Banco Santander Chile (BSAC) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Banco Santander-Chile third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Mr. Raimundo Monge, Corporate Director of Strategic Planning, sir, you may begin.

Okay, thank you very much and good morning ladies and gentlemen to our third quarter 2016 conference call. As told, my name is Raimundo Monge, Director of Strategic Planning and I'm joined today by Emiliano Muratore, our CFO and Robert Moreno, Manager of Investor Relations. Thank you for attending today's conference call in which we will discuss our performance in the third quarter.

Let us start our call with a brief update on the outlook for the Chilean economy. In the quarter, we have begun to see some positive news on the economic front. According to market consensus, the economy should grow at a higher rate next year of around 2% to 2.2%. Although the mining sector has been weak, there are other sectors that are showing positive growth trends such as the non-mining export sector, the communications sector, utilities, and infrastructure. At the same time, we expect the mining sector to begin contributing to GDP growth next year. Unemployment continues to be resilient, inflation is trending to the center of the Central Bank's inflation target of 3%, which should also lead to stable or lower interest rates, which will also help to boost GDP growth next year. Finally, consumer and business expectations are improving, which is also another positive sign that the economy should begin to perform slightly better in 2017.

Loan growth in the banking system has been gradually decelerating. As of September, loans were growing at 4% year-on-year. As expected, the growth rate of mortgage loans has been decelerating, but the positive growth of most non-mining sectors and the stability of employment have kept loans to individuals expanding at a healthy rate. Asset quality has been improving, a reflection of loan growth in risker segments and a healthy corporate loan book. For the entire 2016, we expect loan growth to be around 6% and between 7% and 8% in 2017.

Now, we will give further detail into the implementation of our strategy and how its benefiting our client activity and results this year. Net income totaled CLP363,718 million as of September 2016. In the third quarter, net income totaled CLP121,979 million. The Bank's ROE reached 17.7% both in nine months 2016 and in the third quarter, in line with our previous guidance. Core business trends remain solid with healthy loan growth, strong client margins, expanding fees, sound asset quality indicators, and controlled cost growth. This propelled a 16.6% year-on-year increase in the net contribution for our business segments. This metric include all revenues, provisions, and costs related with our clients excluding all non-client revenues and expenses especially the impact of inflation. We think this give us a better understanding of the underlying recurring profitability of our franchise and the solid execution of our business strategy. Net income was flat compared to nine months 2015 as the solid client trends were offset by the extraordinary severance payments, a lower inflation rate, and a higher corporate tax rate.

In terms of strategy, the Bank made important advances this quarter in all of our four strategic objectives. As seen in the slide, our strategy has circled around number one, focusing our growth on those segments with a higher risk-adjusted return; two, increasing client loyalty through an improved client experience and quality of service; three, deepening our ongoing commercial transformation by expanding the Bank's digital banking capabilities, and four, optimizing our profitability and capital use to increase shareholder value in time.

In the rest of this webcast, we will review the usual figures, but at the same time, we'll give a little bit more color on the developments regarding customer activities and our digital banking capabilities, which are helping to boost our recurring results.

Regarding our first strategic objective, during the 3Q 2016, loans increased 1.8% QonQ and 6.2% year-on-year. The Bank continued to focus loan growth segments with the highest profitability, net of risk. Loans to individuals increased 1.4% QonQ and 11.1% year-on-year. The Bank is focusing on expanding its loan portfolio in the middle and (technical difficulty).

Mr. Monge, please go ahead.

Okay, thanks very much and sorry for the interruption. As we were mentioning, consumer loan growth this quarter was 1.7% QonQ and mortgage loans increased 1.8% QonQ. Among consumer loan, the growth among middle and high-income earners grew 3.7% QonQ and 15.2% year-on-year while in the low-end of the market, consumer loans decreased 5.6% QonQ and 22.2% year-on-year reflecting the lower attractiveness of this segment. We expect in 2017 to see similar trends in the middle and high-income segments and a gradual recovery of our PBT in the mass market as we anticipate to introduce our new distribution and client model for this segment in 2017.

Loans to small and middle-sized companies, SMEs also expanded at a healthy rate in the quarter, growing 1.7% QonQ and 9.3% year-on-year. A sound management of risk and an important rise in loan lending revenues are accompanying the growth of loans to SMEs and therefore this segment continues to contribute to Bank's ROE despite slower economic growth.

Loans in the middle market accelerated and increased 2.9% QonQ. In Global Corporate Banking (GCB), our wholesale banking unit, loans increased 0.9% QonQ, but decreased 9.2% year-on-year. Loan growth in the middle market and the large corporate segment has been less robust in part due to the lower credit demand, but also because our commercial effort has been put in the non-lending banking activities such as cash management, fee-based income, and treasury services, which boost revenues with little capital use.

The Bank's strategy of focusing equally on both lending and non-lending businesses has also led to solid liquidity levels and our liquidity coverage ratio (LCR) calculated under the new Chilean guidelines regarding liquidity reached 150% as of September 2016. The sound level of liquidity allowed the Bank to proactively shift customer funds from deposits to mutual funds in order to boost fee growth and improve the spread earned over deposits. As a result, total deposits decreased 1% QonQ, but total customer funds, which are deposits plus mutual funds managed by the Bank increased 0.8% QonQ and 8.7% year-on-year. This has helped to improve client margins despite the shift in the loan mix to less risky and lower yielding assets.

Despite a more selective approach to loan growth and a more proactive management of our funding base, we are still gaining market share across the board in the Chilean market. Between December and September, we have increased our market share in terms of total loans by 40 basis point with a rise in share in consumer, mortgage, and commercial loans, and in total deposits, our market share went up by 50 basis points, which [raises] both in demand and time deposits.

Our funding costs are also improving the process. The spread we earned over our deposit including demand deposit is rising and the cost of our time deposit base compared to our main peers is improving. As a result of all the above, client net interest income, which is net interest income from our business segments and exclude the impact of inflation, increased 3.4% QonQ and 8.1% year-on-year. Client NIMs, defined as client net interest income divided by average loans reach 4.9% in 3Q16, increasing 10 basis points QonQ.

Total NIMs, which reached 4.5% in the quarter, should also remain relatively stable going forward as we expect inflation in 4Q to be similar to the current levels. The change in the asset mix continues to improve asset quality. In the third quarter, the non-performing loans ratio reached 2.1%, flat compared to second Q of 2016 and 40 basis points lower than in 3Q15.

Total impaired loans, a broader measure of asset quality that includes non-performing loans and renegotiated loans, improved 30 basis points QonQ to 5.9% and 70 basis points since the end of the third quarter of last year. Total coverage of non-performing loans reached 146% in the third quarter of 2016. Provision for loan losses increased 12.9% QonQ and decreased 8.2% year-on-year in 3Q16.

The cost of credit, that is provision expense over loans in the quarter was 1.4% compared to 1.3% in 2Q16 and 1.7% in 3Q15. The improvement in asset quality was visible in all products with a stable or lower non-performing loans ratio in commercial, consumer, and mortgage loans. The coverage ratio of commercial non-performing loans reached 142% as of September 2016.

The coverage ratio of mortgage non-performing loans also increased to close to 43% as of September 2016. Finally, the coverage ratio of consumer non-performing loans reached 319% as of September 30, 2016. The consumer non-performing loans ratio remained relatively stable at 2.2% and the impaired (spoken in foreign language) (technical difficulty).

Ladies and gentlemen, please standby. Sir, please go ahead.

Okay, sorry, again for being cut off. I don't know what's going on, but anyway. The consumer non-performing loan ratio remained relatively stable at 2.2% and the impaired consumer loan ratio in 3Q16 was steady at 6.6%. As mentioned in previous earnings reports, the Bank has been enforcing a strategy of lowering our exposure to the low-end of the consumer loan market. This entailed an active policy of charging-off and bolstering coverage ratio in the lower income segment. These efforts should lead to a further reduction in our cost of credit going forward. A key indicator that supports this expectation is the so-called loan vintages.

This measures the non-performing loan ratio after several months has passed since origination and allows to understand the quality of the origination process and the quality of the loans in time. In our loan book to individuals and SMEs, vintages has shown steady improvements due to the better asset mix, improved credit models, and overall better risk management. Vintages are a leading indicator of future asset quality trends and as can be observed in this slide, this should lead to a lower cost of credit in 2017. We expect the cost of credit to reach around 1.1%, 1.2% next year.

Regarding our second strategic objective, the Bank continues to increase customer loyalty and improve customer satisfaction, which are key strategic goals as they create sustainable and long-term value for our shareholders. During the quarter, Santander-Chile reached another milestone in our efforts to create a bank that is simple, personal, and fair for our clients, as it closed, the client satisfaction gap we maintain with our main peers. As of October, 77% of our clients rate us with the top marks in client service according to an independent survey conducted every April and October of each year.

Positive teamwork together with our technological innovations such as the CRM make this achievement possible. This sustained improvement in customer service should be a key driver for continued growth of cross-selling and fee growth going forward. Loyal individual customers that is clients with more than four products plus minimal usage and profitability levels, in the high-income segment grew 9.3% year-on-year. Among mid-income earners, loyal customers increased 3.9% year-on-year.

Loyal middle market and SME clients grew 9.3% year-on-year. Loyalty is very linked in the medium-term with the growth of fees and that's why it's important to follow these metrics. These initiatives are driving fee growth. On a year-to-date basis, fee income is up 7.2% compared to the same period of 2015 and in line with our guidance. In the third quarter, fee growth was below this annual rate mainly due to a large one-time fee recognized in 3Q15 and more importantly that the Bank is also in the process of optimizing its ATM network, which [has negatively affected fees], but has a positive impact on costs and efficiency.

Other product lines in retail banking continue to grow at a healthy pace led by insurance, brokerage, and asset management. Fee income in the rest of the Bank segments and products continue to grow in part due to the greater product usage and customer loyalty and a recovery of fees in GCB, our wholesale unit. In GCB, the Bank has won the majority of the advisory and rich financial services for larger infrastructure projects being built in Chile.

In the quarter, the Bank also developed various initiatives in digital and branch network transformation in line with our third strategic objective. Since 2013, we have been engrossed in an ambitious project to redesign and test new distribution models. Three years ago, we took the first step of transforming our branch network away from the model in which an important percentage of transactions carry out added little value and a lot of costs to a branch network more focused on profitable client activities. By 2019, our aim is to completely transform our network into true business centers with a more intelligent layout and in which employees are engaged in creating value and hopefully removing all unprofitable transactions out of the branch.

In the third quarter, we took another step in this direction by opening two so-called Work Cafe branches. These innovative branches, which have a cafe, meeting rooms, and free Wi-Fi for clients are one of the most relevant innovations in the local market. Besides the cafe format, the people who work there are 100% dedicated to value-added activities. In a traditional branch, more than 50% of the account officer's time is dedicated to relatively non-productive tasks as branches are cluttered with non-clients. In the Work Cafe, which attends all segments, there are no tellers, which significantly reduced the flow of non-profitable activities. The new format, there is no back office, branches are paperless and fully digital. As a consequence, we estimated that the personnel in these branches will be able to attend up to 80% of their client base in a month compared to around 20% in a standard branch.

The Bank is also redesigning its main branches with a new multi-segment model. Currently, 32 branches has been remodeled with the new format, which is multi-segment, which dedicates space for the different business segments. These new models have the advantage of being smaller, efficient, and client friendly. These branches already lead the Bank's productivity and client satisfaction indicators. Apart from transforming our brick and mortar branch layout, we are expanding our digital banking capabilities. As of September, we had 953,000 digital clients, up 5.5% year-on-year and till now, our strength has been in Internet banking in which we have a 40% market share, twice the level of our main competitors.

Currently, our focus is on expanding mobile phone banking. We have launched the app [first initiative, which keeps up] development priority over any other project in the Bank. This transformation has already boosted productivity. Since we started this process, we have closed 7% of our branches and the total volumes per branch has grown 64%. We believe that this trend should continue in time contributing to increase our operational excellence and contain cost growth. These efforts are beginning to pay off. In 3Q16 for example, operational expenses increased 3.9% year-on-year and were down 0.7% QonQ. Year-to-date costs are [rising 5.8%], in line with our previous guidance for the year. Personnel salaries and expenses increased 2.1% year-on-year in 3Q16, also the lowest growth rate in the last 10 quarters. Administrative expenses increased 1.8% year-on-year mainly driven by a rise in IT expenses partially offset by a reduction in the majority of the remaining administrative expense items.

In the last 12 months, the Bank has closed 11 branches and eliminated 150 unprofitable ATMs. An increase in transactions through channels such as the Internet, mobile, and phone banking have replaced these. The effectiveness of the Bank's CRM has also increased productivity. Going forward, we expect the growth rate of cost will continue to decelerate as a result of these productivity enhancing and cost cutting measures becomes more visible.

Finally, our client-driven strategy should optimize the profitability and capital and increase shareholder value. The Bank concluded the quarter with strong capital ratios. The core capital ratio reached 10.3%, 40 basis points higher than in the same period of last year and the Bank's total Basel ratio was 13.2%. The growth of risk-weighted assets was [summarily] 1.4% year-on-year compared to 6.2% for loans. The Bank has been implementing a series of initiatives to control the growth of non-productive risk-weighted assets. This better capital ratio was achieved following the temporary increase of our payout ratio. This year, our dividend yield was 5.3%, a very attractive rate given low interest rates [across the globe].

With (inaudible) plus the share price appreciation, since the end of 2014, the ADR price of Santander-Chile has outperformed several of our main LATAM peers reflecting the positive results our strategy is bringing to shareholders especially in the long-term despite being a relatively challenging period for banks.

In summary, during the quarter, the Bank continued executing its strategy and maintained a solid client base momentum. Our ROEs have been moving between 17% and 18% and we maintain our guidance in this regard. We have maintained steady growth of client revenues with market share gains both in the lending and deposits. Asset quality keeps improving, cost growth is starting to decelerate given the different initiatives the Bank has been implementing. Most importantly, our clients are feeling difference, are increasingly preferring us over other competitors in the market. At this time, we would gladly answer any questions you might have.

(Operator Instructions). Ernesto Gabilondo, Bank of America.

A couple of questions, do you have any concerns about the macro outlook considering the high unemployment rates and lower investments in the country? How can this be translated to loan growth or higher NPLs in the next quarters? How do you perceive competition? It appears that the largest competitors are moving to the high middle-income segments, in the retail segments or are trying to grow through fees transactions. And for my second question, I would like to know your expectations for the Chilean peso considering a strong appreciation against other LATAM currencies in the region? Thank you.

Okay, in terms of the macro outlook, as we pointed in the call, we think that the economy is very close to be bottoming in terms of the cycle and there are some early symptoms of a bounce back. We don't foresee a big bouncing back and that's why our central forecasts are very much in line with the market consensus of growth of between 2%, 2.2% next year. In terms of the job market, we have seen some deterioration of job market conditions, but are mostly in the very low-end where you have a lot of informal jobs et cetera, not in the upper part of the market where we are now focusing more than 100% of our growth

And there, we haven't seen any deterioration up to now and as we pointed through the call, today, they feel the mix effect, the fact that we have been getting out from the very low-end of the consumer market and getting into the high-end is still making our consolidated asset quality metrics to improve. So, we have two sort of clashing forces. One is beneficial because our mix is healthier, but at the same time, we have some drags about the economy. Still, we think that the remaining of this year and 2017, the two forces should -- the mix effect should dominate the macro effect especially if we think that the macro conditions will be similar or improving going forward.

In terms of competition, it is true that most banks are doing relatively the same were doing because these changes were more linked to changes in the market conditions, regulation et cetera than the macro conditions, but we think that we have tools especially in terms of CRM that we implemented a couple of years ago, in terms of the new credit models that we launched also a couple of years ago that will allow us to improve in terms of being more connected with clients, knowing a little bit faster than the rest what to offer, at what time et cetera and that's why we think that in terms of competitive positioning, we are in a stronger position now. We have to develop these tools in order to move to this upper-end of the market and that's why now we are starting to reap that benefit and you can see that in terms of market share gains and other metrics that make us believe that we are kind of pressing the correct keys in that sense.

In terms of the exchange rate, the view is very similar to today, we're close to -- a mild depreciation especially because the Central Bank is expected to slash rates probably by the early 2017. So we think that the peso could see some depreciation, currently has been the opposite, but to be fair, it's anybody's guess. Nobody really knows especially in the short-term where the exchange rate is going. For practical purpose, the Bank is hedged at all times. We have very little mismatches in terms of currency and to the best of our knowledge, the clients also don't have big positions. So we don't foresee major problems coming from the fluctuations of exchange rates. Actually for the treasury side, we are market makers, that volatility tends to be beneficial.

Carlos Macedo, Goldman Sachs.

Couple of questions, first question, Raimundo, you mentioned the dichotomy between the new clients that are coming in that are upper middle-income and the old clients that you are phasing out of that are lower income, could you give us a little bit of color of how -- just to understand and try to understand the mix effect better of how the NPL ratio is behaving for each one of those segments on the consumer side. We would expect obviously because of the nature of the customer or the client for the higher income client to have a [lower] NPL ratio and we also would expect that as you pull back from the lower income, that NPL ratio will go up. Just trying to find out or trying to get a notion of exactly how it's working?

Second question, you mentioned also that you eventually might -- are planning a return to the lower income segments with a differentiated approach. Can you give us some color on that on what exactly you expect that approach to be, the timing, what size you expect that to have on the bank once you're done. Again, just to try to get understanding of how mix will play a role in your results over the next couple of years?

Okay, well, as you correctly pointed, there are big differences between the middle to high-end of the consumer market and the low-end. In terms of delinquency, to be fair, we haven't seen a systematic deterioration of asset quality metrics, but as we have commented in other earnings report and in other conferences, we prefer to take a prudent approach and what we have been doing is charging off whatever -- remember that in that segment and this is very typical for the segment, you tend to many times give some breathing space to customers that face some problems or delays et cetera.

In our case, we have taken for that low-end of the consumer market a much more drastic approach that you simply charge-off the loan and try to recollect money afterwards and that explains why our coverage ratio has been rising in the segment because this is like when you try to get rid of -- I don't know, you are selling something and you discontinue that product line, you tend to liquidate it and try to get rid of it.

Here is more or less the same given that with that profile of clients, we don't want to operate from now on, we simply take the hit rapidly and in many cases, we are anticipating that the eventual deterioration [in time of the] loan portfolio, a process that we expect will be finished by the end of this year. This is something that we have been doing for sometimes to have a completely robust asset quality and loan book even in that low-end of the consumer market.

Concerning to the new model, this is something that we have been working for some time. It's a completely different approach because the market conditions now make the process of going down market very difficult to make you money because you have lower maximum rates, you have restrictions to collecting fees, and you have higher cost of operating, higher rents, higher labor cost et cetera.

So that was what triggered the change in strategy and to get to some extent out of that segment. It was combined by the macro conditions, but it was -- what triggered the change was simply that it was very difficult with the former model to make money with those clients. So what we are moving now is to more of a pull approach as opposed to a push approach where you with [same force] branches you try to go after the clients. Now what you do is the opposite. This is something that of course the launching of the model or the new approach will be conditioned to except the recovery of the economy and of course, we won't be operating with the same profile of clients, it will be mostly for employee clients, somebody working for somebody else with a contract, it will be for the [formalized employer] et cetera and that's why it's a completely different approach that if historically, we were approaching 60%, 65% of the workforce, today it will probably will be approaching 50% of the workforce, but it's a segment that we need to go back because its where most of the -- big part of the new clients will be coming in the next say five to 10 years. So, this is a project that is not completely finished and we're not certain about when to launch it because it will depend on macro conditions, but will be a completely different approach to a segment that we will never get completely off, it's simply that with the former model, it was very difficult to make money. We think that with the new leaner and more IT-based model, we will be able to make money in that segment.

Thiago Batista, Itau.

I have two questions. The first one regarding your NPL coverage ratio, the NPL coverage ratio [of Santander-Chile] increased a lot in last couple of years achieving now almost 150%. What do you expect when looking forward, what we could expect in terms of evolution of your NPL coverage ratio? And the second question, comparing the expansion of your loan portfolio with expansion of your risk-weighted assets, its possible to see that loan portfolio expand at much faster pace than you're risk-weighted assets. Is this explained only by the higher growth of the mortgage or has any change in the calculation of the risk-weighted assets.

Well, regarding the coverage evolution, there, there are two element to take into consideration. Number one is regulation because as you might remember that the Superintendency has been launched in standard models for example for mortgage and for -- that also implies the consumer positions that, that client has et cetera. That means that many of the provisions that we are setting are simply a reflection that we're not using just our internal models, but some standard models are set by the regulator. So, depending on which of the two model is more binding, you should set provisions against that and that's why if you follow the chart, you see that in the last -- this year the mortgage coverage ratio has [soared].

The second element is more voluntary that is linked to the consumer positions of the low-end of the market as we talked before. There what we are basically anticipating the provisions that in time will be occurring, but we think that starting next year, we shouldn't have any surprise coming from the very low-end because we're getting out of that segment and we prefer to take the potential losses right away and not wait for -- because sometimes these loans are very long or still have some length and as a consequence we want to take -- we prefer to take the provisions today and not wait in time.

All-in, we are approaching about 150%. We think that probably that is the maximum level and from now on we should see a level that will be diluted simply by the growth of the loan base, but we don't foresee it to keep on rising because if something, for example as you have seen in the last two quarters, the provisions in the mortgage market which were part of the explanation why this ratio rose has been a reversed because the model is set by Superintendency is very strict, which we agree is a segment that typically can be -- give problems to banks, but we are -- given that we were in the process of reducing our loan to value at origination and reducing the financial burden that mortgage represent to clients, that has resulted in a release. So to make long story short, I would say that probably 150% is the maximum and from now on, we should see that level stabilizing or with a slight drop in the next 12 months.

In terms of the difference between loan growth and risk-weighted assets, there are two things, one is that we have been getting rid of relatively low productive assets that consume capital and didn't generate too much revenue. And secondly, there was a change in regulation, as you know, we are moving into Basel III regulation and the Superintendency at the beginning of the year move some of the weightings and as a consequence, we had some efficiencies in terms of the use of capital. Still, that benefit from moving to Basel III are not fully recognized. In our case, that will represent a further boost of more than 200 basis point in our core capital ratios, but is part of the movement towards Basel III, which is benefiting banks among them, Santander-Chile.

Nicholas Reva, Citi.

My question is on the outlook for margins. So next year, assuming a more normal inflation of 3%, we could see a slight compression in your margins. However, if the Central Bank were to cut interest rates, this will have a positive effect on [funding cost] on margin. So my question is what's your outlook really for inflation and the monetary policy in 2017 and how you're thinking of margins based on this projection? Thanks.

Okay, well there are many moving pieces, but if you think the inflation rate that we have seen in the last two quarters is even below 3% on an annualized basis. So the inflationary drag, I would say is pretty much taken into account in the margins we are generating in the last two quarters. I think the year-on-year inflation is even below the central targets set by the Central Bank. Apart from that, on the client side, what we have seen is a more balanced growth, 18 months ago we were growing mostly on mortgages which carries the lowest yield by far.

Now we are growing more balance between SMEs, consumer lending, mortgage, and the like and that also results in a certain compression -- a certain sorry support of our margins. And thirdly, the fact that when we started the process of changing the asset mix, at the beginning, you see the kind of the negative part, which is margins trending down. At some moment of time, the spread of the maturing operation is similar to the spread of the new one, which happened by the end of last year more or less and that's why our client margin are stabilized and this quarter jumped 10 basis points.

We foresee that trend to sustain throughout 2017 and that's why if inflation won't be a drag, the mix probably could support and the repricing effect could be supported. We think that margins can be stable or rising going forward. We don't foresee margins to be further compressed neither because of lower inflation, again assuming that the Central Bank sticks to its target of 3% and on the client activity, we think that margins could be stable or slightly rising. So depending on how conservative you are, stable savings spreads over with separate increase in the next 12 months.

Tito Labarta, Deutsche Bank.

A couple of questions also, just first on loan growth, we saw a bit of a slowdown going around 5% year-over-year. I understand the different segments are on a different basis, but just want to get with the economy growing around 2%, a little bit more next year, what type of loan growth should we expect? Can it pick up a little bit from what we're seeing and also the different segments you continue to expect retail to grow at the pace it's growing or could that slowdown or pick up if the economy picks up?

Then my second question is in terms of expenses, seeing some good cost control and particularly with the change in the distribution network, moving towards more digital, do you expect expense growth to remain around this mid-single digits that you're seeing. What kind of growth should we expect in expenses and what should that mean for your efficiency ratio. Thank you.

As we mentioned in the call, we foresee some bouncing in line of the bounce of the economy probably this year, well finish the year around 6%, which is the year-to-date growth more or less. We think it can be sustained and next year probably a little bit higher from 6%, 7% something like that.

In our case, it's a little bit more uncertain because as you know, our strategy is focused around profitability more than loan growth or size. As you have seen, we are growing I would say very rapidly in retail loans, in SMEs, but of course in the corporate side, we have been putting the brakes because of market constraints, the rest of the system is still is trying to grow own cost and we prefer to allocate capital just where it has enough contribution. The other element is that in a more slow-growth environment, the Bank is focusing the non-lending business very much. In the large corporate segment is where this model is more implemented. There, roughly 90% of the revenues are collected in non-lending activities. So you basically lend as a compensation for getting other more profitable pieces of the business with companies. In the retail, the mix is more geared towards lending activity, but still, if you deduct from the lending side, the provisions, the non-lending revenues represent like 50% of what we make in the retail part.

And we think that, that proportion should be rising in time given that our focus now is moving into more the non-lending part especially because the new client profiles that we're targeting are more affluent and as a consequence, not only need finance, but also need insurance, investment, and mutual funds and the like.

So we think that even in a slowing economy, which might have any impact on loan growth, we can sustain our profitability by moving to other pieces of the market and trying to be very effective in tapping those extra needs that clients in the affluent market tend to have. In terms of expenses, we think that at the end, the other side of the coin in a slowing economy is to be very efficient. Today, we have efficiency ratios approaching 41%, which has been affected by relatively low inflation compared to last year, but going forward we foresee cost growth of not more than 5% for the year. Something close to that, for next year. At the end, cost are the only -- I mentioned that you do control in a more demanding operational environment and because we are developing all these programs that should support our performance with no big need of further investment today, but by maintaining the CapEx that we have been seeing in the last three or four years but focusing the bulk of in IT solutions, we think we can maintain productivity gains without necessarily increasing our total cost. So we think that something in the mid-single digit is a good projection for cost growth.

Thanks, that's helpful Raimundo. I guess just one follow-up with the focus on non-lending products that you mentioned, the fee income [is growing around 9% kind of year-to-date compared to last year, do you think that 9%] is kind of sustainable should you continue to grow fees faster than loans?

I would say that yes, but of course, not every single quarter as we saw this quarter, the speed tends to sometime to decelerate, but we think that -- at the end, if you take long-term say two, three year's time, the correlation between lower clients and fee income is very accurate, but of course, not every single quarter and that's why today we maintain our guidance that we gave last year of growth for the year of around 7% in fees probably little bit higher next year because again, the other resource you [can't] have when margins are under pressure and when the loan growth is not growing that healthy to raise more fees and the fact that we have been quite innovative is allowing us to increase our fee income without raising the transaction fees or things like that. Simply more use given that we are more bonded with our clients.

Domingos Falavina, JPMorgan.

I think you mentioned to Macedo you are increasing your coverage as a result of basically two drivers, one more specific related to mortgage and the second one I think you mentioned even anticipation of some worsening as you let your clients breathe a little bit, but you provision ahead just in case even given a little bit more time the clients are able to pay.

The question is, if that's extension of loans that you are allowing your clients to breathe a little bit more, shouldn't we see this number when we look at the impaired loans and because it does have the renegotiated loans in there and then when we look at this number, it's basically coming down the line or flat in the consumer and we still see the provision coming up. So my question I guess is, would you see your provisioning more driven by being conservative or really because of anticipation of something getting worse and why don't we see any big indication that your asset quality is showing some further signs of weakness when we look at those headline figures?

It's simply to be conservative and remember there is a segment that we won't be doing business for now on. It's a very low-end of the consumer market. This is a small fraction of total consumer exposure and we want to get rid of it and there are two alternatives, to wait in time until this is either paid or you have to charge-off or to anticipate that the difficult that eventually you might have. So, at the end, it's a combination of both.

The other element I forgot to mention and also explain why the coverage ratio has been trending up in the last three or four years is because when we move and we change our credit models, we move to actual losses as a way to provision to expected losses. So today, we set provisions ahead of facing difficulties because these are statistical models that try to anticipate the behavior of the client in the different stages of the cycle. So that also is the third element that explains why coverage has been systematically right in that we are setting provisions ahead of troubles, but of course taking in consideration the type of client that we are doing business. So at the end, it's a combination of improved models and some prudence because of course the macro outlook is weaker than what we have been used to for many years in Chile.

Second quick question, thank you, is on branch, again. We did, as you mentioned, branches being down and optimization was very, very high when we look at deposits and loans per branch and you said the trend should continue. What kind of branch optimization you see for the next 12 months like 5% to 10%, [0% to 5%].

At the end what you're doing is basically replacing branches that were mostly or to a large extent transactional units where you pay bills, where you go to cash a check for points of more value-added services and that's why the number -- at the end, the cost of running the branch network we think will be trending down because you would have smaller branches, leaner branches.

Remember that in a kind of old branch, a big proportion, if you go to a bank branch, you will see that a big proportion of the surface is dedicated to tellers and back office and today, technology allows you to have a centralized back office, which are remotely located et cetera and in terms of tellers, technology today facilitates because you have ATMs that not only allow you to withdraw money, but also to deposit money and you can deposit checks, actually currency et cetera.

So replacing three or four tellers by an ATM that does more or less the same saves you a lot of surface, a lot of size of the branch and a lot of people because you were moving that people that used to be in very high expense areas or very expensive areas, you move it to processing locations that are cheaper to run et cetera and that's why, we think that the number of points probably will bottom in some moment of time because you need to be in most of the cities in Chile and hopefully closer to the client.

It's a little bit -- people tend to be a little bit kind of old because they say no, I don't want to have branches and I've never been in a branch in the last three or four years, but in reality, if you close branches, people complain. So that's why the trick here has been to maintain more or less the same number of points, but reducing the size of the branches and reducing the headcount of the branch. That at the end is maintaining the contact points with clients, but allowing you to have contact points that are much more profitable and customer friendly and valuable customers and all the kind of transactional stuff hopefully to be moved to mobile, to direct payments and the like.

That has been the approach and we foresee that in the next whatever, five years or so, we will have both digital banking capabilities that are much stronger than what we have to today plus physical branches that are more or less in number not very different of what we have today, but completely different in terms of what you do at the branch level.

(inaudible).

My question is very specific. Do you any targets for the consumer impaired ratio?

No, actually, we don't have -- there is some amount of time it should level because again if we plan to go to those clients that [are in] the more massive market but not as slow as we get in the previous cycle, you see that level rising at some moment of time. At the end, what you try to maximize is the spread net of provisions or actually after loss and sometimes to avoid the loss, you give breathing space to the client to try to minimize the actual loss, you try to give some breathing space to clients and that's why it's better as a metric to follow impaired client, impaired loans more than non-performing loans, which to some extent you can, it's more [exploratory] because it depends on how relaxed or how stringent you are in your refinancing policies, but once you follow both, you have a better measure of what's going on. In our case, we don't have a specific metric, but of course, it's something that you measure against the profitability you are getting. So if we can get a more profitable consumer lending, of course your willing to accept a higher impaired loan ratio.

Okay, so the 6.6% that we are seeing now, its going to be flat in the coming quarters, that's your expectation, right?

No, not sure, because at the end it will depend on the growth, but very likely we'll keep going down for some time because we don't plan to go in full throttle to the middle market, which is the one that could reduce the drop. So probably similar or slightly decreasing in time.

(Operator Instructions) Carlos Gomez, HSBC.

Two brief questions, and if you have answered them in the initial comments, please sorry for that. First, on your tax rate, we see it has increased to 19% this quarter. Can you remind us what your expectation is for this year and for next year and do you have any expectation of additional fiscal changes that will result in a change of your corporate tax rate in the medium-term?

And second, if you could comment on the demand for mortgages and construction loans. We were expecting a big slowdown at the beginning of the year, would it change again in fiscal legislation, but it doesn't seem to have happened, if it's a temporary phenomenon or is demand for mortgages permanently higher than you have anticipated before. Thank you.

Okay, In terms of the tax rate, this year --

[Does the fourth quarter] with 19% as well?

Yes, it could be very close to 19%, a little bit between 19%,19.5% more or less and next year probably 150 basis points higher. Remember that the level of the effective tax rate is linked to inflation. So again, assuming that inflation is around 3% next year which we should see a rise of 150 basis points, [21] or so for next year. In terms of changes on the fiscal side, it's science fiction to us, but we foresee that whomever is selected will have to do to tackle the complexities of the new tax reform probably keeping the rates, the level of the rates for the corporate side, but simplifying the way the taxes are collected, because it is perceived to be very cumbersome but we have no advise and probably it would be an issue in the forthcoming Presidential race.

In terms of mortgage and real estate, as was anticipated, we saw a slowdown and probably the slowdown in mortgages will remain for the remainder of this year and next year. What happened is that in 2014 and especially in 2015, people anticipate the acquisition of an apartment or a house in order to take advantage of some tax breaks that were eliminated and the same happened with the real estate companies, but this was a very anticipated and that's why we haven't seen -- we have seen lower activity from the real estate companies, but we haven't seen them facing major difficulties because it was very much anticipated in these companies.

In our case, we operate with the very stronger companies, companies that survive for example the 2010 earthquake where we had a lot of potential troubles because you have works that were in the middle of construction and they suffered, that could have been devastating. So these companies are well run and that's why for us the real estate portfolio is very low risk and historically has been the case. So, this is simply a demand and supply condition that demand is falling and at the same time supply is falling in the same line and eventually it will bounce probably by the next year -- end of the year, if not, 2018. So it's a segment that will slow down. For practical purposes, mortgages is not very appealing per se, is appealing because clients with mortgages tend to be more profitable, but that's why although we have seen deceleration in terms of the client net interest income, the impact is very small.

And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Raimundo Monge for any closing remark.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.