Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Banco Santander-Chile Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions] We will have a question-and-answer session later, and the instructions will be given at that time. Now, we’d like to welcome and turn the call to Mr. Raimundo Monge, Director of Financial and Strategic Planning. Please go ahead.

Thank you very much and good morning, ladies and gentlemen. Once again, welcome to Banco Santander-Chile’s fourth quarter 2016 results, webcast and conference call. As told, my name is Raimundo Monge, Director of Strategic Planning, and 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 fourth 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 in the economic front. According to market consensus, the economy should grow between 2% to 2.2% in 2017. We have also included our forecast for GDP growth in 2018 at 2.7%. Unemployment continues to be resilient. Inflation has fallen below the Central Bank’s inflation target at 3%, which has opened the door to the Central Bank’s first interest rate cut. We expect at least one more cut in rates in the first-half of this year. Finally, consumer expectations are improving, which is also another positive sign that the economy should begin to perform a little bit better in 2017. The recent strength in corporate prices may result in upside potential to our GDP growth forecast. Loan growth in the banking systems remains stable. As of November, loans were growing at 5.6% year-on-year, quite in line with our expectations for the year. The growth rate of mortgages loans has been decelerating as anticipated, but the positive growth of most non-mining sectors and the stability of employment have kept loans to individuals expanding at a healthy rate. Asset quality has been improving, a reflection of loan growth in riskier segments and a healthy corporate loan book. For 2017, we continue to expect loan growth for the…

Thank you. [Operator Instructions] And our first question comes from the line of Philip Finch with UBS. Please go ahead, Philip.

Thank you. Thank you, Raimundo, for the presentation. A couple of questions for me, please. In terms of cost of risk, we saw steady improvement last year with the fourth quarter level of 1.3%. Looking ahead into 2017, and where can we see cost of risk come down to? And linked to that, also in terms of coverage ratio, we’ve seen decent improvement there with latest figure at 145%. What is the optimal level for coverage ratio that you’re looking for? And my second question is regarding your digital transformation strategy, and linked to that, the branch optimization plans. What improvements can we expect to see in terms of efficiency? And linked to that, do you have a target for cost income ratio this year? Thank you.

Okay. In terms of cost of risk, as we stated in the call, we take that level to be between 1.1% and 1.2% for the whole year 2017. And why is that? Basically because as we mentioned in previous calls, once the bank’s started shifting the asset mix at the beginning you see the negative effect of lower gross margins, given that you are substituting relatively high yielding loans for relatively lower yielding loans. But then after a lag, which we are starting to see that today, you also see the same phenomenon happening in the cost of credit, yeah. And in terms of gross margin, as you see this year, the client gross margin has been very stable at around 4.8%, 4.9%. And then we should foresee in the next year-and-a-half, at least 2017 and early part of 2018, that the trend in asset quality or cost of credit improvement to sustain. It’s basically because the new mix is lower risk and lower yielding. Today, we have seen the lower yielding part. We should foresee the lower risk. And therefore, we have a mix effect that is already is trying to be visible, and the counterforce will be the macro-conditions. But today, the basic consensus is that the economy in 2017 will be similar, if not, slightly better than 2016. Yes, so we don’t - we expect cost of risk again to be improving 10 [ph] basis points to something between 1.1%, 1.2%. In terms of coverage, remember that in Chile what you do - you do provision is the expected loss, yes. And why coverage have raised so fast in the last year-and-a-half, is a combination that that we have changed our models to expected loss model, where you take the provision ahead of the eventual bad news.…

All right. Thank you, Raimundo.

And our next question comes from the line of Guilherme Costa with ‎Itaú BBA. Please go ahead.

Good morning, guys. This is Guilherme Costa from Itaú BBA. Thank you for the opportunity. My first question is about the loan expansion in 2017. We saw that during 2016 you showed an increase in the market share of total loans and you indicated that loan growth for the Chilean financial system will probably be around 6% to 7% in 2017. So I would like to know how much do you believe your portfolio could extend in 2017 and what segments should drive the expansion in the year. And my second question is about your NPL ratio. You indicated that the NPL ratio will probably remain flat during 2017. But I would like to know the breakdown of the NPL ratio, if you expect to see some potential increase in the delinquency rate of customer loans or if this is already under control. Thank you.

Okay. Thank you very much. In terms of loan growth, as rightly pointed, remember that in our case we don’t have a target for loan growth. Loan growth in our case is a result of the implementation of our profitability driven strategy. So we tend to grow lower than the market when we think that spreads are out of line, and a little bit faster than the market when we think that spreads are right, yes. This year that happened, and we were able to - and that’s why our client activity has been fueling a relatively solid performance. That was subdued because of lower inflation, which has nothing to do with clients and higher corporate ratios - or corporate taxes that also have nothing to do with client activity. So for next year, we foresee that the system should be growing between 6% and 7%. In our case, starting the year probably in line of that, we don’t see any reason to be growing faster than the market or lower than the market. But of course at the end, it will depend on the pricing decision of our peers. If we see kind of spreads that don’t compensate for the use of capital, we stop slow growing for some this year, we saw that very clearly in the wholesale area, where we decreased our exposure, simply because the spreads that we’re seeing in the market were not fulfilling our risk-adjusted return on capital. As a consequence, we think to put the brakes in that area. Contrary to that, in other segments, for example consumer lending we have been accelerating, yes. So at the end of the day, we don’t have a target for loan growth. It’s very likely that we should be moving, falling in line with the market.…

Okay, perfect. Thank you very much.

And our next question comes from the line of Ernesto Gabilondo with Bank of America Merrill Lynch. Please go head, Ernesto.

Hi, good morning, Raimundo, and thanks for taking my call. If there is a reduction in interest rates, how do you perceive NIM in 2017? For my second question, a follow-up regarding the transformation to multi-segment branches and Work/Café branches, what can we expect in terms of fees and OpEx growth? And finally, how do you perceive Chile’s sovereign risk? And I will also appreciate your outlook on the new presidential elections taking place this year. Thank you.

Okay. In terms of NIMs, there are two forces that we’ll be struggling, probably a stable or slightly higher client NIM, which is beneficial; lower interest rates that are also beneficial in - we put in the press release that every 100 basis point drop on rates has that positive impact of like the $10 million.

Ten basis points.

10 basis points, sorry. And then, that will be partially or fully compensated by lower inflation. We foresee a U.S. inflation, which is what it matters to us to be around 20 basis point lower in 2017 compared to 2016. So those are the moving parts. So net-net, we think that our total spreads will be stable at around 4.8, something like that. We don’t see them dropping unless again, U.S. inflation is below the 2.5 target that we have in mind, yes. In terms of the transformation, fees have been lagging to be clear. And that’s why this year we are putting special emphasis on increasing our fee base, especially usage cycle fees. We have been doing a lot of things in client, in loyalty, a lot of things in terms of simplifying the way we operate it, et cetera. We think that this is the year to start - well, extracting the benefit of that. In 2016, we were held by a very active position in the wholesale market. Today, we think that we should be doing something in the same line on the retail side. And therefore, fees should be growing similar to what we did for this year, between 7% to 8%, but more fueled by retail growth than by wholesale, which tend to be less stable, yes. In terms of OpEx, as we stated in the call, we finished the year with a year-on-year growth of close to 4%, next year probably something similar to that, between 4% and 5% or so, yes. In terms of sovereign risk, probably somewhat tricky question, because if you see countries with one notch below Chile macro ratios, we tend to have better macro ratios than many of the countries that have similar level of rating assuming a cut in the sovereign rating. However, what concerns the rating agencies is the speed of the, especially the indebtedness of the public sector. So there we think that is where most of the concern is today concentrated. It’s difficult to know what the end, because the timing is very tricky. But we think that the Ministry of Finance is doing a very good job in tackling issues that are concerned by the rating agencies. And we hope that Chile will maintain its sovereign ranking. In terms of the presidential election, it’s a very open question. We don’t have a strong view, but the most likely candidates should be more market friendly. And that should be perceived us good news. We have seen some improvement in consumer confidence and business confidence, which I think is a combination of the various external outlooks, especially copper commodity prices and the idea that going forward the political process will be more based on consensus and not necessarily in kind of one-sided approaches as we have seen in some cases in the last year.

Great. Thank you very much, Raimundo.

And our next question comes from the line of Carlos Macedo with Goldman Sachs. Please go ahead Carlos.

Hey, thanks. Good morning, Raimundo. A couple of questions, first, you touched upon this many times throughout your speech in answering questions. How far long do you think you are in the process of converting to or migrating to the higher level or the higher income strata in your strategy? I mean, are you 90% along, are you 50% along? In other words, when will this cease and we’ll start seeing more stable trends in terms of asset quality that we can forecast, so that we can see the steady state? This transformation has helped - it hurt NIM as you talked about and hurt a little bit the fee revenues, but it has helped asset quality a lot. I’m just trying to understand when we will see that stabilized and be the new norm. Second question, give us an update on the regulatory front. We know that Basel III was being discussed in Congress. Can you just give us a little bit of an update there and what we can expect from that side? Thanks.

Okay. In terms of how far, although this is very tricky to know, when you’re done, yes. But I would say that generally speaking, on the earning mix we are basically where we should be, yes, in the sense that we are already - we have leveled our market share in the upper segment. Historically, we had - we were lower than our total market share in the upper segment. Today, we are - it’s difficult to reach an estimation, but we think we are approaching our natural market share in that segment as well. And we think that going forward it will be more of going behind the trend, so at the macro level. In asset quality, as I mentioned before probably this is where we should be. We should have some improvement in non-performing levels, and especially on provisions in the next 18 months that we support our performance 2016 - 2017, sorry, and to a large extent 2018. But in terms of asset quality indicators, should be around what we have seen today or a little bit lower. And then the more difficult part is that, what the lessons that we have learnt by doing this process. We plan to move than down market, to say that in the way that - the CRM which is basically a platform to manage all the client relationship was at the beginning developed mostly for the high-end of the consumer market, people that have many different needs, in savings, in investments, in financing activity. Now that capabilities can be replicated for the more massive market with fewer digital models, yes, actually three - or where the interactions are mostly done through the Internet or mobile. And that’s why the process I would say will never stop, yes. It’s simply that…

Okay, perfect. Just a follow-up, just to confirm, are you going to go back to 60% payout this year from the high level in last year?

It’s something that, of course, you propose the shareholder meetings in - but we think that the fact that growth won’t be too high and that the - remember that, at the end what you do is, you say, okay, in order to keep strong capital ratios and in order to fuel your growth, which is how much you have to retain. We think that retaining 40% can be enough, yes, but would be moving between 60% or between 55% and 65%.

Okay. Great. Thanks, Raimundo.

And our next question comes from the line of Nicolas Riva with Citi. Please go ahead.

Yeah, thanks. Raimundo, just a follow-up on Basel III and capital, remember, in the past you said that the move to Basel III could be positive for your capital ratios. And you mentioned potentially a positive impact of around 200 basis points, and of course your capital position right now is very, very comfortable. So in the case that Basel III, the move to Basel III were to be positive for capital ratios, where would be the plans to deploy the excess capital? Thanks.

Of course, this is a risky industry. And you never have excess capital, yeah. But if the circumstances are sound, of course, you can maintain a relatively higher payout. And in that way you are to some extent reducing your - the capital ratios to the level of your main competitors, yes, which is probably the path we should be following.

Thanks.

And our next question is from the line of José Burmester with Itaú Asset Management. Please go ahead. José Miguel Burmester: Good morning, Raimundo, and thank you for the conference. My question is regarding the growth in the Santander Banefe branch. If you can give us some follow-up of what you mentioned. The company mentioned previous quarter that you were going to grow in that segment. So if you can give us a follow-up on that. Thanks.

There, there are two things that the - what we have been changing is the approach from a branch-based approach, where you have account officers and it’s that relatively heavy model, to a leaner model that is mostly IT and especially Internet and mobile phone based, yes, which is what we have been doing. And then to have their sale activity, with because of course you have enquiries and you have doubt, et cetera, we are putting, instead of having full blown branch, we are putting corners in the risk of Santander branch for Banefe clients. But eventually, and we are very close to that point, we will have a completely IT-based model for that client profile. And we will push it very, very great hard. But we are waiting for proper market condition. So we still - our kind of - this year we reduced our exposure, especially in the very low end, where we are at 100% provision now. And then on the remaining part, one that we want to keep doing business, we are in a not full blown approach, because of course the macro conditions could have an effect in jobs, et cetera. So we have been prudent in that. But we are doing a lot in terms of how to change the model that we attend those clients, and which will be the approach - the commercial approach that we follow. And we are very ready to deploy that, but of course, we prefer to wait until we have more clarity in terms of what are the economic outlook is for that segment in the next two, three years. José Miguel Burmester: Okay. And my second question is regarding, is there any sector that you see with some risk that you are concerned with?

No. Today I would say, we continuously monitor different sectors, yes. They are - but I would say that generally speaking, there are players in specific sectors that are concerned. And at the same time concerns are more in terms of the size of the business than in fact of activity they’re doing, yes. Of course, there today the exporters are doing well compared to two, three years ago. But I would say that most of the concerns come from the specific companies in goods sectors. And secondly, the smaller companies that tend to be less, how to call it in a positive way, less fluent in managerial techniques and things like that. But sometimes because of the swords [ph] or because of the way they handle it, it can produce a surprise. But it’s more related to - with the management capabilities that then the sector where they are operating. So that’s why we foresee that our - we think there is - sorry, our non-performing loans should be relatively flattish as going forward. José Miguel Burmester: Thank you.

And our next question comes from the line of Alonso Garcia with Credit Suisse. Please go ahead.

Thanks for taking my question. Good morning, everyone. I would just like to get some color in regards to the provision related to the bandwidths of the commercial portfolio. I mean, should we think of them as one-off, given the stable asset quality ratios in the segment during the quarter? Thank you.

Yes. What happened is that in the fourth quarter of 2015, we downgraded a number of positions in that segment that were company-specific issue, et cetera. Then we have in 3Q a very low level. And what we are seeing today is more of a normalization of that segment. There was one specific client that we had to put a - but it was a very company-specific issue. So I would say that the number is more the kind of normal number going forward than what we saw either in the third Q or in the fourth Q of 2015, yes. So with the only exception of that, the company that was close to Ch$6,000 million, the rest is relatively the typical SMEs and smaller companies that require continuously to have provisions and charge-offs, et cetera. So it’s not a fully normal number, but it’s not too deviated as compared to the three quarter figures and the fourth quarter that you see with our head - or way of the secular trend.

Perfect. Thank you very much.

[Operator Instructions] And our last question is from the line of Sebastian Gallego with Credicorp Capital. Please go ahead.

Hi, good morning, everyone. Thanks for the presentation. I have two questions. First one, can you talk about competition and how do you perceive the environment given the current macro conditions for this year? And, the second question I would like to ask is, can you talk about your competitive advantages on the cash management and financial advisory fees? You were particularly strong in that segment within the wholesale banking. Thank you.

Okay. In terms of the competitive environment, I would say that banks have been - after rounds of regulation that affected banks in terms of setting maximum rate, limiting the ability to charge fees, more provisions, et cetera, in the last two, three years banks have been very much on steady waters, yes. And that has allowed at least but larger banks to do a lot of retooling in terms of how to operate, because this was like a one-time change in the model that resulted in banks adding more technology and thinking more about their predominant business model, et cetera. So I would say that the price competition has been less intense than historically, because banks are realizing that you have to take care of your capital and your liquidity, and you have to be more doing your effort in order to sustain your market position, not in terms of slashing prices but in terms of bringing hopefully clever ideas for your customers to benefit, yes. So I would say that we have today relatively normal competitive - competition of course. The fact that Itaú has been in a rigid process, to some extent leaves them a little bit of aside of the competition. But the rest of the larger banks have been doing sensible things and coping very well with the weaker operational environment, yes. In terms of our competitive advantage of the cash management, there are basically two things that are necessary doing the cash management business. Number one is to have physical branches, because at the end of the day the money that you are handling on behalf of the customer needs to be going to a branch, yes, and of course, the more branches you have the more, what, you’re in a better position to…

Okay. Thank you, Raimundo. And one follow-up if I may, I’m not sure if you answered this question. But when do you expect the commercial loan book to pick up? Is it during this year or do you see another transition year given business sentiment in Chile?

At the end I would said that it will be very much linked to expectations, yes. And expectations probably today are very much linked to the political cycle and to some extent the things you are seeing aboard, yes. And both are a little bit unpredictable at this time. You don’t know for sure. But as long as you see more clarity, and probably in the political side, you will see more clarity throughout the second quarter or end of the first quarter we will have no clarity, which will be the [context in the presidential race] [ph]. That will eliminate that. Secondly, the Ministry of Finance has very convinced, I would say, the rest of the government that growth should be a priority, because otherwise it’s very difficult to move your political changes, et cetera. And as a consequence, it’s difficult to know, but probably will be more entering the second half than in the first-half, yes. We think that this year banks will start relatively week in the first quarter, basically because inflation will be very low and growth in the summer season is relatively low. But from then on we should be gathering momentum and finish a year in the line of what we have talked on the call.

Thank you very much.

And we do have an additional question from the line of Diego Ciconi with Scotiabank. Please go ahead, Diego.

Hi. Thanks for taking my question. I just wanted to get a sense of how you’re managing your balance sheet in 2017. I mean, loan growth has been decelerating from previous levels. But your total funding is still growing at low double-digits. So we see that you’re increasing your exposure to other investment securities, but the trading results in 2016 has not been so strong. What can we expect of the securities book and the trading this year?

Hello, hi, this is Emiliano. Regarding your question, I would say that, by the end of last year 2016 the investment portfolio grew. And it was part of a liquidity management strategy, where we took advantage of the robust domestic markets in terms of funding. And so we placed a significant amount of bonds in the domestic market, mainly refunding part of the loan growth for this year that although is not going to be like so high like, not double-digits, but you can expect the investment portfolio to fall comparing to the end of the year, because we were like holding cash, because we did the bonds placements in the domestic market. And in terms of upgrading [ph] results, we don’t expect any much difference from the other revenue lines for 2016. But in terms of balance sheet, you will see a fall in the investment portfolio, because of using the liquidity for loan growth and also paying off liabilities.

Great. Perfect. Thank you.

And I’m not showing any further questions in the queue. I would like to turn the call back to the management team for any final remarks.

Okay. 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.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day.