Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 Banco Santander-Chile Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I’ll turn the conference over to your speaker for today, Emiliano Muratore. You may begin.

Good morning, everyone. Welcome to Banco Santander-Chile's Third 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 all continue to stay safe and healthy. During the quarter, Chile has begun a gradual reopening, which so far has been working well to control the health situation. We have a lot to discuss today with various important messages. Claudio will start with an update on the economy and the macro scenario. Then we will go into the results of the bank during the quarter. And finally, we will explain how we continue to progress in our digital strategy and other initiatives. So now I will hand the call over to Claudio.

Thank you. Please turn to Slide 4. During the third quarter, the pandemic has been receding in Chile allowing a gradual easing of lockdowns. The reopening strategy involves going through various phases. Stages are defined at the communal level considering not only local indicators but also regional and national information. Currently, less than 10% of the population is still in stage one with full lockdown. As you can see on Slide 5, the reopening process has allowed mobility to resume, helping the economy to kick-start once again. Households have received substantial liquidity, thanks to the pension fund withdrawal of about US$15 billion, equivalent to 6% of GDP, and the government cash transfer programs. This strong injection of resources will continue to boost consumption until the end of the year. On Slide 6, we show that the economy began its recovery slowly in June. In August, we saw a much stronger rebound, thanks to the increase in mobility and the liquidity shock. September's data show an even faster increase in activity. Retail sales are running above pre-coronavirus levels. Business confidence attained its highest standing since last October, with the overall perception of the country situation reaching optimistic territory. Export grew favored by a high copper price and imports, contracted less than in previous months. Employment has also begun to rise. As long as the pandemic remains subdued, the recovery should continue throughout the rest of the year. On Slide 7, the economy should – as seen on Slide 7, the economy should contract between 5% and 6% this year and recover during 2021. Inflation will remain contained as large gaps in the economy still restrain price increases. Therefore, we believe it will continue below the 3% target during 2021 and converge toward this level by 2022. With this, the Central Bank will maintain the interest rate low for several quarters. Finally, as seen on Slide 8, the constitutional reform process has officially begun. Last Sunday, October 25, the constitutional referendum made it clear that there was support for the – from the population for a new constitution. The approved option won by a wide margin as well as the option for a constitutional convention as we're voting charge of writing the new text. The election of the constitutional convention members will take place on April 11, 2021. They will have up to a year to propose a draft that will be voted for in an exit referendum by mid-2022.

Thank you, Claudio. We will now move on to explain our strong balance sheet and the results in the quarter, which started to show positive trends as the lockdowns were eased. If we move on to Slide 10, net income in the third quarter increased 23.9% quarter-on-quarter, totaling CLP 105 billion. It is important to point out that third quarter results include additional voluntary provisions in the amount of CLP 30 billion recognized in order to increase coverage ratios, considering the uncertainty surrounding the potential impacts on credit quality of the COVID crisis. In the quarter, the bank also recognized CLP 34 billion in regulatory provisions set aside for FOGAPE loans due to a regulatory change in these loans expected loss models. Since August, we have seen our results recover in line with the easing of lockdowns. In the graph on the left on this page, we can see the monthly evolution of operating income net of provisions during the year, with August and September showing positive trends. This has contributed to a stronger quarterly return on equity of 11.5% compared to 9.5% in the second quarter. On Slide 11, let us begin with the analysis of the evolution of net interest income. As of September 2020, our NII on a nine month basis, has shown strong growth of 10.5%. Our NIMs, that reached 3.7% in three quarter – in the third quarter, were mainly affected by the focus on growth in low-yielding but less risky assets and the 0% U.S. inflation rate in the quarter. The good news is that inflation is expected to pick up in coming quarters which should boost NIMs back to the 4% level. In Slide 12, we show that despite the adverse scenario for NIMs, the successful management of the balance sheet has led…

Thank you. [Operator Instructions] Our first question comes from the line of Ernesto Gabilondo with Bank of America. Your line is open.

Hi, good morning, Emiliano and Claudio. Thanks for the opportunity and for the presentation. My first question is on the political and economic outlook. I will appreciate your thoughts on the potential second round of pension fund withdrawals. And the uncertainty on the constitutional process, given that next April, there will be 100% new members. In this last point, do you see this will be balanced or do you see a concentration of a political party? Also given that the government has been receiving a lot of the demand and that the government has put a lot of effort to do fiscal and monetary measures, we're seeing a higher debt GDP. So do you expect a new tax reform next year? And how do you think all this will influence on presidential elections of next year I know a lot of questions on the macro side, but I would like to know your thoughts. And then my second question is on your provision charges and cost of risk. I know that you have been creating preventive provisions, and the cost of risk has averaged 1.6%. However, when compared to the 2009 crisis, I think the cost of risk used to be at 2.5% and the economy declined around 1.5%. So now the economy is expected to decline around 5%, 6%, and you have a lower cost of risk. So I would like to know why is this difference. And on the other hand, we have seen that 29% of your deferred clients resume payments in September and that only 2% is delayed. So again, I just want to know, if this is the reason why you are having a lower cost of risk or what should we expect going forward. And considering that, I think you have clients resuming payments in October and November.

Thank you, Ernesto, for your questions. Claudio, are you around to go to the first one?

Okay. So there are many questions, many, many things there. So let me begin with the 10% withdrawal. It's not clear yet what will happen with the second – the proposition for a second withdrawal. It passed a first stage in the House of Deputies that they need to be approved at the full house now. Remember that this is a constitutional reform. Therefore, you need high quorums to be approved. It's not clear yet what will happen with deputies of the Chile Vamos Coalition. It's not clear yet what will the government do. They have announced some – there are some hints that they could go to the constitutional court to avoid this project to become a law. On the other hand, deputies from the office of coalition are asking new measures on the government side in order to counteract this proposal. So there is still some uncertainty. There is certainly a chance that this proposal will go again. And that will mean an extra boost of liquidity to households. We already saw that the first withdrawal implied a huge liquidity shock that have the economy to recover in August and September and probably still during October. So in case that you have a second withdrawal, you will have a boost on consumption. But it will create, of course, more tension on the reform of the pension system that is currently being discussed in Congress. Now regarding the constitutional process, the next stage is, of course, the election of the constitutional members – the members of the constitutional convention, that will take place in April. Yesterday, it was voted a law that will include for including indigenous people within the convention. So there are 155 members to be elected, plus 23 members from indigenous communities. The election system for…

Thank you, Claudio. Before moving to your second question, Ernesto that Robert will address it. I mean, I would like to mention regarding the potential second withdrawal from pension funds that, leaving aside the long-term discussion and effects on pensions that definitely, that's a big issue. But leaving aside that for a while, the short-term effects definitely are showing higher liquidity for households. As you can see on the Slide 5 in the webcast, almost 400,000 people in the third quarter left the negative credit bureau in Chile, meaning that definitely, part of that money went to paying back debt. You can also see that in the asset quality for our balance sheet and for the rest of the system. And so – and the second effect is consumption going up. And that's also having some pressure on inflation and prices being so low as we had in the first part of the year. So those short-term effects of the potential withdrawal, I mean higher liquidity, lower leverage for families, higher consumption and prices not so low, are not negative effects for banks in the short run at the cost of definitely the pension effect that the decision could take – could have on the long run.

Yes. So taking off from that. So back in 2009, the big difference is that the economy obviously contracts a lot more at this time. But the help that people have received has been much bigger this time around, okay. And that's basically what we try to show on Slide 5, as Emiliano said. Just in August and September, $15 billion was injected into the economy, basically, people's pockets. And obviously, some people have to use that for basic necessities, some people re-saved it and some people went ahead and continue paying off their loan obligation. Another really important factor, there's two other very important factors comparing this crisis with 2009. First of all, today, our coverage ratio is already at 200%, okay. And in consumer lending, which has already finished the payment holidays, it's more than 500%. Back in 2009, our total coverage ratio of NPLs was only 74%, okay. So over the last 10 years because of internal changes and regulatory changes, we've really built up our coverage ratio. So that's a big reason why the cost of risk is trending much better this time than in the previous crisis. So I think that's really good news. And the other thing is, remember, we've been saying for a long time, back in 2009, Santander Banefe represented probably 12% to 15% of our loan book for individuals, okay. After what happened in 2012 with the increase in – a decrease in maximum rates and other regulations, remember, we got out of that business. And today, Santander, the low income is less than 1% of our loan book. That's absolutely key. Also is why this time around, the cost of credit is significantly – not significantly but different to trend than when it was in 2009. So a mix of a much more proactive government this time around, a much higher coverage ratio built over the years and a significantly different loan mix has ended up in this lower cost of risk.

Super helpful. Thank you so much.

Thank you.

Our next question comes from the line of Juan Recalde with Scotiabank. Your line is open.

Hi, good morning. Thank you for taking my question. So my question – I have two questions. One related to provisions and the second one related to expenses. So in terms of provisions, taking into account the positive evolution of the scale of programmed loans, and the fact that you are expecting additional provisions in the fourth quarter, how should we think about provisions in 2021 in next year. What's the base case that you are working on And then, the second question related to expenses. So we've seen that noninterest expenses rose around 3% so far this year. And so we – what noninterest expenses growth can we expect in 2021. What's the base case that you are working on?

Okay. Thank you for your questions. I mean regarding provisioning for 2021, that's a bit like long term under the current circumstances. So we don't want to give much guidance on 2021 yet. As you can see the – our forecast for last quarter is relatively encouraging because we are seeing the cost of risk around 1.2, 1.3 even considering additional provisions. And that – why is that the case Because basically, the situation of the portfolio and the behavior of clients in paying their debts, it's been so good that, let's say that the natural cost of risk is going even below pre-COVID levels, which at this time, we think that it's maybe too aggressive to, let's say, not to take advantage of that in order to build up some additional provisions and increase coverage. So looking into today 2021, as I said, it's a bit long term because we are still waiting for the evolution of the pandemic here. We haven't had a second wave yet, but there's a risk that we may have. But it's also true that we have built a good outstanding of voluntary provision. The coverage is high. So we are, let's say, relatively comfortable looking into 2021 under a relatively benign scenario. And so it's not, let's say, it's not easy to see a cost of risk on 2021 going above this year under a base case scenario, that I think it would need some more time, maybe for the next quarterly call, we will have more visibility over a potential second wave, and we can give more guidance. So we don't want to go much further than this guidance over the fourth quarter. And regarding expenses, basically, our idea is to keep the discipline on efficiency and expenses. And that means, definitely not growing above inflation. I mean, that's a kind of a threshold we always try to keep, to have expenses growing at or below the inflation rate. So you can expect that for the future. I mean, expenses not growing above inflation are hopefully, slightly below. We don't want to strangle the – let's say the investment plans and all the digital things we are doing. So that's why we never target efficiency going. That's extremely low we got at the end, we think that this might be bad for our business, but definitely keeping discipline on cost and not growing above inflation.

Thank you. That’s very clear. Thank you very much.

Thank you. [Operator Instructions] Our next question comes from the line of Sebastián Gallego with The CrediCorp Capital. Your line is open. Sebastián Gallego: Hi, good morning. Thanks for the presentation. I have couple of – going back to the constitution. I think this is a key point and maybe just a follow-up on a previous question. I know you mentioned couple of points, but I just want to ask what are your main concerns going into this new constitution. This should be a long process. The outcome of the constitution vote was unexpected in terms of the gap between the yes and no. And I'm just wondering, if you could provide more color on what are your main concerns going into the constitution process. And what could be potential game changers for the industry Second question is kindly related to the first one, but is more associated – or more broad in terms of regulatory risk. We have seen regulatory risk increasing, not only in Chile but also in other countries of the region. What are your main concerns in terms of regulatory risk going forward? That will be the two questions.

Okay. Thank you, Sebastián. Claudio, can you please comment on the first…

Yes. Okay. So in terms of the extension of the process, it will take up to two years. It's already defined. The first stage is April with the election of the constitutional convention members. And then they will have up to a year, no more than that, to produce an outcome. And then there is the exit referendum. So the process, the extension of the process is that one. It cannot be longer than that. If the exit referendum turn out to the people – if people turn out to, yes, the proposal of the constitutional convention, then we'll remain with the current constitution. That is pretty clear. Now what are the key elements of the constitutional debate, if you follow more or less what I'm discussing several stakeholders? The first one, I would say is, the political system. Chile has a very procedural the election system that has been – has created certain tension that we see currently with the parliament, but also in terms of the regional distribution of power and so on and so forth. So the first element will be on the political system. To, in a way, sort of sort out a little bit the power of the President in favor of Congress and also probably in favor of regions within the country. The second discussion is about the so-called social rights. It's possible that in the constitution will include more social rights. It's not clear yet what is the – what will be the status of those rights, whether those will be sort of roadmaps for the political public policies in a long-term horizon, or there will be some mandatory requirement for the state to sort of provide certain basic rights. The risk there is that, you start putting pressure on the size of…

And thank you, Claudio. Going to your second question, Sebastián, regarding regulatory risk, I agree that in this context, that risk has increased. It's also, I think, true that in Chile, I think we are a bit like ahead of that trend. I mean when you look back what has happened in the last 10 years, I was here right in the list, I have like 10 or 12 different points from the reduction of the maximum legal rates. Now the portability law, the introduction of this auctioning process for insurances of mortgages, the automotive repayment of overdraft lines, the – let's say, the provision of overdraft fees, the freeze on prices, the law that, let's say, makes banks like responsible for digital fraud, for clients. And also, you can also include the increase in taxes that the country has had. So we have that a lot. So looking forward, it's not so easy to imagine other areas where we can have more regulatory pressures. As of today, there are only two initiatives being discussed at the different – at a very early stage that's being discussed. One is like a project that the Minister of Finance to the Congress in May or June regarding regulating the interchange fees. And that's not relevant for our business today because we are not yet in the acquired business. But as you know, it's one of our initiatives. So that is still in very early discussions. And we think that maybe out of that, we get some kind of regulation on interchange fees. That we feel comfortable to expect the government right to balance all the different aspects of the payment systems and trying to promote more adoption of cards and electronic payments and all that in favor – in contrary of cash. And that's why we don't – we are not very concerned in that sense. And the second is, one that was approved by the lower house last week regarding insurances. Now which are at the Senate of the Finance Commission at the Senate. Already the Minister of Finance and the President of the Financial Market Commission, the financial regulator were presenting, and they basically, they stated that they see this as not good or a positive project for the system, for the economy. Basically, that project asked the banks to pay for half of the cost of the different credit-related insurances. So that's something, as I said, in early discussion, we expect that not to progress in the Senate. In general, the regulator and the government is showing their concerns. But apart from those two initiatives then, it's difficult to imagine other areas where we can have more regulation, apart from the ones we already have. Sebastián Gallego: Very, very clear. Thank you so much.

Thank you.

Thank you. Our next question comes from the line of Gabriel Nóbrega with Citigroup. Your line is open. Gabriel Nóbrega: Hi, good morning. Thank you for the opportunity to ask questions. I also have two questions. My first one is sort of a follow-up towards provisions. I understand that you're saying that 90% of the clients which have adhered to the grace period program, they are already paying. We're also having the benefits from the pension withdrawal. And you also mentioned that if there is a second pension withdrawal, this could even help more beyond delinquency of your clients. So I'm just wondering, if maybe you made too many provisions. And if we could expect a reversal of provisions during [Audio Dip] And as for my second question is actually related to dividends. We're seeing that your common equity Tier 1 ratio reached levels of around 10.7%. And you were guiding that, we are supposed to start seeing better net income through the incoming quarters. And so I am just wondering, if you could not maybe raise your historical payout ratio, which, if I'm not mistaken, has been around 50 – some 60%. It's – if it could not even be higher next year, given the higher capital that you have and also better prospects for organic capital generation over the coming quarters.

Okay. Thank you, Gabriel. I will take the first one, and I will leave the second one for Robert. And regarding provisions, I mean I think that we are not expecting any revision of onetime provisions in the short run. I mean we have seen that in some other players in the market. We don't think that now it's the time to do that. Going forward, definitely, if the pandemic begins to, let's say, get better, the second wave is not as bad as in other places here in Chile, and delinquency keeps at these levels, definitely, we want to stop building voluntary provisions. And there is a chance, as I said a moment ago, in time to think about revisions, but I don't see that in the near future. But as you can see, even building voluntary provisions, we expect to have cost of risk at decent levels. I'm definitely going to the previous questions at much better levels than the 2008, 2009 crisis. I mean, so – yes, I think it's fair to expect that. But in the long run, subject to these trends keeping in place. I mean the uncertainty today, we think that it's high to think about revision provisions instead of keeping them or even increasing them if the underlying delinquency and asset quality stays as good as it's now.

Okay. And regarding the other question, dividend and dividend policy, you're correct. As we said in the presentation, we finished September with a core capital ratio of 10.7. But that was 70 basis points higher than in June. On top of that, our total BIS ratio reached 15.1, which is the highest level since 2010. And that's why the Board is proposing an additional payout this year of 30% of 2019 earnings that we didn't pay. So remember, in April this year, we had a payout of 30%. We're paying out another 30%. So the total payout for 2019 earnings will be 60% similar to what we paid in previous periods. Going forward, how much we pay of 2020 earnings Once again, everything is pointing towards going back to a more normal payout, okay But as we said, regarding like the forecast of provisions and so forth, there's still a lot of uncertainty, okay But if trends continue, we should be paying around 60%. We don't rule out going again to this 30-30 payout method because that gives a little more flexibility in uncertain times. But – and on top of that, risk-weighted asset growth has been relatively low in the second half. As we said in the call we're kind of at an inflection point where there's a lot less demand for clients for emergency funding and FOGAPE loans. But we still haven't seen a reactivation of loans like the consumer. Eventually, that will come, okay. So next year, there could be a rebound in loan growth, if economy continues to rebound. So – and don't forget that in December of next year, we begin with Basel III. Everything points to – for now, at least that our Basel III ratios will be very similar to what the Basel I ratios are. So to make a long story short, everything is point to going back to pay out – normalized payout. That's why we're paying something more now. But given the uncertainty, it's not 100% share. So – but we should be going back to 60% payout over 2020 earnings. But once again, it depends on what happens in the next few months. Gabriel Nóbrega: Perfect, thank you so much.

Thank you. Our next question comes from the line of Gustavo Schroden with Goldman Sachs. Your line is open.

Question is regarding the loan growth. You just mentioned that you should expect a rebound in loan growth next year. I wonder, if you could share with us more info about the loan growth you're expecting, especially on the mix, should we expect a better mix for NIM next year I mean, could you elaborate more, in which lines should we focus on next year?

Yes. Thank you for your question, Gustavo. Yes. I mean, going forward, again, we need to talk about uncertainty, but I think that there are a couple of points, going to your question on that. First, this year, we are showing consumer loans falling for us and for the system. I mean, because of say, the low consumption in the economy, but also the deleveraging we are seeing in households from the money they got from the government and from the pension funds. So I think that for – going forward, we can expect consumer loans to grow, let's say, faster than the rest of the portfolio, considering the starting point, considering, therefore, we are having this year, that should be good for NIMs. I mean the mix in that sense should be better. We think that as a whole, we expect the multiplier to GDP – I mean loan growth to GDP multiplier for next year, we expect it to be slightly below the historical terms as a whole. But then the breakdown, we do expect consumers to be – consumer loans to be above that. And commercial loans to be below that because on the contrary, this year, we had all the FOGAPE program that basically represents like 11% of the portfolio. So basically this year, if you factor out that FOGAPE loans, that commercial loans would have been falling also. They are not falling and they are double-digit growth because of that. So that's on the other side, gives a starting point relatively high, which should make commercial loans to grow below the rest of the portfolio and below consumers. But also talking about the margins of the consumer loans, remember that, all the FOGAPE loans were granted as a fixed spread of 3%. And so that going forward, the origination, we don't expect it to be, let's say, on FOGAPE loans, as you can see in the presentation, the demand for that has been going down. So the margins in the consumer, in the commercial origination won't have this fixed price, which can give some room to also improvement on – in the margin on the commercial loans origination. And as a mix, we can expect to have a favorable mix on the spreads going forward because of this. And mortgages there will be – the state growing relatively high until the midyear of this year. Now they are decelerating. We expect to have, let's say, a more normal growth going forward, maybe more in line with the average – the average portfolio. And also spreads for mortgages are say, at a decent levels compared to the – some years ago, where spreads were, let's say, below 100 basis points. Today, they are in better levels. And so that's – I know, Bob, if you want to add

Yes, that's basically – actually on – so for NIMs, the outlook is a little better, as we said. NIMs were a little low in the second and third quarter because of all of these factors. We've been defending ourselves relatively well. Our NII is growing a lot – because we have expanded the balance sheet. But next year, I would say the balance sheet maybe not even grow that much like this year as we normalize liquidity. But I think the loan mix should be better. And obviously, there could be – the rates should remain low. Our deposit cost, our interest-bearing deposits should – the costs remain low and there could be a little bit higher inflation, which should also help NIMs a little bit as well. So I would say, in general, the outlook for loan mix is slightly better beginning next year. And for NIMs beginning already in the fourth quarter.

Very clear. Just one follow-up here. So assuming that you have probably a better NIM next year, considering information that you just said. And I mean, if you have some normalization in provisions, so should we expect the ROE that is 15% to 17% next year as well?

We don't want to talk much about ROE going – next year. But yes, I mean, the part on the revenue side on the provisions are like you said, I mean, then, yes, you can do the math, and you can reach the level. But the uncertainty on cost of risk is still higher. I would say that maybe, it's higher than on the NIM side, that's all the forces on the NIM side are, I think, a relatively predictable, if you want, because inflation definitely should be rebound and the mix effect which was mentioned, will be there. But then to talk about the – with a high level of uncertainty about cost of risk is too early for us.

Okay, very clear. Thank you very much.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to management for closing remarks.

So 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.

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