Ladies and gentlemen, thank you for standing by. And I would like to welcome you to Banco Santander-Chile Results Conference Call on the 2nd of February, 2024. At this time, all participant lines are on listen-only mode. The format of the call today will be a presentation by the management team, followed by a question-and-answer session. So, without further ado, I would now like to pass the line to Mr. Emiliano Muratore, the CFO. Please go ahead, sir.

Good morning, everyone. Welcome to Banco Santander-Chile's fourth quarter 2023 results webcast and conference call. This is Emiliano Muratore, CFO and I'm joined today by Cristian Vicuna, Chief of Strategic Planning and Investor Relations; and Carmen Gloria Silva, our Economist. First, I want to express my gratitude for your presence at this quarterly meeting. Let's go down to business. We are here to discuss our performance during the fourth quarter. The macro conditions were more favorable as we anticipated in our last call, which helped our margins and net income recover. The Central Bank of Chile has continued its rate reduction strategy, which has had a positive impact on funding costs. We'll dive into the specifics of our quarterly results in a moment. Now I pass the line to Carmen Gloria for the macro update.

Thank you, Emiliano. On slide 5, I present a summary of the macro overview in the country. After a necessary process of macroeconomic adjustment 2023 was marked as a year of strategic [ph] global economic growth, extended global financial conditions and emerging geopolitical tensions. All of this occurred in a context was the process of inflationary convergence was consolidated, which would have facilitated the end of the cycle of rate hike by the main monetary authorities. In this global environment economic activity in Chile continued its deceleration during 2023. Investment persisted in the adjustment profit of previous years and private consumption presented year-on-year reduction in response to elevated interest rates and the continually deteriorating labor markets. Indeed, the labor force participation rate showed visually no progress hovering around 61% of nearly the entire year below pre-pandemic levels and the unemployment rate escalated to 8.5%. Despite this weakness, economic activity was bolstered by strong case effects emanating from specific supply factors. On one hand, the added value of electricity generation received an additional impetus into due to increased rainfall in the countries. On the other hand, the mining sector displayed improved performance due to the start of new projects. The level of activity would have contracted marginally in 2023 exhibiting an annual variation of minus 0.2% less than the previously estimated. For the current year, economic activity is projected to grow at a rate of around 2% propelled by less restrictive financial environment, increased labor market dynamism during the latter half of the year and the search in mining production. This process will persist through 2025, culminating in an expansion of 2.5%. Domestic inflation continued its effect at a process base than anticipated. The CPI concluded 2023 with an annual variation of 3.9% falling below what was projected. And the US…

Thank you, Carmen Gloria. Turning our attention to slide 7. Let me begin by reminding you of our commitment to our four key strategic pillars that are part of our Chile First strategy. We would like to take the opportunity to highlight some of our main achievements in 2023. Firstly, we are the largest bank in Chile in terms of total volume, the sum of loans and deposits with a market share of 17.4%. Our place in the Dow Jones Sustainability Index for emerging markets was confirmed being the only Chilean bank to qualify for this index and emphasizing our leadership in sustainability. In this context, we issued our first green bond for around US$50 million under our ESG framework. This issuance was the first in Chile to stay green mortgage as the use of proceeds. Currently, we have a growing portfolio of approximately CLP100 billion in green housing that complies with the highest housing energy certifications by the Ministry of Housing and Urban Planning in Chile. We offer preferential interest rates to clients using green housing and we also contribute to consolidation and preservation projects in Chile. We continue to remain committed to financial inclusion through our digital initiatives Santander Life and Más Lucas. Just in 2023, we have contributed by facilitating access to a bank account to more than 167,000 people. The advances in our digital initiatives have driven our clients to reduce their cash transactions allowing us to accelerate the transformation of our branches. By year-end 2023, we reached 91 Workcafés including five Expressos, which we will hear more about in a few slides. Thanks to these advances. We have the highest quality service among Chilean banks on the fourth -- for the fourth consecutive year with an NPS of 60 and we have been recognized as…

Thank you very much for the presentation. We will now be moving to the Q&A part of the call. [Operator Instructions] Our first question comes from Mr. Tito Labarta from Goldman Sachs. Please go ahead, sir.

Hi. Good morning. Thank you for the call and taking my questions. A couple of questions, if I can. Just to follow up a little bit on the asset quality and loan growth, right? I mean, you're seeing a little deterioration there, but I think as you mentioned more normalization. Just how much more do you think you could expect in terms of asset quality deterioration and in terms of how that could impact the loan growth, right? If things cover faster than expected. Do you think there could be upside to your loan growth? Or any risk to get into that mid single-digit loan growth? And maybe just some color on the loan growth by the different segments where you see the bigger opportunities? Thank you.

Thanks, Tito. So first on the loan growth part, we don't see relevant risks regarding our guidance of mid-single digits at 6%. We see different composition in the way that growth should happen. We see more opportunities in the second half of the year for our consumer loan portfolio due to lower rates, lower short-term rates that are going to be probably in the market by the third quarter. Apart from that, we don't see any extraordinary risks to our guidance. We should see a relevant growth in our retail portfolio of SMEs and personal loans compared to a larger corporate customers. And regarding the cost of risk, we're currently at a 1.2% cost of credit. We see some pressures that are coming along with the cycle. Our employment is closing the 9% to 10% for the country. So this is pressuring a little – the NPLs. So NPLs would be going up to 2.5 to maybe 2.6 levels in the first part of the period and then normalizing, we see a more favorable second half of the year. So we are thinking of a total yield guidance of 1.2 for the cost of credit. Q – Tito Labarta: Okay. That’s very clear. Thank you.

Thank you very much. Our next question comes from Mr. Ernesto Gabilondo from Bank of America. Please go ahead, sir.

Thank you. Hi, good morning, Emiliano and Cristian. Thanks for taking my call. I have a couple of questions from my side. The first one will be on your NIM guidance. So when making the numbers, I believe you're expecting NIM expansion between 110, 130 basis points to the 3%, 3.5%. So having said that, can you walk us through on how should we expect NIM during 2024, especially considering the maturity of the derivative hedge and after paying back the credit line to the Central Bank? So I was wondering, if we can divide how should we expect NIM for the first half and NIM for the second half? And then my second question will be on Santander Life. Can you talk a little bit more on how profitable is already Santander Life – I don't know if you can share like a P&L for this segment, what could be like the efficiency and the ROE for this segment? And I don't know if you have like a medium-term target for this business? Thank you.

Hello, Ernesto. This is Emiliano. Thank you for your question. I'll take the first one and I'll leave the second one for Cristian. So regarding the NIM profile for the year, I think that would be useful to see the NIM slide, where you see the evolution during the quarters in 2023, that definitely the effect on NIM is the combination between the level of inflation and the level of rates. So as you saw in the fourth quarter last year, we still have high rates but the level of inflation was high enough to be able to sustain a NIM close to 3% for the quarter. So in 2024, we have the first half with a NIM lower than the total year, lower due to two main reasons. First, that we have this negative CPI in December that is impacting the UF in the first quarter. So the NIM for the first quarter will be in the low 2%, if you want. I mean assuming that low inflation but it's true that the rate scenario has been evolving favorable for our balance sheet because the Central Bank cut 100 basis points once day, and also provided quite let's say [indiscernible] for our guidance. Then when you go to the rest of the year, the NIM will be going up because rates will keep going down and inflation will be closing the year in UF variation around 2.5, 2.7 for the year. And the second half will have NIMs going north of 3.5 probably because of the combination of rates and inflation. And also as you mentioned, that the expiration of the FCIC will imply, let's say significant reduction on the denominator of the balance sheet in total interest-bearing assets will go down, because basically we will be deleveraging the balance sheet paying of that liability with short-term, with short-term securities, and so that will make the arithmetic of the NIM to take it north of 3.5 for the second half and as you said, finishing the year between 3 and 3.5, depending on the combination of inflation and rates during the year.

Thank you for the Life question, Ernesto. While we are not disclosing yet specific P&L for Life, I can give you some numbers for your better understanding of the initiative. Currently, we have about $1.3 billion in customer deposits related to Life and about $100 million in consumer loans and in the Life account. Fees for the segment, means about $32 million a year in car fees for ourselves. So the monthly fee that the customer pays to access the car, that costs about $3. And we are currently having close to 100% of our live customers on a beta model with no relationship manager finds them. So, that's very, very helpful for us to drive the cost of serving the customer very low. And the customer acquisition cost for every single Life customer is paid within three months. That means that, on the fourth month, that a Life customer gets into the bank, it's already profitable. So, those are some figures to give you some flavor of how the Life its currently performing.

Thank you, very much, Emiliano and Cristian. Just a follow-up on Santander Life. So, how many clients do you have today? I don't know if you have a target to get or to approach to a certain amount of clients.

So currently in terms of current accounts, total current customers for the bank, we have about 300,000 -- a little more than 300,000 SME customers, 1.3 million Life current account customers and about one million to the -- one million traditional current accounts. So that's 2.6 million current accounts total. We're aiming to get by 2026 to an area of 4.5 million customers. So we are closely monitoring these figures to drive our customer expansion.

Perfect. Thank you, very much.

Thank you, very much. Our next question comes from Mr. Yuri Fernandes from JPMorgan. Please go ahead, sir.

Hey guys. Thank you, very much for taking my question. I have a first one regarding the normalization of taxes like in the guidance, what normalized tax mean like, if you can provide a range on that? Then I would like to ask about deposits. When we -- I like a lot you're breaking down by business units, right to have the retail the middle the corporate. But when I check like the deposits grow, it seems that most growth is coming from CIB, right? Like potentially larger, like more wholesale kind of funding. So my question is what you are seeing on the funding side? Are you like, I don't know maybe households they're still in a more challenging scenario and you don't see a lot of retail deposits. But just want to get some help to understand a little bit, the funding cost on the bank going forward because, a point of concern is that the wholesale funding may be a little bit more expensive. So, I'd like to get your thoughts on this different deposit growth. And then I may do a follow-up. Thank you.

Thank you, Yuri. I'll take the tax one and Emiliano will address the first one. Regarding tax to [indiscernible] tax rate for Chilean NTVs [indiscernible] operations in 27%. Normally, our historical tax rate on normal inflation years and without dollar effects between 23% to 25%, we expect inflation will be more in the 2.5% range this year to be reaching those levels. And anticipating a little Emiliano's answer there is some certain sectionality in the last quarter in terms of how corporations display their end of year manager of their deposits. So, it's like a sort of flight to quality and we see its vesting flows from those companies in December, but more detail with Emiliano.

Hello Yuri. Thank you for the your question. Now, then regarding like cost of funds or cost of deposit, I think that going forward we have two main like tailwinds. I mean first is like the rates going down, so the cost of time deposits will go down significantly during the year. We have been doing -- we'd say a very aggressive tactic in terms of pricing the different segments in individuals and SMEs trying to increase the margin coming from time deposits. Actually when you look at the beta -- taking the beta, the average cost of time deposits in pesos for the whole bank compared the monetary policy rate, we were able to take that from 92%, 93% of the rate to close to 80%, 82%. I mean that's because we have been -- that's implied as you mentioned some kind of loss of balances from maybe affluent or private banking clients that are more price-sensitive. But as an overall strategy was very profitable for us. So, the cost of time deposits will be positive going forward. And the second is the mix. As you were pointing out the wholesale or middle market to bigger corporates has been doing better in terms of liability balances, but it's also true that it's -- it was the first -- it was the first segment to stop falling in demand deposits and stabilizing and now starting to grow demand deposits, which are non-interest bearing. So, also the mix between time and demand deposits that was part of the headwind we had this last few years because of the level of rates and the opportunity cost that the clients have. Now, going forward we expect that mix to start improving from where we are now and we are relatively like optimistic with how the cost of fund will support the NIMs going forward.

Super helpful Emiliano and Cristian. If I may just on a more strategic question here on the client mix, you discussed life previously and you have this breakdown customers by segmentation, you were doing Getnet, you have the Delta strategy. My question to you is regarding the mix of clients going forward, right? Historically, I think you -- most of your retail clients, they are higher income. Is there any change to that like is Santander willing to go more lower income in Chile? Like how should we think about like your positioning on the customer mix in Chile going forward? Thank you.

Yes, I mean definitely as you said if you compare the mix in terms of number of clients, now our composition is much more geared to the middle low part of the pyramid. And I would say that the main driver for that switch of the strategy and also going forward is digitalization, right? I mean the cost to serve clients with branches and with an account representative for each client that is a very expensive model to serve and that's historically produced that only middle to high-income individuals were able to create enough revenue to sustain such an expensive model to start them. And now with all the work we have been doing in developing the digital solutions, we are able to have a very efficient -- cost-efficient model to serve any kind of clients. And as we were showing the Life initiative because of the balances it created in terms of deposits and also the credit presentation we are seeing is a very profitable source of business for us. So, yes, I mean, I would say that, the number -- we have the ambition to grow in number of clients, and in the composition definitely compared to, I don't know 5, 10 years ago that will be much more massive, if you want. We don't have at this moment of the cycle any specific high appetite for lending and for credit, because we are -- as we are seeing the economies still going out of the recession we had. But definitely that will provide some raw material going forward to cross-sell or to up-sell and even the pure transactionality with how efficient we are in the digital solutions makes a business case to sustain the client on their payments and their transactionality. Looking forward to up-sell and cross-sell them depending on their behavior and their profiles.

No, no. Very clear and makes a lot of sense. Thank you. Thank you, guys for the answers.

Thank you. Our next question comes from Ms. Neha Agarwala from HSBC. Please go ahead, ma'am.

Hi. Thank you for taking my questions. Could I clarify on the liquidity after you repaid the Central Bank bonds during the middle of this year should that pressure your liquidity? Could you clarify that? I think you have deposits to cover for it. But if you could just clarify any impact on liquidity coming from that? And my second question is on asset quality. You mentioned the pocket where you're seeing some worsening in the SMEs. But any other part of the loan book where you're seeing stress? And any extraordinary provisions that you would like to make during the year for any of these segments? Thank you so much.

Hello, Neha. Thank you for your question. I'll take the first one and I'll leave the second one for Cristian. So regarding the maturity of the FCIC that won't create any liquidity pressure, because as we mentioned some calls in the past the Central Bank in January of 2023 established a kind of phase out strategy or regulation for banks that basically forced banks to start buying high liquid assets starting January 2023 to cover 100% of the maturity of the FCIC. I mean, what that means is that by the date of the majority we and all the rest of the banks we'll have 100% of that money in short term or maybe not short term by highly liquid assets. And that's why in terms of the calculation or computation of the NIM, and any other ratio that uses total assets or interest-bearing assets as a numerator that we'll create because at the end, we have roughly speaking like 10% of the assets in that facility that will go away together with liability. So in terms of liquidity, let's say that, we'll reach that maturity with a 100% pre-funding on that and won't impact. I mean, it has been impacting if you want during this last year and by the date of maturity we will have it fully funded.

So, Neha, regarding a deep dive into our asset quality. First, we're very happy with the current performance of our consumer loan book. It's actually very, very healthy. Regarding the mortgage loan, the mortgage loan we are monitoring very closely the performance, because there are some specific very specific parts of the portfolio that are suffering due to the higher rates, and the well inflation over the last years that have increased their monthly payments, but it's something that's very concentrated on specific and little part of the portfolio in the mortgage book. And regarding, the commercial portfolio, let me remind you that we have about a 14% total market share for the commercial portfolio. And when you look at, how it's composed, we have about an 11% market share in the single name, like individual large middle market on corporates and about 20% market share in the SME portfolio. So we are actually quite at ease with the larger part of the portfolio the commercial, middle market and corporate. But in the SMEs, we see pressures in three specific industries, construction and real estate that has been something that is happening worldwide. Very, very short-term funding stressed by higher rates and the increased cost of materials and construction costs that is impacting that segment. Agricultural particularly in Chile, because of the flooding of the Nino range in the third quarter that has impacted crops and hotel and restaurants that have been suffering since 2019 and COVID and a very specific names there in the semi portfolio that are stressed. So all-in-all, we see this as a very contained but -- and I expect that I give you a little more understanding of how this is going to be working on.

Super helpful, if I can just verify the numbers. You mentioned that you have about 11% market share in the very large corporate, and about 20% market share in the SME. And it is in the SMEs for specific cases you are seeing some problems. But the large accounts are okay?

Yeah. Exactly.

Perfect. Thank you so much.

Thank you very much. Our next question comes from Mr. Ewald Bittencourt from BICE Inversiones. Please go ahead sir.

Hello. Thanks for the presentation. How do you expect to build the addressable market size of lower-income clients and thus the profitability of digital initiatives in targeting those segments considering the regulators increasing some loan loss provisioning, needs capital needs? Thanks.

So Thomas [ph], can you explain a little more your question? So I didn't really get what…

Well, my question is, how do you expect -- what's your expectation for the total market size of lower-income clients to evolve given that the regulator has increased some loan loss provisioning needs? Or at least is targeting to increase those loan loss provisioning needs? My question revolves around if it's -- if you expect to still be profitable those digital initiatives you're targeting given that the total size of potential clients could decrease?

Yes. So Ewald, I'll take it. So, yes, your question is to say it implies more on the economics of lending, which definitely is a revenue source for our business. But that's, kind of, a middle to low part of the pyramid clients like most of Life clients also Más Lucas clients. So that we can make money without lending much say our customer acquisition cost for those digital clients. I mean in the first part of the life cycle, it was like close to $1 or $2. I mean that was very too good to maintain. Now we are closer to the $7, $10 of customer acquisition costs. And when you look at the lifetime value of those clients, mainly on liabilities rationality on met businesses, you see you get the payback close to four, five months in that. I mean and then you have some attrition. And so, we think that we can make a profitable business with that number of clients, despite the fact that when we consider lending and start penetrating them with different products for lending. We have to factor in, as you said, higher costs in provisioning and also in capital, but we do expect to keep being profitable in acquiring those kind of clients despite the higher regulatory pressure on our volume.

Okay. Thanks very much.

Thank you very much. Our final question comes from Mr. Daniel Mora from Credicorp Capital. Please go ahead, sir.

Hi. Good morning and thank you for the presentation. I have a couple of questions. The first one is regarding the performance of the new credit card loans. We saw during the last quarter a strong pace of growth with a double-digit growth even quarterly and annual. And I would like to understand if you are feeling comfortable with the performance of these loans with these new vintages or should we start to think that the performance is worse than the -- for example, the loans that were disposed at the beginning of 2023 or 2022? That would be the first question. And the second one is regarding the guidance of ROE. Just trying to understand the 15%, 17% range that you provide in the presentation is the full year ROE, because if we start with the first quarter with a 10% ROE. It means that in the second half of the year, we should be close to the 20% or even above? Thank you so much.

Daniel, thank you for your question. I mean let me start with the second one. Yes, that is the full year guidance for ROE. And as you as you mentioned, starting at 10% fourth quarter, assuming the path of rates that even after the Wednesday meeting that the Central Bank has stated that the neutral rate of 4% will be reached during the second half. You get ROEs close to 20% that, let's say, give you that average of 15% to 17% for the full year. And regarding asset quality in credit cards, I mean we are comfortable. I mean what we are seeing -- when you look at the graph of the evolution of the credit cards, you have to factor in also the effect of inflation. I mean definitely, in terms of nominal pesos, the credit card business has a very tight linked to inflation. And so when you look at the evolution of the balances in real terms, let's say, we are going back to the pre-pandemic levels. I mean at the end what happened is that households get a lot of liquidity from the pension fund with grows and also from the fiscal hubs during the pandemic. So part of that liquidity was spent and part of that liquidity was invested and part of the liquidity was used to pay back debt basically households deleverage -- got some deleverage rent during the pandemic. And now they are going back to normal levels of leverage and we know quite well that the clients have their profiles and we are not seeing a specific deterioration of the new businesses in the credit cards business.

Perfect. Thank you so much. That will all from my side. Thanks.

Yes.

Okay. Thank you very much. It looks like we have no further questions. I'll pass the line back to the management team for the concluding remarks.

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 very much. This concludes today's conference call. We'll now be closing all the lines. Thank you and goodbye.