Banco Santander Chile (BSAC) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Banco Santander-Chile's fourth-quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode to prevent background noise. (Operator Instructions) We will have a question-and-answer session later and the instructions will be given at that time.

Now, I would like to welcome and turn the call to Mr. Raimundo Monge, Director of Financial and Strategic Planning. Please go ahead.

Thank you very much, and good morning, ladies and gentlemen. Once again welcome to Banco Santander-Chile's fourth-quarter 2016 results webcast and conference call. As told, my name is Raimundo Monge, Director of Strategic Planning. 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 fourth 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 in the economic front. According to market consensus, the economy should grow between 2% and 2.2% in 2017. We have also included our forecast for GDP growth in 2018 at 2.7%. And employment continues to be resilient. Inflation has fallen below the Central Bank's inflation target at 3%, which has opened the door to the Central Bank's first interest rate cut. We expect at least one more cut in rates in the first half of this year. Finally, consumer expectations are improving, which is also another positive sign that the economy should begin to perform a little bit better in 2017. The recent strength in copper prices may result in upside potential to our GDP growth forecast.

Loan growth in the banking system remains stable. As of November, loans were growing at 5.6% during the year, quite in line with our expectations for the year. The growth rate of mortgages loans has been decelerating as anticipated, but the positive growth of most non-mining sectors and the stability of unemployment have kept loans to individuals expanding at a healthy rate. Asset quality has been improving, a reflection of loan growth in riskier segments and a healthy corporate loan book. For 2017, we continue to expect loan growth for the system between 6% and 7%.

Now, we will give further detail into the implementation of our strategy and how it is benefiting our client activity and results this year. Net income in 2016 totaled CLP472 billion, and increasing 5.2% year-on-year. Pretax profit was up 10.3% in the same period.

The Bank's ROE reached 17.1% in the year, which was in line with initial guidance, despite an annual inflation rate that was below the market expectations of around 3% -- the initial market expectations of around 3%, 3.3% for the year. The Bank achieved its ROE target due to the strong growth of our client activity. Core business profit showed solid trends throughout 2016, with healthy loan growth, stable client margins, expanding fees, sound asset quality indicators, and controlled cost growth. These propel a 25.6% year-on-year increase in the net contribution from our business segments. This was partially offset by two elements. Number one, the low inflation rate in 2016 compared to 2015 and the impact that this has on our net interest margins, NIMs. And secondly, the higher effective tax rate due to the hike in the statutory tax rate.

In the fourth quarter of 2016, net income attributable to shareholders totaled CLP109 billion. Compared to 4Q 2015, net income increased 29.7%, due to a 63.8% year-on-year increase from the net contribution from our business segments and the recognition of an additional provision of CLP30,000 million in 4Q 2015, due to the new provisionary requirement. Compared to 3Q 2016, net income fell 10.9% Q-on-Q, due to the lower inflation rate in 4Q 2016 compared to 3Q 2016 and the lower income from our wholesale banking unit.

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. Number two, increasing client loyalty through an improved client experience and quality of service. Number three, deepening our ongoing commercial transformation by expanding the Bank's -- each of the banking capabilities. And four, optimizing our profitability and use of capital to increase shareholder value in kind.

Regarding our first strategic objective, during the fourth quarter of 2016, loans increased 1.3% Q-on-Q and 7.5% year-on-year. The Bank continued to focus loan growth on segments with the highest profitability net of risk. These signified positive growth among larger SMEs and the mid- to high-income individuals, while still avoiding growth in the low end of the consumer business and the low spread wholesale lending segment.

Retail loans increased 2.1% Q-on-Q and 9.2% year-on-year. Consumer loans were the fastest-growing product in the quarter and grew accelerated to 3.1% Q-on-Q and 7.1% year-on-year. Despite loan growth in the middle market and our wholesale unit GCB, both of these segments had record years in terms of contribution to the Bank's bottom line. This was due to a strong increase in non-lending revenue, such as cash management, investment banking and treasury service for clients, as well as positive asset quality numbers.

The Bank was selective in its growth in 2016, but still managed to gain market share in loans. Loan market share including interbank loans increased 40 basis points with a rise in market share in both consumer, mortgage and commercial loans. The Bank's strategy of focusing equally on both lending and non-lending businesses has also led to positive growth of the deposit in the year. Total customer funds, which include deposit and mutual funds managed by the Bank increased 1.6% Q-on-Q and 6.9% year-on-year. Total deposit increased 3.2% Q-on-Q and 5.9% year-on-year.

In the quarter, non-interest-bearing demand deposits led growth and increased 9.1%. Also, in the quarter, local pension fund experienced strong flows to their fixed income funds. These lowered long-term interest rates and improved issuance spreads. The Bank took advantage of this momentum and issued the equivalent of [$700 million gross] in long-term bonds, mainly in the local market. These also demonstrate that when the cost of issuing bonds [of course] rises, we have access to ample liquidity in the local market at attractive rates.

The Bank also focused in 2016 on improving its funding cost. The Bank's main source of funding are nominal time deposit in Chilean pesos. The average cost of these deposits descended throughout 2016. These issues helped to support client margins in 2017. Not only did our funding cost also improve in 2016, but we were able to expand our market share in the process. Total deposit market share was up 30 basis points in 2016, with a 14 basis point rise in our market share in non-interest bearing demand deposits.

In the fourth Q of 2016, net interest income decreased 2.1% Q-on-Q and 0.6% year-on-year. The net interest margin reached 4.2% in the quarter. The main reason for this lower margin was the lower inflation rate in 4Q as already mentioned, while client margins remained stable. At the same time, the large inflow of liquidity in the Bank via deposits in the quarter and bonds in the quarter, led to an increase in lower-yielding financial investments, which should normalize in the early quarters of this year.

Client net interest income, which is net interest income from our business segments and excludes the effect of inflation, increased 6.8% year-on-year in fourth Q 2016. Client NIMs reached 4.8% in 4Q 2016 compared to 4.9% in 3Q 2016 and 4.8% in 4Q 2015. The 10 basis point Q-on-Q fall in client NIMs compared to 3Q 2016 was mainly due to the shift in the loan mix away from the low end of the consumer market. This is leading to a gradual improvement in the Bank cost of credit, which should continue in 2017.

In the fourth Q of 2016, the net interest margin, net of provisions in retail banking rose 40 basis points compared to both the third quarter and the year-end of 2015. We expect in 2017 the net interest margin, net of provision in retail banking to expand a further 10 basis point to 20 basis point.

The Bank's strategy of de-risking the asset mix had a positive impact in asset quality and coverage ratios across the board in 2016. In the fourth quarter, the non-performing loans ratio reached 2.1%, flat compared to the previous quarter and 40 basis points lower than by year-end 2015. Total coverage of non-performing loans finished the year at 145.4%, up from 117% in December 2015. Provisions for loan losses decreased 6.9% Q-on-Q and 41.6% year-on-year in the fourth-quarter 2016. As a reminder, provision expense in the last quarter of 2015 included a non-recurring pretax provision of CLP35,000 million, directly related to regulatory changes regarding provisioning models for mortgage loans and substandard consumer and commercial loans analyzed on a collective basis. Excluding this impact, provision expenses still decreased 23.9% Q-on-Q in the fourth quarter.

The cost of credit in the quarter was 1.3% compared to 1.4% in 3Q 2016 and 1.8% in 4Q 2015. This lower cost of credit was mainly due to a decrease of 34.8% Q-on-Q and 14.5% year-on-year in provisions for consumer loans. As mentioned in previous earning reports, the Bank has been enforcing a strategy of lowering exposure to the low end of the consumer loan market. This entail an active policy of charging off and bolstering coverage ratio in the lower-income segment. In the whole of 2016, this signified approximately CLP36,000 million in higher provisions for consumer loans. We expect lower provisions for consumer lending in 2017, given the aforementioned rise in coverage, plus the change in the consumer loan mix, improvements in admission policy and more efficient recovery efforts.

This improvement in asset quality was visible, not only in consumer loans, but in all products. As we can see in the graphs on this slide, the non-performing loan ratio fell in all of our products and the coverage ratio rose significantly as well. This is notable considering that 2016 was a relatively low-growth year. Going forward, we expect that the non-performing loan ratio should remain relatively stable.

Regarding our second strategic objective, the Bank continued to increase customer loyalty and improve customer satisfaction, which are key strategic goals, as they create sustainable long-term value for our shareholders. In the quarter, Santander-Chile reached another milestone in our efforts to create a bank very 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 top marks in client service, according to an independent survey conducted every April and October of each year. Positive team work, together with our technological innovations such as the CRM, has made this achievement possible. This sustained improvement in customer service should be a key driver for commercial growth of cross-selling and fee growth going forward.

Loyal individual customers, that is clients with more than four products plus minimum usage and profitability levels in the high income segment grew 11.1% year-on-year. Among mid-income earners, loyalty customers increased 8% year-on-year. Loyal middle market and SME clients grew 12.9% during the year. These initiatives are driving fee growth. On a 12-month basis, fee income was up 7.1% in 2016, in line with our guidance. In the fourth quarter, fee growth slowed down mainly due to lower fees in retail banking. This was to a large extent due to the lower origination of mortgages loans that affected insurance-related fees. The Bank has also been eliminating money-losing ATMs which lower fees, but also -- but it improves overall profitability.

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 of redesigning and testing new distribution models. The Bank is transforming its branch network by adapting a multi-segment approach with its smaller branches that are multi-segment with dedicated spaces for the different business segments. These new branches are more productive and client-friendly and therefore, we do not expect this to impact our business volumes. In 2016, we remodeled 57 branches to our new multi-segment format. In 2017, we expect this trend to continue, while closing and consolidating less-efficient branches.

In 2016, we also innovated by opening two Work Cafe branches. These branches are high-tech, high-touch branches with no human tellers or back office. These innovative branches, which also have a cafe, meeting rooms and free WiFi, were one of the most relevant innovation in the local banking. In 2017, we expect to open approximately 18 Work Cafes.

The Bank's digital transformation and new branch format had been quite successful and as a result, the Bank accelerated its branch closure plan in the quarter. In the fourth quarter, the Bank closed 21 Santander Banefe branches that attends the mass consumer market. This transformation is boosting productivity. In the last two years, we have closed 8% of our branches and eliminated 21% of our ATMs. In this same period, total volumes per branch has grown 32%.

An increase in transactions through channels such as Internet, mobile and phone banking has allowed the Bank to reduce its brick-and-mortar network without hurting business growth or client service. In Internet banking, for example, our market share, excluding this state-owned bank, is close to 40%. This signifies that more and more customers are performing transaction as operations through our Web and this reduces the need not only for branches, but for ATMs as well.

The effectiveness of the Bank's CRM has also increased commercial productivity, as well as the implementation of other digital initiatives. We believe that this trend should continue in time, contributing to increase our operational excellence and contain cost growth. In 2017, the priority will be to further develop our mobile banking capabilities and the usage by our clients.

These efforts are beginning to pay off. In 2016, operating expenses increased by 3.9%, a little below our initial guidance. Going forward, we expect the growth rate of course to remain at this level as a result of this productivity enhancing and cost cutting measures should become more visible.

Finally, our client-driven strategies, optimizing profitability and capital are increasing shareholder value. The Bank concluded the quarter with strong capital ratios. The core capital ratio reached 10.5%, 20 basis points higher than the same period last year, despite the higher payout ratio. The growth of risk-weighted assets was merely 2.9% year-on-year, compared to 7.5% for loans. The Bank has been implementing a number of initiatives to control the growth of non-productive risk-weighted assets.

Given the good dividend the Bank has been paying, plus the share appreciation, since the end of 2014, the ADR of Santander-Chile has outperformed several of our main LatAm peers, reflecting the positive results of our strategy are bringing to our shareholders, especially in the long term and despite being operating in a relatively challenging economic environment.

In summary, during the quarter then in 2016, the Bank continued executing its strategy on maintaining a solid client business momentum. The Bank has been steadily improving its competitive position in the market, gaining market share across the board, increasing its customer loyal base and transforming its business model and distribution capabilities to face both a more demanding business environment and the digital challenges most companies are now facing.

In 2017, revenues should expand in line with loan growth, driven by higher GDP growth and a better level of customer businesses, driven by greater loyalty and market share gains. This should be further leveraged by two factors. Number one, a lower cost of credit, which should go down to levels between 1.1% and 1.2% for the year and cost of growth that should be in the range of 4% to 5%. This will be partially offset by a higher effective tax rate that rises 1.5 percentage points, and some lower inflation as we have already mentioned. All in, this double-leverage effect should lead to ROE expansion in [2017] in the range of 17% to 18%, as long as US inflation remains above 2.5%.

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

(Operator Instructions) Philip Finch, UBS.

A couple of questions from me please. In terms of cost of risk, we saw steady improvement last year with the fourth-quarter level of 1.3%. Looking ahead into 2017, where could we see cost of risk come down to? And linked to that, also in terms of coverage ratio, we've seen decent improvement there with the latest figure at 145%. What is the optimal level for coverage ratio that you're looking for? And my second question is regarding your digital transformation strategy, and linked to that the branch optimization plans. What improvements can we expect to see in terms of efficiency? And linked to that, do you have a target for cost-to-income ratio this year?

In terms of cost of risk, as we stated in the call, we expect that level to be between 1.1% and 1.2% for the whole year 2017. And why is that? Basically, because as we've mentioned in previous calls, once the Bank started a shift in the asset mix, at the beginning you see the negative effect of lower gross margins, given that you are substituting relatively high-yielding loans for relatively lower-yielding loans. But then after a lag, which we are starting to see that today, you also see the same phenomenon happening in the cost of credit. And in terms of the gross margin, as you see this year, the client gross margin has been very stable at around 4.8%, 4.9% and then we should foresee in the next year and a half at least, 2017 and the early part of 2018 that the trend in asset quality or cost of credit improvement to sustain, basically because the new mix is lower risk and lower-yielding. Today, we have seen the lower-yielding part. We should foresee the lower risk and therefore, we have a mix effect that is already starting to be visible and the counter force will be the macro conditions. But today the basic consensus is that the economy in 2017 will be similar, if not slightly better than 2016. So we don't -- we expect the cost of risk again to be improving 10 basis point to something between 1.1% and 1.2%.

In terms of coverage, remember that in Chile, you do provision is the expected loss. Why coverage has risen so fast in the last year and a half? It's a combination that we have changed our model to expected loss model, where you take the provision ahead of the eventual bad news. Secondly, because there have been some changes in regulations that have forced banks to take provisions regardless of their internal model, especially that happened last year, but has happened in other places with large corporate borrowers, et cetera.

And thirdly, because we have -- as we mentioned in the press release, we have been going through a process of getting out of the low end of the consumer market, the very low end of the consumer market. And the way to do that is to increase coverage by provisioning 100% of those positions that you won't be making business with them for long. That's why this year we took an extraordinary provision to (inaudible) of CLP36,000 million, which is very similar to what we took the year before, because of the regulatory change.

So in terms of bottom-line performance, the two elements cancel out, but leave us with a high coverage and completely out of that low-yield segment that we won't be doing business going forward. So the coverage today is around 145%. We think that the level -- that should be very close to its peak and from now on being at that level or slightly lower, whenever you start normalizing the provision effort that we have already been doing.

In terms of digital transformation, we have been moving in that direction. We have a lot of new capabilities and of course they're not only done as a way to save money, but -- of course they allow us to be more and more productive and more efficient, but also to lure client and retain clients more thoroughly, which should spill in the different lines of a profit and loss [move]; more money in your checking accounts; more bonding with the company-based income and the like.

In terms of branches, we don't have a specific plan of a branch closure, but of course what you are doing is calibrating the transactionality that is done at the branch level vis-a-vis the surveys that you have and the movement that -- you have some threshold to start closing branches whenever clients, or the number of transactions carried out at the branch level does not justify a physical point. So, what we have been doing is basically concentrating two or three branches in one single space and the way to do that is of course moving rudimentary transactions to other channels. Secondly, as we have been toying with the new Work Cafe format, getting rid of the back office that is there, and that means that you have smaller branches that are mostly commercial contact points and not necessarily transactionality point, or where you are processing transactions. Banks for many years have had a -- to call it someway -- the ovens to produce the bread on-site and then they sell what they produce over there. That is very inefficient, because prime retail space that are used for branches is very expensive to do back-office operation and today technology allows to move that process out of the branches. So, we don't have a -- but of course in time, this will be improving efficiency. But remember that at the end, what you're trying is to -- the Bank doesn't have an absolute problem for efficiency. We have cost-to-income ratios of 41%, 42%. What we need to do and that's why we've been doing this transformation, is to increase the profitability by client, to some extent working harder with their clients for their own interest to get more activity with the Bank and as a consequence more profitability. So, this is not necessarily a cost cutting effort, it is more a productivity enhancing and a revenue-enhancing effort, which of course at the end will have an impact in efficiency ratios, but not necessarily on the cost side, but also in the revenue side. So it comes with two-way improvement.

Guilherme Costa, Itau BBA.

My first question is about the loan expansion in 2017. We saw that during 2016 you showed increase in the market share of total loans and you indicated that loan growth for the Chilean financial system would probably be around 6% to 7% in 2017. So I'd like to know how much do you believe your portfolio could expand in 2017, and what segments should drive the expansion in the year?

And my second question is about your NPL ratio. You indicated that the NPL ratio will probably remain flat during 2017. But I would like to know the breakdown of the NPL ratio, if you expect to see some potential increase in the delinquency rate of customer loans, or if this is already under control? Thank you.

In terms of loan growth, as you rightly point -- remember that in our case we don't have a target for loan growth. Loan growth in our case is a result of the implementation of a profitability-driven strategy. So we tend to grow lower than the market when we think that spreads are out of line and a little bit faster than the market when we think the spreads are right. This year that happened and we were able to -- and that's why our client activity has been fueling a relatively solid performance that was subdued because of lower inflation, which had nothing to do with clients and higher corporate rate, or taxes -- corporate taxes that also have nothing to do with client activity.

So for next year, we foresee that the system should be growing between 6% and 7%. In our case, starting the year probably in line of that, we don't see any reason to be growing faster than the market or lower than the market. But of course at the end it will depend on the pricing decision of our peers. If we see kind of spreads that don't compensate for the use of capital, we stop slow-growing [from summer] this year. We saw that very clearly in the wholesale area, where we decreased our exposure, simply because the spreads that were seen in the market were not fulfilling our risk adjusted return on capital. As a consequence, we simply put the brakes in that area. Contrary to that, in other segments, for example, consumer lending, we have been accelerating.

So at the end of the day, we don't have a target for loan growth. It's very likely that we should be moving in line with the market, but at the end it will depend on getting the right spread for the right risk profile and the right capital consumption that we are seeing in the market. So, perfectly our [spreads] is in line with the market, but we don't have a firm target in that line.

In terms of non-performing loans, we say that we foresee the non-performing loan to be relatively flattish in around 2.1%, could be a little bit lower, but not that very much. Why is that? Because the mix effect that has been improving is starting to be concluded, and from now on probably the macro effect will be the one to follow. And given that we foresee that the economy will be very similar in 2017 to what it was 2016 or could be slightly more positive, we don't foresee any headwind coming from the macro situation in our asset quality.

In terms of segments, again, in retail, the fact that unemployment figures have been very stable, wage growth has been very stable, we don't foresee surprises and especially, because today we are operating with the upper 30%, 35% of the working population. So, we are basically in the segment that is more resistant to any problems on the macro side. And the same happens with SMEs, that traditionally are the ones that create more and more noise in a weaker operational environment. Today, we're operating mostly in the larger SMEs and especially SMEs that not only borrow money, but also have other side revenues. As we have talked before, the intention is to be the main bank of the majority of our clients and that is applicable not only in retail, but also especially in the SMEs, where we are kind of foreseeing that if we are not the main bank of the customer, it's better to reduce our exposure there, because of the risk-return relationship doesn't square. So, flat non-performing loans, simply because the mix effect won't be pushing down that figure and we don't foresee the macro to deteriorate in that figure as well.

Ernesto Gabilondo, Bank of America Merrill Lynch.

If there is a reduction in interest rates, how do you perceive NIM in 2017? My second question, a follow-up, regarding the transformation to multi-segment branches and Work Cafe branches. What can we expect in terms of fees and OpEx growth? And finally, how do you perceive Chile's sovereign risk? And I will also appreciate your outlook on the new Presidential elections taking place this year. Thank you.

In terms of NIMs, there are two forces that we'll be describing; probably a stable or slightly higher client NIM is beneficial. Lower interest rates also are beneficial. We put in the press release that every 100 basis point drop on rates has a positive impact of like [10 basis points]. And then that will be partially or fully compensated by low inflation. We foresee US inflation, which is what matters to us, to be around 20 basis point lower in 2017 compared to 2016. So those are the moving parts. So net-net, we think that our total spreads will be stable at around 4.8%, something like that. We don't see them dropping unless again US inflation is below the 2.5% target that we have in mind.

In terms of the transformation, fees have been lagging, to be clear. And that's why this year we are putting a special emphasis on increasing our fee base, especially usage type of fees. We have been doing a lot of things in client loyalty and a lot of things in terms of simplifying the way we operated et cetera. We think that this is the year to start extracting the benefit of that. In 2016, we were helped by a very active position in the wholesale market. Today, we think that we should be doing something in the same line on the retail side and therefore, fees should be growing similar to what we saw this year, between 7% to 8%, but more fueled by retail growth than by wholesale, which tend to be less stable.

In terms of OpEx, as we said in the call, we finished the year with a year-on-year growth of close to 4%. Next year, probably something similar to that, between 4% and 5% or so.

In terms of sovereign risk, well it is a somewhat tricky question, because if you see countries with one notch below Chile macro ratios, we tend to have better macro ratios than many of the countries that have similar level of rating, assuming a cut in the sovereign rating. However, what concerns the rating agencies is the speed of the -- especially the indebtedness of the public sector. So, there we think that is where most of the concern is today concentrated. It's difficult to know at the end, because as you know the timing is very tricky. But we think that the Ministry of Finance is doing a very good job in tackling issues that are a concern by the rating agencies, and we hope that Chile will maintain its sovereign rating.

In terms of the presidential election, it is a very open question, we don't have a strong view, but the most likely candidates should be more market-friendly and that should be perceived as good news. We have seen some improvement in consumer confidence and business confidence, which I think is a combination of the better external outlook, especially copper, commodity prices, under the idea that going forward the political process will be more based on consensus and not necessarily in kind of one-sided approach, as we have seen in some cases in the last years.

Carlos Macedo, Goldman Sachs.

Couple of questions. First, you touched upon this many times throughout your speech and answering questions. How far along do you think you are in the process of converting to, or migrating to the higher level, or the higher income strata in your strategy? I mean are you 90% along, are you 50% along? In other words, when will this cease and we'll start seeing more stable trends in terms of asset quality that we can forecast, so that we can see a steady state? This transformation has helped -- it hurt NIM as you talked about and hurt a little bit the fee revenues, but it has helped asset quality a lot. I'm just trying to understand when we'll see that stabilize and be the new norm.

Second question, give us an update on the regulatory front. We know that Basel III was being discussed in Congress. Can you just give us a little bit of an update there and what we can expect from that side?

In terms of how far, although it is a very tricky to know when you're done, yes. But I would say that generally speaking, on the earning mix, we're basically where we should be, in the sense that we are already -- we have leveled our market share in the upper segment. Historically, we were lower than our total market share in the upper segment. Today we are -- it's an estimation, but we think we are approaching our natural market share in that segment as well. And we think that going forward it will be more of going behind the trends at the macro level.

In asset quality, as I mentioned before, probably this is where we should be. We should have some improvement in non-performing levels and especially on provisions in the next 18 months that will support our performance in 2017, sorry, and to a large extent 2018. But in terms of asset quality, indicators should be around what we have seen today, or a little bit lower. And then the more difficult part is that what the lessons that we have learned by doing this process, we plan to move them down market, to say that in the way that -- the CRM, which is basically a platform to manage all the client relationships was a the beginning developed mostly for the high end of the consumer market, people that have many different needs, savings, in investment, in financing, et cetera; now that capabilities can be replicated for the more massive market with fewer digital models, branches-free or where the interactions are mostly done through the Internet or mobile. And that's why the process, I would say, will never stop. It's simply that you are changing the speed. So it is a little bit difficult to answer, because we don't have a period where we have 100% accomplishment. We have been moving and we are starting to see that. But the tricks that we have learned for the upper 30% of the population can be replicated and that is something that we're waiting until we have a more solid macro conditions to start deploying new models for the more massive market.

Again, we cannot give up for a piece of the market that is relatively large and growing faster than the upper end. It's simply that today the timing is not right. And today, the models that the banks are using or not suitable, given the new realities. But if you develop a model that is leaner and more technology based, et cetera, and given the fact that demand is more aware of the IT and mobile activities, et cetera, we think we can have, going forward, [an IT], but that of course will be depending on the macro conditions.

In the regulatory front, we haven't seen any advancements in Basel III. The problem is that there is a big backlog of projects under discussion in Congress and the government to some extent is running out of time to get -- so we don't have any update on that side. But in our case, at least, we are basically Basel III compliant. We are reporting to the regulator of our controlling shareholder. Figures are very comfortable in terms of capital, liquidity, et cetera, and we think that the process for us at least, it will be leveling of the playing field that would be beneficial, because we have done an effort in anticipation to having Basel III implemented in terms of liquidity, in terms of capital that some of our -- the rest of the players are not necessarily following and that means that we are on a relative disadvantage position compared to them. Once we have full implementation of Basel III, it would be good news for us. But the timing is very uncertain and probably, although the commitment has been to do it this year, but the chances are relatively low, because there are so many things are pressing before that. However, the regulation of the financial system in Chile, given that -- Basel III is very useful when you have large number of banks and therefore you don't know them very well. In Chile, there are seven or eight banks that define 90% of (inaudible) as a very thorough working knowledge about them, and as a consequence, it's a system that has been very sound for many years. And that's why it's a good to have an international standard, but probably won't mean a big change in the day-to-day activities of most of the banks that you might know.

Just a follow-up, just to confirm. Are you going to go back to 60% payout this year from the high level in last year?

it is something that ff course you propose at the shareholder meetings in -- but we think that the fact that growth will be too high and that the (technical difficulty) at the end what you do is you say, okay, in order to keep strong capital ratios and in order to fuel your growth, which is how much you have to retain, we think that retaining 40% can be enough, yes, but we will be moving between 60% or between 55% and 65%.

Nicolas Riva, Citi.

Just a follow-up on Basel III and capital. Remember in the past you said that the move to Basel III could be positive for your capital ratios and you mentioned, potentially a positive impact of up to 200 basis points. And of course your capital position right now is very, very comfortable. So in that case that Basel III, the move to Basel III were to be positive for capital ratios, what would be the plans to deploy the excess capital?

Of course, this is a risky industry and you never have excess capital. But if the circumstances are sound, of course you can maintain a relatively higher payout and that way you are to some extent reducing your capital ratios to the level of your main competitors, which is probably the path we should be following.

Jose Burmester, Itau Asset Management.

My question is regarding the growth in the Santander Banefe brand. If you can give us some follow-up of what you mentioned -- the Company mentioned previous quarter that you were going to grow in that segment. So if you can give us a follow-up on that.

There there're two things. What we have been changing is the approach from a branch-based approach, where you have account officers and is a relatively heavy model, to a leaner model, that is mostly IT and especially Internet and mobile phone based there, which is what we have been doing. And then to have their sale activity, because of course you have inquiries and you have doubt, et cetera. We are putting -- instead of having a full blown branch, we are putting corners in the rest of Santander branch for Banefe clients. But eventually, and we are very close to that point, we will have a completely IT-based model for that client profile and we will push it very hard, but we are waiting for a proper marketing conditions. So we still are kind of -- this year we reduced our exposure, especially in the very low end, where we are 100% provisioned now. And then on the remaining part, the one that we want to keep doing business, we are in a not full blown approach, because of course the macro conditions could have an effect in jobs, et cetera. So we have been prudent in that.

But we are doing a lot in terms of how to change the model that we are -- and those clients, which will be the approach, the commercial approach that we follow. We are very ready to deploy that, but of course we prefer to wait until we have more clarity in terms of what are the economic outlook for that segment in the next two, three years.

And my second question is regarding, is there any sector that you see with some risk that you are concerned with?

No. Today, I would say we continuously monitor different sectors. But as I said that generally speaking there are players in specific sectors that are concerned, and at the same time, concerns are more in terms of the size of the business than in the type of activity they are doing there. Of course, today the exporters are doing well compared to two or three years ago, but I would say that most of the concerns come from specific companies in good sectors. And secondly, the smaller companies that tend to be less -- how to call it in a positive way -- less fluent in managerial techniques and things like that, sometimes because of the [source] or because of the way they handle -- it can produce a surprise, but it's more related with the management capabilities than the sector where they are operating. So, that's why we foresee that our non-performing loans should relatively be flattish going forward.

Alonso Garcia, Credit Suisse.

I would just like to get some color in regards to the provisions related to the Bank [ratings] at the commercial portfolio. I mean, should we think of them as one-off, given the stable asset quality ratios in the segment during the quarter?

Yes. And what happened is that in the fourth quarter of 2015, we downgraded a number of positions in that segment that were company-specific issue, et cetera. Then we had in 3Q a very low level and what we are seeing today is more of a normalization of that segment. There was one specific client that we have to put -- but it was a very company-specific issue. So, I would say that the number is more the kind of normal number going forward than what we saw either in the third Q or in the fourth Q of 2015. So, with the only exception of that company that was close to CLP6,000 billion. The rest is relatively typical SMEs and smaller companies that require continuously to have their provisions and charge-off, et cetera. So, it's not a fully normal number, but it's not too deviated as compared to the three quarter figures and the fourth quarter of [last year figures are away] of the secular trends.

(Operator Instructions) Sebastian Gallego, Credicorp Capital.

I have two questions. First one, can you talk about competition and how do you perceive the environment, given the current macro conditions for this year?

And the second question I would like to ask is, can you talk about your competitive advantages on the cash management and financial advisory fees? You were particularly strong in that segment within the wholesale banking. Thank you.

In terms of the competitive environment, I would say that banks have been -- after a round of regulations that affected banks in terms of setting maximum rate, limiting the ability to charge fees, more provisions, et cetera, in the last two, three years banks have been very much on steady waters. And that has allowed, at least the larger banks to do a lot of retooling in terms of how to operate, because this was like a one-time change, the change in the model, that resulted in banks adding more technology and thinking more about their predominant business model, et cetera.

So I would say that the price competition has been less intense than historically, because banks are realizing that you have to take care of your capital and your liquidity and you have to be more doing your effort in order to sustain your market position, not in terms of slashing prices, but in terms of bringing, hopefully, clever ideas for your customers to benefit. So, I would say that we have today relatively normal competition, of course. The fact that Itau has been in a merger process to some extent, leaves them a little bit aside of the competition. But the rest of the larger banks have been doing sensible things and coping very well with the weaker operational environment.

In terms of our competitive advantage of the cash management, basically two things are necessary in the cash management business. Number one is to have physical branches, because at the end of the day, the money that you are handling on behalf of the customer needs to be going to a branch. And, of course, the more branches you have, you are in a better position to handle that physical cash. And the second is assistance and there we benefit from group-wise systems are very good tools, etc. And I would say this is something that takes a lot of time to develop, but once you have it, it tends to be a relatively sticky business, because for companies it's very difficult to change their provider of cash management, given that you have to integrate them to their (inaudible). So, it's something that takes time to develop, but once you develop and unless you don't do crazy things or have big service problems, it's a business that is very resistant or very sticky.

In terms of financial advisory work, that is more a reflection that we have seen a number of foreign -- good players quit in the market to some extent and that results in more space to compete and the fact that we are controlled by Grupo Santander also allowed to do a number of cross-border deals that facilitate the life of our clients or things like that. So, it's more short-term to call it some way. And of course, every deal is a completely new reality, and as a consequence, it's difficult to say we have developed a sustainable capability. We have them today, but of course it's something that you start every year from ground zero up, and as a consequence, it's difficult to predict whether you can repeat it or not. So, we benefited last year. It's a little bit different from cash management, where your starting position is very relevant to forecast what you'll be doing. Here, you start from zero every year.

And one follow-up if I may. I'm not sure if you answered this question, but when do you expect the commercial loan book to pick up during the -- is it during this year, or do you see another transition year, given business sentiment in Chile?

At the end, I would say they will be very much linked to expectations and expectations probably today are very much linked to the political cycle and to some extent, the things we are seeing abroad. Both are a little bit unpredictable at this time, you don't know for sure. But as long as you see more clarity and probably in the political side, we'll see more clarity throughout the second quarter -- end of the first quarter, we will have more clarity, which will be the contestants in the presidential race, that will eliminate that. Secondly, the Ministry of Finance has convinced, I would say, the rest of the government that growth should be a priority, because otherwise it's very difficult to move your political changes, et cetera. And as a consequence, it's difficult to know, but probably will be more entering the second half than in the first half. We think that this year banks will start relatively weak in the first quarter, basically because inflation will be very low and growth in the summer season is relatively low. But from then on we should be gathering momentum and finish our year in the line of what we have talked while the call.

Diego Ciconi, Scotiabank.

I just wanted to get a sense of how you're managing your balance sheet in 2017. I mean, loan growth has been the decelerating from previous levels. But your total funding is still growing at low-double digits. So we see that you're increasing our exposure to other investment securities, but the trading results in 2016 has not been so strong. What can we expect of the securities book and the trading income this year?

This is Emiliano. Regarding your question, I would say that by the end of last year 2016, the investment portfolio grew and it was part of a liquidity management strategy where we took advantage of the robust domestic market in terms of funding and so we placed a significant amount of bonds in the domestic market, mainly pre-funding part of the loan growth for this year, that although it's not going to be like -- so high like not double digits, but you can expect the investment portfolio to fall comparing to the end of the year, because we were like hoarding cash because we did the bonds placements in the [metro] market.

And in terms of trading results, we don't expect any much different from the other revenue lines for 2016. But in terms of balance sheet, you will see a fall in the investment portfolio, because of (inaudible) the liquidity for loan growth and also pain of liabilities

And I'm not showing any further questions in the queue. I would like to turn the call back to the management team for any final remarks.

Okay. Thank you all very much for taking the time to participating 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. This concludes the program, and you may all disconnect. Have a wonderful day.