Banco Santander-Chile Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 8 speakers on the call.

Operator

Hello, and welcome to Banco de Chile Banco Santander Chile's 2nd Quarter 2023 Results Conference Call. We are joined today by CFO, Emiliano Muratore Chief Strategic Planning and Head of IR, Cristina Bertuna and Chief Economist, Claudio So to. I'll now hand the line over to Emiliano to begin the presentation. Please go ahead, sir.

Speaker 1

Good morning, everyone. Welcome to Banco Santander Chile's Q2 2023 results webcast and conference call. With This is Emiliano Mugatore, CFO, and I'm joined today by Christian de Cugna, Chief of Strategic Planning and Investor Relations and Thiago So to, Chief Economist. With Thank you for attending today's conference call. Today, we will be discussing the trends and results of the 2nd quarter.

Speaker 1

I'm pleased to share that our digital strategy and customer centric product offerings have been instrumental in driving robust results across all business segments, with a very strong quarter, particularly witnessing exceptional growth in non NII revenues. With a In addition to this success, our relentless focus on cost discipline has allowed us to partially offset the NII pressures arising from with the non clients' NIM during this period of lower inflation and high rates. Looking ahead, We are optimistic about the benefits our well positioned balance sheet will reap from the Chilean Central Bank Eastern Cycle of interest rates, the which commenced last week. This shift is anticipated to trigger a significant recovery in our NIMs, and we expect this positive impact to manifest in the final months of this year. To begin, I invite Claudio Sotto to give us an update on the macro scenario beginning on Slide 5.

Speaker 2

Thank you, Emiliano. With the During the Q2, economic activity contracted significantly due to continued tight financial conditions with a very strong financial performance, also a poor mining performance affected by the delay of large investment projects, with an impact on activity. In the coming months, we will continue to see a weak economy with consumption falling at significant rates with a strong cash flow and low investment. Based on the information available, we have revised downward our activity estimate for this year from minus 0.75 percent to minus 1%. However, next year, the economy should rebound and grow at around 2%.

Speaker 2

With the The contraction of GDP has generated a significant slack in the economy. This together with an appreciated peso, the normalization of raw material prices and a reduction in international logistics costs have caused inflation to drop rapidly. With Thus, the CPA after closing 2022 with an annual expiration of 12.8%, with Today, it stands at 7.6%. In this context, the Central Bank of Chile began the process of monetary issuance with a sharp cut of 100 basis points in the monetary policy rate at its July meeting. The rate drop was somehow higher than expected by the market.

Speaker 2

Because of that, there were adjustments in some financial crisis. The peso tended to depreciate with the and

Speaker 1

swap rates fell

Speaker 2

significantly, indicating that the next rate cuts would be more intense than we expected until a few weeks ago. In recent days, the peso has continued to depreciate due to global factors with greater risk aversion after the downgrade of the U. S. Sovereign note. Looking ahead, we estimate that despite the recent depreciation of the peso, with inflation will continue to drop rapidly and will close 2023 at around 4%, to then reach the target of 3% during the Q2 of 2024.

Speaker 2

This will give room for the Central Bank to continue cutting the monetary policy rate at least one a record quarter of approximately 100 basis points in each of the following meetings during the year, with which the NPR will close at around 7.25 with a percent. In the 2nd part of 2024, the rate will reach its neutral level, which we estimate at 4.25%. With On Page 6, we give an update on proposed regulations. At the political level, the After the rejection of the tax reform in Congress last March, the government has announced a fiscal pact. The idea is to implement measures with the aim of increasing fiscal revenues and thus financing our sales of expenses in the areas of health, pension and public security.

Speaker 2

Next March, there will be a new deal with appropriate tax a tax reform, although details are still unknown. On the other hand, the government has summoned various factors to unlock the pension a reform which has failed for bans in contrast. In financial matters, the Central Bank of Chile decided to activate the countercyclical a countercyclical capital requirement, setting it at 0.5% of risk weighted assets. This as a precautionary measure against financial risks from the external scenario. Banks have until May 2024 to constitute that requirement.

Speaker 1

Thank you, Flavio. I would like to start by reminding you of with our Chile first strategy on Page 8, where we are aiming to become the best time for our customers, employees, communities and shareholders. With the We want to achieve this plan through the 4 pillars of our strategy. 1st, to become a digital bank with branches, with a digital bank with Workafes to reach customers with state of the art technology and the best level of service. 2nd, with specialized and value added services for our corporate, middle market and private banking businesses that focus on value added transactional, trade, FX with the and advisory products and services.

Speaker 1

3rd, searching for growth opportunities. We want to break priorities in the banking sector, Finding new business opportunities and leading the sustainable transformation of our clients. And finally, a key enabler, an organization that is agile, collaborative and high performing in which a diverse culture with exceptional people can advance based on merit. To elaborate on our first pillar of a digital bank with Work Cafe, we highlight the a set of our digital products such as the Santander Life account, which has over 1,000,000 clients with access to a simple current account with the opportunity to buy other products such as time deposits, mutual funds and access credit lines and loans when they meet the bank's risk requirements. We also offer our Mafrugas, our new site and savings account that was launched in March this year and is gaining traction every day.

Speaker 1

The onboarding process is 100% digital. There are no passwords, only facial recognition. This account has no fixed or variable costs and accepts deposits for up to MXN 5,000,000. Thanks to these successful initiatives, we have around 2,000,000 digital clients who are able to carry out their banking needs through the website or phone app. With the The advances in our digital strategy have allowed us to deepen our branching innovations.

Speaker 1

Many of you we have had the opportunity to experience our Work Cafe branches, our digital branches with a co working space, and we have reinforced our branch network with the World Cafe espresso branches, a format that aims to consolidate cash operations in our transaction half with a World Cafe look and feel and a state of the art technology behind the scenes to offer our customers an efficient and more secure experience. We have opened 4 World Cafe Espresso Centers in Vina, Brancawa, Santiago Center and Las Condes, and we are looking for further expanding the model in other dense areas in Chile. On Page 10, we can see the results in the advancement on our digitalization and simplification in the reduction of our branch footprint. As of June, our total network reached 260 branches, down 16% from June 2022. 31% of our branches currently are cashless, meaning that there is no back office with the conference call and that the branch is a business center oriented product advisory, new business and customer experience.

Speaker 1

At the same time, with loan and deposit volumes per branch increasing 22% year over year the same indicator per employee rising 6.8% in the same period. Moving on to Page 11. We can see how our SME footprint is growing strongly with the joint offer with GetNet. Firstly, with our digital life accounts for SMEs continue to drive a 17% year over year increase in total clients of that segment, reaching more than 300,000 SMEs and a 13% year over year increase in active SME clients. Furthermore, with the SEC.

Speaker 1

If we consider current accounts for businesses as reported by the CMS, we have increased our business accounts by 31%, representing 33.5 percent of the market share as of April 2023. GetNet, our acquiring business, also continues to contribute to the success of attracting more SME clients. GatNet continues to focus on the development companies of different sizes and improving customer experiences through the integrated payment solutions to business. In total, that GetNet has now deployed more than 219,000 POSs across the country with over 157,000 with SMEs Gezmer's clients, which have been growing 83% year over year. In the 1st 6 months of the year, that the has generated fees of MXN 21,000,000,000.

Speaker 1

Some results on how productivity is being achieved through our committed and talented workforce are shown in Page 12. We can see how our strategy is leading to our cost structure where it costs us less to serve our clients compared to our competitors. With the Our fees generated by our customers now cover almost 60% of our expenses with a compared to an average of 43% in the industry. Our costs represent only 1.1% of our assets with a compared to 1.5% in the industry, and the operating cost to serve our loans is 2.3%. With our cost per branch is MXN 3,144,000,000 compared to over MXN 4,000,000 average by the The cost per current account is €350,000 per account, less than half with the industry average of BRL 800,000 per account.

Speaker 1

These indicators show how the organization is transforming to be more agile, a call over a bit on high performance. On Page 13, in terms of NPS, results with the ongoing improvements in cybersecurity for our 2,000,000 digital clients. Our live clients continue to surface with our lower client satisfaction with the bank with an NPS of 72 points, demonstrating the strength of our digital channels on our website and app both score highly with 70 69 points respectively. With the Furthermore, Euromani have recognized us as the best bank in Chile, demonstrating the impressive results of our strategy compared to our local peers. With Another point to highlight was the progress made in our commitment to our responsible banking objectives, with our progress to meet our goals, such as diversity and inclusion, are well on track.

Speaker 1

We have a market leading range of sustainable products that help care for climate change with Santander Benswear. And in 2022, we managed to support numerous customers with sustainable operations in our businesses and corporate banking business. So far, in 2023, we have disbursed $140,000,000 for refinancing the first half of the year. We believe that this will be one of the fastest growing areas in the coming years. With the results in being ranked 1st in the main sustainability indices such as Sustainalytics and MSCI.

Speaker 1

By the end of the quarter. We are also the only Chilean bank included in the Down Jones Sustainability Index for Global Emerging Bank Emerging Companies. With Now let's talk about the trends in our results and balance sheet. On Page 17, we show our results for the quarter. With our operating segments that exclude the corporate centers and ALM continue to perform well with a 38.8 8% year over year increase in their net contribution, an important expansion in income lines with the and fees with cost and risk under control, demonstrating the results of our strategy across the segments.

Speaker 1

With the The accumulated net income as of June 2023 totaled COP263 billion, decreasing 50% year over year. On the other hand, the book value of our equity increased 16% year over year with our TNAP with dividend per share growing 23%. With those two effects of net income and equity, the accumulated ROE a rigid 12.9% in the 1st 6 months of 2023. Moving on to Page 18. With the results of Santander CIB, Corporate Investment Banking, have continued to be impressive, increasing 84.5% year over year.

Speaker 1

With a net contribution from the middle market of corporates increased 38% year over year. Both of these commercial segments with experienced an important rise in deposit spread as well as high growth of fees and pressure income. The focus of these segments continues to be with On Slide 19, we can see that retail banking results increased 21% year over year, driven by the greater client base and more the review of our clients. Our active individual clients increased 4.2% year over year and digital clients increased 1.3%, with a very strong quarter, while our active entity clients have grown 13% compared to June last year. The margin increased 18.5% year on year with a better mix of funding and loan growth.

Speaker 1

Fees in this segment increased strongly by 29% year over year, driven by hard fees due to greater usage and the increase in the client base as well as the fees generated by Getnet. Provision increased a 50 5 percent 57% year over year due to the normalization of the liquidity of our clients in recent periods. Operating cost increased in a controlled manner by 4.5% year over year as the bank continues its digital transformation, generating greater operating efficiencies. With In terms of loan growth, in the Q2, loan growth remained subdued as the economy continued to feel the effects of the high interest rates. During the quarter, the CID segment decreased 1 point a record quarter over quarter as the short term loan operation carries out in 2022 comes due.

Speaker 1

With the The middle market segment's loan portfolio slightly increased 0.2% quarter over quarter, mainly driven by positive translation gains with a review of our financial results on U. S. Denominated loans. Earlier this year, we launched specialized attention models for the agro automotive and multi Latina sector that will enhance loan and income growth in this sector in the coming quarters. Retail Banking loans grew 1.3% Q on Q, led by a 2.4% quarter on quarter growth in mortgage loans and a 1.3% the in consumer loans.

Speaker 1

Origination of new mortgage loans has remained subdued due to a higher interest rates and the impact of the inflation on the value of the Unibail element. Regarding consumer loans between the end of 2019 2021, these loans decreased 7% as clients reduced large purchases such as travel and hotel, which fuels credit card loans. With the liquidity obtained from government transfer and pension fund withdrawals. With the At the end of 2022, as household liquidity levels returned to normal and holiday travel resumed, with Credit card loans began to grow again, increasing total balance compared to pre pandemic levels. As for SMEs, with the demand for new loans continue to remain subdued as clients continue to pay back their full GAAP loans disbursed with the results in 2020 2021.

Speaker 1

Overall, loans have grown 3% year over year, and we maintain our guidance of a year over year loan growth of mid single digits. Slide 21. Liquidity levels remained strong in the quarter. With the bank's total deposits increased 0.3% Q on Q and 2.2% year over year. The increase was driven by time deposits that increased 4.4% quarter on quarter and 25% year over year as the high interest rates continue to attract While our demand deposits have decreased 15.6% year on year, with the bonds issued increased 7% and 2.6% the last quarter.

Speaker 1

During the year, the bank has issued bonds for US1 point ARS 7,000,000,000 383,000,000, dollars 30,000,000 and a JPY 17,500,000,000, taking advantage of attractive opportunities in the various fixed income markets locally and abroad. With the bank's liquidity coverage ratio, LCR, which measures the presence of liquid assets over net cash outflows as of June 30, 2023, was 175%, well above the minimum. With the SEC. At the same date, the bank's net stable funding ratio, NFFR, which measures the percentage of illiquid assets financed through payable funding sources reached 109.4%, also well above the current legal minimum set for this ratio. With In terms of margins, the bank's NIM in the quarter reached 2.2%.

Speaker 1

With the valuation of the U. S. Continues to decelerate while short term interest rates remain high. Both These factors continue to weigh on the bank's NIM. As shown on this slide, this is mainly a phenomenon that affects our non client NIM or the net interest margin from our ALM activities, including the U.

Speaker 1

S. GAAP with the liquidity. The client NIM, which is defined as NII from our businesses segments over interest earning assets, with the The sensitivities to inflation and interest rates remained stable through the Q1 with 100 basis point drop in inflation will pressure down our NIMs by 16 basis points and 100 basis points in the average interest rates will increase our NIM by 30 basis points. With a Given the negative U. S.

Speaker 1

Variation in July and the recent 100 basis point drop in the monetary policy rate, with a U. S. Variation of 4.3 and an average monetary policy rate of 10.3% for 2023, with our NIM showing sign of a solid recovery in the 4th quarter to reach an estimated total NIM a review of 2.3 percent for 2023. Moving on to asset quality on Slide 23. With the NPL ratio rose to 2.1%, broadly returning to pre pandemic levels as household liquidity levels return to normal And the economy feels the squeeze from high interest rates.

Speaker 1

The coverage of NPLs past June 2023 with the reached 165%, and there has been no reversal of the voluntary provisions. With As we can see on Slide 24, this overall positive asset quality indicator led to our cost of credit of 1 point a range of 19% in 2023, in line with our guidance for this year. On Slide 25, we move on to non net interest income revenue sources, which continue showing exceptional growth trends. Income from fees and treasury rose 51% compared to the Q2 of 2022 and 6.6% quarter on quarter, driven by higher usage of flows in all segments. We expect these trends to continue in 'twenty three.

Speaker 1

The gradual implementation of the new interchange fee regulation will start by year end, and we we made a negative impact in fees in ARS24,000,000,000 of ARS25,000,000,000 and ARS47,000,000,000 in 2025. With As shown on Slide 26, we also consider the bank's efforts to continue increasing productivity and to control costs. With the Operating expenses decreased 7.5% year over year and increased 2.2% quarter on quarter. The bank it continues ahead with its $260,000,000 in technology investment plans for the years 'twenty three to 'twenty five. With the Investor Relations Conference Call.

Speaker 1

And because of these investments, we are expecting costs to fall in absolute terms in 2023. Moving on to Slide 27, we observed a positive evolution of our capital ratios. At the end of the Q2 of 'twenty three, the bank reported a core equity ratio of 11% an ABB ratio of 17.5 percent after the distribution of the annual dividend that amounted to 60% of the 2022 earnings. With In May, the regulator announced that from next year, the Chilean banks will need to include a countercyclical buffer with a of 0.5%. This, together with the conservation buffer of 2.5% and the systemic buffer for Santander of 1.5 results means that our minimum fully loaded CET1 will be 9.0% in December 2025.

Speaker 1

With a Below on the right, we summarize the requirement levels by our regulator, including the potential buffer requirements and additional capital. With On Slide 39, we conclude with some guidance. Our strategy of a digital bandwidth work affair will continue to provide us with a greater digital client base and solid fee growth and impressive operating efficiencies. With our updated macro scenario for 2023 is now a GDP contraction of 1%, a U. S.

Speaker 1

Variation of 4.3% on an average interest rate of 10.3% for the year. In terms of loan growth, we expect mid single digit growth with a focus on all segments. As mentioned, the bank is well positioned for a fall in real rates. And so, with further cutting rates expected on a U. S.

Speaker 1

Variation of 4.3% for the year. We expect NIMs of 2.3% for the full year with solid prior NIMs and with the upward trends to continue into the next year. With non NII growth should surface 20% this year on the back of strong client acquisition and usage figures. With a major focus, and we expect a decrease of low single digits in our total cost base. That the asset quality has now almost normalized and the cost of risk should remain at a manageable level of 1.1% to 1.2% for the rest of the year.

Speaker 1

With a In summary, due to our updated inflation expectations, we expect ROE to be in the neighborhood of 15% for the full year, and our long term ROE expectations remain unaltered at 17% to 19%. With this, with the I finished the presentation, and now we will gladly answer any questions you may have. I will hand over the word to our moderator.

Operator

With the Q and A part of the call. We already acknowledge the questions that came in. However, if you have any questions, please press star 2. With the a question if you are dialed in via the web. With the call.

Operator

Our first question comes from Mr. Juan Eretado from Scotiabank. Please go ahead, sir. Hi, good morning, Emiliano, Chris and Claudio. With the I have two questions.

Operator

I will ask the first one and then the second. So the first one is in terms of NIM. The NIM projection for 2023 is expected now to be around 2.3%. And

Speaker 1

in the

Operator

past, it was mentioned that in 2024, it could rebound to 3.3% or 3.5%. So under the current macro outlook, how do you see NIM in 2024?

Speaker 1

With Hello, Juan. Thank you for your question. I mean, I think that what you mentioned it still holds something like we expect the NIM for this year to close around I mean by the 4th by the end of the year to be around 3. And for the next year, according to the year rates, we are the anticipating for next year, I mean, combining rates to trajectory with inflation slowdown to be in the 3.5 area for the full year 2024.

Operator

Thank you. And my second question is related to this because so next year, the FCIC facility is expected to be repaid. With the And my understanding is that also some derivatives will expire next year in the first half of the year. So I was wondering if you can to talk about the expected impact of these two factors, the FCIC facility being repaid and some derivatives expiring.

Speaker 1

Yes, absolutely. So in our case, I mean, the FCIC was mainly floated. I mean, for us, it's like a floating rate liability. That's it's in part what has been affected affecting our NIMs during the last 2 years because of interest rates short term interest rates being as high as they are and they were. But The good part of this thing is that for us, the maturity or the expiration of the FCIC will be like with Non relevant for our NII, that the number of the NIM will improve because, let's say, we'll have with a significant part of the balance sheet like the leveraging and falling with a low NIM and that will make the the overall NIM of the bank to improve.

Speaker 1

But going to your question, in our case, the exploration of the FCIC will be

Operator

with a question. Our next question comes from Mr. Ernesto Gabilondo from Bank of America. Please go ahead, sir.

Speaker 3

With Thank you. Hi, good morning, Emiliano, Claudio and Christian. Thanks for the opportunity to ask questions. So my first question is on your ROE guidance. And remember, you were guiding before between 15% to 17%.

Speaker 3

So now you're expecting the low part of the range because of the expectation of lower inflation levels. So just wondering how should we think about the ROE next the year 2025. Just wanted to understand how would be approaching to your 2017, 2019 term target? With Then my second question is on your research coverage ratio of 175%. With a Given your strategy to expand to the mid to high income segment in the consumer segment, What would be the level you'll be comfortable to maintain for the next years?

Speaker 3

And then my final question is on your effective tax We have seen it has benefited because of high inflation. We're now thinking that we're going into a lower with the level of inflation, how should we think effective tax rate should be normalizing? Thank you.

Speaker 1

With the Okay. Thank you, Ernesto. Thank you for your question. I mean, I'll take the first one and I'll leave the other two to Cristiano. As we are mentioning, I mean, from 2017 to 2019, how and what part of that range will be basically will depend on with the path of rates.

Speaker 1

And then as I mentioned before with the NIM for the year being around 3 point 5% according to our expectation of GEA rates next year being around like 2% to 0.2% for the full year. That will take us maybe closer to the higher part of that range. And in looking forward to 2025, which is really long term, we still hold with our long term range and we think that will stay there. Ernesto, this is Cristian. Regarding your credit risk question, we are seeing the portfolio behaving at the with a 1 to 1.2 cost of credit levels and with the anticipated that we expected that the lower with the velocity of the economy is also increasing a little our NPLs to levels pre pandemic.

Speaker 1

So we expect this situation to continue in this area. We are not seeing the portfolio deteriorating further. So we are comfortable with the 1.1 to 1.2 levels. And regarding the tax rate, the effective tax rate, Well, Chilean banks, because of this inflation exposition, get with the The credit book in terms of the taxes, we adjusted by inflation. So a lower inflation that we will make our effective tax rate increasing in the coming quarters, and we expect it to get back to the levels we've seen when inflation is usually lower, so closer to 20%, 23%.

Speaker 1

With

Speaker 3

Thank you very much, Emiliano and Christian. Just a follow-up in terms of the you were mentioning captive risk, but in terms of your reserve coverage ratio, so You feel comfortable to maintain these levels?

Speaker 1

We well, that's a Board decision, but we haven't made any decisions in order to take use of our additional provisions or coverage should remain in the same area.

Speaker 3

Okay, perfect. Thank you very much. With

Operator

the Thank you very much for that. The next question comes from Tito Labarda from Goldman Sachs. Please go ahead, sir.

Speaker 4

With Hi, good morning. Thank you for the call and taking my question also. I have one question just on your fee income, the non NII, which is growing about 20% this year. Just to think about how that can continue to evolve in 2024 and 2025? How should we think about that non NII growth with the

Operator

Hi, Thibault. This is

Speaker 1

Cristian. Well, we're having a very good year on with the Q2, so we're growing higher than 20%. So that's very good news for us. And we expect The reason this is happening is because we're increasing our customer base and now we're raising the profits of that growth. So we expect this trend to continue further, but to lower down a little.

Speaker 1

So we're looking at 10% -ish Figures for the 2024 and 2025. Factoring in the headwind from the interchange fees going down in the next

Speaker 4

Okay, perfect. Thank you.

Operator

Thank you very much for the question. Next question comes from Mr. Guli Fernandez from JPMorgan. Please go ahead, sir.

Speaker 1

Hey, guys. Thank you very much. I have two questions, one on U. S. GAAP with the Let's start with the U.

Speaker 1

S. GAAP. I saw that this quarter your GAAP moved up. With the Just would like to understand the rationale here because given the situation is moving lower and you have been reducing your debt over the past quarters. I just would like to understand a little bit why the gap is higher now.

Speaker 1

I'm not sure if the cost of derivative is moving up. It has been more costly to have a disaster liability on the left and this will explain the higher gap. But that's the first one. And regarding the cost, I would like to check our investment plan, right? You put out in the presentation the $260,000,000 plan.

Speaker 1

This it's not new, right, we knew about it. But how much of the plan has been implemented this year? Because your operating the results are super tracking, super good, right? I think it's the other line, also no surprise. But given you have such a big investment plan.

Speaker 1

My concern is that you may need to accelerate the execution of this plan for 2024, 2025 with higher taxes, potentially the pressure of your bottom line and your ROE target. So trying to understand like how much we are like asking about investment plans to understand how your operating expenses may evolve in the near future. Thank you. With Hello, Yuri. Thank you for your question.

Speaker 1

So regarding the U. S. GAAP, as you mentioned, I mean, we in the second quarter a great, I mean, basically, that's because of derivatives that were expiring. I mean, like, let's say, we had the inflation locked in at high levels and those derivatives expired that produced like a net increase with a And the reason why, let's say, we didn't keep it down is basically because we saw that the inflation implied in the derivatives going forward is like in line with what we are expecting and Considering the latest evolution of the FX rate, we even think that we can have some, let's say, upward pressure in headline inflation for the rest of the year. So basically, the decision is if we lock in what the market has Today, which is around like 3% dependent on the tariff, but it's an inflection of 3%.

Speaker 1

We can, let's say, look in that and reduce the gap. And in that case, the adjustment will be lower, but the margin will be higher or what we can expect from that 3%, which is implied and we don't see a clear call of the inflations being far away from the what the derivatives are discounting and that connects to your point about the cost that basically when We have done today that we operate in the areas of market. We don't do it at mid prices. I'm basically trying to lock in the 3% would imply leave some basis points of inflation on the table when you hedge, and that's why we are, say, comfortable, not because but we don't feel that we are not growing the risk, but the level of the price load we could hedge, It's reasonable for us, and that's why we keep we don't expect to grow the gap further. It will stay like around where we were in the second quarter, but that's the reason because why you saw the jump from Q1 to Q2.

Speaker 1

And regarding cost going forward, I mean, our investment plan keeps the same. I mean, basically, our efforts are making room in OpEx the to make room for investment, especially in all the digitalization and all the transformation of the branches network. And we keep our long term target and ambition to have costs all in costs growing below inflation, And that holds for next year to where we plan to have all the expenses here in the U. S. Debt remain around those like ARS 7,000,000,000 kind of level, right?

Speaker 1

Those are the picks. Thank you very much. With a

Operator

Thank you very much. Our next question comes from Daniel Mora Ardea from Credicorp Capital. Please go ahead, Daniel. Your line is open. With

Speaker 5

Hi, good morning and thank you for the presentation. I have just two questions. The first one is a follow-up regarding the NIM. I would like to understand that negative part that is impacting currently the meaning related to the swap of interest rates, How it's going to evolve with the decrease in interest rates expected for the rest of 2023 and also beginning of 2024 And what could be the impact of the exploration of the FSC related to the swap of interest rates? With Just to understand what will be the process there.

Speaker 5

And the second question is regarding to NPLs. With If you are seeing any risk in any the company or any economic sector that you have explained this performance

Speaker 1

with And what will be

Speaker 5

the expectation going forward? Thank you so much.

Speaker 1

Hello, Daniel. Thank you for your questions. But I'll take the first one and I'll leave the second one for Cristiano. Regarding the NIM path and the non clients, I mean, that may have been, let's say, the rebound, I mean, to positive territory in the coming quarters. I mean, we basically expect that to be more closer to the 0.5% negative during the next year in order to have the clients means around 4% and the non clients in the minus 0.5% and that adds up to the 3.5% we were talking before.

Speaker 1

I mean, basically, the main driver of the non clients' NIM improving is with the fall in interest rates, short term interest rates, combined with the process of getting the curve steeper from where we are now. I mean, we have a very steep curve on the negative float territory and going forward, we'll have that going more to flat at the beginning and gaining some the positive slow by the end of next year, and that will have the non clients' NIM because of with the positive level of the curve. And connecting that with the FCIC, Basically, in that case, considering that we have that liability floated, we will benefit in the next the quarter to the reduction of the interest rate that we have abused the cost of that. And at the maturity, it will be kind of neutral for us because basically we have short term assets to pay that off and basically we have with the monetary policy rate assets falling together with a liability that for us is also floated to with the market policy rate, so we'll be kind of neutral and not much relevant for our NII going forward because with an asset liability with a similar yield will, let's say, go away with the expiration of that.

Speaker 1

With Hi, Daniel. This is Christian. Regarding your NPL question in the commercial portfolio, Actually, the commercial NPL has increased from 2.5% to 2.9% in the 1st 6 months the of the year and our impaired loan ratio about has increased from 7% to 7.6% In the 1st 6 months of the year. So all you know, we are seeing a slight deterioration in the SME's portfolio, But it's nothing to be really concerned on the higher net lending names. We haven't seen with the middle market or the CIB portfolio actually being very stressed.

Speaker 1

And I will to say that the factors that we are seeing are agron, some construction, but those are very, very a small part of our with the of our portfolio. There is some further details on Page 38 of the management commentary.

Speaker 6

With the Okay.

Operator

Thank you very much. Next question comes from Ms. Isabelle Eilish from Berenberg Asset Management. Please go ahead, Nam. Your line is open.

Speaker 7

Hello. My question is actually on Minerals, which we've partially answered before, but an extension to that On the funding cost, I see the switch that you would get interest rate to high, you switch from demand to time deposits. With How sticky is that? Does that persist for a long time? And how quickly did that go did that shift back?

Speaker 7

Thank you.

Speaker 1

With Thank you, Italo, for your question. So well, what we are seeing is the reasonable with a economic decision of a person that has money in their account and moving them to time deposits with the to attain the benefits of our higher interest rate. Demand deposits are paying 0 in Chile and time deposits are paying about 1% per month for the last 12 months. So we are seeing a trend of the reconciliation of our deposits that we expect to start reversing once the interest rate in the monetary policy rate in the coming months starts further decreasing. So we don't have sensitivities yet of how this effect will go.

Speaker 1

With But definitely, we are going to see a further movement further reduced movement from the time deposits. With a

Operator

question. Thank you very much. Our next question comes from Neha Agarwal from HSBC Global Research. Please go ahead, ma'am.

Speaker 7

Hi. Thank you for taking my question. Just one quick question. How How should we think about the asset quality trend and cost of risk for next year? This year, we are seeing some normalization, but should we see some stability in 2024?

Speaker 7

With Any other headwinds in terms of going back to normalized revenues of ROE for 2024 that we should watch out for? Any reason by the ROE for 2024 should be viewed from the normalized ROE level. Thank you very much.

Speaker 3

With And then in terms of so

Speaker 1

as in quality, I mean, well, remember that because of risk For next year, I mean, we still hold a significant amount of voluntary provisions that will, let's say, serve as kind of backstop in case that the behavior or the asset quality deteriorates. So we feel comfortable to be around 1.1%, 1.2% we are in terms of cost of risk the possibility of tapping the voluntary provisions in case the situation goes worse. In terms of the risk for the path to normal ROE next year, Basically, I would say that it goes to again to the NIM part because as I just mentioned that with the cash quality part, we feel like comfortable to stay around there in terms of NIMs will depend on how with this reduction of BIA rates goals going forward. Chile already started the cycle. I mean, Brazil followed, and we have developed economies still with the and that implicitly has also the Fed and the developed countries Doesn't don't start the hurricane cycles.

Speaker 1

You can argue that the floor for the rate in Chile would be maybe with a higher than that 4% to 5%, and that will create some pressure on the NIM normalization for us. And that might be one of the things that could deviate the path to normal salaries. But Apart from that, I don't see I don't know if you can give any other Well, not really. I will bring forth Emiliano's point. So Actually, the rate path and the inflation are probably the main effects to be monitoring, And we are seeing asset quality stable from what we are looking at now.

Speaker 1

So I'm very confident that we can believe with on our cost figures and fees that we already mentioned and what we expect. So I would say all in all, We feel that we are going back into our regular profitability levels

Speaker 6

with a

Operator

question. Our final question comes from Mr. Ewald Stark Bittancourt from Vite Investments. Please go ahead sir. Your line is open.

Speaker 6

With Hello. Thanks for taking my question.

Operator

You mentioned earlier in the presentation that Fugate loans will reactivate with SME credit growth. So I was wondering what's the expected margin on these Golgappa loans? How do we compare to normal margins on SME loans?

Speaker 3

With the

Speaker 1

Yes. So thank you for the question. Yes, I mean, basically, in the SMEs portfolio, we have like 2 forces. I mean, first, we have like the maturity of the initial Forgato loans that were granted in 2020, 2021. Those, let's say, are maturing and going away.

Speaker 1

Those were set with very low rates because we are the prevailing the at that moment. So those were really low yielding and low spread loans, and those are going away. With the new ones, the new foraba loans where the program itself was set in this new rate environment. So actually, the spread is not as low as it was at the beginning, and it's in line or slightly higher than the average with the spread for SMEs. So that's your question regarding if you want the with the average spread of the portfolio, the dynamic of the old ones going away and the new ones entering at average or slightly higher than average spread for the portfolio.

Speaker 1

It's a tailwind for the average spread of the SMEs moving forward. And The program is still there, and it's a significant part of the new origination in SMEs, And it's different to the original one where in terms of pricing was kind of a sacrifice for us. In this case, it's more in line with the rest of the results of the portfolio.

Speaker 7

Okay. Perfect. Thanks.

Operator

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

Speaker 1

Thank you all very much for taking the time to participate in today's call. We look forward to speaking with you again soon.

Operator

With a question and answer session. Thank you very much. This concludes today's conference call. We will now be closing all lines. Thank you and goodbye.

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Key Takeaways

  • Banco Santander Chile’s digital strategy and innovative “Work Café” branches drove strong growth in customer acquisition, reaching 2 million digital clients and lifting non-interest income by over 50% year-over-year.
  • Strict cost discipline delivered operating efficiencies: fees now cover 60% of expenses (vs. 43% industry), cost-to-asset ratio fell to 1.1% (vs. 1.5%), and operating expenses declined 7.5% YoY.
  • Net interest margin (NIM) stood at 2.2% in Q2, with full-year guidance of 2.3%, as elevated short-term rates and non-client ALM activities pressured margins—though upcoming central bank rate cuts should support a recovery late in the year.
  • The macro outlook was revised: Chile’s GDP is forecast to contract 1% in 2023 (vs. –0.75% prior) as inflation fell from 12.8% to 7.6%, with further rate cuts expected to bring inflation to 3% by mid-2024.
  • Asset quality remains largely stable with a non-performing loan ratio of 2.1% (back to pre-pandemic levels) and cost of credit around 1.1%–1.2%, supported by a 165% coverage ratio and no reversal of voluntary provisions.
AI Generated. May Contain Errors.
Earnings Conference Call
Banco Santander-Chile Q2 2023
00:00 / 00:00