Banco Santander Chile (BSAC) 2023 Q1 法說會逐字稿

Good afternoon, and welcome to Banco Santander-Chile's First Quarter 2023 Results Conference Call. We are joined by Emiliano Muratore, Claudio Soto, Cristian Vicuña, and Robert Moreno.

I will hand over to Emiliano to begin the presentation.

Good morning, everyone. Welcome to Banco Santander-Chile's First Quarter 2023 Results Webcast and Conference Call. This is Emiliano Muratore, CFO, and I'm joined today by Robert Moreno, Head of Investor Relations; Cristian Vicuña, Head of Strategic Planning; and Claudio Soto, Chief Economist.

Thank you for attending today's conference call. Today we will be discussing the trends and results seen in the first quarter, while tight monetary policy continues to squeeze margins, our successful digital strategy and customer-oriented product offering continues to drive strong results from our business segments.

To begin, I invite Claudio Soto to give us an update on the macro scenario, beginning on Slide 3.

Thank you, Emiliano. The economy continues its adjustment process after the overheating of 2021. GDP grew [2.4%] in 2022 and contracted [0.5%] in the first quarter of this year in response to tight financial conditions and a contracting fiscal policy. High interest rates drained away excess liquidity from past pension fund withdrawals. The labor market remains relatively weak with low employment growth and an increasing unemployment. Real wages have contracted due to high inflation.

Political uncertainty fell after the referendum that rejected the constitutional proposal of the constitutional convention last year. However, it remains relatively high as compared with historical levels. In this context, we expect that GDP will have a mild contraction this year of around minus 0.25% before returning to trend next year. Domestic demand will remain subdued, while the external sector will benefit from the reopening of China. Overall, the outlook for activity is better than what we previously estimated.

With domestic demand and better terms of trade will help recovering the external accounts. During the first quarter, the trade balance reached [7.5 billion surplus, a] historical record. For the year, we expect a current account deficit of 4% of GDP down from the 9% of GDP deficit of last year. High copper prices, lower political uncertainty and the global depreciation of the dollar has strengthened the Chilean currency. Inflation, although remains elevated, has begun to fall in line with our past forecast. More CPI increased 11.1% year-on-year and during the second quarter, CPI, annual changes should reach a single digit. The slackness of the economy, the appreciation of the currency and the fall of fuel prices will keep pushing down inflation, which we expect will be running at [5.1 U.S.] variation by the year's end.

The Central Bank has kept its monetary policy rate at 11.25%. Although the last inflation report had a relatively hawkish tone, we accept that the condition for initial cycle will be met at the beginning of the third quarter, as the following core inflation becomes entrenched. Given the high level of the monetary policy rate, once the board begin cutting, they will proceed at a fast pace. As a result, we expect the monetary policy rate to finish the year between 7.5% and 8% above our previous estimate. Our baseline scenario assumes that the proposal for a new pension fund withdrawal that is currently being discussed in Congress is not approved.

On Page 5, we have some of the reforms that are in the agenda of the government. One of the most important ones, the tax reform was rejected in Congress last March. Currently, the government is trying to build an agreement for a new tax proposal. In the meantime, the discussion for increasing the mining royalty has advanced. The pension reform is still pending and should be announced during the second semester. The reduction in the number of [weekly] hours from 45 to 40 was approved during March. The new regulation introduces some more flexibility in the labor market and contemplate a 5-year transition for the hours reduction. This week, the new interchange fee for credit and debit cards were officially published. The transition from the current fees to the new ones will be gradual and will start in 6 months time.

Also, this year, the government has relaunched the Fogape scheme for SMEs and the Fogape scheme offering state guarantees for the first time mortgage buyers. Last week, the government announced a new national strategy for (inaudible), involving the participation of both public and private companies, the use of greener technologies and looking to add more value added in the production process.

Finally, the constitutional process has continued as schedule. The expert commission is preparing a preliminary draft for a new constitution that should be sent to the Constitutional Council in June. The members of this council will be elected on May 7. The final text will be subject to a referendum with mandatory participation on December 17, 2023.

Thank you, Claudio. In my presentation in Page 5, 6, I would like to start first by reviewing an update on the bank strategy. Our purpose like the rest of Global Santander's is to help people and business prosper with the mission of being the best financial services company, acting responsibly and gaining the loyalty of our clients, shareholders, collaborators and communities. Our style of doing business is simple personal and fair. And our day-to-day behavior with all the stakeholders is summarized by the team's acronym.

And where do we envision ourselves by 2026. We see ourselves as the leading financial services company to deliver our clients, collaborators, communities and shareholders. We will focus on being obsessed for our clients, their progress and their experiences. For our collaborators, we seek to maintain a committed on high performance team. For the community, we expect to be leaders in social and sustainable finance. And finally, for shareholders, we seek attractive and predictable returns, and to be the leading bank in terms of profitability, efficiency and recurring risk-free revenues in Chile.

We want to achieve this plan through 4 pillars of our strategy under the Chile First. First, to be a digital bank with branches at the (inaudible) bank with work office. The rich customers, with state-of-the-art technology and the best level of service. Second, with specialized and value-added services for our corporate and wealth management businesses, that focuses on value-added transactional trade and advisory products and services. Third, always searching for unexplored growth opportunities. We want to break paradigms in the banking sector, finding new business opportunities and leading the sustainable transformation of our clients. And finally, a key enabler an organization that is agile, collaborative, and with a high performance and diverse cultures where exceptional people can advance based on merit.

As we can see on Page 9, we are also fully committed to diversity. For example, as of April, we are the Chilean company with the highest percentage of women among the board. Amongst all trends included in (inaudible), moreover, 56% of the bank's total employees are women, and the percentage of women in the top managerial position has increased from 18% in 2019 to currently 32%.

Another key innovation launch in the first quarter of 2023 was the Work/Cafe Expresso. In this newly fully transactional branches, it takes on average less than 5 minutes to perform a transaction with the highest level of security for our customers and the state-of-the-art technology with facial recognition and digital programs. All of this combined with the great service experience of our Work/Cafe Santander style. We have opened 4 Work/Cafe Expresso centers in [Vina], Rancagua, Santiago Centro and Las Condes, where we serve over 50,000 people weekly. The NPS of these branches is an eye-opening 96.

The Work/Cafe Expresso will allows us to keep updating our branch network while improving waiting times on NPS. At the same time, other traditional branches surrounding the Work/Cafe Expresso will be 100% dedicated to value-added services. Currently, 28% of Santander-Chile's branches do not perform transactional services and are completely paperless, improving efficiency and productivity. Loan and deposit volumes increased 22% year-over-year and in the same indicator per employee rose 9.3% in the same period.

On Page 12, we show how Life continues to shine with clients growing 17% year-over-year and total revenues generated by Life increasing by [40%].

Moving on to Page 13. We show how Life success has permitted the bank in a short period to achieve a market share of approximately 25% of checking account balances in Chile. Now our aim is set on the large pocket of site and saving account deposits. This market in Chile totals $24 billion in deposits in which we only have a 1.8% share of savings accounts and a 7.7% share of the side account market.

In order to capture a greater share of these markets, in the first quarter of 2023, we launched Mas Lucas. This is a 100% digital product that includes an interest-bearing side account plus a saving account. The onboarding process is 100% digital, and there are no password, only facial recognition. And the account number is very easy to remember. Chile's country code 66 plus your national ID number. This account has no fixed or variable cost and accepts deposits for up to [CLP5 million].

Moving on to Page 15, we show how the success of Getnet continues. Our acquirer has sold more than 177,000 POSs, with a 17% market share in points of sales and a 7% in total purchases according to our estimates. Fee totaled more than [CLP10 billion] in the quarter and are growing more than 200%.

In the first quarter, we also introduced a new specialized attention model in our middle market segment for the agriculture, automotive and Multi-Latinas sector, which encompasses Chilean middle market corporations seeking to internationalize. This new specialized attention model seek to enhance our growth and market share in these highly attractive sectors of the Chilean economy, which are intense not only in lending, but also non-lending products as well.

Another point to highlight was the progress made in our commitment to the objectives of sustainable finance and environment. We have a market-leading range of sustainable products that help care for climate change with Santander Verde. And in 2022, we managed to support numerous customers with sustainable operations in our business and corporate banking businesses. In total, in 2022, we [disbursed] sustainable trades, both social and environmental for an amount of $230 million, 390% more than in 2021, making us the leader in this approach in Chile. We believe that this will be one of the fastest-growing areas in the coming years.

The success in sustainable finance has also been achieved in all our responsible banking objectives, as shown on the next slide. We achieved our goals in gender, environmental, social and educational targets. This has resulted on being ranked the #1 in the main sustainability indexes such as Sustainalytics and MSCI. We are also the only Chilean bank included in the Dow Jones Sustainability Index for global emerging markets.

In terms of NPS, we continue to have an indicator above the average of our main peers, in the first quarter of '23, we [didn't] see a slight dip in our results. This was due to the ongoing changes in our app to improve cybersecurity. We are fully committed to return to the #1 spot. The Work/Cafe Expresso should be key of the improvements of these models in terms of NPS at the branch level are substantial.

Now I will turn it to Robert, who will discuss our results.

Thank you, Cristian. Moving on to Page 22. Net income in the first quarter totaled $136 billion, decreasing 42% year-over-year and increasing 33% quarter-on-quarter. In the quarter, the bank's margins continued to be negatively affected by the high interest rate environment. The bank's ROE in the quarter reached 13%. On the other hand, our business segments continued to show solid growth with an important expansion in net interest income and fees with costs and risks under control.

The net contribution from our business segments that excludes the Corporate Center and ALM, increased 30% year-over-year. The results of Santander Corporate and Investment Banking or CIB have remained impressive, increasing 76.7% year-over-year. Net contribution from the middle market of corporate increased 31% year-over-year. Both of these commercial segments experienced an important rise in deposit spreads as well as high growth of fees and treasury income. The results from Retail Banking rose 10.5% year-over-year, also driven by rising deposit spreads and greater fee income, coupled with higher productivity levels.

In terms of loan growth, in the first quarter, loan growth accelerated as the economy feels the effects of high monetary policy, slowing inflation rates and depreciation of the peso. During the quarter, the CIB segment decreased 1.2% Q-on-Q, influenced by translation gains -- or translation losses caused by the 6.5% appreciation of the peso in the quarter. This also explains the 1.0% Q-on-Q decrease in loans in our middle market segment. As mentioned, during the quarter, we launched specialized attention model for the agriculture, automotive and Multi-Latina sectors to enhance loan and income growth in the sector.

Retail banking loans grew 1.1% Q-on-Q led by consumer loans, which in turn, were driven by good demand for credit card and outlook. Origination of new mortgage loans have decelerated with the slowdown of inflation and high interest rates. As for SME, the demand for new loans remains subdued as clients continue to pay back of rapid loans dispersed in 2020 and 2021. A new [Fogape] program was launched by the government in April to support mortgage growth to households and lending to SMEs. We maintain our guidance of year-over-year loan growth of 5% to 6%.

Liquidity levels remained strong in the quarter. The bank's total deposits increased 3.7% Q-on-Q. The increase was driven by time deposits that increased 9.9% Q-over-Q. Bonds issued increased 17% year-over-year and 2.3% for the quarter. During the first quarter, the bank has issued various bonds in the local bond market in order to take advantage of the inverted yield curve to control funding costs. The bank's liquidity coverage ratio, which measures the percentage of liquid assets over net cash outflow at the end of the quarter was 182%, all above the minimum. At the same date, the bank's net stable funding ratio, which measures the percentage of illiquid assets financed through stable funding sources reached 113%, also well above the current legal minimum set for this ratio.

In terms of margins, the bank's NIM in the quarter remained stable Q-over-Q at 2.2%. The variation of the U.S. continued to decelerate, while short-term interest rates remained high. Both of these factors continue to weigh on the bank's NIM. As shown on this slide, this is mainly a phenomenon that affects our nonclient NIM or the net interest margin from our ALM activities, including the U.S. Gas and our liquidity. The client NIM, which is defined as NII from our business segments over interest-earning assets has increased as deposit and loan spreads have risen.

On Slide 27, we give further insights into our margins for the rest of 2023. For every 100 basis points decline in inflation, our NIM fall on average by 15 to 20 basis points and for every 100 basis points rise, the average monetary policy rate or NIM followed by around 30 basis points. We have updated our base case scenario for 2023 with our latest internal forecast by increasing the expected average monetary policy rate from 9.2% to 10.4% this year and the U.S. inflation of 5.1%. Under this base case scenario, the bank NIM in 2023 should reach 2.4%.

Moving on to asset quality on Slide 28. The rise in the NPL ratio to 1.9% is gradually returning to pre-pandemic levels as household liquidity, a gradual returns to normal and the economy feels is squeezed from high interest rates. The coverage of NPLs as of March 2023 reached [186%], and there has been no reversal of the voluntary provisions.

As you can see on Slide 29, these overall positive asset quality indicators led by cost of credit of 1.2% in 2023, in line with our guidance for this year.

On Slide 30, we move on to non-net interest income revenue sources, which continues showing exceptional growth trends. Income from fees and treasury rose 33.8% year-over-year and 20% Q-on-Q, driven by higher usage of products in all segments. We expect these trends to continue for the rest of the year.

As shown on Slide 31, we can see the bank's efforts to continue increasing productivity and to control costs. Operating expenses decreased 1.2% year-over-year and 8% Q-over-Q. The bank continues ahead with its $260 million technology investment plan for the years 2023 to 2025. And because of these investments, we're expecting costs to fall in absolute terms in 2023.

Moving on to Slide 32. We also observed a positive evolution of our capital ratios. At the end of the first quarter, the bank recorded a core equity ratio of 10.5%. It is important to point out that in March 2023, the bank changed its policy for provisioning as dividends. In March, the bank provisions a full dividend, which was paid out in April 2023, equivalent to 60% of 2022 earnings following the Board's approval of Fed dividend. Last year, the bank -- last year, the full impact of the dividend was recognized in April. Therefore, the 2 equity basis are not entirely comparable. As a result, value-added for our shareholders measured as a growth in book value plus dividends disbursed increased 23.7% year-over-year.

On Slide 33, we will conclude with some guidance. Despite 2023 being a somewhat more challenging year on the macro [plant], we believe our strong client activities will continue to expand. Coupled with this, we will continue with our investment program, which focused on digitization and [automization]. We also expect client growth to remain robust, led by Santander Life, Getnet and Mas Lucas.

In terms of loan growth, we expect mid-single-digit growth with a focus on all segments. NIM should contract to 2.4% with solid client NIMs. As the monetary policy rate comes down, we expect NIMs to rebound. Non-NII growth should surpass 20% this year on the back of strong client acquisition and usage figures. Cost control will be a major focus, and we expect a decrease of low single digits in our total cost base. Asset quality should deteriorate somewhat, but the cost of risk were made at a managed roll level of 1.1%, 1.2%.

In summary, we start the year with the ROEs in the low teens. As the year progresses, ROE should improve for the full year. And for the full year, we are guiding an ROE of 15% to 17% lower than the initial guidance. This is mainly due to higher average short-term interest rates, partially offset by strong buy and profitability numbers. Our long-term ROE expectations remain unaltered at 17% to 19%.

With this, I finish my presentation, and now we will gladly answer any questions you may have.

(Operator Instructions) So our first question comes from Juan Recalde at Scotiabank.

My question is related to the NIM. So the NIM expectation has declined and now you are guiding for around 2.4% NIM for 2023. I was wondering what kind of NIM can we expect for 2024? I'm just trying to get a sense of what a more normalized level of NIM can be?

I mean, a more normalized NIM would be like around like 4%. That's on monetary policy, it's like on a normal level. That's -- we don't see that happening before 2025 maybe. So in 2024, would be like in the middle from where we are this year at around 2.4%, 2.5%. So next year being around 3.3%, 3.5%, all depending on the pace and the path of the monetary policy rate, but that would be like the trend going forward.

So our next question comes from Neha Agarwala from HSBC.

Could you please explain once again, what led you to the future guidance for ROE for this year? Is it just the interest rates which are higher than expected previously or something else? Regarding the NIM from the market, when does -- when do you think that will normalize or be close to 0, if nothing else, by early 2024, it seems right now? Could you please confirm?

So the adjustment in NIM guidance basically is like the -- if you look at the heat map, the way we call that chart on the previous call, basically, what we did is we moved to the new average monetary policy rate and the new inflation. So let's say that it's just related to the delay in the interest rate cuts that we were expecting before, and now we are expecting a bit later. So there is not more than updating to the new macro scenario we are expecting now.

And so in terms of the non-clients NIM going to neutral, again, will depend on the level of interest rates. And according to the pace we are expecting for the Central Bank to cut rates, that should be more around the second half of next year.

Perfect. And any regulatory changes that we should expect this year or next year that cutting by the bank?

There is nothing in agenda. I mean, now we have the interchange fees already known and the transitioning period announced. So there are no regulatory issues being discussed at this moment that we envision that could affect us in the coming months.

We have a question from Tito Labarta from Goldman Sachs.

A couple of questions. Just to understand a little bit, the ROE evolution and the timing of when you expect the rates to come down? Because as long as rates remain high, the ROE to be relatively low, just given the guidance. So should we expect sort of first half of the year, you will be below that ROE guidance of 15% to 17% and then maybe 3Q and 4Q, you start to go above that? And then could you clarify when do you expect rates to start to come down in Chile?

And then my second question is on your fee income, which is very strong is that growth that we're seeing sustainable? How long can you continue to grow the fee income at that pace?

And regarding the timing for interest rate cuts, our base case scenario is assuming a cut in July, I mean a small cut, but the cut in cycle starting in the third quarter and then continuing during the year. So with that path, the trajectory of ROE will be the one you mentioned, I mean, basically, first half below the average for the year and the third quarter starting to rebound together with the NIM when the Central Bank starts the relaxing cycle and keep going up during the fourth quarter as the additional cuts are made.

So, Tito, this is Cristian. Regarding the fee question, of course, this year is spectacular for us with more than 20% growth or over 15% to 20% growth. So it's looking pretty good. This is very linked to our customer growth base and the performance of our Getnet initiatives and Life initiatives. So for the upcoming years, we, of course, expect to grow strongly, hopefully better than the market, but I'll say that 20% figures for the long run are not what we expect normal. So I would say, larger than 10% but not 20%.

Our next question comes from Carlos Gomez from HSBC.

My question has been answered.

So our next question then comes from Daniel Mora at CrediCorp.

I have a couple of questions. The first one is regarding the NIM. You already explained the decrease in the guidance, but I would like to understand what will be the strategy of the derivatives that are currently impacting the net interest income, I mean, the hedge of interest rates. Are you waiting for them to decrease -- the decrease of rates will improve the position of the derivatives. So are we going to wait for the exploration date of these assets, what is the strategy there?

And the second one is regarding fees, very strong performance in the first quarter and without considering the fact of the new regulation of interchange fees. Do you expect this to continue in the coming years, the current pace of growth? And I would like to understand what is in the order fees in the first quarter because we observed a strong increase in order fees?

Regarding the derivative strategy, I mean, definitely, that portfolio will have the margin improvement when interest rates start to fall. Today, as you saw, our expectation for monetary policy average for the year is like [10.4%]. When you look at what the market is pricing is slightly higher than that, I mean, like [10.6%] or so. So that's why -- we are not like logging in that or fixing that level because we do expect that the trajectory will be slightly lower and faster than what the market is implying. And that's why the strategy basically is like to wait to rates to fall and to follow our path, which is now slightly lower than what the market was expecting. I mean, late last November, the market was on the opposite side, I mean, it was implying a more dovish trajectory to our view. And in that moment, we closed part of that sensitivity, securing a more dovish path. But today, we don't see that opportunity because we -- our scenario is on the lower part compared to what the market is expecting on the field.

So I will leave it to Cristian to comment.

So regarding the fees similar to the previous question, we expect a very strong 2023, and then to grow a little slower, but better than the market. So probably something a little higher than [term, but not the same term] that we're expecting for the year. And regarding your question on the order fees, it's mostly related to corporate investment bank advisory fees on M&A and the restructuring.

Our next question comes from Olavo Arthuzo at UBS.

Yes. Actually, I just have one related to the operating expenses because the bank revised downwards the guidance for this year with the expectations for a negative growth in costs. So could you please just clarify a little bit more on the drivers by high in this performance? And if you could add towards if we could expect like a drop of 1% to 2% or maybe 5% of the operating expenses that would be helpful.

I mean, no, I mean, it's not like a minus 5%. I mean, it's like more on the low single-digit fall that we are expecting. And the drivers are the combination of things. I mean first, all the control that we are doing, I mean, all the fraud expenses that we have on the bank are in the other operating expenses, and that's something that we have been making good progress, and that number has improved and is going to help the loan growth or the loan -- the cost fall for this year.

And then what we are doing in the branch networks optimization and also the transformation, I mean you saw the Work/Cafe Expresso (inaudible), which is also apart from driving NPS app, because clients are also happy. It's a very efficient way to deal with the transactionality coming for clients. And in general terms, all the digitalization of the bank, all the Mas Lucas and all the Life initiatives we are doing are taking productivity up by having new client growth, new client acquisition and client revenues and having cost under control.

Cristian, do you want to add on that.

I would say that we expect these new initiatives to keep us from allowing us to update the branch network as a whole, and we see further improvements in how we deploy our study.

Our next question comes from Yuri Fernandes at JPMorgan.

I have a first one regarding expenses. It has been very good and have been delivering on these closing branches, reduce a little bit the head count. But we are seeing a super strong growth on fees, right? And I think part of that fee is like some administrative expenses, they should be somewhat related, right, like technology, software, like I don't know. My question is how sustainable is for you to keep such a good level of G&A growth? I understand the guidance is negative for this year. But my question is, should we see more investments in 2024? Like how comfortable are you that this year is not a one-off because you kind of built some provisions on costs last year, and we should see like a pickup in the coming years. That's the first one.

I have a follow-up regarding the margins. Just a curiosity on the FCIC instruments. I think the FCIC, they explain part of your margins, right, like a part of your strategy on asset liability management. And when your FCIC instrument should mature, I don't know. I think there are different mature dates depending on the program. So I'm not sure if March, not sure if this is July 2024. So just trying to understand when should we start to see like your FCIC instruments getting paid?

Regarding expenses, I mean, definitely, you should not expect costs fully in the following years. I mean this is -- in that sense, this year is going to be a one-off. Our usual target and what we have done basically every year, I would say, in the latest period is to have costs growing below inflation. I mean that is like the starting point for our strategy. So inflation will be in the mid- to low single digits going forward, and that's where we want cost to be.

The composition of that cost will be shifting to what you mentioned, I mean more on amortization of technology investments and digital initiatives. I mean and taking advantage of the improvements in the footprint of the branch network because we be having like last (technical difficulty) strategy of Work/Cafe Expresso will help us to reduce the square feet of branches, and that will help in that past. And also all the digitalization will increase the productivity per employee.

And so yes, I mean, in that sense, it's a one-off of the performance in cost for this year. It's part of the discipline. We think we need to have with the revenue pressure we are having coming from margin. So this is going to be a tight year on that, and we are delivering on that. And going forward, we should expect to go back to a more normalized pace of cost growth slightly below inflation.

And regarding the FCIC, I mean, the FCIC basically matures half of it in April or half of it in July next year. And as you said, I mean, considering our strategy that basically has that liability loaded. The maturity itself won't have a significant impact for us because basically, we are already paying the floating cost of that. So that, we will be benefiting from interest rates going down, starting the same day that the interest rates start to fall. And so when the maturity happens, considering that we are already floated at the level of rates that will be at that moment, let's say, 6%, 7% or whatever percent we have in mid next year. For us, it won't have an impact because we are already with the liability at that level. I know if I explained the situation.

If I understood like the liability is floating, but your assets, they are not floating for that, right? You bought, I don't know, fixed rate instruments on that. So like the material -- and correct me if I'm wrong, but maybe the maturity of that FCIC should be a tailwind for your margins. No?

No. In our vision, this is not going to be a significant tailwind because we already have -- I just said, I mean, we are talking on the liability side. Then we have the assets repricing in this context, and we are already seeing repricing on the asset side that will help us that...

Yes. It's a... Yuri, it's Robert. It's a tailwind in the sense if rates come down, it's a tailwind, okay. And when it expires, it should be a tailwind, if depending on where rates are, okay? But in itself today, it's not, you see. It will be a tailwind when rates start to go down. Okay?

Okay. No, perfect, guys. If I may, a third one, just touching on the asset quality. If you can provide some color for us like the trains we are seeing like some worsening on consumers. So just like your overall view on asset quality.

Yes, in asset quality, as you saw on the slide, basically, we are normalizing in terms of NPLs and impaired loans, impaired loans is still below prepandemic levels. And that's what we see for the year. I mean there's 1.2 -- 1.1%, 1.2% cost of risk for the year is consistent with having a similar to prepandemic levels of asset quality. We are like confident that we [can't] be there. We still have the voluntary provisions as a way to cope with a more deteriorated scenario in case that happens that, as you saw, first quarter cost of risk was up 1.2%, and we think that we can keep at that level for the rest of the year, which is definitely a higher level of cost of risks to the one we had this last couple of years, but consistent with a more normalized scenario that in a certain sense, is a bit of the flip side of the slower pace of rate cuts that we are seeing consistent with a not so weak economic scenario. That is also, let's say, reflected in the asset quality, which is normalizing to prepandemic, but not in a extreme or harder way.

One thing that has been clarified to us regarding asset quality this year is that the adjustment in the consumer portfolio of the new regulation that was being discussed. It's being delayed, so we don't expect this happening in 2023.

At least, not before or late this year, I mean, and maybe next year.

No, that's good news, guys. And congrats on the cost control.

Our next question comes from data from Ewald Stark from BICE Inversiones.

I have 2 questions. The first one is related to NIMs. And then the monetary policy is expected to stay high and clearly expected. How do you expect [NIM to be] in 2024, a year from now in a scenario of (inaudible) an upward slope and some level of reflection as opposed to portfolio? Because new material is least suspected in the previous months and going forward in one would expect that in the news should we cover off the portfolio in prices adjust to the monetary policy?

Okay. So -- yes. So, what you said is correct. We have some tightness in the NIM because of the high rates, but effectively, effectively. And you can see some of this already in the client NIM. The client NIM is hard to forecast. But you can see that our client NIM, which is basically the interest margin of our business segment, okay, is rising because repricing their assets, okay? So we're getting hurt more by the increase in cost of deposits, but assets are slowly beginning to reprice and spreads are rising even though loan growth isn't helping [2 months]. But our repricing you need quicker loan growth, but there has been definitely an increase in loan spreads and also deposit spreads, okay?

This is important that every money we get in, in checking account, the spread rises with rates. So, but those are both tailwinds to our margin. So effectively, next year, a little bit what Emiliano said before, as rates go down, probably we'll get -- our funding base will get cheaper. The assets will be still repricing. And then obviously, you still have the headwind of lower inflation. But all in, effectively, NIM should bottom out and if everything goes as what we expect in the second or third quarter and then slowly begin to recover next year, as Emiliano said, [3.5%] around there and then in 2025, probably to reach equilibrium rate and inflation, right? Should we go back to our historical levels of around [4%].

Okay, perfect. And the second question, it's about operating expense. You said previously that you expect a stronger sort of rating expense maybe growing at [0% or maybe a bit]. But in the first quarter, operating expense grew by 13%. So how do you arrive to the consolidated figure with the remaining partners are here?

Yes. I think that when we talk about total expenses, we are included in other operating expenses. When you factor that in, that total number fell like 1.2% in the first quarter. And I think that is like the line that you have to factor in, and that's why we talk about total expenses, including other operating expenses.

So it's personnel, mediation and others, okay?

In the first quarter, that number fell 1.2%.

So what line of operating expense?

Okay. So that when we talk about our operating expenses, we're [showing incentive] ratio up in the financials now, which is personnel, administrative, depreciation and amortization and other operating expenses. The big item that's falling is other operating expenses, which has a lot to do with the improvements we have made in cybersecurity and the lower cost of our cyber fraud insurance. And it's also an interesting reduction in personnel, okay?

And we have a question from Ernesto Gabilondo from Bank of America.

Most of my questions have been answered. So I just have a couple of questions. The first one is a follow-up in your net income guidance on your ROE guidance. We incorporate the ROE of 15%, 17%. This implies earnings contraction between 15% to 25% this year. So I just wanted to double check if that sounds reasonable? And I believe last time, you were expecting a modest earnings contraction. So as you have explained, the delay in lower interest rates has mainly the key reason for over in the guidance.

And then my second question is on your effective tax rate. We have seen the banks have benefiting from high inflation before having lower effective tax rates. But now that we're thinking of a more normalized imposition level? How should we be thinking about the effective tax rate in the next years?

So, yes, I mean, your assumption, I know call it like reasonable, but it's consistent with ROE guidance to be around like 15% fall in net income. And yes, I mean, basically, the biggest driver to our adjustment in guidance of NIMs and ROE has to do with the monetary cycle normalizing later than what we were expecting. And so we see this as a process of normalization of NIMs and ROE taking longer than we were expecting, and that's in terms for 2023. We'll have, let's say, an impact for 1 or 2 quarters of that delay. And in the third quarter, starting the normalizing process and going forward and also being closer to normal in 2024 and definitely in 2025.

And the second was tax effective. Yes. Bob, you want this?

Yes. So they're effectively as rates and inflation go back to normal, the tax rate should rise. The ROE should also rise. And so today we're paying like 12%, 13%, effective tax rate, there's different effects, inflation is still high. The lower note in income also lower the tax, but effectively, by next year, if inflation is back to lower than 6 single digit levels. We shouldn't be going by 20, I would say 2024, we should be roughly close to the 18% effective tax rate 2025. Probably around 21, 22, it should stay around there.

Sorry. And one quick thing regarding your first question is true that the net income falls, but we do see a slight rise in book value. I think that's a key point to make that we try to explain it a bit in one of the slides, but book value given the way rates and inflation are moving, which might have a negative impact on NIM, but in capital has been positive. So our book value is growing. And I think that means we're still creating value.

I'm not seeing any more questions. So perhaps I can hand back to Emiliano for closing remarks.

Yes. So Robert, the floor is yours.

Okay. Thank you, everyone. Just as a final note after 30 great years, today is my last day at Santander-Chile, I decided to move on to other projects. I would like to thank the investor and analysts community for your support. Cristian Vicuña along with [Rowena] and Claudio will keep you guys covered. For me, it has been an honor to be your IR guy. Please feel free to keep in touch and I'll be sending an e-mail soon with my details. Thank you, everyone. Bye.

And I want to publicly thank Bob for his commitment and his terrific job during these 30 years. Without any doubt, he made a huge positive impact on Santander-Chile and the Chilean banking sector as a whole. He will be deeply missed. I wish him the best of luck with this new stage. And on this emotional note, I thank you, everyone, for joining us today, and we look forward to speaking with you soon again.

Thank you. That concludes the call for today. Thank you, and have a nice day.