Banco Santander Chile (BSAC) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Banco Santander-Chile first-quarter 2016 earnings conference call. (Operator Instructions) As reminder, this conference call may be recorded. I would now like to turn the conference over to Raimundo Monge. You may begin.

Thank you very much and good morning, ladies and gentlemen. Once again, welcome to Banco Santander-Chile's first-quarter 2016 results webcast and conference call. Thank you for attending today's conference call, in which we will discuss our performance in the quarter.

This is Raimundo Monge, Director of Strategic Planning. And I am joined today by Emiliano Muratore, our new Chief Financial Officer; and Robert Moreno, Manager of Investor Relations.

Emiliano has been recently appointed as the CFO for Santander-Chile. He joined the Bank 10 years ago, and for the last eight year has been leading the financial management division, in charge of assets and liability management for the Bank. Prior to this, he has held other senior positions in Grupo Santander in Spain.

He will be joining the Bank's communication effort with the market, bringing his big knowledge about, among other things, market trends, regulations, capital, and liquidity. He will be available at the Q&A session at the end of this conference for any questions you might have.

Let us start our call with a brief update on the outlook for the Chilean economy. According to the most recent survey of Chile's main economists compiled by the Central Bank, the broad consensus is that this year, the economy should manage to grow close to 1.7% and to recover to 2.5% in 2017. Economic growth has been slower than expected in the first quarter, but should be close to bottoming out, as the slightly better external conditions and the weaker currency should help the export-oriented activity.

In addition, the government has completed the bulk of its reform and is expected to have a greater focus on economic policy and especially productivity and growth issues. And unemployment, which until now has been resilient, has shown lately some weaknesses.

But investment, on the other hand, has finally begun to enter positive growth territory. We believe there should not be any further hikes this year in local interest rates, as inflation should stabilize below 4%, a level that the Central Bank feels comfortable with.

Pretty clearly, the mining sector has been the economy's Achilles' heel in the last few years. But there are other sectors that are showing positive growth trends, such as the non-mining export sector, the communications sector, utilities, and infrastructure.

Wage growth remain in positive territory, and this is driving retail loan growth, especially in the middle and upper income segments. As a result, asset quality has been fairly stable, and loan and deposit growth remains quite steady, expanding close to 10% as of March. For the entire year 2016, we expect loan and deposit growth to be between 7% to 9%.

Now we will give further detail into the implementation of our strategy and how it is benefiting our client activity and results this quarter. In the first Q of 2016, the Bank made important advances all of these strategic goals. The thorough implementation of our strategy continues to be the basis for our sustained profitability and performance, despite slower economic growth.

As we will see in the rest of the presentation, the Bank showed positive balance sheet growth and results in those segments it has been targeting, mostly retail banking and the middle market of companies. This has been achieved by the improvements in customer loyalty and service, which has helped to boost loan growth, checking accounts, and fee income in those segments. At the same time, our strategy has resulted in better asset quality metrics, which brightens the outlook for our cost of credit in 2016 and 2017.

Finally, we also finished the quarter with the strongest capital ratios among our main peers, which should allow us to continue grow at an attractive pace and to pay good dividends to our shareholders. We expect this relentless focus on our strategic goals to continue producing some profitability throughout this slower economic growth period.

Regarding our first strategic objective, focus growth, in the first Q of 2016, loan growth continued to be focused on the middle- and higher-income individual, larger SMEs, and the middle market of corporate, segments that in our current macro environment tend to deliver high-risk adjusted profitability. Total loans increased 1.6% Q on Q and 9% year on year in the first quarter.

However, retail banking loans, which includes loans to individuals and SMEs, increased 2.6% Q on Q and 13% year on year. Loans to SMEs were focused on larger SMEs that also generate non-lending income. The SME segment was the most profitable business unit in the quarter, a notable feet given the lower economic growth.

The second-most profitable unit is our middle-market segment. Although in the first Q 2016, loans in the middle market increased 1% Q on Q and 8.1% year on year, as demand has weakened, this was more than offset by non-lending activities, especially cash management and fee-based income, which has helped to drive the positive quarterly result in this unit.

In corporate banking, loans decreased 3.8% Q on Q and 14.7% year on year during the quarter. Spreads in this segment tightened, resulting in a temporary pause of our loan growth with those clients. It is important to point out that more than 80% of net revenues in this segment come from non-lending activities, mainly cash management fees and treasury services, which once again drove the results of the unit in the first Q of 2016.

Loans to individuals increased 2.8% Q on Q and 13.6% year on year, but with a very different trend by subsegment. Loans to high-income earners attended by our Santander Select network increased 21.4%. Loans to middle-income earners attended through our traditional branch network increased 8.9%, and loans to the low-income segment decreased by 9.4% year on year. These reflect the Bank's focus on driving growth in those areas with a higher risk-adjusted return and in line with Chile's lower economic growth.

The Bank's strategy of focusing equally on both lending and non-lending businesses has also led to solid deposit growth. Total deposit increased 1.3% Q on Q and 12.1% year on year. In the quarter, deposit growth was led by time deposits that increased 4.4% Q on Q and 13.3% year on year. The Bank deposit decreased 3.6 -- 3.8% Q on Q due to the seasonality of the quarter, but increased 9.9% year on year.

The Bank continues to lead the market in cash management services for companies and to generate high customer loyalty in retail banking. The middle-market segment, which expanded 10.8% year on year, led demand deposits growth. Demand deposits in retail banking and global corporate banking, GCB, increased 8.4% and 6.8% year on year, respectively.

Regarding our second strategic objective, the Bank continued to improve customers' loyalty and quality of service. In order to do so, we are making significant progress in re-adapting our distribution capability with segmented branch formats and a strong focus on retail banking. Therefore, loyal individual customers, defined -- explained with four product plus minimum usage and profitability levels, in the high income segment increased 9.7% year on year.

Among middle-income earners, loyal customers rose 6.6. The same indicator for SMEs and middle market rose 10.5%. However, let it be said that still only 15% of our customer base meets our redefined loyalty standards, reflecting the large potential we have for further growth.

Here, our new CRM is helping to boost client activity and commercial productivity of our salespeople. This favorable evolution of our loyal customer base has been achieved by a steady improvement in our customer satisfaction indicator.

In 2012, we set a goal to close the customer satisfaction gap between us and our main peers by the end of 2016, measured as a percentage of clients who consider the Bank's customer satisfaction as good or very good minus those who rate the Banks poorly in an independent survey done twice a year for banks. We are very close to reaching this target.

Another key leverage point for improved client loyal has been expanding our digital capability. In Internet and digital banking services, we continue to lead our main competitors by a wide margin. According to late information published by the Superintendency of Banks, our market share in Internet banking among private banks, measured as defined as entering Internet bank website using a password, doubles that of the second player. The figure is consistent with our strong market share in the transactionality with our clients.

The improvement in customer loyalty is also being achieved by improving and better segmenting our distribution network, the strongest in Chile. In the last 12 months, the Bank has first, increased by 17.4% the amount of Santander Select branches aimed at the higher end of the consumer market. Secondly, close to 23% of Banefe and other payments aimed at the lower end of the market.

Thirdly, the number of Santander standard branches has remained unchanged. But with relevant notifications to the layouts, the Bank has remodeled 28 branches onto the full-service model, which are multi-segment branches with dedicated space to different client segments we attend and greater square footage dedicated to automatic banking services.

Under this format, all segments share back-office interior space, generating important efficiencies. In simple terms, through improved digitalization of our services, we are extracting more income from each square foot.

In 16 of these branches, we have opened Santander Select corners or space exclusively dedicated to this segment. Likewise, in 15 branches, we opened Banefe corners, which are areas in a traditional branch with only three employees dedicated to consumer lending for the mass market. Finally, we have opened eight middle-market centers outside of Santiago that are specialized centers for those clients.

Another achievement in the first quarter was the improvement in asset quality and capital ratios, which are a key element of our third strategic objective. The improvement of our asset quality metric is mainly due to the change in the loan mix, which has more than offset the negative impact of slower economic growth. The Bank's total nonperforming loans ratio remained stable at 2.5% in the first Q of 2016 compared to 4Q 2015 and improved from 2.7% observed in the first Q of 2015.

Total coverage of nonperforming loans in the first quarter reached 122.5% compared to 117.3% in 4Q and 111% in the first Q of 2015. The impact of better consumer loan mix in asset quality can be clearly observed in the consumer lending business.

The consumer nonperforming loan ratio improved to 2.3% in first quarter of 2016 compared to 2.5% in the first Q of 2015. The impaired consumer loan ratio also improved to 7% in the first quarter of the year, coming from 9.1% from the first Q of 2015. The coverage ratio of nonperforming consumer loans reached 285% in the first quarter compared to 256% in the first Q.

The Bank also concluded the first quarter with strong capital ratios. The core capital ratio reached 10.6% and the Bank's total BIS 1 ratio reached 13.5% at the same day. As can be observed in the slide in our webcast, we have the strongest capital ratios compared to our main peers.

Because of this solid capital position, the Bank's Board agrees to propose shareholders a one-time increase to the Bank dividend policy to 75%, equivalent to CLP1.79 dividend per share, which was approved in our recent shareholder meeting. Therefore, the dividend yield was 5.3%, considering the share price at the close of the record date in Chile.

With this dividend plus the share price appreciation, since the end of 2014, the AVR price of Santander-Chile has outperformed several of our main Latin peers, reflecting the positive results of our strategy which are bringing to our shareholders, despite being a relatively challenging period for banks.

With this, we conclude our section on strategy and commercial activity. Now we will briefly review the Bank's profit and loss statement. In the first Q of 2016, net interest income increased 1.8% Q on Q -- sorry, decreased 1.8% Q on Q and increased 14.4% year on year. The net interest margin reached 4.5% in the first Q of 2016 compared to 4.7% in the last quarter of 2015 and 4.4% in the first Q of 2015.

In this first half, the valuation of the Unidad de Fomento, an inflation indexed currency unit, was 0.7% compared to 1.1% in the fourth quarter of last year and negative 0.02% in the first Q of 2015. As you might know, the Bank has more assets than liabilities linked to inflation, and as a result, margins go up when inflation accelerates and vice versa. This explained the Q-on-Q fluctuations in total net interest margins.

Going forward, we expect quarterly inflation rates to be between 0.7% and 0.9% per quarter, and therefore to have relatively stable net interest margins. On the other hand, client interest income -- that is, the net interest income from our business segments and excluding the impact of inflation -- rose 1.5% Q on Q and 6.6% year on year, driven mainly by loan growth and improved funding mix.

Client NIMs reached 4.8% in Q on Q, similar to what we saw in the 4Q of 2015 and lower than the 5% we observed in the first Q 2015. On a year-on-year basis, the decline in client margins was mainly due to the shift in the asset mix to less riskier segments, which is gradually producing an improvement in the Bank cost of credit.

As seen in the chart, the cost of credit improved to 1.2% in first Q 2016 compared to 1.8% in fourth Q 2015 and 1.4% in one Q 2015. Provision for loan losses decreased 48.1% Q on Q and 1.6% year on year in the first quarter.

As a reminder, in January 2016, Chilean banks, in accordance with rules adopted by the Superintendency of Banks, adopted a new standard credit provision model to calculate loan loss allowances for impaired consumer and commercial loans and for residential mortgage loans with a loan-to-value ratios greater than 80%. This provision was recognized as an additional provision in the fourth Q of 2015 for CLP35,000 million. Excluding this charge, provision expenses would have decreased 32.4% Q on Q.

Going forward, the cost of credit should stay at levels between 1.3% and 1.4% of loans. This rise is not due to any major deterioration of asset quality, but due to the fact that in the first Q of 2016, provision expense was positively affected by the appreciation of the peso, which lower provisions over loans denominated in foreign currency. There is a counterbalancing result in financial transactions net; therefore, the slight rise in the cost of credit in coming quarters will not necessarily affect the bottom line.

Net fee and commission income increased 6.5% Q on Q and 13.6% year on year in the first quarter of 2016. Retail banking fees grew 2% Q on Q and 13.6% year on year. Fees in the middle market also rose 8.7% Q on Q and 11.2% year on year.

At the same time, fees recovered in GCB, global corporate banking, and increased 51% year on year. This rise in fees was in part due to our CRM platform, which has been fueling greater product usage and customer loyalty, as previously mentioned. Fees in global corporate banking also recovered due to greater investment banking activities.

The Bank's efficiency ratio improved to 41.6% in the first Q. Operating expenses decreased 7.8% Q on Q due to seasonality. Personal salaries and expenses increased 10.4% year on year. This was mainly due to the indexation of wages to inflation.

The Bank has been deepening the use of technology to increase its digital capabilities, improve the branch network, and restructuring the top tiers of management to control cost growth. These signify highest-ever expenses throughout 2015 and 2016.

In April of this year, another wave of management changes was executed. And as a result, the Bank will recognize a one-time charge of between CLP10 billion to CLP11 billion this month. With this and other measures, the Bank expects to lower cost growth to mid-single digits by the end of this year.

In summary, the first Q was a solid quarter. Our ROE reached 18.1%. Net income increased 31.4% year on year due to the higher inflation. But more importantly, the steady growth of client revenues and volumes coupled with better services and loyalty indicators.

This shows our strategy is generating positive returns and is notable, given the current economic environment. The streamlining of the branch network and headcount, together with our digital banking strategy, should also generate lower cost growth as the year progresses.

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

(Operator Instructions) Tito Labarta, Deutsche Bank.

A couple questions, looking more at fees and expenses. You saw good growth in your fee income, given the benefits of your CRM system. Do you expect that growth to continue? Can we expect to continue to see the double-digit growth that we saw this quarter on a year-over-year basis? Or do you think that could slow down a bit?

And then similarly, in expenses. I know it declined on the quarter, but still growing around 10% for the year. I just want to get a little bit more color on how you see expenses growing this year as well.

As we mentioned in the conference and in our press release, fees have been steadily recovering, which to a large extent is due to increased use. Because, as you know, banks in Chile for many reasons have very limited choices of rising their transaction fees, what you try to stimulate the use. And there, our new CRM is doing is helping us to do the trades because we have been able to fuel growth and fuel transactionality with clients.

How high we can grow, there are two forces that are a little bit offsetting. One is our ability to help clients to increase their level of transactionality and to increase the level of fees that they generate in the process. And the counter effect is, of course, that the economy has been slowing down. So the two effects tend to go in the different direction.

Net-net, we think that fees for a year-on-year basis for the full year will be growing, as we have mentioned in previous calls, between 7%, 8% or something around that. And depending on the macro outlook could be higher, but we prefer to be a little more conservative in this issue.

Contrary to that, expenses also have been running ahead of our medium-term trends, basically because we have been investing in upgrading all the systems that now are finally starting to pay. But at the same time, the first Q probably is a little bit misleading because as we mentioned in the press release, we -- our collective bargaining implies that we have to agree we adjust our salaries by the accumulate inflation.

Usually, the process is done on May. But this time, because the accumulate inflation was higher, we anticipate the indexation, the adjustment by inflation, to a margin. That's why the first-Q results include two adjustment by inflation, the one we had last year in April-May plus this one. That's why, in time, or the rest of the year, given that we don't foresee new adjustments, you will have a comparison base that will be larger and that will reduce the year-on-year growth rate of a [wage].

At the same time, we have been moving into a more, having a stronger digital capability, moving some sections out of the branches, and streamlining our branch network, which we think will help us to contain cost growth. And at the same time, we have done, in April, a one-time adjustment, especially of senior and second- and third-layer of management, which will be booked in April, but will also help to achieve this mid-single-digit growth that we foresee for the end of the year.

That's very clear, thank you.

Thiago Batista, Itau BBA.

I have two questions. The first one, about the consumer loan portfolio. We saw in the first Q some contraction in the consumer portfolio Q over Q when we looked Q over Q. But with some improvement in the delinquency ratio; material decline in provisions of the consumer portfolio. So my question is what could we expect for the consumer loan portfolio going forward?

And the second one, about the margins. I know that this year, we have the negative impact of inflation. But considering the inflation impact, do you believe that your NII should expand in line with your loan portfolio in 2016?

Yes. Regarding consumer loan portfolio, there are two things. One is that January and February tend to be seasonally low because this is mostly holiday season. And people tend to borrow more by the end of the year to prepare for holidays and Christmas and say that. So typically, we have slowed down in these first two months.

But if you go into our monthly figures, which are published by the Superintendency, you see an increase in March. Net debt in the quarter was kind of flat, but the dynamic of loans has resumed in March. We don't foresee a big increase of consumer lending because we are still contracting our exposure to the low end and expanding our exposure to the middle to high end.

So net-net, consumer lending, which now is growing at around close to 8% or so, would be accelerating to something closer to 7%, 8% at most. But we don't foresee it this year because of our more prudent approach and because we are reducing our absolute exposure to the low end to grow further than that.

In terms of margins, as we stated on the previous call, on the call when we comment on the results of 4Q, we expect the total net interest margin to be below 15 basis points, 10 basis points to 15 basis points because inflation this year is expected to be lower than the inflation we saw last year. This first quarter is a little bit of an outlier because inflation has been much higher than in the equivalent quarter in 2015. But if you take a year-on-year view, our total net margin could be around 10, 15 base lower simply because we will see lower [headwind inflation].

However, on the client net interest margin that is the bulk, we see some room for expansion because the profile of our growth will be more accretive and will be less reliant on mortgages that tend to be the lowest-yielding asset by far. So that's why if we sustain our growth in SMEs and we start growing a little bit more rapidly in consumer, which is what we are basically hinting, and we sustain our growth in midsize corporate, we can see, simply by a mix effect, to have a higher client NIM. But total NIM suffering because of the lower inflation for the year.

Okay, thanks. Perfect.

[Nicholas Reva], Citi.

Thanks for taking my questions. The first one is on loan loss provisions. They reached 1.2% of average loans this quarter. But that's below the guidance that you offered the last conference call, which was 1.4% to 1.5%.

So my first question is what explained the lower loan loss provisions this quarter. And also, if you can give again your guidance for loan loss provisions this year. Because I heard in this conference call a lower number, which was 1.3% to 1.4% of average loans.

And the second one, more general -- I know that your strategy has been over the last few years to decrease your exposure to segments of higher risk, such as, for example, Banefe. And to increase exposure to mid- to high-income consumer loans and also the large SMEs and the middle-market companies.

However, the economy continues to slow down; unemployment is picking up. So I wondered your thoughts on what could be the impact of higher unemployment on the slower economy in asset quality. Thanks.

Well, in terms of loan loss provision, as you already say, our guidance for this year was closer to 1.4%, 1.5%. We had a very sound first quarter, which was to some extent a benefit because we didn't have any major surprise in the midsize and large size corporate. The loan loss reserve requirements for the more massive market are produced by statistical models that are fairly reliable. But of course, while you have surprises in the nonstandardized clients, large corporate, midsized corporate, etc.

So when we were talking about 1.4%, 1.5%, we were assuming that some one: surprises should appear either in the quarter or the full year. Of course, the level of 1.2% is much lower than what we were expecting, and it is basically because we had more or less the same level of provisions in the standard categories, the ones we do with models, and no surprises in the corporate size. Plus the positive effect of the appreciation of the peso because those loans are granted in dollars, which are around 13% of our loan book.

The provisions are also set in dollars. And as a consequence, when you see an appreciation of the currency, you also have a translation effect on the provisions you need to set aside for those position. As we mentioned in the webcast, that doesn't have an impact in the bottom line because that positions are covered at the Bank level. And as a consequence, when you have an appreciation of the currency, you tend to have lower provisions on one side, but it is hedged.

And the opposite: when the currency depreciates that you have -- your provisions are to some extent inflated by translation exposure. But at the same time, you make money on the derivative that is covering the position. So this is not something that affect our net income because it's hedged. But of course, sometimes it's grows up our provision expense, or in the case of the first Q, lowers the stated.

So that's why in the first Q, our provision levels were closer to 1.3%. And if we expect some surprises in the remaining quarters of the year, 1.4%, 1.3% can be sustained.

In terms of the growth, we have been monitoring the macro figures, what, since the beginning of the lower growth cycle that we entered a couple of years ago. We think that there are still mix effects that are not fully visible in the sense that one thing is to start changing the mix and the other is that you see in that quarter the benefits of that lower-risk growth.

And that's why we think that, again, assuming essentially a scenario where the economy manage to grow at around 1.7% of the consensus to the forecast built by the central bank states, we think that the mix effect that is still visible will be compensated for the lower unemployment. But of course, if we see especially employment figures entering the negative territory because as you know, sometimes unemployment is a mix of supply and demand conditions. If many people rush to the market, you can see an increase in the unemployment rate. But to banks, it's not that bad because you never lend money to people that are out of a job.

What is concerning is when you see job destruction: people that used to have a job that are out of job, because those are the clients that eventually won't be able to pay you. So today, we are of course monitoring that activity permanently as usual, but we think that's still, in the central scenario that you have to try to state it in the call, the mix effect will be dominant.

But of course, if the situation turns around very rapidly, this is then a complete answer. And we will to take actions to defend our profitability. But still in our central scenario, we don't see that.

Okay, thanks.

Jason Mollin, Scotiabank.

Thank you for taking my question. More of a general question -- you showed some updated information on Internet usage; looking for improving customer loyalty and quality of service. And in fact, in the total number of branches, of course, it declined in the last several years.

Can you talk about how you are viewing the value of traditional branches? And if you think technology is reducing that value? And if you think that the branch network should continue to shrink going forward?

It's a very good question, and we think we don't have an equivalent good answer. But I would say that today, what we have been doing is basically think about the value of branches. And probably the ongoing model for the next two or three years, because it is changing very rapidly, is that you will still need branches because many more complex type of transactions will still be done at the branch level.

But probably the simple tasks -- let's say cashing a check or paying the water bill or things like that -- will be moved increasingly to nonphysical branches, non-physical distribution [skins]. Because clients at the end are getting increasingly used to technology, and clearly there was a drawback that Internet access and especially smartphone access was relative expensive.

But today, the bulk of the population, especially in the middle class and even in the lower-income segments, are increasingly having access to mobile technology. And as a consequence, clients are the driving force in the process. And for us it's a bonus because allow us to do what we have been doing: that is, to reduce the number of branches. But more importantly, reduce the size of the branches and the headcount you have within the branches.

So I would say that in the foreseeable future, the next two, three, four, five years, probably will be a combination of higher technology; leaner branches. But we don't foresee a model of branchless banking because it has not been successful in any place. And still people need to shake hands for settling the mortgage and companies for devising a hedging strategy and things like that.

So it's a probably smaller investment in branches and smaller bricks-and-mortar surface, but we don't foresee operating without branches. Because at the end, people need to see -- and banks, especially on the deposit side, when you see a branch you say, well, there is my money. I feel comfortable. If you have it, I don't know, in the cloud, sometimes you get a little bit nervous.

So probably the two coexisting. And the way we are moving it to have clever branches, less transactional-intensive branches, more value-added services in the branches and the rest move to alternative channels. Just to give an idea, in the shareholder meeting, we announced the CapEx [favors] for this year, and the bulk will be IT-related, simply reflecting that the bulk of our focus is in technology more than in brick-to-mortar.

That's helpful. And that budget, is that increasing for this year versus last year, for instance?

No, it's coming slightly down. Basically because in the last three years, we have invested a lot in the new tools that now are starting to pay: basically new credit models and also the CRM that are finished.

And from now on, you don't have to keep pace with that level of investment because you already have them. It's simply you try to strike more revenue or more use of the investment you have already done. So going forward, the level is a little bit lower than the previous three years, but still we will maintain a relatively heft level, especially in IT-related activities.

Thank you very much. Have a good day.

Carlos Gomez, HSBC.

Two questions. The first one refers to your tax rate expected for the end of the year. And the second, I would to know where the [taxa maxima commisionale], the maximum interest rate, is today, where do you expect it to go, and whether at this point it has an effect on your business or not.

Okay. Well, regarding the debt tax rate, although this year the statutory tax rate rises to 24%, the Bank is -- generally, all banks -- it has some way to reduce it. Basically because for tax purposes, the adjustment that you have to do on your capital has been remained, has been maintained. And as a consequence, the adjustment of your capital to gross it and to keep in constant on real terms by grossing on nominal terms, is counted as an expense for the tax purposes.

And as a consequence -- and we tried to explain that at the end of our first release. Typically, the rate can be lowered by 350 basis points, 400 basis points. So we expect this year the tax rate, the effective tax rate, to be closer to 20%, more than closer to 24% or so.

In terms of the impact of this cap that we have in rates, today, the most rate -- because there are several rate caps for several types of operations. But the most binding is in the consumer lending for smaller operations. If around 35% have been rising lately, basically a reflection of the high risk that you are assuming.

But today is very little binding because as we comment before, we have been basically reducing our exposure in that segment more than increasing. And those operations are -- this is binding only when you renew or when you do a new lending. For the older lending, you still have it at the rate you closed the deal whenever you close it. So it's not binding today, except for very few operations.

And of course, the side effects, which is negative as well, is that many clients have been simply -- move out of the formal market and into the formal market. But that's more of a policy issue than a commercial issue for us. In our case, the rate is not very binding, of course. It would be better to have still flexible prices to reflect the increased incremental costs and the incremental risks that you assume in going down market. But today, the focus for many reasons is precisely the opposite.

Thank you. And if I can follow up on the tax side, we understand that. We understand the reduction. Of course, inflation is relatively high today. So for planning purposes, when you are looking two, three years from now, when the tax rate normalizes at the level that will eventually reach and with an inflation rate which is more normal -- 2%, 2.5% -- where will you expect your normalized tax rate to be?

Well, the final stage is to have a statutory rate in 2018 of 27%. And as a consequence, if you -- as you correctly point, you foresee inflation going down, the gap between the effective rate and the statutory rate will narrow probably 200 basis points or so. So we expect that by the year 2015, if inflation comes down, to have an effective rate closer to 25% or 24.5% or things like that. Because as you correctly point, it depends on the absolute rate of inflation.

The other thing and is another technicality is that remember that for foreign investors, the higher corporate tax can be used as a credit when you receive dividends. And that's why from a valuation standpoint, the fact that you have the total tax burden is 35% and has not changed means that from a valuation standpoint, the issue is not very relevant.

Because although the bank might or any company might be paying more, you receive a higher credit out of a total payment of 35%, which from a valuation standpoint, if you use the kind of [cordon] standard growth models, it should be neutral. Because the bank is paying more, you as a financial shareholder, foreign shareholder, are paying less. As a consequence, in a valuation standpoint, the change doesn't matter that much.

The tax increase is basically affecting the local shareholders, the ones that are local citizens, which in our case is less relevant because the bulk of our trading is done outside in the form of ADRs, etc. That's why we think that from a valuation standpoint, although the effective rate and the statutory rates are rising, should have less of an impact in our case, given that the bulk of our shareholder base are foreign shares.

Thank you very much.

(Operator Instructions) [Dio Catreos], BCI Asset Management.

Thank you for taking my question. Regarding the mortgage loans, what have you seen in the dynamics in term of asking the 20% of down payment and the customer having 10% to 15% in savings? And what do you expect in the future in term of growth in this segment?

In terms of the dynamic, the growth rate is foreseen to be slowing down. There, there are at least two elements. One is that last year, we had a record level of sales of houses and apartment. And as a consequence, the mortgage market was growing abnormally high, basically because people were trying to get advantage of the lower value-added taxes on new properties.

That issue will be on time coming down. There are still like 16 to 18 months to go because many of the sales that were done last year were properties that were not even constructed, some of them. And as a consequence, we see that that element reduce the growth rate, but not meaning that we will see zero growth on mortgages.

The second element is more permanent that the Superintendency apply. This is standard models for mortgages that make very expensive to go in the mortgage. And it would be beyond loan-to-value higher than 80% because otherwise, you have to set high provisions. And given that the margins on mortgages are very low, it's completely punitive.

So at the end of the day, we think that the two elements will reduce the growth of mortgages from a very high level of 18%. This year, our expectation is something between 12%, 13%. And probably next year, more closer to 10% or so basically because of the combination of the two elements.

In terms of profitability, it doesn't produce a big impact because as you know, the spreads on mortgages are very low. But of course, it is at the center of the competition of banks because clients with mortgages tend to be more profitable than clients without mortgages.

So at the end, what counts is more than the size of mortgage or whether you have the mortgage or not the type of clients you are pursuing. And of course, a client with a mortgage, at least in our case, tend to be two times more profitable than a client without the mortgage. Not because the mortgage itself is profitable, but simply because you have more time to cross-sell it and more time to have bonding relationship with the client.

So we foresee a slowdown in the market to something close to 12%, 15% a year. But we don't foresee that as a big driver in our profitability because at the end, you are basically breaking even in many of the mortgages you are originating. Just like the mortgages, the side products are very profitable.

Okay, thanks.

(Operator Instructions) I am showing no further questions 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 participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.