Good day ladies and gentlemen, and welcome to the Banco Santander-Chile Third Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session. [Operator Instructions]. As a reminder this conference call is being recorded. I would like to introduce you host for today’s conference Mr. Raimundo Monge, Corporate Director of Strategic Planning. Sir, you may begin.

Okay. Thanks very much and good morning ladies and gentlemen to our third quarter 2016 conference call. As told my name is Raimundo Monge, Director of Strategic Planning. I’m joined today by Emiliano Muratore, our CFO; and Robert Moreno, Manager of Investor Relations. Thank you for attending today’s conference call in which we will discuss our performance in the third quarter. Let us start our call with a brief update on the outlook for the Chilean economy. In the quarter we have begun to see some positive news on the economic front. According to market consensus the economy should grow at a higher rate next year of around 2% to 2.2%. Although the mining sector has been weak there are other sectors are showing positive growth trend such as the non-mining export sector, the communication sector, utilities and infrastructure. At the same time we expect the mining sector to begin contributing to GDP growth next year. Unemployment continues to be resilient, inflation is trending to the center of the Central Bank inflation target of 3%, which should also lead to stable or lower interest rates, which will also help to boost GDP growth next year. Finally, consumer and business expectations are improving, which is also another positive sign that the economic should begin to perform slightly better in 2017. Loan growth in the banking systems has been gradually decelerating. As of September, loans were growing at 4% year-on-year. As expected the growth rate of mortgage loan has been decelerating, but the positive growth of most non-mining sectors and stability of employment have kept loans to individual expanding at a healthy rate. Asset quality has been improving, a reflection of loan growth in riskier segment and a healthy corporate loan book. For the entire 2016, we expect loan growth to be…

Ladies and gentlemen please standby. Mr. Monge, please go ahead.

Okay thanks very much and sorry for the interruption. We were mentioning in consumer loan growth this quarter was 1.7% Q-on-Q, our mortgage loans increased 1.8% Q-on-Q. Among consumer loan, the growth among middle and high income earners grew 3.7% Q-on-Q, and 15.2% year-on-year, while in the low end of the market, consumer loans decreased 5.6% Q-on-Q, and 22.2% year-on-year, reflecting the lower attractiveness of this segment. We expect in 2017 to see similar trends in the middle and high income segments and a gradual recovery of our activity in the mess market as we anticipate to introduce our new distribution and client model for this segment in 2017. Loans to smaller middle-size companies, SMEs also expanded at a healthy rate in the quarter, growing 1.7% Q-on-Q, and 9.3% year-on-year. A sound management of risk and an important rise loan lending revenues are accompanying the growth of loans to SMEs and therefore this segment continues to contribute to the bank’s ROE despite slower economic growth. Loans in the middle market accelerated and increased 2.9% Q-on-Q. In Global Corporate Banking, GCB our wholesale banking unit, loans increased 0.9% Q-on-Q, but decrease 9.2% year-on-year. Loan growth in the middle market and the large corporate segment has been less robust impart due to the lower credit demands, but also because our commercial effort has been put in the non-lending banking activities such as cash management, fee-based income and tertiary services which boost revenues with little capital use. The Bank's strategy of focusing equally on both lending and non-lending businesses has also led to solid liquidity levels and our liquidity coverage ratio LCR calculated under the new Chilean guidelines regarding liquidity reach 150% as of September 2016. The sound level of liquidity allow the Bank to proactively shift customer funds from deposits to mutual…

Ladies and gentlemen please standby. Sir please go ahead.

Okay sorry again for the cutoff I don’t know what’s going on. But anyway the consumer loan non-performing ratio remained relatively stable at 2.2% and the impaired consumer loan ratio in 3Q ‘16 was steady at 6.6%. As mentioned in previous earning reports, the Bank has been enforcing a strategy of lowering our exposure to the low end of the consumer loan market. These entail an active policy of charging off and bolstering coverage ratio in the lower income segment. These efforts should lead to a further reduction in our cost of credit going forward, a key indicator that support this expectation is the so-called loan vintages. This measure the non-performing loan ratio after several months has passed since origination and I love to understand the quality of the origination process and the quality of the loans in time. In our loan book to individuals and SMEs vintages has shown steady improvements due to the better asset mix, improved credit models and overall better risk management. Vintages are a leading indicator of future asset quality trends and as we observe in this slide this should lead to a lower cost of credit in 2017. We expect the cost of credit to reach around 1.1%, 1.2% next year. Regarding our second strategic objective the Bank continue to increase customer loyalty and improve customer satisfaction, which are key strategic goals as they create sustainable and long term value for our shareholders. During the quarter Santander Chile reached another milestone in our efforts to create a bank that is simple, personal and fair for our clients as it closed the client satisfaction gap we maintained with our main peers. As of October, 77% of our clients rate us with the top marks in client service according to an independent survey conducted every April…

[Operator Instructions] And our first question comes from the line of Ernesto Gabilondo with Bank Of America. Your line is now open.

Hi, good morning. Thanks for taking my call. A couple of questions, do you have any concerns about the macro outlook considering the high unemployment rates and lower investments in the country? How can these be translated to loan growth or higher NPLs in the next quarters? How do you perceive competition it appears that the largest competitors are moving to the high middle income segments in the retail segments or are trying to grow through fees transactions? And for my second question I would like to know your expectations for the Chilean peso, considering a strong appreciation against other LatAm currencies in the region? Thank you.

Okay. In terms of the macro outlook, as we pointed in the call, we think that the economy is very close to be bottoming in terms of the cycle and there are some early symptoms of a bounce back. We don’t foresee a big bouncing back and that’s why our central forecast are very much in line with the market consensus of growth of between 2%, 2.2% next year. In terms of the job market the -- we have seen some deterioration of job market conditions. But are mostly in the very low end where you have a lot of informal jobs et cetera, not in the upper part of the market where we are now focusing more than 100% of our growth. And there, we haven’t seen any deterioration up to now and as we pointed through the call, today still the mix effect the fact that we have been getting out from the very low end of the consumer market and getting to the high end is still making our consolidated asset quality metrics to improve. So we have two sort of clashing forces, one is beneficial because our mix is healthier, yes, but at the same time we have some drags about the economy. Still we think that this year the remaining of this year and 2017, the two forces should -- the mix effect should dominate the micro effect especially if we think that the macro conditions will be similar or improving going forward. In terms of competition, it is true that most banks are doing relatively same, we are doing because these changes were more linked to changes in the market conditions the regulation et cetera than the macro conditions. But we think that we have tools specially in terms of the CRM that we…

Thank you, much appreciated.

And our next question comes from the line of Carlos Macedo with Goldman Sachs. Your line is now open.

Thanks, good morning Raimundo, Robert. Couple of questions. First question, Raimundo you mentioned that the economy between the new clients that are coming in that are upper middle income and all clients that are phasing out of that are lower income. Could you give us a little bit of color of how just to understand and try to understand the mix effect better of how the NPL ratio is behaving for each one of those segments on the consumer side? We would expect obviously because of the nature of the customer or the client for the higher income client to have a lower NPL ratio and we also would expect that as you pull back from the lower income that NPL ratio would go up. Just trying to find out or trying to get a notion of exactly how it’s working. Second question, you mentioned also that you eventually might are planning a return to the lower income segments with a differentiated approach, can you give us some color on that and what exactly you expect that approach to be? The timing, what size you expect that to have in the Bank once you're done. Again just to try to get understanding of our mix will play a role on your results over the next couple of years?

Okay well. As we rightly pointed there are big difference between the middle to high end of the consumer market and the low end. In terms of delinquency to be fair we haven't seen systematic deterioration of asset quality metrics. But as we have comments in other earnings report and in other conferences we prefer to take a prudent approach and what we have been doing is charge enough whatever. Remember that in that segment and this is very typical for the segment, you tend to many times give some breathing space to customer that face some problems or delays, et cetera. In our case we have taken for that low end of the consumer market a much more drastic approach that you seem to charge off the loan and try to regulate money afterwards. And that explain why our coverage ratio has been rising in the segment. Because this is like when you get -- try to get rid of I don't know you're selling something and you disconnect -- discontinue that product line, you tend to liquidate it and try to get rid of it. Here it’s more or less the same given that with that profile of clients we don't want to operate now on. We simply take the hit rapidly and in many cases we're anticipating that the eventual deterioration in time of that loan portfolio. A process that we expect will be finished by the end of this year. This is something that we have been doing for sometimes to have a completely robust asset quality and loan book even in that low end of the consumer market. Concerning to the new model, this is something that we have been working for some time is a completely different approach. Because the market conditions now make…

Fantastic. Thank you, Raimundo.

And our next question comes from the line of Thiago Batista with ITAU. Your line is now open.

Hi, Raimundo and Robert. Thanks for the opportunity. I have two questions, the first one regarding your NPL coverage ratio, the NPL coverage for the Chile increased a lot in last couple of years assuming now almost 150%. What do you expect when we are looking forward to what would expect in terms of evaluation of your NPL coverage ratio? And the second question, comparing the expansion of your loan portfolio with expansion of your risk weighted assets, is it possible to see that loan portfolio expanded at much faster pace than your risk weighted assets? Is this expand only by the higher growth for the market or has any change in the calculation of the risk weighted assets?

Regarding the coverage evaluation there is two elements to take into consideration, number one, is regulation because as you might remember that the tendency has been launching standard models for its standard mortgage and for that also implies the consumer position that, that client has et cetera. That means that many of the provisions that we are setting are I recall it simply a reflection that we are now reducing just our internal models, but some standards models are set by the regulator. So, depending on which of the two model is more binding, you should set provisions against that and that’s why if you follow the chart you see in the last -- this year the mortgage coverage ratio has soured. The second element is more voluntary, that is linked to the consumer positions of the low end of the market as we talk before. There was we are basically is anticipating the provisions that on time will be occurring, but we think that starting next year we shouldn’t have any surprise coming from the very low end because we are getting out of that segment and we prefer to take the potential losses right away and not wait. Because sometimes these loans are very long or still have some length and as a consequent we want to take -- we prefer to take the provisions today and not wait in time. All in we are approaching about 150% we think that probably that is the maximum level and from now on we should see a level that will be diluted simply by the growth of the loan base, but we don’t foresee to keep on rising because it’s something -- for example as you have seen in the last two quarters the provisions in the mortgage market, which…

Okay, perfect. Thanks.

And our next question comes from the line of Nicolas Riva with Citi. Your line is now open.

Thanks Raimundo for taking my question. My question is on the outlook for margins, so next year assuming a more normal inflation of 3%, we could see a slight compression in your margins however if the Central Bank want to cut interest rates this could have a positive effect on funding cost of margin. So my question is what’s your outlook really for inflation and the monitor policy read in 2017, and how you are thinking of a margin based on this projection? Thanks.

Okay. There are many moving pieces, but if you think -- the inflation rate that we have seen in the last two quarters is even below 3% on an annualized basis. So the inflationary drag I would say is pretty much taken into account in the margins we are generating in the last two quarters, I think the year-on-year inflation is even below the Central target set by Central Bank. Apart from that on the client side, what we have seen is a more balance growth, 18 months ago we were growing mostly on mortgages, which carry the lowest yield by far, now we’re growing more balance between SMEs, consumer lending, mortgage and alike and that’s also results in a certain support of our margins. And thirdly, the fact that when we started the process of changing the asset mix at the beginning you see the kind of negative part, which is margins trending down, at some moment of time the spread of the maturing operation is similar to the spread of the new one, which happened by the end of last year more or less and that’s why our client margin stabilized and this quarter jumped 10 basis points. We foresee that trend to sustain in the throughout 2017 and that’s why if inflation won’t be a drag the mix probably could support and the repricing effect could be supportive. We think that margins can be stable or rising going forward. We don’t foresee margins to be further compress neither because of lower inflation again assuming that the Central Bank sticks to its target of 3%. And the client activity we think that margins could be stable or slightly rising. So dependent on how conservative you are, stable spreads or with a supply increase in the next 12 months.

Thanks.

And our next question comes from the line of Tito Labarta with Deutsche Bank. Your line is now open.

Hi Raimundo thanks for the call. A couple of questions also just first on loan growth, we saw a bit of a slowdown growing around 5% year-over-year understand the different segments running different paces, but just want to get with the economy growing around 2% a little bit more next year what type of loan growth should we expect I mean you could pick up a little bit from what we’re seeing? And also the different segments you continue to expect retail to grow at the pace it’s growing or could that slowdown or pick up as the economy picks up? And then my second question is in terms of expenses seeing some good cost control and particularly with the change in the distribution network moving towards more digital. Do you expect expense growth to remain around this mid-single-digits that you’re seeing what kind of growth should we expect in expenses and what should that mean for your efficiency ratio? Thank you.

Yes in terms of loan growth as mentioned in the call we foresee some bouncing in line of the bounce of the economy, probably this year we’ll see finish the year around 6%, which is the year-to-date growth more or less we think it can be sustained and next year probably a little higher from 6%, 7% something like that. In our case it’s a little bit more uncertain because as you know our strategy is focused around profitability more than loan growth or size. As you have seen we’re growing I would say very rapidly in retail loans, in SMEs, but of course in the corporate side we have been putting the brakes because of margin constraints, the rest of the system is still is trying to grow around cost and we prefer to allocate capital just where it has enough contribution. The other element is that in a more slow growth environment the Bank is pushing the non-lending business very much in the large corporate segment is where this model is more implemented, there roughly 90% of the revenues are collected in non-lending activities. So you basically lend as a compensation for getting other more profitable pieces of the business with company. In the retail the mix is more charged to -- or more geared towards lending activity. But still if you decide from the lending side of provisions, the non-lending revenues represents like 50% of what we make in the retail part. So -- and we think that that proportion should be rising in time given that our focus now is moving into more the non-lending part especially because the new client profiles that we're targeting are more affluent and as a consequence not only need finance, but also need insurance, investment and mutual funds and a…

Thanks, that's helpful Raimundo. I guess just one follow-up with the focused on non-lending products that you mentioned. The fee income is currently around 9% kind of year-to-date compared to last year, do you think that 9% is kind of sustainable? Should you continue to grow fees faster than loans?

I would say that, yes but of course not every single quarter as we saw this quarter the speed tends to sometimes to decelerate but we think that at the end if you take long-term say two, three years' time the correlation between loyal clients and fee income is very accurate, but of course not every single quarter. And that's why today we maintain our guidance that we gave last year of growth for the year of around 7%, it is probably a little bit higher next year. Because again the other resource you can tap when margins are under pressure and where loan growth is not growing that healthy to raise more fees. And the fact that we have been quite innovative is allowing us to increase our fee income without raising per transaction fees or things like that. There is simply more use given that we are more bonded with our clients.

Great, that's very helpful. Thanks, Raimundo.

And our next question comes from the line of Domingos Falavina with JP Morgan. Your line is now open.

Hi, thank you Raimundo and Robert too for taking my call. I think you mentioned Macedo that you're increasing your coverage as a result of basically two drivers. One, more specifically related to mortgage and the second one I think you mentioned even in anticipation of some worsening as you let your clients breadth a little bit. But your provision ahead just in case even given a little bit more time the clients unable to pay. Question is if that's expansion of loans that you're allowing your clients to breadth a little bit more, shouldn't we see this number when we look at impaired loans. And because it does have the renegotiated loans in there. And then when we look at this number it’s basically coming down the headline or flat in the consumer. And we still see the provision coming up. So my question I guess is, would you say your provision on what driven by being conservative or really because of anticipation of something getting worse. And why don't we see any big indication that your asset quality is showing some further signs of weakens when we look at those headline figures?

No simply to be conservative and remember that a segment that we won’t be doing business for now on is the very low end of the consumer market this is a small fraction of total consumer exposure and we want to get rid of it and there are two alternatives to wait in time and till this is either paid or you have to charge-off or to anticipate that the difficult that eventually you might have. So at the end it’s a combination of both, the other element I forgot to mention and also explain why the coverage ratio has been trending up in the last three or four years is because when we move and we change our credit models we move to actual losses as a way to provision to expect that losses. So today we set provisions ahead of facing difficulties because these are statistical models that try to anticipate the behavior of the client in the different stages of the cycle. So that also is the third element that explain why coverage has been systematically right and that we are setting provisions ahead of troubles but of course taking into consideration the type of client that we are doing business. So at the end it’s a combination of improved models and some prudence because of course the macro outlook is weaker than what we have been used for many years in Chile.

Second quick question I think is on branch again we did see as you mentioned branches came down and stimulation was very, very high when we look at deposits and loans per branch and you said this trend should continue what kind of branch optimization you see for the next 12 months like 5% to 10%, 0% to 5%?

At the end what you are doing is basically replacing branches that were mostly to a large extent transactional units, where you pay bills, where you go to cash a check et cetera. For points of more value added services and that’s the number of -- at the end the cost of running the branch network we think will be trending down because you have smaller branches, leaner branches. Remember that in a kind of old branch a big proportion if you go to a bank branch you will see that a big proportion of the surface is dedicated to tellers and back offer. And today’s technology allows you have centralized back office which are remotely located et cetera and in terms of tellers technology today facilitates because you have ATMs that not only allow you withdraw money but also to deposit money and you can deposit checks, actually currency, et cetera. So replacing three or four tellers by an ATM that does more or less the same saves a lot of surface a lot of size of the branch and a lot of people because you are moving that people that used to be in very high expense areas or very expensive areas you move it to processing locations are cheaper to run et cetera. And that’s why we think that the number of points probably will bottom in some moment of time because you need to be in most of the cities in Chile and hopefully closer to the client. It’s a little bit -- people tend to be a little bit kind of odd because they say I don’t want to have branches and I never been in a branch in last three or four years but in reality if you close branches people complain. So that’s why the trick here has been to maintain more or less the same number of points but reducing the size of the branches and reducing the headcount of the branches that at the end is maintaining the contact point with clients but allowing you to have contact points that are much more profitable and customer friendly and valuable to customers and all the kind of transactional stuff hopefully to be moved to mobile, to direct payments and alike. That has been the approach and we foresee that in the next whatever it’s five years or so we will have both digital banking capabilities that are much stronger than what we have today plus physical branches that are more or less in number not very different of what we have today but completely different in terms of what you do at the branch level.

Perfect, thank you very much.

And our next question comes from the line of Jose Miguel Burmester with ITAU. Your line is now open.

Good morning, Raimundo and Robert. Thank you for taking my call. And my question is very specific, do you have any target for the consumer impaired ratio?

No, actually we don’t have -- there is -- at some moment of time it should level, because again if we plan to go to those clients that are in the most massive markets that not as low as we get in the previous cycle. You see that level rising at some moment of time. So that actually at the end what you try to maximize is the spread net of provisions or actual loss. And sometimes to avoid the loss you give breathing space to the client to try minimize the actually loss you try to give some previous space to clients and that’s why it’s better as a metric to follow, to follow impaired loans more than non-performing loans, which to some extent you can -- it's more arbitrary because it depends on how relax or how stringent you are in your refinancing policies. But once you follow both you have a better measure of what’s going on. In case we don’t have specific metric but of course it’s something that you measure against the profitability you’re getting. So if we can’t get a more profitable consumer lending, of course you’re willing to accept higher impaired loan ratio.

Okay. So the 6.6% that we are seeing now it’s like it’s going to be flat in the coming quarters that is your expectation, right?

No I am not sure because at the end, it will depend on the growth. But very likely, we’ll keep going down for some time, because we don’t plan to go in full throttle to the middle market, which is the one that could reduce the drop. So probably it’s similar or slightly decreasing in time.

Okay, thank you very much.

[Operator Instructions] And our next question comes from the line of Carlos Gomez with HSBC. Your line is now open.

Hello, good morning and thank you for the call. Two brief questions and if you have answered them in the initial comments please sorry for that. First on your tax rate because it has increased to 19% this quarter, can you remind us what your expectation is for this year and for next year? And do you have any expectation of additional fiscal changes that will result in a change of your corporate tax rate in the medium term? And second if you could comment on the demand for mortgages and construction loss, we were expecting a bit of slow down at the beginning of the year with a change again in fiscal legislation, but it doesn’t seem to have happened is this a temporary phenomenon or is demand for mortgages permanently higher than you had inspected before? Thank you.

Okay. In terms of the tax rate this year -- it could be very close to 19% a little between 19%, 19.5% and next year probably 150 basis point higher. Remember that the level of effective tax rate is linked to inflation. So again assuming that inflation is around 3% next year. We should see a rise of the 150 basis points 21 or so for next year. In terms of changes on the physical side, it’s science fiction to us, but we foresee that whoever is selected will have to do to tackle the complexities of the new tax reform probably keeping the rates -- the level of the rate for the corporate side, but simplifying the way that taxes are collected because it is perceived to be very cumbersome. But we have no advise and probably it will be an any issue in the fourth coming presidential race. In terms of mortgage and real estate as was anticipated we saw a slowdown and probably the slowdown in mortgages will remain for the reminder of the year and next year. as what happened is that in 2014 and especially 2015 people anticipate the acquisition of the apartment of a house in order to take advantage of some tax rates that were eliminated and the same happen with the real estate company. But was a very anticipated event and that’s we haven’t seen -- we have seen lower activity from real estate companies. But we haven’t seen them facing major difficulties, because it was very much anticipated. And this company in our case we operate with the very stronger companies, companies that survive for example in 2010 earthquake where we had a lot of potential troubles because you have works that were in the middle of construction and they suffered that could have been devastating. So these companies are well run and that’s why for us the real estate portfolio is very low risk and historically has been the case. So this is simply a demand and supply condition that demand falling and at the same time the supply is falling in the same line. And eventually it will bounce probably by the next year, end of year if not 2018. So is a segment that will slow down for practical purposes mortgages is not very appealing per se is appealing because clients with mortgages tend to be more profitable, but that’s why although we have seen deceleration in terms of the client net interest income the impact is very small.

And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Raimundo Monge for any closing remarks.

Okay. Well thank you all very much for taking the time to participate in today’s call. We look forward to speaking you again soon. Have a good day.

Ladies and gentlemen thank you for participating in today’s call.