Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Banco Santander-Chile Earnings Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. I would like to introduce your host for today's conference, Mr. Emiliano Muratore. Sir, please go ahead.

Good afternoon, everyone. Welcome to Banco Santander-Chile's Second Quarter 2018 Results Webcast and Conference Call. This is Emiliano Muratore, CFO of the bank, and I'm joined by Robert Moreno, manager of Investor Relations; and Claudio Soto, our Chief Economist. Thank you for attending today's conference call. We are very content with the performance of the bank during the first half of 2018. During the second quarter, we were able to deliver stable results with positive trends in lending growth, reflected our focus on growth with good asset quality. For the rest of the year, we continue to see a positive macro backdrop in Chile. Claudio Soto will give us part of the case on what has been going on in the past few months and looking ahead.

Thanks. Good afternoon to everybody joined. We have seen a general positive news coming from Chile's economy. Business confidence remained relatively high. Monthly economic activity continues on the rise, reaching almost 5% year-on-year in May. Job creation, however, has remained somewhat stagnant but should stop being that in the following months. Inflation has remained contained in the short run with the depreciation of the peso due to global tensions is pulling upward pressure. However, labor costs are low. The latter reflects capacity gaps still present in the economy and the impact of the strong expansion in the labor force in previous quarters. Despite tensions in the international front with the commercial war between the U.S. and China, the consequences for Chile have been somewhat muted until now. This is an issue that must be monitored closely. At the beginning of 2018, we were much [indiscernible] However, we [indiscernible] Moving forward, we [indiscernible] up from our previous estimate of [indiscernible] this growth is being pushed up by an increase in investment, which should grow by 5.7% this year following a decline every year since 2014. For next year, GDP will grow at 3.2% as the comparison phase become more stable. Here, we are also seeing some mild deterioration of the external scenery. Unemployment should reach 6.6% this year as job creation slowly as job creation slowly picks up. With the depreciation of the peso and increasing the oil price at the beginning of the second quarter, we have revised up our U.S. inflation forecast from 2.5% in our last call to 2.9% now. We maintain our view that the central bank will increase its short-term reference rate by 25 basis points in December following with few more hikes next year. The short-term reference rate should reach its neutral level of 4% by mid-2020.

Thank you, Claudio. I will now give details on our strategy and results in the first half of the year. First of all, I would like to mention some changes that we made to the bank board in the quarter, which we believe is a further step in helping to position us as a bank that is well prepared for a future competitive environment dominated by issues regarding growth and digital innovation. On April 24, we held the annual shareholder meeting where Mr. Claudio Melandri was ratified as our Executive Chairman and country head. As you know, Claudio Melandri has had ample experience within Santander, entering as the relationship manager in 1991, moving his way up to CEO and now, Executive Chairman. Shareholders also ratified Felix de Vicente, a person with vast experience in the private and public sector, especially in matters regarding entrepreneurship. Alfonso Gomez was also appointed to the board. He currently heads the Anacleto Angelini Innovation Center of Universidad Catolica, the most important center for innovation and entrepreneurship in the country. Mr. Gomez also founded Apple Chile and Virtualia, the first social network in Latin America. The board's latest incorporation was Rodrigo Vergara as independent director and first Vice President. Mr. Vergara was President of the Central Bank of Chile up to 2016 and was nominated as one of the top five best presidents of central banks in the world by Global Finance. With these changes, we welcome three new independent directors which bring with them diverse backgrounds in finance, technology and economics and will guide the bank through an ever-changing environment. Regarding results, the first half of 2018 was a positive period for the bank with strong business activity. This was reflected in a 7.8% increase in operating income in the first half with net income…

In summary, the first half of 2018 was a good reflection of what we want to achieve during the rest of the year. For the whole year 2018, here is some guidance. Our GDP estimate has been increased to 4%. In tandem, we have increased our loan growth estimation to 8% to 10%. Our NIMs should remain stable with higher inflation in the second half, pushing margins upward and the loan mix growth adhere more towards commercial loans. Our previous cost of credit estimate was 1.7% to 1.15%, and we believe now it should remain in the lower end of this range or 1.1%. Client loyalty and higher growth of total clients will continue to drive fee income in the upper single-digit range. Finally, the efficiency ratio should reach levels around 40% with cost growing in the low single-digit range. Our statutory tax rate was increased this year to 27%. We should see our effective tax rate reach between 20% to 22% in 2018. All in, we maintain our ROE guidance at 19% to 19.5%. At this time, we will gladly answer any questions you may have.

[Operator Instructions] Our first question comes from the line of Thiago Batista with Itau BBA. Your line is open. Please go ahead.

Hi guys good morning. I have a few questions. The first one on the provision for loan losses of the commercial segment. In your press release, you mentioned that – you explained that a 30% increase in provision for commercial segment was counted by the middle market portfolio. Can you give a bit of – a little bit of more color about deceleration in the middle-market portfolio? And how we can forecast the provisions for the commercial provisions, its – this level we continue moving forward or if you’re seeing some acceleration in the provision for commercial segment. And the second question is about competition. Clearly, all the banks in Chile are becoming more positive with some growth this year. So if you can share with us how do you see the competition, if you are seeing the competitors more aggressive or not. In each segment, they get more aggressive, so if you can give us your view about competition nowadays.

Okay. Thanks, Thiago. So regarding provision for loan losses, and general asset quality has been performing well even the commercial loan book. But we had in the quarter, we charged off the provision two or three specific times. We can’t give any more specifics on that but – so it’s kind of like a semi one-off thing. And we’re not expecting these levels of growth going forward. And you can also see that because on the commercial loans, the NPLs and the impaired loans continue to do well. So it’s more of a specific. And I think one time, there was one bankrupt in the quarter and you have to do some levels of provisions and so forth. So it’s relatively contained one, two or three clients, not in any specific sector either. It’s kind of like more related to ownership than sector. So that’s why we’re not seeing an increase in the cost of credit going forward. And in general, we feel quite good about the evolution of asset quality.

And regarding your second question about revising the loan growth outworks, that was basically explained by the better macro outlook. We are expecting, as you said, many others – competitors are seeing similar trends. And because of that being explained by better macro and GDP growth, we don’t see any significant change in the competitive dynamics. And we are increasing our loan growth but we don’t expect to gain market share because of this because we expect the system on the whole loan portfolio, the system growing also faster. So it’s just a matter of recognizing a better macro scenario rather than seeing competitors looking to gain market share.

Okay, that’s perfect.

Thank you. And our next question comes from the line of Nicolas Riva with Bank of America. Your line is open. Please go ahead.

Thanks very much. Emiliano andRobert for taking my question. Just one question on Basel III. If you can give us an update on – in terms of the implementation. When do you expect the changes to the banking law to be approved? When do you expect the regulators introduce the new risk weight? And really, what interest me the most is when do you expect then banks maybe to be in a position to start issuing 81 bonds in line with what happened in other countries in the region? Thanks.

Nicolas, I mean, we have had like positive news in the sense the law is still in Congress, that there was some pending issues to be agreed between the different Congress members, not related to capital but related to the secrecy and all that in the banking law. According to the press, the consensus has been reached so we are expecting to have news in the next one, two months in approving this law. Actually, the government puts some priority, the executive power puts some priority in the legislative treatment of this law. So the law should be approved, let’s say, during the next two, three months. But then going to your question about timings, once the law is approved, there is one year for the CMF, I mean, the new commission created to put together all the financial regulators, there is one year for the CMF to absorb the bank in relation to the current superintendency. And after that process of absorption or merging, there is one year for this CMF commission to publish like the fine print of the regulation. So let’s say that we are talking about 2010 as a year where we should have news regarding the fine print of Basel III regulation in Chile. And for that reason, I don’t expect to see any one issuing high grades or 81’s or any kind of this instrument before 2010. And maybe second half – 2020, I’m sorry. Second half of 2020. I wouldn’t expect to see anything before that.

Great, thanks Emiliano. Thanks so much.

Thank you. that. And our next question comes from the line of Ernesto Gabilondo with Bank of America Merrill Lynch. Your line is open. Please go ahead.

Hi, good afternoon and thanks for taking questions. We noticed your NII was below the loan growth. And it was this even with higher inflation levels. I don’t know if it was related because you are growing also in lower yield problems such as corporate, middle markets and mortgages. So I just want to know if you think this trend should continue in the next quarters? Or do you expect to increase exposure in higher yield products to have NII above the loan growth? Secondly, you mentioned several investments that will take place in the next quarters. So I don’t know if this changes your expectations for the expense line growth. How much will be the total amount of investments related to cybersecurity, the branches expansion into WorkCafes and the digital transformation? And then finally, based on EC year-over-year counts for the second half of this year. We’re already expecting double-digit net growth for the full year. So I don’t know if that will be reasonable with your expectations. And where do you see the sustainable ROE? Thank you.

Okay. So regarding NII, and I think it is stated in the various factors, obviously, and this year since they’ve been really – driving the economy has been investment, not so much like employment or wages. And we’re seeing like a lot of companies kind of wake up after – and our investment in Chile fell from like 2014 to 2017 every single year. And this year, it’s finally growing again at around 5%, 6%. So loan growth is really being driven by that. The other segments are growing but they’re growing more or less the same they were growing in the past. There’s been a big speed up in demand of loans by middle market, corporate, some larger SMEs. So I think this is good news because it reflects like the real economy doing well. But obviously, it tends deliver lower yielding. On the other hand, though, these companies and our success in client service and cross-selling is driving checking account. So it is true that the asset yield has come down a bit. But the cost of fund as well and the risk. So that’s why we showed in one of the slides that the NIMs, net of risk are actually rising and that’s a very good reflection of our strategy. So for this year and the second half, inflation should continue to accelerate a little bit. Remember the peso has depreciated. That would be good news. On the other hand, as we stated in our work, probably growing the mix still, a little bit more focus on commercial loans. We do expect the consumer loans to accelerate a little bit from their current levels. But all in, I would say NIMs will be around 4.5% this year, and we should finish the year with an NII growth…

Perfect thank you very much.

Okay.

And our next question comes from the line of George Friedman with Citibank. Please go ahead.

Most of my questions were already responded, but let me try to do a follow-up here on the efficiency trends. I understand the – so you need the investments for the next, I know, few years. But do you have an idea about when are you going to be able to start seeing another wave of improvement in your efficiency once everything is deployed? This is the first question. And my second question, with regards to the provisioning model that is going to be analyzed on a collective basis, I know that you’re still calculating the impact and this is going to be implemented just, I know, mid-2019. But would it be reasonable to assume that you could start booking some provisions in advance to the implementation of the law taking advantage of the good asset quality momentum that you’re seeing? Thank you.

Thank you for your question. Regarding efficiency, in the long run, and we don’t expect to cut our efficiency ratio going much lower than 40% or in the high 30s percent. And we do expect a change in the composition of our expenses as we have seen that basically that the personnel and administrative expense not related to IT and that might lose share in the total expenses. But this investment cycle will be kind of endless because of this new kind of banking era we are in terms of IT and different experience to clients. So we don’t see a point in time where we can change significantly the level of our efficiency ratio and go much lower than where we are now, although the composition of our expenses will keep shifting to a more invested and depreciation-related components and not rather personnel and administrative expenses. As Robert mentioned, we plan to keep – now to start grow the number of branches and – but the systematic and the processes of those branches, we expect them to be much different to what we have now. And the personnel expenses, composition of those new branches will be much lower than what we have now. So going to your question, we don’t expect a point in time where our efficiency ratio will drop significantly. And we also believe that it might be not so healthy to go so low because sometimes, you stop investing or you stop catching up with the needed investment for the bank. And in terms of the – when to recognize this new provisional rule. Well, definitely, first, we have to finish doing the numbers. It’s not going to be later than July 2019 because that would – the relations established but we haven’t discussed yet about the timing for that. I mean, I guess we – for the end of this year, we have to begin with the fine numbers of the impact and maybe we can discuss there the timing of that. But in terms of the phase of the credit risk cycle in the next 12 months, we don’t expect any significant change. I mean, we keep expecting a relatively benign credit risk scenario for the next 12 months, so there is no hurry if you want to do it in that sense, and we’ll have further information later this year.

That’s perfect. If I could just make a very quick follow-up on that one. It would be reasonable to assume then that your coverage on that segment could continue to come down because it has been coming down from 145% to the levels of 122% right now. And given the consistent improvement that you are still seeing there, so would it be reasonable to assume or is there any ideal level that you might be targeting for the coverage in that particular commercial segment? Thank you.

We don’t have a target for that, but underlying this change in the regulation, there is also a kind of shift that we are trying to do in that segment, in the SME segment, to try to move to more collateralized lending that’s less risky and with lower expected loss. And in terms of that shift in composition that it’s a downward pressure in terms of coverage because of the collaterals that we’ll be gaining in share in that part of the portfolio. But apart from that, it’s a downward pressure on the coverage that there is no other like a specific trend.

Yes. So toward that end as you saw, we’re not growing so much in SMEs at the moment we’re growing but not as much as other segments. And there, we’re changing the composition. So we’re expecting that’s going to be one of the big drivers next year and probably in the second half of this year of why we’re keeping the cost of credit lower because the SMEs, which aren’t deteriorating but we still think there’s room, there’s value to be extracted and improving the composition of that loan book. So as Emiliano stated in the next 12 months, we expect the expected loss in the SME portfolio to improve significantly. And therefore, coverage could come down because the loss would be lower.

That’s perfect. I really appreciate, thank you.

Thank you. And our next question comes from the line of Philip Finch with UBS. Your line is open. Please go ahead.

Great. Thank you, for the presentation. I only have one question. In recent years, you’ve been raising payouts, which has been really impressive. In your presentation just now, you said that while you’ve increased your loan growth guidance for the year to 8% to 10%. So the question is, will this impact your ability to pay out as much dividends going forward? Thank you.

Thank you for your question. In terms of payout, the new banking law on the Basel III is definitely an input that will – that might affect us, as we have stated in the past. We still see the Basel III implementation as a positive for our capital base. So if that finally is the case, that will give us room to sustain this kind of high payouts ratio. But as you stated, if that is not the case or if that takes longer to finally materialize, we expect with this loan growth of 8% to 10%, the payout should be around 60% to 70%, and it’s unlikely to – for us to be able to sustain the 75% if finally the loan growth goes to around 10%. So that would be the question. Basel III should be something to allow us to sustain this high payout. If not, the more long term or – maybe not long term but the more consistent payout with this 8% to 10% loan growth should be between 60% to 70%.

Thank you very much.

Thank you. And our next question comes from the line of Alonso Garcia with Credit Suisse. Your line is open. Please go ahead.

Good morning everyone, thank you taking my question. My first question is regarding – or to see if you have any comments on the potential implications, especially on your Santander Life and the rest of the consumer portfolio from the migration of the CMR portfolio to the bank into Banco Falabella. Do you think this could have positive implications for the business given that you will have – like probably allow your addressable market and maybe other implications that you foresee from this migration? And my second question is basically just a clarification on the figures you mentioned regarding the change in provisionary requirements. You mentioned a figure estimated by the SBIF for the whole system but I didn’t catch the number very well. And also, you mentioned, I think it was 1% of your loan portfolio that will be affected by this change. Thank you.

Okay. So well, Banco Falabella apparently, will be incorporating their flow credit portfolio and their – and what this means is that we’ll have – we should have more information because everyone will be regulated by the bank authorities. So in general, more information is better. And today, one of the problems we had in Chile, we thought, apart from the lower end of the maximum rate and other issues with that, 30%, 40% of the consumer loan book was out of the banking system. We have a very good negative credit bureau. But the positive credit bureau was missing some information. There’s been certain M&A transactions and certain movement of loan books back to like retailer banks. This is all positive for the system and for evaluating credit correctly. Because before, when a lot of people were out of the positive credit bureau, it was hard to say especially when they’re just beginning the relationship, if they were going to be a good payer or not such a good payer. So we definitely view all of this as positive for the industry and bank penetration and for Santander Life. Regarding your second question, yes, the SBIF in their press release, which is on their website stated, that the impact of $300 million for the whole system and we calculate according for the loans that are – our loan book that is under this provisioning model, the impact for us should be less than 1% of that loan book. So it might affect one month of provisions. But overall, the impact on the loan book is – on this particular loan book, which is around $7 billion, is very little.

Thank you very much.

Thank you. And our next question comes from the line of Diego Ciconi with Scotiabank. Your line is open. Please go ahead.

Hi, congratulations on the results. And thank you for taking my question. I only have one. I wanted to get some sense of your exposure to FX, other than the higher future inflation which should be positive to NIMs. What can you say was the impact of the peso depreciation in the second quarter? Did the impact loan growth or provisioning levels? And if it did, how much?

Okay. So overall, we have very minute exposure to FX. We have a policy of hedging, okay. But in the quarter, there was a lot of movement of rates and different market volatility that did lower our financial transaction income. But it had really nothing to do so much with FX, more to do with rates and these type of things. Our Alcor ALM portfolio is we ran no credit risk there. It’s all Chilean sovereign risk and we also have some U.S. treasuries and those you have to mark-to-market. Some of it goes against capital. Some of it, the realized part goes against the P&L, okay? So the bottom line of depreciation had no impact but all these movements there were, especially in rates, did have an impact on the ALM portfolio. And regarding the depreciation of the peso, for example, if you have a loan in dollars, you provision over that and the amount in dollars obviously went up. So provision expense, there was a little – a part of a reason and whatnot. We didn’t really discuss this too much because of the depreciation of the peso. But in the end, that’s offset with hedging. So there’s really no net impact, okay? So provisions in part were up a little bit between the first and second because of the effect on the bottom line. There’s no impact, okay?

Okay. And how much of your loan book is in dollars?

Like 10% of our loans, mainly short-term foreign trade loans, okay?

Okay. Thank you.

Thank you. And our next question comes from the line of Neha Agarwala with HSBC. Your line is open. Please go ahead.

Thank you for taking my question. I just wanted to follow up on the new regulatory requirement for the provisioning. Could you clarify if the provisioning to that – be made will pass through equity or through income statement in the third quarter possibly if next year? And also, would this – would similar requirements be enforced for other segments like this one? I believe it’s for the commercial loans. Could the regulator impose any other changes to other segments of the loan book? Thank you so much.

Okay. In our press release, it’s basically stated only against the income statement, okay? So any hope of going against equity, no, it’s income statement. There’s a change in estimate more than like IFRS 9. A lot of that was done against equity in many parts here. This to change that goes to the income statement. And this has been a process that the regulator has been going through for a while, okay? In 2010, they published the provisioning model for the commercial loans analyzed not on a collective basis. Then they changed the mortgage. Remember, they introduced at the end of I think it was 2015 or 2016, where they put a lot more importance on loan to values. Now they changed the commercial loans, analyzed on a collective basis. And the last one should be consumer loans, which will be in 2020, okay? And with that, they all finished their models, updating their models, this is kind of like instead of [indiscernible] they do standardized models of expected loss, which everyone either has to follow your own model, internal model or the SBIF is more conservative. Remember, this is all part of the transition to Basel III and Basel III uses different risk ratings but these models will also permit you, probably, especially for the loans that are not impaired, to do less risk weighting so there might be a more stringent provisioning. But on the other hand, we should get through our lower density of risk-weighted assets.

Great. Thank you so much.

Thank you. And I’m showing no further questions at this time, and I’d like to turn the conference back over to Emiliano Muratore for any closing 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.

Thank you.

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.