Banco Santander-Chile (BSAC) Q4 2024 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and I'd like to welcome you to Banco Santander-Chile's Fourth Quarter 2024 Earnings Conference Call on the 7th of February 2025. [Operator Instructions] So with this, I would now like to pass the line to Mr. Cristian Vicuna, the Chief of Strategic Planning and Investor Relations. Please go ahead, sir. Cristian Vicuña: Good morning, everyone. Welcome to Banco Santander-Chile Fourth Quarter 2024 Results Webcast and Conference Call. This is Cristian Vicuna, and I'm joined today by Patricia Pérez, CFO; and Andrés Sansone, our Chief Economist. Thank you, everyone, for joining us today to review our 4Q performance and results. Now I'll hand it over to Patricia.

Good morning, everyone. First, we are excited to announce that Andrés Trautmann will be promoted to CEO and Country Head starting in July, succeeding Roman Blanco, who will guide Andrés through this transition. Andrés has had a distinguished career with the Santander Group, serving as our Corporate and Investment Bank Head since 2021. We look forward to introducing him more formally soon. Today, we'll provide a strategy update and review of our results, followed by a Q&A session where our Chief Economist, Andrés Sansone, will be available to answer any economic questions you may have. So let's turn our attention to Slide 4 to highlight our key messages. Firstly, we are proud to report impressive results for 2024, with a net profit of CLP 865 billion, a 73% increase compared to 2023. Our margins recovered throughout the year, achieving a NIM of 3.6% with the fourth quarter reaching 4.2%, boosted by inflation. Overall, our return on average equity improved to 20.2% for the year with the fourth quarter at 26%. The improvement in our margins and solid cost control led to an efficiency ratio of 36.5% for the quarter with our recurrence ratio or fees to expenses reaching 61.2%. Our customer funds grew strongly with total deposits increasing by 5.9% in the quarter, allowing us to improve our loan-to-deposit ratio by over 10 percentage points in 2 years. Total loans grew by 2.2%, driven by accelerated consumer lending, particularly through credit cards. Our fees and financial transactions in fourth quarter 2024 increased by 19.6% compared to fourth quarter 2023, reflecting the positive impact of cross-selling our digital products. Our capital ratio remained solid with a CET1 of 10.5%, which includes a provision for a 70% dividend payout of 2024 earnings. Additionally, our bank received significant recognition in 2024. We were named Best Bank in Chile by Latin Finance and Euromoney awarded us Best Bank in Chile in the SMEs and ESG categories. Global Finance also recognized us as Best Bank for SMEs. ALAS20 ranked us first in the leading company in sustainability category and Institutional Investor awarded us most honored company. In the Dow Jones Sustainability Index, we scored 80 points, the highest among Chilean banks and within the top 3% of the most sustainable banks globally. Furthermore, in January, we received the Top Employer Certification for the seventh consecutive year. On Slide 5, we have an update on the progress of our strategy for 2023 to 2026. Our strategy is focused on expanding our models and solutions from a very strong position with affluent customers and corporates to effectively cover the entire population and companies operating in Chile. Our strategy has 4 pillars. The first 2 focus on what we want to become and the second 2 on how we want to achieve it. In 2023 and 2024, we continued to increase our customer base, reaching over 4.3 million customers with high level of customer satisfaction, supported by our digital product offering such as Más Lucas and Más Lucas Kids. We are also proud of our position among SME clients, where we have the largest market share of 39% in terms of current accounts with over 450,000 SME clients. These clients are also supported by our acquiring services through Getnet, whose fast expansion has led to a market share in number of transactions of 17% with over 192,000 POSs deployed throughout Chile. We have continued to evolve and optimize our branches, reducing the network by 4.5% in the last year to 236, while we have expanded our Work/Café and launched our innovative espresso model. Also, we have been enhancing our value proposition for our corporate clients, further extending our specialized attention models for specific industries. We have continued to enrich our products and services offered to our private banking clients as well as developing our FX franchise. Aligned with our digitalization efforts, we simplified our product offering to provide a better experience and higher productivity. This has led to high levels of efficiency, setting the best-in-class in the Chilean industry in the last quarter. So what's in store for 2025? In January 2025, we completed our Gravity initiative, successfully migrating our legacy system to the cloud, bringing significant benefits to our customers and improvements in the performance of our platforms. This is a relevant milestone in our digital transformation that will allow us to further evolve other channels and systems. The bank will continue with its $450 million investment plan from 2023 to 2026, allocating 60% to technology and digital platforms and 40% to our branch network. As we have seen in recent years, this investment plan is driving a significant increase in our client base and fee generation as well as enhancing operational efficiencies. This capital-light growth strategy is expected to improve our earnings generation going forward. Cristian will now give us more details on this achievement.

Thanks, Patricia. So on Slide 6, we can see some key information related to our first strategic pillar of digital bank with Work/Cafés. We reduced our branch network by 4.5% in 2024, following an 18.2% reduction in 2023. Currently, 38% of our branches do not have human tellers, and we have 99 Work/Cafés. We also decreased the number of products by 38% last year by merging or eliminating legacy products. This streamlined product offering will improve operational efficiencies and client experience. The implementation of Gravity is a key milestone in our digitalization plan. Gravity has enabled us to transition our core systems from the traditional mainframe to the cloud, allowing our app to respond twice as fast at a lower cost. We are proud to be the third subsidiary of the Santander Group and the first among the Lat Am subsidiaries to make this transition. This sets us apart from our local competitors in Chile and prepare us for the future evolution of the banking industry. At the bottom of the slide, we can see how our client base continues to expand, reaching 4.3 million clients. It is important to mention that we actively close accounts with no activity. Around 60% of our total customers are active users, and we have 2.2 million digital clients who access their accounts monthly. Our active clients and digital clients are growing at rates of 7% and 6%, respectively. This growth is driven by the development of digital platforms and the popularity of 2 main products for the mass segment, our Santander Life account, a digital account that saw significant uptake during the pandemic, accounts for over 1.3 million of our clients. Más Lucas, a simpler account launched in 2023, has now over 288,000 clients, including a subproducts for teenagers. On Slide 7, we can see how these initiatives are translating into a 9% year-on-year increase in fee generation and improved efficiency due to higher income and tighter cost control. At the end of 2024, we celebrated the 30th anniversary of our agreement with LATAM Airlines. The LATAM Air Miles feature on our credit card is highly attractive as we expand our credit cards to live customers and see increased usage, we are witnessing a 17% year-on-year increase in the number of transactions. This increase in transactionality has helped mitigate the impact of the interchange fee regulation. The assets under management of Santander Asset Management, with whom we have an exclusive brokerage agreement, increased by 33% as clients sought higher-yielding investment products amid falling rates. Our online platforms made this investment simple and straightforward through the app. Our insurance brokerage also continues to perform well with a 21% increase in policies sold. We have seen a 25% increase in business current accounts in 2024. This success is closely tied to the success of Getnet, our acquiring business, where clients are incentivized to open an account at Santander to receive additional benefits such as payment deposits from customers up to 5 times per day, a differentiating feature compared to other competitors in the payments market. Transactions through Getnet now account for around 17% of all payment transactions in Chile. Our fee generated from clients represent more than 60% of our core expenses. Compared to the rest of the Chilean banking industry, we are far above the average. Our efficiency has been improving, reaching 36.5%, the best in the Chilean banking system in the last quarter. Now let's review the results -- financial results in Slide 8 -- Slide 9. We can see the impressive improvement in our results during 2024. Our quarterly ROE reached 26%, marking the third consecutive quarter above 20%. For the full year, our ROE reached 20.2%, up 822 basis points from last year, surpassing our guidance. Our net income attributable to shareholders increased by 13.7% in the quarter with accumulated results reaching CLP 858 billion, an increase of 72.8%. On Slide 10, we show how we surpassed our 2024 targets, achieving record profit and ROE in the quarter, thanks to a rebounding margins and solid fee growth. In 2024, we delivered loan growth of 4%, excluding the onetime effect from Bansa and the generate-to-distribute model. Our net interest margin reached 3.6%, above the 3.4% to 3.5% range advice. Our fees increased by 9% year-on-year despite the impact of the interchange fee regulation. Our efficiency improved, reaching 39% for the year as revenue growth rebounded. Our cost of risk was 1.3% as expected, and we surpassed our ROAE guidance of 18% to 19%, reaching 20.2%, with a robust balance sheet and capital structure. On Slide 11, we can see the evolution of our net interest margin during 2024. As short-term interest rates continue to decrease, our cost of funds improved by 2 percentage points in 2024. This is because our liabilities have a shorter duration than our assets. So when rates fall, the cost of our funding decreases faster than the yield on our assets. This improvement was partially offset by a lower U.S. variation of 4.4% in 2024 compared to the 4.8% in 2023, resulting in a decrease in readjustment income from our U.S.-denominated assets and liabilities. Overall, considering the lower cost of funds and U.S. variation, our net income from interest and readjustment increased by 62% leading to a net interest margin of 3.6% for the year. In the fourth quarter, our net income from interest and readjustment was further boosted by a relatively strong U.S. variation, resulting in a NIM of 4.2% for the quarter, the highest in 2024. On Slide 12, we can see the growth of our funding base. Our total deposits increased by 5.7% year-on-year and 5.9% in the fourth quarter. Despite decreasing rates, we continue to see solid growth in time deposits, while demand deposits show some seasonality, particularly with corporate clients maintaining liquidity at year-end. With the growth in customer deposits, we have improved our loan-to-deposit ratio in recent years, reaching 128% at year-end 2024 and 94% when adjusted for the portion of our mortgage loans financed with long-term bonds. As interest rates fall, our clients are moving to more attractive mutual funds managed by Santander Asset Management. Our liquidity coverage ratio and net stable funding ratio remain well above regulatory limits. On Slide 13, we can see our loan book. Our loans grew by 1.3% in the year, affected by the deconsolidation of subsidiary, Bansa, and our generate-to-distribute model, where we actively rotate parts of our loan book. In the fourth quarter, our loan book grew by 2.5% driven by increased demand for commercial loans and the depreciation of the Chilean peso against the U.S. dollar on foreign trade loans. Consumer lending continued to grow well with credit card loans increasing by 10.7% in the quarter due to higher usage and end of year seasonality. Our mortgage loans decreased in the quarter as we actively seek to improve our loan mix with higher-yielding loans after strong growth in the mortgage loan book during recent high inflationary periods. In terms of segment growth, the main operating segments of the bank showed solid growth with Corporate Investment Bank and Middle Market loans benefiting from the exchange rate depreciation and higher demand for some industries. The Retail and Wealth Management segment growth was mainly due to consumer lending and some mortgage lending. On Slide 14, we show our cost of risk and payment behavior of our clients. In the first graph, we can see the evolution of the quarterly provision expense and cost of risk. As a reminder, we made a onetime provision expense in July of CLP 18 billion for the commercial portfolio due to an adjustment in the valuation of guarantees. As shown in the graph on the right, our nonperforming loans, NPLs, that are 90 days overdue, have been increasing over the year, mainly in our mortgage and commercial loan books, while our consumer loan book remains relatively stable. Our impaired loan portfolio, which includes NPLs plus restructured loans, has also been increasing significantly in the same portfolios, especially mortgages. This behavior aligns with a weaker labor market in 2024 and sluggish economic activity for much of the year. Additionally, asset quality ratios are affected by weaker loan growth. However, the graphs also show that the increase in volumes is starting to slow down. Furthermore, the high level of collateral on our mortgage and commercial loan books should help contain the cost of risk at these levels. As a reminder, from the beginning of 2025, our regulator requires a new provisioning model for consumer loans. Our initial impact is an increase in provisions of CLP 100 billion, for which we can use our voluntary provisions, so we do not expect an impact on our cost of risk from this implementation. Next, we look at non-NII revenue sources. Fee income increased by 8.8% year-on-year despite the negative impact of approximately CLP 25 billion from the cap on interchange fees in 2024. As a reminder, the second part of the reduction of the cap on card interchange fees was suspended. We are currently awaiting the commission's decision on the second rate cap. Quarter-on-quarter, fees decreased by 5.2% after a strong third quarter for fee generation, along with lower collection fees and insurance brokerage in the quarter as well as the impact of some seasonal marketing campaigns. Income from financial transactions decreased year-on-year, mainly due to non-client income from ALM exercises. Meanwhile, our client business continued to generate solid results throughout the year with a slight decrease in the final quarter related to demand for market making of fixed income instruments. On Slide 16, we can see our efficiency has been consistently improving, reaching 36.5% in the fourth quarter and 39% in 2024 with recurrent levels of 60%. Core support expenses, salaries, administration and amortization grew 3.5% year-on-year below the yearly inflation, demonstrating good cost control, while there was a slight decrease of 1.8% in the quarter, mainly due to lower salary expenses. The yearly increase in administrative expenses is mainly due to the variation of the UF on our leases and long-term contracts as well as the effect of the depreciation of the peso on our technology service contracts. Total operating expenses, which includes other expenses, increased 12.4% in 2024, driven by higher other operating expenses. This had 2 main components. Firstly, during the year, we set aside provisions of some CLP 43 billion for the restructuring of our branch network and the transformation to Work/Café and advances in digital banking. Secondly, we have established higher provisions for operational risks. Productivity also continues to improve with volumes per branch loans plus deposits, up 24% year-over-year and volumes per employee up 5.1% year-on-year. This increase in productivity reflects the strength of our digital channels and a higher level of automation across the different cost centers. On Slide 17, we can see how we have maintained strong capital ratios well above our regulatory minimum. Our capital ratios as of December 2024 include a provision for the dividend payment of 70% of the 2024 earnings. While in 2023, the provision was just for 30% of earnings. This impacted our CET1 ratio by around 80 basis points. However, we're still above the 9% required when we are fully phased in at the end of this year. The provision of the payment of dividends is still pending the formal proposal of dividend distribution by our Board and the consequent approval of shareholders at our General Shareholder Meeting in April. If we consider this 70% of earnings, it will mean a dividend per share of CLP 3.19 per share, our historical high. Finally, we would like to mention that we currently have no charge for Pilar 2 for 2024 nor 2025. However, the measurement of the market risk of the banking book is under review by the regulator. On Slide 19, we present our current outlook for 2025. Firstly, we are considering a macro scenario of GDP growth of around 2.3% with a UF variation of 4.1% and an average monetary policy rate close to 5%. With this, we expect our loan book to grow mid-single digits, adjusting for the effect of our generate-to-distribute model. With our current macro expectations, our net interest margins should remain above 4% throughout the year. Our fees should continue to grow strongly around mid-single digits. Our efficiency levels should remain around what we saw in the fourth quarter, so around mid-30s. Considering where we are in the credit cycle and the initial slowdown in the creation of nonpayments, we are guiding a stable cost of risk of around 1.3%. Overall, this should give us an ROE of 20% to 21% for the full year. With this, I finish the presentation, and we can now move on to the Q&A.

[Operator Instructions] So our first question comes from Ernesto Gabilondo from Bank of America. Ernesto María Gabilondo Márquez: My first question will be on the political side. So last year, Chile had midterm elections. Now you're going to presidential elections this October. So just wondering how are you seeing the candidate? It's likely that after what happened last October, should we expect center right candidates? Can you share with us what could be the 2 leading potential candidates? Is it reasonable to expect a divided Congress as the base case scenario? And if case there is a divided Congress, do you think that will limit to pass structural reforms over the next years and to make Chile to return to its growth potential? Any color on that will be very helpful. Then my second question is on your effective tax rate has been favored because of the high inflation of the previous year. So how should we think about the effective tax rate on a more normalized level during the next years? And my last question is on what could be your long-term or sustainable ROE? Cristian Vicuña: Thank you, Ernesto. I'm going to give the word to Andrés Sansone, our Chief Economist, to discuss about the first question, and now we'll take on your second and third. Andrés Sansone: On the last couple of years, we have had elections in every year. And what we have seen is that the citizenship has prioritized consensus or more to the middle, not to the extremist. And we believe that will continue probably in the presidential elections. And what we have also seen is that there is, again, some consensus in Congress. Recently, we have the pension reform being approved, where there was a consensus in Congress. And there is also even in society, but also in the political system, a consensus that growth is something that has to be prioritized in the next year, so we believe this will be in the agenda of every presidential candidate. Cristian Vicuña: So to sum up a bit, we are seeing a trend to moderation and a relevant discussion along all political parties regarding a return to growth. And we also see with good eyes the recently approved pension reform, which should replenish Chilean capital markets. So all in all, we are positive on the general scenario, as Andrés was mentioning. So regarding the effective tax rate, I think it's fairly safe to assume that we are going to continue to have for 2025 similar tax rates as the general inflationary scenario is very similar to last year. And from that on, as inflation starts to realign to the 3% target of the Central Bank, we should see a slight increase in our effective tax rate. So regarding the long-term ROE, what we're seeing now are the results of the improvement in the operational performance of the bank with the digitalization strategies and the increase in the customer base. So I think it's safe to assume that in the long run, we are going to be able to deliver ROE similar to what we are guiding this year and we saw the previous year, so in the area of the 20s.

Our next question comes from Daniel Mora Ardila from Credicorp.

I have just a couple of questions. The first one is regarding ROE. What factors explain that the 2025 guidance of ROE is below what we observed in the last 2 quarters with profitability of 23%, 26%. What should normalize -- what factors should normalize to see the decrease in profitability? That will be my first question. And the second one is what is the outlook for NPLs, especially in the commercial segment? And when do you expect to see the turning point in this metric because it is going in an opposite direction of the rest of the industry? Cristian Vicuña: Thank you, Daniel. So well, we think that -- regarding your ROE question, we think our guidance reflects a prudent and feasible approach based on the current macro conditions and internal risk assessments. So we acknowledge the positive trends that you mentioned, but we also have to factor in potential headwinds in rates, market volatility and different political scenarios. So while we are seeing our NIMs above 4%, considering upward pressure on inflation for the first half of the year, but then somehow slower inflation on the third quarter and our fees still remain strong and our cost of risk stabilizing at the levels that we're seeing of 1.3%, we think that we are going to be able to deliver this range of 20% to 21%. So that's what we're guiding for now, and there are still relevant parts of this puzzle to be revealed in order to give the market a more precise figure. And regarding the NPLs, we are seeing in our deteriorated portfolio signs of stabilization, and we have kept the levels that we saw by the end of the third quarter. So I think that this is something that we are working relevantly. We have deployed several projects within the bank to address this higher-ish rate of NPLs and deteriorated portfolio, so we should start to see some improvements by the second or third quarter of this year.

Our next question comes from Neha Agarwala from HSBC.

Can you talk about your capital strategy? What kind of payout can we expect? What is the risk there? And my second question is, could you reiterate what your fee income outlook was? And I believe this year, we'll not see any more impact from the interchange cap since that's postponed. If you could just confirm that. Cristian Vicuña: Thank you. I'll pass the capital payment question to Patricia, and I'll take the fee question.

Thanks, Cristian. Well, regarding the capital question, during the end of this year, we will complete the phase 10 of Basel III, where we will have a fully loaded requirement of 9% of CET1. So in that line, we are still assuming 0% charge of Pilar 2, which is the last information that we received for the CMF, I mean our charge is still 0. And regarding the countercyclical buffer, we are assuming a 0.5%, even though Central Bank said that it will increase that charge to 1%, but we don't have still news about when the Central Bank is going to increase that figure. So currently, we are now having, as I mentioned, a 9% capital requirement of CET1, and we are well above that number, 150 basis points. Cristian Vicuña: So let me put the fee figure slide on the screen. Just a second, Neha. Okay. Here it is. So as you can see, our '24 fee growth was 9% and our guidance that we're going to be around mid-single digit in fee growth for 2025. We are assuming that there is a regulatory impact on the interchange fee in our guiding to the market. So that will impact our card fee growth, and this is what we are assuming in the mid-single-digit growth of the fees. So this implementation of the second reduction in the interchange fee cap is delayed. There is some room for improvement in the growth here. So -- but pretty much we're assuming that most of the fee line figures are performing well, and there is a slight delay in the growth in card fees.

Understood. Last question, any changes in strategy? You had changes in management recently. What kind of change in strategy or priority that we can expect from the bank? Any new areas of focus with changes in management? Cristian Vicuña: No. Actually, in terms of the strategy, what we're seeing, it's a very consistent strategy along the years. When Roman arrived back in 2022, what he actually did was accelerate some parts of the strategy that we were already deploying in the last 3 to 4 years. So I think it's very safe to assume that we will be consistently trying to reduce our cost to serve our customers. We're going to be augmenting and increasing decisively the size of our customer base while trying to foster all the transactional and noncapital requiring business and containing costs through the deployment of the different technologies that we're leveraging from the global businesses' units of Santander Group. So I think that part is very safe to assume that the strategy will be actually consistent and accelerated.

Our next question comes from Beatriz Abreu from Goldman Sachs.

My question is on NIM. The guidance implies around 40 bps or higher NIM increase for 2025. If you could maybe talk about what would be the drivers of that NIM increase, especially considering that you expect inflation to fall around 30 bps this year? And also what the NIM evolution intra-quarter you expect that to be? And a second question is actually a follow-up on Neha's question on payout, given that you are currently 150 bps above Basel III expected for the end of the year. What should we consider a normalized payout would be going forward? Should we expect the 70% to be normalized? What would be a normalized payout for you?

Okay. Thanks, Beatriz. Well, starting with your second question, I would say that we are expecting to maintain our normal payout we have had during the last past years, which has been around 60%. That is what we are assuming in our base case scenario for this year. Different scenarios will be evaluated like later on this year. But I think that is a reasonable assumption for this year. So regarding NIM, I would say that we are like seeing numbers above 4%, considering that we still have some pressures on inflation, especially during the first part of this year. It's true that we are expecting to decelerate during the second half, but during the first half, we are still seeing some room, especially because of the FX rate and also the -- still some adjustments we are expecting to come. Cristian Vicuña: So as you saw today, Beatriz, CPI in Chile for the January figure is out, it was 1.1%. So actually, in terms of the path in inflation that also affects our NIM figures, we're seeing a stronger first and second quarters, a slower third quarter, which should have the lower inflation of the year, and then it will pick up a little in the fourth quarter.

Yes. And regarding rates, we are expecting an average monetary policy rates for this year around 5%. So it's 120 basis points less than the previous year. So given our sensitivity to rates, we will have an improvement in that line as well.

Our next question comes from Marlon Medina Robles from JPMorgan.

Can you hear me?

Yes.

Okay. So my question is on loan growth. And basically, if you could give us the breakdown on what are you expecting for the different segments like retail, SMEs. I recall you said like in previous calls that demand was improving in retail. So just wondering, going forward, what should be the main drivers for growth?

Yes. Well, as Cristian mentioned, in the guidance, we are expecting mid-single-digit growth for this year and driven mainly by retail lending, in particular, consumer lending. This is a phenomenon we are seeing since last year, and it is given because of the lower rates. So on the commercial side, commercial loan book, we could have some improvements depending on the improvements that we are seeing potentially on the investment side. And we could expect more demand and better dynamics in that line. And regarding mortgages, we are still seeing that the demand is not improving given that the long-term yields are still high.

[Operator Instructions] We have a question from Carolina Guerrero Matta from LarrainVial.

At the beginning of the presentation, you mentioned your investment plan between 2023 and 2026. I would like to know how much has already been invested? And how much should we expect in 2025 and 2026? Cristian Vicuña: Thank you for the question, Carolina. So it's fairly evenly divided in the 3 years. So it's about $150 million for every period. So about 60% of that, it's on technology and about 2/3 of the technology, it's on hardware -- software deployment and about 1/3 on hardware deployment and initiatives. And the rest is on the transformation of our branch network and the implementation of some Work/Cafés. The other thing that's relevant to mention is that we are also building the Santander campus in Las Condes, and this is not considered in the $450 million.

I'm not seeing any more questions. So perhaps I can hand it back to the Santander-Chile team for closing remarks. Cristian Vicuña: Thank you, everybody, for joining us today on our yearly conference call of our results for 2024. We expect to meet with you very soon, and we are going -- and we expect to see you on our General Shareholders' Meeting and our first quarter results by the final days of April, first days of May. Talk to you soon. Thank you.

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