Banco Santander Chile (BSAC) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q1 2015 Banco Santander-Chile earnings conference call. My name is Tia and I will 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)

I would like to turn the call over to your host for today, Raimundo Monge, Corporate Director of Strategic Planning. Please proceed.

Okay. Thank you very much and good morning, ladies and gentlemen to all of you. Welcome to Banco Santander-Chile's first conference call for the first-quarter 2015 results. Thank you for attending today's conference call in which we will discuss our performance in this quarter. Following the webcast presentation, we will 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 2015 and 2016.

Regarding the economy, despite the existence of internal and external uncertainties the overall outlook for the Chilean economy is being improving. We expect the economy to grow close to 3% in 2015 and 3.6% in 2016. As a result of this moderate uptick in the economic growth expectation, inflation expectations for the year has also gone up. The inflation rate measured by the variation of the UF, an inflation-linked unit and the most relevant indicator for the Bank, should increase around 3% in 2015.

Given this inflation outlook, we expect the Central Bank not to cut interest rate any further during this year. The pickup in economic growth is being led by various factors. First of all internal demand should expand 2.5% in 2015 and 3.5% in 2016. Secondly, the outlook of growth of Chile's main trade partners, especially the US, continues to be healthy. Export growth, as measured in GDP figures, should expand at around 4.6% in 2015. At the same time, the fall in international oil prices is another positive event for the Chilean economy as Chile imports most of its oil.

Regarding the investment in 2015 and 2016, we are expecting a slight recovery in the investment levels following the contraction seen in 2014. This should be driven by the greater investment expected in infrastructure and the energy sectors.

Finally, total consumption including government expenditure should continue to grow at around 4% in both 2015 and 2016. All in, this should represent a relatively supportive market environment for banks. For this reason, loan growth should continue to grow close to 8%, 9% in 2015. We expect that ROE of the system to fall in 2015 compared to 2014 due to the lower inflation of the whole year and higher corporate taxes, but core operating and asset quality trend should remain relatively healthy throughout the period.

Now, we will review how the Bank continues to move forward in its strategic objectives, and the main commercial results achieved in the year. The Bank continues to experience robust core business trends in various business segments. As we will see in the rest of the presentation, we continue to see solid loan growth especially in those segments with a highest risk adjusted contribution.

Our funding mix is also improving as growth has not only been focused on the lending side but our loan lending business has also been growing at a steady pace. We have also seen a continued improvement in our client base, cross-selling and customer satisfaction levels.

At the same time, the evolution of our asset quality indicators also show that the different changes in our credit approach are starting to be positive contributors to the Bank's profitability. Our capital levels also remain robust, allowing us to continue paying an attractive dividend. All the above should allow us to continue to achieve an optimal balance between return on equity and our cost of capital. By maximizing this gap, we should be able to expand shareholder value on a consistent way.

In terms of our first strategic goal, focused growth, in the first Q 2015, total loans increased 3% Q on Q and 9.9% year on year. The Bank targets its loan growth in the higher income segment, while remaining more selective in lower income segment and SMEs. Lending to individuals increased 2.1% Q on Q and 12.9% year on year. This growth was led by loans in the high income segment that increased 13.9% year on year.

The other area of relevant growth in the loan book was in the middle-market segment. In the first quarter, loans in this segment increased 3% Q on Q and 9.6% year on year. The Bank's strategy of focusing equally on lending and non-lending businesses has also led to a strong deposit growth. Total deposit increased 4.6% Q on Q and 15.9% year on year.

Non-interest bearing demand deposit increased 14.8% year on year and the time deposit rose 16.6% in the same period. Core deposit, that is total deposit minus short-term wholesale deposit, increased 14.3% year on year. The effectiveness in the execution of our loan and funding strategy has been based on the growth of our client base and the improvement of our commercial approach, our second strategic goal.

In the first quarter of 2015, the Bank achieved positive net client growth for the eighth consecutive quarter. But with a greater focus on improving cross-selling, retail clients with checking accounts rose 6.3% year on year. More importantly, among our individual clients, those that are cross-sold measured not only in terms of how many products they have but whether they used them intensively or not, increased 16.2% year on year. A similar situation can be observed in the SME segment where cross-sold clients rose 13.8% year on year.

In terms of our third strategic goal, the transformation project, is also resulting in a vibrant evolution of our asset quality, which is a key element of our strategy to obtain higher margins net of provisions. The Bank's total non-performing loans ratio decreased to 2.7% in the first quarter. Total coverage of non-performing loans in the first quarter reached 111.3% compared to 107% in the first Q of 2014. In the quarter, the Bank saw stable or improving asset quality trends in the majority of the products and segments; these reflect the changes in the loan mix, the focus on pre-approved loans granted through our CRM, the improvement in asset quality and SMEs and the strengthening of our collections area.

The Bank also concluded the first quarter with strong capital ratios. Our core capital ratio reached 10.6% -- this is a 100% tangible common equity -- the highest among our main peers. The Bank's shareholders approved on April 28, 2015 the Bank's annual dividend equivalent to 60% of 2014 net income or CLP1.75 per share. This was equivalent to a dividend yield of 5.1 based on the dividend record date in Chile.

The dividend increased 24.5% compared to the dividend paid in 2014. The prudent management of the Bank's capital ratios and solid yearly profitability has allowed the Bank to continue paying attractive dividends without issuing new shares since 2002.

Now, we will explain the evolution of our quarterly results. In the first Q of 2015, net interest income decreased 23.3% Q on Q and 12.8% year on year. As expected, the Bank's profitability was lower mainly as a result of the zero inflation seen in the quarter. The net interest margin reached 4.4% in the first Q compared to 5.8% in first Q of 2015 and 5.4% seen in the first Q quarter of 2014.

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

In the first quarter of 2015, the evaluation of the UF and inflation indexed unit was negative 0.2% compared to positive 1.88% in the fourth Q of 2014 and 1.28% in the first Q of 2014. The average gap between asset and liabilities indexed to the US was CLP3,905 billion in the first Q of 2015. This imply that for every 100 basis point change in inflation, our net interest income increases or decreases by approximately CHP40 billion, all other factors being equal.

The existence of this gap is mainly due to the Bank's lending and funding activities. We expect UF inflation to be approximately 1% per quarter for the remainder of the year. And therefore, non-client net interest income should rebound. Client net interest income, which excludes the impact of inflation, increased 2% Q on Q and 9.1% year on year, driven mainly by loan-growth and improved funding mix.

Client NIMs, defined as client net interest income divided by average loans, reached 5% in the first Q and was stable compared to both first Q of 2014 and fourth Q of 2014. Client NIMs have remained stable despite a continued shift to less riskier segments and the forced fall in interest rate caps due to regulations implemented in the early -- just last year, since early 2014.

This stability in margins was mainly due to an improved funding mix. The Bank's strategy of focusing both on lending and non-lending businesses and a strict management of loan spreads has driven the stability observed in client spreads.

Net fees and commissions were flat year on year and decreased 7% Q on Q in first Q 2015. Fee income continued to rebound in retail banking but this was offset by lower fees in our corporate area. Fees in this segment tend to be more volatile than other segments due to large transactions that are not recurring between one quarter and the next, especially during the [summer] period.

Excluding the large corporate segment, fees grew 2.1% year on year led by the SME segment. This evolution of retail fees reflect the Bank's effort of expanding the client base and to increase cross-selling in the retail segments. Going forward, fees should continue to grow at a healthy pace in the retail banking with fees from corporate banking picking up from current levels.

As we saw in previous slides, asset quality improved in the quarter. As a result provision for loan losses decreased 27.8% Q on Q and 2.5% year on year despite the growth of lending volumes as we saw. The improvement in credit risk levels has led to a rise in client net interest margin net of risks, which reached 3.6% in the first quarter of the year compared to 3.5% in the first Q of last year and 3.1% in the last quarter of 2014, with improvements in most segments. The improvement in asset quality should be a key element in sustaining steady levels of recurring profitability going forward.

Operating expenses increased 9.9% year on year in the first Q of this year. Efficiency ratio reached 42% in the first Q of 2015. This rise in costs was mainly due to, number one, the high inflation rate in 2014 that has a lag effect over salaries and some administrative expenses, which are indexed to inflation.

And number two, the ongoing investment to continue optimizing the branch network. In the quarter, the Bank did not open new branches, but is in the process of modernizing the existing network. The Bank has developed a new branch format that was successfully tested in 2014 in various locations. This new format has exceeded expectations in terms of efficiency and client satisfaction. The Bank will now expand this layout to approximately 100 traditional Santander branches.

The Bank also remains focused on growing through complementary channels, such as Internet, phone and mobile banking. This will allow the Bank to maintain solid levels of efficiency going forward, while improving productivity and customer satisfaction.

This increase in cost was partially offset by the 9.9% year on year decrease in depreciation and amortization expenses. As a reminder, in 2014 the Bank performed a one-time impairment of intangibles mainly of obsolete or unprofitable systems. This explained the reduction in amortization and depreciation charges. These savings will be used to finance further investment in systems and the Bank's network as mentioned above.

Our effective tax rate reached 24% in the first Q, up from 15.5% in the first Q of 2014. The reason for this high tax rate were mainly two; the lower inflation rate in this quarter, which resulted in a null adjustment of the Bank's capital by the Consumer Price Index, which translates into a higher taxable net income in the tax books. And number two, the statutory corporate rates for 2015 that increased to 22.5%. For the rest of 2015, our effective tax rate should be approximately 19% to 20% assuming a 1% quarterly CPI inflation rate.

In summary, the first-Q 2015 results showed positive recurring trends in our business segments, clouded by the low inflation and higher tax rate. The Bank's pretax ROE reached 19.9% in the first quarter, compared to NPA 0.3% in first quarter of 2014. Adjusting the pretax ROE for normalized inflation levels of 3% on an annualized basis, that is 0.75% inflation per quarter, as we have been doing in the previous quarter, the Bank's pretax ROE was 23.9% compared to 24.9% in the first Q 2014, reflecting the relative stability of the Bank's core profitability trends.

These healthy normalized profitability levels reflect that the Bank is increasingly reaping the benefits of our comprehensive transformation project. This initiative is helping our client activity, business volumes, asset quality and productivity levels.

For the remaining of 2015, we expect that these trends will be more visible in the bottom line, as we expect inflation to increase and our effective tax rate to be slightly lower.

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

(Operator Instructions) [Guillermo Costa, NWB]

My first question is on asset quality, could you comment what is your expectation regarding the NPL ratio going forward? I mean you have been presenting a higher growth in the high income segment. Do you expect this to improve even for NPL ratio going forward?

And my second question is about your competitors' perception of this segment. Have you been watching an increase in the competition in this segment?

In which segment?

In the high income individuals and also the mid-market companies.

Okay, perfect, thank you. Well, in terms of non-performing loans, we think that going forward there are two forces here; one is that the economy for the second year will be showing lower than its potential growth, and that could have an impact in job creation, an impact also in salary growth, yes, so that is a kind of a negative element to take into consideration. And the positive is that, especially in retail where we measure delinquency levels and by vintages, we have seen that our vintages the quality of the origination process has been steadily improving.

So the two forces have been up to now more or less say compensated and that is why we have seen stable or slightly lower levels. Going forward, we think that we should not think that at least for the year, assuming the central scenario of growth of 3% in our non-performing levels close to 2.7%, 2.6% but we don't foresee big changes neither up or down, yes.

In terms of the competitive landscape, I would say that most banks have been moving to the safer segments in part because of the softer macro environment but also because the regulations to some extent had made the process of going to the low end of the consumer market and the mortgage market increasingly more difficult there. We have seen some hints of banking -- the penetration suffering in the market. So everybody is kind of moving to a segment that we have been targeting.

There I would say that our competitive advantage today is mostly in terms of speed being a little bit faster than the rest in addressing the needs of the client and that's why we launched the select format, a couple of years ago and that's what today the bulk of our lending origination is done through pre-approved deals that is providing us, I would say, a competitive advantage. So being a little bit quicker than the rest in addressing the needs of the clients has been making, in our case, a big difference. And that's why we have been growing faster than the rest and our calculation is that we have been increasing our market share and catching up actually in our market share in the segment because we were under represented historically and that has not been at the cost of lower spreads or lower fees.

And that's why we think that again given that these CRM and this new platforms that has been originated still has room to improve and has been steadily improving. We've seen we can outpace the growth of the rest of the system. The competition today we've seen, generally speaking, is probably softer than historically in part because retailers are increasingly reducing their credit activity and because other banks have their own distractions and are starting to do, the -- what we think is the homework that we have done a little bit ahead of the rest.

So I would say that the competitive landscape is, if anything, a little bit softer than before and that is allowing us to do the transformation and at the same time delivering what we think are solid commercial results.

Okay, perfect. Thank you very much. Very clear.

Fred de Mariz, UBS.

A few questions on my side. First on the tax rate, we saw that the taxes were a bit higher than usual in the quarter. Can you -- you mentioned your guidance for this year around 19%, 20% from the effective tax rate. Can you just comment on why the taxes reached this level in the quarter? That's my first question.

Second question on the ROE, can you just remind us what's your guidance for sustainable ROE for this year and next year? And then a final question on the fee income, you gave some explanation in your press release on the fees. They tend to be quite volatile on the corporate side. I just was curious about your guidance for this year. I remember you were mentioning that fee income would grow together with the client base and just wanted to hear from you what the latest update is here. Thank you.

In terms of the tax situation, in our press release we published, hopefully, a clarifying table. There the explanation is the following that for tax purposes our equity is adjusted by CBI and that is considered as the tax expense, therefore the higher the inflation level, given that this is an expense, the lower the effective tax rate. And the opposite happens when you have zero inflation or negative inflation that the lower the inflation or the more negative inflation, the higher is your effective tax rate. That is one of the basic elements that has resulted in an increase. We're comparing a period of relatively high inflation last year with a period of zero or slightly negative inflation this year.

And the second element is that after the tax reform that was approved last year, our corporate tax rate has increased from 21% to 22.5%. So the two elements combined.

But the volatile element is linked to inflation so as long as inflation goes back to sort of 1% per quarter, which we foresee to get a final inflation of 3% this year, our effective rate would be lower than our -- the statutory rate, but year on year will be higher than next -- than last year. It's simply that it will be lower compared to what we have seen in the first Q. So that's why rates will be closer to 19%, 20% for the whole year probably lower in the second, third and fourth than in the first Q.

In terms of ROE, we have been mentioning that our medium-term ROE before taxes to be around 23%, 24%. Now that taxes are a little bit higher, it means our after-tax ROE would be around 18.5%, 19% but again as we always do the caveat, a moving average of three, four quarters because given the volatility that inflation gives in our results, every quarter it's very difficult to have a specific comprehensive data year on year figure. We think that something around 18.5% or 19% as an average for four quarters is a good estimation.

In terms of fees as we have comment before, fees tend to move very much in line with client activity and that's why we don't -- we maintain our basic guidance of fee growth of 6%, 7% for this year as the first quarter it's a little bit not meaningful quarter because it's holiday period, summer vacations in the Southern Hemisphere and therefore especially in the corporate side it's difficult to get fees on the corporate side.

On the retail is more linked to use the products and it's linked therefore to the number of clients and the number of products that have been actively used. And there we are seeing encouraging trends in our retail customer base, so that's we tend to be confident that something close 6%, 7% for the year is achievable.

That's right. That's very clear. Thank you for this. Just a follow up to clarify.

Hello.

Tito Labarta, Deutsche Bank.

A couple of questions first summing up on the asset quality one the provisioning side we saw the cost of credits this quarter fell to like 1.4% of loans, well below the levels we have been seeing. And you mentioned asset quality should be relatively stable going forward. So do you think the cost of credit should remain around these levels or was it a bit lower than normal this quarter and should kind of normalize back up. Just want to get a sense of how you see the cost of credit going forward.

And my second question is on expenses, even though expenses fell in the quarter, it's still growing 10% year over year well above inflation. So I wanted to get a little bit more color on why growing so much year over year -- I think you did mention that it should kind of moderate going forward. So where do you see that for the full year as well. Thank you.

In terms of cost of quality our cost of credit has been trending down for some time. We think there is room there. As we commented last year, we had no big concerns about asset quality except in the SME segment, so we took a number of actions throughout the year especially in the second half. We have specific provisions to -- for the segment, and we moved from clients, which were more transactionaly (inaudible) that they -- one of the needs of the client is to borrow but there are other needs that banks fulfill.

And therefore today we are operating to a large extent with the SMEs that apart from borrowing need other services that provide lots of checking account and things like that and that's why we have improved the profitability and at the same time reduced delinquency levels on that segment. And that's why today again as a general, we don't have the big concerns about asset quality again assuming an economy that grows faster this year than last and that we don't see big external shocks, yes.

In the central scenario, asset quality is stable or is slightly improving and therefore the cost of credit that today is close to 1.5% probably moving in that line for the rest of the year. It could be marginally lower because we foresee growth a little bit higher than the figures for provisions.

In terms of expenses, we think that again the first Q is not (inaudible) the year-on-year growth as we saw in first Q is not a good indicator. We still maintain our basic guidance of cost growth of 6%, 7% for the year. As there are many things in the first Q that probably won't be repeated, among them volume sales and things like that that we don't repeat them throughout the year.

In terms of the investment and changes of models, et cetera, they are considered in this 6%, 7% growth of cost for the year as a whole. So we foresee that the -- we don't see cost getting out of control. Actually we -- part of the tricks that had been delivered by the transformation project are precisely to make our people more productive and to make the job a little bit easier for them.

Okay, great. That is very helpful. Thank you.

Saul Martinez, JP Morgan.

Two questions, one a follow up on the previous question on cost of risk. If I just look at this quarter, Raimundo, it was about 1.36%. That's the lowest level it's been at since 2011. So I just want to clarify that you feel there's still some incremental room for improvement relative to the 1Q level.

And secondly, a related question, your risk adjusted debt interest margins from client activity stripping out obviously the inflationary impact have had a very nice bounce and you showed that on the slide if I look at -- in terms of [abnorminal] growth rates was very strong this quarter. How do you see risk adjusted client net interest margins and net interest income evolving going forward? Is there additional room for expansion there?

Yes, in terms of cost of credit, we think that there is room because we have made a big shift in the profile of business that we have in our books. Remember that historically Santander was on the forefront of the process of increasing banking penetration, et cetera, and we to some extent didn't put too much attention in the high end of the consumer market.

And today because of regulation, et cetera, we have been moved to the opposite direction, so we are going into a subset of segments that have lower delinquency levels and provide extra compensation in terms of higher checking and balances, more fees and things like that. And that's why we are moving into a different profile and that necessarily has a change in our risk profile and accordingly to the requirements of provisions.

Apart from that, we have improved our tools for assessing and for originating away from loans that were mostly granted one by one into pre-approved deals that we have a lot of information about clients and therefore we can produce (technical difficulty) increasingly narrower and therefore we think we had an ability to price risk today's much more thinly than say three or four years ago. And that's why the combination of the two, a lower risk segment by itself plus better tools of a segment, make us believe that we still can reduce in time the cost of credit.

For this year, we think we can maintain it or see some slight reduction with we're not seeing a big reduction anywhere yet -- but this is a reflection of a relatively structural change that we have done in the segments we attend and in the way we originate our business, which is linked to the second part of your question, how high can we expect our client margins debt of risk to go. And there is a -- there are two forces, one is that of course is our segments are lower risk and therefore that your gross margins there are under pressure, but our safer and therefore the provision expenses is lowered.

Today we are seeing -- we think that this vertex should increase in time. When we talk about time, it's not on a quarter-by-quarter basis, but on a year-on-year basis. Today -- in the very short term in the next two quarters or something like that, we think that that will be not likely because most of our business or our growth is centered in mortgages which tends to be the relatively low yielding very safe business, but very low yielding. And that has to do with changes in the tax performance, et cetera. So it's something that is simply a short-term movement that we don't control.

And that's why there are pressures that this figure cannot rise faster, but if you're asking me about what to expect in 2016, is definitely will be higher because we are pressing the correct keys we think.

That's helpful. If structurally it does move higher, would that cause you to reassess your long-term ROE assessment and could there even be some upside to 18.5%, 19% after tax ROE?

It could be, but remember that unfortunately taxes will rise also in 2016 as well. So that's why we think that all these changes and the transformation project came in a period where we were facing headwinds and in terms of caps, of rates, in terms of limits to the fees, et cetera. So we think that we have been diligent to a large extent compensate for those drives, but today is too early to say that we will do outpace that level.

Great. Thank you so much. That's very helpful.

Alonso Correa, Credit Suisse.

My question is regarding -- and apology if you have already addressed this but my line got disconnected briefly -- is regarding any potential impact on provisions stemming from the new standard methodology to provision the mortgage portfolio that is going to be affective next year? Thank you.

Yes, in -- well there are two things. Number one is that these provision guidelines are still under discussion, so they're not a final say. And depending on how harsh or how soft is the final -- remember that to go from the very basic to the more specific, the provision in the -- or the loss, the actual losses that we have been seeing in the -- historically on the mortgage market has been less than 0.5% of loan. So this is -- has never over the last 20 so years has never been a concern to provision loan.

So that the Superintendency is putting a more demanding especially in terms of the type of mortgage to go forward. So if you don't originate mortgages with a loan to value below 80%, you will have to set increasingly the higher provisions.

So the biggest changes in terms of -- signaling that this is the regulator doesn't want banks to move too much ahead of a loan to value of 80% in the region or more. So that means that all the business that is done above that could have an effect in terms of further provisions.

So we haven't cut -- we don't have a fair calculation of the impact, it is something that starts in 2016. And the second element is that the banks are trying to -- or asking that this charge if at all should be done against reserves because its changing the rules and historically that has been the case when you have a change in rules you don't go through costs -- through profit and loss, you try to -- you go through a equity or capital base.

So depending on that, the impact can be zero or it goes against the equity. But at the end, given that we don't lose too much money, is simply that we are over provisioned or you have a sort of a buffer of capital impact unless well of course we see changes in the mortgage market which up to now we haven't seen.

So probably by the -- in the rest of the year, we will have a more precise calculation that we can share. But today it's more of a discussion and will be applicable throughout 2016.

Okay. Thank you very much.

There are no further questions in queue at this time.

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.

Ladies and gentlemen, thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Have a great day.