Banco Santander Chile : Earnings Transcript 549.4 KB

BANCO SANTANDER CHILE

CONFERENCE CALL DEDICATED TO BANCO SANTANDER CHILE FINANCIAL RESULTS 2Q 2022

Date: 29.07.2022

Participants:

• Emiliano Muratore, Chief Financial Officer
• Robert Moreno, Managing Director and Head of Investor Relations
• Claudio Soto, Chief Economist

Operator:

Ladies and gentlemen, thank you for standing by. And I would like to welcome you to Banco Santander- Chile results conference call on the 29th of July 2022. At this time, all participant lines are on listen only mode. The format of today's call will be a presentation by the management team, followed by a question and answer session. So without further ado, I would now like to pass the line to Mr. Emiliano Muratore, the CFO of the company. Please go ahead, sir.

Emiliano Muratore:

Good morning, everyone. Welcome to Banco Santander Chile second quarter 2022 results webcast and conference call. This is Emiliano Muratore, CFO. And I'm joined today by Robert Moreno, Managing Director and Head of Investor Relations. And Claudio Soto, Chief Economist. Thank you for attending today's conference call. The bank has continued with strong results in the second quarter of this year, with all time highs ROE and solid financial performance. Our successful digital strategy and consumer oriented product offerings continues to attract new clients indicating great growth opportunity going forward. Before we start the presentation, let me start with some important news. Santander-Chile's results in recent years have consolidated its leading position in the Chile market. Not only in terms of loans, profitability, and efficiency, but in client growth and digital innovations. This performance has been achieved with the contribution of all the teams under the leadership of Claudio Melandri and Miguel Mata.

Emiliano Muratore:

Leadership in the corporate world has always been dynamic and changes are the norm. After more than 30 years working for the bank, our current CEO Miguel Mata will be leaving this position to take new challenges, and he will continue to contribute to the group. Claudio Melandri will remain as chairman of the board in Chile. On August the 1st, Roman Blanco will take over as country head and CEO of the bank. Roman has 18 years of experience in the group, which he joined in 2004 as vice president of Banco Santander Banespa in Sao Paulo, Brazil, where he was assigned the task of strengthening the group's presence in this market. In 2007, he was appointed as president and CEO of Santander in Columbia, whose strategy led to significant value creation for Santander in that country. In 2012, he assumed the same responsibilities in Puerto Rico and later was appointed as CEO of Santander Bank NA and Santander Holdings in Boston United States.

Emiliano Muratore:

He was currently responsible for Santander Group operations in the Andean region and Uruguay. He's also a member of the board of directors of Santander Uruguay, Santander Peru and Santander Columbia. We would like to stand a warm welcome to Roman Blanco whose leadership will continue strengthening Santander's strong market position in Chile. Now I invite Claudio Soto to give us an update on the macro scenario beginning on slide five.

Claudio Soto:

Thank you Emiliano. During the second quarter, the economy has continued slowing down. Gradual returning back to trend. Consumption has remained resilient, while investment is contracting. High interest rates have helped to normalize liquidity levels. Business confidence has decreased and the growing concern of a global recession has led to significant fall in the copper price. The labor market continues subdued] with employment still running below pre pandemic levels. The economy will keep decelerating throughout the year. We estimate GDP will contract Q on Q, in the third and fourth quarter.

Claudio Soto:

As a result, annual growth will be negative in the second semester. We keep our GDP growth forecast for this year at 1.5%, as seen on slide six. Inflation has continued increasing, the consumer price index CPI rose 12.5% year on year in June. And it will reach more than 13% in August and September. Behind that, there are the still high commodity prices with currency and second round effects from past price increases. In the last quarter of the year it should begin slowing down as global prices soften and local activity moderates. All in all CPI inflation should close the year at around 12%. The Central Bank has tightened its monetary policy even further by raising the monetary policy rate by 225 basis points since March, reaching 9.75%. We expect the monetary authority will increase its policy rate in the next two meetings, finishing the heightened cycle with an MPR at around 10.5%.

Claudio Soto:

After that, they should keep the rate on hold and begin cutting at the beginning of next year as inflation and activity slow down. There are a few weeks ahead before the constitutional referendum, which will take place on September 4th. The result is highly uncertain and most likely it will be tight. In any case, there is broad consensus that indicate the approved option wins amendments to the new tax will be necessary. In case the reject option win, a deeper reform to the current constitution will take place because of that, there will be still a considerable period of uncertainty ahead.

Robert Moreno:

Thank you, Claudio. We will now move on to slide eight, to focus on the evolution of our various client and digital initiatives this year. A key theme of the quarter is the ongoing strong client growth driven by these platforms. On slide nine, we begin with our most successful initiative Santander Life.

Robert Moreno:

This platform reached in the second quarter, the important milestone of surpassing 1 million clients. As can be seen from the graph, we started a life program in 2018 and this platform really gained traction once we launched the Cuenta Life in June, 2020. A full blown digital checking account that clearly differentiated us from our competitors, who focused on offering a digital prepaid debit card. In 2022 Santander Life also began offering clients the ability to open a US dollar checking account online for an additional fee. Life clients are growing 42% year-over-year and 86% of our Life clients are new to the bank. Life active clients, defined as those in which Santander is their main bank increased 30% year- over-year. And loyal clients, which are those that are active and profitable and profitably use a majority of Life products rose 46%. Furthermore, our Life clients have a net promoter score of 68 highlighting their satisfaction with this platform.

Robert Moreno:

Santander Life's clients are also rapidly being monetized with gross income of $63 million in the first half of 2022, a 68% increase compared to the same period of last year. Demand deposits remaining high at 950 million, surpassing by many, many times the amounts clients have deposited in similar competing platforms. On the loan side, Life clients had a total of 316 million in consumer loans, increasing by 56% in consumer credit and 118% year-over-year in credit cards alone. These clients are also beginning to purchase other products such as mutual funds and time deposits, which have grown 44% year-over-year and 203% respectively. On slide 10, we showcase our two most recent digital initiatives that are piggybacking on the Life's platform to expand our presence among micro entrepreneurs, Prospera and Cuenta PYME Life. These are two projects in the incubation stage. Prosper is for the owner operated microbusinesses, which need a current account. With a small monthly fee and a one time payment for the mobile POS these clients can access a current account with free and unlimited transfers and no limits to their monthly balance.

Robert Moreno:

Cuenta PYME Life has a slightly different focus targeting companies with tax records that need a current account. The government has a program called Tu Empresa en un Día in which approximately 365 companies are created each day online. Through this same platform, companies have the option through Cuenta PYME Life to open a checking account online without previous history nor minimum sales. Cuenta PYME Life builds on the same successful platform we had created for individuals focusing mainly on transactionality, as well as responsible lending opportunities in the future. The success of Getnet continues, as shown on slide 11. Getnet has sold over 111,000 POS's. Also in the second quarter, Getnet began rolling out it's eCommerce solution. 94% of Getnet's clients are SMEs, our target clients. And 99% of the POS's are sold to the bank's distribution channels. Getnet already has a market share greater than 14% in POS's with around 318 billion in monthly sales flowing through these POS's. This product has been quick to monetize, generating 9 billion in pesos and fees in the first half increasing 800% year-over-year.

Robert Moreno:

And in the second quarter, Getnet has also started to break even after just over one year of operations. On slide 12, we show how Superdigital continues to expand. Superdigital is a prepaid digital product aimed at the unbanked who seek a low cost bank account. Superdigital clients have grown 84% year- over-year, reaching over 334,000 clients. This growth has been held by alliances with companies such as Cornershop and Uber as a way of attracting new clients. As can be seen on slide 13, we continue to lead our main competitors in NPS. And then in 2022, our NPS has dipped slightly as the bank has accelerated the monetization and digitization of customer channels and incorporated tighter cybersecurity protection, which has led to some client disruptions in the short term. But that will allow us to give a better service and heightened cybersecurity in the medium term.

Robert Moreno:

On slide 14, we show how all these efforts are translating into record client growth led by our most important product, checking accounts. Clients with checking accounts increased 29.6% year-over-year compared to June of last year. With this success and attracting new current account clients, we have gained over seven percentage points since April, 2019, reaching a market share of 29.1%. With the new US dollar checking account offer through Life, we have seen a sustained increase in our market share in this product, which reached an impressive 34.5% in April of 2022. As shown on slide 15, the bank accelerated the branch transformation process, focusing on the work of a model and closing less productive branches. In the last 12 months, we have closed 10% of our branch network and in the same period, we have opened nine more work cafes. As a result of these initiatives, coupled with our digital strategy, productivity is rising significantly with volumes per point of sale increasing 13.9% year-over- year, and volumes per employee increasing 10.2% year-over-year.

Robert Moreno:

Moving forward to slide 16, we want to highlight the most relevant progress in our responsible banking commitment. Since 2019, we have financially empowered over two million people, mainly through our Life, Getnet and Superdigital platform. This puts us well on track to reach our goal of financially empowering four million people by 2025. Another milestone was reached in our environmental goal in the quarter. As many of you may remember from our ESG talk last year, the bank announced that it will start to generate its own energy through six solar plants. We are pleased to comment that our first solar plant will begin operations in September and the further three plants will be operational by the end of the year. Each plant generates 300 kilowatts of energy, with these solar plants, we should reach our goal to be carbon neutral in our own operations by 2025.

Robert Moreno:

Beginning on slide 18, we will now take a look at our financial results, our net income to shareholders in the second quarter, reach a new quarterly record of 285 billion pesos. Increasing 41% year-over-year and 21% Q over Q. With this, our quarterly return on equity also reached a new high of 31.7%. With this strong quarterly result our net income in the first half totaled 521 billion pesos increased increasing 40.9%. And our ROE reached an impressive 28.7% in the first half of this year. As we will analyze an upcoming slides, the high inflation rate was clearly a key factor behind these solid results, but as we can observe on slide 19, the contribution from our client segments, which excludes the impact of inflation, continue to grow steadily. As of June, the net contribution of our business segments increased 17.6% year-over-year. Results from retail banking, which includes individuals and SMEs increased 10% year- over-year, mainly driven by higher margins and higher fees due to client growth and greater product usage.

Robert Moreno:

Our middle market segment grew 20% year-over-year driven by a higher loan spread. Additionally commissions increased 36% in line with the greater activity of clients and cash management and foreign trade businesses. The results of Santander Corporate and Investment Banking, or SCIB, grew an impressive 39% year of year due to the increase in loans, higher loan spreads, and an increase in fees driven by our investment banking unit and greater client treasury income. On slide 20, we review our loan book, which grew 3.8% Q over Q, and 10% year-over-year. Loans to individuals increased 11.8% year-over-year and 3.3% Q over Q. With loan growth in this segment being driven by high yielding outer loans, which grew 5.2% Q over Q and 51% year-over-year. Our credit card loan book also started to accelerate growing 7.4% as household consumer behavior patterns have begun to normalize. Mortgage loans increased 13.5% year-over-year and 4% quarter over quarter. Growth in this product was mainly driven by the higher UF inflation rate that resulted in a positive translation impact on mortgage loans.

Robert Moreno:

During the quarter loans in our SCID segment group 12.8% Q over Q, while loans to our middle market increased 4.7% in the same period, as economy continued to grow and large corporate sought funding in the form of corporate loans as the bond market remained illiquid, this growth was also affected by translation gains from the depreciation of the peso and the high UF and variation in the quarter. On slide 21, we show the evolution of our funding mix. Total deposits decreased 6.3% year-over-year and increased 2.1 Q over Q. After a strong increase in non-interest bearing deposits in the last two years, we have started to see clients shifting their money to time deposits as rates rise. As a result, time deposits increase 17.1% Q over Q. With this shift, we expect average funding costs to continue to rise as the monetary policy rate continues to go up. These higher rates will be eventually transferred to our loan book, but given that our interest bearing liabilities have a shorter duration than our assets funding costs will go up first.

Robert Moreno:

Moving on to slide 22, we can see how the movement of volumes rates and inflation have been affecting our margins in the quarter, the variation of the UF in the second quarter reached 4.3% compared to 2.4 in the first quarter of this year, and 1.1 in the second quarter of last year. This led to a strong increase in our net interest income from readjustments, which grew 11.7% year-over-year and 24% Q over Q, and led to an increase in the quarterly [NIMs 00:18:14] to 4.5% compared to 3.7% in the first quarter of this year. However, this has been partially offset by the rise in funding cost due to the increase in the monetary policy rate by the Central Bank and the subsequent shift of funds from non- interest bearing demand deposits to time deposits.

Robert Moreno:

Going forward, we expect rates to continue to rise and for inflation to gradually start to slow down. This will put a downward pressure on our NIMs in the second half. Therefore we maintain our guidance for NIMs for 2022 at a level between 3.5% and 3.7%. On slide 23, we can see the evolution of asset quality over a long period where it is clear that the asset quality of the bank remains at historically low levels as measured both by the NPL and impaired loan ratio, while coverage also remains at all time highs. As household liquidity levels normalized we expect asset quality levels to gradually return to pre pandemic levels. As shown on slide 24, this process was visible in the quarter with NPLs increasing to 1.5% of loans. However, it is important to note that the impaired loan ratio, that is the ratio of NPLs plus restructured loans did not show the same trend. Reflecting that new impaired loan creation did not