Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Banco Santander-Chile Earnings Conference Call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instructions will be given at that time [Operator Instructions]. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Mr. Emiliano Muratore, Chief Financial Officer. Please go ahead, sir.

Good afternoon, everyone. Welcome to Banco Santander-Chile's third quarter 2018 results webcast and conference call. This is Emiliano Muratore, CFO of the bank. I am joined by Robert Moreno, Managing Director of Investor Relations and Claudio Soto, our Chief Economist. Thank you for attending today's conference call. In order to improve the experience of the webcast, we enabled the option of letting you change the slides, so make sure you press forward as we go along. During the second quarter, we were able to deliver stable results with positive trends in lending growth, reflecting our progress on growth with good asset quality. For the rest of the 2018 and going to 2019, we believe we'll continue to see positive macro environment in Chile. Claudio Soto will give us further details on what has been going on in the past few months and looking ahead. Claudio?

Thank you. Good afternoon to everyone. Please turn to Page 4 to see our forecast of this year and next year. Although we continue to see general positive trends coming from this year [indiscernible] has slowed down last month, affected by a more challenging external scenario. Despite this, we maintained our GDP forecast as 4% for this year and 3.5% for next year. During the last quarters, we have seen a significant increase in investment, offset by equipment reposition and some greenfield developments. During this year, we have purchased worth more than $20 billion as agreements have been approved. Going into 2019, we should feel some more of the effect of these projects on the economy as they come through the pipeline. Official data on the middle market shows some stagnation. However, administrative data suggests mortgage management and job creation had risen. And the remaining inflationary pressures have remained contained although headline CPI has risen, pushed by the increasing yield price and the depreciation of the currency. This, in turn, has been the result of [indiscernible] strength and the full October price. In 2018, U.S. inflation should reach 2.9% and 3.1% by the end of 2019. As expected, the Santander Bank increased by short-term interest rate by 25 basis points in October. Going forward, we expect normal hikes in 2019. Accordingly, the short-term reference rate should reach up to 3.5 at the end of next year.

Thank you, Claudio. I will now give details on our strategy and results in the third quarter of the year. Please turn to Slide 6. The first months of 2018 showed strong business activity at the bank with core revenues, this is net interest income and fees, increasing 7.3% year-on-year. It is important to point out that during the third quarter, we made a onetime additional provision of CLP 20 billion, anticipating future changes to our consumer provisioning model. This led to net income attributable to shareholders, increasing 1.2% year-over-year. However, we managed to maintain a strong ROE of 19%, in line with our guidance for the year. Excluding the onetime addition of provision charge, net income rose 4.6% year-over-year and the adjusted ROE was 19.6%. Net income attributable to shareholders in the third quarter totaled CLP129,727,000, decreasing 16% compared with second quarter and increasing 5.5% compared to the third quarter of last year. Excluding the pretax of onetime additional provision, recognizing the quarter, net income fell 6.6% Q-on-Q but rose 5.1% year-over-year. As was the case for our year-to-date results, core revenues led growth, rising 10.4% compared to the same period of last year. The adjusted ROE in the third quarter was 19%. On Slide 7, you can see that in terms of ROE, we continue to offer increasingly attractive returns above our main competitors, reflecting our focus not only in growth but profitability and efficiency. Please turn to Slide 8. During the quarter, we continue the three objectives for healthy growth and higher profitability. Refocusing on growth in line with the economy, increasing client loyalty through an improved client experience, deepening our ongoing physical transformation by expanding the bank's digital capabilities and optimizing our profitability and capital use to increase shareholder value in time. Please turn to Slide…

In summary, on Slide 28, our GDP estimate continues to reflect the positive macroenvironment. In tandem, we continue to expect loan growth of 8% to 10% this year and the next. Core revenue would grow roughly in line with average loans growth. Our NIMs should remain between 4.4% to 4.5%, depending on inflation and the velocity of the rate rises. Client loyalty and higher growth of clients will continue to drive the income with greater contribution from the mid-income segments. The recurring cost of credit, this is clearly the change in the provisioning requirement for SMEs, should fall to 1%. Finally, the efficiency ratio should reach levels between 39.5% to 40%, with cost growing in line with inflation. All in, we maintain our recurring ROAE guidance at 19% to 19.5%, with the all in ROAE 120 basis points lower. At this time, we would gladly answer any questions you may have.

[Operator Instructions] Our first question is from Jorg Friedemann with Citibank. Your line is open.

I'd like to ask two questions. The first one, I was checking these provisions that strengthened or that accounted for the new methodology on the consumer book, but I didn't follow the movement in the balance sheet. I was expecting that coverage had increased a bit more given these movements. So could you elaborate a bit more on why coverage did not increase accordingly? And the second question, looking to the recent inflation pickup and your explanations in this conference about how the assets and liabilities should behave, would it be reasonable to assume that if we didn't see a pickup in net interest margin in this quarter, maybe we could see this already in the next quarter?

So regarding your first question, we took the CLP 20 billion as an additional provision. So that's another liabilities. Okay? In other provisions -- and other provisions and the liabilities. So these are all credit-related. So they didn't show up yet in the loan loss reserves, okay? That's why in the webcast, we made those adjustments. So when we actually do the change in the model that we're required to do, they'll shift away from additional provisions into the normal loan loss required. And there you can see the jump in -- the accounting jump in coverage. So they're already recognized, we recognize them before. We actually made this change we had to make in our consumer model. So we decided to, since we knew we had to do this, go ahead and recognize it and then later on we'll leave other provisions and the liability and move over to the loan loss provisions. Regarding your question on inflation, yes, so basically, we should see a slightly higher inflation in the fourth quarter, which is good for margins. On the other hand, rates have been rising, so the central bank increased rates already, the market was already kind of anticipating it. So I think margins will be stable, most likely. And maybe you're right, depending on how high the inflation is, I think we're expecting inflation in the fourth quarter of around 0.8%, 0.9%. So obviously, the closer that is to 0.9%, the better, but don't forget that interest rates rises also put some pressure on margin. That's why when we give the outlook for our interest margin for next year, we give you a range because it depends on the velocity of the rise in interest rates.

Our next question is from Alonso Garcia with Crédit Suisse.

Could you please provide some color regarding the termination of the coin contract with Transbank that took place earlier this month? I mean, in which way should we expect the economics of the credit cards business to change for you, if any? And also, how this event changes your strategy in the coin business and what is your outlook for the overall coin business in Chile?

Alonso, this is Emiliano. Basically, what we decided to do is to move to a full parts model as it is the international model used mostly everywhere until now, that's why the processing done was like both with Transbank so we are going to do this full part. More than that, that implies that the economics for us will change because now, we will be getting the interchange fee from the different flags, Mastercard, Visa and Amex, instead of the merchant that we are getting now after the cost of Transbank. So basically, we are following the recommendation by the antitrust authority in Chile who recommended moving into this full parts model. And we don't expect this change, although the dynamics of the economics are different, in terms of impact in our free line, we don't see a significant change in our fee income. It's just moving into a more international production, that's the main reason behind that and we don't expect any further or any significant change in our credit card business.

Any comments on competition or likely overall business environment record in Chile?

No, there aren't any specific comment anywhere. This last three, four months of the year, we will have the Falabella consumer portfolio getting into the bank, the CMR portfolio. So that's basically the execution of the decision they announced some time ago. And also, the merger between BBVA and the Scotia, it's already in place and beginning to do the integration so those are, like, the two may be biggest, not news, because our old news that we are now in the implementation phase of those events, and so we don't see any segment change of the competitive environment.

Our next question is from Verena Wachnitz with T. Rowe Price. Your line is open.

Two quick questions, one is on the fees, just if you could repeat the explanation on the mortgage fees and whether that's a recurring impact? And what you expect in terms of fee growth going forward? And the other one is if you can just update us on your thoughts around the dividend payout going forward as you go through this transition in the capital requirements.

Regarding your first question, in the quarter, as we saw relatively good growth in terms of the business segments, and we did have to change, like, our methodology for calculating one of the fee items. Basically, or as you know, when you get a mortgage loan, you acquire as well. In insurance, basically, fire and earthquake. And every time a client prepays or refinances, many times, you have to refund part of the insurance you already charged them. So every quarter or every time we sell, we have to do estimate a provision for an estimate regarding the level of prepayment and refinancing. In this quarter, given that rates are lower and there's been more refinancing and so forth, we decided to basically increase the calculation of that provision. So I would say more than a one-off, there's going to be a lower level of collection fees from this mortgage product especially if our calculations for prepayment and so forth are correct. And the fees are still growing underlying. That shouldn't be at the same levels as they were in the first and second quarter. But this should still be growing from this level, roughly in the line with loan growth.

And in terms of dividend payout, we see the Basel III implementation in Chile as a tailwind for our, say, capital position and investments. It's positive for the payout prospects, although we don't see that, say, being implemented before 2020 because there's still time for the Chilean regulators to merge, and after the merger, they have to publish a defined frame on Basel III. So although that's a positive, let's say, looking forward, we don't expect that to affect our next dividend next April. And in that sense, we don't -- definitely, we think that we will review the payout comparing to this last April as we take 75%. Assuming -- or considering that our risk-weighted assets are growing in line with our loan book from 8% to 10%, we expect the next payout to be in the range from 60% to 70%. I mean, lower than the last one but it's still quite attractive. And as I said, we still think that the implementation of Basel III might be a positive in this regard, that we still have maybe 2 years before having that implemented.

[Operator Instructions] Our next question is from Neha Agarwala with HSBC.

I wanted to get an update on the branch network. You currently have about close to 400 branches. And if I remember correctly, you have a target of 500 by 2020, 2021. Is that -- does that remain unchanged? What proportion would it comprise of in terms of WorkCafés? And how many will be traditional branches? And my second question is you mentioned that the WorkCafés are much more efficient and the costs are less to open a WorkCafé, could you give us an estimate of how long does it take for a WorkCafé to breakeven and become profitable versus a traditional branch?

So as we stated -- or actually, as did our President stated in the last shareholder meeting, and -- we are searching for ways to continue to increase our branch network. We would like to, in the next 3 years, reach 500 branches. And more than branches, I would say, points-of-sale, yes, 3 to 5 years. And probably 2021, 2023, in order for this to happen, obviously, we're working very hard in the back office digitalization. So the idea here isn't to go crazy spending an opening large branches with 10, 15 people. The idea is to start to think of a new layout, a new format using innovation robotics, digital processes and to have very lean branches with obviously few employees and no back office. So we're tinkering with a couple of ideas, we're working with outside providers, with Findex, et cetera. And then we also have soon, be able to show a little bit what we're thinking. So that's a little bit of the overall idea with the branch network. So the idea will be to have some of these, like, newer models, very modern, smaller branches. We'll still have some traditional branches because some people need to still cash checks and they have to take care of the quality of service. And we'll also have the WorkCafé, okay? The idea is to have around 15% to 20% of our network under the WorkCafé format. And here, what I would say is that WorkCafés are more efficient. The efficiency ratios are like 2 percentage points lower in the WorkCafé. Remember that WorkCafé, the majority are transformational branches. So it's usually a branch that is already working and then we transform it into a WorkCafé. In fact, that transformation, since we're getting a lot more know-how, is getting cheaper and cheaper, and today, to open a WorkCafé is roughly 10%, 15% cheaper than a normal branch. So it reaches breakeven you could say rather quickly because the cost of opening is lower and most of these branches already have -- already some more profitable to begin with. So I think it's just more of a transformation to something that is much better, not only from efficiency but income generation and obviously, look and feel.

Our next question is from Sebastián Gallego with CrediCorp Capital. Sebastián Gallego: I have two questions. The first one is related to the loan growth in the middle segment on individuals. You mentioned that the Santander Life, for example, has 70% new clients, 23,000 clients, but when you look at the loans to individuals in the middle income segment, you see just a mild or flat growth. Can you elaborate more on the impact on Santander Life? What do you expect from the middle income segment? Or whether the Santander Life is just devoted to the high-income individuals? And the second question is more related to the IT -- or OpEx on IT, can you provide a bit color on the outlook of the total OpEx that you expect to incur for -- related to IT and cybersecurity?

So in terms of -- we don't know if the -- in the middle income segments, as you can see the figures and you've directly stated, I mean, the speed of loan growth has been slower than what we're expecting and even slower than that -- the rhythm of new customers acquisition under the [Indiscernible] life, it's mainly oriented to middle income individuals and that's where the new clients are coming from, that we are still in the -- it will have maybe eight months, nine months of Life fully ended since we launched last December. So I think we are still in the, say, speeding up phase of the Life project, and we definitely expect the growth in those segments, the loan growth in those segments to speed up and go definitely more in line with total consumer loan growth.

And then regarding OpEx, as our three-year plan and, its around 360 million, of which, roughly 80%, 85% is IT, okay? And a lot of this is basically bringing out these new products and working a lot the new format of the branches as well as the back office utilization, which I think is very interesting. Also there's, as we said on the last call, we're focusing also on cybersecurity. Cybersecurity, to this year, will be roughly around $20 million. The next year, it will be growing, in pesos, around 25%, 30%. So I would say that the idea is $360 million, the majority of it to IT, digitalization and then there's obviously the majority of it to IT, digitalization and then there's obviously an increase in cybersecurity as well as systems growth. Sebastián Gallego: Just as a follow-up, those $360 million is three to five years or only three years? And just to -- also a follow up on the...

Three years. Sebastián Gallego: Okay, three years. And just to also confirm another figure, you mentioned another 18 basis points in cost of credit for the onetime effect next year. But you mentioned also, and amounting in pesos, I'm not sure, CLP 55 billion, you said? Can you confirm this number?

Yes, that is correct. [Based off] 18 basis points cost of credit, CLP 55 billion. And we've paid a cost of credit because this is, obviously, an estimation and there's loan growth, and then it's hard to say exactly how large that portfolio is because we expect to grow more, okay? So you have a figure for both.

And I'm showing no further questions. This does conclude today's Q&A portion. I'd like to turn the call back over to management for any further remarks.

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 does conclude today's program, and you may all disconnect. Everyone, have a great day.