Banco Santander-Chile
Q3 2017 Earnings Call Transcript

Published: 28 Oct 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q3 2017 Banco Santander-Chile Earnings Conference Call. At this time all participants are in a listen-only mode. Later we'll conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded. I'd now like to introduce your host for today's conference, Emiliano Muratore, CFO. You may begin.

[Emiliano Muratore:]

Good afternoon, everyone. Welcome to Banco Santander-Chile's Third Quarter 2017 Results Webcast and Conference Call. This is Emiliano Muratore, CFO; and I am joined today by Robert Moreno, Manager of the Investor Relations; and our Chief Economist, Claudio Soto. Thank you for attending today's conference call. We are quite excited with the performance of the bank so far, this year. I will pass it on now to Claudio for a brief overview on the Chilean economy during the quarter and our expectations for the rest of the year.

[Claudio Soto:]

Good afternoon, everyone. The economic situation in Chile has shown strong sign of improvement. The external scenario with a rebound in corporate price and the recovery in global trade and a better outlook for our main trade partners will push up our export sector as well as investment in corporate-related activities. At the same time, confidence has to recover substantially and there's higher chances of the new government to be elected in November will have a more pro-market approach to coming quarters. So, demand-directing indicators showed more demand in the last month, and the labor market has improved with more dynamic job creation. Real wages are growing favored by slopped consumer prices. We expect a gradual increase in domestic demand in the coming years. Investments [indiscernible] slowdown is continuing in service sector and better [indiscernible] will lift investment. At the same time, improvement in the labor market will support us speed up in consumption. Higher frame of trade and a better outlook for our trade partner will lead exports. Volume next year, indeed, should grow by a range between 2.5% and 3%, up from the 1.5% expected for this year and in 2019, loan growth will be around 3%. Along with this, we will see a continued decline in the deposits rate to levels that are green [indiscernible] each level, which range between 6% and 6.5%. Inflation has remained low during this year due to recurrent depreciation and the sluggish economy. CPI was particularly low during the third quarter because of some one-offs and because of the fall in food prices related to weather conditions. Going forward, the output gap -- as the output gap closes, inflation should cover increase towards the 3% target of the Central Bank. In the short run, it is likely that the Central Bank loans, it's monetary deposit rate by 25 or 50 basis points to 1Q that is convergence of inflation towards target, of course, between the two years' horizon. During the second half of next year, monetary authority will start to withdraw its monetary inputs. Now I'll pass on to Robert.

[Robert Moreno:]

Okay. Thank you, Claudio. Now we'll get into further details of our results and implementation of our strategy 2017 continues to be a good year for us. Net income attributable to shareholders as of September 2017 totaled CLP430 billion, increasing 18.3%. Our return on average equity in the same period reached 19.7%. These positive results were driven by client activity reflected in a 21.2% year-on-year growth of net contribution from business segments, which was led by a 40% increase in the net contribution from our Retail Banking segment. This has more than offset the negative effects of a lower inflation this year and the higher corporate tax rate. These results were also quite positive when comparing evolution of our results to our main competitor. We now have a similar level of absolute earnings in a much better overall performance. We're also generating a similar ROE. In the third quarter, net income attributable to shareholders totaled CLP137 million, increasing 12.6% year-over-year. The bank's return on equity in the quarter reached 18.8%, up from 17.7% in the same quarter of last year. This rise in net income and return on equity compared to 3 quarter '16 is notable considering the strong difference in inflation rates in both quarters. This was due to a rise in client margins, a fall in the cost of credit, greater fees and strict cost control. As we'll explain in the rest of this presentation, our strategy has been a key factor behind this. In terms of the strategy, we made important advances this quarter in all of our four strategic objectives. As seen in the slide, our strategy has circled around

[Operator:]

[Operator Instructions] And our first question comes from the line of Thiago Batista from Itaú BBA. Your line is now open.

[Thiago Batista:]

I have just one question regarding the provisions. When do you sort of recognize provisions? The mortgage line -- the provisions for mortgage loans increased materially in this 3Q. Are these kind of one-off? Or do you believe that this level can stay in the medium-term?

[Robert Moreno:]

Yes, in the quarter, as you see the total provision expense line was as expected. But there was -- we do what we call here a recalibration on the provisioning models for loans analyzed like in a group basis, okay? So basically, periodically the bank goes to its models and recalibrates them according to the -- makes some minor adjustments to match more reality with expectations, okay? Remember, we have expected loss models. So, what we did in this quarter, first of all, we extended the period of time or years or periods we take when we estimate or when we calculate the expected loss. For example, we extended the period, which also included a longer period of recession, for example, okay? So, after we finished recalibrating these models, it had three impacts basically, okay? In consumer loans, it had signified a reduction in coverage, okay? Basically, expected loss and it has turned out to be below what we -- the model initially forecasted that's because as you guys can see the change in the loan mix has been very successful and profound, okay? So, in consumer loans, there was a reversal, because of the recalibration of around CLP 19 billion, yes. And then, that same recalibration for commercial loans analyzed on a group basis and mortgages had the opposite effect, and leans to increase the expected loss and to increase the amount of coverage. So, the impact in commercial mortgage loans was roughly around -- also around CLP 18 billion to CLP 19 billion. So, net-net, the net effect was marginal, that's why total coverage really didn't change. And then you had a slightly higher than normal provision in mortgages and commercial and an average lower one in consumer.

[Thiago Batista:]

Can I make just as more follow-up? In the slide that you showed the soft guidance, you mentioned that loan growth will be 6% to 8%. This is nominal terms or real terms?

[Robert Moreno:]

Nominal terms.

[Operator:]

And our next question comes from the line of Nicolas Riva from Citi. Your line is now open.

[Nicolas Riva:]

Robert, my first one is going to be on the earnings drivers for next year because this year, clearly you have been delivering very good net income growth, in the high teens year-to-date despite limited loan growth. So, my question is, as you look into next year for 2018, what do you think should be really the main drivers of earnings growth? And particularly, if there is room to continue lowering credit costs, which are right now riding at about 1.1% of average loans. And then within loan growth, this guidance of 6% to 8%, which segments do you think should be driving the pickup in loan growth? And then I have a second question.

[Emiliano Muratore:]

In terms of drivers, definitely we don't see cost of risk as one of the drivers because we think that we have already reached our kind of stable level for the future. But we don't think that the combination of top line growing above what we have seen so far, this year, basically margin in line with loans growing from 6% to 8%. I mean, fees may be slightly higher than that, but still in the single-digit area, maybe very near from trading transactions, might be a little bit weaker than margin and fees. So, with that top line and top being the low inflation around 2.5 for next year, I mean, that combination of revenues growing double compared with the rate of growth of cost will be the main driver. I mean, in terms of those, we are expecting a relatively broad rebound into different segments and areas considering that the economy will be growing around 2.5% to 3%. So, we expect a general revamp in consumer, in general, in credit demand, probably due to corporate, definitely. Big corporates might be a little bit more volatile. But also in a base case scenario and considering where for the corporate prize is now, we can expect a new flow of investments and that's creating the greater demand from corporation's demand for credit. So, it's quite general, the growth we're expecting in the loans and the combination between top line growing 6% to 8% and cost growing below inflation, that would be like the main driver for next year with cost of credit being relatively stable to where we are now.

[Nicolas Riva:]

And then my second question on capital, which you continue to call a quite strong capital position at 10.7% Tier 1. What's your view in terms of deploying this capital? And, particularly, if you are going to wait until we have more clarity in terms of Basel III implementation in Chile before you decide to increase your payout or making that onetime during payment?

[Emiliano Muratore:]

As Robert mentioned, we do see some room to increase payout now. I mean, basically, our strategy in terms of capital is still to keep up with rate, our core equity Tier 1 ratio stable before the implementation of Basel III. As you might know, we still see the Basel III implementation as something neutral to positive for us. So, we don't want to have our ratio growing. And that's why in this environment of high profitability and low asset growth, there is some room to increase payout. That's why the 70% to 75% ratio is something that we think it's doable, I mean, although the final decision will be by the shareholder meeting. But definitely, if we were to be absolutely like strict to keep the ratio flat, we will -- we have even more room to increase payout that. With that being above 75%, it might be like, with us considering that we still have the risk of the Basel III, which we expect to be positive, not positive, but we might be wrong. So, in order to move further increasing the payout, definitely, we will have to wait for the final regulation.

[Nicolas Riva:]

So, Emiliano -- so this means that next year, in April following the shareholders meeting, then you're going to pay between 70% and 75% of this year's net income, but that's the idea?

[Emiliano Muratore:]

Yes, yes. [Indiscernible] years.

[Nicolas Riva:]

Just one last one. In the other operating income line, I saw that you booked this CLP 21 million gain on the sale of the repossessed assets. Was that offset by higher minority interest? Or it was neutral to the bottom line?

[Emiliano Muratore:]

I mean, more than offset is that gain was created -- was generated in a company that it's controlled by management, if you want that, not by owner. So, it was a gain created in a subsidiary that we don't own. And that's why, basically, all the money went to minority interest because we are not the owner. We are...

[Nicolas Riva:]

So, in your bottom -- okay, so in the bottom line, there was zero impact.

[Robert Moreno:]

Yes. Net income attributable to shareholders and shareholders' equity, absolutely no impact, okay? Zero.

[Operator:]

And our next question comes from the line of Alonso Garcia from Credit Suisse.

[Alonso Garcia:]

I would just like to touch base on the competitive landscape in Chile. If you could comment how you're feeling the environment by segment? And maybe, in particular, in the segment of mid- to high-income individuals, which you are focusing? And maybe also comment on how would you expect a potential consolidation in the Chilean banking system to impact or to affect the current competitive landscape?

[Emiliano Muratore:]

Definitely. As you might know, we have this potential transaction between Scotiabank and BBVA. I mean, Scotiabank is to buy BBVA business in Chile. So that together with the previous transaction between Itau CorpBanca, that's what it actually about. It looked like it's going to finally happen. So, we will end up with a more concentrated, consolidated system. I mean, with fixed banks concentrated -- concentrating around 90% of average assets, liabilities and net income. I mean, so we think that's relatively positive, especially, in the short run. I mean, as we can see in the case of Itau and CorpBanca and, in general, with mergers of those sizes, it's -- the beginning in the first two, three years, I mean, it's kind of problem for the different companies to get the merger done and implemented. So, from the commercial point of view and that is positive for the rest. And then after that, I think, that it's also kind of positive because what we saw from some of these players in the past was a strong pressure on prices, trying to get organic growth. So now, I can expect to have that pressure relapse to reduce because they will be already big enough and then the BBVA plus the Scotiabank will be around 14%to 15% of market share. So that's well on critical mark. So that's -- we don't see a big risk in competition from that transaction. And, in general, in the medium- to highest-income individuals segment, competition is high. I mean, you know that most of the banks are focusing on the same segments, that you also know that we have been able to grow there. I mean, to improve the asset quality mix. And so, we've set the competition to be what it is, which is strong, but we are confident that we can keep delivering in those segments, but in gaining market share, it may be with the big banks gaining market share against the more medium or smaller or niche banks and so on. And where -- what Robert mentioned in his speech is that we do see some room to get into lower segments, I mean, not as low as the Banefe business was, but medium- to low segments where we -- in that front, we don't see that high competition or such high-pressure competitors. So, at the moment, while we don't see in macro condition supportive enough to get into those lower segments to where we are now, we don't have an opportunity to gain some market and gain some business with not so high competition from the rest.

[Robert Moreno:]

Also with a very much more digital platform, for example, this Onboarding has a lot to do with that. I mean, it permits to nonclients from a CLP 800 disposable income and upwards to become clients of the bank just by with their finger on the phone. So, all of this is being slowly developed and the good thing is that lot of the technology we have we've been really advancing that and will slowly be introducing things when we feel the time is right.

[Operator:]

And our next question comes from the line of Sebastián Gallego from CreditCorp Capital.

[Sebastián Gallego:]

I have two questions. The first one on asset quality. We're seeing some stable indicators or even improving compared to last year. But when we see impaired loans, we are having significant increase year-on-year or at least they're increasing. Could you comment on those trends? And what could happen over the next quarters in terms of impaired loans and the effect on provisions, even though you already mentioned the guidance of cost of credit? How can that effect, basically the cost of credit? And the second question regarding ROE. Because we're seeing, obviously, very good results on ROE this year and probably next year. But how can we think about sustainable ROE for this bank, thinking that the economy -- the Chilean economy could be higher over the medium term?

[Robert Moreno:]

Okay. So, going to the first question. The NPL ratio and, in general, asset quality, I think, has been evolving quite well. Remember that in the first half of this year, the economy, I think, performed quite poorly. And that did have an impact -- beginning to have some impact on our asset quality like in the initial stages. And that to some degree reflects an impaired loan, okay? Now, remember when a client enters impaired loan status, that has a different provisioning model and we do some refinancing, but one of the big changes we did in the bank in the last 3 years has been restricting that. And we -- consumer mortgage cannot be refinanced more than one time a year. So, all that had been implemented so that we have a correct assessment of provision levels and asset quality, okay? Said that, given that the economy started out quite slow and we have some pickup in the impaired and the margins. But at the same time, we see the economy starting to -- really start to see like a much better sign. And next year what we're basically showing is kind of an equilibrium between both of those [indiscernible] forces, okay? And then that's why we have the cost of credit being relatively stable. That we think there should no longer be any major improvements in the cost of credit. We don't see a deterioration. But we should see provisions more or less staying in line with loan growth, okay? And then if the economy really does gather momentum, okay, because until now, we have very good signs, but the very initial signs. So maybe in the second half of 2019 -- sorry, in the beginning of 2019, we could see another improvement in the cost of credit, okay? And in terms of the ROE, our guidance is 19%, 19.5%. And then to move from there, well, it really depends on two factors, which we're still not having enough assurance

[Emiliano Muratore:]

It could be another driver of change. I mean, we expect to be, as I said, those are the positive, but that's still a question mark in our forecast.

[Operator:]

[Operator Instructions] And our next question comes from the line of Neha Agarwala from HSBC.

[Neha Agarwala:]

I wanted to understand your branch optimization strategy. How much more contraction in your network in terms of branches, ATMs and employees could we see further in the years ahead? And how much longer do you think you can benefit in terms of lowering your cost base for next year as well or in 2019?

[Robert Moreno:]

Sorry, if you repeat the second part of your question? Sorry.

[Neha Agarwala:]

So how long do you think your network optimization can benefit you in terms of lower operating expenses growth? Only in 2018? Or do you see some benefit in '19 as well?

[Robert Moreno:]

So, the branch optimization, we're all finished with closing Banefe. So Banefe, I think, has like six, seven branches left. Some of the branches are still there, but they're going to be transformed too, okay? So, part of it is closing, part of it is transformation. We're opening WorkCafé. As I remember, the WorkCafé as we mentioned, it's also branch transformation and we usually take two branches that are near each other and make it a WorkCafé or make a WorkCafé and close another one. So, I would say, and going forward as the economy improves, obviously, there might be new areas of growth. So, branches, probably, we'll reach around 400, and there may be some variations up and down going forward, but I think 400 is a good number to see where we'll stabilize, okay? And then, obviously, because of these changes not only the branches, ATM, headcount and especially everything that is digitalization, okay? The fact that a person is becoming a client today just using the fingerprint on the phone, that's a big boost to productivity and efficiency. So, we see next year cost growing slightly below inflation. And probably and once again it depends on how much the economy is growing in 2019. It's hard to say how much cost would grow, but there should still be marginally an improvement in the efficiency ratio.

[Operator:]

Thank you. And at this time, I'm showing no further questions over the phone lines. I would like to turn the call back over to Emiliano Muratore for closing remarks.

[Emiliano Muratore:]

Thank you all very much for taking the time to participate in today's call. We look forward to speaking with you again soon. Have a good day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.