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Edited Transcript of BSANTANDER.SN earnings conference call or presentation 30-Oct-19 2:00pm GMT

Q3 2019 Banco Santander-Chile Earnings Call

Santiago Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco Santander-Chile earnings conference call or presentation Wednesday, October 30, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Claudio Soto

Banco Santander-Chile - Chief Economist

* Emiliano Muratore

Banco Santander-Chile - CFO

* Robert Moreno Heimlich

Banco Santander-Chile - Manager of IR

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Conference Call Participants

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* Ernesto María Gabilondo Márquez

BofA Merrill Lynch, Research Division - Associate

* Gabriel da Nóbrega

Citigroup Inc, Research Division - Research Analyst

* Jorg Friedemann

Citigroup Inc, Research Division - Director

* Neha Agarwala

HSBC, Research Division - Analyst, LatAm Financials

* Yuri R. Fernandes

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Banco Santander-Chile Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker, Mr. Emiliano Muratore, Chief Financial Officer. Please go ahead, sir.

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Emiliano Muratore, Banco Santander-Chile - CFO [2]

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Good morning, everyone. Welcome to Banco Santander-Chile's Third Quarter 2019 Results Webcast and Conference Call. This is Emiliano Muratore, CFO, and I'm joined today by Robert Moreno, Manager of Investor Relations; and our Chief Economist, Claudio Soto.

Thank you for attending today's conference call. As you will see in the rest of the presentation, despite ongoing turmoil locally and abroad, the bank continues to obtain positive profitability and high client growth.

Before we get into the results, Claudio will give us some insights into the macro environment and our expectation for the rest of the year.

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Claudio Soto, Banco Santander-Chile - Chief Economist [3]

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Thank you, Emiliano. Please move forward to Slide 3. Activity expanded slower than expected during the second quarter, growing 1.9%. Consumption decelerated while investments speed up, boosted by the [advance] of large projects. The labor market has shown some signs of recovery with a stronger job creation and a rise in real wages. However, business confidence has remained subdued. Inflation has been low despite of the depreciation of the exchange rate during the year. In this context, the Central Bank lowered the monetary policy rate by 50 basis points in September, as expected, and by 25 basis points in October, reaching 1.75%.

During the last days, the country has faced severe social unrest. There are several demands today in the population, which point toward more economic inclusion and fairer social relationships. Demonstrations have affected the normal functioning of several activities. So it is expected that growth figures in the last quarter will be affected. It is still too early to quantify its impact. Asset prices have had a moderate adjustment and the capital risk premium increased only marginally.

In response to this event, President Piñera has announced a social agenda intended to increase basic pensions, expand social health coverage and to reduce and stabilize some public services [tariffs.] He has also announced the introduction of a negative income tax.

The package will cost USD 1.2 billion that will be financed through budget adjustments, a rise in the top marginal income tax from 35% up to 40%, and net debt that will account for $600 million. All-in-all, we expect the budget deficit to reach 2.5% of GDP during 2020. On Monday, the President changed 8 members of its cabinet, including the Minister of Internal Affairs and the Minister of Finance. The new Minister of Finance, Ignacio Briones, has declared his intention to advance quickly with the tax reform currently in Congress, preserving strong incentive for investment.

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Robert Moreno Heimlich, Banco Santander-Chile - Manager of IR [4]

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Thank you, Claudio. I just wanted to highlight that although there has been increased volatility in the local market this past week, the impact on our operations has been minimized, thanks to our digital strategy, which has been able to support the branch network and serve our clients over this period. Going forward, the bank will continue to push ahead its strategic plan.

Here on Slide 5, we have the different initiatives, the bank has been developing this year. Although we have been progressing in all of them, we wanted to discuss the progress during the last quarter of those initiatives that are highlighted.

On Slide 6, although not officially launched, the soft launch of Superdigital has been quite successful, and we are preparing for the official launch soon. By word of mouth, we already have more than 17,000 downloads and more than 10,000 stable clients. Just as a reminder, Superdigital is a prepaid card digital platform aimed at the younger generation, immigrants and people who currently do not have full access to a bank. We believe this product to be very useful and a very high potential -- and has a very high potential to start relationships with new clients. And if they wish to do so, become a direct client of the bank in the future.

Moving on to Slide 7. As mentioned in the second quarter, we launched a new Cuenta Life and Life Latam program. Each plan is targeted to resolve the different needs within this mass segment. Cuenta Life is geared towards the unbanked population that want access to online banking and a simple debit account with no credit approval necessary. This is the first approach to (technical difficulty) and teaches them responsible [indiscernible] banking through a merit system. They can set saving goals and receive merits for contributing and achieving these goals. Once they comply with these minimum requirements and if they would like credit, they can gain access to a Life credit card or Life consumer loan through the Life program. As this is their first credit product with us, we aim to improve their financial education by also rewarding them for their good credit behavior.

Finally, those clients that want to have access to the same benefits that our other Santander clients have, we offer the Santander Life LatamPass, which along with merits, allows them to accumulate Latam air miles. These initiatives have been very well received by clients with monthly new clients accelerating from 3,000 a month to around 15,000 the past months. In total, we have more than 98,000 Life clients now, and they continue to be our happiest clients evaluating us with a score -- an NPS score of 9 out of 10 in terms of client satisfaction.

On Slide 8, our latest initiative to be launched soon is Klare. The first digital insurance broker in Chile. A recurring theme among our clients is that when buying insurance, it was very difficult to understand and compare the different options available in the market in a timely fashion. We, therefore, decided to create this open platform where clients can easily compare between different insurance plans. Although we have an alliance with Zurich, this platform will be open to other insurance providers as well. We aim to do this in line with the bank's culture of being simple, personalized and transparent. We recently received approval of our local regulator to launch this platform, and we are excited to open this up this new way of contracting insurance in Chile. This will be fully operational in 2020.

On Slide 9, we show updated numbers for Santander Consumer, our auto financing unit, which we expect to acquire soon as of June 2009 (sic) [June 2019]. The company continues to show good growth, with total loans increasing 22% compared to last year. NPL stable at 2.6%, which is a healthy level in the car loan industry. This is a highly profitable business with gross NIMs over 10%; net income growing 22% year-over-year and ROAEs over 21%. In August, we held the extraordinary shareholders' meeting, where our shareholders approved the acquisition of 51% of this company for CLP 62 billion. Currently, this company has owned by SKBergé and Banco Santander Spain, our parent group. Once this is approved by our local regulator, we will own 51%, while Santander Group will own the remaining 49%. We believe this should -- we should start consolidating this business over the next few months.

Moving on to Slide 10. As a result of all these initiatives, we have seen an acceleration in account openings, gaining market share compared to our peers. This year, we reached over 1 million checking accounts. We currently have 21.6% of all checking accounts in Chile and a 24% market share in net increase in checking accounts this year. With this growth, checking accounts have increased by 10% year-over-year.

On Slide 11, we can see the fruits of the recently launched initiatives, including Life and Superdigital and the rise in checking accounts, which doubled the level of new account openings. In a normal quarter, we were opening 35,000 to 40,000 new checking and debit card accounts. And in the third quarter, this increased to 86,000.

Due to the growing interest of our investors, on Slide 12, we would like to highlight our progress in responsible banking. The first fundamental change was in the bank's mission. Today, we not only want to be the best bank, we will also want to emphasize that what we do is done responsibly. We have been working on this for years now, and we wanted to communicate this commitment to our stakeholders. Part of that responsibility also goes beyond the financial -- financial factors that goes hand in hand with environmental, social and corporate governance issues. We have been part of the FTSE4Good since 2016 index, and we are also part of the Dow Jones Sustainability Index for Chile since 2015. And we are also in the Dow Jones Sustainability Index for the MILA market. We're also highly ranked in the MSCI Index with an ESG rating of A. We also created a responsible banking sustainability and cultural -- and culture committee locally, where top management is actively involved with the participation of the Chairman of the bank. This committee oversees the responsible business strategy and ensures that our culture -- corporate culture, sorry, permeates everything we do as a bank.

Slide 13 shows the commitment we also have to our employees. 75% of our employees belong to a union, which with the bank has good relations with. Last year, we signed a new collective bargaining agreement with the main union federation that will last 3 years. And this collective bargaining agreement, we ensure that our employees have a high standard of working conditions that go well above and beyond the minimum required by law. For example, the minimum wage in the bank is currently CLP 760,000 per month, well above the legal minimum wage. This excludes the collection of phone banking employees, which are subject to a separate collective bargaining agreement. Women make up more than 50% of our workforce, but we need to improve gender equality at managerial levels. We have created a gender equality area. And in the quarter, the bank also signed a commitment with the Ministry of Women and Gender Equality to continue advancing in this matter.

On Slide 14, we will briefly discuss our most recent results.

Moving on to Slide 15. Net income attributable to shareholders in the third quarter totaled CLP 138 billion. This was a 6.9% increase compared to third quarter '18 and a decrease of 19% compared to the second quarter. As a reminder, in July 2019, the bank recognized a onetime charge of CLP 31 billion, for a regulatory change in the provisioning model for commercial loans evaluated on a collective basis. Our return on average equity in this quarter, excluding this provision, was 19.5%. These solid results in the quarter reflect the bank's positive evolution of client activities, higher fee income, strong client treasury results, stable asset quality and controlled costs.

Net income attributable to shareholders accumulated as of September was flat year-over-year with an ROAE of 17% or 18.6%, adjusting for the onetime provision charge and well in line with guidance.

Please turn to Slide 16. The bank's total deposits increased 10% year-over-year and 3.8% quarter-on-quarter in this quarter. In the third quarter, the Central Bank lowered the monetary policy rate again by 50 basis points to 2%. This led to lower growth of time deposits, a shift of savings to mutual funds and a compression of issuance spreads in the local bond market. Therefore, time deposits increased 2.2% quarter-on-quarter compared to a 6.7% Q-on-Q rise in mutual funds and a 3.7% rise in bonds outstanding. The growth of our mortgage loan book also drove our funding strategy of matching those long-term assets with long-term bonds. At the same time, the bank continued to see positive growth of its checking account base and cash management business that led to a strong rise in noninterest-bearing demand deposits of 6.2% quarter-on-quarter and 18.5% year-over-year.

In our corporate banking area, demand deposits were also driven by a large influx of short-term demand deposits. Even adjusting for these, noninterest-bearing demand deposits would have grown 12% year-over-year. Our liquidity levels remain healthy, with the LC ratio -- LCR ratio at 126% and the NSFR at 108%.

On Slide 17, we review loan growth. Total loans increased 6.4% year-over-year and 2.6% quarter-on-quarter. Retail banking loans continued to lead growth in the year, increasing 2.1% quarter-on-quarter and 8.8% year-over-year. Consumer loans increased 8% year-over-year and 1.5% quarter-on-quarter. And mortgage loans continued to grow healthy and increased 2.3% quarter-on-quarter and 11% year-over-year. Long-term interest rates continued to fall and reach a new all-time low in the quarter, driving the increase in demand from new mortgages and a high level of refinancing of existing mortgages.

We continue to expect a loan growth of around 8% for this year and next year, driven by retail lending. Despite local social turmoil, in October, the bank's loan book expanded by $400 million, mainly in the middle market segment. Loan growth could be somewhat slower in consumer lending due to these events, but we expect some recovery in 2020. In 2020, we also forecast loan growth of around 8% using current GDP forecast.

On Slide 17 (sic) [Slide 18] and before we get into the evolution of margins, we wanted to show you the behavior of short-term rates compared to long-term rates in the third quarter. As you can see in this slide, the yield on the Central Bank's 10-year note fell steadily during the year, and more so during the third quarter. At the same time, the Central Bank cut the monetary policy rate, but at a slower pace, resulting in a flattening of the yield curve. The lower short-term rate improved funding costs, but the historically low long-term rates sparked a sharp rise in loan refinancing, especially mortgage loans, pressuring margins in the quarter. However, from September onward, when the Central Bank began cutting rates more aggressively and long-term rates started to pick up, this pressure on margins began to subside.

With this in mind, we move on to Slide 19 and our analysis of net interest margins. The volatility seen in the margin mainly has to do with the volatility we have seen in inflation throughout the year, as around 50% of our loan book is linked to inflation. Compared to the previous quarter, inflation was 0.5% compared to 1.2% in the second quarter. NIMs were also pressured as many clients refinanced their mortgages. However, we believe now that the 10-year curve -- sorry, the 10-year yield has left the lowest point behind, this effect will start to normalize. On the other hand, the Central Bank has been reducing short-term interest rates. So our liability should continue to reprice, and our cost of funds should continue to fall. Remember, the Central Bank cut last week by another 25 basis points the short-term rate, and we expect a further drop later this year.

Furthermore, with the focus on initiatives in consumer lending, we should see NIM stabilizing for the rest of this year. And in 2020, roughly around the same level, we'll see at the end of this year, with some upside when we receive the approval of the acquisition of 51% of Santander Consumer.

On Slide 20, we can see that the asset quality of our loans continues to remain healthy across our portfolio. With NPLs consistently improving, reaching 2% with a coverage ratio of around 130%. This evolution of asset quality is thanks to the strategy we have been following of growing lending in less risky clients, such as the high income clients, and selectively growing in the mass segment, where we mentioned the focus on financial education and inclusion.

In light of the current political events in Chile, we expect a short-term rise in NPLs and the cost of credit due to branch closures and lower working hours, which is hindering to a certain level, our collection efforts.

Commercial and consumer loan asset quality improved compared to last quarter, although mortgage loans have had a healthy evolution as well, there was a slight uptick in NPLs due to a seasonal calendar effect as the second quarter only had 89 days. So most new NPLs fell on the first days of July.

As you can see on Slide 21, our mortgage portfolio continues to be healthy, and the rise in NPLs was mainly due to this calendar effect. Here, we show the evolution of the 18-month NPL vintages, which is the NPL ratio of mortgage loans after 18 months in being -- since being originated. At 18 months, those mortgages taken out during the fourth quarter of 2017 had an NPL of 0.3, well in the recent average.

On Slide 22, we present the cost of credit, which reached 1.5% in the quarter. If we adjust for the onetime charge previously mentioned, the cost of credit remained flat year-on-year at 1.07%, in line with our guidance for the year. Going forward, in the fourth quarter, we expect some increase in the cost of credit from the recent events in Chile, but hopefully, will normalize next year.

On Slide 23, we present noninterest income, which showed positive growth in the quarter. In the third quarter of this year, fees from Retail Banking started to pick up, growing 5% quarter-on-quarter, with credit card fees, checking account, asset management and insurance brokerage rebounding after a sluggish start.

For example, credit card fees increased 21.5% quarter-on-quarter. In the third quarter, almost all of our credit cards have been migrated to the 4-parts model using interchange fee model, driving this rise in fees. Results from our treasury continue to perform well in the year, compensating the weaker performance of fees. With a higher volatility in the external markets, our clients' needs have evolved. So while last year, they were looking for financial advisory and looking to grow their business. This year, they have been more focused on treasury products and protecting themselves from exchange rate fluctuations.

Also nonclient income accelerated in the quarter, thanks to good ALM management by the bank. This gain is mainly due to our realized gains of the sale of our available-for-sale investments. The bank's fixed income portfolio is mainly comprised of Chilean sovereign risk and U.S. treasuries. Therefore, when a reduction in inflation is accompanied by a lower rate environment, the portfolio revalues and partially offsets the negative impact of lower inflation on our margins.

Together, we expect fees and financial and treasury income to grow in double digits this year. Next year, we expect noninterest income to grow mid-high single digits, client growth and cross-selling should remain healthy and driving fees, but lower treasury income should grow at a slower pace.

On Slide 24, we show our distribution network. As of the end of September, we had 381 branches, and we reached 50 Work Cafés across the nation. In the fourth quarter, the bank has experienced some business disruption due to social unrest that has resulted in 50 branches with different degrees of damage. The majority of this damage is covered by insurance, but there are some minor additional expenses necessary in security and cleanup that will be reflected in the fourth quarter. However, our digital channels have been able to serve our clients efficiently during these times. We will continue to push forward the restructuring of our branch network to make it more digital.

On Slide 25, we present our operating expenses. The 4.1% increase in cost in the quarter was mainly due to the rise in costs related to investments in technology and branch digitization, leading to the increase in productivity showed in the previous slide. Operating expenses to total assets reached 1.8% and efficiency ratio was 39.3% in the quarter. We continue to spend our marketing, communications, cybersecurity and technology developments, as well as improvements to our distribution network.

Slide 26 shows that at September 2019, we reached a core capital ratio of 10.2%, stable compared to the same date as last year. The solid capital ratios at the end of the quarter give the bank room to grow and continue implementing our investment plan. We also expect to have a dividend payout similar to last year, around 60%, and that would give us a dividend yield around 4% currently.

Please turn to Slide 27 now. As many of you already know, a new banking law was approved in January. With this, the SBIF merged with the CMF. The merger initiated the start of an 18-month period in which our regulator, the CMF will work with the Central Bank to create regulations for the implementation of Basel III in Chile. The CMF already published for discussion, the definition of systemic banks and additional capital requirements needed. This level is calculated by -- according to 4 factors to reach a weighted average of systemic importance. According to our initial calculations, we should fall in Level 2, meaning a systemic charge of 1.25% to 1.75%. The regulator also published for discussion the determination of the operational risk coefficient, which is very much in line with the recommendations made by the Basel Committee in Basel IV. We estimate operational risk should add on around 7% to our risk-weighted assets, very much in line with our original estimate.

The next guideline to be published shortly should be credit risk weightings, and this will be an important milestone for the implementation of Basel III in Chile. We continue to believe that the transition to Basel III will be neutral to positive for our bank in terms of core capital ratio.

We will now move on for our outlook for what remains of the year. After the events of recent weeks in Chile, we should see some short-term impacts in the cost of credit and some minor increases in operating expenses, but a recurring ROAE of 18% is still attainable for the year.

For 2020, we believe it is still too early to determine the impact. We do not believe current events should be underestimated, but long-term impact should not be overestimated at the moment either. For this reason, we will continue with our investment plans, focusing on technology and new initiatives. Next year, our acquiring business will be launched as well as Klare, our new open platform for brokering insurance. We still expect loan growth of around 8%, including the incorporation of the highly profitable auto lending business we are purchasing.

With inflation relatively stable and lower interest rates, NIM should be stable or slightly higher at 4.1%, 4.2% going forward. Our improving client service and digital channels has enhanced our ability to capture new clients and cross-sell existing ones, and this should continue to drive noninterest income. We expect -- until now, we expect asset quality to remain stable in the medium term, with a cost of credit around 1% -- 1.1% using current GDP forecast.

The efficiency ratio should also remain around 40%, even including our ambitious investment plan, and our effective tax rate will remain on average around 22%. In the next earnings call in -- at the end of January, we should give some more clear guidance regarding 2020.

At this time, we will gladly answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jorg Friedemann with Citibank.

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Jorg Friedemann, Citigroup Inc, Research Division - Director [2]

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So first, with regards to the revision in labor law that, I know, could limit the number of working hours per week, I think, to 40 hours. Could you give us some color about the expected impacts for the banking system and for Santander, in particular? And my second question, just to clarify, you provided a very good chart in the presentation with regards to the evolution of mortgage asset quality. And it seems that it's just back to average. But taking into consideration, the current refinancing that we have seen this portfolio, would it be reasonable to expect that asset quality could even improve further? because I understand that a lot of clients are renegotiating those contracts at even lower yields?

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Emiliano Muratore, Banco Santander-Chile - CFO [3]

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Thanks, Jorg, for your questions. This is Emiliano. Regarding the labor law, Robert will go into more details about the impact of the proposed law. Although considering the current events, that kind of law is still in Congress, but I think that it's going to be -- maybe not so in the front line of the things that the government will be dealing with considering all the different fronts that they have to deal. I mean, Robert will comment a bit about the...

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Robert Moreno Heimlich, Banco Santander-Chile - Manager of IR [4]

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Yes. So remember that under our current main collective bargaining agreement we have, Santander-Chile already has established a 40-hour work a week, okay? That's -- there's different laws being proposed. Some going down to 35 hours a week without lunch, 40 with lunch. There's with 41 including lunch. So this -- obviously, I think, today, the work week in Chile is around 45 hours?

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Claudio Soto, Banco Santander-Chile - Chief Economist [5]

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That's the law.

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Robert Moreno Heimlich, Banco Santander-Chile - Manager of IR [6]

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Law today, right? Yes. They were at 40. So I think for us, it shouldn't be a major impact. Also, as I said in the presentation now, we already have a relatively high minimum wage standard in the bank. So in that sense, we're rather tranquil that there shouldn't be any major impacts on our cost base currently, okay?

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Emiliano Muratore, Banco Santander-Chile - CFO [7]

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And about the mortgage asset quality impact because of this refinancing process, the macro -- the macro number that we estimated is that this whole process is putting around like $300 million yearly on the hands of mortgage debtors. So in average, that -- it's a reduction around 7% to 10% reduction in the monthly payment, although that's an average. Some people are getting even higher reduction. So -- yes, I mean, from the asset quality point of view, that's definitely a tailwind because the monthly payment is going down. So all the things -- all the other things equal, this is like good news for asset quality in the mortgage portfolio.

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Operator [8]

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Our next question comes from Ernesto Gabilondo with Bank of America.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [9]

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Emiliano, Robert, I have 3 questions. The first one is on your macro outlook. I think you have already talked about the impacts that happened in Santiago and in other cities. But I think the impact that we saw in the (inaudible) in some of your branches and the low activity in most of the cities. And then we saw that the government was heeding to the different demands of the people and probably the structural reforms that the country needs to have will no longer be the same for next year. So anything -- or what do you see the macro outlook for next year will be very appreciated. And then my second question is, in terms of fees, you mentioned the potential impact for cost of risk and expenses due to the impacting 15 (sic) [50] of your branches. But how do you see the impact in fees for next quarter given that Santiago and other cities in the region experienced low activity in the last 2 weeks, especially in everything related for credit, debit and POS transactions in retailers and shopping malls? And then -- and my last question is on NIMs, except for this quarter, we have seen all of the interest rate cuts happen already this year, that has been contributing to lower funding costs. So given the next year, the effect is likely to be behind, and you mentioned that you expect stable NIMs for next year. So I just wanted to know your point of view that even -- that you will have a more tough base for next year that you expect NIMs to remain stable.

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Claudio Soto, Banco Santander-Chile - Chief Economist [10]

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Okay. On the macro outlook, we -- there is still too little information to have a broader assessment on overall impact of the current situation. Definitely, we will probably revise downwards our estimates for growth this year. For next year, the domestic events points toward also lower growth. But on the other hand, we have seen better figures in the world economy, in general. Today release of GDP in the U.S. was better than expected. And up to now, an important drag for the Chilean economy has been the slowdown in the global economy due to the trade war. Therefore, there are a few forces pointing in 2 different directions. But definitely, the current situation -- domestic situation will point towards a lower activity. But the assessment, probably, we will do better assessment in a couple of weeks.

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Robert Moreno Heimlich, Banco Santander-Chile - Manager of IR [11]

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Okay. And then fees, yes. So in the presentation, we talked there will be some impact on the cost of credit, a little bit in expenses. And I would expect some fees to be slightly lower than the third quarter. The good news is that people are continuing to use the digital channels, buying online and all this is helping. But yes, so if fees were around CLP 72 billion in the third quarter, they should be lower. Still hard to see. It depends how the Christmas season -- the Christmas season is really strong, obviously, in buying and [-- I've a feeling.] So yes, I wouldn't expect these to surpass the third quarter. But we still expect them to be higher than how they were last year when they were around in the fourth quarter, like CLP 67 billion. So somewhere in between maybe around CLP 68 billion, CLP 70 billion, I would say is a good guess at this time, okay?

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Emiliano Muratore, Banco Santander-Chile - CFO [12]

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And about NIMs, when you look at the NIM in this third quarter, we think that we should be from stable to up in NIMs. Mainly, I think, there are the main drivers. First of all, as you know, inflation is relevant for us. I mean, in the quarter, it was not high. I mean, it was like 0.5 for the quarter. I mean, that's a 2% annualized rate of inflation. Next year should be -- I mean, from there to higher because today, we are forecasting like 2.2% inflation for next year. So inflation should be a positive for NIM. And then the slide, we showed about the slope of the curve. And that's -- I think the main driver to be kind of constructive on NIMs. Because we will still be getting the benefits of the cost of funds going down because of the latest cut of the central banks and the one -- maybe 1 or 2 more, we expect in the coming months. And then the long end of the curve, rebounded. So all this wave of refinancing and especially in the mortgage portfolio should kind of slow down. And we should stop being, let's say, hit on the repricing on the asset side. So -- and then you have the incorporation of consumer finance business into our balance sheet, that is also a very attractive business in terms of NIM. And all put it -- putting all that together, that's why we are relatively [constructive.]

Also, I can see that with the introduction of Basel III into the market and having some of the big banks with lower positions in terms of capital, that's also from the competitive point of view, it could be a kind of positive news on margin of having, let's say, a softer competition on prices. But that's maybe long shot now.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [13]

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Very clear.

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Emiliano Muratore, Banco Santander-Chile - CFO [14]

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Okay.

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Operator [15]

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Our next question comes from Gabriel Nóbrega with Citi.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [16]

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Could you just maybe talk about the competitive environment, given that the interest rates have been coming down, and you have even been guiding for maybe further interest rate cuts. So I just wanted to see if you believe that other banks are being rational in the competition? And as for my second question, it's on your capital. I note that we are still waiting for the RWA weightings from the regulator. But if we expect these to actually decrease over the coming year, could we maybe see more upside for your payout ratio in 2020 and onwards as well?

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Emiliano Muratore, Banco Santander-Chile - CFO [17]

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Thanks, Gabriel. On the competitive environment, we haven't seen any significant change. I mean, that's a very competitive market. And so far, the competition has stayed quite stable. As I said before, maybe Basel III would be a game changer in that front, but that's still early to be seen. And the rest of the competitive environment, I would assess it as normal and stable compared to -- comparing to the recent past.

And going into capital, yes, I mean, we still expect to have the Basel III reform being neutral to positive for us. And considering that we don't expect to change our CET1 ratio target under the new law, that should be positive for payout, although not for 2020 because we pay dividend in April, and I would not expect to know the final version of the law or the regulation by that date. For 2021, yes, has the potential to be a positive news on payout.

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Robert Moreno Heimlich, Banco Santander-Chile - Manager of IR [18]

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By December of 2020, we'll have our risk-weighted assets under Basel III, okay? And as we said in the presentation, very soon, I don't know if the current events may make everything get behind. But the regulators said the next thing they're going to publish for commentary is the risk weightings of credit -- of loans. And that's really the core of the whole model, okay?

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Operator [19]

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Our next question comes from Neha Agarwala with HSBC.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [20]

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My first question is on the Life product. You mentioned that you have more than 94,000 clients. But when you implemented the Life product, how has the results of this segment been versus your expectations in terms of margins, in terms of asset quality and profitability? And my second question is, of the investment plan of $380 million, how much of that investment is front-loaded? And then how much of that should we expect as already done in 2019? And what portion of that would be spread over 2020 and '21? Just to get an idea of how the costs will likely evolve.

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Robert Moreno Heimlich, Banco Santander-Chile - Manager of IR [21]

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Okay. So Life is going perfectly as planned, I would say, and recently, even better, especially regarding the client acquisitions. I think with the new products and the new attributes we added on to Life, we're seeing a lot of demand, it's a very good product, especially the Cuenta -- all of it is good, but Cuenta Life is also relatively cheap. You know, it's a -- it's around less than $5 a month. So in terms of margins, profitability, asset quality has gone as planned and even slightly better. Life already makes money. We have around CLP 60 billion in loans, I believe -- CLP 60 billion in loans -- CLP 40 billion? CLP 40 billion, sorry. CLP 40 billion. And as I said, Life is growing very gradually. It's all organic. The way we wanted it. We wanted to start off slowly, start speeding things up, adding on new attributes. And that is what's happening. It's growing at a good rate, and it's meeting all of our profitability, asset quality and margin targets. And so we think this is a very good instrument to begin to go more into the mass market, but responsibly.

And regarding the cost -- Yes, sorry, go ahead.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [22]

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On the Life, do you see your competitors adopting a similar strategy in the mass market? And how is the competitor's landscape here?

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Robert Moreno Heimlich, Banco Santander-Chile - Manager of IR [23]

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Well, until now, I think, Life has been quite unique, adding on like a way to open an account easily and bank digitally and this whole program of getting merits; merits, if you pay on time, merits, if you save. And the more merits you get, the lower the interest rate on your loan products becomes. And (inaudible) until now has been very unique. And the current clients and the new clients. When you compare their options, the options many times is to go to the retailer or go to the state-owned bank debit card system. This is much cheaper, much better and much more favorable, I think, in all sense. That's why Santander Life clients, they have an NPS score, Net Promoter Score of 90%, which is the highest in the bank.

And regarding the cost, basically, the investment project is 1/3 a year. So of the $380 million, it's roughly $130 million per year, and that's the case for next year and the case for this year.

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Operator [24]

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(Operator Instructions) Our next question comes from Yuri Fernandes with JPMorgan.

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Yuri R. Fernandes, JP Morgan Chase & Co, Research Division - Analyst [25]

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Emiliano and Robert, I had a question on your coverage ratio. We saw some decrease, and for us, that was something that caught the attention because you had the onetime provision. So looking through your (inaudible) formations was a bit higher. But the point is, how should we see the coverage for the bank? Because you're growing more on consumer loans, on -- like higher risk. Should we see the coverage ratio moving higher? Like do you -- do you have any number that you are targeting for that? That's the first one. And my second question is regarding loan origination post the protest. If you can share any view how the protest affected new loans origination? And if you think the 8% is -- is feasible for this year because you need to grow about more than 2% quarter-over-quarter and it's going to be very, very challenging in this kind of environment, I think, maybe business confidence may be under pressure. So if you can share how things are behaving now. And if you believe the 8% is doable for this year.

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Robert Moreno Heimlich, Banco Santander-Chile - Manager of IR [26]

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Okay. So effectively, the coverage ratio fell. That was due mainly due to the -- what we talked about in mortgage. So mortgage -- remember, in Chile, NPLs, by definition, is 90 days or more, okay? And it's strictly days accounting, how many days there are. And you have to have faith in what I'm saying that June, the second quarter had 89 days. So a lot of like the people who are 90 days overdue, they didn't fall over until the beginning of July. So there was kind of like an unrealistic fall in NPLs in the second quarter. And then we call this here internally, the calendar effect. September, it basically back -- went back to normal, okay? And that's why we kind of show, and especially if you look at Slide 21 on the webcast, you can go back and look at it later, we showed the vintages. So we showed that there hasn't been a deterioration of vintages, meaning this is truly a calendar [effect and the] fact that there's a deterioration. So all the NPL formation was basically the fact that they didn't fall in the second quarter and the 90 days NPL was in the beginning of July, and they all went into NPLs in the third quarter. So we don't -- so said that, I would say the third quarter is a more normalized level. We don't target a coverage ratio. Remember, we have expected loss models here in Chile. They're not IFRS 9. The expected loss models kind of driven by the regulators policies. So basically, our coverage ratio is reflected -- a reflection of what our expected loss is, okay? And since this calendar effect didn't harm our expected loss, our coverage fell, basically. But the stock of provisions for loan losses in the balance sheet over total loans is a true reflection of what our expected loss is. So the coverage ratio is kind of an output of that, okay? So going forward, we expect the -- the expected loan loss ratio maybe to rise a bit in the fourth quarter, basically because since some branches are closed. Remember when someone is charged off or they have to go to the branch or they had to go to the branch to pay their loans, what we're doing is that today, we're now permitting people who have been charged off to have access still to the web page to be able to pay the loan online and so forth. So basically, through improving the collection efforts online, we're trying to minimize the impact of people who have to go to the branch to pay their past due or charged off operations, okay? So I think the cost of credit will rise a bit to 1.1, 1.2 in the fourth quarter. And if everything starts to normalize, then we should see the cost of credit and asset quality stabilize next year.

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Emiliano Muratore, Banco Santander-Chile - CFO [27]

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And regarding the loan origination. Well basically last week, branches were mainly closed most of the day and so the origination was very low. As our retail business, basically, that means like losing like 1 week of sales. This week has been a bit better, but still much lower than normal. So in order to assess how that will affect loan growth over the year. We need to know how things will evolve, and we are not yet how it's going to -- or when this is going to normalize. I mean, we are still, as I said, a bit more normal than last week, but still away from, let's say, the real normal. So it is -- that's kind of negative for loan growth. Although, so far, not so relevant to, let's say, get the 8% out of the picture, but it depends on how things evolve from now. I mean, tomorrow and -- on Friday, it's holiday here in Chile. So let's see how Monday, the beginning of November, things start. But -- so far, we're still -- 8% is on the table, but it depends on how things evolve.

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Robert Moreno Heimlich, Banco Santander-Chile - Manager of IR [28]

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And in October, we grew like $400 million, the equivalent in pesos. So it wasn't a bad month overall. Obviously, much more geared to the middle market, okay? A little slower in consumer mortgage, but there was decent loan growth in October. And the other thing is we're still waiting on the final approval of the acquisition of Santander Consumer auto financing, and that would help, obviously, to reach the 8%, if not this year, it will help to boost loan growth next year.

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Yuri R. Fernandes, JP Morgan Chase & Co, Research Division - Analyst [29]

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Okay. So just a clarification. So the consumer unit, it's part of the 8%?

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Robert Moreno Heimlich, Banco Santander-Chile - Manager of IR [30]

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Yes. I would say, and it would add on 1% to 1.5% to loan growth. We would like to have reached 10%, but 10%, I think, is out of the question. So with consumer, we might be able to reach the 8% for the full year, maybe a little more, but it depends on the approval and how fast this normalizes.

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Operator [31]

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Speakers, I'm showing no further questions in the queue at this time. I'd like to turn the call back over to management for any closing remarks.

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Emiliano Muratore, Banco Santander-Chile - CFO [32]

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

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Operator [33]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.