Good day ladies and gentlemen and welcome to the Second Quarter 2013 Banco Santander-Chile Earnings Conference Call. My name is Dominique and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Raimundo Monge, Director of Strategic Planning. Please proceed, sir.

Thank you very much and good morning ladies gentlemen, once again and welcome to Banco Santander-Chile second quarter 2013 results conference call. My name is Raimundo Monge, Director of Strategic Planning, and I'm joined today by Robert Moreno, Manager of Investor Relations. Thank you for attending today's conference call in which we will discuss our performance in the second quarter of 2013. Following the webcast presentation, we will be happy to answer your questions. Before we get into more detail regarding our results, we will briefly give you our latest update on the outlook for the Chilean economy in 2013. We continue to be optimistic on the performance of the economy but we have objected downward our growth expectations for 2013 and 2014, due to lower growth of investment and consumption. As a consequence, we now expect GDP growth to exceed 4.5% this year, and to be close to 4.2% in 2014. Our outlook for rate has also been modified. We are now expecting the Central Bank to begin cutting rates in the second half and throughout 2014. Inflation is expected to rise slightly, but remain under control. News on deposit growth has also been following the recent economic trends with a slight deterioration. In any case, we are still expecting for this year 2013, loan and deposit growth of around 10%. As of May 2013, the result of Chilean banking industry fell 7% due to higher cost and provision. The second half of the year, despite the slight downward correction in economic growth, we're expecting the banking system process to rebound, as the higher inflation increases asset yields and lower rate reduced funding costs. We will now review our strategy and performance in the second quarter of this year. Our strategy has been built taking into consideration both the…

(Operator Instructions) And your first question comes from the line of Tiego Batista of E2BBA.

Thanks for the opportunity. I have two questions. The first one is regarding the subser fee income. The performance of this line was weak in the first half of the year, mainly because of regulation, but you comment in the press release that this line is likely to rebound in the second half and especially into 2014. Could you elaborate a little more about this positive view on fees? This is my first question. And the second question is regarding asset quality, especially on mortgage. Despite the steady performance of the consumer segment asset quality, you comment that the provision on mortgages could expand in the future. Could we have additional -- some additional color on this provision expectation for mortgage?

Okay. First of all regarding fee income we have comment in other previous calls we did expect this year to be a driver on that in partly because of a new regulation that are been applied and especially in terms of the insurance are expecting to grow on this line of income. At the same time we have also been reviewing all the different fees that we are connected in the line of the new regulation and in the line of the new awareness of the client having and at the Bank we don't want to be quarreling with our clients about fees going forward. So, well we're retransforming our fee structure is away from kind of flat fees and moving into usage type of fees, which are people don't complaint about paying usage type of fees and now they do complaint many times because of the kind of flat fees. So we have been streamlining our fee structure simplifying it, making it more clear, and therefore its part of the natural process of adjusting to this new consumer behavior and the new regulation. And thirdly, last year because of these changes in the macro environment, we've reduced our client base especially in the low end for the more massive market, which tend to be proportionately paying more fees than the upper segment there. That cost of capital that year, we were increasing our, in terms of checking account client by roughly 1000 client per month. Today in the last three month we've been increasing our checking account clients by 3500 clients. So that level of activity make us believe that fees will bounce probably by the end of this year and this within the 2014. So we tend to be optimistic however this year it will be, at on…

Your next question comes from the line of Carlos Macedo of Goldman Sachs.

I have a couple of questions. The first one is, as you mentioned, Raimundo, during the call, if you normalize the net interest income for inflation, say, go back to second quarter last year levels, your ROE would be close to 20% -- 19%, 20%. So that would be a normalized level now. Of course, with winding down the investments that you are making for the transformation project and all that, I think it's reasonable to believe that ROE could go even higher. What is the view that you have for ROE in the medium term? Should we expect higher than what the normalized ROE of 19% you have now? And I think the second question goes in line with that. You mentioned in the release that there is still discussion regarding how the interest rate cap in Chile will be determined. If you could give us an update in that and the Bank's view on it and if you have any sensitivity on what kind of impact that could have on your net interest income over the next -- well, whatever it is implemented. Thank you.

Okay. Well regarding our medium-term view about ROE as we have mentioned in the previous calls we think that inflation is unfortunately after the Chilean Banks moved to IFRS. It was that the volatility of our bottom line is built into the volatility of inter quarter inflation levels there. If you take inflation on a year-over-year basis or in a moving average of say six, seven quarters the effect of inflation tends to come from that because sometime you will have higher than average inflation lower than average inflation et cetera. So at the end we think that the source of value that the bank is able to create is linked to client activity. And that's why the fact that deposit and loans grew at 3.5% or close to 14% on an annualized basis this quarter. The fact that we are growing much faster than that in those segment and we have targeted on a risk that I believe a much higher risk adjusted or after provision margin. Because again if you take a look at the area where we have been lagging the most compared to our peers is mortgages. Mortgages today yield absurdly low level of profitability especially in an environment where capital totally will be price and capital term will be constraint for the future. So allocating capital in low yielding mortgages for 20 years we think that these doesn't fulfill our performance criteria and that's why we are lagging mostly on mortgages and in last operations which where, as we don't get enough revenues on the loan lending side we tend not to allocate capital as well. And that's why that the good news is that in those targets, those segments are delivering good risk adjusted returns that are growing faster than the market. And in…

And the election will probably have an impact on that, correct?

That’s right.

Just going back to the first question, then. If we don't look at ROA -- ROE specifically, but look at ROA, and ROA has been fluctuating with inflation. ROA for this quarter specifically was 1.4%, which isn't particularly bad. It's better than the first quarter, but it is weaker than it was last year. Do you think that ROA could migrate back to the 2% level where you've seen, and then the leverage can take care of itself? But is that something that you see happening?

Going back to 2% in the short-term is very unlikely, but I'm sure that we will be started to increasing given that we use to have a -- we still a very liquid balance sheet. We have been on purpose for paying high levels of liquidity especially short-term Central Bank notes and short-term mainly Central Bank notes and that again we’ll eventually start. We have already been reducing that excess liquidity, but still it’s finalizing the ROE. So, the point is that in -- we think that in -- we can leverage a little bit more the balance sheet and in addition, improve the underlying profitability with clients, which is at the end the value was created.

Yeah.

But 2% probably not this year by far.

Your next question comes from the line of Tito Labarta of Deutsche Bank.

Raimundo, thank you for the call. I've a couple of follow-up questions. Just first in terms of your net interest margin, clearly you should benefit in the second half of the year from higher inflation. You also mentioned you expect rates to begin to get cut in the second half, which should also benefit your margin. But how much do you think the rates will fall and what type of benefit do you think that would be to, say, your margin? And then, the second question, just going back to asset quality and provisions, given you saw an improvement in the quarter, do you think this improvement will continue for the rest of the year? And how much mark in NPLs come down, and how would that impact that provisioning levels? As you mentioned, provisioning about 1.8%, on average, like a historical average? Is that where we should consider going forward or could that come down further as asset quality improves? Thank you.

Okay. Well, in terms of net interest margin this quarter was very low because of a negative inflation something that's very unlikely to happen in many economies, especially an economy that is low in at 4%, 4.5% close to 6% as we see it for this year. So that's why we think that in the second half this will have a low non inflation we’ve never had the June inflation, which is relevant for July results, has already been published it was 1.6% and very likely that July inflation also is high so 1% would be short of where - what are the end results of the relevant inflation for the quarter. So, but again, even we've much higher inflation and we've seen in the period Bank has been able to have EBITDA's margin of around 5% on a moving average of 6, 7 points. We think that that is our basic (inaudible). When inflation is lower and we have been growing in the more profitable segment. We don't think that the levels to be higher simply because we -- after all the creative models that we did we are targeting the middle to high end of the consumer market. The domestic market, the more low end of the consumer market, we are seeing much less activity than before and that's why we don't expect margins to go beyond that 5% again that’s an effort. And as related with your second question, how we proceed asset quality indicators. We think that again unless we see a brisk cooling of the economy, which now is that you don’t have any indicator I think it’s year-to-date unemployment figures were released and we still see a very robust job market and employment is 6.2 and to a large extent because the growth of…

Just following up on the net interest margin. What is the sensitivity to interest rates because you did mention you expect rates to come down? So how much do you think rates would come down and how would that impact your margin?

Hi, Tito this is Robert. As we mentioned in the release, we can burn a lot in core deposits, away which with the (inaudible) of companies. And it also has another particularity that there tend to be more sensitive to the short-term interest rate. So, they’re much more stable or cheaper, but they’ve also increased the sensitivity to rates. So, it’s taking us four month period like a 100 basis point decrease in the short-term rates benefits our margins at around $50 million to $60 million, okay. Unlike inflation which is directly to the bottom-line I think this is over a one-year period, okay. So, I think that the growth of core deposits and their falling rates it likes to fall that is actually good in the next six months for margins. We’ve actually with the courage of increasing core deposits and we’ve also increased to a certain extent the sensitivity to the short-term rates on the funding side.

So then, just looking at the second half of the year with inflation picking up, rates coming down, and I know Raimundo, you mentioned about a 5% net interest margin. But could that maybe be even higher just in the second half from the short-term movements in rates, or is it like the 5%, more or less, where you expect that to be, given all of these variables?

It should be more than that maybe a little higher the timing on the inflation but when you discount a provision that cost of credit also coming down in the evolution of margins net of our provisions to be higher. In the fourth quarter of last year we had inflations of 1%, we actually reached the net interest margin of 5.5. So, that’s definitely in the range I mean we could have net interest margins of 5.5 example in the third quarter, okay. Once again that’s -- that I think what Raimundo was trying to say that if you take the average for the year it’s going to closer to 5% and not the 4.7% that we’re seeing today. So, it’s 4.7% in the first half, between 5.2%, 5.5% in the second half, the average will be 5%.

Your next question comes from the line of Jose Barriera of Bank of America. Jose Barriera – Bank of America: Definitely seeing some positive signs. I just want to go back to some of your comments on the macro and your expectations for loan growth this year. I'm just having a hard time reconciling the fact that we have a decelerating economy, or at least slightly decelerating, even based on how you guys have brought down your expectations for growth this year. But you are looking at loan growth to accelerate from roughly 7.5% to 10%. So just sort of trying to wrap my hands around that, and if you can just give us some color, that would help us understand how that's happening. The second question is with regards to trading treasury results. I noticed that they were very high in the quarter. You noted that there was some profits on the repurchase of bonds that were trading at a discount. If you could tell us exactly how much was coming from that, because I expect that not to be a recurring level of trading, or at least of that particular portion. If you could comment on that as well, that would be great. Thank you.

Okay. Look, going back to the macro outlook, when we adjust our expectations for the remaining part of this year and next, we were basically thinking in terms of the investment. Remember that Chile went through a big earthquake in the year 2010, yeah, which has resulted in extremely high investment levels in 2011 and 2012. And of course, many of these projects are finishing, yeah, so that has an impact in investment. In the case of internal demand consumption basically, which is not related with the financial activity, the news that we’re seeing in the job market make us believe that although consensus is moving down the economy is still being very robust and our concerns are more in terms of the expectations going forward than the realities that we’re seeing today. And expectation pictures change very rapidly. As you see in the case of the US that things have changed very quickly from a negative view to a very positive view. In the case of the Chilean economy, we’ve seen a drop in the consumer confidence surveys and that’s why many economists are reducing consumption going forward, but it’s something that up to now up it’s not fully difficult. So, it’s an open issue (inaudible) consolidated purposes we’re adjusting our macro functions. We don’t see a clear change in internal consumption. And the third component, which is the external outlook, we had good news on that. As you know, Asian-Pac probably weaker than it was expected. The U.S. is stronger and Europe is kind of flattish, which is good news, yeah, that’s why we think that we were expecting for midyear something close to 5 to 5.1 and it dropped to 4.7 or so, it’s not a big change. It’s simply a reflection of these kind of minuses and plusses, right, but we don’t have any clear --

Crystal ball?

Crystal ball to put it. In terms of trading, there are two components. Roughly two-thirds or on average it’s like 75%, 80% of our trading gains are client related. Remember that since 2012 Santander Chile has not cut proprietary trading desk. We had a leading edge of our proprietary trading activities. So, the bulk of the trading gains are with clients, market may and can say that or the concession we have for Central Bank loans for the sake of liquidity. So, this year, we saw an increasing in that part mostly due to the drop of long-term rates there on the one hand and, secondly, we don't buy bonds but that is not very meaningful. The bulk was mark-to-market of bonds that we keep for liquidity sake, and a very stable or slightly increasing level of client activity, which we (inaudible) reported in two-thirds but historically close to 80%. That’s why in our case trading gains it shouldn’t be seen as kind of volatile stock trading related revenues. In our case, are client driven and the element of moves the client is have to deal with the volatility of the market staying gray, inflation and things that are precisely the list but clients are looking to close with that. So, that’s why for us that is our commercial line is linked to clients and that’s why it's similar to (inaudible) market, it tends to be very stable. Jose Barriera – Bank of America:

Yeah, that’s probably to a large extent due to lower long-term rates and mark-to-market of these bonds to keep our liquidity sales.

Going forward the line usually fluctuates between $20 billion to $25 billion.

The total.

For the total. Jose Barriera – Bank of America: I see.

For the client and the non-client. Jose Barriera – Bank of America: And do you know -- in this line, do you know the amount of gains that were related to your repurchase of bonds that were --

That was probably around, yeah; in mark-to-market was a $10 million, $5 billion in (inaudible)

And in the repurchase must have been like $1 million or $2 million. Jose Barriera – Bank of America: And then just finally very quickly on your effective tax rate, obviously rates, the tax rate should go up towards the end of the year. What should we expect on a quarterly basis and for the year for 2013 for the effective tax rate?

Yeah, in this call we try to explain how, why this difference between this statutory rate and the effective rate, and again has a lot to do with inflation, yeah. So, this first half we had an effective rate of 17% more or less which is higher because cost inflation was low which is a little bit choppy. So that’s why in the second half although for surgery purposes we state that effective rate close to 17% and 18% level should be expected probably to inflation is effectively higher the effective rate could be lower than 17%, which is a little bit costly but if it is follow the math, of the chart we put in slides, sorry in page 16 of the press release you will understand why the higher inflation the lower the effective rate but (inaudible) is guaranteed. That’s for practical purpose, our budget is going to be 17%, 18% this year.

(Operator Instructions) And your next question comes from the line of Christopher DiSalvatore of Credicorp Capital.

Hi guys, thank you for the question. I just wanted to follow-up with loan growth. It sounds to me that in this quarter it looks like the trend have changed a bit and you guys have become a little bit more, I guess you could say aggressive particularly on the segments that are returning a bit more margin. My question looking forward into 2014 is, if indeed the appetite for the bank has expanded and you see potentially more aggressively in the middle consumer and SME going forward which and how that can relate to potentially even higher potential risk that we’ve seen in the commercial segment, which I’m assuming is coming from the focus more on the SMEs? And generally that, I mean compensating the uncertainty which seems like a lot of market participants seem to have today. I mean, if you as a bank the appetite you feel that it can be sustained and looking into 2014 potentially a bit more aggressive on those two fronts.

Well, first of all, as a reminder once that the market change because of the consumer behavior, because of the napalalia affair, because of different regulations, we decided a couple of years ago to do two things. Number one is to change our credit risk models to take into consideration these changes on the first-hand, and secondly, we’ve been working through them in this transformation initiative that precisely try to cope with these new rules, and the way to do that is to have more robust tools for evaluating and follow-up of creating efficient and at the same time to have a more efficient and a more intelligent way to tackle the relationship with clients. What we’re seeing in this second quarter we expect to hopefully to sustain going forward is a new way to manage the bank which is link with on a client by client basis taking into consideration the risk that we are assuming, the profit potential the client has, the level of transactionality that it keeps with us and accordingly you have a relatively a tailor-made soup for every single client. Of course that is still 100% deployed and implemented that theoretically will be more visible in our results. And that’s why we have stick to segments that are compliant with those new requirements in terms of risk adjusted returns, and then hopefully mortgages eventually will come to that area mainly to large corporations, but in the short term given that we don’t see those level we decide to lose market share because again, we’re in the business of creating value for shareholders more than expanding our size or reducing. And that’s why in the case of mortgages very little activity there is a big drive as we have vis-à-vis the market. And secondly, in terms…

Great, okay. And then just looking at the commercial side, I mean, if we sustain, which I would assume that SMEs kind of leading this growth. If we were to sustain this level, let’s say going into the next 6 or 12 months, how much more or where do you see kind of the NPLs -- I mean, how much more growth do you see in the NPLs or do you see this level more or less is a good photo of kind of the risk-adjusted reward that you are seeing?

Yes. We think that in time you’ll see lower levels but again we’re growing - we’re not growing the very upper part of consumer lending and we’re growing very fast on SMEs, which tend to have higher non-performing levels, which are backed by the state guarantee. So, at the end, the way you try to grow is by looking which are my expected losses and how I can collect different sources of revenue for the client to compensate for the risk and capital consumption we’re allocating to that specific client. That why the end of the story but we expect spreads to be flattish or slightly down in gross terms but at the same time given that we expect commissions to be lower than before to have spreads adjusted by commissions, which are tighter than historically.

There are no additional questions at this time. And I would like to hand the call back over to Mr. Monge for any closing remarks.

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

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. And have a wonderful day.