Good day, ladies and gentlemen, and welcome to the Q3 2015 Banco Santander-Chile earnings conference call. My name is Mark and I'll be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question and answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Raimundo Monge, Corporate Director of Strategic Planning. Please proceed sir.

Thank you very much, and good morning, ladies and gentlemen. And once again, welcome to Banco Santander-Chile third quarter 2015 conference call. Thank you for attending today's conference call in which we will discuss our performance in the third Q of '15. Following the webcast presentation, we will answer your questions. We will begin this presentation by giving a brief update on the outlook for the Chilean economy in 2016. Regarding the economy, there is a growing consensus that the growth figures have stabilized and for the first time this year we have not modified our outlook for GDP growth in 2015 and 2016. We do not expect a strong pickup in economic activity next year, but growth should stabilize at levels between 2% and 2.5%. [Indiscernible] should slowly begin to rebound, but average employment, which usually lags the rest of the economic indicators should pick up upwards but still remain at manageable levels. Even though the price of copper has fallen in 2015, the full international oil prices, Chile imports a 100% of its oil needs, and the depreciation of the peso has led to a reversal in Chile's trade balance and clearing account deficits, which has gone from a deficit close to 4% of GDP to an expected surplus of around 1% of GDP this year. Segment [ph] in the corporate sectors continue to contract, but given the diversity of Chile's economy and the fact that the average GDP growth of Chile's main trading partners is relatively high, the economy has done better than other regional peers. This is also reflected in Chile's sovereign risk measured according to CBS's spread, which are still the lowest in the region. Chile's fiscal situation remains robust with net fiscal debt at only 2% of GDP. All in, this is translated into…

[Operator Instructions] Your first question comes from Guillermo Costa. Please proceed.

My question is about the asset quality evolution. We observed that your NPR ratio showed a decent evolution and I would like to ask if you're expecting a deterioration going forward due to the economic slowdown and what sectors, if any, concerns you the most? And my second question is about the standard generic provisions you need to do in the 4Q. What's the average loan to value of your mortgage portfolio? And how much of your mortgage portfolio has a loan to value higher than 80%?

In terms of evolution of asset quality, we think that the aligned trends are generally positive, especially in the consumer side, in the mortgage side and in the mid-size market. We haven't seen any deterioration. That, as we mentioned in the call, is a combination of a mix which we have been for the last two or three years moving to the upper end of the consumer market and to the relatively larger companies. And therefore, the mix effect is helping to maintain asset quality metrics that are stable or slightly improving as we mentioned in the call. And going forward, we don't have basically big clouds of concerns of course, as we saw this quarter. We sometimes, especially in the large corporate segment you have an asset quality progress and the impact is relatively large. But there at the end of the day, it's easier to work with those clients to solve their problems because they are clients with viable business models, [indiscernible] that eventually sometimes we have short-term difficulties. So we don't expect many of those large client provisions to be effective losses at the end of the day. They might be delayed in terms of how soon you recover the money, but we don't have big clouds there. So, the fact that the central economic scenarios that we have seen that -- is sound. The fact that our models have been delivering on the promises, as we saw in the slide we included in this conference call. And the fact that the mix is included, allow us to be relatively comfortable. And that's why we have expectation that asset quality metrics should be stable going forward or with some marginal improvement by the end of next year's dividends. In terms of the mortgage portfolio -- Robert Moreno is also with me and he will give some --

Regarding the loan to value, the average for the full loan book is around 70% to 71%. And I would say we are no longer, or very rarely, giving loans now above a loan to value over 85%. To give you an example, less than 1% of the loan book now of the new sale is over 90%. And I would say more than 50% to 60% is being sold at loan to values, or even greater percentage, lower than 80%. So there is a one-time impact because there are still some loans with loan to values over 80% and that's what the charge will be more or less. This change in provision requirement also has some effects on the margin and consumer and commercial loans, but the big effect is on mortgage and that's what the CLP50 billion charge will cover. And with that, we should be up to date with this new provisioning guideline.

If you [indiscernible] model Superintendency apart from taking or forcing banks to set better provisions for operations with a loan to value higher than 80%, also is very strict in terms of clients with delays in the payments. So what happened is that in a mortgage that lasts 20 years on average, you have many advancing with clients' is basically delays in the payment of this total debt. Now you are forced to radically increase the level of provision to that client, although you know that at the end of the day you won't be losing money because the client has a lot of time to be back in normality, et cetera. And then eventually you have the property to foreclose. So that's why we think it's a very conservative model that is in many cases you also have a client that from a commercial standpoint you go to more than 80% because he has a lot of kinds of [indiscernible] or shares of things that can be used as proof that the guy is wealthy. So we think it's a very conservative positioning model that we have of course to comply. And but at the end of the day, you take a long time [indiscernible], even in the financial crisis of 2007 and 2008 and the previous Asian crisis in the mortgage book, the actual losses has never been higher than 0.3% to 0.4% of the outstanding. So if I think that it simply proves that our regulator is very prudent, which we share that view. But of course, in our case we think this makes basically a provision that is basically ahead. We don't foresee that our relevant share of that will be an actual loss, but we have to comply of course and we prefer to anticipate the recognition of that fees than to wait until 2016 as we could.

Your next question comes from line of Catalina Araya from JPMorgan. Please proceed.

I just wanted to follow-up on asset quality. I see headline NPLs and coverage posted improvements. However, the provision charges rose significantly because of the two specific cases, so my question is do you expect these two companies to become non-performing? And if they do, what would be the impact of the NPL ratio? And then also following up on the credit provisioning, this 50 billion increase is a one-time off, but do you -- what normalized level of cost of risk are you seeing into 2016?

In terms of this corporate client, we cannot speak about specific cases or specific names, but in both cases, are companies with viable models and that there's old incentives to give them breathing space. They're facing short-term difficulties related to very specific issues and of course all the lenders have incentives to give them breathing space, because they have a viable business model. So again, only in extreme cases where somebody really gets too nervous or tries to rush things, we could foresee losses. And that's why we set these provisions against those worst case scenarios but the central scenario is that we should manage to, under [indiscernible], to manage, to do relatively well with delays in terms of how soon we will be paid back, but we don't foresee a loss. This is something that happens every [indiscernible]. It's simply that in the case of large corporate borrowers the receipt [ph] is more difficult. But in the mid-size and the large company segment, this is relatively common. It's difficult to model because they are -- events that happen and you cannot have an operating model for anticipating. What you see is here for more diversified or a smaller client where you have a large sample of clients to anticipate. In terms of the ongoing cost of credit paper, as we point to the aim for the year, we will finish closer to 1.5 or something like that, yes. And we think that as we put in our call, or as we mentioned in our call, that in 2017 we could be around 1.2, 1.3. So in 2016 especially by the end of the year probably approaching 1.4 or something like that, in a gradual slowdown of that figure. And as I mentioned before, the key elements there are our more robust for origination process and the fact that our mix, although it's lower yielding, which could use some spread, is basically better quality and the [indiscernible] are good enough that the claim has foundation. With our origination process is smoother and that the mix we have -- should be lower risk and therefore it's reasonable to approach levels similar to other larger banks in Chile.

Your next question comes from Philip Finch from UBS. Please proceed.

Really just one question from my side, and that's regarding your net interest margins. In the past week we saw a positive correlation between inflation and margins. In the third quarter, as you pointed out, inflation was stable and yet we saw a 20 basis point decline in net interest margins. So can you explain first of all why this relationship broke down in the third quarter, what were the drivers? And going forward, what can we expect in terms of the outlook from the interest margins? Will we see further compression?

In terms of net interest margin and the stated inflation, as you correctly point, the correlation is positive. Banks by the natural commercial growth tend to create a gap. They have [indiscernible], it's linked to inflation and liability. And what we do every once in a while is manage the gap so to anticipate what will happen with inflation going forward. In our case, our view is that the Central Bank has already started taking actions to reduce the headline inflation to something closer to a 3% level in the next -- they have a horizon of around 24 months. So what you do is you start taking actions to reduce a little bit that gap in anticipation to lower inflation rate. And that's why the correlation being positive is not one-to-one, especially on a quarter-by-quarter basis. This correlation is clearly, when you smooth out and take three, four quarters moving average but with the ratio it's much more [indiscernible]. So it's simply a reflection that we said we are sharing the view that the Central Bank will have a [indiscernible] space in terms of controlling inflation, which has been running on a little bit ahead of the essential target that has been set by themselves. And as a consequence you tend to adjust your structural balance to face that reality. So the market and we share that, we expect next year inflation to be lower than this year and simply you're moving the structural balance to face that reality. In terms of client margins, we think that we are very much finishing this process of a change in the mix that started three or four years ago. We still have a long priority originated before 2012 [indiscernible]. We think that the conversion of the client mix is to the large extent happening. And next year we should see relatively stable net interest -- decline in net interest margin. Because as we try to put in the conference call, this year the drag on the client net interest margin has been because we have been growing abnormally fast in mortgages, which is by far the assets have yields with lower spreads.

Your next question comes from Alonso Garcia from Credit Suisse. Please proceed.

Regarding the 50 billion provisions charge, I would like to clarify if it's going to float with the P&L or if it will go directly to shareholders equity.

No, the superintendency has not yet fully stated, the course is very likely that will go to P&L and that's why in principle, of course we will follow whatever the superintendency decides, but it's very likely that will be against P&L.

Your next question comes from Peggy Koury of Hartford Investment Management.

I want to talk about asset quality too. You mentioned the reasons for why the provisioning rate went up third quarter and one of the reasons you gave was because of the currency depreciation. Could you elaborate on that a little bit? And specifically, are you making foreign currency loans? And secondly, can you tell us what sectors, what industrial sectors those corporate clients are in that are having a little bit of difficulty? Thank you.

What happened is the following that our foreign trade loans that represent like 14% of the loan book are denominated mostly in U.S. dollars. And as a consequence, the provisions you have to set aside also is expressed in terms of U.S. dollars. Your provisions say 1%, meaning that you have a dollar equivalence of provisions that are earmarked for these loans. So when the depreciation of the currency is like in the previous quarter, like 9%, you have that amount of provision has to be adjusted by the translation effect. So what is beneficial from loan growth and that's why we try to eliminate that in our report, it's also equivalent in the provision side that we have gross up your provisions simply to keep up with a new exchange rate. However, as we explained in our press release, we have very little [indiscernible] position all our book. What we do is we close that gap, but from an accounting standpoint, the bad news is that provisions are grossed up, but the good news is that you have an equivalent profit on the financial transaction line reflecting that we have covered that translation gain or loss, because sometimes it can be a loss. So at the end of the day, has no impact from a bottom line perspective, the different changes of translation in different lines of the profit and loss statement because it's already hedged. But of course it can gross up line specific. Because in the same case with the emulous [ph] cost, we have, for example, [indiscernible] denominated in U.S. dollars, they are grossed up in the cost line, but you have an equivalent profit on the financial transaction side that counterbalance they do. So that's why from a profit and loss statement or from a net income basis, the changes in exchange rate, that can have a relevant impact, but of course you have impact in other lines, especially cost provision, et cetera. The reverse is also true, that when, for example, the peso strengthens, you see the opposite effect. You have lower provisions, you have lower costs, but of course you have a loss on the financial transaction, and that's why it's relatively neutral from a net income standpoint, but has impact in -- simply where we highlighted this quarter because depreciation of 9% on a quarter is something completely unusual. In terms of sectors, we don't have any concern about specific sectors. The two clients that we mentioned are completely unrelated, they affect us. And the rest of the players in their own sector are also sound. So that's why it's very [comprehensive] specific issues and not necessarily sectors specific issues.

Thank you, I can follow up with one question. These foreign currency denominated loans you're making, are they strictly to companies?

Yes, they are companies. Mostly foreign trade loans for import and export.

Great.

And very short term.

[Operator instruction]. Your next question comes from Juan Dominguez. Please proceed.

I have a couple of questions regarding net interest margins. The first one is I wonder if you can provide us some color on the margin of maneuver the bank has to keep its structural balance in [foreign language]. And the second one is related to the client margin. You already said that you'd expect this have in client margin. But under a scenario of a still a mild demand of credit, and considering a less expansive monetary policy, I wonder if you can elaborate on what are your expected trends, especially on the cost of funding side. You already said that due to a change or a relatively stable mix in terms of mortgages, consumer and commercial lending you don't expect major changes in your deal and loans. But I wonder if you can provide some guidance on cost of funding. Thanks.

Okay, sorry, didn't understand the first part of the question. In terms of means and how they are impacted, the impact of writing short-term interest rates is [indiscernible] at the beginning, because basically you are repricing your liabilities at a faster pace than your assets. And that's why interest rates tend to compress shortly our net interest margin. However, very rapidly, the once you have repriced most of your liability, you have two counterbalancing effect. Number one is that -- well, actually this is very-very fact as well. That you start making more money on your demand deposits, which are 99% are non-interest bearing. So that tends to counter a little bit the effect, the negative effect of the repricing. You tend to compensate by giving a high return on your demand deposit. And the second element that is positive is that you start doing the repricing on your assets as well after a time. And that's why typically when you see interest rates increasing, you see a short-term margin compression followed by a margin expansion. And that process tends to last three, four quarters, more or less. In terms of cost of funds, it's basically the same, that at the end the time deposits are more expensive, but at the same time, the profitability of your demand deposit is wider because of the fact that most of them are non-interest bearing and you can reinvest those funds at the higher marginal rate.

Just a follow-up on that answer, I mean to what extent you could translate increasing cost of fund into your clients in that scenario, which seems pretty completed right now.

It's a challenge, but it can be done because at the end all the market will be facing more or less the same -- in the same incremental costs. So again, on this there is something really trying to reduce the stated profitability, which I guess nobody wants. At the end you try to pass prior incremental costs and given that everybody has the same expenses, it's meant to happen. Not instantaneously, but very rapidly you pass it to your customers. Because, it's something that is completely coming from the outside, it's an external condition that is common for all the players.

There are no further questions in queue at this time.

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