Banco Santander-Chile (BSAC) Q2 2020 Earnings Report, Transcript and Summary

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 quarantine stage. There are, however, some regions of the country where the COVID-19 spread is still high. In response to the economic downturn, the government has implemented several measures to provide liquidity to households and SMEs, including tax deferrals, plus transfers to the most vulnerable and a guarantee program for commercial loans. On Slide 6, we highlight the political agreement reached in June to set up a sister fund for up to $12 billion to be spent over a two-year horizon. The objective of the fund is to enhance financial support to households and to provide a fiscal stimulus for a fast recovery. As part of this, the government presented a bill that includes an expanded cash transfer program and a soft loan at 0% interest rate, targeting the middle class. The fund will be financed through the issuance of public debt up to $8 billion and the use of public financial assets. All in all, we expect public deficit to reach 10 percentage points of GDP this year and to 4% to 6% next year. The financial market commission, CMF, published for consultation an important adjustment to the capital regulation of the COVID-19 providing guarantee. According to the proposal, instead of competing as Tier 2 additional provision, 15% of the guarantee, they would be considered in the Tier 1 capital ratio calculation with a 10% weighting. Last week, a constitutional reform to allow for a onetime withdraw of 10% of pension savings was approved in Congress, Slide 7. The reform establishes a cap on the withdrawal at approximately $5,500 and a minimum of $1,300 in case a person has enough savings. We estimate a total amount of $15 billion could be withdrawn. That is equivalent to 7% of GDP. A share of those resources will be saved in a similar instrument as they are now, but under a different legal status. Some people may also pay debt. However, a relevant fraction will be spent in consumption, helping to boost the economy in the second part of the year. This might also create some inflationary pressures, in particular, in sectors where supply remains restricted. In Slide 8, we can see the initiative the Central Bank has undertaken. On the monetary side, the Central Bank has expanded its liquidity measures by increasing the resources of the loan growth conditional facility, FCIC, by $16 billion and by expanding its purchases of financial assets, mainly private bank bonds. In the short term, the liquidation of assets by ASPs might create some market volatility, more than 40% of the federal exchange rate in the short term. Part of the recent depreciation of the peso might reflect such adjustment. Also, a large share is allocated into fixed income assets. Thus, we could expect some increase in the long-term interest rate. However, the Central Bank has made it clear that it is prepared to act in case of excessive volatility. Up to now, it has increased its purchases of bank bonds. There are some that will allow it to buy treasury debt in the secondary market is also well advanced in Congress. That will provide extra tool to neutralize any sharp increase in interest rates.

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 our clients a convenient solution. For all clients with less than 30 days non-performance, the Bank has offered three-month grace period on consumer mortgage loans. At the end of June, approximately 50% of the mortgage loan book benefited from the three-month grace period, while only 12% of our consumer loan book requested a payment holiday. The strong uptake of grace periods for mortgage loans is explained by the attractive interest rate of inflation plus 0% offered by the Bank. As a reminder, over recent years, the Bank has focused growth among high-income earners. In total, 44% of our lending to individuals reprogram according to the CMF guidelines. As of June 30, the Bank had already disbursed more than CLP1.5 trillion to SME and middle-market companies in FOGAPE guaranteed loans, representing around 8% of the commercial loan book. As the graph at the bottom shows, the demand for FOGAPE loans started off very strong in May. However, demand has now been reducing with most requests already processed. On Slide 14, we show our healthy capital ratios. We finished the quarter with a capital ratio of 10% and a total BIS ratio of 14.6%. In July, the CMF published new treatments for FOGAPE loan guarantees. Instead of computing at Tier 2, they will now be included in the calculation of risk-weighted assets with risk weighting lowered from 100% to 10%. And adjusting our ratios for this new treatment, our core capital ratio would reach 10.3% and our total BIS ratio 14.5%. Moving on to our results. On Slide 15, we provide a brief summary of the quarter. Net income in 2Q decreased 41% Q-on-Q and 50.4% year-on-year, totaling CLP84,859 million. It is important to point out that the 2Q results include a voluntary provision of CLP30 billion, recognized in order to increase coverage ratios considering the uncertainty surrounding the potential impact on credit quality of the COVID-19 crisis. Excluding this provision, the adjusted net income was CLP 106,759 million, and the adjusted quarterly return on average equity was 12%. A positive point in the quarter was the strong revenue generation. Total gross income, defined as net interest income, fees, plus results from financial transactions, increased 7.1% compared to one quarter -- the first quarter and 6.7% compared to 2Q '19, demonstrating the bank's ability to continue to provide solid income even during this pandemic. Furthermore, operating expenses increased just 1.5% year-on-year, and the efficiency ratio reached the world-class level of 38.9% in the quarter. Moving on to Slide 16. While NIMs were affected by lower inflation and growth of -- growth focused in less risky assets, net interest income still increased strongly by 10.9% year-over-year in the first half of the year. However, as seen with a 39% increase in the demand deposits and a fall in the monetary policy rate to 0.5% in March, the better funding mix has led to lower cost of funding that is helping to support margins, which finished the quarter at 3.8%. On Slide 17, we show the evolution of our asset quality over the last 10 years with our core coverage ratio reaching a record high level of 154% as of June. While it is still too early to predict, so far the increase in the cost of risk has remained well inside our expectations and similar to past downturns. An important reason for this has been a healthy evolution of asset quality in our consumer loan book. On Slide 18, we show the breakdown of asset quality by loan portfolio -- loan products. With payment holiday, the NPL and impaired loan ratio have not varied significantly. Furthermore, coverage has risen across all portfolio as we created voluntary provisions to make up for any shortfalls generated by the payment holiday. In these graphs, we have also included the percentage of loans that are between 1 and 89 days overdue, shown by the blue line. The improvement in this indicator, especially in consumer and mortgage lending, is a clear indication that for those clients that have not requested payment holiday, the default rates have remained low. The change in the loan mix to high income earners in recent years has been key in this process. This is especially true in our consumer loan portfolio, as shown on Slide 19. Here, we can see that over the last 12 months, when compared in absolute terms, relative to our main competitors, the NPL and impaired ratio have increased at a much slower pace. The cost of risk of our consumer portfolio has also remained much lower, including voluntary provisions. Our consumer loan clients also demanded far less payment holidays than our competitors. On Slide 20, we can see that the cost of risk rose in the quarter in line with the ongoing crisis and reaching 2.2% for the quarter and 1.7% year-to-date. This includes CLP 30 billion recognized as additional provisions with CLP 10 billion allocated to each portfolio: mortgage, commercial and consumer. It is still too early to give guidance to how much higher this will go. But given the information shown on previous slides, three quarter could possibly be the peak. Our Board has given management the go-ahead to recognize further voluntary provisions of CLP 30 billion in July to minimize the spillover effect of the pandemic into 2021. So apart from what we did in June, there will be another CLP 30 billion in July. In Slide 21, we show how in the second quarter noninterest income had a strong quarter, increasing 43.4% compared to the first quarter. On the one hand, financial transactions had a very strong quarter. Our client treasury business increased -- revenues increased over 49%, while our non-client treasury business went from a loss in the first quarter to a gain of more than CLP 31 billion. The bank's fixed income liquidity portfolio only includes instruments that are high-quality liquid assets, such as Chilean sovereign risk and U.S. treasuries. During the quarter, as inflation expectations declined, interest rates along the new accruals fell and the bank realized gains from its AFS portfolio. This offsets the impact of lower inflation on our margins. On the other hand, fees fell due to lower usage of credit cards, which we expect to begin to rebound as the economy is gradually reopened. And as shown on Slide 22, we can see that of the gross new account opening -- the gross new account openings remained strong in the bank. According to the last public information, Santander's market share of new accounts reached 44%. Client service indicators also remained high in the quarter despite the lockdowns. Our clients have ranked us top 2 for Net Promoter Score and voted us number one for innovation, commitment and product benefit. The Santander app has a high NPS score of 74, highlighting the user friendliness of this app. And Santander Life clients, which are mainly served by our digital channels, gave us a score of 71. These results obtained help us view the post-COVID world with optimism. On Slide 23, we show the evolution of efficiency and expenses. Our efficiency ratio improved to an impressive 38.9% in the quarter and 39.7% year-to-date. Operational expenses remained under control, increasing only 3.8% year-over-year and 1.7% quarter-on-quarter. The main factors leading to the slowdown in the growth rate of cost was lower variable incentives for commercial teams and management. And as we can see on Slide 24, the strength of our digital front and back office systems has proven vital to keep the bank running in these times with no major disruptions. Despite the COVID-19 crisis, the Bank is open for business with over 70% of branches opened and around 95% of central office employees teleworking. In branches, strict safety procedures have been put into place to protect our clients and employees, such as restricting the amount and people in the branches at any one time. In the second quarter, we spent CLP5 billion, which are recorded in other operating expenses to prepare the Bank for the gradual reopening process, as well as improving the teleworking experience. Our network has also been supported by our digital platforms, with online transactions increasing 11% quarter-on-quarter and our digital clients growing 20.7% year-over-year. Our market share of digital clients has also increased. As of March, the latest information available was a 34% market share among private bank users, far above our closest competitors. As can be seen in Slide 25, productivity during the pandemic continues to rise, indicating that the Bank is spending less to attract and cross-sell clients, leveraging on the investments we have made in our digital platforms. In the final portion of this presentation, we would like to update everyone on our most significant strategic initiatives, as summarized in Slide 27. Since the beginning of the COVID-19 crisis, our strategy has remained the same, continuing the investment plan of $380 million for the period 2019-2021 in technology, branch upgrading and new products and services. However, with some initiatives taken more priority this year, such as the development of digital onboarding for SMEs, which we successfully started and completed in time for the launch of FOGAPE loans. During July this year, the Getnet subsidiary was officially approved, which will be our acquiring business, and we are ready to launch pending the final approval to begin operations from the regulators. Our Getnet offer is designed to include digital payments, which now more than ever is important considering the COVID-19 lockdowns and social distancing. In April, we also launched Klare, Chile's first insurtech, one-stop digital platform for selling insurance products. We are also introducing a new strategic initiative, which is our branch transformation project that will start in the second half of this year. In Slide 28, we will also review Superdigital, which was officially launched in April. As a reminder, this is a digital prepaid card with a target market of 4.5 million people who have little or no access to the banking system, as their income is generally less than CLP400,000 a month, roughly $7,000 a year. All Superdigital accounts are free of charge this year. And since the start of the lockdown, we have seen strong demand for this digital product with over 52,000 new clients in the first semester, reaching a total of 70,000 clients. Importantly, Superdigital clients can receive emergency government payments without having to go to our branch. On Slide 29, we show the evolution of our Santander Life program. As a reminder, Life is aimed at the middle-income segment and encourages good credit behavior through the Merit Program. As clients pay on time, they receive merits that over time give them access to financial benefits, mainly lower interest rates. Since its launch, we have a record uptake of this simple fully online product. In total, we now have over 250,000 clients in the Life program, and they are happiest clients with a Net Promoter score of 71. As we show on Slide 30, after only 3 years, Life is already a very profitable product line. Compared to Banefe, the old segment of the bank that was aimed at the mass market, Life is already achieving similar profitability levels per client with a completely different distribution model. For example, in Banefe, which had 100 branches, over 2,000 persons in the sales force and zero digital onboarding, the cost of acquiring a new client was around $150. In Santander Life, the cost of acquiring a new client is only $15, with 75% of client demand generated through digital channels, and Life has no branches. Also due to the positive incentives of the MERITOLIFE program, our Life clients have a much better risk profile than in Banefe. Santander Life will continue to evolve in the second half. Firstly, all Santander Life debit cardholders will be upgraded to full-blown digital current account status. This includes complete integration with Santander Pass, our digital security code system, enabling Santander Life clients more and easier online transactions with their debit and credit cards. This change also means that these clients will be able to make transfer and payments daily of up to CLP5 million at no cost. And Life accounts have no maximum balance amounts. These are significant competitive advantages over similar products such as [indiscernible]. In the coming months, we will be offering new products under the Life brand, and we will be including new sources of noncredit merits, such as program savings. We are also introducing a remote attention model based on advanced AI and robotics that will replace many human interactions. Lastly, on Slide 31, we want to give some insights into our -- into the future of our branch network. The social distancing imposed by COVID-19 will continue into the next year. And therefore, while over 70% of our branches remain open, we have been considering what our branches will look like in the near future. Considering the success of the Workcafé branch model, we began piloting in 2019 the Workcafé 2.0. Its digital format fits perfectly for the post-COVID-19 world with no teller, no vaults, no cash and minimal back office personnel. These branches also incorporate significantly more advanced digital and IT capabilities. This makes these branches more efficient and productive. For example, through June 2020, the pilot Workcafé saw a 32% rise in gross revenues compared to 2% for the traditional branches and a 16% rise in new clients compared to 3% in our normal branch. For these reasons and with the onset of the COVID pandemic, we have decided to accelerate the implementation of this new branch model in the second half of this year. This will be a company with other profound changes in our distribution network. In the next quarter call, we hope to show some results of these initiatives. To conclude, on Slide 32, the COVID-19 crisis has hit Chile as hard as elsewhere. But a more organized reopening is being implemented as contagion rates diminish. The government, the Central Bank and CMF have launched a series of initiatives that will help to maintain companies and households afloat, along with liquidity and capital levels. The bank deposit base has continued to accelerate especially demand deposits, and loan growth has been driven by less risky assets. Revenue generation remained strong in the quarter. Asset quality has deteriorated as expected. We are ensuring that the cost of risk and coverage levels reflect our true expected loss in order to minimize spillover of the COVID-19 effect into 2021. Thanks to our investments in digital platform, client growth has remained strong with a high uptake of new clients since the start of the crisis. The bank is continuing its investment plan and will begin a major change in its branch model. As we said in the beginning, a lot of water must still flow under the bridge. We are well prepared to confront the situation and look optimistically towards 2021. At this time, we will gladly answer any questions you may have.

[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 a grace period of two, three months there, but they will start accruing and paying -- I mean, they never stop accruing interest, and they will start paying in the next two, three months. So I would say that that's the mismatch we have between collecting and accruing, if you want, but it's the payment holidays on mortgages and that will finish by -- in two or three months that mismatch will disappear, and we will be having collections and accrual at the same pace. Going to the branch transformation and expansion, I think it's a fair point you made that in the next, I don't know, 12, 14, 24 months, I mean, after the -- going out of the crisis, it's difficult to think about expanding the network, but definitely would be transforming more than expanding because we think and we expect that this crisis will keep showing effects for at least a couple of years or maybe slightly more in order to be fully normal again. So yes, I mean, the focus for the near future or the next one or two years would be more transforming rather than expanding. And meaning about the restricted stance for loans coming from a capital position, I mean, I would say, no. We are very comfortable with the capital position we have and it's getting even stronger. I mean, we expect at this stage of the regulation and the evolution of the effects during July, we expect to be in July even around 10.5 in CET1. So the capital is not a restriction for us in order to set our lending guidelines or policy. And that will be definitely more guided by the situation of the crisis on how the economy is doing rather than by our capital position that, as I said, we feel comfortable with it. I don't know, Bob, do you want to add?

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.