Good day, ladies and gentlemen, and welcome to the Q1 2018 Banco Santander-Chile Earnings Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. I would now like to turn the call over to Mr. Robert Moreno, Manager of Investor Relations. Sir, you may begin.

Good afternoon, everyone. Welcome again to Banco Santander-Chile's First Quarter 2018 Results Webcast and Conference Call. As we stated before, I'm Robert, Manager of Investor Relations. I also have here with me today, Claudio Soto, our Chief Economist; our CFO, Emiliano Muratore, is currently attending an advanced program -- study program at Harvard, and I will be filling in for him today. He sends his regards, and he'll be back in our Investor Day in next earnings call. Thank you for attending today's conference call. We are very content with the performance of the bank in the first quarter of this year. I will first pass the call on to Claudio Soto for a brief review of the Chilean economy during the quarter, and our expectations for growth for the rest of the year. We are quite optimistic on the outlook for the economy. Claudio?

Growth conditions have been favorable for Chilean economy. Solid growth by elementary partners, a high growth price and the lifting confidence have accelerated local activity. Employment has increased, with an important contribution of salary product jobs and consumption of global goods has been dynamic in recent months. Investment record indicators point towards an [indiscernible] recovery. We estimate the economy will be at around 4% during the first quarter, slightly above our forecast a few months ago. Despite a more dynamic activity, inflation has remained limited, [indiscernible] below 2%, the lower part of the rent of the Central Bank. Behind this low inflation, the rate is still open out of cap and the recent appreciation of the peso. Given the current dynamism of the economy and a favorable global outlook, we have revised our GDP forecast for this year from 3% to 3.5%. In 2019, GDP will grow at 3.3% as that favorable base effect fades away. An improvement will slightly decline and stronger job creation will be coupled with an increasing labor force, especially, more women looking for jobs for the first time. We have also revised downward our inflation forecast for the end of the year, from 2.7% to 2.5% as the peso has remained stronger than what we were expecting at the beginning of the year. While it's still possible that the Central Bank might decide to increase the short-term interest rate at the end of this year, we expect the first increase to pick pace at the beginning of next year. We all remain optimistic about the economy. Happy sign of growth will, in turn, fuel domestic demand for loans.

Thank you, Claudio. Now we will give further details into our results for the first quarter. Our net income attributable to shareholders in 1Q '18, totaled CLP 151 billion, increasing 12.1% compared to 4Q '17 and 6.1% compared to the same quarter of last year. The bank's return on average equity in the quarter reached 19.4%. The positive evolution of our results reflect solid operating trends in terms of business volume growth, strong growth of non-lending activities, a stable cost of credit and a tight control of costs. Overall, the year started out with results slightly higher than the market anticipated and should remain positive throughout the rest of the year, as the economy continues to gather pace. During the quarter, we are focused on growth in line with the economy, continuing the same strategy as other quarters of increasing client loyalty through an improved client experience and quality of the service, deepening our ongoing digital transformation like expanding the bank's digital banking capabilities and optimizing our profitability in capital use through increased shareholder value in time. Regarding business volumes, we will begin with our funding mix. In the first quarter, the bank's total deposits grew 2.3% quarter-on-quarter. Year-over-year total deposits growth was slower at 0.2% due to the bank's funding strategy in 2017, which focused on lowering deposit rates in tandem with the lower Central Bank rates and optimizing liquidity levels, leading to an improvement in the funding costs. The average cost of deposits, including demand and time deposits, decreased from 2.1% in the third quarter of last year to 1.7% in the current quarter. The bank also focused on increasing -- on improving the funding mix, leading to a 5.2% Q-on-Q and 10.4% year-on-year rise in noninterest bearing demand deposits. The bank's equity continued its positive growth trend,…

[Operator Instructions] And our first question will come from Diego Ciconi with Scotiabank.

I was wondering, on your outlook for NIMs, you mentioned that you expect it to be stable. Do you think that the Central Bank could maintain rates this low for how long? And, I mean, we see that the consensus for inflation is within the Central Bank's target but considering the increase in prices of oil and the reactivation of the economy, maybe it could be higher if rates continue to slow. So what do you think about that and how would that impact your NIMs?

Okay. So as our economist mentioned, economy is gaining momentum. But we still see low inflation risk, with inflation this year. We're talking about UF inflation, the CPI is slightly different but marginally different around 2.5% with that level -- in fact, our inflation expectations actually came down. They were a little bit higher at the beginning of the year. So up to now, the effects of the appreciation of the peso have been more relevant than the reactivation of the economy and the increase of the price of oil, okay? So for this reason, we expect -- and the Central Bank has kind of stated the same thing. They are giving this message rather clearly in their minutes, of their policy meeting, that they want -- they expect the interest rate to remain stable, at least throughout the rest of this year, okay? Well, we changed that scenario? I would say, the price of oil may [indiscernible] want to change because the Central Bank sometimes tends to ignore this kind of shocks, okay? And so the only thing that would really make us change our view on rates, I think, is that the increase in inflation is due to the economy really gaining momentum more than an increase in the price of oil. Also, if the peso begins to depreciate again for some reason, that could change it. But overall, our main scenario is that we're not going to see any rise in rates. And so the beginning of next year maybe.

Okay, great. And my second question, you did complete the downsizing of the Banefe brand. And at the same time, you introduced a new brand, Santander Life. What's the strategy there and how different is it from the strategy that you previously had for the mass segment and how do you plan to manage risk in this segment?

Okay. So to make it simple. Banefe was a division and Santander Life is kind of -- is more integrated in the bank and is a new line of products with a completely different distribution model. So Santander Banefe had a, for example, at its peak, had its own sales force, 2,000 people, it had 100 branches. So it was a division for the mass consumer market based on -- heavily based on branches and sales force, okay? So when interest rates came down, the cap on interest rates goes slower, when there were restrictions on fees and the economy started to slow down, this like heavy cost model, you could say, high-yielding but heavy cost model, didn't have a future we believed. And there is also another very important thing here. We also believed that we made up this kind of Santander Banefe model that was copied in other banks. But we believe that the times were no longer for you to have -- for the bank to have like a separate unit for the mass market, okay? To say, okay, you are in the mass market, go to this branch or this client, go to the other branch. We decided that apart from the model being inefficient, the environment like sociallogically was for now -- for earnings mass consumer client that qualify to be a client of the bank to be integrated into the bank as any other client. So today, someone who takes the product in Santander Life, they can go to any branch, they can go to the WorkCafa. There's no differentiation and no distinction regarding income level, okay? And Santander Life, as we said, there is no branches, there's no sales -- additional sales force. Everything can be bought online. You can go to the…

Great, perfect. If I may just, one last question, I see that Santander Spain started implementing, as Mark read, concept of branches a couple of years ago. And this is also being implemented in Mexico this year. How different is it from the WorkCafa branches that you have here in Chile?

So the WorkCafa is thought of and born here in Chile, okay? So this is something we designed here locally. In the middle of 2016, our CEO [indiscernible] talked to the Head of Retail Banking and told them, design a branch in 4 months that made people want to come back to the branches, okay? We have a lot of branches still. A lot of them are in exceptional locations and it was, kind of, sad to see these excellent locations and no one inside them, okay? Well, the people inside them were doing unproductive tasks. So in a record time, with a very good work between the commercial teams here and the system's team administration, we designed the WorkCafa concept, locally. Which basically, is a concept where the branch has a co-working space, with very good cafe inside, and the cafe isn't run by us, it's run by a third party. And they also got rid of the majority of the back office. The vaults, the human tellers. So basically, the space we saved in -- from back-office functions, and we dedicated much more space to the front office. So in a normal branch, you have 3 or 4 account executives and relationship managers. In a WorkCafa, you can have up to 20. So the amount of people doing front office activities is 3 times to 4 times greater. And the other part of the space is dedicated to having a much nicer area for our clients and non-clients can come in. And this has been very successful. So branches, for example, you can see WorkCafa next to branches of our competitors and the competitor branches have the old, kind of, 1980s feel, where no one goes in and our branches, especially, WorkCafa are full of people, okay? So this is a concept that we designed that we are exporting. I believe that other areas of Santander are going to be opening them soon or maybe next year. But this is a concept we are exporting. And this is part of Grupo Santander, where if an idea works, you share it with the rest of the group, and I'm sure Mexico, Brazil also come up with our Santander poll and is also really doing interesting things in digital banking will adopt them if it works for our local market.

Our next question comes from the line of Thiago Batista with ITA BBA.

So I have basically, 2 questions. The first one regarding the provisions that Santander-Chile is facing. Can you comment sort of the potential impacts of regional regulation? If I'm not wrong, we're talking about $100 million for the system. Can you comment about this deceleration and when do you believe this should impact the banks? I believe in 1920 but want to double check. And also about the WorkCafa, if you can mention specifically a bit this is the second year of this, let's say, product or this type of branch for the bank. Is this a way to reduce the costs or will it increase the cross-selling with those new type of branches?

Okay. So regarding your first question, just so everyone is on board. In the beginning of this year, the Superintendency of banks published a new provisioning rule for -- the exact title is Commercial Loans Analyzed on a Group Basis, okay? So you basically, in Chile, have 2 types of provisioning models: You have loans that are analyzed on a group basis, meaning you group together a bunch of loans. This is mainly done for individuals and SMEs. And according to some type of profile that you group together with the loans, you give them -- you calculate the expected loss in the provision. And then you have another group of loans which are annualized -- analyzed, sorry, on a case-by-case basis. [indiscernible] very large loans, okay? So -- and another thing I want to mention real quickly is, we are not adopting IFRS 9. That's not in the SBIF's plans, according to last I heard. But what the SBIF does is, they publish the models for doing your expected loss. So, I don't know if you remember, but a couple of years ago, they published the expected loss -- the new expected loss model for mortgages, which mainly included the loan to values as part of the expected loss. And now they are doing the next phase, which is publishing the expected loss models for basically, SMEs or commercial loans analyzed on a group basis. So if you read through this new guideline, you will see that one of the things that they do is, they kind of attach a certain expected losses depending on NPLs but also depending on lateral growth of collateral, okay? We don't have yet an estimate of what the impact will be because we believe this is still under analysis and we'll go through…

Our next question comes from Alonso Garcia with Credit Suisse.

My first question is regarding competition. I mean, first, do you think this quarter, you grew in line with the market or you think you might have outgrown the overall system. And in general how do you expect to grow this year with respect to the system after losing some market share last year? And my second question is more on the economic side. Have you seen the improvement in overall activity of the economy and improvement in sentiment translating into increased spending from the households and increased demand for consumer or do you think that should be like a second-round effect to be seen only in the next few quarters?

Okay. So in this quarter, I think, we started out a little slow in January and February, and then we really gathered pace in March. I think, idea is not to lose market share this year. So, I think, by the end of the quarter, we believe we gained market share both in loans and in noninterest-bearing and checking accounts, and that was really good evolution. Not only of loans but of the funding side as well, okay? And this also ties in to your second question. Loan growth, as we said, was really a little bit more focused, and we're accustomed not including last few years in the corporate segment in the middle market, okay? So this has like a short-term effect where it didn't have a very positive impact on margins. But I think, if you look at the projects, the clients coming in, we're optimistic because it really shows the companies are beginning -- the large ones are beginning to gain momentum, okay? So regarding your second question, I think, you don't see the household spending much more yet, you don't see wage growth, okay? But that definitely is going to come because the companies are coming to us with really good projects. So think of it this way, the large corporates are coming with interesting things, GCB grew 15% quarter-on-quarter after falling 20% last year. This is fueling in for the middle markets. Think of the middle market as kind of like the service providers. They're hiring trucks, they're hiring consultants, engineers, and then, that's going to fuel into wages employment, okay? So -- and that you should see in the second round. And then I think you going to start to see that already in the beginning a little bit in the second quarter. So even though, loan growth was good, we're not going to lose market share. It wasn't the most highest yielding loan growth, but I think, it's a really good sign because it means the rest of the economy is going to start to grow. And if this fuels into checking accounts and it fuels into fee income. So the lower yield was offset by basically fee income and then later on, we should see good retail loan growth, okay?

Perfect, thank you. And just a follow-up on the fee income side. How do you expect the lower ATM network to balance out with this increase in client activity and also, in the number of clients for this year?

Yes, there will be lower ATM fees -- direct ATM fees but people are using more of their cards. So you look at retail, they grew like 15%, 16% year-over-year, I think, a little more. Basically, because people are using more their credit cards and debit cards. So on the one hand, people -- the ATM fee is mainly a fee we charge the other banks it's like a clearing house, okay? So obviously -- but the fees we that get on cards is because they are spending more. So consumer loans didn't grow very much, credit card loans didn't grow very much but usage is growing a lot. So I think it's a very good secondary effect, don't go to the ATM for cash use your cards. Net-net, I think, it's a positive. We did open some ATMs as well, because we saw some good locations, okay?

Do you think, at the end of the day, fee growth can be roughly in line with overall growth in loans for the year?

I think so. There's always a question mark of the corporates because they tend to be a little lumpy. But, I think, overall, given that we started out strong, we should see fees growing in line with loan growth. I think, loan growth is going to be closer to 8% this year. So I think, fee should grow similar. Also considering that we started out really good last year fees and then it slowed down, but I think this year, it should be more stable, the level of fees throughout the year.

[Operator Instructions] And our next question comes from Sebastian Gallego with CrediCorp Capital.

Just a question on the OpEx front. You mentioned during the presentation, Robert, something about an investment in IT for $360 million. Can you provide more color on the distribution per year of that investment and whether or not this investment should or may cost deterioration on the efficiency ratios?

Okay. No, it shouldn't. It shouldn't have the -- an impact in efficiency, it's included in our guidance. It's part of -- in fact the last 4 years, I think we invested like CLP 500 million. So more or less in line with what we have really been doing. And the idea of these investments, as I said, it's IT. And with the idea of keeping very good levels of efficiency. Mainly, IT regarding the digitalization of processes and improving efficiency at the branches. So -- I also think, on Investor Day, we're going to give you a little more light into that. I think that should be an interesting part of the Investor Day. With a lot of really interesting things that still can be done at the branch level, the back-office level in terms of IT. We also, kind of, in-house -- a lot of the IT personnel, which is also part of trying to make this IT investment more efficient, okay? To make it simple, when you outsource it, you're paying the cost of the person plus the markup of the outsourced company, the idea is to kind of save that. So we're trying to make the process of investing in the whole IT process more efficient as well. So that is a reflection. So overall, no. I think, these investments are positive for efficiency, and we maintain our outlook for cost and efficiency.

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

Okay, thank you very much. I hope to see everyone at the Investor Day and where you'll also get a chance to interact with the President, the CFO the CEO. So thank you for being in our call today bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.