business through the CRM and through this so-called transformation project.

Okay, thank you very much. And just a follow-up on the credit bureau. Where do we stand now? Is there any new news on this subject?

No, has been -- the last announcement is that they have been moving forward but many other priorities in the (inaudible) agenda. So this is not a top priority and therefore it will be moving but very slowly. The focus today that tax reform and some other reforms are big headlines. This is a secondary issue for the economic agenda.

Sounds good, thank you very much.

And we have no other questions.

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

Everyone, thank you for your time. You may disconnect and have a great day.