Ladies and gentlemen, thank you for standing by. And I would like to welcome you to Banco Santander-Chile 3Q 2023 Results Conference Call on the 3rd of November, 2023. At this time, all participant lines are on listen-only mode. The format of the call today will be a presentation by the management team, followed by a question and answer session. So, without further ado, I would like to pass the line to Mr. Emiliano Muratore, the CFO of the company. Please go ahead, sir.

Good morning, everyone. Welcome to Banco Santander-Chile’s third quarter 2023 results webcast and conference call. This is Emiliano Muratore, CFO; and I am joined today by Cristian Vicuna, Chief of Strategic Planning and Investor Relations; and Carmen Gloria Silva, our Economist. First, I want to express my gratitude for your presence at this quarterly meeting. Today, our primary focus is to discuss our performance during the 3Q. We faced challenges such as lower inflation and elevated interest rates. Despite of all this, our steadfast commitment to digital strategies and customer-centric products has enabled us to deliver on customer experience and business growth. The Central Bank of Chile has continued a rate reduction strategy, as Carmen Gloria will elaborate on shortly. We anticipate this move will have a positive impact on our funding costs and margins in the quarters to come. We look forward to a more in-depth discussion of this development as we delve into the specifics of our quarterly results.

Thank you, Emiliano. On slide five, I present a summary of the macro overview of the country. The economic activity remains weak. The adjustment cycle initiated last year after a strong overheating in 2021 has continued this year. Private consumption has had a sharp decline due to the withdrawal of liquidity and a weak labor market. While the labor force participation has been increasing since the pandemic, it’s still below its historical pattern and the employment rate remains at high levels, around 9%. Investment, on the other hand has tended to remain flat. The progress of large projects in mining and energy sectors has compensated for the contraction in real estate investment. In the first half, the economy contracted by 1% annually and expected to end 2023 with an annual variation of minus 0.5%. In 2024, economic activity will grow again, although at a moderate pace, reaching around 2%, driven by less stringent local financial conditions. The declining consumption has allowed the country’s external accounts to improve. The current account deficit was 9% of GDP in 2022 and we predict it will be 3% of GDP at the end of this year. The inflation has decreased rapidly. After reaching a maximum of 14% in August 2022, it ended at 5.1% last September. This reduction has been due to three main factors; first, the fall in international commodity prices; second, the appreciation of the exchange rate during the first half of the year; and third, the contraction of domestic demand because of restricted financial conditions. Going forward, inflation will continue to decrease, but at a slower pace, due to more demanding comparison basis, the rebound exhibited by oil prices in the Middle East tensions and the sharp depreciation of the peso since the beginning of July, even beyond its fundamental. We…

Thank you, Carmen Gloria. Turning our attention to slide nine, let me begin by reiterating our commitment to our four key strategic pillars encapsulated under the umbrella of Chile First. First, we are doing a transformative journey towards becoming a digital bank. This evolution is not just about embracing cutting-edge technology. It’s about maintaining a physical presence through an innovative work ethic. These spaces will serve as more than just customer touch points. They will be dynamic hubs fostering connectivity. Equipped with state-of-the-art technology and a dedication to exceptional service, our work ethics are designed to redefine the banking experience. Our second pillar is centered on providing specialized value-added services tailored to our Corporate, Middle Market and Private Banking clients. Our commitment is to deliver premium transactional trade, foreign exchange and advisory products and services, ensuring our clients receive a top-notch experience. In our third pillar, we are committed to fostering innovation and propelling growth. We are not content with the status quo, we aim to lead the change in redefining the banking landscape. We actively seek out new business opportunity, pioneering the sustainable transformation of our clients. By challenging conventions, we aim to drive growth and cultivate success. Lastly, we place great importance on the role of our organization. To realize our objectives, we are dedicated to building an agile, collaborative and high performance group. We recognize that diversity is our strength and individuals will flourish based on merit. We are constructing a thriving community where talents are nurtured and innovative ideas are highly valued. On slide 10, we have witnessed remarkable success in our digital products, exemplified by our ability to consistently grow our digital client base. Key initiatives such as Santander Light and more recently, Mas Lucas, have been instrumental in achieving this. Our Santander Light account…

Thank you very much for the presentation. [Operator Instructions] Thank you. Our first question comes from Mr. Yuri Fernandes from JPMorgan. Please go ahead, sir. Your line is open.

Hello. I have a question regarding fees. You have been doing a very good job on fees and we all know that fees can be very good for ROEs in the long run, like you don’t allocate a lot of capital for most of those businesses, right? So what is the outlook for fees here? For sure, not the 30% base. At least this is not what we believe. You have the interchange. You discussed this in the presentation. But for 2024, 2025, do you think fees should continue to grow well above loans? Any soft guidance you can provide for that line? And then I can ask a second question. Thank you.

Hi, Yuri. This is Cristian. So thank you for the question. So, yes, we are convinced that we can continue delivering fee growth higher than our loan growth and this is mostly because our strategy is structured towards increasing our customer base and focused on transactional products such as FX transactions and fees. So Getnet is also pushing our fees lines toward that goal. So the amount of SMEs that we are growing and increasing the customer base is also explaining why our fees revenues are growing consistently.

And also I would add. Hello, Yuri. That our focus on customer satisfaction and NPS, it’s a lever that, as you said, in the long run can sustain the fee growth. Because at the end, you need to be able to provide a service or a product that the client is willing to pay, and as you saw in our performance, we have been doing great also too in that front of customer satisfaction.

Perfect. So something like teens growth is reasonable for this line going ahead, like mid-teen, something like that. You think it’s a good guess for the fee line growth?

Mid-teens, considering the interchange piece, pressure looks like challenging, but we will try to be in the double digits area and as high as possible.

No. Super clear. And like on, still on this operating efficiency metrics, on the cost side, again, you did a very good job. I know margins, it’s harder for you to control, but on expenses, you have been delivering a lot. What is the outlook here? Can you continue to grow? I think below inflation is officially your speech. If you can provide more color on cost side, what are the big plans for 2024? I would appreciate it. Thank you.

Yeah. As you said, I mean, usually our cost strategy is to have them growing below inflation. I mean, this year they are actually like falling, I mean, significantly below inflation. So in a certain sense that provides some kind of a headwind going forward. I mean, we still target to be below inflation. We talked in the guidance there of cost around inflation, but our intention is to keep growing in the low-single digits and hopefully below inflation.

Okay, Cristian. And final one, capital, are you comfortable with this 10.7%? Like any change on the dividend payout policy or no? It’s a matter of ROE moving up and helping…

Yeah.

… you to re-compound capital.

Yeah. No. We don’t see any change in the payout policy. I mean, that 10.7%, it’s kind of low in the sense that it was pressured by the effects that it was at its peak, close to its peak by the end of September and also some short-term risk-weighted asset inflation, but in the quarter, so by the end of the year, we expect to be again above 11% and so we are comfortable in that area and we think that we can sustain the payout policy we have been having this last few years.

Perfect. Thank you guys.

Thank you.

Okay. Thank you very much. Our next question comes from Mr. Daniel Mora Ardila from Credicorp Capital. Please go ahead, sir.

Hi. Good morning and thank you for the presentation. I have just a couple of questions. The first one is, can you mention what will be the steps considering the expiration of the FCIC, the liquidity line provided by the Central Bank and the different effects on the accounts on the balance sheet and the financial results? This should resolve the negative performance of derivatives that is impacting the AII in 2023 or can we expect further impacts after the expiration of the FCIC? Thank you so much. That will be my first question.

Okay. So, Daniel, thank you for your question. So regarding the effects of the maturity of the FCIC in our balance sheet and results. Roughly speaking, we have around like CH$6 trillion in that facility, and also roughly speaking, half of that is maturing by the end of March and the other half by the end of June. So you can expect that at least like three quarters of the total amounts will imply a reduction in the balance. I mean, basically we will be -- we already have more than half of that money in liquidity, like waiting to pay the maturity of that liability. And we expect to increase that amount of liquidity at least to three quarter of the total amount by the time that it’s maturing. So you will have assets and liability falling in roughly speaking around 10% of the current balance sheet. So in terms of ratios, that would imply a reduction in the denominator for NIM. So that’s in the math will take down our NIM. In terms of NII, considering that most of that is already floated at a market rate and that’s the same market rates that the liquidity and the assets are yielding. So in terms of NII for us, it will be non-material the maturity of the FCIC. So you can’t expect a jump in NII because of the maturity. You do can expect an improvement and jumping in NII because of rates going down, because at the end, the lower the rate is the better for us because of that liability and the positioning of the balance sheet. So that is like roughly speaking in our case, the impact of that maturity. I mean, a non-relevant impact in NII, neither positive or negative and a reduction of the balance sheet as a whole and impacting the different ratios where total assets or total liabilities are used.

Perfect. Thank you so much. But just to clarify the current negative position that you have on derivatives that is impacting the net interest margin should decrease with the expiration of the FCIC, right, because you have the swap to variable rates.

Actually, it will decrease and it’s decreasing as interest rates go down. So that’s the main factor for that negative to phase out or to disappear. I mean, like interest rates going down rather than the maturity itself.

Perfect. Thank you so much. And my second question is regarding the NPLs of the commercial segment. Even though you explained that SMEs that just represent 9% of the total portfolio is pushing this indicator up. Do you feel comfortable with the current performance? This is the normal levels of the SMEs considering the structural performance of the portfolio or should we expect an improvement in these figures given the improvement of the economy in the next year? What will be the normal level of the NPLs for the commercial segment?

So, hi, Daniel. This is Cristian again. So regarding your question, we are seeing the impact in our commercial portfolio mostly in the upper part of the SME market and the lower part of the Middle Market, right? So like a smaller part of the large corporates and the upper part of the SMEs. Specifically, we are seeing impacts in three -- roughly three sectors. So agro, especially in the central part of Chile due to the heavy rains associated with the Nino effect between July and September. Some impact in [inaudible] hotels, restaurants and casinos that’s also suffered for the last four years. And we are also seeing pain points in the construction and the real estate developer market. So those are the three segments that are the main point of concerns. The rest of the segments of the rest of the industries are looking quite normal, I will say, considering the current state of the economy and the cycle. So we expect some recovery in the -- particularly in the second half of 2024, especially probably associated with the agro portfolio. But it’s all subject to further news and we have monitored very closely the situation in those specific industries.

Perfect. Thank you so much for the answer. Very clear.

Okay. Thank you very much. We will now be moving to Ms. Neha Agarwala from HSBC Global Research. Please go ahead, ma’am. Your line is open.

Hi. Thank you for taking my question. Just a quick one on your loan growth. We expect loan growth will still be mid-single-digit for the next year. But where do you think the loan growth is going to come from? If you can give us some color regarding the segmental growth, that would be very helpful. And my second question is on policy rate, what is the risk in your view regarding rates actually not reaching 5.5 for next year, being higher than that? Is that a risk and what would be the impact of that on your bottomline, in your view? Thank you so much.

Hello, Neha. Thank you for your question. Regarding loan growth, I mean, just to try to give some color on the breakdown of that mid-single-digit loan growth. We think that mortgages, considering that inflation will be going down, I mean, to the 3% area. And also here in Chile, as in the rest of the world, the long-term rates have gone up significantly this last few months, weeks. So we expect, at this level of rates, demand for mortgages to go down a bit. So I would say that mortgages should be, let’s say, kind of below the average of loan growth and then on the consumer side kind of the opposite. I mean, like, because we still have the liquidity from the pandemic going away, so people have higher borrowing needs, if you want and also rates are going down. So in terms of -- and consumer lending, it’s much more linked to short-term rates rather than long-term rates and we think that also should create a negative, let’s say, excuse me, a positive elasticity of people like demanding more loans and so consumer to be on the upper part. And also in SMEs, I mean, after the phase out of the FOGAPE program, that it’s a kind of a negative drag on that portfolio, that it’s going down after the pandemic, you are going to have the SME portfolio going above the average. Then when you go into more middle to large corporates, that will depend a lot on how investment is progressing in the economy as a whole. I mean, we don’t expect investment to grow too much and there you might be more on the average of that mid-single-digit growth for next year. I am sorry, can you hear me?

Yeah. That was super clear. Thank you so much.

Okay. And so we are going to your second question regarding the risk or the path for monetary policy rates. And so, yeah, definitely having a terminal and an average rate for our base case scenario give us an average rate of around 6.5% for the -- for 2024. So the higher that average, the worse for us and the opposite, if it is lower, that’s why this guidance of NIMs for 2024 is such a large. I mean, we have talked about 3% to 3.5% and basically with our base case scenario, we should be like in the middle of that range for the NIMs for the year. And then you have that sensitivity, we should point it at 100 basis points higher should impact like 30 basis points that NIMs. I mean, so just in rough numbers, an average monetary policy rates of 7% should take us closer to 3% for the year and an average closer to 6% should take us closer to the 3.5% NIMs for the year.

Okay. That’s super clear. And the ROE range is 17% to 19% for next year.

Actually, that’s the long-term target. We will…

Yeah.

Next year we will be moving towards that range. To be in that range or not will depend again on the path of the monetary policy rate.

Okay. Great. Thank you so much Emiliano. Very helpful.

Thank you very much. Our next question comes from Mr. Ernesto Gabilondo from Bank of America. Please go ahead, sir. Your line is open.

Thank you. Hi. Good morning, Emiliano and Cristian. Thanks for taking my call. My question is just to follow up on the ROE expectations. So, can you hear me? No?

Yes. Now you can. Now we can. Actually, we have lost you.

Okay. Sorry. Yes. I can hear you.

Okay.

So I was saying that my question is a follow-up on the ROE. You were saying that you are expecting this medium ROE guidance of 17%, 19% in the medium-term, but would it be reasonable to start getting to the low end of these medium-term guidance range in 2024? So for example, even if what you were mentioning in NIMs, now if you go to a level of 7% in the interest rates and NIMs at 3%, at that level, would it be reasonable to start getting into the 17% ROE or you will need to get more into the interest rate of 6% and a NIMs of 3.5% to start getting into the ROE of 17% next year?

So -- hi, Ernesto. This is Cristian. So we are expecting somehow lower first half of the year, especially the first quarter should not be as positive as the second half of the year. So in order to get to the levels of ROE that you are mentioning, we are probably going to be requiring to be in the 3.5%-ish NIMs and that probably could happen in some of the final quarters of the year, but not for the complete year.

Perfect. And then just a second question, can you remind us if you have still an excess in provision charges and where do you see your reserve coverage ratio for the next years?

Yes. So Ernesto, regarding the voluntary provisions, yeah, we still have like CH$295 billion on voluntary provisions, that’s the total balance. Remember that part of that will be used to cover the new regulation regarding provisioning for consumer loans. I mean, the new standard model that the regulator is proposing. I mean, there were news regarding that. I mean, they published like the second proposal or the second draft for consultation, which is, let’s say, softer than the first one. I mean, they were basically receiving the comment from the industry and the market, and so at the first draft, we were expecting an impact between like CH$100 billion or CH$150 billion in provisioning. Now we see that like much lower. I mean, like around like CH$90 billion will be the impact. So, yes, I mean, we still have this almost CH$300 billion of voluntary provisions. A third of that will be used by 2025 to cover this new provisioning model for the consumer portfolio and the rest is there basically to cope with let’s say potential part of the duration of our cost of risk or our NPLs.

One point of clarification is that our coverage will not be impacted by this new consumption measure. So no consumption provisioning measure, because it will -- it’s a general provision that we allocated to a consumer loan portfolio. So no deterioration in the coverage ratio for this.

Okay. So you expect to keep the same coverage ratio for the next years?

Yeah. Yeah. Yeah. We are prepared to keep it.

Perfect. Thanks.

Yeah. Mention not.

Thank you very much.

Thank you very much. Our final question today comes from Nicolas Riva from Bank of America. Please go ahead, sir.

Thanks very much, Emiliano and Cristian, for taking my questions. I have a question regarding your expected bond issuance international market for 2024. So you have a senior bond maturity in January 2025 for about $750 million. So I want to confirm if the idea would be to refinance that in the international market. And also if you were to come to international market in 2024, if it would be specifically in the senior format given that you have already placed 81 capital with your parent company and especially also if you expect maybe additional dollar funding needs in 2024, given the expected pickup in economic and loan growth in Chile next year? Thanks.

Hello, Nicolas. Thank you for your question. I mean, yeah, regarding the format definitely it would be like senior. I mean, we don’t plan any hybrid, because we have already our 81 outstanding and initially it’s like the group’s policy to place hybrids, especially 81s with the parents. So it would be definitely the senior format. And regarding the potential of going to the public market in the U.S. Yeah, that’s something we follow closely on a regular basis. I mean, even though the credit markets and the -- and in general, the spreads in the U.S. are not bad, let’s say, are not too high, but then when you do the math considering the basis swap to local currency which is at the end, our ending currency, you can see that the falling markets abroad have been around the 100 basis points more expensive than domestic market. Domestic market has lost some, let’s say, liquidity and depth in the last few years, but it’s still available. We have been able to issue good amounts in the last few quarters. So I think it’s a possibility and I don’t see it as a given, because even when you look at the other markets, maybe the Swiss market and some markets in Asia, they are more favorable than the U.S., definitely the U.S. has the size benefits where you can get a, let’s say, a higher size with -- without more -- without much difficulty. But I think it’s something that might happen during the next year, but I wouldn’t put it as a given. I mean, it will depend on the market prices and how our liquidity position and loan growth progresses.

Thanks very much for that Emiliano. Very clear. One, just a follow up. So you said -- right now you said a differential of about 100 basis points in favor of issuing locally rather than issuing offshore and then swapping back to Chilean pesos, right?

Yeah. Yeah. Factoring in all the cost expenses with holding and everything. When you are looking on non-falling basis, we are -- it fluctuates like every day, because the basis swap has been quite a volatile by that. But recently yesterday and in the last few days we have seen the swaps -- the basis swaps going down and that let’s say create a pressure upwards on the synthetic cost of funding abroad.

Thanks very much, Emiliano.

Okay. Thank you.

Okay. Thank you very much. We see no further questions at this point. I will pass the line back to the management team for concluding remarks.

So thank you all very much for taking the time to participate in today’s call. We look forward to speaking with you again soon.

Thank you very much. This concludes today’s conference call. We will now be closing the line. Thank you and good-bye.