Ladies and gentlemen, thank you for standing by, and welcome to Banco Santander-Chile Second Quarter 2020 Earnings Conference Call. [Operator instructions] I would now like to hand the conference over to your speaker today, Chief Financial Officer, Emiliano Muratore.

Good morning, everyone. Welcome to Banco Santander Chile's Second Quarter 2020 Results Webcast and Conference Call. This is Emiliano Muratore, CFO, and I'm joined today by Robert Moreno, Managing Director of Investor Relations; and our Chief Economist, Claudio Soto. Thank you for attending today's conference call. We hope you are all safe and healthy during these times. As we are working remotely, please bear with us if we experience any technical difficulties during the call. In Chile, after a spike in the COVID-19 cases, we are slowly beginning the reopening process. A lot of water still must flow under the bridge, but we hope the worst is past us in terms of health and economic issues. We have a lot to discuss today with various important messages. But given the uncertainty of the ongoing crisis, we have removed our guidance for 2020. We will not be -- we would appreciate to keep this [indiscernible] for our Q&A session. Claudio will start with an update on the measures our government and local regulators have taken during the months to minimize the impact of COVID-19 on the economy. Then we will go into the results of the bank during the quarter. And finally, we will explain how we continue to progress with our strategy and our investment in innovations. So now we will hand over to Claudio.

Thank you. Please turn to Slide 4. The pandemic has had a significant impact on the economy. In May, the monthly indicator of economic activity fell 15.3% year-on-year. And for June, we expect a similar contraction. As a result, unemployment has gone up drastically. The official unemployment rate in the quarter finishing in May rose to 11.2%. Employment, in turn, fell more than 15% with respect to the previous year. This activity and the lagging effect of past oil price falls have pushed inflation below 3%. We expect it will remain below the Central Bank target for some quarters ahead. In this context, the Central Bank has kept its policy rate at 0.5% and a signal that it will keep it at this level for at least 2 years. On Slide 5, we show how despite the severe impact of COVID-19 around the world, external demand for Chile has been resilient. The country has benefited from high copper prices supported by the fast recovery of China, our main trading partner. While exports have been sluggish, they have not suffered a sharp contraction we have seen in imports. As a result, the balance of trade has improved in the last few months. On Slide 6, we show how during the second quarter, the pandemic expanded quickly in Chile. Daily infections went from about 500 cases at the end of April to up to more than 6,000 cases by mid-June. Since then, infections have been receding amid stronger containment measures. Overall though, the mortality rate has remained relatively low. Over the last few weeks, the fall in infections, the lower number of active cases and fewer intensive care patients has led the government to announce our de-confinement strategy. Starting this week, some important goals of the metropolitan area have led to full…

Thank you, Claudio. We will now move on to explain our strong balance sheet and the results in the quarter, as well as evolution of some of our strategic initiatives. On Slide 10, we observe how the pandemic, how during the pandemic, deposit growth has remained very high, driven by non-interest-bearing demand deposits. In terms of liquidity, the strong growth in deposits, along with the liquidity provided by the Central Bank, which amounted to CLP3.3 trillion at the end of June, led to an LCR of 198% and a net stable funding ratio of 105%. On Slide 11, we can see how the increase in deposit has led to an improved funding mix. Firstly, the graph on the left shows how the monetary rate has fallen to 0.5%, contributing to the fall in the cost of time deposits. Furthermore, Santander has been able to offer lower interest rates compared to our main peers, while maintaining a yearly growth rate of 7.8% in this product. Our demand deposits continued to see strong growth in the quarter, with all segments contributing to the 39.3% year-on-year growth. This together with the cheap liquidity from the Central Bank have helped us to lower the cost of funding. On Slide 12, we review loan growth. Total loans increased 13.5% year-on-year and 2.7% quarter-on-quarter, driven by working capital lines to corporate and the middle market, and FOGAPE guaranteed loans to SMEs. Lending to individuals continued to fall with consumer lending contracting as our clients have become more restrictive in their consumption behavior. At the same time, the payment behavior of our clients, especially in credit cards, has remained very healthy, leading to a reduction in personal debt levels. Moving on to Slide 13, since the beginning of the COVID-19 crisis, Santander has been proactive in offering…

[Operator Instructions] Our first question is from Ernesto Gabilondo with Bank of America.

My first question is on the preventive provisions. When you look into these preventive provisions of CLP 30 billion, we notice that they represent 0.4% of the total reprogram individual portfolio. If we include your corporate portfolio, I think it will be lower. However, we have also seen that the preventive provisions helped to increase the coverage ratio, while the FOGAPE guarantees will help to protect the asset quality. So my question is, how comfortable are you that you have created the necessary preventive provision for the rest of the year? And if we should start to see provisions normalizing in the next quarter, you will wait to have more understanding on the behavior of payments after ending the relief programs? And then my second question is on NIM. Can you help us to break down the impacts of loan needs, low inflation and the FOGAPE program? And considering the FOGAPE 6-month risk period, what do you think would be an impact for NIM in the next quarters? And finally, my last question is this topic of the withdrawal in the pension funds. Just wanted to understand what could be the implication for your P&A?

Thank you, Ernesto, for your questions. Regarding the voluntary provisions, it's important to mention that apart from the CLP 30 billion we recognized in June, the Board also approved another CLP 30 billion to be recognized in July. So -- actually, your numbers were correct, but they will be double by the end of July. So as of now and as you said, with this level of voluntary provisions, we feel comfortable to have built a relevant cushion, and we will wait further information coming from the portfolio when the grace periods and the payment holidays finishes. So as of now, I would say that that's all so far. Definitely, the situation is changing with the crisis and -- but as of today, I would say that we feel comfortable with the provision we have. And I would expect further voluntary provisions before the payment holidays begin to end. And so in terms of normalizing, yes, it's -- normal is a difficult word to use at these times. But after these voluntary provisions in July, I would expect, yes, the cost of risk to go significantly lower to what we had in the last two or three months to more, if you want, normal levels or new normal levels. Bob, do you want to...

Okay. Yeah. So net interest margin in the first quarter was 4.2% and in the second quarter 3.8%. Remember, we had US inflation in the first quarter of 1% and 0.3% in the second. With that fall in inflation, NIMs should have been around 4% in the quarter, OK? So the additional decrease was basically, we have better funding, which is true. But I would say the additional is because of the asset mix change, OK? So on the one hand, I would say, FOGAPE a lot of the interest-earning assets today, more than in the past are government security. So, our balance sheet is actually growing a lot in less risky assets. Our NII is continuing to grow. But I would say of the fall in NIMs, half was inflation and the other half was basically loan mix, OK?

And regarding your question about the 10% withdrawals of pension funds, first, connected to your last question, one of the direct effects we are foreseeing is like, let's say, an upwards pressure on inflation. I mean, we expect a significant part of that money basically going to consumption. And with the restrictions we have today in supply regarding the COVID crisis, I think it's reasonable to expect, let's say, inflation going up because there will be significant money on people's pocket. Then, I mean, leaving aside all the political discussion that was very intense during the discussion in the parliament, I think that it will imply very strong support to people in the short-term. Then definitely, there's pressure for them taking in their pensions because their savings for pensions are going down. But in the short run, that will be a strong influx of liquidity to people. And for our business, that's not a bad thing to happen because it will support people to go through the crisis. It's not so easy to model where that money will finally end up. I mean, if it will end up paying bad debt, consumption and mix of them, saving for longer tenures, but also a relevant topic although it is still being discussed in Congress is that, this project was coming from the opposition and was approved, and the government also has the program to support middle-class families that is still in Congress under discussion and might also be approved, and that will add another layer of support to the economy. When you look at our numbers of asset quality and leaving aside the payment holidays, which are a significant part of the portfolio, but except that part of the portfolio that it's on hold, if you want, the rest of the portfolio is behaving really good. I mean, they're much better than expected. And I think that the support coming from the government on the authority is part of the explanation why people have been able to cope with the crisis and also stay, let's say, on time with their payments. And so I think that's -- and also it's important that another tailwind to asset quality is that people are spending much less in this context because they cannot leave their houses, many of the people. So that's also one of the positives we see for our business. And we are already seeing that in our portfolio behavior.

And sorry, just one last thing. Yes, sorry. One last thing. The Central Bank is also doing bond purchasing program. They're looking for approval and -- for a constitutional reform to kind of be able to buy government bonds in the secondary. Why is that important? Because when people take out a lot of money, there could be a risk of sharp movements, volatility in the yield curve, okay? I think that is also being sterilized. So in the end, as Emiliano said, there are implications long term. But in the short term, I think this isn't necessarily a bad thing for the bank and the economy.

It is creating a big challenge for, I would say, the country, pension funds, but also implicating banks and some other actors from the operational point of view. I mean the pension funds will have to pay, depending on the rate of adoption of the withdrawals. But, let's say, around 10, 11 -- CLP11 million payments in 1 month. And so we are working with them to do that fully digital, and we have been working with them. But that in the short run. It's also part of the challenge how to channel that money to people. Many of them have accounts advanced and that is [indiscernible] to do. But some others, they don't. And so -- and under this environment of COVID and physical potential contamination, that is one of the challenges the country, I would say, is facing nowadays. And actually, today was the first day that people could apply for the withdrawal.

Our next question comes from Sebastián Gallego with CrediCorp Capital. Please go ahead. Sebastián Gallego: I have several questions. The first one, if you can expand or provide some more color on the actual collection of interest on loans, given the fact that, as you mentioned in the presentation, you are providing benefits to clients. How is that recording of revenues compares to the actual collection of interest? And how do you expect that to evolve going forward? The second question is regarding your strategic initiatives and particularly focused on the branch transformation processes. Because I recall that before the COVID-19 crisis, you were talking about branch expansion. Are you not going to do so anymore or just focusing on the branch transformation process rather than expansion? And probably the last question I will ask today is whether you foresee a more restrictive stance going forward on your loan growth portfolio considering the current capital position.

Thank you for your question. I mean, regarding the collection of interest, I mean, the only part of the portfolio that has now like 0 interest rate or 0 real rate is the part of the mortgages that we did. And actually, the payment holidays we got up to July 10, they were at U.S. plus 0. And since then, according to the new guidance from the government, the rate of the mortgage will stay as it was. But that is a very small fraction of the loan, if you want, because it's just that part of those 3 installments are the one going to U.S. plus 0. I mean the rest is sustained with the current rate. And we are not collecting any interest neither principal on those mortgages during the holiday. In July, we got the first people finishing the three months' period. And out of them, we got around 25%, 30% of the people that began to pay again, I mean, without much -- without too much problem. And around like 2/3 of them getting another three months of payment holiday. So that's the only part of the portfolio where we are not, let's say, collecting interest. And the other is on the SMEs portfolio. When you grant a loan -- actually, when you used to grant a loan up to July 1 because that also changed, but until July 1, you had to give a grace period to those clients for at least four months under, let's say, preexisting loans. And so that's also the part of the portfolio we are not collecting, but we will start to collect, let's say, by the end of the year. Then on the consumer, we didn't have any -- we don't have any mismatch because although we gave them…

Yeah. That's what, so now loan growth might slow down a bit. And we're still open to giving FOGAPE loans, but the demand for FOGAPE loans, as we showed in one graph, is coming down. So in the end, it depends how the reopening goes, OK? But obviously, the second quarter saw strong loan growth, but a lot of it was FOGAPE loans where the demand has been coming down now naturally.

Perfect. Very helpful.. Thank you very much. Very clear.

Thank you. Our next question comes from Alonso Garcia, Credit Suisse. Please go ahead.

Good morning. Thank you for taking my question. My question is regarding Basel III implementation in Chile. I think last week, it probably is too soon to ask. But I think last week, some guidelines regarding market risk were impacted [Ph] were published by the CMF. So I wanted to hear if you have any color on those guidelines? I mean, do you still estimate, let's say, 50 basis points positive impact from Basel III implementation in Chile when that comes? Thank you very much.

Okay. Thank you, Alonso. I mean, yes, as you said, last week or actually earlier this week, the regulator published the guidelines for market risk and Basel III. I would say, that was a bit disappointing for us. I mean, basically, the proposal is to set the simplified standardized approach for all the banks in Chile and leave internal models or leave the Basel 3.5 framework for the future, I mean, to leave some time before going there. So, we would have expected to be closer to the latest international standards and also being open to implement market risk. As of now, with all the regulations we know under consultation basically now, we know all of them in consultation. We are expecting the final versions of many of them, but we have some insight on all of them. So, I would say, our expectation today is more, kind of, neutral. I mean, we don't expect on average, and as I said, we are still planning to see the final print. But I would expect that our capital ratio to be around where it is under Basel III if the final launch are close to the ones that were published for consultation. It's important to mention that if that is the case, that -- as I said, it would be that neutral for us is non-negative, but it would be much harsher than the international Basel III framework. I mean, we will end up in Chile with a very conservative approach to Basel III, and that's why maybe the upside we were expecting and foreseeing some time ago, going, I don't know, 50 or 100 basis points higher. That's what we see every month when we do our capital position for our parent company that is under Basel III. We see our CET1 100, 150 basis points higher than the local that after seeing the regulation under consultation that now sounds a bit optimistic, if you want, although we don't lose the hope to have the regulator moving to -- moving closer to full Basel III and not being, let's say, excessively conservative in the final framework when they set. I mean we will know that in the next 2, 3 months because as of December 1, we should have all the final norms published.

And do you think -- I mean, what could be the implications for your payout ratio? Do you think you could go back to 60% already next year? Or do you think based on the evolution -- the expected evolution of the -- of your results and the effects, you could have 30% also for next year?

Yes. Now before knowing the local versions of Basel III, we saw, let's say, kind of opportunity because we -- as you said, we were expecting our CET1 to go up. So that would have open opportunities, I mean, either for further growth or for increasing dividends. Now as I said, we are -- our base case scenario is to stay where we are. And that implies that we -- coming from there, we don't see any impact in our dividend policy going forward. And I do expect our dividends be more driven by loan growth expectations, I mean, to be -- to see the final net income of this year. And as you see in our ratios, our situation is very comfortable. And I wouldn't expect like any significant change to the dividend policy we have in the bank. But that will be more subject to COVID situation and the behavior of the asset quality rather than Basel III that would be, like neutral. And we can say that, that opportunity that we foresaw in the past, now it's not so evident that it will happen, and we will stay in a similar position to where we are. I mean it's -- don't see any significant change either to the downside or the upside.

And remember that Basel III will be implemented beginning in the end of 2021. So the next dividend payout is kind of still considering Basel I. And there, it really depends on the outlook of the -- not only loan growth, but like the COVID crisis so forth, okay?

And our next question is from Neha Agarwala with HSBC.

My question is more on the FOGAPE loans. What is the spread that you make on these FOGAPE loans? And how do they compare with the spreads that you have on the SME and corporate loans that you originate? So what I want to understand here is if in the medium term, in the next two, three years, would you have a negative impact on your margins due to the increased share of FOGAPE loans that have been in the market? My second question is on your strategic initiatives on Superdigital. How do you plan to monetize Superdigital in the coming years? And lastly, on your sustainable ROE. Do you foresee any change in the sustainable level of ROE? What do you expect as of now a sustainable ROE level for the bank?

Yes. Okay. So regarding the FOGAPE loans, remember, they have a fixed rate of monetary policy rate, plus 3%. And since a lot of our long-term financing is being generated at monetary policy rate and the spread is effectively 3%, okay? And then for SMEs, a typical spread is 4%, 4.5% around there. So these loans definitely have a lower spread than a normal SME loan. Now on the other hand, the average collateral guarantee we're getting is 77% of the loan. So when you -- all in, obviously, FOGAPE isn't a big money generator, but -- and of probably lower margin. It's 8% of the loan book for us. And -- but the spreads are lower than what we make on an SME. I would say it's barely -- we could expect a loss on FOGAPE. Because even though they have a guarantee, there is a deductible. Not all the entire loans are guaranteed. So I would say it's a little bit about breakeven what we make on FOGAPE loans. But if it wasn't for this, I think the cost of credit would be much, much higher, okay? And FOGAPE loans, I think now the government corrected something where they're only risk-weighted 10% now. So from a risk -- return on risk-weighted assets, I think now the equation is a little better. And for Superdigital, how we're going to monetize that? Well, basically, here, first of all, obviously, we want people to -- this has to be a large number of accounts we eventually want to open. We're going to get the floating balances of people who are depositing. But Superdigital, the other part that's very important is that the more the people have a digital account, it can be Superdigital, maybe for the more on bank population, Santander Life or a normal checking account maybe in the private banking, the fact that if people have these accounts and they don't go to the branch to get their salaries -- remember, a lot of people in the target market of Superdigital, they're people who are on bank. And if they have a job, their employer pays them through a check -- cashier's check, which they go pick up at the branch. So that's really expensive for us. And obviously, the more the people have these type of accounts, the less we're going to have clutter the branches. And considering how you're trying not only because of cost but because of sanitary reasons due to the COVID crisis, and this is very much in line with our branch transformation, over time, you slowly want to get rid of tellers, have branches with low back offices. A key part of that strategy is to have more and more people opening accounts digital, okay? So that's how you monetize Superdigital, okay? Superdigital really help us continue with our cash management program with corporates. But obviously, lower the cost of these programs.

And also, Superdigital, you have three different plans. And I'd say, only one is like will be free, let's say, forever. And it's like fully digital, then you have an advance where you can have a physical card more than one. And depending on the number of cards you want to have is the fee you would pay. So that will be also potentially another source of revenue. At this moment, we are like granting, I mean, given that money and charging no fees during 2020, but that might change in the future. And also, as you see in many of these digital businesses in other industries, we see it as a way to acquiring clients for the Bank in a much, let's say, cheap and inexpensive way. Not of them, not all of them will qualify, not all of them will evolve into Bank's clients, but some of them will. And so, as a whole, as an entry point, for the relationship with the Bank, we see that as a very strong link because when you put it in the full context, you have Superdigital, then you have Life and then you have the Plan Life and then you have the other value propositions going up in the pyramid. So with Superdigital, we have the bottom link of the chain where we can build the relationship with basically every single people in Chile, and then try to build up the relationship and take it to the other products of the Bank, either Life or the other. So we're seeing that a very strong source of potential future clients for the Bank. And going to your question, Neha, about sustainable ROE, I mean, unfortunately, at this moment, I think that we don't have enough visibility to discuss what's the new -- if it's new or the same, I mean, what's our sustainable ROE going forward. I think that we need to leave some more time to this crisis to settle. And maybe later, we -- later in the year or earlier next year, we can discuss that. But as of now, I think that it's like too early to discuss it.

Okay. Thank you so much, Emiliano and Robert.

Thank you. And sir, I'm not showing any further questions.

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

Thank you.

And with that, ladies and gentlemen, we thank you for participating in today's conference. You may now disconnect.