Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Banco Santander-Chile Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker, Mr. Emiliano Muratore, Chief Financial Officer. Please go ahead, sir.

Good morning, everyone. Welcome to Banco Santander-Chile's third quarter 2019 results webcast and conference call. This is Emiliano Muratore, CFO, and I'm joined today by Robert Moreno, Manager of Investor Relations; and our Chief Economist, Claudio Soto. Thank you for attending today's conference call. As you will see in the rest of the presentation, despite ongoing turmoil locally and abroad, the bank continues to obtain positive profitability and high client growth. Before we get into the results, Claudio will give us some insights into the macro environment and our expectation for the rest of the year.

Thank you, Emiliano. Please move forward to Slide 3. Activity expanded slower than expected during the second quarter, growing 1.9%. Consumption decelerated, while investments speed up boosted by the advance of large projects. The labor market has shown some signs of recovery with a stronger job creation and a rise in real wages. However, business confidence has remained subdued. Inflation has been low despite of the depreciation of the exchange rate during the year. In this context, the Central Bank lowered the monetary policy rate by 50 basis points in September, as expected, and by 25 basis points in October, reaching 1.75%. During the last days, the country has faced severe social unrest. There are several demands by the population, which point to a more economic inclusion and favor social relationships. Demonstrations have affected the normal functioning of several activities, though it is expected that growth figures in the last quarter will be affected. It is still too early to quantify its impact. Asset prices have had a moderate adjustment and the capital risk premium [ph] increased only marginally. In response to this event, President Piñera has announced a social agenda intended to increase these expansions, expand social health coverage and to reduce and stabilize some public services tariffs. He has also announced the introduction of a negative income tax. The packet will cost US$1.2 billion that will be financed through budget adjustments raised in the top marginal income tax from 35% up to 40%, and net debt that will account for $600 million. All-in-all, we expect the budget deficit to reach 2.5% of GDP during 2020. Among that, the President changed eight members of its cabinet, including the Minister of Internal Affairs and the Minister of Finance. The new Minister of Finance, Ignacio Briones, has declared his intention to advance quickly with a tax reform currently in Congress, preserving strong incentive for investment.

Thank you, Claudio. I just wanted to highlight that although there has been increased volatility in the local market this past week, the impact on our operations has been minimized, thanks to our digital strategy, which has been able to support the branch network and serve our clients over this period. Going forward, the bank will continue to push ahead its strategic plan. Here on Slide 5, we have the different initiatives, the bank has been developing this year. Although we’ve been progressing in all of them, we wanted to discuss the progress during the last quarter of those initiatives that are highlighted. On Slide 6, although not officially launched, the soft launch of Superdigital has been quite successful and we are preparing for the official launch soon. By word of mouth, we already have more than 17,000 downloads and more than 10,000 stable clients. Just as a reminder, Superdigital is a prepaid card digital platform aimed at the younger generation immigrants and people who currently do not have a full access to our bank. We believe this product to be very useful and a very high potential -- and has a very high potential to start relationships with new clients. And if they wish to do so, become a direct client of the bank in the future. Moving on to Slide 7. As mentioned in the second quarter, we launched a new Cuenta Life and Life LATAM program. Each plan is targeted to resolve the different needs within this mass segment. Cuenta Life is geared towards the on-bank population that want to access to online banking and a simple debit account with no credit approval necessary. This is our first approach to [technical difficulty] and teaches them responsible banking through a merit system. They can set saving goals and…

Thank you. [Operator Instructions] Our first question comes from Jorg Friedemann with Citibank.

Thank you for the opportunity to make questions. So, first, with regards to the revision in labor law that, I know, could limit the number of working hours per week, I think, to 40 hours. Could you give us some color about the expected impacts for the banking system and for Santander, in particular? And my second question, just to clarify, you provided a very good chart in the presentation with regards to the evolution of mortgage asset quality. And it seems that it's just back to average. But taking into consideration, the current refinancing that we have seen this portfolio, would it be reasonable to expect that asset quality could even improve further because I understand that a lot of clients are renegotiating those contracts at even lower yields? Thank you.

Thanks, Jorg, for your questions. This is Emiliano. Regarding the labor law, Robert will go into more details about the impact of the proposed law. Although considering the current event, that kind of law is still in Congress, but I think that it's going to be -- maybe not so in the front line of the things that the government will be dealing with considering all the different fronts that they have to deal. I mean, Robert can comment a bit about the …

Yes. So remember that under our current -- the main collective bargaining agreement we have, Santander-Chile already has established a 40-hour work a week, okay? That's -- there's different laws being proposed. Some going down to 35 hours a week without lunch, 40 with lunch. There's with 41 including lunch. So this -- obviously, I think, today, that the work week in Chile is around 45 hours?

That's below.

The law today, right? Yes. And they were at 40. So I think for us, it shouldn't be a major impact. Also, as I said in the presentation now, we already have a relatively high minimum wage standard in the bank. So in that sense, we are rather tranquil that there shouldn't be any major impacts on our cost base currently, okay?

And about the mortgage asset quality impact because of this refinancing process, the macro -- the macro number that we estimated is that this whole process is putting around like $300 million yearly on the hands of mortgage debtors. So in average, that -- it's a reduction around 7% to 10% reduction in the monthly payment, although that's an average. Some people are getting even higher reduction. So, yes, I mean, from the asset quality point of view, that's definitely a tailwind because the monthly repayment is going down. So all the things -- all the other things equal, this is like good news for asset quality in the mortgage portfolio.

Perfect. Thank you very much.

Thank you. Our next question comes from Ernesto Gabilondo with Bank of America.

Hi. Good morning, Emiliano and Robert, and thanks for taking my call. I have three questions. The first one is on your macro outlook. I think you’ve already talked about the impacts that happened in Santiago and in other cities. But I think the impact that we saw in the [indiscernible] in some of your branches and the low activity in most of the cities. And then we saw that the government was heeding to the different demands of the people and probably the structural reforms that the country needs to have will no longer be the same for next year. So anything -- or what do you see the macro outlook for next year will be very appreciated. And then my second question is, in terms of fees, you mentioned the potential impact for cost of risk and expenses due to the impact in 15 of your branches. But how do you see the impact in fees for next quarter, given that Santiago and other cities in the region experience low activity in the last two weeks, especially in everything related for credit, debit and POS transactions in retailers and shopping malls? And then, my last question is on NIMs. So for this quarter, we’ve seen all of the interest rate cuts happen already this year, that has been contributing to lower funding costs. So given the next year, the effect is likely to be behind, and you mentioned now that you expect stable NIMs for next year. So just wanted to know your point of view that even in -- that you will have a more tough base for next year that you expect NIMs to remain stable? Thank you.

Okay. On the macro outlook, there is still too little information to have a broader assessment on the overall impact of the current situation. Definitely, we will probably revise downward our estimate for growth this year. For next year, the domestic events points to also lower growth. But on the other hand, we have seen better figures in the world economy in general. The release of GDP in the US was better than expected. And up to now, an important drag for the Chilean economy has been the slowdown in the global economy due to the trade war. Therefore, there are a few forces pointing in two different directions, but definitely the current situation -- domestic situation will point towards a lower activity. But the assessment, probably we will do a better assessment in a couple of weeks.

Okay. And then fees, yes, so in the presentation, we talked, there will be some impact on the cost of credit, a little bit on expenses. And, yes, I would expect some fees to be slightly lower than the third quarter. The good news is that people are continuing to use the digital channels, buying online and all this is helping. But, yes, so the fees were around Ch$72 billion in the third quarter, they should be lower. It's still hard to see. It depends how the Christmas season -- the Christmas season is really strong, obviously, in buying and -- I've a feeling. So yes, I wouldn't expect these to surpass the third quarter. But we still expect them to be higher than how they were last year when they were around in the fourth quarter, like Ch$67 billion. So somewhere in between maybe around Ch$68 billion, Ch$70 billion, I would say is a good guess at this time, okay?

And about NIMs, when you look at the NIM in this third quarter, we think that we should be from stable to up in NIMs. Mainly, I think, they are the main drivers. First of all, as you know, inflation is relevant for us. I mean, in the quarter, it was not high. I mean it was like 0.5 for the quarter, I mean, that's a 2% annualized rate of inflation. Next year should be -- I mean, from there to higher because today, we are forecasting like 2.2% inflation for next year. So inflation should be positive for NIM. And then the slide, we showed about the slope of the curve. And that's -- I think the main driver to be kind of constructive on NIMs. Because we will still be getting the benefits of the cost of funds going down, because of the latest cut of the central banks and the one -- maybe one or two more, we expect in the coming months. And then the long end of the curve, rebounded. So all this wave of refinancing and especially in the mortgage portfolio should kind of slow down. And we should stop being, let's say, hit on the repricing on the asset side. So -- and then you’ve the -- this operation of consumer finance business into our balance sheet, that is also a very attractive business in terms of NIM. And all put it -- putting all that together, that's why we are relatively constructive. Also, I can see that with the introduction of Basel III into the market and having some of the big banks with lower positions in terms of capital, that's also from the competitive point of view, it could be a kind of positive news on margin of having, let's say, a softer competition on prices. But that's maybe long shot now.

Very clear, Claudio.

Okay.

Yes, very helpful. Thank you very much.

Okay.

Our next question comes from Gabriel Nóbrega with Citi. Gabriel Nóbrega: Hi, everyone. And thank you for the opportunity of making another question here on our side. Could you just maybe talk about the competitive environments, given that the interest rates have been coming down, and you have even been guiding for maybe further interest rate cuts? So I just wanted to see if you believe that other banks are being rational in the competition? And as for my second question, it's on your capital. I note that we are still waiting for the RWA weightings from the regulator. But if we expect these to actually decrease over the coming year, could we maybe see more upside for your payout ratio in 2020 and onwards as well?

Thanks, Gabriel. On the competitive environment, we haven't seen any significant change. I mean, that's a very competitive market. And so far, the competition has stayed quite stable. As I said before, maybe Basel III would be a game changer in that front, but that's still early to be seen. And the rest of the competitive environment, I would assess it as normal and stable compared to -- comparing to the recent past. And going into capital, yes, I mean, we still expect to have the Basel III reform being neutral to positive for us. And considering that we don't expect to change our CET1 ratio target under the new law, that should be positive for payout, although not for 2020 because we pay dividend in April and we don't expect to know the final version of the law or the regulation by that update for 2021. Yes, we’ve the potential to be a positive news on payout.

By December of 2020, we will our risk-weighted assets under Basel III, okay? And as we said in the presentation, very soon, I don't know if the current events may make everything get behind. But the regulators -- so, the next thing they are going to publish for commentary is the risk weighing of credit of loans. And that's really the core of the whole model, okay? Gabriel Nóbrega: Perfectly clear. Thank you.

Thank you. Our next question comes from Neha Agarwala with HSBC.

Hi. Thank you for taking my question. My first question is on the Life product. You mentioned that you have more than 94,000 clients. But when you implemented the Life product, how has the results of this segment been versus your expectations in terms of margins, in terms of asset quality and profitability? And my second question is, of the investment plan of $380 million, how much of that investment is front-loaded? And then how much of that should we expect as already done in 2019? And what portion of that would be spread order in '20 and '21? Just to get an idea of how the costs will likely evolve? Thank you so much.

Okay. So Life is going perfectly as planned, I would say, and recently, even better, especially regarding the client acquisitions. I think with the new products and the new attributes we added on to Life seeing a lot of demand, it's a very good product, especially the Cuenta -- a lot of it is good, but Cuenta Life is also relatively cheap. You know, it's around less than $5 a month. So in terms of margins, profitability, asset quality has gone as planned and even slightly better. Life already makes money. We have around Ch$60 billion in loans, I believe -- Ch$60 billion in loans -- Ch$40 billion? Ch$40 billion, sorry. Ch$40 billion. And as I said, Life is growing very gradually, it's all organic, the way we wanted it. We wanted to start out slowly, start speeding things up, adding on new attributes. And that is what's happening. It's growing at a good rate, and it's meeting all of our profitability, asset quality and margin targets. And so we think this is a very good instrument to begin to go more into the mass market, but responsibly. And regarding the cost? Yes, sorry, go ahead.

On the Life, do you see your competitors adopting a similar strategy in the mass market? And how is the competitive landscape here? Thank you.

Well, until now, I think, Life has been quite unique, adding on like -- we open an account easily in the bank digitally and this whole program of getting merits; merits, if you pay on time, merits, if you save. The more merits you get, the lower the interest rate on your loan products becomes. And I think this until now has been very unique. And the current clients and the new clients. When you compare their options, the options many times is to go to the retailer or go to the state-owned bank, debit card system. This is much cheaper, much better and much more favorable, I think, in all sense. That's why Santander Life clients, they have an NPS score, Net Promoter Score of 90%, which is the highest in the bank. And regarding the costs, basically, the investment project is $130 million a year. So of the $380 million, it's roughly $130 million per year, and that's the case for next year and the case for this year.

Perfect. Very clear. Thank you so much, Emiliano and Robert.

Okay.

Thank you. [Operator Instructions] Our next question comes from Yuri Fernandes with JPMorgan.

Thank you, gentlemen. Thank you, Emiliano and Robert. I had a question on your coverage ratio. We saw some decrease, and for us, that was something that called the attention because you had the one-time provision. So looking through your new [indiscernible] formations was a bit higher. But the point is, how should we see the coverage for the bank? Because you're growing more on consumer loans, on -- like higher risk. Should we see the coverage ratio moving higher? Like you do -- do you have any number that you are targeting for that? That's the first one. And my second question is regarding loan origination for the protest. If you can share any view how the protest affected new loans origination? And if you think the 8% is feasible for this year, because you need to grow about more than 2% quarter-over-quarter and it's going to be very, very challenging in this kind of environment, I think, maybe business confidence may be under pressure. So if you can share how things are behaving now, and if you believe the 8% is doable for this year. Thank you.

Okay. So effectively, the coverage ratio -- that was due mainly due to the -- what we talked about in mortgage. So mortgage -- remember, in Chile, NPLs by definition is by 80 -- 90 days or more, okay? And it's strictly days accounting, how many days there are. And you have to have faith in what I'm saying that June, the second quarter had 89 days. So a lot of like the people who are 90 days overdue, they didn't fall over until the beginning of July. So there was kind of like an unrealistic fall in NPLs in the second quarter. And then we call this here internally, the calendar effect. September, basically back -- went back to normal, okay? And that's why we kind of show, and especially if you look at Slide 21 on the webcast, you can go back and look at it later, we showed the vintages. So we showed that there hasn't been a deterioration of vintages, meaning this is truly a calendar effect and the fact that there's a deterioration. So all the NPL formation was basically the fact that they didn't fall in the second quarter and the 90 days NPL was in the beginning of July, and they all went into NPLs in the third quarter. So we don't -- so said that, I would say the third quarter is a more normalized level. We don't target a coverage ratio. Remember, we have expected loss models here in Chile. They're not IFRS 9. The expected loss models kind of driven by the regulators policies. So basically, our coverage ratio is reflected -- a reflection of what our expected losses, okay? And since this calendar effect didn't harm our expected loss, our coverage fell, basically. But the stock of provisions for loan losses in the balance sheet over total loans is a true reflection of what our expected loss is. So the coverage ratio is kind of an output of that, okay? So going forward, we expect the loan loss ratio maybe to rise a bit in the fourth quarter, basically because since some branches are closed. Remember when someone is charged off or they have to go to the branch or they had to go to the branch to pay their loans, what we're doing is that today, we're now permitting people who have been charged off to have access still to the web page to be able to pay the loan online and so forth. So basically, through improving the collection efforts online, we are trying to minimize the impact of people who have to go to the branch to pay their past due or charged off operations, okay? So I think the cost of credit will rise a bit to 1.1, 1.2 in the fourth quarter. And if everything starts to normalize, then we should see the cost of credit and asset quality stabilize next year.

And regarding the loan origination or basically last week, branches were mainly closed most of the day and so the origination was very low. That’s -- retail business -- our retail business, basically that means like losing like 1 week of sales. This week has been a bit better, but still much slower than normal. So in order to assess how that will affect loan growth over the year. We need to know how things will evolve, and we are not yet how it's going to -- or when this is going to normalize. I mean, we are still, as I said, a bit more normal than last week, but still away from, let's say, the real normal. So I think that's kind of negative for loan growth. Although, so far, not so relevant to, let's say, get the 8% out of the picture, but it depends on how things evolve from now. I mean, tomorrow on Friday, it's holiday here in Chile. So let's see how Monday, the beginning of November, things start. But -- so far, we're still at -- 8% is on the table, but it depends on how things evolve.

And in October, we grew like $400 million of equivalent in pesos. So it wasn't a bad month overall. Obviously, much more geared to the middle market, okay? A little slower in consumer mortgage, but there was decent loan growth in October. And the other thing is we're still waiting on the final approval of the acquisition of Santander consumer out of financing, and that would help, obviously, to reach the 8%, if not this year, it will help to boost loan growth next year.

Okay. So just a clarification. So the consumer unit, it's part of the 8%?

Yes. I would say, and it would add on 1% to 1.5% to loan growth.

Okay.

We would like to have reached 10%, but 10%, I think, is out of the questions. So with consumer, we might be able to reach the 8% for the full-year, maybe a little more, but it depends on the approval and how fast this normalizes.

Super clear. Many thanks for the answers.

Speakers, I'm showing no further questions in the queue at this time. I would like to turn the call back over to management for any closing 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.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.