Good afternoon, ladies and gentlemen. Welcome to Banco Santander Chile Fourth Quarter 2021 Results Conference Call on the 3rd of February 2022. [Operator Instructions] The format of today's recorded call will be a presentation by Banco Santander Chile management team followed by a question-and-answer session. Today's host is Mr. Emiliano Muratore, Chief Financial Officer of the company. So without further ado, I would now like to pass the line to Mr. Emiliano. Please go ahead, sir. The floor is yours.

Thank you, Michael. Good morning, everyone. Welcome to Banco Santander-Chile's Fourth Quarter 2021 Results Webcast and Conference Call. This is Emiliano Muratore, CFO, and I'm joined today by Robert Moreno, Managing Director of Investor Relations; and Carmen Gloria Silva [ph] economist from our research team. Thank you for attending today's conference call. We hope you all continue to stay safe and healthy. The bank rounded off 2021 with another solid quarter with a strong ROE and solid financial performance, thanks to our successful digital strategy, rising NPS levels, strong margins, sound asset quality and impressive efficiency levels. Before we get into the results, Carmen Gloria, an economist in our research department, will start with an update on the macro scenario, beginning on Slide 4.

Thank you, Emiliano. Since our last call, the number of contagions has increased substantially due to the fast spread of the Omicron variant. Despite the new infections, the number of deaths associated to the pandemic has decreased and the health system remains in good shape. This has explored [ph] in a context with more than 86% of the population have received the full immunization program, including children, and 63% have the booster. Some mild sanitary restrictions have been imposed once [Technical Difficulty] while others have been lifted. For now, we expect this new wave will have a relatively muted impact on the economic outlook. Moving on to the Slide 5. We will now give our outlook for the economy in 2022. During last year, the Chilean economy saw a strong recovery. The increase in mobility, thanks to the fast vaccination rollout and significant liquidity injections through pension funds withdrawals and public transfers for about 7% of GDP, led to a GDP growth of about 12%. With this growth, economic output not only recovered its prepandemic level, but also expanded beyond its strength. The strong domestic demand, the depreciation of the currency and international pressures led to a sharp rise in inflation, which ended the year at 7.2%, its highest level since the commodities boom in 2000, along file, a hefty deficit in the current account. The Central Bank has moved quickly, raising the monetary policy rate by 500 basis points since June up to 5.5%, above its neutral value. It's likely that the Board will raise the policy rate again in March, ending the hiking cycle with the rate between 6.5% and 7% by the end of the first quarter. With inflation and growth probably moderating in the second half of the year, we see some room for rate cuts…

Thank you, Carmen Gloria. We will now move on to Slide 8 to focus on the evolution of our various digital initiatives in 2021. On Slide 9, we summarize our strategic initiatives, identifying those that we classify as run the bank that contribute to consumer satisfaction and productivity such as Life, the Work Cafà our Santander green initiatives and Prospera, an initiative launched in the last few weeks. The bank also has a strategy to change the bank, transforming the bank into a platform so that our clients can use us as a channel rather than just as a traditional banking service. This includes our initiatives such as Superdigital, Getnet, Klare and Autocompara. This strategy has led to important improvements in profitability, client growth and satisfaction in 2021. On Slide 10, we show key data for Santander Life, our most successful initiative. Santander Life achieved in 2021 a Net Promoter Score of 76, making it one of the highest ranked product offerings in the bank. Client growth also remained strong with Santander Life reaching over 900,000 clients as of year-end, an increase of 86% year-over-year. Of these clients, 66% are active, meaning that their Life account is their main account, but only 17% are considered loyal or fully cross-sold clients, demonstrating the high cross-selling opportunities we have in this new segment. Santander Life is also rapidly monetizing. As of year-end, Life clients had $1.2 billion of demand deposits, surpassing by many times the amount clients have deposited in similar competing platforms. On the loan side, Life clients had a total of $270 million in consumer loans, a 38 -- a 43% year-over-year increase. These clients are also beginning to purchase other products such as mutual funds and time deposits that have grown 148% and 130%, respectively, year-over-year. Overall, Santander Life…

[Operator Instructions]:

Thank you. Hi, good morning, Emiliano, Good morning everyone. Congrats on your fourth quarter results. Three questions from my side. The first one is on the political landscape. We have seen some moderation of the new government. However, how do you see the potential risks? I don't know, I would like to hear your thoughts on the tax reform, the change in the constitution and the pension reform. On the tax reform, I believe the effective tax rate of the Chilean banks remains low when compared to other sectors. For example, Andina [ph] the effective tax rate is at 30%. So considering this tax reform and aggressive social spending policy of the new government, do you think they could be exploring to limit some of the deductions of the tax rate of the Chilean banks? So that's the first question. My second question is on your expectations on asset quality. As you mentioned, you're expecting a cost of risk of 0.9%, 1% of average gross loans, but just wondering is this considering any potential release of provisions? And then my last question is on your ROE expectations. As you mentioned in your presentation, you're expecting approximately an ROE of 20%. If putting that into our numbers, would this imply earnings contraction in this year? Would that be reasonable in your expectations? Thank you.

Hello. Thank you for your questions. Going to the first one about the political landscape. I think that much of the uncertainty has already been like cleared. I mean now we know the government, the cabinet. And so far, the reaction from the market has been like positive. And going forward, the constitutional reform is the depending thing to be known, but we still believe that the two thirds quorum that is required to approve any of the articles of the constitution is a good safety net to have a broad consensus regarding the constitution and that we see it as positive thinking about the outcome. And regarding the tax -- potential tax reform that has been announced from the upcoming government, actually, there are not any significant or any deduction, especially applied to banks. I mean it depends on the general tax law and the effect of the inflation on the non-monetary assets and liabilities. So far, there hasn't been any discussion regarding impact on banks regarding the tax reform, but we all know that, that a tax reform is coming. It's one of the priorities that has been set by the new government and actually by Mario Marcel, the upcoming Minister of Finance. And in that regard, also part of the strategy going forward from the government, apart from the tax reform, I think that it could be a fiscal prudency in general terms in order to reach a more balanced fiscal situation that -- what has been announced by the government so far. So going to your question, nothing specifically regarding banks has been put on the table, and we don't foresee anything special for banks in that regard. Going to your second question about asset quality, no, it's not considering any reversal of voluntary provision. It's like the base case for the underlying, let's say, cost of risk for this year. And yes, I mean, regarding the guidance, it's - the bottom line is from flat to maybe - or around flat considering to - comparing to last year, slightly negative net income in absolute terms.

Super helpful. And just any comments on the potential pension reform?

No. Actually, that's something to be -- well, now part of that reform has already now passed by the current government with this universal guarantee pension that it's, I think, an important pillar of the new or the future pension system. And we'll know more about that coming forward. I mean, but the first priority stated by the upcoming government has been the tax reform. And maybe after that, they will tackle the pension reform, but nothing special to comment on that.

Thank you very much.

You’re welcome.

Thank you very much. Our next question comes from Mr. Juan Recalde from Scotiabank. Please go ahead sir, your line is open.

Hi, good morning. Congratulations on the result. And thank you for taking my question. The first one is related to dividends. What would be your payout assumption in the 2022 guidance? And the second one is related to Santander Life. Can you provide us with an estimate or some information to help us think about the unit economics, for example, the client acquisition cost? And also in terms of revenues expectations for Santander Life and the new products that are expected, so I remember you had mentioned that the expected revenues for this year for 2021 were around CLP 60 billion to CLP 70 billion, and they ended up -- the revenues ended up being CLP 81 billion, so better than expected. So I was wondering what's the expectation for 2022? And what would be a breakdown of revenues by fees and by interest income? Thank you.

Thank you, Juan, for your questions. Bob, I'm taking the first one. You take the second. So regarding the assumption for dividend policy, we are not planning any change. We are assuming a range from 50% to 60% payout. I mean the final proposal will come from the Board and finally, we decided at the Board, but that range is the one implied in the guidance Robert mentioned. Bob, do you go with the second one? You're on mute.

Yes, I'm here. I'm here. So Santander Life, as you said, it's had a very good performance. It's generating good income level. So some economics. In Santander Life, its fee structure is actually very simple. So we don't charge for transferring money. We're taking money out of the ATM. It's not like hidden fees. It's a one flat fee just to have the account. It's in UF, but it's roughly CLP 3,000, a little less per month. So initially, the main source of income is a client who signs up and gets a full-blown checking account with no restrictions, it's not a debit card or a prepaid card, it's a full-blown checking account. It has no minimum income level requirements, et cetera. So -- but you have this flat fee. So now that we have 800,000 clients, when you multiply that by the fee, that's kind of like the fixed risk-free income that these clients will generate. So in 2022, the fact that the client base has been growing very, very strong and we're starting the year with 800,000 and last year, we started the year, I believe, with something less than 300,000, you already have a big growth in the base fee income, okay? At the same time, as we said, a lot of these new digital platforms, even Superdigital, have a lot of clients, but they don't have very much money in checking accounts, okay? They're prepaid digital debit cards. Most of the platforms probably have $15 million, $20 million in demand deposits, but this Life, it's a full-blown checking account and it has a lot of active users. We already have $1 billion equivalent in pesos in noninterest-bearing checking account money. And that -- basically, take in account, that yields at least monetary policy rate, okay? At…

The next question comes from Mr. Carlos Gomez-Lopez from HSBC Securities.

In terms of the structural changes that we see in the system, we know that there has been some problem with the long-term funding for mortgages. Now that there are no more withdrawals from the pension funds, but we may have the cases in [Santander], how do you envision your growth in long-term assets, such as mortgages? And do you expect to continue to be using the UF paper indefinitely.

Carlos, thank you for your question. Yes, as you said, I mean, part of the impact of the pension withdrawals has been a weakening of the local capital markets and our capabilities or our capacity to raise long-term funding in UF. I think that now that has gotten better. I mean new pension fund withdrawals, I mean, are unlikely to happen in the short term, at least according to what has been stated recently by the upcoming government. So we see that as positive going forward. I mean there we have seen some new activity in the local capital markets, and we do foresee that our capacity to reach -- or to raise funding in UF in the domestic market will be there, not in the same amount or the same debt that was before, but it will be there. And also it's important to point out there all our efforts to globalize and to go into the international market. I mean we began that process more than 10 years ago. I mean now we have access to the Japanese, the Swiss, the U.S. market, the rest of Asia also. And that has been our strategy even way before the pension funds has suffered the withdrawals because we always thought that depending our long-term funding in a few names because at the end, you were talking about from 5 to 10 relevant local players, was not a good position to be in. And that's why we did all these efforts to globalize our funding base. And going forward, we do expect to be able to fund the long-term assets between local and international markets, but it's also true that the demand for long-term assets, let's say, for long-term mortgages, now is showing a slowdown considering the new level of rates because the funding will be there, but the level of rates is higher and that is, let's say, making the demand or the appetite for mortgages to slow down. And so the combination of those two things, I mean, slower demand and combination between domestic and international market leave us like comfortable that we'll be able to give that business in a healthy way going forward.

Thank you.

Thank you very much. Our next question comes from Mr. Jordan Hymowitz from Philadelphia Financial. Please go ahead, your line is open

Thanks, guys. A couple of questions. First of all, what was the net interest margin in the month of December, not the average for the quarter?

Bob, do you have that number in mind?

Let me -- if you want, I'll look it up real quickly, we'll go to the next question and then I'll jump in and say it. Okay?

Okay. Second, you gave guidance for NIM for the year next year, but what do you think it will be in the first quarter of this year?

Bob?

Okay. So for the first quarter of this year, we're expecting our UF inflation expectations is around 1.5%, okay, which should give us -- and obviously, short-term rates are also higher. So we're looking at a NIM close to around 4% for the first quarter, okay? That's more or less the expectations with inflation, which is still relatively high, but coming down from the 3%, but also a higher short-term rate.

I'm sorry, what that 4.5% in the fourth quarter?

Yes. In the fourth quarter, the full -- the NIM for the fourth quarter was 4.5%. And for this first quarter, it should be around 4% or so.

So you expect it to fall 50 basis points in the first quarter?

Yes.

Yes. And the NIM for December was 4%.

Okay. And finally, if inflation stays at the current 6.5% or 6.6%, what do you think the ROE will be in 2022? Would it still be around 27%, 28%?

It's -- that's -- I mean if you take only the inflation part, it will be positive for NIMs and for ROE, but then that will imply the Central Bank hiking rates even higher than what is expected in the market, and that will like counterbalance a significant part of the benefit coming from inflation. So I mean in 2021, we had a high inflation, and rates not so high yet because the Central Bank started hiking process late in the year. So this year, we are starting with higher rates. And if the scenario of inflation that you are mentioning finally happens, the Central Bank should raise rates faster and harder. And so we don't see that -- the combination of two things should imply those kind of ROE and should tend to the around 20% we are right guiding.

Okay, thank you

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

Hi, good morning, everyone. Thank you for taking my question. I have actually two questions. My first is regarding -- it's a follow-up on cost of risk. I mean you mentioned that you are not considering in the guidance the reversal of the original provisions that you have created for COVID. So question is, is there a timing or something you are waiting to see to have before feeling confident about reversing these provisions? Any color on that would be very helpful. I mean could that happen this year? Would that be something for next year? Right. And my second question is, if you could give us an update on the regulation of interchange fees in Chile. And how could that impact your business, considering the new structure of your acquiring business now that you have Getnet? And if there is any other regulation regarding the banking system be discussed that we haven't commented on this call. Thank you very much.

Thank you, Alonso, for your questions. I mean regarding the potential reversal of provisions, as I said, I mean, we are not expecting that for this year. And as of now, we see those as basically a protection for a downturn in the credit cycle, right? I mean so if the credit -- the asset quality and the credit situation for us and for the system stays what we -- in this condition as the one we are expecting, we don't foresee us tapping those voluntary provisions because, as I said, we see it more as a way to get their balance, rainy days or worse scenario going forward than reversing it, let's say, to boost even lower the underlying cost of risk we are seeing, which we see it as healthy and relatively good. So as of now, we see in that way, I mean, during the year, we'll see how asset quality evolves and the macro scenario evolves, and that could make us -- more than us, I mean, the Board -- could make the Board to reassess the situation. But as of now, that is the situation. And regarding the interchange fees, we are just days away from knowing the regulation. It's supposed to be published during the first half of February and to take -- to be in place by April. So we don't have any specific information about the final outcome and it's likely to have the fees reduced. I mean I think no one is expecting the fees to go up. And -- but it's important what you -- the final outcome we'll know it's like soon. So for the next few weeks and the next call, we'll have more info or more guidance to share in that regard. But I think it's important what you mentioned that in our case, the interchange fees, I mean, going down, will affect our issuer business, but then we have our acquiring business. That is what we are doing in Getnet. And also remember that we still own 25% of Transbank. So at the end, the reduction in interchange fee -- potential reduction, it's going to be a positive for the acquiring business. We are going to capture part of that through our 100% ownership in Getnet and also through the 25% we own of Transbank. So the net effect for us will be, let's say, lower than other banks that could only have the issuer part. But as I said, we'll know more soon, and we'll share more information regarding that in the next call.

And just -- is there anything else being discussed here in the convention or in Congress regarding regulations for the banking system?

No. I think that the interchange fees is like the most relevant and it's very close to be known. And there is nothing relevant apart from that. There was -- there is a project in the Congress regarding interest rate cap that has been there for a while. I mean it hasn't, let's say, advanced. And we haven't heard any news regarding that. There is a -- on the positive side, this project to have the positive credit bureau integrating all the credit providers, not just banks, including retailers and auto loans providers, that's already in Congress. There has been some discussion regarding the benefits of that. And it's not so evident how fast that will move forward, but that is something positive to happen in the future if that project finally moved forward, and we have a positive credit bureau with all the information and not just the one from banks.

Great. Thank you very much.

We'll take the next two voice questions, and then we'll move to the text questions. The next voice question is from Mr. Yuri Fernandes from JPMorgan. Please go ahead, sir.

Thank you, everyone I have a follow-up on margins. If you can refresh us the sensitivity. I recall from many calls, something between 10 bps for rates and 20 bps for inflation. But if you can refresh if something has changed given your guidance of NIM compression in 2022, that would be great. I have a second question regarding Getnet. Very good that you have like this fee growth, the CLP 7 billion year-to-date. And my question is, if you have like a guidance for Getnet growth in 2022? And what that fee is about? Is that the net MDR? Like what is that fee so we can have more visibility on like on the economics of Getnet? And last but not least, on OCI, we note a better quarter for the mark-to-market on your equity proportion. So if you can explain us what happened if this is related to the curves in Chile, with the interest rates in Chile? Or is this related to something else, you may improve on your balance sheet so we can understand how OCI may evolve in 2022. Thank you very much.

Bob, do you take the first 2? Then I take the third?

Sure. Okay. So regarding net interest margins, today, you're correct, we have sensitivity both to the inflation and to the short-term interest rates. For every 100 percentage point increase in short-term rates -- on average short-term interest rates, we have a sensitivity -- a negative sensitivity in the first 12 months of around 10 basis points. And for inflation for every 100 basis points rise or fall in the UF compared to the previous year, the sensitivity is between 15 and 20 points, okay? Obviously, why I say that range because we do move around the gap and you have inflation, you have more flexibility. It's not so easy on the rate side, but we do have flexibility in terms of moving the gap with inflation. Today, I would say, given that we're expecting, as our economist said, more inflation in the first half, we'll probably have a little more exposure to UF inflation, and it will probably then lower the gap by year-end. So those are the 2, like around 10 basis points for the short-term rate and 15 to 20 on UF inflation. And then going forward, obviously, in 2023, what we should expect and also probably in this year, is that loan growth should continue to pick up, should -- the asset yield should slowly start to incorporate the higher yields. And that's why we think in 2023, there should be stability or maybe increase in margins. Inflation is obviously important in bank results. That would be ridiculous to say the contrary. But remember, last year, we had very good results, no doubt. And then in the fourth quarter, we had ROEs of 28%. But obviously, if that high inflation isn't sustainable, all right, just because of the price level, but it's also -- the ROE isn't…

And regarding OCI, as you said, I mean, fourth quarter, we got an improvement there considering the evolution of rates and inflation breakevens in the market. And for 2022, I could say that the worst there is behind because the level of rates during the last part of last year was really high with all the withdrawal noise and the elections. And now since then, even in January, we have already seen a fall in rates from the levels of December and the same for breakeven inflation. So moving forward for this year, and then you have the time decay because at the end, a significant part of the impact in 2021 was like the time to -- the mark-to-market of those positions and just with the time passing that value basically gets better because there is less time before maturity. And so for 2022, we don't expect, let's say, a negative impact on -- coming from OCI and should be from neutral to positive. How positive will depend on the evolution of rates and how the market evolves, but we shouldn't have the same situation we had in 2021, considering the ending point of last year.

Super clear. And congrats on the 28% ROE, guys. Thank you.

Thank you.

Thank you very much. Our next question comes from Santiago Alba from Credicorp Capital. Please go ahead. Your line is open.

Hi. Can you hear me?

Yes.

Okay. I entered a little late to the call. I don't know if this answer was already like answered. The question is why the bank prefers to maintain a conservative approach in terms of provision expenses when asset quality indicators remain like under control? And if you are observing some difficulties in the payment of some clients, that is still not reflected in the asset quality indicators, the latter also considering a robust coverage ratio of 270%.

Bob?

Okay. Just basically, in Chile, in Chilean gap, we've done additional provisions basically every quarter through the fourth quarter. And as we said in Chilean credit risk, banks don't follow IFRS 9 and additional provisions are pretty much a discretion of the Board. And our Board, obviously, supported with management's views, is that -- there is still risks in the economy coming from the pandemic basis, okay? In fact, now we're in the Omicron crisis. It hadn't been so bad, even though contagion levels are going through the roof. So the fact is that the Board, at least to the end of last year, felt it prudent to continue saving, adding voluntary provisions for a rainy day. And our guidance for this year, we don't expect to add on any more voluntary provisions, but we're not expecting to reverse them. And with the idea there that those are for exceptional events in terms of credit risk, we don't see any -- we don't have any pending issues on the corporate side or any clients, in fact, the opposite. 2021, we saw quite evolution of asset quality across the board. But it is also true that eventually kind of this usage of pension fund monies or direct government transfers will be drying up. There's still a lot of liquidity in households today, but that will eventually dry up. And that is why in our cost of risk last year, excluding voluntary provisions, was like 0.8%, okay? And this year, our cost of risk, the forecast we have in the guidance is 0.9% to 1%. And that's kind of a jump that reflects some deterioration in asset quality on the margin just because it's impossible to keep these levels that we saw last year, once again, excluding voluntary provision. So going forward, I think the coverage ratio will remain high. It could come down a bit. and the cost of risk on a comparable basis without voluntary provision should go from the 0.8% last year, to 0.9% to 1% and that range will depend on how good the economy is. And if some unexpected tail event happen, as we've seen in the last 10 years. In the last 10 years, we've seen pandemics, we've seen riots, we've seen earthquakes, we have those provisions in the balance sheet to absorb those, okay?

Okay. Thank you very much for answering my question.

Thank you very much. We have also detected a question from the line of Citibank analyst team from Sao Paulo. We’ll just open the line in case there is a question there. Please go ahead. With your question. Q – Unidentified speaker: Okay. We will just come back to this line, it looks like it's muted. In the meantime, we will go back to the text questions. We acknowledge Florencia Stefani's question about interchange fees regulation. We believe that was already answered. [Operator Instructions] The next question is about main risks to inflation in 2022. Do you believe it could persist at the level above 2021 inflation? What is your impact on NIM and ROE for every 10 basis point increase in inflation?

Okay. Thank you, Michael. I think that the sensitivities were already mentioned by Robert. And regarding the risk, I think that in general, there is a -- these are all inflation pressures across the board, I mean, worldwide. I mean all the supply chain disruption and all that. It's unlikely at our forecast, our expectations shows that we are expecting inflation to be above the target from Central Bank, but not as high as it was in 2021. So our best case scenario is to have that slight reduction in inflation trending to the Central Bank target. And the risks, I think they are coming more from abroad and from all these international inflation pressures, and I don't see many internal risk of inflation going up. And definitely, if any of those upwards risk appears, especially the ones coming from the domestic situations, the Central Bank I think will be even more aggressive in hiking rates and that could like counterbalance the positive coming from inflation.

Okay. Thank you very much. A question about normalized ROE. What is normalized ROE and net income growth for the group?

Bob?

Yes. So -- we believe that if we return to a situation where we have GDP growing 2.5%, 3% on a normalized basis, with inflations going back to 3% and the Central Bank rates more or less at 3%, 3.5%, a neutral rate, as we said before, the ROE -- our ROE guidance is around 17% to 19%. And therefore, we think that the net income growth should be pretty much in line, given that we're probably paying a payout of 50% to 60%, and if we're able to keep those ROEs more or less in that range, net income growth should be similar to loan growth, which for Chile -- Chile is growing 2% or 3% real GDP, nominal loan growth should be roughly around 6%, 7%. And that should give you kind of like the normalized net income growth. What could drive this upward? Basically, what could be -- or at the higher range of the ROE or driving this upward is obviously a continued success in our digital strategy, okay? I think that's -- it could call up our forecast of normalized ROE, net income versus what I just stated. And what could pull it down really is the political economic environment and maybe some type of regulations that are always out there, okay?

The final text question, how do you think the pension withdrawal affected consumer loan demand? And how does their absence affect your forecasts?

So I mean, definitely, the withdrawals affected consumer loan demands to the downside in a significant way. I mean there were -- there was a lot of liquidity in people's accounts and buckets and so that made them demand less credit. And the situation is still similar to that. I mean there is still a lot of liquidity around. So that's why we are not expecting a rebound in consumer the lowest demand in the first half of the year, first quarter, second quarter. But in the loan growth expectations that Robert was mentioning between 6% to 8%, we are already factoring in that, that situation begins to revert by the end of the year. And so people will start to consume and to use the liquidity they have and they start to demand more credit. And that's why we also think that the loan growth in terms of the mix could be like positive to NIMs because from the starting point we are seeing, we see maybe consumer loans growing in the upper part of that 6% to 8% range and that would contribute to the mix and to support NIM. But definitely, withdrawals were a significant pressure and will be -- won't be there going forward, and that should support consumer loan demand and growth.

Okay. Thank you very much. I am seeing no further questions at this point. Perhaps I'll pass the line back to the management team for your concluding remarks.

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

Thank you very much. This concludes today's call. We'll now be closing all the lines. Have a great day.+