Good afternoon and welcome to Banco Santander-Chile's First Quarter 2023 results Conference Call. We are joined by Emiliano Muratore, Claudio Soto, Cristián Vicuña and Robert Moreno. I will hand over to Emiliano to begin the presentation.

Good morning, everyone. Welcome to Banco Santander-Chile's first quarter 2023 results webcast and conference call. This is Emiliano Muratore, CFO and I'm joined today by Robert Moreno, Head of Investor Relations, Cristián Vicuña, Head of Strategic Planning and Claudio Soto, Chief Economist. Thank you for attending today's conference call. Today, we will be discussing the trends and results seen in the first quarter, while tight monetary policy continues to squeeze margins, our successful digital strategy and customer-oriented product offering continues to drive strong results from our business segments. To begin, I invite Claudio Soto to give us an update on the macro scenario beginning on Slide 3.

Thank you, Emiliano. Given the continuous adjustment process after [indiscernible] of 2021. GDP grew by 2.4% in 2022 and contracted 2.5% in the first quarter of this year in response to tight financial conditions, and a contracted fiscal policy. High interest rates have drained away excess liquidity from past pension fund withdrawals. The labor market remains relatively weak with low employment growth and an increasing unemployment. Real wages have contracted due to high inflation. Political uncertainty fell after the referendum that rejected the constitutional proposal of the constitutional convention last year. However, it remains relatively high as compared with historical levels. In this context, we expect that GDP will have a mild contraction this year of around minus 0.25% before returning to trend next year. Domestic demand will remain subdued, while the external sector will benefit from the reopening of China. Overall, the outlook for activity is better than what we previously estimated. With domestic demand and better terms of trade will help recovering the external accounts. During the first quarter, the trade balance reached 7.5 billion surplus and historical record. For the year, we expect a current account deficit of 4% of GDP down from the 9% of GDP deficit of last year. High copper prices, lower political uncertainty and the global depreciation of the dollar has strengthened the Chilean currency. Inflation, although remains elevated, has begun to fall in line with our past forecast. More CPI increased 11.1% year-on-year and during the second quarter, CPI, annual changes should reach a single digit. The slackness of the economy, the appreciation of the currency and the fall of fuel prices will keep pushing down inflation, which we expect will be running at 5.1. U.S. variation by the year's end. The central bank has kept its monetary policy rate at 11.25%.…

Thank you, Cristián. Moving on to Page 22. Net income in the first quarter totaled 136 billion decreasing 42% year-over-year and increasing 33% quarter-on-quarter, in the quarter the bank's margins continued to be negatively affected by the high interest rate environment, the banks ROE in the quarter reached 13%. On the other hand, our business segments continued to show solid growth with an important expansion in net interest income and fees with costs and risks under control. The net contribution from our business segments that excludes the Corporate Center and ALM increased 30% year-over-year. The result of Santander net corporate and investment banking or CIB have remained impressive, increasing 76.7% year-over-year. Net contribution for the middle market of corporates increased 31% year-over-year both of these commercial segments experienced an important rise in deposits spreads, as well as high growth of fees and Treasury income. The results from retail banking rose 10.5% year-over-year, also driven by rising deposits spread and greater fee income coupled with higher productivity levels. In terms of loan growth, in the first quarter loan growth accelerated as the economy feels the effects of tight monetary policy, slowing inflation rates and depreciation of the peso. During the quarter, the CIB segment decreased 1.2% q-on-q influenced by translation gains or translation losses caused by the 6.5% appreciation of the peso on the quarter. This also explains the 1.0% q-on-q decrease in loans in our middle market segment. As mentioned, during the quarter, we launched specialized attention models for the agriculture, automotive and multi-Latinas sectors to enhance loan and income growth in the sector. Retail Banking loans grew 1.1% q-on-q led by consumer loans which in turn were driven by good demand for credit card and auto loans. Origination of new mortgage loans has decelerated with the slowdown of inflation…

Thank you. We will now move to the question-and-answer section. [Operator Instructions]. So our first question comes from [indiscernible] at Scotiabank. Your line is open. Please go ahead.

Hi, thank you for taking my question. My question is related to the NIM. So the NIM expectation has declined and now you are valuing for around 2.4% NIM for 2023? I was wondering what kind of NIM can we expect for 2024, I've just tried to get a sense of what a more normalized level of NIM can be? Thank you.

Hello, Juan. Thank you for your question. I mean, the more normalized NIM would be like around like 4% that's when monetary policy it's like on a normal level. That's we don't see that happening before 2025 maybe so in 2024 would be like in the middle from where are we are this year at around 2.4, 2.5. So next year being around 2.3, -- 3.3, 3.5, all depending on the pace on the path of the monetary policy rate. But that would be like the trend going forward.

Thank you. So our next question comes from Neha Agarwala from HSBC. Please go ahead.

Hi. Thank you for taking my question. Could you please explain once again, what led you to reduce your guidance for ROE for this year? Is it just the interest rates which are higher than expected previously? Or is it something else? Regarding the NIM from the market, when do you think that will normalize be close to zero, if nothing else, by early 2024 seems right now? Could you please confirm? Thank you.

Yes. Hello, Neha. Thank you. Thank you for your question. So the adjustment in NIM name guidance basically is like -- if we look at the heat map the way we call that chart, on the previous call, basically, what we did is, we moved to the new average monetary policy rate and the new inflation. So let's say that it just related to the delay in the interest rate cuts that we were expecting before and now we are expecting a bit later. So there is not more than updating to the new macro scenario. We are expecting now. And so in terms of the non-clients and NIM go into neutral, again will depend on the level of interest rate and according to the pace we are expecting for the central bank to cut rates that should be more around this the second half of next year.

Perfect. And any regulatory changes that we should expect this year or next year that could impact the bank? Thank you so much.

There is nothing in agenda. I mean, now we have the interchange fees already known and the transitioning period announced. So there are there are no regulatory issues being discussed at this moment that we ambition that could affect us in the coming months.

Thank you. We have a question from Tito Labarta from Goldman Sachs. Please go ahead.

Hi, good morning. Thank you for the call and taking my questions. A couple questions. Just to understand a little bit, the ROE evolution, and the timing of when you expect the rate to come down? Because as long as rates remain high, the ROE should be relatively low, just given the guidance. So should we expect sort of first half of the year you will be below that ROE guidance of 15% to 17%? And then, maybe 3Q and 4Q you start to go above that? And then, could you clarify when do you expect rates to start to come down in Chile? And then my second question is on your fee income, which is very strong. Is that growth that we're seeing sustainable? How long can you continue to grow the fee income at that pace? Thank you.

Hello, Tito. Thank you for your question. Regarding the timing for interest rate cuts, our base case scenario is assuming a cut in July, I mean, small cut but the cut in cycle starting in the third quarter and then continuing during the year. So with that path, the trajectory of ROE will be the one you mentioned. I mean basically first half below the average for the year and third quarter starting to rebound together with the NIM when the central bank start the relaxing cycle and keep going up during the fourth quarter as the additional cuts are made. CristiánVicuña: So Tito, this is Cristián, regarding the fee question, of course this year is spectacular for us with more than 20% growth or over 15% to 20% growth. So this looking really good. This is very linked to our customer growth base and the performance of our Getnet initiatives and life initiative. So for the upcoming year, we of course expect to grow strongly, hopefully better than the market. But I'll say that 20% figures for the long run are not what we expect normally. So we'll say, larger than 10%, but not 20.

Thank you. Our next question comes from Carlos Gomez from HSBC. Please go ahead.

My question asked and answered. Thank you.

Okay. Thank you. So our next question then comes from Daniel Mora at Credicorp. Please go ahead.

Hi, good morning, and thank you for the presentation. I have a couple of questions. The first one is regarding the NIM. Your rates explained a decrease in the guidance. But I would like to understand what will be the strategy of the derivatives that are currently impacting the net interest income, I mean the hedge of interest rates? Are you waiting for them to decrease that increase of rates will improve the position of the derivative? So are you going to wait for the expiration date of these assets? What is the strategy there? And the second one is regarding fees, very strong performance in the first quarter without considering the effect of the new regulation of interchange fees. Do you expect these to continue in the coming years, the current pace of growth? And I would like to understand what is in the order fees in the first quarter, because we observe a strong increase in order fees. Thank you so much.

Thank you, Daniel for your question. I mean, regarding the strategy, I mean, definitely that portfolio will have the margin improvement when interest rates start to fall. Today as you saw our expectation for monetary policy average for the year is like 10.4, when you look at what the market is, pricing is slightly higher than that I mean, like 10.6 or so. So that's why we are not like logging in that or fixing that level, because we do expect that the trajectory will be slightly lower and faster than what the market does imply. And that's why the strategy basically it's like to wait, to rates to fall and to follow our path, which is now a slightly lower than what the market was expecting. I mean, late last November, the market was on the opposite side, I mean, was implying a more dovish trajectory to our view and that in that moment, we closed part of that sensitivity, securing a more dovish path. But today, we don't see that opportunity, because our scenario is on the lower part compared to what the market is expecting. And on the fees, I will let it to Cristián to comment. CristiánVicuña: All right. So regarding the fees, similar to previous question, we expect a very strong 2023. And then to grow a little slower, but better than the market. So probably something a little higher than 10, but not the same 20 that we are expecting for the year. And regarding your question on the order fees, is mostly related to corporate investment bank advisory fees on M&A and restructuring.

Thank you. Our next question comes from [Oliver Tuzo] [ph] at UBS. Please go ahead.

Yes. Thank you guys for taking my question. Actually, I just have one related to the operating expenses, because the bank revised downwards the guidance for this year with the expectations for a negative growth in costs. So could you please just clarify a little bit more of the drivers behind this performance? And if you could add to it, if we could expect like a drop of 1% to 2% or maybe 5% of the operating expenses? That would be helpful. Thank you.

I mean, no, I mean, it's not like minus 5%. I mean, it's like more on the low single digit fall that we are expecting. On the drivers, the combination of things. I mean, first, all the fraud control that we are doing, I mean, all the product expenses that we have on the bank are in the other operating expenses. And that's something that we have been making good progress and that number has improved. And it's going to help the long road for the lawn -- the [indiscernible] for this year. And then, all the work we are doing in the branch networks, optimization and also the transformation. I mean, you saw the Work/Café Expresso initiative, which is also -- apart from driving NPS app, because clients are also happy, it's a very efficient way to deal with the transactionality coming forward clients. And in general terms or the digitalization of the bank, all the Más Lucas, and all the life initiatives we are doing are taking productivity app by having new client growth, new client acquisition and client revenues, and having cost under control. I don't know Cristián, if you want to add on that. CristiánVicuña: I will say that when we expect we expect this new initiatives to keep us -- from allowing us to update the branch network as a whole. And we see further improvements and how we deploy our study.

Thank you. Our next question comes from Yuri Fernandes at JPMorgan. Please go ahead.

Thank you guys. I have a first one regarding expenses. It has been very good and have been delivering on these closing branches, reducing a little bit the headcount. But we are seeing a super strong [local] [ph] fee, right? And I think part of that fee is like some administrative expenses, they should be somewhat related, right. Like technology's software, like, I don't know. My question is, how sustainable is for you to keep such a good level of G&A growth? I understand the guidance is negative for this year. But my question is, should we see more investment in 2024? Like, how comfortable are you that this year is not a one off? Because you kind of built some provisions on costs last year, and we should see like a pickup in the coming years? That's the first one. I have a follow up regarding the margins just a curiosity on FCIC instruments. I think the FCIC, they explain part of your margins, right, like a part of your strategy on asset liability management. And when your FCIC instruments they should mature? I don't know I think that are different mature dates, depending on the program. So not sure if March not sure if this is July 2024. So just trying to understand when should we start to see like your FCIC instruments getting paid. Thank you.

Okay. Thank you, Yuri for your question. I mean, regarding expenses, I mean, that definitely you should not expect costs falling in the following years. I mean, this is -- in that sense, this year is going to be a one-off. Our usual target and what we have done basically, every year, I would say in the latest period is to have costs growing below inflation. I mean, that is like the starting point for our strategy. So inflation will be in the mid to low single digits going forward. And that's where we want cost to be the composition of that cost will be shifting to what you mentioned, I mean more on amortization of technology investments and digital initiatives. I mean, I'm taking advantage of the improvements in the footprint of the branch network because we'll be having like less square meters, all this strategy of Work/Café Expresso will help us to reduce the square feet of branches and that will help in that cost. And also all the digitalization will increase the productivity per employee and so yes, I mean, in that sense, it's a one off the performance in cost for this year. It's part of the discipline, we think we need to have with revenue pressure we are having coming from margin so this is going to be a tight here on that and we are delivering on that. And going forward we should expect to go back to a more normalized pace of course growth slightly below inflation. And regarding the FCIC, I mean FCIC basically matures, half of it in April, and half of it in July next year. And as you said, I mean, considering our strategy that basically has that liability floated, the maturity itself won't have significant impact for us, because basically, we have already been the floating cost of that. So that we will be benefiting from interest rates going down starting the same day that the interest rates start to fall. And so when the maturity happens, considering that we are already floated at the level of rates, that will be a bad moment. I mean, I don't know let's say six, seven, or whatever percent, we have in a mid-next year. For us, it won't have an impact because we are already with the liability at that level. I know if I explained the situation.

If I understood like the liabilities floating, but your assets, they are not floating for that right. You bought, I don't know, fixed rating from it's on that. So like the materials, correct me if I'm wrong, but maybe the maturity of that six would be a tailwind for your margins? No?

No. It's not -- this is not going to be a significant tailwind because we already have -- I just said I mean, we're talking on the liability side, then we have the assets repricing in this context, and we are already seeing repricing on the asset side that will help us that.

Yuri, it's Robert. It's a tailwind in the sense that rates come down into tailwind, okay. And when and when it expires and should be a tailwind. And if depending where rates are okay, but in itself today it's not you see it'll be a tailwind when rates start to go down. Okay?

No, perfect, guys. Thank you. If I may a third one just touching on asset quality. If you can provide some color for us, like the trains, we are seeing like some worsening on consumer. So just like your overall view on asset quality. Thank you.

Yes. I mean, asset quality as you saw on the on the slide, basically, we are normalized in terms of NPLs and impaired loans. Impaired loans is still below pre-pandemic levels. And that what we see for the year, I mean, there's 1.1%, 1.2%, because of risk for the year, is consistent with having a similar to pre-pandemic levels of asset quality. We are like, confident that we can't be there, we still have the voluntary provisions as a way to cope with a more degraded scenario in case that happens. But as you saw first quarter because rate scores up 1.2. And we think that we can, we can keep up that level for the rest of the year, which is definitely higher level of customer risks to the one we had this last couple of years, but consistent with a more normalized scenario that that, in a certain sense, is a bit of the flip side of the slower pace of rate high of rate cuts that we are seeing consistent with a not so weak economic scenario, that is also, let's say, reflected in the asset quality, which is normalized into pre-pandemic, but not in extreme or harder way. CristiánVicuña: One thing that has been clarified to us regarding asset quality here is that the adjustment in the consumer portfolio of the new regulation that was being discussed. It's been delayed. So we don't expect this happening in 2023.

At least not before late this year. I mean, maybe next year.

No, that's good news, guys. Thank you and congrats on the cost control.

Thank you. Our next question comes from [indiscernible]. Please go ahead.

Thanks for the presentation. I have two questions. The first one is related to earnings and then the monetary policy is expected to stay high and clearly expected. How do you expect him to behave in principle before a year from now, when scenario [indiscernible], I mean it's an upward slope and some level of reflection as opposed to portfolio? Because new material is least suspected in the previous months and going forward in one would expect that in the news should we cover off the portfolio in prices adjust to the monetary policy.

Okay. So, yes, we just say this is correct. We have some fineness in the NIM because of the high rates but effectively and you can see some of this already in the client NIM. The client NIM is hard to forecast. But you can see that our client NIM which is basically the net interest margin of our business segments, okay, is rising because a the repricing their assets, okay? So, we're getting hurt more by the increasing cost of deposits, but assets are slowly beginning to reprice and spreads are rising. Even a loan growth isn't helping too much, for that repricing you need quicker loan growth, but there has been definitely an increase in loan spreads, and also deposit spreads, okay? This is important, every money we get in and checking account the spread rises with rate. So, those are both tailwinds to our margin. So, effectively next year, a little bit what Emiliano said before, as smart as rates go down, probably we'll get -- our funding base will get cheaper, the assets will be still repricing. And then, obviously, you still have the headwinds of lower inflation. But all in effectively NIMs, it should bottom out, and if everything goes as good as we expect in the second or third quarter, and then slowly begin to recover next year, as Emiliano said, 3.5 around there, and then in 2025, probably reached equilibrium rate and inflation, right, should we go back to our historical levels of around four?

And the second question is about great expense. You said previously, but you expect that some year for breaking spec is already spent, maybe growing at 0% or maybe a bit. But in the first quarter operating expense grew by 13%. So how do you arrive to the consolidated figure, if the remaining quarters as it is?

Yes. I think that when we talk about total expenses, we are included in other operating expenses when you factor that in that total number felt like 1.2% in the first quarter. And I think that is like the line that you have to factor in and we are talking and that's what we talk about other expenses, including other operating expenses.

So it's personnel, mediation and others. Okay.

In the first quarter, that number fell 1.2%.

So what line of operating expense?

Okay. So when we talk about our operating expenses, just as they show up in the financials now, which is personnel, administrative, depreciation, amortization and other operating expenses. The big item that's falling is other operating expenses, which has a lot to do with the improvements we have made in cybersecurity and the lower cost of our cyber fraud insurance. And there's also an interesting reduction in personnel, okay?

Thank you. And we have a question from Ernesto Gabilondo from Bank of America. Please go ahead.

Thank you. Hi, good morning, Emiliano and Robert. Most of my questions have been answered. So just have a couple of questions. The first one is a follow up in your net income guidance or your ROE guidance. When we incorporate the ROE of 15%, 17%. This implies earnings contraction between 15% to 25% this year. So just wanted to double check if that sounds reasonable. And I believe last time you were expecting a modest earnings contraction. So as you have explained it, the delay in lower interest rates has mainly be the key reason for lowering the guidance. And then my second question is on your effective tax rate. We have seen the banks have benefiting from time inflation before, having lowers effective tax rates, both now that we're thinking of a more normalized inflation level, how should we be thinking about the effective tax rate in the next few years?

So yes, thank you very question [indiscernible]. I mean, your assumption, I call it like reasonable, but it's consistent with ROE, a guidance to be around like 15% fall in net income. And, yes, I mean, basically, the biggest driver to our adjustment in guidance of NIMs and ROE has to do with the monetary cycle, normalizing later than what we were expecting. So we see this as the process of normalization of NIMs, and ROE taking longer than we were expecting, and that's in turn for 2023 will have, let's say an impact for one or two quarters of that delay. And in the third quarter, starting the normalization process and moving forward and also being closer to normal in 2024, and definitely in 2025. And the second was tax effective. Bob, you want this?

Yes. So they're effectively as rates and inflation go back to normal, the tax rate should rise. The ROE should also rise. And so today we're paying like 12%, 13%, effective tax rate, there's different effects, inflation is still high. The lower note in income also lower the tax, but effectively, by next year, if inflation is back to lower than six single digit levels. We shouldn't be going by 20, I would say 2024, we should be roughly close to the 18% effective tax rate 2025. Probably around 21, 22, it should stay around there. Sorry. And one quick thing regarding your first question is true that the net income falls, but we do see slight rise in book value. I think that's a key point to make that we try to explain it a bit in one of the slides, but book value given the way rates and inflation are moving, which might have a negative impact on NIM, but in capital has been positive. So our book value is growing. And I think that means we're still creating value.

Thank you. I'm not seeing any more questions. So perhaps I can hand back to Emiliano for closing remarks.

Yes. So, Robert, the floor is yours.

Okay. Thank you, everyone. Just as a final note after 30 great years, today is my last day at Santander Chile, I decided to move on to other projects. I would like to thank the investor and analysts community for your support. Cristián Vicuña along with [Rowena] [ph] and Claudio will keep you guys covered. For me, it has been an honor to be your IR guy. Please feel free to keep in touch and I'll be sending an email soon with my details. Thankyou, everyone bye.

I want to publicly thank Bob for his commitment and his terrific job during this 30 years. Without any doubt, he made a huge positive impact on Santander Chile and the Chilean banking sector as a whole. He will be deeply missed. I wish him the best of luck with his new stage. And on this emotional note, I thank you everyone for joining us today and we look forward to speaking with you soon again.

Thank you. That concludes the call for today. Thank you and have a nice day.