Banco Santander-Chile (BSAC) Q2 2025 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and I'd like to welcome you to Banco Santander-Chile's Second Quarter 2025 Earnings Conference Call on the 5th of August 2025. [Operator Instructions]. So with this, I would now like to pass the line to Patricia Perez, the Chief Financial Officer. Please go ahead.

Good morning, everyone. Welcome to Banco Santander Chile's Second Quarter 2025 Results Webcast and Conference Call. This is Patricia Perez, CFO, and I'm joined today by Cristian Vicuña, Head of Strategy and IR; and Andrés Sansone, our Chief Economist. Thank you, everyone, for joining us today to review of our second quarter performance and results. Today, Andrés will start with an overview of the economic environment, and then Cristián will go through the key strategy points and the results of the bank in the second quarter of the year. After that, we will have a Q&A session where we will be happy to answer your questions. So let me hand over to Andrés. Andrés Sansone: Thanks, Patricia. On Slide 4, we have our current outlook. Since our last webcast, the tariff agenda has seen several developments. After postponing the implementation of new tariffs from July 9 to August 1, the U.S. reached trade agreements with multiple economies. This include tariff of around 20% on several Asian countries and 15% on the Eurozone. For Chile, the 10% rate will remain in place, which corresponds to the minimum threshold established. Although there were initial threats of a 50% tariff on copper prices, the Trump administration ultimately decided not to apply it to input materials such as concentrates, cathodes, anodes and copper crafts, all of which were excluded from the final decision. While market reaction has been relatively muted so far, trade and geopolitical uncertainty has increased. During the quarter, the peso briefly reached CLP 1,000 per dollar following the announcement of inauguration date before returning to the CLP 930, CLP 940 range. However, renewed trade tensions have led to depreciation of the peso currently trading around CLP 970 per dollar, above our model-based estimate of approximately CLP 940. Long-term interest rates in Chilean peso have declined, narrowing the spread against the U.S. counterparts. On the activity side, preliminary image figures suggest GDP grew 2.9% year-on-year in the second quarter or 3% when excluding mining. While we await the full national account report on August 18, which will also include first quarter revisions, the better-than- expected performance in the first half introduced upward bias to our full year 2025 growth forecast currently at 2.1%. In terms of inflation, the second quarter inflation surprised on the downside due to a drop in food prices and discounts associated with [ Cyber Day ] with the annual change reaching 4.1% in June. We expect this inflation process to continue given the softer demand environment, both globally and domestically. Additionally, global trade diversion triggered by tariffs could reduce the prices of imported goods, supporting faster disinflation. We maintain our forecast for the U.S. at 3.6% for the end of 2025 and 3% by year-end in 2026, in line with the Central Bank expectation with risk tilt to the downside. Last week, the Central Bank made its first policy rate cut of the year, reducing the benchmark rate from 5% to 4.75% and signaling openness to another cut later this year. In our base scenario, the policy rate will close 2025 at 4.5% and reach 4% in 2026, which is close to its neutral level. On Slide 5, we present recent developments in the regulatory framework. In the context of the fiscal fact, the government announced the submission of a proposal to amend the income tax with a focus on SMEs. The reform extends most SMEs from the first category tax and also includes benefits for the middle class. The estimated cost of the measures is $1 billion annually to be offset by higher personal income tax rates for the upper income brackets. The proposal does not include changes to the corporate tax rate for large companies. On the housing front, the mortgage subsidy bill was approved on May 20, 2025. The legislation targets individual purchasing new homes valued at up to USD 4,000. It includes a 60 basis point subsidy on mortgages rate as well as a state guarantee of up to 60% for half the long term, covering up to 50,000 new homes. On June 19, the first auction was held with 12 financial institutions participating and a total of USD 10 million awarded. In this initial auction, Santander secured 18.3% of the total, the highest among our peers and just below our national market share in this product. Finally, regarding the political landscape, 2025 is a presidential election year in Chile. Elections will be held on November 16 with a potential runoff on December 14. Primaries took place on June 29, with only the ruling coalition Unidad por Chile participating. Their candidate, Jeannette Jara was elected. Right wing parties choose not to participate in Primaries. According to the latest general poll, right candidate, José Antonio Kast lift the race with 30% support, followed closely by left wing candidate, Jeannette Jara and central right candidate, Evelyn Matthei with 14%. While the presidential race has gained visibility, we must not overlook the parliamentary elections where the entire lower house and nearly half of the Senate will be renewed. Paul showed that the Chilean remain highly concerned with crime, security and the business environment. Simulation suggest the right wind candidates may gain ground in Congress, driven by local campaigns emphasizing security. This implies that even if the left wing candidate wins the presidency, Congress could right, potentially moderating more radical policy initiatives. As such, while some electoral-related volatility is likely in the near term, we believe the longer-term market impact will be limited. However, rising political polarization will likely continue to hinder the possibility of reaching meaningful agreements on legislation aimed at boosting long-term GDP growth. And with that, I will now hand it over to Cristian.

Thanks, Andrés. During the year, we have continued to make important advances in achievements in 2025 that we are very proud as we can see on Slide 7. As we mentioned in our last call, we completed the milestone of migrating our legacy mainframe service to the cloud in the project that we have named Gravity within Santander. So since the first quarter, we are now operating 100% on the cloud, an important stepping stone for the digital part of our strategy to become a digital bank with branches or Work/Café in Chile. In this line, we have launched some interesting initiatives in recent months. Firstly, we have enhanced the functionality of our smart POS, allowing merchants to carry out banking transactional services such as receiving deposits and cash withdrawals, top-ups and payments of utility bills. It is even possible to open a simple digital account through these points of sales. We have also launched Santander en tu comuna, a small transactional hub near local district authorities where we can offer financial services to the community. These efficient service points are extending our footprint in communities coming even closer to our clients in their day-to-day life. With a longer-term view of expanding our client base, we have enabled a simple savings account for children from birth, looking to compete in this product that up until now has been mainly centralized through the State Bank in Chile. Overall, these initiatives aim to increase transactionality and strengthen our funding base going forward. During the first semester of 2025, we have continued to issue debt actively on the local and international market, issuing in Swiss francs, Japanese yen and U.S. dollar. We have also been highly recognized on several fronts. We continue to be highly ranked in terms of sustainability with an A grade in the MSCI Sustainability Index and 19.2 points in Sustainalytics with low risk. We are proud to have won the best bank in Chile by Euromoney and Best Private Bank. And we also won the Top Employer certification for the seventh consecutive year. Furthermore, the mutual funds that we broker won over 40 awards in different categories. On Slide 8, we can see that yet again, the bank produced impressive results, reaching an ROE of 25.1% in the first 6 months of 2025 with a net income of CLP 550 billion and an ROE of 24.5% in the second quarter of the year with a net income of CLP 273 billion. This is the fifth consecutive quarter with an ROE above 20%. As we will see on the coming slides, this is a result of sustained strong profitability in our main income lines, good cost control, thanks to our strategy focused on a digital branch with Work/Café. On Slide 9, we can see how our rapidly expanding client base is leading to higher fee generation. We currently have 4.5 million clients, of which around 60% actively engaged with us and some 2.3 million are digital, accessing the online platforms on a monthly basis. The number of current accounts is increasing 10% year-on-year, driving the 7% and 8% growth of our active clients and digital clients, respectively. With this increase in the client base, we are seeing a 12% yearly increase in credit card transactions and a 19% increase in mutual funds that we broker. Overall, our clients maintain high satisfaction levels with the bank and our product offering. Furthermore, we continue to expand our footprint among companies, where we have increased the number of business current accounts by 25% in the last 12 months. This is explained by the simple business accounts we offer to smaller companies and the integrated payments offered through Getnet. We now have more than 212,000 Getnet clients, representing an annual increase of 21% and Getnet now has a market share of 20% in terms of numbers of transactions. As we can see in the table on the right, the increase in our client base and product usage is translating into high fees and results from financial transactions, growing 16.3% year-on-year. Our main products such as account fees, mutual fund fees and Getnet continue to show strong results in the quarter, while card fees follow similar trends to the first quarter this year. On Slide 10, we can see how our net interest margin has been improving over the last 12 months to stabilizing levels of around 4.1%. In the last year, our NIM has improved some 100 basis points. Firstly, when we compare the first 6 months of 2025 to those of 2024, we have a slightly higher U.S. variation, which, as you know, directly affects our readjustment income. the first half of 2024, our net interest margin was negatively affected by our balance sheet position related to the FCIC, the credit guidance given to us by the Central Bank. However, after the final payment of this in July 2024, we have seen a market improvement, representing 60 basis points of NIM in the period. Our tight control of our cost of funds has led to a further 50 basis point improvement in our net interest margin. This has been compensated by a contraction of interest earned on our assets related to the decrease in our available-for-sale portfolio due to the payment of the FCIC and a stable loan book year-on-year. In the quarter, our net interest margin remained stable, following the solid trends of the first quarter of the year. On Slide 11, we can see how our recovery of income generation and tight cost control has improved our key performance metrics. Our efficiency ratio reached 35.3%, the best in the Chilean industry in 2025 so far, and our recurrence ratio reached 62%, meaning that over 60% of our expenses were financed by our fee generation. During the first half of 2025, we have seen an increase in our operating expenses related to the migration of our mainframe server to the cloud, leading to an increase in administrative expenses, mainly in the first quarter of the year. However, overall, our costs grew below inflation in the year so far. In the quarter, we continue to look for efficiencies in our branch network, closing some traditional branches while we remodel and refurbish to ensure a more efficient usage of space while upgrading steady appearance in line with our Work/Café look and feel. It is thanks to these adjustments to our contact points with clients along with the evolution of our vetoed platforms that we have been able to achieve these impressive levels of operating performance. On Slide 12, we show an overview of our cost of risk and asset quality. As we have seen in previous quarter, our cost of credit has been higher than our historical levels due to an increase in nonperforming loans in recent quarter. Also, it is important to note that in June 2025, similar to the previous year, we adjusted the valuation of guarantees in the commercial loan portfolio as part of our review of the provisioning models. This year, we mitigated this impact by using CLP 20 billion of voluntary provisions established in previous years. From the graph on the right, you can see that our NPL and impaired portfolio showed a reduction in absolute value and also a ratio in terms of total loans despite a stable loan book, demonstrating tangible improvements in our asset quality and early signs of asset quality recovery. On Slide 13, we can follow the improvements by product. Firstly, in our mortgage loan book, we can see that in absolute value, the nonperforming loans have now stabilized, while the impaired loans increased marginally as more delinquent clients renegotiated their mortgage. Overall, we have seen clear signs of a stabilization of the asset quality of this portfolio. Regarding commercial loans, the bank focused efforts on improving the portfolio with several renegotiation initiatives and writing off some individual clients. With this, we have seen an absolute value of nonperforming loans and impaired loans fall relevantly and our NPL ratio is now at 3.6%. On the other hand, our consumer loan book has remained healthy during this cycle, thanks to our positioning of consumer lending to the mid- to high- income sectors. On Slide 14, we can see the CET1 ratio reached 10.9% in June 2025, far above from our minimum requirement of 9.08% for December 2025 and demonstrating some 30 basis points of capital creation in the last 12 months. This was driven by our income generation in 2024 and '25 and compensated by the 70% dividend payment of our 2024 profits and the current 60% dividend provision of our 2025 profits accumulated so far. As we mentioned in our last call, we have a 25 basis point Pillar 2 charge, of which we have fulfilled the 50% required by our regulator in June 2025. Recently, at the beginning of July, the CMF published the definitive guidelines for Pillar 2 in Chile. The regulation adjusts the metrics related to the market risk in the banking book and the definition of when a bank qualifies to be a prioritized bank. According to the CMS report, 10 banks could be classified as priority banks. This is the same number of banks who currently have a Pillar 2 charge. Banks will have to start reporting the new metrics related to the market risk of the banking book in December 2025 and the other aspects will be implemented starting with the self-assessment of regulatory capital report to be submitted in April 2027. So let's start -- let's look at our outlook for the rest of 2025 on Slide 16. Firstly, we are considering a macro scenario of GDP growth of around 2.1% with the U.S. variation of 3.6% and average monetary policy rate of 4.9%. Given the demand dynamics that we have seen this year so far, we are lowering our expectations for loan book growth to low single digits. At the beginning of this year, we were expecting a reactivation of the commercial loan book with stronger trends coming from the consumer loan book, too. However, now we are starting August, and we continue to see weak demand. And given the upcoming elections and the global uncertainty in the background, we expect our loan book to grow low single digits. On the other hand, our net interest margin should remain within guidance with the third quarter impacted by the lower expected inflation. We expect our non-NII guidance to grow high single digits with further interchange fee regulation not expected until the end of the year. Our efficiency levels should remain around the current levels so mid-30s. Considering that we now see better trends in terms of asset quality, but the cost of risk was 1.39% year-to-date. We expect the cost of risk to improve slightly during the second semester to finish the year around the 1.35% area. Overall, we continue to see solid profitability in what remains of the year. So we are expecting ROEs of 21% to 23% range. With this, I finish the presentation. So now we can start the Q&A session.

[Operator Instructions] So our first question is from Ernesto Gabilondo from Bank of America. Ernesto María Gabilondo Márquez: I have a couple from my side. The first one will be on your cost of risk. So as of the second quarter, consumer loans represent 15% of the total loan book. So what do you see its contribution in the future? And how would you see the sustainable cost of risk for Santander-Chile? And then my second question is on your long-term sustainable ROE. As you guided, it could be between 21%, 23% for this year. But how should we think about it in the medium term? And what would be the common equity Tier 1 ratio that you will be assuming under that scenario?

Ernesto, thank you for your questions. So regarding the cost of risk and the consumer part of the portfolio, so we are seeing some healthy growth demand from credit cards that will translate into consumer loans in the medium horizon. So we expect that the consumer lending demands continue to be a little bit above our average growth of loans, right? So with that in mind, we are seeing very healthy metrics from our cost of risk of the consumer lending portfolio. And this is what makes us believe that we will be in this 1.35% range. So a slight improvement in the second half of the year for the portfolio. And we expect to increase slightly the contribution of the consumer portfolio within the total loan book. So regarding your long-term ROE, so we reviewed our long-term ROE recently, about a couple of quarters ago from a range of 17% to 19% to above 20%. So what we have seen after the pandemic period and the high interest rate environment is that most of the transformation decisions that we have implemented in terms of our structure and the evolution of our digital stack are allowing us now to deliver very, very efficient levels for our retail universal bank, so mid-30s. With having that in mind and allowing us our fees and non-NII income to grow handsomely as we are expanding our customer base, we're confident we are going to be above 20% ROE for the long term. Ernesto María Gabilondo Márquez: Excellent. Just a follow-up in terms of the cost of risk. I understand 1.35 that area for this year. But looking maybe to the next years, are you expecting this ratio to remain relatively at that level, considering this slightly higher contribution in consumer loans? Or how should we think about this ratio in medium term?

As we mentioned in the call, we are going slightly above our long-term average. So we should have a normalization. It's not going to be a fast normalization as if the issues were coming from the consumer lending portfolio. Those issues tend to solve faster. Issues in the mortgage portfolio tend to digest more slowly. So we are going to gradually go back to levels closer to 1.2% cost of risk. So that's going to take a couple of periods. I'm missing the part of your CET1 assumptions. So that should be closer to 11% area. So where we are now, we are -- we feel like comfortable.

Our next question is from Tito Labarta from Goldman Sachs.

A couple of questions also. I guess, first on your loan growth, as you mentioned, it seems mostly weakness in the commercial book, maybe partly going into the elections as well. So I mean, do you think going into next year, once you're past the elections, you expect the loan growth to potentially accelerate? And if so, how much? And the consumer, you mentioned auto credit cards are doing fairly well. but should the rest of the consumer portfolio also accelerate sort of after elections? Just to think about what kind of loan growth we could think about for 2026. And then second question on fees, good performance there continues to grow at a fairly healthy pace. Also kind of thinking more beyond 2025 since you have your guidance for this year. But is this high single-digit growth that you're seeing, do you think that can sustain as well into next year? Do you -- I know you said that there shouldn't be any impact, I guess, on fees until year-end, but do you expect some new regulation to potentially impact '26 as well, just to think about longer-term fee growth? Andrés Sansone: Thank you. Let me take the fee question, and I'll pass the word to Patricia for the loan book expansion. Well, first, it's a little too early for us to start into the 2026 guidance. But -- let me try to give you some clues of what to expect. So this year, performance has been driven by the increase in fees explained by the expansion of our customer base. So that dynamic should continue, and that's why we are aiming as part of our core strategy to grow the non-NII lines handsomely and above our asset growth. So that's something that should be expected. There are a couple of moving parts that we are seeing for next year. And the first one and maybe the most important one is the impact that can come from a further interchange fee limit on prices that we might suffer in the final quarter of this year. right? So there are some studies being done by the Ministry of Finance and the commission that is assigned for this decision, and we expect that to come to a ruling by year-end. So if you remember, our initial assessment of this 2 movement interchange fee cap, it was about CLP 50 billion of total impact, and we only have seen half of that. So that's one thing to consider moving on to 2026. Having said that, we are still expecting that our non- NII income grows faster than the loan book. And with that, I'll pass the word to Patricia.

Thanks, Tito, for your question. Regarding the loan growth, we are seeing like on the retail part of our portfolio, as Cristian already mentioned, quite healthy growth on the consumer loans. Consumer lending shows already have shown signs of a pickup with credit card loans growing around 10% year-on-year, and this should lead to more demand for installment loans. And regarding SMEs, we continue to grow strongly. On the mortgage portfolio, we are seeing that this subsidy bill that was passed on May should help to activate the real estate market and mortgage loans as well going forward. And as you already mentioned, large corporate has been -- has grown lower than we were expecting at the beginning of the year. And this is our big question mark. We think that this is too early to say something regarding loan growth for next year. But obviously, the political landscape could help to reactivate all the investment project and projects and demand from larger corporates.

Our next question is from Pietro Nobili Ruz from BTG.

My question is very related to the last one. But I would like to know, given that the situation -- economic situation in the last year, your total loan portfolio changed the structure in the portfolio. And what are your initiatives to change this and for example, come back to 17% in the commercial -- sorry, consumer portfolio. And how long can take this to come back to the numbers of the years before? Andrés Sansone: Thanks for the question, Pietro. So organically, we will try to grow our consumer lending book, but without rushing it because nothing good comes from rushing growth in those portfolios. We have to be a very, very smart and conservative lender in that area. So that's what we are trying to do. We are trying to achieve growth with a good deployment of our capital there. There are some other initiatives that we might tap into, like we might try to rotate some risk or try to securitize some part of their portfolio if some changes in regulation are implemented that we are currently discussing with the relevant players and regulators in order to reignite the securitization system within the country. So that could help. But it's going to take a while. It's not going to be a fast movement that, let's say, we are going to converge in 24 months to that ratio. It's something that's going to be gradual. But we're taking the steps one by one.

Our next question is from Neha Agarwala from HSBC.

Congratulations on the results. Very quickly, what are the main risks that you see around the business with the upcoming elections, we are definitely seeing muted loan growth. But beyond that, do you see any other risks from the macro side or from any other risks on the asset quality that we should be mindful of for the rest of the year?

Thanks for the question, Neha. Maybe, Andrés, do you have to have something to say here? Andrés Sansone: Yes. From the macro perspective, the main risk to Chile's outlook continue to steam from abroad. particularly U.S.-China trade dynamics. And in that sense, a sharper-than-expected global slowdown, especially in the U.S., will have a meaningful negative impact on Chile's domestic economic momentum.

So as Andrés mentioned, most of our risk, Neha, are currently being assessed by -- from abroad. We are seeing a relatively positive scenario for the political elections given the survey that we are seeing that suggest a more market-friendly environment. But having said that, the results from the primary rounds of election actually increased the central scenario, but also increased the tail scenarios, right? So a more extreme probability. So that's also something to monitor.

Our next question is from Daniel Mora Ardila from CrediCorp.

I have just one question regarding to the NPLs. I would like to understand where should the NPL normalize in the coming quarters or years? Because if you compare to the industry level, Santander's NPL is quite high. And due to this situation, I would like to understand what exactly are the reasons behind having a commercial NPL well above the industry level and also mortgage NPL well above also the industry level. I would like to understand if this was related to the bank's strategy, just the loan mix. I would like to clarify that situation.

Thank you, Daniel. So let's take this part by part. So regarding our NPLs in our consumer lending portfolio, actually, those NPLs are really above the average of our peers and show a very healthy performance. This is the most asset part of the portfolio. So a deterioration here is what impacts the NPLs also the P&L the most. Then regarding why our commercial portfolio shows some structural higher NPLs compared to the peers and industry, this is mostly because we have a higher penetration of SME lending within our total commercial loan book. So about 1/3 of our total loan book is concentrated on SME lending. And this is something that is very related to our strategy to become a universal bank. We cater to the retail customer. That's our specialization, and that's expected to continue structurally, right, to having a higher NPL ratio, but that's mostly explained by how we view ourselves as a more retail-oriented operation. And finally, regarding the situation on the mortgage portfolio, we have explained this in the past, but we have about 30% of our mortgage book that reprices on a variable rate. And this is higher than the average of the industry, right? So the typical lending mortgage will be originated on a 20- to 25-year fixed UF product. And we have about a 30% that is lent on a yearly UF rate portfolio. That's the part that suffered the most during 2023 and early 2024, where real rates in U.S. were high and that repricing damaged the payment capability of some of our customer base, and that's reflecting in the 2.7% NPL that we are seeing as of now. The good news is that, that real rate scenario of U.S. is now below 2%. So the repricing problem, it's not happening anymore, and we are now focused on providing solutions to our customers so they can renegotiate and start paying again. So what we are seeing now is that, that part of the portfolio is going to remain stable at levels of 2.7%. And you can see that in absolute terms, it has remained for the last 6 months pretty much stable. And that's what we expect to start improving on the next quarters, but that's going to be a very gradual recovery. So all in all, we are still expecting some better improvement of the total NPLs for the portfolio in the second half of the year. Most of the improvement will come from the commercial portfolio further improvements that we are expecting. But we -- as a whole, we should still be slightly higher than the average of the industry, especially because of our composition of the commercial loan book and our SME orientation. I don't know if this helps.

No, perfect. Very, very clear. Just to understand. So the normal level of NPL will be very close to the industry level, just to understand how far are we from a normalized level of NPLs.

I think it's a little too soon to tell for ourselves where we are seeing the long term, but there are still some improvements to the current levels, we should be below 3% by early in 2026. And then that depends on how the evolution of the mortgage general macro scenario environment evolves, right?

Our next question is from Andrew Gary from Morgan Stanley.

I wanted to drill down on the net interest margin a bit more. And I realize this isn't an easy exercise to do, but can you try to walk us through how you're thinking about the path of NIM, at least directionally, considering your macro expectations for inflation and rates, possible loan mix shifts and then obviously, your deposit beta. I know you said during the call, 3Q will be impacted again by lower expected inflation. But how are you thinking about 3Q versus 4Q this year and then 2026 in terms of the direction of NIM?

Sure Andrew. So let's first review our general sensitivities of our balance sheet. So we're still carrying a long inflation $8.5 billion on our NIM sensitivity to inflation. And regarding our inflation to -- so this translates of something about 12 basis points of inflation per 100 percentage points of U.S. variation. And we have about 4 to 5 basis points of sensitivity per 100 percentage points of average monetary policy rate variations on the sensitivity to interest rates. So with that in mind, we, in the third quarter, saw a negative USD 0.4 CPI news in July, and that's going to impact the July performance within the quarter. The rest of the quarter looks more normal. So in the end, we should be at very high 3s of NIM for the quarter. And then we expect to come back to levels of above 4.0% NIM in the final quarter of the year as the inflation path suggests for the market expectations for year-end. So with that, we will be very close to 4.1% for the full year, so around above 4% for the year. And we expect something similar for next year as there are between 1 to 2 interest rate caps to be performed by the Chilean Central Bank in the second half of the year, additional to the one that we saw recently. And we are expecting monetary policy target reaching 4% by the final part of 2026. So with that and inflation is converging to 3%, we should be able to sustain NIMs in the current area. So we have some feedback questions that we will like for you to answer after the final questions. I don't know if Luis, we have any other questions.

Yes, we have no further questions. So we just shared the survey on your screen and your feedback will be greatly appreciated. The question-and-answer section is still open. [Operator Instructions]. Okay. It looks like we have no further questions. So I'll now hand it back to the Santander-Chile team for the closing remarks.

Thank you all very much for taking the time to participate in today's call. We thank you also for the answers you provide to our 5- question survey and we look forward to speaking with you soon. Have a great day.

That concludes the call for today. Please note that the survey will remain open for a few minutes after the call closes. Thank you, and have a nice day.