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Banco Santander-Chile
Banco Santander-Chile
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Good morning, and welcome to Banco Santander-Chile's Fourth Quarter 2022 Results Conference Call.
I will now hand over to Mr. Emiliano Muratore to begin the presentation.
Good morning, everyone. Welcome to Banco Santander-Chile's fourth quarter 2022 results webcast and conference call. This is Emiliano Muratore, CFO, and I'm joined today by Robert Moreno, Head of Investor Relations; [indiscernible], 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 fourth quarter and give some insights into our expectations for this year. Our successful digital strategy and customer oriented product offering continues to attract new clients, indicating great growth opportunity going forward.
To begin, I invite Claudio Soto to give us an update on the macro scenario beginning on Slide 4.
Thank you, Emiliano. The economy has continued slowing down although at a slower pace than expected. According to the latest figure of the Central Bank, GDP grew 2.7% in 2023, above our previous estimate of 2.25. Consumption has been more resilient than expected and investment has rebounded as postponed projects to resume in second part of last year. Also, a weak peso has helped the external sector of the economy.
Going forward, we forecast the economy will continue slowing down as financial conditions remain tight. While political uncertainty has moderated, it is still relatively high and will continue conditioning investment. On the other hand, the economy will benefit from the reopening of China, which has pushed up copper prices. All in all, we estimate the economy will contract between 1% and 1.5%. In 20 24, we will see a recovery back to its trend.
The labor market remains relatively weak and employment has been oscillating around 8% and total employment is still below its pre-pandemic trend. This year, the impairment rate may increase slightly as the economic moderates. The current account deficit, which was widening until the third quarter of last year, should start shrinking during the following month, as domestic demand contracts and turn off (ph) trade improve.
Inflation remained elevated but has shown some signs of slowing down. December CPA was in line with expectations after a negative surprise in October and a positive one in November. Finishing the year with a 12.8% increase year-on-year. During the first quarter, CPA will continue increasing fast (ph) in part due to seasonal factors. But from the second quarter onwards, we will see a moderation due to the selectness of the economy, the appreciation of the currency and the flow of fuel prices.
As a result, we expect the CPA inflation will be running at 4.75% by the year end. The Central Bank concluded its hike (ph) in cycle with a monetary policy rate at 11.35% in October. We expect the board will begin an issue in cycling during the second quarter as inflation moderates. Given the high level of the monetary policy rate, once they begin cutting, the board will proceed at a fast pace. As a result, we expect the monetary policy rate to finish the year between 6% and 6.5%. The government position improved in 2022 amid strong revenues and a sharp fall in expenditure.
All in all, the fiscal balance ended with a sub 10% of GDP, somewhat lower than what we were expecting. Gross debt increased moderately up to 37% of GDP. This year, there will be a mild expenditure expansion with gross debt climbing up to 39% of GDP. As a result, public finance will remain in good shape.
On Slide 5, we have the details of two of the main reforms of the government, a tax reform and a pension reform. So far, progress has been slow. For them to advance in Congress, a political agreement must be done with the position was a majority in the Senate. Therefore, the discussion on these reforms will require certain compromises by the government. We do not expect they are going to be approved anytime soon.
On the 4th of January of 2023, the new fintech law became officially allowed (ph) did update the relation of financial -- on the financial industry recognizing the existence of new business models based on technology. According to the law, new technological payers will be under the regulation parameter of the CMF. Also the law regulates of finance, establishing that consumers are the owners of their financial information. Although there are pieces of regulation that are still due by the CMF, we consider this new law a step forward that opens different opportunities for the financial industry.
On Slides 6 and 7, we have some details about the new Constitutional process, which should be finished by the end of this year. This new process in case proposing a new constitution with a defined framework of main ideas. The new text (ph) is expected to be ready by November 2023 and there will be a referendum with mandatory participation on December 17, 2023 to accept or reject this new draft.
Thank you, Claudio. We will now move on to Slide 9 to begin discussing our positive client and business trends. Year-to-date, the bank's net income totaled CLP809 billion, an increase of 3.8% compared to the same period last year. With this results, our year-to-date return over average equity reached 21.6% in line with our guidance. Our net income to shareholders in the fourth quarter reached CLP102 billion weaker than previous quarters and mainly due to lower NIMs in the quarter as inflation decelerated and interest rates continued to rise.
As we show on Slide 10, this was offset by very strong results from our business segments. The net contribution from our business segments increased 19.7% year-to-date with all segments presenting a significant rising profitability. It is important to note that the results from our client segments exclude the impact of inflation and the cost of our liquidity and therefore present a clear view of the sustainable and long term trends of our business.
Moving on to Slide 11, the results of Santander Corporate and Investment Banking or SCIB have been impressive during the year. Total net contribution from this segment increased 49.3% year-over-year, driven by an increase in all profit lines items. Net interest income was 49.1% year-over-year due to the increase in loans and a higher spread earned over deposits.
Also noteworthy was the year-on0year increase in treasury income of 44.4% and 19.8% in fees income in line with this segment's focus on non-lending income. Net contribution from the Middle Market increased 30.6% year-over-year with an increase in total revenues of 20.4% due to a 19% growth in net interest income as a result of a better loan and deposit spread and volume growth. Additionally, commissions increases by 25.7% in line with the greater client activity with the banks.
On Slide 12, we show the results from our largest segment, which is Retail Banking, which include the results from individuals and SMEs. The net contribution from this segment increased 6.2% year-over-year. The margin increased 9% year-over-year due to a better mix of funding and loan growth, based (ph) in this segment's strong increased by 15.1% year-over-year, led by card fees due to higher usage and increased customer base, as well as fees generated by Getnet.
Provisions increased 43.9% year-over-year mainly due to a normalization of asset quality of our retail loans after historically low levels of non-performing loans due to the increasing liquidity of our clients during the pandemic. Operating costs increased in a controlled manner by 3.2% year-over-year as the bank continues its digital transformation generating greater operating efficiencies.
These positive results can be broken down to a single key factor, client growth. As can be observed on the left of this slide, our active individually clients that is clients that have a minimum average balance and introduction levels are growing 7.2% year-over-year and our checking account customers are growing at an impressive 13.5% year-over-year. Our SME client base is also evolving favorably with active clients increasing 14.6%, checking account clients are up 29.4% and loyal clients have grown 7.4% year-over-year.
As we show on Slide 13, the success of Santander Life’s among individuals is now being replicated in the SME market. This clearly demonstrates the versatility of this digital platform With minimum additional investments, Life has opened a new segment of growth in the SME market that previously was enabled to digitally open or checking account.
Not only is Life growing pretty quickly, it is also rapidly monetizing as we show on Slide 13. Total Life claims increased 22% in 2022 with active clients increasing 13% and loyal clients growing 21% year-over-year. The major innovations in 2022 were the expansion in to the SME market and the ability to open a U.S. dollar checking account a 100% [indiscernible] for an additional fee. Santander Life's clients are also rapidly being monetized with gross income from Life's clients increasing 44% year-over-year. Demand deposit remained high at CLP931 million surpassing by many times the amounts clients have deposit in similar competing platforms.
The other important driver of our SME client base is Getnet as shown on Slide 15. Getnet has already sold some 157,000 POS, 91% of Getnet's clients are SMEs are target clients, and 99% of the POS are sold through the bank's distribution channels. Getnet is currently processing CLP580 billion in monthly sales. This product has been quick to monetize generating CLP27 billion in fees year-to-date. During 2022, Getnet launched e-commerce attracting some 8,500 business with some CLP5 billion in transactions in the month of December.
On Slide 16, we show how we continue to innovate and evolve our brand solutions. In the fourth quarter of 2022, we launched the Work Cafe StartUp. This is an initiative that aims to offer an integrated solution to all the entrepreneurial needs and especially to increase bank penetration carrying out pilot programs with the bank and even offering financing.
It is directed at companies that have three main characteristics. Firstly, for them to be in shading activities and presenting an accelerating growth; secondly, that technology is part of the value proposal; and third, that the proposals will be scalable to a real problem. Thanks to all of these initiatives.
We can see on Slide 17, how we consistently continue to lead our main competitors in net promoter score. After a slight dip in our net promoter score at the beginning of the year, following some necessary changes implemented to improve cybersecurity protection. The NPS has rebounded to our digital platforms, app, website, contact center and work affair continued to be highly valued by our customers. In 2032, we also fulfill all of our banking targets, as can be seen on Slide 18, and are well on our way to fulfill all of the goals we set for 2025.
On Slide 19, we highlight some of our most recent achievements. Once again, we received the top employer certificate for the fifth consecutive year. This positions us as one of the companies with base labor conditions in Chile. Secondly, our ESG rating on behalf of Sustainalytics was significantly upgraded. We improved our rating from 29.9 medium risk to 15 lowest reaching the best score among Chilean banks.
Thank you, Tristian (ph) for that excellent highlight of our strategy. We will now move on to discuss the discussion of the balance sheet and results. So moving on to Slide 21, we start with loan growth, which grew 5.5% year-over-year and remained flat in the quarter. During the quarter, loan growth was subdued mainly as a result of the translation loss produced by the 12% quarter-on-quarter appreciation of the Chilean peso against the dollar, approximately 20% of our commercial loans are denominated in foreign currency mainly dollars, especially in the Middle Market segment.
As the large corporate segment continues to grow by 3.4% Q-on-Q and 32% year-over-year due to various successful large loan operations and the fact that large companies continue to seeking short term financing through corporate loans because of fixed -- local fixed income market remains somewhat illiquid. (ph)
Retail banking loans grew 1.8% Q-on-Q and 5.5% since December 2021. With loans to individuals increasing 11% year-over-year and 3% quarter-over-quarter. Consumer loans increased almost 5% quarter-over-quarter and 6% compared to the close of 2021. This was driven by an increase of 23% in the year by Santander Consumer, our subsidiary that sells auto loans and a 20.6% increase in credit cards.
During the pandemic, credit card loans decreased 7% as clients reduce large purchases such as travel and hotels, which yields credit card loans. At the same time, many clients paid off credit card debt with the liquidity obtained from government transfers and pension fund withdrawals. In fourth quarter ‘22 as household liquidity levels return to normal and holiday travel resumed, credit card loans began to grow again and this trend should continue to be visible in 2023.
Origination of new mortgage loans has fallen as inflation and rates remain high. As for SMEs, the demand for new loans remained moderate after a strong increase in 2020 and 2021 for the FOGAPE programs. Given the above SME segment loan book decreased 5.7% Q-on-Q and 20.6% year-over-year as SMEs repaid for FOGAPE loans.
For 2023, despite negative GDP growth, we expect loans to grow in the mid-single digit range. Consumer loans will continue to be led by the rebound of credit card loans, SMEs will probably benefit from a new FOGAPE program to be announced soon. At the same time, we expect similar growth rates as the average portfolio in our corporate segment.
On Slide 22, we show the evolution of our funding. Total deposits decreased 3.4% year-over-year and 4.3% quarter-on-quarter as the bank focuses on reducing funding costs. The Central Bank continue to raise the monetary quality rate, which reached 11.25% and the yield curve is sharply inverted. In order to control funding costs, we have been maintaining our market share and demand deposits while replacing wholesale time deposits with longer term funding sources that today are much cheaper than time deposits.
Moving on to Slide 23, we can see how the movements of volumes, rates and inflation has been affecting our margins. The U.S. variation continued to decrease from the highs of mid-2022 and reached 2.5% in the quarter. This was coupled with an increase in the average monetary policy rate. Although, these factors drove down the bank's NIM to 2.2% in the quarter and 3.3% for the full year.
As shown on this slide, this is mainly a phenomenon that affects our non-client NIM for the net interest margin from our ALM activities, including the U.S. GAAP and our liquidity. The client NIM, which is defined as the NII from our business segments over interest earning assets has and will remain stable in 2023.
On Slide 24, we give further insights into our margins for this year. For every 100 basis points decline in inflation, our NIM falls on average by 20 basis points. And for every 100 basis points rise in the average monetary policy rate, our NIM falls by 30 basis points. Our base case scenario for 2023 is an average monetary policy rate of 9.2% and a UF inflation for the full year of 5.3%. Under this base scenario, the Bank's NIM in 2023 should reach 2.8%, starting below this level in the first quarter of 2023 and rising back to levels of 3.6% by the end of this year.
Moving on to asset quality on Slide 25. The rise in the NPL ratio to 1.8% in the quarter is mainly related to household liquidity levels gradually returning to the post-pandemic levels and the softer economy. This has mainly affected clients who already prepared pre-pandemic. The coverage of NPLs as of December reached 185% and has been no reversal of the voluntary provisions.
As we can see on Slide 26, these overall positive asset quality indicators led to a cost of credit of 1% for the full year, in line with our guidance for the year. During 2022, our regulator, the CMS, publish to draft of new standardized provisioning model for consumer loans. We expect this new model to be implemented in the second half of 2023. Our initial estimate is an increase in provisions of between CLP100 billion and CLP150 billion, mainly in our auto lending and credit card portfolios.
We are permitted to use voluntary provisions to comply with this new regulation. During the fourth quarter, we saw cost of credit picking up reaching 1.2%. This was mainly due to specific clients in the Middle Market segment and construction sector. Given the trends and our economic outlook for this year, we are updating our guidance for cost of credit for 2023 to 1.1% to 1.2%.
On Slide 27, we move on to non-net interest income revenue sources, which continue showing exceptional growth trends. Fee income increased 16% year-over-year and 1.2% Q-over-Q driven by higher client activity, new products such as Getnet and the growth of our client base as previously described. We expect these trends to continue in 2023.
As shown on Slide 28, we can also see the bank's efforts to continue increasing productivity and to control costs. Operating expenses increased 6.7% year-over-year and decreased 5.7% Q-over-Q well below inflation trend. The bank continues ahead with its CLP260 million technology investment plan for the years of 2022, 2024, And because of these investments, we are expecting cost to grow significantly below inflation levels in 2023.
As shown on Slide 29, the Bank continues with its process of optimizing the branch network. This year, we have closed 12% of our branches and have opened 11 new Work Cafes there, not only a major improvement in client experience, but are also more efficient. As a result of these initiatives, coupled with our digital strategy, productivity is rising significantly with volumes per point of sale increasing 16.2% and volumes per employee increasing 8.5% year-over-year.
Moving on to Slide 30, we observe an excellent evolution of our capital ratios. At the end of the fourth quarter, the bank reported a core equity at CET1 ratio of 11.1% up from 9.2% in December 2021. Our total CET1 increased 20.6% compared to a 0% rise in risk weighted assets year-over-year. Despite lower net income falling rate and inflation expectations benefited OCI and equity and therefore, book value growth has outstripped net income, a trend that should be also visible in 2023.
With this high capital level, we expect to maintain our historical payout of 60% over 2022 earnings. This still requires final Board and shareholder approval in April 2023. With this payout, our current dividend yield is close to 8%.
On Slide 31, we will conclude with some guidance. Despite 2023 being a somewhat more challenging year on the macro front, we believe our strong client activities will continue expanding. Coupled with this, we will continue with our investment program, which focus on digitization and automation. We will continue investing to improve our leading NPS scores as well. We also expect client growth to remain robust as in 2022, led by Santander Life and Getnet.
In terms of loan growth, we expect mid-single digit growth with a focus on all segments and non-NII to expand by at least 15%. NIM should contract the 2.8, but with solid client NIMs. As the NPR comes down, we expect NIMs to rebound to 3.6% by year-end. Asset quality should deteriorate somewhat, but the cost of risk will remain at a manageable level of 1.1% to 1.2%. Cost control will be a major focus and we expect low-single digit expansion of cost.
Regarding capital, book value growth should continue. And as we mentioned, we currently have an attractive dividend yield. In summary, we will start the year with ROEs in the low-teens. As the year progresses, ROE should improve and for the full year, we are guiding an ROE of 18%.
With this, I finished my presentation and we will gladly answer any questions you may have.
Thank you. We will now move to the question-and-answer section. [Operator Instructions] So our first question comes from Yuri Fernandes from JPMorgan. Please go ahead.
Hi, guys. Thank you for the question -- asking questions. I have a first question regarding our ROE guidance, the 18% your call for 2023. And Robert, it's very clear that PAT (ph) right, like a more challenging first half and ROE is improving the second half. But when we look to the margin guidance that basically implies 50 bps decrease on your NIMs, right from 3.30 to 2.8. We have a hard time getting to the 18% for the full year because you have around CLP50 billion, CLP53 billion on interest earning assets and these pressure on margins, it cost some CLP200 billion to CLP250 billion on your NII.
And we've got other numbers like G&A, the things we have, it's hard to get you those 80%. So my question is, where is the source here, right? It's lower taxes, maybe higher fees, other than very good G&A, and this NII pressure, what could be the drivers for you to reach those 18%? And can I ask a second question after you reply this one. Thank you.
Okay, Yuri. So you have the margin, a picture clear. So the margins were for the 2022 were 3.3. For the full 2023, it will be 2.8, 50 basis points, so NII will probably fall. So the good -- so that's, let's say, the difficult part as we said before, the ALM is the main responsible for that. The client NIM should be relatively stable. Here the key thing for NII is, is the velocity at which the Central Bank lowers monetary policy. Okay.
On the one hand, we know that for that to happen inflation comes down okay, that's kind of a headwind, but that's only a headwind in the very short term. If that triggers a rapid decline in rates, the faster that goes down, the better. Okay? So today, think of this as more a play on, let's say, on rates falling than the new plays (ph) come down. So the faster rates come down, the better it will be for outlook for NIM. But given the base scenario, that's 2.8%.
Provisions should grow a bit, but under control. And then from there on, we should have a quite good news, okay? So first of all, it's fees, okay? Fees we're expecting as a 15, 20% growth. The same -- that includes fees and treasury, okay. We continue to see -- this is something we try to stress, but with [indiscernible] in the beginning of our presentation. Everything that's client related is doing very, very well, okay?
You saw the results of corporate banking and Middle Market retail. So for there, I think in a client growth everything that's non-lending should continue to be pushed, okay. Just to give you an example, we increased SME checking accounts by 30% last year. We grew individual checking your grounds, I think, believe by like 20. So everything that's product use is getting it. That's good news.
And then there's cost. And when we talk about costs, we're talking about personnel, administrative, depreciation and other operating expense. And how their operating expenses, we should have -- including those items, we should have a very, very low growth of cost Obviously, we talked about 2%. It could have been even lower. So there's probably the difference in your model is other operating income and other operating costs, which we're going to see a big improvement, okay?
There, for example, we have and a lot of insurance cyber costs. We did a lot this 2022 to improve that. So a lot of things are going to come down there as well. So that's going to be a big boost to the bottom line to get the '18. Okay. Taxes, now taxes with lower inflation. We're not -- we'll be paying like say 16, 17, but overall everything that's not margins is going to that leaves -- we feel confident with the 18% ROE, okay?
No, that's a pretty clear Robert. And maybe a little bit of cost of risk with the detractors and all the other lines helping you to have a better 2023. I have a second one regarding capital. And by the way, congrats. I guess our capital position was under pressure. We saw 2021, we had a lot of mark to mark and see equity -- shareholders actually suffering a little bit. But this was a good quarter for capital.
So if you can explore a little bit more what drove the RWAs down? I guess you comment on some derivatives strategy and also the mark to mark. So basically, it's clear that message, right, you keep it at 60% payout on dividends. But could we see ongoing capital improvements in similar levels? Like, what is the -- again, it's clearly a bit the change. And what should we wait ahead for your capital position? Thank you.
Hello, Yuri. Thank you for your question. So in the quarter basically the main source of risk weighted assets contraction, let's say, that main -- the overall risk weighted assets stay flat for the year was the market risk with assets. As you may have discussed it in the past with you and the market. I mean, the change of regulation for market risk is the standard model more basic approach to Basel III. So basically that penalizes the let's say the more sophisticated business as the one we have and we are the leaders in the derivative market in January (ph) far.
So the bigger the book, the bigger the risk weighted assets and that's without considering the real sensitivity or the real risk of the book. So basically, what we have started in the fourth quarter and we plan to keep for this year. It's a big program of compression of positions have been basically netting down or netted out balancing positions without risk and leaving both positions out of the books. And so that's what's helped risk weighted asset.
And then in terms of mark to market of the -- our inflation on hedges, I mean, the fall in the inflation in the second part of the year and then the recent months also helped the mark to market of our inflation hedges. So going forward, we are still optimistic about our capital position. We still see some room efficiency in the risk weighted assets coming from market risk. So that will be a tailwind for this year. Book value also like doing well in this new scenario of inflation moderate interest rate also going down.
So as going forward, we think that we're going to stay from 10.5% to 11% CET1 with relatively easy even today with our 11.1% after paying the 60% in April in case the board decides to propose it on the ATM to approve it. Even with that, the CET1 should be at 10.5% or higher, which would be like the highest CET1 after dividend in the recent year. So we are we are optimistic going forward in terms of capital book value and risk weighted assets trend.
Thank you very much.
Thank you. Our next question comes from Carlos Gomez from HSBC. Please go ahead.
Hello. Good morning. Thank you for taking my question. [indiscernible] talk about the high and update of regulation on provisions for the consumer portfolio and how you would have to provision for that? Any changes in that and what is your expectation? And second, going back to the initial question about the margin, I mean, you emphasized a lot that rates are going to come down and what impact is going to have? What if rate to stay up and it don't decline as you expect? Would that be positive or negative for you? And could you give us an order of magnitude? Thank you.
Hello, Carlos. Thank you for your questions. In terms of the new provisioning for consumer loans. No change. I mean, we still are expecting an impact between CLP150 billion in the stock of provisions. The recent development is that at the beginning, it was expected to be in place during the second quarter of this year. Now we -- that this has been like a postponement of -- in the process, so we are seeing now for second half or maybe last quarter of this year, but no change so far in the impact we are foreseeing.
And in terms of your question about the sensitivity to interest rate, definitely, if the rates go down at a slower pace or it might be worse for us and the opposite, if they go down at a faster pace and that's why we included the heat map, we call it on Slide 24. Where there you can have the different impacts, different inflation, monetary policy rates. I mean there you can see that in case, we -- the average monetary policy rate for the year stays like 100 basis points higher than our base case. We have an impact in NIM of 30 basis points. And well, basically, there you have the -- it's quite linear the effect.
So it's just a matter of a few, let's say, put in what you think the average monetary policy rate could be. We include this two axis chart basically because inflation definitely will also be different if rates are different. So that's why we think that it's important to have both the sensitivity in the same chart to play. If you are more on the [indiscernible] side, higher inflation or higher rates, what would happen? And if you are more on the salvage side, what would happen with lower inflation or lower rates?
Thank you very much. And this is very clear. Thank you very much for showing this slide. To what extent can you change this during the year. I mean, this is your restructure of position presumably as of now. If you change your view, if you think rates are going to evolve in a different way, can you change this in the next two or three months or is this set for the NIM of the year?
No, I mean, I would say that the midpoint, let's say, for the NIM of the year, it's -- it would be like around there and what we can change. And if you compare this chart to the one we showed last quarter, you will see that the sensitivity to inflation went down because basically we reduced the U.S. GAAP. So this is due to inflation now. Basically, we kind of secured higher levels of inflation. So now we have like less risk to that.
And at the end, managing this is a matter of what trajectory of fitters' rate the market has implied in the prices because basically we can changed this by adapting the sensitivity by paying fixed rate or reducing fixed rate and basically today, we see that what the market is implying, it's close to our base case scenario in terms of inflation and trajectory for interest rates. So we don't see any significant value in fixing or locking in that scenario. So that might change in the future if basically the market starts discounting a more [indiscernible] scenario that make us, let's say, take a position there. But so far we expect to have this dispositioning at least for the first part of the year.
Thank you so much.
Thank you. [Operator Instructions] Our next question comes from Tito Labarta from Goldman Sachs. Please go ahead.
Hi. Good morning. Thank you for the call and taking my question. I guess a follow-up to Yuri's question on the ROE guidance and sorry to ask kind on a little bit more short term basis, but even get into that low-teens for next quarter. Maybe if you can help us think how do you think the interest rates will evolve, like, when do you expect [Technical Difficulty] start to come down and also even evolution a little bit on the inflation?
Because it seems inflation should probably be lower in 1Q, but rates still not coming down. So not even sure how the margin would improve next quarter to get to that low-teen ROE, particularly because this quarter you had the negative tax rate. So if you could just help us think about just how that ROE is going to evolve sort of throughout the year with your macro assumptions on a kind of shorter term basis? I would appreciate it. Thank you.
Okay, Tito. So in the first quarter, as we said, the NIMs in the fourth quarter are like 2.2 and they should be like 2.2 in the first quarter. At the same time, remember, there's a lot of seasonality in costs in the first quarter. So that's going to help. But effectively, the ROE in the fourth quarter was in the 10% range. In the first quarter, there's a lot of moving parts, but the margin slightly lower. Provisions should be stable or lower fees more or less the same and costs are seasonally lower as well.
So overall, I think the first quarter and also there's what I was talking with Yuri, I think cost is going to be a big difference, okay? So in the end, you end up having a very similar net income in the first quarter. And then going on basically what we have is, is the seasonality of the race. And here, I think I'll turn it over briefly to Claudio if you can mention that. And then I'll wrap it up, okay?
Yeah. Well, in terms of inflation, in the first quarter, we will have to – things that are important to have in mind. First of all, there was a change in access on services that will impact the CPI in January, that will be transitory. And there was a -- there will be a high teen prices due to these one-offs and that will help with the UF. And then in March, we usually have high inflation in Chile because of seasonal factors. So we will have a first quarter with a relatively high CPI.
Then the decision for cutting rates by the Central Bank will be done. We expect during the second quarter, there are three meetings in the second quarter, so it could be in any of those meetings. But at that moment, we expect inflation would be going down in a very clear trend and that will help the Central Bank to cut rates in a very rapid fashion. You have to have in mind that the monetary policy rate in Chile is particularly high. If you compare previous cycles for trades or if you compare to other countries, the tightening in Chile was very aggressive. And therefore we expect also the cutting phase will be also aggressive.
Yeah. So basically it's also like first quarter NIM is around 2%. And then as we follow what we expect to be the base scenario in rates and inflation. Second quarter inflation, UF inflation is always seasonal a little bit higher, but basically NIMs of like 2.6, 2.7 in the second quarter, third quarter 2.9, fourth quarter 3.6, more or less that depends on your interest asset earning growth as well, okay. So we are seeing some volume growth as we said 5%, 6%. Overall, you got a NIM of like 2.8% for the full year.
And as we said before, this coupled with very good non-NII risk rising a bit, but it also a lot of things on the cost, okay. So this gives you an idea of the sensitivity we talked about, okay, that it's quite sensitive to the fall and the monetary policy and there's a big difference between first quarter NIMs and fourth quarter, okay. And the other thing that this is also a little detail, but something I wanted to mention is that we still have a significant amount of liquidity held in the held to maturity portfolio and that, that all comes due in 2024.
So basically, there we have -- remember that's the collateral against the Central Bank line. We took cheap funding from the Central Bank, where we had a hold collateral. Some of that is held to collect. So it doesn't affect our volatility of equity, but obviously those are a lower rate. So this is looking forward to 2024, which obviously is a far away. But in 2024, we kind of return to normal interest rates, normal inflation, the uptake is paid back. A lot of this collateral, it has exact same maturity.
So in 2024, we should also have a jump in it (ph) even with inflation coming down, given that we finished the [indiscernible] program our held to collect portfolio should be repriced at a higher rate. So basically in 2024, once again, it's quite [Technical Difficulty] we're looking back at NIM, the 3.3%, 3.5%, okay, or at least where we left off in the fourth quarter. So basically, we have to kind of travel through this first half, okay? But from then on, as a Central Bank, a lowest rate and obviously in 2024, when the Central Bank financing comes due, rates should definitely have an upward trend -- sorry, NIM is an upward trend.
Great. Thanks, Robert and Claudio is very clear. Just one quick follow-up, I guess. Should we also expect a negative tax rate in 1Q like we saw this quarter or…
Okay. So regarding the negative tax rate, basically that does make factors are complicated, but that's a simple answer. Even though the -- remember that for tax purposes, in Chile, you still do inflation accounting not in our financial books, but in our tax books, everyone, every company, every person, you still do tax accounting. So our equity continues to grow because of inflation, okay? So basically that monetary correction of capital was larger than, let's say, net income. So that's why you have a reversal of tax in the fourth quarter.
In the first quarter, it should be still very low because we're still having some inflation and our book value has been growing, okay. As you saw, as we mentioned before, our book value for different reasons has been expanding at a faster pace and the book value is readjusted for tax purposes by price level restate. So said that, our tax rate should kind of have a similar trend as ROE in a certain sense. We're starting out low and then paying much higher tax. I don't know if it will be negative, but the tax rate should be very low-single digits or low-teens. And then slowly rising at the year and finishing at the year in an average of like 17%, okay. But once again, it should be relatively steep like the ROE.
Okay, perfect. That's very clear, Robert. Thank you.
Thank you. So our next question comes from Anand (ph) from White Oak Capital. Please go ahead.
Thank you for the opportunity. Two questions from my end. One, the CLP260 million CapEx. Can you give us some details around it? What is it about and in which quarters do you intend to spend this?
Sorry, you're asking about our investments.
Yeah. The CLP260 million investments that you're talking about, what is that?
Okay. So basically, we usually do an investment plan that expands three years. So we're in the middle of our CLP260 million investment plan that we announced in 2022 -- sorry for 2022 to 2024. It’s roughly equal per year. That's just digital, okay? Obviously, there's other investments and fix that, whatever. But basically, that entails the transformation of the branch work, automation, everything that's the new robot, taking a lot of the systems and products to the cloud. So basically, it's a big overhaul in line with the digital transformation that a lot of companies and banks are doing worldwide.
And for us, it's very important because obviously with margins coming down, we're cost conscious, okay. We're doing a lot to control costs, but the idea here is not to touch the technological part and not to like cut costs today and then have to reinvest or invest more in the future. So basically, we have been reducing branches. Headcount has been coming down a bit.
There's other cost initiatives, but the whole investment plan, which is transformation of the branch office, the front end and transformation of the back end operations, which means a lot of automation and digitalization and other technological improvements is what is covered by that plan, which is CLP260 million total and roughly one-third per year. And then maybe by the end of this year, we will announce a new plan for the next three years.
Okay. And from the corporate tax perspective, given the current changes in the contradiction being contemplated. Is it fair to expect that this corporate tax rate of 17 would not continue and it should rise in the future by a certain percentage point? And if yes, then what is the expectation you have for the increase in corporate tax rate?
Okay. So, in Chile, the corporate tax rate is 27. Okay, in your tax book. So we're always paying 27 in our tax accounting. But when you look at it, our financial and remember that -- for tax accounting, you have to readjust for the inflation account. And basically, what happens that means for banks is that your equity is increased by inflation every year. So if you have equity of 100, 10% inflation at the end of the year, your equity and your tax books goes to 110. That additional 10 is a tax loss in your tax books, okay?
So that's why the effective tax rate is lower than this statutory tax, okay? So therefore as inflation rises, the monetary price dollar restatement of equity goes up and your effective tax rate goes up. As inflation slowly normalizes, okay, the tax rate will go up. And in inflation -- our normal inflationary environment was inflation around 3% to 4% our effective tax rate should be around 21%, okay? And that should be the normal in line with the 27% corporate tax rate plus the monetary price level restatement of equity, okay?
In terms of the discussion about the constitution or the tax reform, it is not under discussion an increase in the corporate tax rate. I mean the discussion goes in other direction more on the on the personnel and the wealth tax and all that, but no discussion so far on increasing the corporate tax rate.
Sure. Thank you and all the best.
Thank you.
Thank you.
Thank you. So we have one more question from Mariel Abreu from T. Rowe Price. Please go ahead.
Hi. Thank you for the time. I have two questions. One, if you can remind us what are your refinancing needs for this year and next? And how do you plan to cover for those. And are liquidity conditions still pretty favorable overall and if you can comment about that? And the second question is on asset quality. I'm looking at your non-performing loans and it almost doubled for consumer, the increase was also pretty meaningful even for commercial and mortgages. Is that all explained by the change in liquidity conditions or is there something else? Perhaps you can give a little bit more color on maybe a specific industry or products that are driving that as well? Thank you.
Okay. So thank you for your question. Regarding the first one, our funding needs will be seen here like, say below the average we usually have on a yearly basis, I would put it in the CLP1 billion ballpark. So we are like comfortable with that and we plan basically to use the same mix we have been using lately between deposits coming from clients and institutional investors some [indiscernible] funding lines from banks abroad and very active on the capital markets domestically and abroad, I mean, more on the private placements side. Even though this last few days, weeks, I mean, the public capital markets abroad have improved like dramatically. And so now even public transactions in the U.S. market and another public market, it could be an offset.
So on the funding needs for this year, we are quite comfortable and about liquidity conditions. The capital markets, the domestic capital markets is in better shape and used to be in the middle of the pension fund withdrawals and all that tension the market had. Now situation is, it’s better even though the total sizes of the transactions are not the ones we had in the best moment of the market, but the situation is quite favorable. Definitely, any potential risk of additional pension fund withdraws would put a pressure on that, but it's not let's say, our base case for the year. And the good news is that public markets abroad also are improving and that give us much more flexibility either to that the domestic or international markets for our funding needs, which are below the average on a yearly basis. And Bob, do you want to comment on asset quality?
Yeah. So asset quality, regarding consumer lending, that's really the rebound post and the excess liquidity. So that's just going to go back to where it was pre-pandemic. It might overshoot a little bit depending on how strong the recession is. But remember last year, I believe NPLs and consumer were like 0.9%. We had never seen it that low and clearly this is a direct result of normalizing liquidity and the levels of last year were extremely low.
The good news is that we still have very high coverage. We haven't touched the voluntary provisions and we're good or for worse. We're going to add on 120 billion, 150 billion more of provisions in consumer obviously redirecting voluntary, it's not going to have an effect on the P&L, but the consumer coverage is going to be on the year at very high. And mortgage, I think it's very similar.
Even though I think mortgage, there is some impact of the higher inflation and rates, especially higher inflation. We always talk about the good news on margins, but obviously higher inflation results in higher mortgage payments and there was a little bit of impact there. Once again, still very low and we have much higher coverage and the value of collateral is still quite good even though it's done very conservatively.
In commercial loans, a bit the same, but in commercial loans, there has been some sectors with a little more weakness. And as we said in the presentation and in that management commentary, I would say, particularly in the core of the construction sector, without being not even near a crisis, there has been some weakness in the construction sector and that drove up provisions, especially in the Middle Market.
In the Middle Market, it's a broad segment, but it includes everything that's construction and real estate. The real estate developers have been very, very, let's say, healthy. But when you have very little construction going on with high rates, obviously, construction companies of all sectors are probably the ones that are suffering the most in Chile. We have like 1% of our loan book I believe in construction. So that will be a weakness probably for a while until rates go down and until real estate developers begin their projects again.
So basically, and under the segments like restaurants, all of that, those are coming out of the pandemic getting better, but still weak. And then with the recession, it's kind of hard to go through a pandemic and now a recession. So some of those sectors, which once again, they're like 1% of the loan book, but there should be some weakness as the economy slowed down. So therefore, that's why we finished the year with a cost of credit of 1% but in the last quarter, 1.2% and we think for this year, the average will be 1.1% 1.2%, okay? So once again, a rise, but still we have a lot of coverage. We haven't touched our voluntary provisions. We think that 1.1%, 1.2% is quite realistic.
Okay. Thank you very much.
Thank you. We have a question from Daniel Mora Ardila at Credicorp Capital. Please go ahead.
Hi. Good morning and thank you for the presentation. I have just one question. And it's regarding derivatives. What is the strategy regarding derivatives? If for example, if we saw -- if we see the first three quarters of 2022, when you see the accounting hedge of interest rate risk, it represents roughly 48% of the total interest expense without considering their adjustment, net interest income.
So considering also that the royalties decreased from CLP17 trillion to CLP11 in this quarter. What will be the effect of these on margins going forward? What will be the strategy for derivatives and what will be the fate of the decrease in derivatives for margins going forward? Thank you so much.
Okay. So there's two effects there and they're kind of unrelated, okay? So first of all, we have, let's say, three big groups of derivatives, okay, that are in the balance sheet. What is the biggest is, what we do with clients, okay? The client needs a forward on an interest rate swap and that is all managed with advancing our risk metrics, et cetera. Okay. And those are basically matched on the asset liability, okay? But given that we're a big bank, we're a lot of clients come to ask for protection, especially against FX movements, yeah. So our derivatives, and with a little bit what Emiliano said before in Chile, accounting for derivatives, basically, you have the asset and liability, okay, and there isn't much netting, okay?
So basically, when the Chilean peso depreciated, that inflates the asset and liability of our derivative volumes, but the net doesn't really change, okay. So the big growth you saw in the derivatives as a percentage of assets and liabilities was because as a bank that does a large forward derivatives, especially with clients and through these type of things. The depreciation of the peso leads to an inflation of that volume asset liability and now when the peso appreciates that comes down, okay?
And also the compression we have been performing in order to net that out and to reduce the decrease with assets for the capital ratio has also…
Sorry, just bear with us a moment. I think we're having one or two technical difficulties. Please bear with us just a moment. We've lost the host, but we're just trying to recap now. Thank you. Thank you for your patience. If you just hold on for a few more minutes, we're just reconnecting the host. Thank you. Apologies for the delay. We're still trying to reconnect the host. If you can please continue to be patient while trying to reconnect them now? Thank you.
Hello?
Thank you. Okay. Sorry. I connected. I was really inspired, but I don't know why I left off. So basically, I was talking about a -- so when the peso appreciates the volume at [indiscernible] is false. Do you know if anybody tell me where I left off?
I'll just summarize it up. And then we have the UF GAAP. So we control the UF GAAP using cash flow hedges. And those are -- the asset is a mark to market with strong mortgages, but the derivative is against equity, okay? So that explains during 2022, while part of the year, we had a loss in OCI because as inflation expectations went up, that that produces a loss. But as inflation expectations go down, even though there's an impact on margins, the book value growth. So there's another reason for book value growth because of these cash flow hedges, okay?
So basically and that's always going to be that way. But as long as long term inflation expectations remain anchored with the Central Bank, what the Central Bank wants. That shouldn't be a noise. This happens when you have big sharp turns and inflation expectations, okay. And then there's a third type of derivative, which is a derivative we use in order -- because as -- remember, we always talk about we're long inflation and we're also short liability sensitivity to rates, okay?
And part of that sensitivity to short term rates is also done through a hedging okay, but those type of hedges are not recognized against equity. The cost of those hedges of those swaps are recognized in net interest income, both the cost of that and the mark to market. So when you look at our NII, you're going to see that last year 2022. We had a big increase on what is valuation, what is inflation because we're -- we increased the inflation gap.
Well, we also had a policy, we go long inflation, but we don't like to be on both sides of the equation. We go long inflation and long rates because if inflation goes down, rates usually go down, maybe not at the same moment, okay? But our biggest fear here is that if inflation goes down, rates will go down. So basically through what we have today is a situation where we see that inflation is going down and therefore rates should begin to go down, okay?
And therefore, this year if rates begin to go down, not only would you have a decrease in funding costs, but also that increase in the value of that -- of those swaps, which is also included in NII, will also start to reverse, okay? So long story short, with inflation and rates coming down, you're going to see an improvement in the book value because of the OCI and you're going to see an improvement in margins. I don't know if that was clear or not.
Yes, perfect. Very clear. Thank you so much for this financial.
Thank you. So we have a question from Alonso Aramburu from BTG Pactual. Please go ahead.
Yes. Hi. Can you hear me?
Yes.
Yes. Okay. Thanks. Yeah. I wanted to follow-up on the return on equity clearly it's going to be lower in the first half of the year, increasing in the second half. For you to get to 18% you probably need to be closer to 20% towards the second half of the year and you're talking about potentially margins being even higher in 2024. So my question is, when you look at your sustainable ROE potentially in a mid-cycle situation with rates, let's say, around 4 or 5 normalized inflation. Should we think that your sustainable ROE is now above 18% given this trend and this momentum 2024 looks like it will be probably closer to 20%.
Okay. Yeah. So basically, we've always stated that the long term ROE is 17%, 19% because there's always -- it's hard to tell the future now. But basically as we said, if we go back to normal rate and inflation with margins going back to their historical standards, what we don't know is, is things like unexpected legislation or things like that, okay, or worse is going to be. But if everything goes back to normal, we don't have any like surprises a 19% ROE is in the long term is absolutely feasible, okay? We keep the range 17%, 19% to take an account of unknowns, but clearly going back to normal levels of inflation in rates and then our strategy continues to be successful, 19% ROE is the high end of that range is clearly absolutely feasible for the launch.
Okay. Perfect. Thank you, Robert.
Thank you. And we have a follow-up question from Anand (ph) from White Oak Capital. Anand, please go ahead.
Thank you. Sorry. Thank you for the opportunity. Three questions. The credit cost for the full year, the guidance is 1.1 to 1.2. In terms of quarterly, do we have any expectation of whether it will be like front loaded or back loaded? That is question one.
It should be a front loaded, maybe second and third, but as I said, this has a lot to do with the involvement of the economy. So as we're seeing the weaker economy now and then picking up at the end of the year, sometimes there's lags and asset quality, but I would say that it's going to be probably higher in the beginning of the year coming down towards the end and obviously that the goal of the bank is to reach a cost of credit of 1% in 2024. So our view is that it will be higher in the first half coming down, especially in the fourth quarter probably.
But it will not too much speed impact. Yeah, the trend should be like promoted, but not significantly.
Yeah. So basically, as we said, 1.2 maybe a little bit higher in the beginning and then going down to 1, 1.1 okay? So it doesn't change too much like the margins for example.
Perfect. Secondly, when you are answering the previous question on derivatives. There was a question about three different aspects. First was about the line predicted derivatives. The last one was about our balance sheet, your long inflation and short [indiscernible]. In the middle you explained about the UF account. If possible, can you explain it once, I couldn’t get that?
Okay. So the UF Chilean banks are very plain vanilla, but we have this special thing called the UF, which is the currency, especially in inflation linked pesos. And the bank by that nature are most long term loans in Chile and [indiscernible] inflation. As a result, since banks usually are taking deposits, which in Chile are either non-interest bearing or time deposits and time deposits tend to be a stable source of funding but very short contractually. So think of it this way, we're capturing nominal pesos and we're lending U.S. okay. So we're lending inflation linked and we're mainly capturing pesos that are not inflation linked. And this produces the inflation gap, okay.
And if we do nothing, the inflation gap goes very, very high and that would indicate the bank would be taking on too much interest rate risk. And so we have a cap. We put a cap on how large the inflation gap could be. In order to control that gap, you can issue inflation linked bonds, which we do, but there's not enough, okay, in the Chilean market. So the other way to control the inflation gap is through derivatives, okay.
And those are the derivatives that we do under cash flow hedging and accordingly under so where basically you do is, is you take a bundle of mortgages and you take a derivative and we basically lower or we control the UF GAAP, okay? So it's very efficient and that basically it's very well documented, okay, but since that is technically defined as a cash flow hedge, that cash flow hedge by accounting rules everywhere under IFRS has to go against equity to that.
So if we did a bond, you would have the asset liabilities, okay, matched and you would have no mark to market. If you don't use a bond, and you have to use derivatives, the accounting forces you not to mark to market the asset but yet, but the derivatives. So – and that's the part that goes under equity, okay? Going a little bit further, remember that under Basel III, those cash flow hedges don't go under CET1, okay? So as we phase in CET1, these cash flow hedges will have no impact on capital.
But today, in Chile, we're not there yet in terms of the phasing in. So this impacts capital and impacts CET1 even though later on, the CET1 will not be impacted by these cash flow hedges, okay? So as inflation expectations come down, we should see that impact of these derivatives fall or have less impact on capital. And under Basel III in the future, this will have zero impact either positive or negative. I don't know if that makes it more clear or not.
No, that's perfectly clear. Many thanks. And the last question is, this derivative of the three varieties reasonable part of our overall operation. From the counterparty risk perspective, how do we get confidence that the counterparty good enough to kind of honor (ph) this. So can you give us a sense of who are the counterparties as these international investment different banks or Central Bank in some case or domestic corporates. So how do we get confident that these derivatives will be on a -- if there is excessive volatility?
Yes. Hello. Can you hear me?
Yes, I can hear you.
So the big chunk of the loan book, because as Robert said, I mean, we have this activity with clients basically, the counterpart is one of our clients, who are corporate, sometimes SME, sometimes the corporate. Depending on the profile of the client and [indiscernible] of the clients, some of them do have collateral agreements that basically have like daily revision and posting of collaterals for the decision.
And in that sense, basically we assess the equivalent credit risk of the derivatives as a loan to the clients. So that is part of our credit risk management with clients. I mean, some of them use their lines with derivatives. And if we aren't alone, maybe we don't have space for the derivatives and that will run. I mean, so just on the client basis, it's just part of the credit exposure management we do with any clients and the derivatives it’s just another product that we factor in that exposure.
And then when we, let's say, with hedge or we go to the market to hedge that exposure to clients. There we -- the counterparts are basically banks. I mean either domestic or international banks depending on the product or a peso swap. Sometimes it's a local bank and for dollar swap. Usually, it's an international counterpart, but it's there. We have all of them with collaborative agreements with CSAs on with daily revision and daily mark to market and let's say either cash or very high quality collateral.
When you have bilateral trading and then you have a significant part of the duration through current houses like SCH or CME and even we have a com derivatives which is the local TCF here in Chile. So from the credit exposure point of view, the derivatives portfolio is quite secure because it's either collateralized on a daily basis or managed as any other exposure to clients within our credit risk management policies.
Sure. Thank you.
Just one follow-up, we have in our financial statements when we publish them for the full year, but we always include a table that shows the derivatives, the assets and liabilities, which ones have the threshold in the collaterals and the big majority do daily margin calls. Okay. So that's really good. So basically we put that because now we want to make sure that people feel comfortable that this is correctly done.
Sure. I have a follow-up, if I may. Go ahead.
Yes, absolutely.
Yeah. So of the overall derivative book, how much is exchange credit versus balances.
Yeah. I don't have the number here in mind.
But I would say that 80% or more has daily post in Oclaro (ph) and CSA. That's in that note I was talking about, okay? Yes, that's important that.
Because even if it is, we have it out with the bank. We have also daily market calls. I mean, the difference is, if you're doing on a – whether it's either house or you are doing it on a bad debt basis, but even the other house are highly volatile.
Yes, it's threshold zero, so basically every day, okay. So yes, that portfolio especially decline has we have no trouble. There's a lot of moving parts, but basically the client businesses has been very safe. And as Emiliano said, that's included -- for example, we do a big deal with a large Chilean corporate, that's included in their credit and exposure. So, no, that has worked very well.
And the trend is to go to clearing houses and when we can because it's efficient on the capital point of view for us for the counterparts. So the trend there is to go to more clearly -- centrally cleared derivatives.
Sure. And lastly, from a capital convention perspective, all these derivative assets on the balance sheet. What percentage of capital is consumed by these or what is the risk weighted assets that come from these derivative assets?
I mean, the total exposure for market risk in our case is around like 16%, 17% of the risk weighted assets, which is large, but again because in Chile with that, we are under the standard approach on the Basel III. So when you -- if you look at our market risk exposure under the European Basel III version, which is the one we report to our company, our risk weighted assets for market risk are like one-fourth of what we see here in Chile.
So if you look at our risk weighted assets on the Chilean version, market rate represents 15%, 20% of risk weight asset. But if you see the same picture under the European version that allows the use of different models that are the ones we use to manage our derivative business that goes to one-fourth basically 5% of the risk weight assets.
Thank you very much. You are very patient and you are very comprehensive. All the best.
Okay. All the best to you.
Okay. So, well, yes, I think we'll conclude here. And so if anyone has more questions or comments, please contact us. So thank you very much everyone and talk to you soon.
That concludes the call for today. Thank you and have a nice day.