Banco Santander-Chile
Q4 2020 Earnings Call Transcript

Published: 5 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2020 Banco Santander-Chile Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. I will now hand the conference over to the Chief Financial Officer, Mr. Emiliano Muratore. You may begin, sir.

[Emiliano Muratore:]

Good morning, everyone. Welcome to Banco Santander-Chile's Fourth Quarter 2020 Results Webcast and Conference Call. This is Emiliano Muratore, CFO. And I'm joined today by Robert Moreno, Managing Director of Investor Relations; and Sindy Olea, from our Economic Research team.

[Sindy Olea:]

Thank you Emiliano. As you can see on Slide 4, following main stake of the company, the situation in Chile will improve, although in recent weeks, the cases have been up to rise again. The authority has sanctioned its entire restriction meaning much of the population, around 70% is with some lockdown level. However, this level still remain below the first wave. In Slide 5, we show that in Chile, the process to vaccinate the population has begun with over 56,000 people already vaccinated. In the first weeks with their result of the latest shipments, we had total of 3.8 million vaccine has started to appear. A massive vaccination process has begun starting with the weaker segments such as the health workers and elderly. Each week it will include a broader segment of the population. If we come down, those that have close contact with people in the work. Chile has to request vaccine from all the major laboratory. The target is to have 5 million people vaccinated by the end of March. And 30 million by the end of June with account for 80% of the healthy population. Once the vaccination process allows effect heard immunity, which required between 65% and 70% of the population has been inoculated, The Chile begin a sustained recovery toward levels close to this before the pandemic. On Slide 6, we can see the Chilean economy continues recovery during the first quarter, and showed mixed progress across sectors. The recovery of the retail sector was supported by the pension fund withdrawal liquidity shock. In December, the second withdrawal of pension fund was approved and involve liquidity increase of around US$14 billion for support at the end of January and boosted consumption and the end of the year. Business confidence has returned to optimistic levels, especially in the industrial sector and employment has also continued to improve, led by formal jobs. This has led to some postponed projects to resume the process with March projects extended to first 2021 previously. As long as the vaccination process are done the recovery should continue throughout the rest of the year.

[Robert Moreno:]

Thank you, Sindy. We will now move on to explain our strong balance sheet and results, which showed good and strong trends in the quarter. Moving on to Slide 9, net income in 4Q 2020 totaled CLP183 billion and increased 74.5% compared to the 3Q 2020% and 57.2% compared to the fourth quarter 2019. It is important to point out that 4Q results include an additional voluntary provision of CLP 50 billion recognized in order to increase coverage ratios considering the uncertainty still surrounding the potential impacts and credit quality of the COVID price. The higher net interest income, a rebound in fees and improvement in asset quality and cost control drove our results in the quarter. The bank's return on average equity reached 20.4% in 4Q. With these strong results in the last quarter, net income for the year for 2020 totaled CLP 517 billion and decreased 6.3% with an ROE of 14.5% in the year. This places us as one of the best-performing banks in the region during last year. As we can see on slide 10, we also significantly outperformed our local peers in 2020. Not only do we regain our leading position in total earnings, but we also led our peers in ROE, net interest margin and efficiency. One of the most important drivers of our strong results in 2020 as can be visualized in slide 11 was net interest income. Despite asset growth being focused on lower-yielding and less risky assets during the year, we still managed to obtain a 12.5% increase and NII in 2020 with a flat NIM that closed the year at 4%. Specifically in the fourth quarter, the variation of the US of 1.3% also helped to boost margins to 4.3% in third quarter.

[Operator:]

Thank you. Our first question comes from Ernesto Gabilondo with Bank of America. Your question, please.

[Ernesto Gabilondo:]

Hi, good morning, Emiliano, Claudio and Robert. Thanks for your presentation, and for the opportunity. My first question is on fee income. Is it reasonable to expect fee income growth similar to your loan growth expectations, or do you think it could be slightly better? And then my second question is on your operating expenses. You mentioned that you are expecting OpEx growth in line with inflation, but is this considering your transformation plan, just want to know that. And my last question is your expectations for net income, when interpreting your guidance, is it reasonable to reach pre-COVID levels for 2021 in income? Thank you.

[Robert Moreno:]

Hello, Ernesto, and thank you for your question. Regarding fees, yes, I think that it's fair to expect to have fees growing at loan growth speed or slightly better. I mean, there are many initiatives with Life and also that’s why our business that should help us to sustain the fee growth. So I think it's -- yes, it's -- I would say from loan growth speed to the upside. In terms of OpEx, yes, that is still lean. I mean, considering the transformation, the transformation plan. I mean, we always try to grow at most at inflation speed or slightly lower. So, yes, that's considering all the factors. And in terms of the net income, well, that's I think 15% to 16% ROE guidance, gives you, like, the ballpark that could be around the pre-COVID levels that we had in 2019.

[Ernesto Gabilondo:]

Perfect. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Jason Mollin with Scotiabank. Your question, please.

[Jason Mollin:]

Hello. Hello, everyone. Can you hear me?

[Robert Moreno:]

Hello. Yes.

[Emiliano Muratore:]

Yes, yes.

[Jason Mollin:]

Great. My first question is related to the 245,000 new Life clients that you showed in 2020, as well as the data on the almost 272,000 current account openings through November and that is impressive, that is 3 times more than the rest of the banks in the system. Are these new Life clients included in the current account openings, and can you provide some color on these new clients in both either Life and/or current accounts? Are these clients that have accounts at other banks? Are they new to the system, what kind of products are they using deposits, loans, cards et cetera? And is there a time period you think it takes for these clients to mature and be profitable for the bank? Thanks.

[Robert Moreno:]

Okay. Hi, Jason sure. So in the total checking account figure that includes Life, okay? So Life is a fully digital onboarding process for checking account. So the digital is a prepaid, debit card is not there. So I think one of the advantages of Life is that the various products coming out in the Chilean system to capture kind of the middle income or the unbanked population. I think the big advantage of Life is that it's a full-blown checking account and has no restrictions. It's okay a lot of competing products from other banks, put restrictions on how much you can deposit, how much you can transfer. They have fees for transferring for transactionality. Santander Life's business model is a little bit different here. We don't have any type of minimum income you need to become a Life client. But once you're in, you have a full-blown checking account, but you do have a fee. We have a fee roughly of CLP 2000 a month. But no other type of transactionality fee and no restrictions on how much you can take out of your account per day or how much you can transfer or deposit. So I think Life in that sense is becoming the go-to product, especially for people who do a lot of transactions, okay? So it's been key in the opening of the current accounts. As we also show on slide -- in the presentation on the slide of Life, I think it's slide 26. Given that Life clients most of them enter the bank with a checking account. If you qualify in terms of credit behavior, Life also does an automatic credit assessment of the person. And if they qualify, they're able to access either a credit card or a line of credit. And Life also gives you merits for savings. So there is program savings through a simple money market fund. And Life also -- clients can access a mortgage product in the rest of the bank. So Banco Santander Life is fully integrated into the rest of the bank's product. So for that reason, Life clients in 2020 generated revenues between the fee and the net interest margin, the net interest income through loans and savings of CLP 43 billion. And last year, that figure was CLP 20 billion. So I think one of the good differentiating factors of Life compared to other products and other banks is that its business model is very low cost, but it also is a very high quality, but also it monetizes very quickly. The average client -- the client that's entering Life or the majority around 70% are new, okay? And I would say they're from all types. There are people are on bank, people who are switching over from other banks. But there's really a big group of people who before the COVID didn't really need a bank account or had -- or what I would call semi unbanked. They would have a simple product maybe in the state-owned bank. And this is basically the jump up a step to really having a full-blown account. A lot of people who are taking money from the pension funds or receiving funds from direct transfers from the government, started finding a surprise that their accounts in other banks and other products that didn't support the amount of money that was flowing in because of these caps. While Life has no caps of how much you can deposit. So I would say a big group of Life is semi bank clients who are moving up a standard in the sense that Santander Life is a much better product without restrictions, it's monetizing quickly. And I would say for example, the average Life client has an average amount in the checking account of around the CLP 300,000 to CLP 400,000 per month and that's rather high. If you look at the average in Superdigital and match and all these other kind of prepaid debit cards, the average volume is significantly less. So the time to profitability, I would say if they maintain these levels plus the fee is roughly a year or so.

[Jason Mollin:]

That's very helpful. Maybe as a second question, you mentioned potential uncertainty related to regulatory changes. What kind of potential changes does Santander-Chile see in the future? And how are you preparing for them?

[Emiliano Muratore:]

Hello, Jason. I mean in terms of regulation, basically the things we have some visibility on as well. The project that the government planned to regulate interchange fees that's uncovered. I mean, it was sent by the former Minister of Finance. So we are not sure how fast we'll now move with the new minister that will potentially affect our issuer business because at the end the interchange fee is what the issuer gets and that's -- but we -- say it -- we are following that. But we think that we have different levers to rebalance the business in the way we sell and we offer the products depending on the outcome of the regulation. Apart from that, well, now Basel III is to say -- it's not uncertain anymore because the regulation is known and it's starting in December and we are still fairly like comfortable with that. We don't see an impact on our strategy and our capital strategy going forward coming from there. And apart from that there were some indication in the Congress regarding insurances, but that like didn't move forward. And as Robert said, it's a matter of uncertainty of -- you never know what kind of initiatives can kind of appear in Congress or from the government. But so far those are the things we have relatively visibility on.

[Jason Mollin:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from Tito Labarta with Goldman Sachs. Your question please.

[Tito Labarta:]

Hi, good morning Emiliano and Robert. Thank you for the call. My question in terms of your guidance for cost of risk of 1.3 to 1.4, just looking this quarter, it seems a bit conservative. You mentioned you already booked a CLP 126 billion in additional provisions, you had CLP 50 billion in this quarter. If we back that out we estimate the cost of risk was well below 1% this quarter. So, just to understand what's driving that 1.3 to 1.4, it just seems relatively conservative given your asset quality has held up well. I mean I understand that is likely to deteriorate from here. But just want to get a sense on what's sort of behind that increase in the cost of risk from the current levels that we saw this quarter? Thank you.

[Emiliano Muratore:]

So, Tito, thank you for the question. Yes. I mean I think that's basically being like conservative on -- especially thinking about the future starting on second quarter or so. I mean as you said when you look at the last quarter of last year performance and what we have seen in January, so far, I mean it's not conservative. So, I mean the behavior of the portfolios are going much better than expected. The point is that it's still early in the year to assess that situation will be -- will stay as it is right now. I mean the vaccination process has just begun. And I would say that cost of risk guidance is being like prudent and factoring in and deterioration from where we are now starting maybe second quarter and going forward. We don't know yet if we are going to land above pre-COVID levels or in line or slightly below, but that guidance is basically being conservative on that assessment of the future.

[Tito Labarta:]

Okay, thanks Emiliano. That's helpful. And I guess maybe just a follow-up thinking also about the ROE the 15% to 16% guidance. I assume that's also because of the relatively high cost of risk. I guess when do you think you can get back to normalized levels of ROE? And I guess the normalized cost of risk? Is that probably second half of the year? Is that more in 2022? And what would you say is a normalized ROE or sustainable long-term level of ROE? Can you get back to 17% 18% or if you can give any rate on that would be helpful. Thank you.

[Robert Moreno:]

Yes. So, basically, the way we see it and we still -- everything is as Emiliano said and as you saw in the quarter is going in the right direction absolutely. And remember we did have two big withdrawals of the pension funds. So, what we need now is the vaccinations to come through quickly the economy to start before people -- there isn't much money for a third withdrawal, okay? So, you kind of have to factor that in. Said this if everything goes as things have gone in so now by, the second half the cost of risk should be decelerating, the ROE should be improving, okay? And we think that 2022 should be the year where we surpassed or how we go back to ROEs more in line with pre-COVID levels around 17% or so. So, I think everything is going in the right direction. We just have to see how these next six months go. Things are going well, but there is still some uncertainty. If everything goes as planned as Sindy laid out in the economic forecast, then 2022 should be a year going back to pre-COVID ROE levels.

[Tito Labarta:]

Okay. Thank you, Robert. That’s helpful.

[Operator:]

Thank you. Our next question comes from Yuri Fernandes with JPMorgan. Your question please.

[Yuri Fernandes:]

Hi gentlemen. Good morning and congratulations on the results. I had a question regarding your acquiring units like Getnet. Can you provide an update on -- I think you already released you left there? But can you provide like an update on how Getnet should evolve from now like any update on the global plan of Santander Spain to have like a global payments unit just for us to have an update on the acquiring. Thank you.

[Emiliano Muratore:]

Okay. Thank you, Yuri for your question. I mean, regarding acquiring as Robert commented, the good news is that we finally got the regulatory approval. So we are ready to go. I mean, the commercial launch of the product would be in the coming days. We are -- let's say still very optimistic about the future. I mean, we are targeting to reach a 15% market share in the -- maybe during 2022 in the next 12 to 24 months. I think we have there a good opportunity to complement the offering we do to our existing -- current existing clients in the SMEs and merchants, but also new clients. I mean, we definitely believe that the working capital solution, we will be able to offer to our clients including the acquiring service. It's very compelling and competitive to what the market has today. In terms of the global platform, as you know I mean, the group is developing this next global platform. And that's -- the intention for that is to be the global backbone of the different payment solution of the group. For us it's really positive to have that global initiative also supporting our local efforts. We began the acquiring business with Evertec as our processor, but definitely in the long run, the idea is to integrate and to be part of the global solution for the bank. As I said, it's a very competitive advantage for us that we will be a significant part of the working capital cycle for our clients with a local approach to a local product, but with supported and sustained by a global backbone developed by the group. So it's completely in line and complemented by the group's initiative.

[Yuri Fernandes:]

And in the case of Brazil, we are seeing a spin-off of the acquiring activity like it's still ongoing, but there are discussions in that, like there are studies on that regard like to spin-off and list a new company just like for payments. Is there anything like that in Chile?

[Emiliano Muratore:]

I mean it's not in our plan. I mean, basically today we have nothing to spin-off because the business has just started yet. So basically our focus now is to grow the business, to grow fast, to gain market share. And after that I mean, we can review and discuss what to do in terms of spin-off and ownership, but so far our main focus is to grow the business, be in the market and grab market share.

[Yuri Fernandes:]

Super clear. Thank you very much.

[Operator:]

Thank you. Our next question comes from Alonso Garcia with Credit Suisse. Your question, please.

[Alonso Garcia:]

Good morning, everyone. Thank you for taking my question. My question is regarding dividends. I mean last year you paid your dividends in two installments as opposed to one previously. So my question is for this year, should we expect a single dividend payment or two installments? And what's the expected timing for it? And my second question is on the NIM. I mean, what are the potential sources of risk both to the downside and to the upside to your stable NIM guidance? Thank you.

[Emiliano Muratore:]

Alonso, thank you for your questions. I mean, I take the first one. I leave Robert, the second. In terms of dividends, as you said, I mean last year we split the payment basically because by April when we usually pay uncertainty about COVID and all the pandemic was really high. So we decided to split it and basically to complete the 60% payout in November with the second payment. That's a flexibility that definitely we don't want to lose. I mean we have. I mean -- but so far, I wouldn't expect a split. I mean for this year what the information we have we expect to go back to normal in terms of one payment in April -- by the end of April. But that's subject to what's going on in the macro scenario in general in the bank balance sheet progresses. So if at that moment we -- mainly not we I mean it's basically a Board proposal and AGM decision. But if we think that the best option is also to go with a split payment, we could do it, but it's not what we are foreseeing at this moment.

[Robert Moreno:]

And regarding the NIMs the potential downside, I would say is the loan mix. So we are expecting loan growth to pick up. I think that's a key component which even though we saw really good asset quality and we continue to see it, as you see in the fourth quarter still loan growth really hasn't picked up at that great pace. But we are expecting eventually that to kick in especially in the retail side. For example, last year consumer lending fell 10%. So we think when people start to really feel more confident to go outside, to start spending again that's going to boost retail lending and that's going to be a potential supportive of NIM. But if the more of that gets behind track, that's what I would say the main potential downside to NIMs. On the upside, I would say, it's inflation, yes. We have a 2.6% US inflation forecast. I would say market, if you look at the Bloomberg estimates and so forth of different economists, some people are talking about US inflation are inflation above 3%. And there's mixed feelings about inflation on the one hand, there's a view that people are going to be reopening and spending a lot and there's going to be some more pressure on prices. On the other hand, we do still see a lot of output gaps in Chile. That's why, at this time, we're a little more conservative on our inflation outlook. But, if inflation does go to work the market is more expecting the level is about 3% for the year that would be a nice upside for our NIMs. That's why overall we have more or less NIM flat. Okay?

[Alonso Garcia:]

Understood. Thank you, Robert. Thank you, Emiliano.

[Operator:]

Thank you. Our next question comes from Jorg Friedemann with Citibank. Your question please.

[Jorg Friedemann:]

Thank you very much for the opportunity. Can you hear me?

[Emiliano Muratore:]

Yes.

[Robert Moren:]

Yes.

[Operator:]

Yes.

[Jorg Friedemann:]

Perfect. Thank you very much. So I have a couple of doubts with regards to the numbers for provisions, because it has been impressive for me that you posted approximately 90 billion pesos of provisions this quarter a bit less of that. And you highlighted that you had 50 billion pesos in additional provisions. When you look into the numbers, even before 2009 that were marked by the extraordinary provisions on the regulatory changes, you had levels between 75 million, 80 million per quarter. So, how do you attribute such an improvement for the level of provisions taking into consideration the pandemic and the NPL creation? And associated to that question, I just wonder if, I know the levels of 1.3% to 1.4% of cost of risk for 2021, already take into consideration the ongoing pressures and potential additional pressures from the pandemic. So you continue constituting, I know, higher provisions to face this challenge. Any special, because I could be wrong and you correct me if I am, but recoveries are not normalized during the pandemic. They came down 10% approximately year-over-year. So, they should be improving as well in 2021. So this makes your cost of risk guidance even more conservative in that regard, because you quote recoveries should be helping a bit more now. Thank you.

[Emiliano Muratore:]

Thank you, Jorg. And going to the cost of risk for last quarter, as you said, I mean basically more than half of the total charge was coming from voluntary provisions. And that -- leaving aside, there’s one-day provisions, the level is really, really low. The reason behind that, I think it's a combination because when -- as you know, we had been getting our portfolio much more geared to middle to high income individual. So I would say that the overall quality of the portfolio got better sequentially in the last few years. So the underlying quality is playing a role. But also the withdrawals from the pension funds in Chile have been a very critical driver for many of the figures we have seen in the economy as a whole and in the terms of asset quality for banks. That's why we kind of used voluntary provisions to cover a potential deterioration. I mean, as -- and now going to the guidance, I would say that we are factoring in a deterioration from where we are now, not because we are seeing it, but we want to be prudent. I mean the figures from that January are in line with what we saw last quarter. It's been so far the information is supportive and encouraging. But we don't think that the pandemic is over and the sky is so clear. So we are, at the same time, maybe having a prudent approach to getting worse from where we are now, and also, not factoring in any reversals from voluntary provisions. I mean I would say that, that is also like an important point to highlight that having the voluntary provisions already built at a certain moment of time the potential deterioration could be absorbed by reversing of those. That's something we are not factoring in the guidance. Basically it's guidance of covering or basically implying a potential deterioration and without using the voluntary provision as a way to counterbalance that. I don't know Rob, if you want to add.

[Robert Moren:]

I think that's what was really important and Emiliano said that the idea here is to keep high cost. Okay? So I think we're in a good position. Everything is going in the correct direction. We hopefully do not want to reverse the voluntary provisions. And as we said, as the year goes on, everyone is -- we're very optimistic obviously about this year, but we have to see how the first half goes, okay. There's -- it can end up being a really clear sunny skies or again the things get cloudy again. We're a -- as we said in the call we're cautiously optimistic, but we can rule out at something, for example now in Chile there are a lot more lockdowns and stuff. It's not even near what it was before, but that risk is always still there. And until we have a lot more certainty about the end of that risk, we have to be prudent.

[Emiliano Muratore:]

Yeah. It's also I think worth mentioning that when you look at the profile during the year, I would say first quarter and even the second quarter in terms of what we are already seeing enough quality and even in inflation in the NIMs, I mean, the first part looks relatively positive and with a higher level of certainty than thinking about the second half. I mean, so that is the thing to consider. I mean like the first part is relatively visible and it looks encouraging, but then we don't know how the situation would evolve with all the vaccinations and the rest of the year.

[Jorg Friedemann:]

That's perfect. Very clear. Thank you very much.

[Operator:]

Thank you. And our last question comes from the line of Neha Agarwala with HSBC. Your question please.

[Neha Agarwala:]

Congratulation on the results Emiliano and Robert. And thank you for taking my question. Very quickly, could you please tell us what are the macro expectations that you're working with? And your outlook on the political situation, the elections and the change in the constitution that is ongoing? Secondly, given the strong growth in the Life product and Superdigital. Claudio, is it fair to expect double-digit fee income growth in the coming years, not just in 2021, but it's -- for the medium term, we could see strong fee income growth? And lastly, any change in the competitive landscape? Thank you so much.

[Claudio Soto:]

Okay. Regarding macro expectations, as we -- second let me -- so this year, we're obviously expecting a rebound in GDP. I think this year, we're expecting GDP to grow 4.5%. Obviously, I think the external sector continues to be beneficial for Chile in terms of export growth and so forth. Also in Chile, we also should expect a rebound in investment and I think it was on slide 6 one of the graphs we show on slide 6, if you see it later on, we have something called the capital goods inventory which is basically the large investment projects that are planned for the future. And what we're seeing this year is a big pickups in some of the projects that were kind of frozen last year, okay? I would say the only weakness here is the reopening. I think investment will slowly pickup. The external scenario doing well. But we have to see how quick the economy is able to reopen. And that is like kind of the big uncertainty. But as we said, Chile has a really well-organized vaccination program that if all goes well that should really help to easily reach our macro expectations. And the other thing the political situation, it's not a mystery that, this is an intense political year in Chile. Remember, in April we have elections to the Constitutional Convention. We also have in April elections for mayors and governors. And then in November, we have elections for President and for Congress. So, we're going to spend a lot of time at the polls. And I would say, here the situation is rather calm. I think Chile has strong institutions. But obviously you always have to keep a look out on what happens on the political front. Even I would say, compared to where we were at the end of 2019, the situation here has been much more institutionalized. And things are running their course in a democratic way. So, -- but obviously that's something you have to keep an eye on. And regarding Life, and so I think an important thing here is that, the outlook for fees, we think is quite good. Remember last year, the first quarter of last year it started out very strong, okay? We had like CLP 74 billion in fees in the first quarter. In the fourth quarter we had CLP 69 billion, which was much better than the second and third. So, if we continue this speeding up of fees, I think fee should be close to the low-teens this year of growth, maybe between 8% and 10%. And the idea obviously is with, the new business, the new initiatives, and new clients, is to keep a, fee growth above loan growth for the next three years.

[Neha Agarwala:]

Perfect. And competition, any change there?

[Claudio Soto:]

No. It remains very competitive. A lot of banks and non-banks are launching their digital debit cards, similar to Superdigital and somewhat similar to Life. I still think, Life is superior to all those products. But definitely, we moved ahead, I think quicker than most banks in Chile. But obviously, everyone is starting to catch up on the digital front. So that's why, we have to continue innovating, because a lot of competing products are coming out now.

[Emiliano Muratore:]

And also, I think it's important in the competitive environment to consider the, Basel III implementation that is finally going to take place. Although, there is a phasing period that, we see that as a point that could affect or modify, growth strategy from some of the players who need to close the gap to the minimums that Basel III requires. In our case, it's a kind of a non-issue. I mean we don't see any, any impact on our strategy or business growth prospects. But I think that for some other players might be a thing that could -- that would make them reassess some of their segments or pricing strategy that is going to be positive for us in the relative term.

[Neha Agarwala:]

Great, thank you so much for your answers.

[Operator:]

Thank you. And this ends our Q&A for today. I would like to turn the call back to, Robert Moreno for his final remarks.

[Robert Moreno:]

Okay. Thank you very much for participating. I hope to speak to you soon again, during the quarter. Thanks.

[Operator:]

Thank you, ladies and gentlemen, for your participation in today's program. You may now disconnect.