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Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Banco Santander-Chile Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded.
I would now like to introduce your host for today's conference, Mr. Emiliano Muratore, Chief Financial Officer. Please go ahead, sir.
Good afternoon, everyone. Welcome to Banco Santander-Chile's Third Quarter 2018 Results Webcast and Conference Call. This is Emiliano Muratore, CFO of the bank. I am joined by Robert Moreno, Managing Director of Investor Relations; and Claudio Soto, our Chief Economist. Thank you for attending today's conference call.
In order to improve the experience of the webcast, we enabled the option of letting you change the slides, so make sure you press forward as we go along.
During the third quarter, we were able to deliver stable results with positive trends in the -- in lending growth, reflecting our focus on growth with good asset quality. For the rest of the 2018 and going into 2019, we believe we'll continue to see positive macroenvironment in Chile.
Claudio Soto will give us further details on what has been going on in the past few months and looking ahead. Claudio?
Thank you. Good afternoon to everyone. Please turn to Page 4 to see our forecast for this year and next year. Although we continue seeing general positive trends coming from the Chilean economy, actively it has slowed down in the last few months, affected by a more challenging external scenario. Despite all this, we maintained our GDP forecast as 4% for this year and 3.5% for next year.
During the last quarters, we have seen a significant increase in investment, offset by equipment reposition and some greenfield developments.
During the year, we repurchased worth more than [ $20 billion [ agreements remained to approve ]. Going into 2019, we should see some more of these type of these projects on the economy as they come through the pipeline.
Official data on the labor market shows some stagnation. However, administrative data suggests [ more dynamism ] and job creation and [ vision ]. And the remaining inflationary pressures have remained contained, although headline CPI has risen, pushed by the increasing yield price and the depreciation of the currency. This, in turn, has been the result of [ pillar ] strength and the fall of [ cover price ].
For 2018, U.S. inflation should reach 2.9% and 3.1% by the end of 2019.
As expected, the Central Bank increased the short-term interest rate by 25 basis points in October. Going forward, we expect normal hikes in 2019. Accordingly, the short-term reference rate should reach up to 3.5% at the end of next year.
Thank you, Claudio. I will now give details on our strategy and results in our third quarter of the year. Please turn to Slide 6.
The first months of 2018 showed strong business activity at the bank with core revenues, this is net interest income and fees, increasing 7.3% year-on-year. It is important to point out that during the third quarter, we made a onetime additional provision of CLP 20 billion, anticipating future changes to our consumer provisioning model. This led to net income attributable to shareholders, increasing 1.2% year-over-year. However, we managed to maintain a strong ROE of 19%, in line with our guidance for the year. Excluding the onetime addition of provision charge, net income rose 4.6% year-over-year and the adjusted ROE was 19.6%.
Net income attributable to shareholders in the third quarter totaled CLP 129,727,000, decreasing 16% compared with second quarter and increasing 5.5% compared to the third quarter of last year. Excluding the [ pretax onetime additional ] provision, recognized in the quarter, net income fell 6.6% Q-on-Q but rose 5.1% year-over-year. As was the case for our year-to-date results, core revenues led growth, rising 10.4% compared to the same period of last year.
The adjusted ROE in the third quarter was 19%.
On Slide 7, you can see that in terms of ROE, we continued to offer increasingly attractive returns above our main competitors, reflecting our focus, not only in growth, but profitability and efficiency.
Please turn to Slide 8. During the quarter, we continued with our 3 objectives for healthy growth and higher profitability. Refocusing on growth in line with the economy, increasing client loyalty through an improved client experience, deepening our ongoing physical transformation by expanding the bank's digital capabilities, and optimizing our profitability and capital use to increase shareholder value in time.
Please turn to Slide 9. Regarding the first point and our customer funds, our demand deposits continue to grow at high rates compared to last year. Despite a slight decrease in the quarter due to seasonal effects, we are particularly proud of the 10% growth in the demand deposits year-on-year. This has been led by a positive increase in checking account balances among persons and companies.
As Claudio mentioned, as inflation has been going up, there has been speculation as to rate hikes, which have increased the cost of time deposits in the market. During the quarter, we focused on controlling the costs of our funding instead of market share. This is due to the fact that in terms of liquidity, we continue to maintain strong ratios with an LTR at 132% and an NSFR at 108%.
Slide 10. As a quick note, in the quarter, we also successfully issued the first floating rate note in Chilean pesos in the local market. We are confident in looking for ways to continue innovating our funding options, enabling us to seek better funding costs and giving investors more diversification of our products. This issuance, apart from being attractive in terms of cost of funds, opens a new investment opportunity for our fixed income investors.
Page 11. We illustrate -- on this page, we illustrate the growth of our loan book, which continued to perform well, increasing 2.5% Q-on-Q and 8% year-on-year. During the quarter, economic growth continued to drive financing needs in our middle-market and corporate company, and mortgage market also continued a healthy growth in line with economic cycle, increasing 9.9% year-over-year and 3.1% in the quarter.
Consumer loan growth remains subdued due to the slower than usual recovery in the labor market as well as the phasing out of the last remaining Banefe products. However, when we break down the composition of our loans by income level, we see that our strategy of targeting higher income individuals has led to a 13.2% year-on-year increase in this segment and 3.2% Q-over-Q.
The middle-income segment growth rate has also began to accelerate as Santander Life is beginning to make a positive impact on growth and risk. We expect the segment to continue to accelerate as the labor market indicators improve.
The mass segment is only about 2% of our loans to individuals and continues to fall. Later on, we will talk about the many new and exciting initiatives to target our wider range of clients. Overall, we continue to expect total loan growth of 8% to 10% this year and in 2019 as well.
Please turn to Slide 12. In the quarter, our asset quality continued to improve, with our NPLs reducing -- or remaining stable in all of our main categories at 2.2% of our total loans. As we stated, in September, we recognized a onetime additional provision of CLP 20 billion for our consumer loans. As a result, our coverage of consumer loans increased to 312%. The overall coverage ratio reached 125%, however, against seeing improving trends in the overall asset quality.
More importantly, we continue to see improvement in our impaired loan indicator, which includes NPL and renegotiated loans in all products, evidencing that going forward, we should continue to see positive trends in terms of asset quality.
This is especially true in our consumer loan book, as evidenced in Slide 13, in which we give more detail in our asset and our consumer asset quality. This graph shows the flows of impaired loans and charge-offs during the past 12 months as a portion of the total consumer loan book. As you can see, over the last year, we've consistently reduced this indicator to 4.7%, well below our main competitors and the system as a whole. This indicator, which we follow closely internally, is a good predictor of the future cost of credit.
Please turn to Slide 14. As a result of loan growth and a positive allusion of funding mix, net interest income rose 7.8% year-on-year and the bank's 9-month NIM rose 11 basis points. During the quarter, inflation rates were stable, however, as we continued to go strongly in commercial and mortgage loans, this led to a lower yield on assets. Also during the quarter, we started to feel some pressure from the rise of cost of funds in the market. Overall, our quarterly NIM was 4.4%.
In the quarter, the slight reduction in margins was also more than offset by a lower cost of risk-adjusted for the onetime provision expense in the quarter. This adjusted NIM, net of risk, reached 3.5%, clearly reflecting how the less risky asset mix is resulting in better margins, net of risk.
For the last quarter of the year, we expect margins to remain stable. We expect similar growth trends in commercial lending accompanied by an acceleration of loan growth and higher-yielding resell loans to a slightly higher inflation rate and higher short-term rates. As a reminder, our liabilities have a shorter duration in our assets, signifying that a 100 basis point average rise in short-term rates leads to a 10 basis point decline in NIM, all else equal. On the other hand, we have more assets and liabilities linked to inflation, so for every 100 basis point rise in inflation, our margins rise approximately 15 basis points.
For 2019, we expect rates to begin to rise and inflation to remain stable with a higher-yielding asset mix. For this reason, margin should remain around 4.4% to 4.5% next year.
Please turn to Slide 15. As the NPLs have shown positive [ dilution ] through the year, our adjusted cost of credit reached 1% in the quarter. Compared to the first 9 months of last year, we also see that the overall NIM net of risk continues to rise to 3.5%.
In 2019, we expect a similar trend, with the cost of risk around 1% and NIM net of risk stable for the year. We also expect positive trends in NPLs on the back of strong economic growth. It is important to point out that this forecast does not include the onetime provision we will probably recognize in the second quarter of next year. In said period, the bank will introduce the new provisioning model for commercial loans analyzed on a group basis, mainly SMEs. We estimate that the total impact this will have, including the effects of continued loan growth of this portfolio, will be 18 basis points in terms of the cost of credit or CLP 55 billion, in line with the SBIF estimates in our market share in this product. As a reminder, the SBIF did not adopt IFRS 9 and instead follows a more standardized approach to expected loss. This change is not related to any real deterioration of the portfolio and will not be recognized by the bank in its full IFRS accounting reported on our 20-F or when our figures are consolidated by our parents.
On Slide 16, regarding the second pillar of our strategy, the focus on increasing client loyalty through an improved client experience and quality of service while increasing our digital banking, we have also seen foreign advances in the quarter.
On Slide 17, in terms of client satisfaction as mentioned by the Adimark survey, we had already surpassed our peer group as of April 2018 and tied in second place. As of October 2018, preliminary results, which are still being reviewed, show that we continue to improve in this indicator, closing this gap with the #1 bank and no longer tied within the bank #2. This indicator is included in everyone's personal target and bonus pool.
Our client satisfaction is also evidenced by the increasing amount of loyal customers in our target segments. Loyal high-end middle-income customers increased around 7%, with SME and middle-market company loyal clients increasing 6%. Digital clients also continued to rise, reaching a compound annual growth rate of 6% since 2015.
Please turn to Slide 18. The effects of cross-selling were reflected in the increase in loyal clients and the consequential growth in fees in our business segments. Fees from our business segments rose 2.7% Q-on-Q and 7.8% year-on-year, very much in line with the growth of client loyalty. This was offset by 2 main factors: first of all, lower mortgage collection fees, mainly due to a change in the estimate of insurance refunds paid to clients when they prepay or refinance their mortgage loans; secondly, we have been reducing the ATM network for these past quarters, and this has led to a decrease in debit and ATM fees. Our ATM network further decreased in the quarter by 23% and 18% year-on-year as we terminated a contract with a major retailer. Remember that this also has a positive effect on our overall efficiencies and clients are using more their credit cards, the fees which are up 31% year-on-year.
On Slide 19, we show how we've been targeting different ends of our individuals portfolios. As we mentioned in the previous webcast, at the end of last year, we launched a new series of products called Life as a way of returning to the mass consumer market without increasing our risk profusely. As of September, we had almost 24,000 clients, using at least 1 Life product. Out of all these clients, 70% are new to the bank. Overall, this product has had a healthy growth throughout the year, and we will continue to push this innovative product in the market.
During September, we also launched a new type of branch aimed at -- towards the mass high-income segment, this branch is built on the physical concept of the WorkCafé for exclusive or select clients. The select private banking branch offers new specialized products with the segment, including investment funds. The experience within the branch has also been redesigned as each client is supported by a pool of specialists, which are better able to advise them. All of this, of course, using a much more the digitalized process, minimizing back-office resources. By the end of the year, we will be introducing various other digital innovations for our clients, especially in the more mass income segments.
Going on to Slide 20. We continue to modernize our physical distribution network. From June to September, we only increased our branches by 1 while we continue transforming traditional branches into WorkCafés. As of September, we had 28 WorkCafés and aim to have 40 by the end of the year. We also continue to invest heavily on back-office digitalization, which is also driving our good efficiency levels.
As a result and as can be seen on Slide 21, we continue to be the most cost-efficient large bank in Chile, reaching an efficiency ratio of 40% up to September. This reflects the various initiatives the bank has been implementing to improve commercial productivity and efficiency.
In the third quarter, operating expenses increased 3.1% year-on-year but decreased by 2.4% quarter-on-quarter. Personnel costs remain contained. Administrative expenses increased 6.5% due to the ongoing investments in digitalization, cybersecurity and branch restructuring already described. Going forward, we expect to maintain an efficiency level at world-class of around 39.5% to 40%.
Moving on to Slide 22. Our third objective is to continue to post healthy capital levels and good returns for our shareholders. As you can see on Slide 23, the bank's core capital was -- capital ratio was 10.2% as of September and the total BIS ratio reached 13%, proving a solid management of our capital considering the growth of our assets throughout the year.
On Slide 24, we mention how, for those who aren't aware, that the new Chilean banking law was finally approved at the end of September, which has 4 key changes to the current banking law. First of all, our local banking regulator will be merged with the financial markets commission, or CMF, which will lead to a more solid market governance. This will allow a more flexible environment to progress with international standards such as changes to our minimum capital requirements. We are currently under Basel I but with these reforms we gradually move towards Basel III or IV. The changes also include mechanisms to manage financial crisis, including early interventions to maintain the financial stability of the system. Finally, it also includes an increase in state guarantees for the deposits.
On Slide 25, as we mentioned before, we are under a very strict Basel I, where all commercial loans are risk-weighted 100, while mortgages are risk-weighted 60%, as well as consumer loans which are also all weighted 100. This leads Chile to have one of the highest-risk weighted asset densities in the world. Our RWA density for Santander-Chile is currently 80%. As moving into Basel III increases the minimum capital requirements, we would expect our regulator to standardize the risk ratings in line with international standards. Moving into Basel III will also enable us to issue hybrid instruments of up to 1.5% of our risk-weighted assets. While we still do not have the final definitions from the Chilean regulator, we already complied with Basel III for our parent and the ECB, therefore, we are confident that this transition will go smoothly for us.
On Slide 26, we have some information on the timing of the implementation phase. Now that the project has been approved, the SBIF, which is our local banking regulator, has to merge with the CMF. The regulator still must specify all of the requirements for the implementation of Basel III, specifically the risk-weighted models throughout 2019. Banks will then have 6 years to fully comply with the new requirements. In our case, we hope that by 2020, we will be fully compliant.
In summary, on Slide 28, our GDP estimate continues to reflect the positive macro environment. In tandem, we continue to expect loan growth of 8% to 10% this year and the next.
Core revenues should grow roughly in line with average loans growth. Our NIMs should remain between 4.4% to 4.5%, depending on inflation and the velocity of the rate rises. Client loyalty and higher growth of clients will continue to drive the income with greater contribution from the mid-income segments.
The recurring cost of credit, this is excluding the change in the provisioning requirement for SMEs, should fall to 1%. Finally, the efficiency ratio should reach levels between 39.5% to 40%, with costs growing in line with inflation.
All in, we maintain our recurring ROAE guidance at 19% to 19.5%, with the all in ROAE 120 basis points lower. At this time, we would gladly answer any questions you may have.
[Operator Instructions] Our first question is from Jorg Friedemann with Citibank.
I'd like to ask 2 questions. The first one, I was checking these provisions that strengthened or that accounted for the new methodology on the consumer book, but I didn't follow the movement in the balance sheet. I was expecting that coverage had increased a bit more given these movements. So could you elaborate a bit more on why coverage did not increase accordingly? And the second question, looking to the recent inflation pickup and your explanations in this conference about how the assets and liabilities should behave, would it be reasonable to assume that if we didn't see a pickup in net interest margin in this quarter, maybe we could see this already in the next quarter?
Okay. So regarding your first question, we took the CLP 20 billion as an additional provision. So that's another liability. Okay? In other provisions -- in other provisions and the liabilities. So these are all credit-related. So they didn't show up yet in the loan loss reserves, okay? That's why in the webcast, we made those adjustments. So when we actually do the change in the model that we're required to do, they'll shift away from additional provisions into the normal loan loss required. And there you'll see the jump in -- the accounting jump in coverage. So they're already recognized, we recognize them before we actually made this change we had to make in our consumer model. So we decided to, since we knew we had to do this, to go ahead and recognize it and then later on we'll leave other provisions and the liability and move over to the loan loss provisions. Regarding your question on inflation, yes, so basically, we should see a slightly higher inflation in the fourth quarter, which is good for margins. On the other hand, rates have been rising, so -- the Central Bank increased rates already, the market was already kind of anticipating of this. So I think margins will be stable, most likely, and maybe rising depending on how high the inflation is, I think we're expecting inflation in the fourth quarter of around 0.8%, 0.9%. So obviously, the closer that is to 0.9%, the better, but don't forget that interest rate rises also put some pressure on margin. That's why when we give the outlook for our net interest margin for next year, we give you a range because it depends on the velocity of the rise in interest rates.
Our next question is from Alonso Garcia with Crédit Suisse.
Could you please provide some color regarding the termination of the coin contract with Transbank that took place earlier this month? I mean, in which way should we expect the economics of the credit cards business to change for you, if any? And also, how this event changes your strategy in the coin business and what is your outlook for the overall coin business in Chile?
Alonso, this is Emiliano. Basically, what we decided to do is to move to a 4-parts model as it is the international model used mostly everywhere until now, that's why -- and the processing done was like both with Transbank so we are going to this 4 part. More than that, that implies that we'll -- basically the economics for us will change because now, we will be getting the interchange fee from the different flags, the different MasterCard, Visa and Amex, instead of the merchant that we are getting now after the cost of Transbank. So basically, we are following the recommendation by the antitrust authority in Chile who recommended moving into this 4-parts model. And we don't expect this change, although the dynamics of the economics are different, in terms of impacts in our free line, we don't see a significant change in our fee income. It's just moving into a more international 4-parts model production, that's the main reason behind that and we don't expect any further -- or any significant change in our credit card business.
Any comments on competition or like the overall business environment for acquiring Chile?
No, not any specific comments anywhere. This last 3, 4 months of the year, we will have the Falabella consumer portfolio getting into the bank, the CMR portfolio. So that's basically the execution of the decision they announced some time ago. And also, the merger between BBVA and the Scotia, it's let's say, already in place and beginning to do the integration. So those are, like, the 2 maybe biggest -- not news, because are old news, but we are now in the implementation phase of those events, and so we don't see any significant change of the competitive environment.
Our next question is from Verena Wachnitz with T. Rowe Price.
Two quick questions, one is on the fees, just if you could repeat the explanation on the mortgage fees and whether that's a recurring impact? And what you expect in terms of fee growth going forward? And the other one is if you can just update us on your thoughts around the dividend payout going forward as you go through this transition in the capital requirements?
Okay. Regarding your first question, in the quarter, as we saw relatively good growth in terms of the business segments, and we did have to change, like, our methodology for calculating one of the fee items. Basically -- or as you know, when you get a mortgage loan, you acquire as well an insurance, basically, fire and earthquake. And every time a client prepays or refinances, many times you have to refund part of the insurance you already charged them. So every quarter or every time we sell, we have to do like -- estimate like a provision for the -- an estimate regarding the level of prepayment and refinancing. In this quarter, we -- given that rates are lower and there's been more refinancing and so forth, we decided to basically increase the calculation of that provision. So I would say more than a one-off, there's going to be a lower level of collection fees from this mortgage product and -- especially if our calculations for prepayment and so forth are correct. So -- and the fees are still growing underlying. They shouldn't be at the same levels as they were in the first and second quarter. And -- but this should still be growing from this level, roughly in the line with loan growth.
And in terms of dividend payout, we see the Basel III implementation in Chile as a tailwind for our, let's say, capital position and investments. It's positive for the payout prospects, although we don't see that, let's say, being implemented in -- before 2020 because there's still time for the 2 regulators to merge, and after the merger, they have to publish the defined frame on Basel III. So although that's a positive, let's say, looking forward, we don't expect that to affect our next dividend next April. And in that sense, we don't -- definitely, we think that we will review the payout comparing to this last April as we take 75. Assuming -- or considering that our risk-weighted assets are growing in line with our loan book from 8% to 10%, we expect the next payout to be in the range from 60% to 70%. I mean, lower than the last one but it's still quite attractive. And as I said, we still think that the implementation of Basel III might be a positive in this regard, that we still have maybe 2 years before having that implemented.
[Operator Instructions] Our next question is from Neha Agarwala with HSBC.
I wanted to get an update on the branch network. You currently have about close to 400 branches. And if I remember correctly, you have a target of 500 by 2020, 2021. Is that -- does that remain unchanged? What proportion would it comprise of in terms of WorkCafés? And how many will be traditional branches? And my second question is on -- you mentioned that the WorkCafés are much more efficient and the costs are less to operate a WorkCafé, could you give us an estimate of how long does it take for a WorkCafé to breakeven and become profitable versus a traditional branch?
Okay. So as we stated -- or actually, as did our President stated in the last shareholder meeting, and -- we are searching for ways to continue to increase our branch network. We would like to, in the next 3 years, reach 500 branches. And more than branches, I would say, points-of-sale, yes, 3 to 5 years. And probably 2021, 2023. In order for this to happen, obviously, we're working very hard in the back office digitalization. So the idea here isn't to go crazy spending and opening large branches with 10, 15 people. The idea is to start to think of a new layout, a new format, using innovation robotics, digital processes and to have very lean branches with obviously few employees and no back office. So we're tinkering with a couple of ideas, we're working with outside providers, with Findex, et cetera. And then we hope to have soon, be able to show a little bit what we're thinking. So that's a little bit of the overall idea with the branch network. So the idea will be to have some of these, like, newer models, very modern, smaller branches. We'll still have some traditional branches because some people need to still cash checks and you have to take care of the quality of service. And we'll also have the WorkCafé, okay? The idea is to have around 15% to 20% of our network under the WorkCafé format. And here, what I would say is that WorkCafés are more efficient. The efficiency ratios are like 2 percentage points lower in the WorkCafé. Remember that the WorkCafé, the majority are transformational branches. So it's usually a branch that is already working and then we transform it into a WorkCafé. In fact, that transformation, since we're getting a lot more know-how, is getting cheaper and cheaper, and today, to open a WorkCafé is roughly 10%, 15% cheaper than a normal branch. So it reaches breakeven, you could say, rather quickly because the cost of opening is lower and most of these branches already have -- are already somewhat profitable to begin with. So I think it's just more of a transformation to something that is much better, not only from efficiency but income generation and obviously, look and feel.
Our next question is from Sebastián Gallego with CrediCorp Capital.
I have 2 questions. The first one is related to the loan growth in the middle segment on individuals. You mentioned that the Santander Life, for example, has 70% new clients, 23,000 clients, but when you look at the loans to individuals in the middle-income segment, you see just a mild or flat growth. Can you elaborate more on the impact on Santander Life? What do you expect on -- from the middle-income segment? Or whether the Santander Life is just devoted to the high-income individuals? And the second question is more related to the IT -- or OpEx on IT, can you provide a bit color on the outlook of the total OpEx that you expect to incur for -- related to IT and cybersecurity?
So in terms of -- we don't know if the -- in the middle-income segments, as you can see the figures and you've directly stated, I mean, the speed of loan growth has been slower than what we are expecting and even slower than the rhythm of new customers acquisition under the [ Life model ]. The Life, it's mainly oriented to middle-income individuals and that's where the new clients are coming from, that we are still in the -- it will have maybe 8 months, 9 months of Life fully implemented since we launched last December. So I think we are still in the, let's say, the speeding up phase of the Life project, and we definitely expect the growth in those segments -- the loan growth in those segments to speed up and go definitely more in line with total consumer loan growth.
Yes. And then regarding OpEx, as our 3-year plan and is around $360 million, of which, roughly 80%, 85% is IT, okay? And so it's -- and a lot of this is basically bringing out these new products and working a lot the new format of the branches as well as the back office digitalization, which I think is very interesting. Also there's, as we said on the last call, we're focusing also on cybersecurity. Cybersecurity, so this year will be roughly around $20 million. And next year, it will be growing, in pesos, around 25%, 30%. So I would say that the idea of $360 million, the majority of it to IT, digitalization, and then there's obviously an increase in cybersecurity as well as other systems growth.
All right. Just as a follow-up, those $360 million is 3 to 5 years or only 3 years? And just to -- also a follow up on the...
3 years.
Okay, 3 years. And just to also confirm another figure, you mentioned 18 basis points in cost of credit for the onetime effect next year. But you mentioned also an amount in pesos, I'm not sure, CLP 55 billion, you said? Can you confirm this number?
Yes, that is correct. [ Based off ] 18 basis points cost of credit, CLP 55 billion. And we say the cost of credit because this is obviously an estimation and there's loan growth, and then it's hard to say exactly how large that portfolio is because we expect to grow more, okay? So you have a both -- a figure for both.
And I'm showing no further questions. This does conclude today's Q&A portion. I'd like to turn the call back over to management for any further remarks.
Thank you all very much for taking the time to participate in today's call. We look forward to speaking with you again soon. Have a good day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.