Banco Santander-Chile (BSAC) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Fourth Quarter 2018 Banco Santander-Chile Earnings Conference Call. At this time all, participants are in a listen-only mode. [Operator Instructions] Later, we’ll have a question-and-answer session and the instructions will be given at that time. As a reminder, this call may be recorded. Now, I would like to turn the call to our Chief Financial Officer, Emiliano Muratore.

Good morning, everyone, and welcome to Banco Santander-Chile's fourth quarter 2018 results webcast and conference call. This is Emiliano Muratore, CFO of the bank. As always, I am joined by Robert Moreno, Managing Director of Investor Relations. Thank you for attending today's conference call. We are really proud of the results during 2018. Financially, the bank achieved record profit and once again proved to be leading the industry towards the future of '19, improving in various aspects. First, let's talk about the macro-environment in Chile and what do we expect for this year. Please go to Slide 4 where we show our dynamics forecast. In general, 2018 was a constructive year with the new possibilities of economic cycles and greater business confidence. This was reflected in the GDP growth of 4% for 2018, driven mainly by investment growth of 6% as more companies invested in machinery and equipment. In 2018, 294 projects were approved by the environmental evolution service for a total amount of approximately $25.6 billion. This should start ramping up in the next few years. In the bilateral next five years, there are around 60 billion in large projects which should continue to drive growth. Inflation also picked up during the year reaching an annualized UF variation of 2.8% within the tolerance of the Central Bank, which packaged an inflation of 2%. As effective, the Central Bank increased interest rate in the fourth quarter of 2018 to 2.75%. They will increase the rates again by 25 basis points and we should expect further increases in the year. The velocity of this increase is in race should be slower than previously forecasted as inflation expectations have come down for 2019 especially in the first quarter of this year. We believe interest rate should only rise once more this year to 3.25% and UF inflations to reach 2.5% in 2019. If you look on Slide 5, you can also see that growth in Chile is being driven by many factors. In 2018, the main factor that drove growth were commerce, mining and agro/fishing, going forward we expect the strong growth coming from construction driven by the big investment projects in the mining and infrastructure sectors. Construction should also remain strong over the next few years. Exports in the first part of 2018 expanded at the economic -- the world economy was more dynamic and pursuing a lower base for the mining exports the previous year. What would be the major risk this year? The tendency towards more protection as policies were during 2018 will affect exports going forward. This has contributed to greater uncertainty in international markets. Now, Robert will give us more details on the banks performance.

Thank you, Emiliano. Let's now look at Slide 7 for an overview of the year. Our net income of 5% in the year driven by positive growth of our core revenues. We finished the year with a return on average equity of 19.2% in line with our guidance. The fourth quarter was also particularly profitable showing a 16% increase compared to the same period of 2017 leading to an ROE of 19.8%. We achieved various milestones throughout the year which are worth mentioning. Going on to Slide 8, we want to highlight various aspects to which Santander-Chile is progressing. We will go further into detailed initiatives of the following topics financials, clients, our phygital strategy, ESG and our employee. On Slide 9, you can see that each of our segment show results in line with each specific strategy. For our individual segments, we launched various digital initiatives and new branches as you'll see in the phygital section of our strategy. During last year, we also restructured the strategy and management for SMEs focusing on loans that we can offer non-lending services as well. For middle market and Santander's corporate investment banking, we continue to consolidate a well rounded client relationship, focusing on the non-lending side of our services. Finally, in financial, non-Santander bank, we not only showed solid results in terms of capital and liquidity where we continue to innovate on financial instruments in order to getting better funding and give our investors attractive investment options. A prime example is the issuance of the first floating rate Chilean peso bond in the local market. We also reissued a second bond at the time in the quarter showing a strong demand in the market for this product. With regard to client on Slide 10, we showed you an allusion of our clients and attractions throughout the year. As of December 2018, we are in the top two banks with the best client satisfaction. We would like to take the opportunities to mention that we have changed the client survey to a more comprehensive methodology, the new survey which is more individual through various channels. Our new client satisfaction survey uses over 60,000 client survey via web and power chrome and measures the satisfaction with the banks and three main aspects service quality, product quality and brand image. This new study has an improvement at a much broader and diverse sample. One of the key differences is our 85% of the survey have gone online and therefore reaches a younger generation and grading tends to be harsher at it is more in-person. So this breakdown, we can make better management decisions to create a better experience for our clients. The true improvement for the year continues to bear fruit and our loyal customer base continues to grow solidly. Moving onto our phygital strategy on Slide 11. We have come a long way in the past few years, just to highlight a few milestones; back in 2016, we launched 123 click where clients could take out a consumer loan online with three clicks; and in 2017, we launched the digital on-boarding and Santander life allowing people to become a client in a few simple steps from their mobile phones. In 2018, we launched Santander Wallet and we are the first bank to offer our clients the ability to pay using only their mobile phones without the need for any physical credit card, all this in tandem with our branch innovations. On Slide 12, we can see that our digital client base has been consistently expanding. During 2018, the monthly active users increased by 27%. In terms of digital cards consumer operations, there was also a significant accrete of 75% during the year. Of our total monetary transactions which include payments, transfers, deposits and services 79% are already done online. Also of our total current account holders, 85% of them are digital.Just to note, of the total amount of pre-approved consumer credit card loans, 80% are taken for our digital platform. Slide 13 shows the branch innovations that we're implementing. We reached our target of 40 work cafes at the end of 2018 and building on what we have learned from these branches and 2019, in 2019, we rolled out two new styles, we select private banking hub and what we recall the Work Cafe 2.0. In the select banking hubs, the new focus of these branches is investment management with a multidisciplinary team helping with the clients need. This team is much more specialized in our type of product be it mutual funds or alternative investments. In this manner, the client can have a much deeper understanding of each product that we can help them reach their financial goals. The work café branches are currently located in prime real estate areas using usually in our largest branches with a co-working space and coffee shop taking up a big part of the branch. In the future, we envision branches more as a point of sale where clients are able to look for advisory service for their financial needs and projects instead of simply cashing checks. Because of this, we're currently targeting a new type of branch which includes all the principle characteristic of the work affair including the co-working space where account managers are inserted within the co-working space. This enables these branches to have much less square footage and fare for more cost effective to expand to other branches. These branches also expand the digitalization we currently have at the work cafe with a new CRM that uses artificial intelligence and machine learning. We're also particularly proud of our ESG initiatives throughout the year. In 2018 as you can see on Slide 14, we have participated in different programs in terms of social and financial inclusion. Through our corporate banking, we also participated for example in the financing of Cerro Dominador, a solar-powered complex which should remove 879,000 tons of carbon emission for electricity generation. Internally, we have also reduced our impact on the environment. In the past three years, we have reduced our paper consumption by 30%, our water consumption by 33% and our electricity usage by 7%. In 2018, we gave out for free more than 4 million reusable shopping bags to replace disposable plastic bags that are now prohibited in Chile. 2018 was also a positive year in terms of labor relations. At the beginning of the year, we successfully renegotiated the collective bargaining of our main union. As you can see in Slide 15, 75% of our employees belong to a union. At the end of the year, we also received the wonderful news that our employees awarded us as a Great Place to Work, reaching the number one among companies in Chile with more than 5000 employees. We also received various awards for our commitment to our employees and unions offering them great opportunities for the professional development. All of this contributes to our three objectives for healthy growth and our higher profitability as shown on Slide 16. We'll go into further detail on Slide 17, we can see that our deposit days grew double digit with demand deposits growing stronger in the fourth quarter. While one of the factors for this growth is seasonality. The overall growth in the year is due to greater economic activity along with a positive trend and client loyalty. Mutual fund also had a strong year, although the last quarter was affected by market volatility. Due to this increase in deposits, the banks liquidity levels rose with our LCR reaching a 152% and the NSFR reaching a 110%. On Slide 18, we can see the effects of the central bank interest rate hike on our time deposit cost. As you can see, thanks to our strategic planning, we manage to keep the cost of funding under control and below that of our main competitors. We also show a breakdown of our demand deposits by segments which also shows that there was strong growth across the board with a particular pick up in the last quarter. Remember that here in Chile we do not pay any interest on our demand deposit being the cheapest form of funding for the bank. Moving to Slide 19, the greater economic activity led to a higher level of investment and greater business confidence. This led to strong growth in the commercial segment as it started to reactivate their investment project. This led to a year-over-year growth of our middle market loans of 13.5% in the year. In the fourth quarter, our focus shifted more towards retail loans. Consumer loans grew over 4% in the quarter as the bank look to improve margin while maintaining strong capital ratio. For 2019, we expect loan growth of around 8% to 10% led by higher yielding retail banking loans. On Slide 20, we can see that our asset quality continued its positive trend with solar NPL ratio improved down to 2.1% and the impaired loan ratio improved 60 basis points year-over-year to 5.9%. The improvement in both NPL and impaired load ratios along with a lower expected loss ratio reflects the positive economic trends in Chile. The total coverage ratio also improved to 129% in the quarter. Asset quality among consumer loans continues to improve as growth was driven by high income earners with the coverage ratio including the one-time provision we recognized in third quarter reaching 316%. Commercial loan continued the positive trend with impaired ratio following from 7.3% to 6.8% at the end of the year. During the quarter, there was a slight deterioration in the NPL and impaired loan ratio mainly due to a change in mix as corporate landing contracted and loans in the middle market in SMEs group; however, coverage remained healthy at a 115%. As you can see from the graph on Slide 21, our NIM has been gradually decreasing due to the change in loan mix with strong growth in commercial loans with lower spreads as well as the higher interest rate. In the fourth quarter as the consumer loans started to accelerate, the interest asset yield increased probably saw pressure from the cost of funds as interest rates rose. As the bank's liabilities reprised stopped in our assets, this rise any had a negative impact on margins and our average cost of funds, rose 18 basis points to 2.9% quarter on quarter. However due to good risk management, our NIM net of risk remains stable at 3.5%. Going into 2019 while we expect retail loan growth to continue to accelerate, interest rates will continue to rise even in inflation in the first quarter will be quite well. Therefore, we should expect weaker margins for the first quarter, and as the year progresses, we should see our NIMs normalizing to around 4.4 by yearend. This outlook is subject to modifications depending on the velocity of rate hikes and changes to our inflation forecast. On Slide 22, you can see that for the full year, our prudent management risk after NIMs net of risk stable for the year offsetting the less risky asset mix and higher funding cost. Going to the second objective, our strategy of increasing client loyalty on Slide 23, this translates into greater income from our fees and other financial services. If you look at Slide 24, the evolution of not interest income had ups and downs in the year. Our client treasury business had a sluggish start to the year, but in the second half of 2018, there is large corporate structured their financing needs for their investment projects with us leading to strong results from client income in the fourth quarter. Fee income showed in inverse trend, starting the year strong and weakening in the second half. This was mainly due to the elimination of ATMs with low profitability and lower collection fees. If you look at fee income by segment, growth was particularly strong in retail and corporate throughout the year. As business from corporate slowdown in the fourth quarter, fees reduced but still achieved a record level in 2018. In December, we also renewed our co-branding agreement with LATAM Airlines for seven years. This will directly benefit more than 1 million customers included in the Santander LATAM pass program, by 2019 is estimated the bank clients will make more than 1 million trips banks to the Santander LATAM pass program. Overall, we see a healthy growth coming from non-lending businesses for 2019 we should grow between 6% to 8%. As you can see on Slide 25, once again we demonstrated good management of our cost. We increased the lower inflation during 2018. We ended the year with an efficiency ratio of 40% which we expect remain stable during the year. On Slide 26, you see that we have finished decreasing amount of branches, which we now refer to as points of sale. Thanks to tech innovations such as our work affair and digital platforms, we have enabled to increase loan and deposit volume by point of sales and employees. Slide 27 shows our efficiency versus our peers showing that we are far below the financial system average. Our third objective on Slide 28 focuses on optimizing profitability and capital use. Slide 29 shows the evolution of our ROE from 2015 to 2018 compared our main competitors. While most banks have been decreasing their profitability, we have been steadily increasing throughout the years, reaching a stable ROE of 19.2%. Slide 30 shows our sustainable capital ratio. At yearend, we reached a core capital of 10.6% and a BIS ratio of 13.4%. This is impressive considering our loan growth of 9.2% and additional provisions we have during the year. With the coming shareholders meeting in April, it is likely we will announce the payout of around 60% of earnings allowing us to continue to take advantage of the growth cycle in the economy while maintenance ratio of above 10.5%. In conclusion on Slide 32, we show our outlook for 2019. We maintain a positive year on the economy, however, we do expect a slow start for the year as inflation lags and central bank has already increased interest rates by 25 basis points. Loan growth will stay between 8% to 10% with the mix changing to higher yield in retail loans and our revenue should grow in line with the average loans. It is important to note that in the last webcast, we mentioned the impact with the new change in provisioning models for those commercial loans that are analyzed in our group basis. In the second quarter of this year, we should recognize a one-time provision expense of approximately 55 billion pretax. There are no more increases with the corporate tax rate therefore we expect an effective tax rate of 22% for the full year. Overall recurring ROE that is without the one-time provision should be around 19% in 2019. At this time, we will gladly answer any questions you may have.

[Operator Instructions] And our first question is from the line of Jason Mollin with Scotiabank. Please go ahead.

I just wanted to see if you could give us some commentary on the strategic focus on the consumer segment in the fourth quarter. You mentioned that a few times in your press release and presentation, if you can talk about how you see that and how that combines with the outlook for recurring cost of risk to stay in 1%? If that incorporates a change -- material change in mix, would you be looking for cost of risk to be increased?

Okay, so as we saw in the fourth quarter, a consumer loans accelerated obviously there was a seasonal effect, but I think a one other would be beyond that. And one thing we mentioned in the earnings report and just now in the presentation, the year began -- the economy growth of 4% driven by investment and as the year has been progressing, we believe the economy and outlook has remained very positive. There's been a lot of questions about unemployment on wages, but we -- the segments we're focusing we tend to look at will be calling Chile's administrative data, we look at some examples the pension fund publish, you can see their good wage growth, good employment growth. So, with economy continue to grow strong with we believe is relatively good news overall in terms of jobs creation and wages. And the fact that, the risk of the consumer loan book has been going -- continuously going down, basically widened our appetite, okay. So, we think, the consumer loan growth will speed up, this year, as we began the fourth quarter, and it should grow at least with the average loan growth maybe little bit more, okay. For the full 2018, commercial loans and corporate lending, middle market lending was the strength, but we are seeing since 2019, it should be more or less equal between all the different products with a consumer loan speeding-up. The cost of credits given our view on economy, employment and what we've seen until now, we don’t see a significant increase in the cost of risk because of this change in strategy.

Robert, maybe a comment on lending spreads in the consumer segment and the mortgage segment? Rates have been going-up a little bit, as we've seen in the impact on your numbers as well. Are you able to pass on the higher rates to the clients in the lending yields? Or are spreads are shrinking a little bit?

Okay, let's say for most part the spreads, but they also fell in terms -- as the net of risks, they have been stable. So until now you can see in our margins as well, the NIM has been coming down. We've been still growing mid on high income, so if you look at the gross spread or the gross rate, we lend that in consumer loans and it has been going down all through last year, okay. But when you grew net of risk, I think the story has been one of stability. So going forward, I think we're no longer exiting the lower end because that basically finished. Now, we're in fact growing in Santander Life and we're growing more in the mass markets as well as the mid to high end. So, I don't think the loans yield should follow any further in consumer lending just because the mix won't be changing like it did before. And the rate increases as you know hurts us negatively in the beginning because our deposits re-priced faster than our assets. But eventually, yes, it should be transferred on to the active side, that usually takes a little more than 12 months. I would say, the rising rates won't impact the pricing yet, but we will impact the margins will be the fact that the mix won't be shifting as much as before.

Thank you. And our next question comes from Ernesto Gabilondo with Bank of America Merrill Lynch. Your line is now open.

A couple of questions from my side, first one is. Can you share with us how much additional provisions related to the recalibration of your consumer portfolio are you expecting for this year? And the second question is. After incorporating your 2019 guidance, is it reasonable to expect mid to high single digit net income growth? And if you can provide, what are you expecting for ROE this year will be highly appreciated?

We, in terms of the sizing of the recalibration of consumer, I mean, when we mentioned to the 55 for the new SMEs regulation, I think, we are putting all together in that field as one-off effects in terms of consideration for this year. And in terms of net income growth, yes, I mean, I would say that in the mid single digit, mid to high single digits, is the kind of ballpark we are getting from our guidance. And the ROE for the year, like the recurrent ROE without considering the one-off of the provision we just mentioned, we are talking about around 19%.

Thank you. And our next question comes from George Friedman with Citibank. Your line is now open.

Just a clarification first on the previous question, you already did in third quarter CLP20 billion for the group base provisions. So, the whole guidance is for 55, so on top of the 20 we expect to have during this year 35 billion more. Is that correct?

No, no, the 20 billion was last year, let me just recap. In the third quarter, we had to do some additional provisions for the consumer, okay. This year and that’s a different thing and then this year, we have to implement the commercial, the new provisioning model for basically SMEs, let's put it. That’s going to be 55 billion this year, okay. So, the 20 billion was in the third quarter for consumer, okay that’s done. And then this year, we have to do the other changes to the provisioning model, which will be 55 billion this year in the second quarter.

And the next question is related to the progression of non-interest expenses. You had announced I think by the end of 2017 or beginning of last year that you were going to invest more than $300 million for the coming three years and the progression of operating expenses in 2018 was awesome, you grew below inflation. So, how should we behave that I understand that you expect to remain stable in terms of efficiency, but is it possible to have OpEx growing in line with inflation again?

I mean, we keep the target of having expenses growing in line with inflation. As you said, last year, we were bit below. But for this year and the coming years, our target is to be in line with inflation. And as you’re mentioning, I mean, the investments needed in this new like era of banking in digital loan that always put some pressure on expenses. So, if you do the math, the efficiency ratio, we’re driving to be around 40 with maybe some downwards pressure, if we’re able to deliver on the very new side that we would prefer to be conservative and total out 40% efficiency going forward.

And the final point here. Just to understand, you are growing now a bit faster on the retail consumer line, but you continue to see improvement -- secretion improvement in asset quality. Does this digitalization process also help on that end? Or is it expected to see some this like deterioration in terms asset quality going forward?

We don’t expect the duration because there are like two forces playing there, as Robert mentioned before. First, the economy is doing pretty well and the employments are also good, so that’s like a tailwind in terms of cost of risk. And that balances how with that maybe higher mix going into consumer loans. I mean, so those two forces kind of neutralized each other and that’s why we would think that we don’t keep the cost of risk around like 1%, I mean, before the one-off. I mean these forces compensating each other.

[Operator Instructions] And our next question is from Yuri Fernandes with JP Morgan. Your line is now open.

Just a clarification, again, on this new risk models, I guess, you, I guess, maybe 2015 or '16 some change this year or 2018, you did for SMEs and now you're going to do for our consumers. Should we expect something, again, in 2020 or in 2019 this 55 billion be the last adjustment you have to do on your risk models?

Well, that would depend on the regulator and as you might know, I mean, in June the 1st, the financial market commission will merge with the Superintendency of Banks. So, the current regulator has mentioned in the past that their idea is also to go into the consumer portfolio with a familiarized provisioning model. We are just two months before the merger. We don't know if the financial market commission and we will also follow this line that. I mean, it depends on the regulator. I mean, I could not match in that. I mean, if the regulator decides to implement the model. Definitely, we will have to follow with that, but I think that the merger of the regulator is like an important milestone in what might happen in the future. I mean we don’t have any information that provisioning model for consumer will be perished before the merger. And after the merger, we will have to see what the new stands of the commission.

This change you're doing now. Is this you being like a more cautious the regulator like you're anticipating potential changes or pushed by the regulator? Because I guess, in 2015, the changed was the regulator pushing. This one in 2018, I think, was like the banks demark proactive on changing the regulation. And this one in 2019, I'm not sure if it's something that the banks are going to be more, I don't know, adequate to the provisions by the regulator?

It's totally pushed by the regulator in the sense that it’s a change in the rules and the motto, okay. So, remember, the banks have a basically IFRS except when it comes to expect loss models where you can have your own internal models, but you all have to do and parallel the regulators models. And if the regulator model -- and that’s giving you more provisions, you have to use there. So, now, we are changing the provisioning model mainly for SMS or commercial loans annualized -- analyze on a group basis. And then, it's turning out that the provisions in the SBF model turns out with more provisions in our internal model. That’s why, we have -- so this is regulatory change, okay.

And our next question is from Sebastián Gallego with Credicorp Capital. Please go ahead. Sebastián Gallego: I have two questions and just a clarification. The initial question is maybe a follow-up on initial questions regarding the strategy. Last call I remember that you mentioned that we are focusing on growth meant primarily focused on the commercial portfolio. Now, this bit seems to be changing again to the consumer. Can you explain again why is this happening since you've mentioned also that in private investments has been a big driver of the economy? Second question is regarding Basel III. I just want to ask you, if there are any progress on conversations with the regulators regarding density for risk weighted assets? And just to clarify third question or jus a quick clarification, if you can clarify the guidance on ROE of 19% is excluding the effect of provision? Mean, in other words, it could be lower the guidance when including the provisions?

I mean according to your last question, yes, that's the case. I mean, we are talking about ROE around 19% without considering the one-off impacts of the new provisioning regulation. And going to your second question about Basel III, we don’t have any news regarding density, the news and the good news is that, the merger between the regulators is taking place like really quick. I mean like, the loss gain one year for the regulators to merge and they announced, the minister of finance announced that they will be merging in June the 1st. So much earlier than the law established. And so and after that, the law gives 18 months to the financial market commission to publish the waitings and the fine print of the relation, and we don’t have any specific news regarding that. I mean, we keep what we have mentioned in the past that as far as the Chilean Basel III model is similar to the European one that is the ones we know and we report every month to our parent company. We expect the change to be positive for our capital ratio.

Then the other one, basically, what we're doing is kind of following the movements in economy. So when economy started picking up, it was basically driven by investments, investments after having four years of decreasing grew in 2018 for a lot of the loan demand was kind of like backlogs investment projects that haven't been done and that were being done that we're reactivating you could say. And now we see that, the investment cycle will continue to grow where several of those commercial loans. But now we are just, we're also going to see a little bit of more growth as well on the retail side. So, for most of 2018 with maybe the exception of the fourth quarter, it was really the middle market, the commercial loans drove growth and a little bit also on mortgage, and then consumer was a little bit slower. And now, we feel comfortable, the economy is going to continue to grow. There is sudden of the investment. There is going to be good commercial loan growth, but either on to that we should see more consumer loans. I think that's basically explains the change in strategies because they were moving along with economy.

And I'm not showing any further questions in the queue, I will like to turn the call back to Emiliano Muratore for his final remarks.

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

And thank you, ladies and gentlemen for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day.