Q2 2022 Banco Santander-Chile Earnings Call
As an update on the macro scenario beginning on slide five.
Thank you Emiliano.
During the second quarter. The economy has continued slowing down relevant returning back to trend.
Consumption has remained resilient.
While the investment is contracting.
High interest rates have hilton to normalized liquidity levels.
Business confidence has decreased and the growing concern of a global recession has led to significant fall in the copper price.
Deliver market continued subdued with employment still running below pre pandemic levels.
The economy will keep decelerating throughout the year.
Estimate GDP will contract Q on Q in the third and fourth quarter as.
As a result.
Our growth will be negative in the second semester.
We keep our GDP growth forecast for this year at one 5% as seen on slide six.
Nutrition has continued increasing.
The consumer price index, CPI Rose 12, 5% year on year in June IV, It will reach more than 13% notes in September .
There are they are still high commodity prices are weak currency and second round effects from past price increases.
In the last quarter of the year it should begin slowing down as global price assessment and local activity moderates.
All in all <unk> inflation should close the year at around 12%.
The Central Bank has tightened its monetary policy in the further by raising the monetary policy rate by 225 basis points since March reaching 975%.
We expect the multilingual <unk> increase its policy rate in the next two meetings.
Fishing, the heightened cycle with an MCR at around 10, 5%.
After that they should keep the rig on hold and begin cutting at the beginning of next year as inflation and activity slowdown.
There are 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 lease amendments to the new tax will be necessary.
In case, they reject optimally a deep response to the current constitution will take place because of that there will be still a considerable period of uncertainty ahead.
Thank you Claudio will now move onto slide eight.
To focus on the evolution of our various client and digital initiatives this year.
Key theme of the quarter is the ongoing strong client growth driven by these platforms.
On slide nine we begin with our most successful initiatives Santander life.
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 light program in 2018 and this platform really gained traction once we launched the quanta 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 cards.
In 2020 to Santander life also began offering clients the ability to open a U S. 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 as their main bank increased 30% year over year and loyal clients, which are those that are active and profitable.
And probably the use and majority of life products rose 46%.
Furthermore, our life clients have a net promoter score of 68, highlighting their satisfaction with this platform.
Santander life clients are also rapidly being monetize with growth gross income up $63 million in the first half of 2022, a 68% increase compared to the same period of last year demand deposits remained high at $950 million, surpassing by many many time.
The amounts clients have deposited and similar competing platforms.
On the loan side life clients had a total of $316 million and consumer loans, increasing by 56% in consumer credit and 118% year over year and 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 303% respectively.
On slide 10, we showcase our two most recent digital initiatives that are piggybacking on a life's platform to expand our presence among micro entrepreneurs sped up and <unk> life. These are two projects in the incubation stage.
Prospera is for the owner operated micro businesses, which need a current account with a small monthly fee and a one time payment for the mobile Pos.
These clients can access of current account with three an unlimited transfers and no limits to their monthly balance.
<unk> life has a slightly different focus targeting companies with tax records that need a current account. The government has a program called to Empress in India in which approximately 365 companies that created eight each day online.
Through this same platform companies have the option to <unk> life to open a checking account on the online without previous history, nor minimum sales.
<unk> life builds on the same successful platform, we have created for individuals focusing mainly on transaction ality as well as responsible lending opportunities in the future.
The success of that net continues as shown on slide 11.
Again that has sold over 111000 Pos it also in the second quarter get net began began rolling out its e-commerce solution.
94% of getting that getting that clients are smes, our target clients and 99% of the pass throughs are sold to the bank's distribution channels.
Again, net already has a market share greater than 14% and pass it with around 13 $318 billion in monthly sales flowing through these these pass.
This product has been quick to monetize generating $9 billion at vessels in fees in the first half increasing 800% year over year.
In 2000 and in the second quarter getting that has also started to breakeven after just over one year of operations.
On Slide 12, we show how Super digital continues to expand Super digital as a prepaid digital product aimed at the Unbanked, who seek a low cost bank account Super digital clients have grown 84% year over year, reaching over 334000 clients. This growth has been helped by alliances with <unk>.
Companies, such as corner shop, 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 cyber security protection, which has led to some client disruption.
<unk> in the short term, but that will give allow us to give a better service and heightened cyber security and the medium term.
On Slide 14, we show how all of 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 comp.
Paired to June of last year with this success in 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 U S. Dollar checking account offer through life, we have seen a sustained increase in our market share in this product, which recently 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 our 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 Fas as.
As a result of these initiatives 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.
Moving forward to slide 16, we want to highlight the most relevant progress in our responsible banking commitment.
Since 2019, we are financially empowered over 2 million people, mainly through our life <unk> and Super digital platform.
Puts us well on track to reach our goal of financially empowering 4 million people by 2025. Another milestone was reached in our environmental goal in the quarter as many of you may remember from our ESG talked last year, the bank announced that it will start to generate its own energy through six solar plants, we're pleased to come.
Comment that our comment that our first solar plant will begin operations in September and a further three plants will be operational by the end of the year. Each plant generates 300 kilowatts of energy with the solar plants, we should reach our goal to be carbon neutral in our own operations by 2025.
Beginning on slide 18, we will now take a look at our financial results. Our net income to shareholders in the second quarter reached a new quarterly record of 285 billion peso.
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 vessels increase increasing 49% and our ROE reached an impressive 28, 7% in the first half of this year.
As we will analyze in 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 continued to grow steadily as of June the net contribution of our business segments.
<unk> 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, our middle market segment grew 20% year over year, driven by a higher loan spread. Additionally commissions.
<unk>, 36% in line with the greater activity of clients and cash management and foreign trade businesses. The.
The results of <unk>.
Santander corporate and investment banking or SCID grew an impressive 39% year over 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 three 8% Q over Q and 10% year over year loans to individuals increased 11, 8% year over year, and three 3% Q over Q with loan growth in this segment being driven by <unk>.
High yielding out of loans, which grew five 2% Q over Q and 51% year over year, our credit card loan book also started to accelerate growing seven 4% as household consumer behavior patterns have begun to normalize mortgage loans increased 13, 5% year over year.
<unk> 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.
During the quarter loans in our <unk>.
CIB segment grew 12, 8% Q over Q, while loans to our middle market increased four 7% in the same period as the economy continued to grow and large corporate soft 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 U F. A variation in the quarter.
On slide 21, we show the evolution of our funding mix total deposits decreased six 3% year over year and increased $2. One Q over Q. After a strong increase in noninterest bearing deposits in the last two years, we have started to see clients shifting their money to time deposits is.
Rates rise as a result time deposits increased 17, 1% Q over Q with this shift we expect average funding cost to continue to rise as the monetary policy rate continues to go up these higher rates will be eventually transfer to our loan book, but given that our interest bearing liabilities.
Have a shorter duration than our assets funding costs will go up first.
Moving on to slide 'twenty to 'twenty, two we can see how the movement of volumes rates and inflation have been affecting our margins in the quarter.
The variation of the U S. In the second quarter reached four 3% compared to $2 four in the first quarter of this year and one one 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 NIM to four 5% compared to three 7% in the first quarter of this year.
However, this has been partially offset by the rise in funding costs due to the increase in the monetary policy rate by the Central Bank and the subsequent shift of funds from noninterest bearing demand deposits time deposits.
Going forward, we expect rates to continue to rise and for inflation to gradually start to slowdown.
This will put a downward pressure on our nims in the second half. Therefore, we maintain our guidance for NIM for 2022 at a level between three 5% and three 7%.
On slide 23, we can see the evolution of asset quality over a long period, where it is clear that the asset quality with a bang remains at historically low levels as measured both by the NPL and impaired loan ratio. While coverage also remains at all time high at.
As household liquidity levels normalize, 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 one 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.
Asian did not accelerate in the quarter.
The coverage of Npls as of June 2020 to reach 228% and there has been no reversal of the voluntary provisions we recognized in 2020 and 2021.
As we can see on slide 25, these positive asset quality indicators led to a cost of credit of 1% for the second quarter of 2022 and 0.9% during the first half of the year in line with our guidance for this year, which remains unchanged.
On slide 26, we move to non net interest income revenue sources, which expanded 15, 3% year over year in the second quarter.
<unk> income increased 17% year over year, driven by higher client activity and the growth of our client base as previously described.
Compared to the first quarter fees decreased two 5% mainly due to the effect the new interchange fee caps that started in April this year that reduced the income the bank makes on a card transactions.
As shown on slide 27 operating expenses in the second quarter increased eight 5% year over year and 15 eight.
8% Q over Q <unk>.
<unk> rise in cost is mainly due to seasonality effects and inflation.
Compared to the second quarter 2021, the rise in costs was mainly fueled by the impacts of inflation on personnel expenses and some administrative costs. The depreciation of the peso, which increased some administrative expenses that are denominated in U S dollars, mainly it related and finally higher other.
Operating expenses due to the recognition of greater provisions for non credit related contingencies, mainly related to future severance payments.
Furthermore, as Santander consumer our outer lending subsidiary sales and results have increased significantly we also incur greater expenses related to the joint venture with our main dealership partner, which is recognized in this slide.
Finally, the bank continues ahead with its $260 million technology investment plan for the years 2022 2024.
Despite this rising cost the banks efficiency ratio in the first half reached 37, 9% compared to 40% in the same period of 2021.
Moving on to Slide 28, we now analyze our capital ratios.
At the end of second quarter 'twenty, two the bank reported a core equity ratio of nine 6% and a total bis ratio of $16 two during.
During the second quarter the bank paid its annual dividend, representing 60% of 2021 net income with an attractive dividend yield of five 5%. This led to a decrease of 60 basis points on our core capital.
Our fully loaded ratio was 10, 1% core capital and we recorded a total.
Loss ratio of 16 seven.
7% at the same date.
We are on track to finish the year with a core capital ratio of about 10% and we are maintaining our guidance of a dividend payment of 50% to 60% of 2022 earnings.
Finally on slide 29, we present our outlook for the rest of 2022, we expect our business segments to continue performing well thanks to our digital platforms and growing client base. This will be the basis for long term growth and profitability in the coming years. The macroeconomic situation is also.
A key factor on our results and as Claudia mentioned, we now expect the GDP of around 0.5% this year with inflation, reaching around 12% and the monetary policy rates with further increases and probably finishing the year at around $10 five with this we expect loan.
Growth of 8% to 10% and our net interest margin for the full year of three 5% to $3 seven <unk>.
Non NII should grow this year by at least 15% driven by client growth and greater product usage, our guidance for the cost of credit remains unchanged at <unk>, 91%.
Given our efforts with our digital strategy, we expect cost to grow below inflation at around 7% for the year.
And at a much slower pace than observed in the second quarter. All in we expect an ROE of 21% to 22% for 2022.
With this I finish my presentation and now we will gladly answer any questions you may have.
Thank you very much for the presentation will now be moving to the Q&A part of the call. If you have any questions. Please press star two on your keypad, let's start to any key pad. You may also ask a voice question if youre dialed in via the web the text questions are disabled for this call.
Our first question comes from Mr. Jason <unk> from Scotiabank. Please go ahead, Sir your line is open.
Thank you very much thanks for the presentation.
Gentlemen.
My thought my first question I guess is on the path for inflation.
In the third and fourth quarter, given the higher policy rates. If you can talk about that path to get.
Two.
<unk> rates for the full year I'm imagining that that sensitivity.
For NIM to inflation is why youre, maintaining the NIM guy.
Guidance at three five to $3 7 million why the ROE.
For the full years.
So much lower than.
And then the first half if you can provide some color that would be great and my second question is really on the outlook for the regulatory environment in Chile.
We've seen some news on.
A potential Fintech law, if you can talk about that and if you expect.
Competition to heat up thank.
Thank you.
Hello. Thank you for your question, Jason on the Minerva and take the first closing for the first one regarding the path for let's say inflation.
Rates on NIM.
Basically our expectation for inflation for the year implies basically having in the second half.
The same inflation on the automotive semi inflation, we've had in the first half so that's let's say.
It would be.
Flat.
Semester.
So semester, but the positive rates for the second half is going to be significantly lower and Thats why.
Even though in the first half we were able to sustain the NIM above four and for the second half the number will trail downwards. According to our expectation for inflation in rates and that will average three five to $3 seven for the for the year is through that.
The reaction function for the central bank in the sense of how.
How sticky high inflation will be on how they will react to that and when they will start the <unk>.
The easing cycle is going to be a crucial.
Element going forward for our NIM by four for the second half basically that's the equation I mean, a similar level of inflation with a higher short term rates and that's implying.
Higher lower named for the second half averaging $3 <unk> for the for the year.
With some of the regulatory environment.
One of the main regulation that is in Congress right now.
I think that regulation.
It also includes open banking and everybody can play in open banking tuna.
If in fact, the CW overviews best is to emulate activities that are currently being developed by companies. So it basically put them under the umbrella of the CMS, which is a good thing.
<unk>.
If they're moving banking.
<unk>, they're basically not a prediction.
Wholesale outgoing Congress right now that is pursuing.
Personnel.
And the important thing here is that.
Both.
Loss.
Talk to each other.
Coherent.
So we put them in the case will be banking piece to update.
Sure.
To have a good reputation in thermal failure personal data also.
There is a it is advancing Congress.
Bill.
Consolidated.
That information.
That has been very important to hub.
Better.
That information.
Risk.
Because of this.
Religion on Fintech.
Banking that is opening the door to re re discussed.
Bill on the coast.
Consolidated debt and will have a positive view on the regulation.
Is there any comment on timing when do you think open banking rules or law.
Could be implemented.
Okay.
We think that at least during this year it would be under discussion in Congress.
There is a decision for implementations that may take place during next year.
Draw, we view political agenda in the second semester of this year would be very much focused on the constitutional process.
Thank you.
That works.
Yes.
Thank a lot of positive energy in Congress, so it might be.
Discussion will stall a little bit.
But it might be finished by the end of this year and then next year, starting the implementation that would be the purpose.
Of implementation.
Thank you.
Appreciate it.
Thank you very much. The next question comes from the strategic law BARDA from Goldman Sachs. Please go ahead, Sir your line is open.
Hi, Good morning, Emiliano and Robert Thank you for taking my question.
A bit of a follow up Jason first question on the guidance for the year.
I mean do you think that the guidance is sort of conservative at this point going to be some upside risks because to get to 'twenty, one 'twenty, 2% Roe for the year.
You probably have to be below 20% in the second half of the year.
Just to get how much conservative Smith may be baked into that guidance and then kind of similarly.
Could you remind us the sensitivity of your margins to the higher rates of inflation will be the same in the second half as the first half how much will your margin fall because of the higher rates.
If you could remind us the sensitivity of that thank you.
Yes.
Hello, Thank you for your question.
I would call it like neutral I mean or balance the different risks to the guidance I mean, basically it will it will depend on the.
Combination of inflation.
One is there a policy rates.
So for our with our expectation of inflation of around 12.
And the rates, peaking at 10 five.
That's the number basically we are we are seeing.
From that basically the the risk or the momentum that the base case scenario would be that the higher the inflation that the better.
Right.
Considering that we are already in July .
Effect of the rate for this year tends to be lower volume for the calendar year and that will be affecting more next year. So.
With our macro expectations I would call it like balanced without let's I wouldn't call. It conservative accorded to two that assumption sort of inflation of 12 mm.
The rates speaking up 10, 5% by the end of the of the year in terms of sensitivity.
Yes, so basically we have around the.
Yes.
30 basis points sensitivity to inflation, Okay for every 100 basis points from 30 basis points of NIM.
It's really informative Emiliano said, it's over like the sequential so even though inflation is going to remain high we had like more or less 6% inflation you up in the first half with more or less up 6% in the second sequentially, we're not gaining any more NIM because of inflation. Okay. So that's why.
Little tricky because inflation is still high but we're not gaining any more from that and the other hand, we have the sensitivity to short term interest rates. As you know we have this kind of natural hedge where we have a long inflation and we're obviously reprice our liabilities okay.
Foster than they are more sensitive to monetary policy rate. So today, the sensitivity of look more or less 100% rise in rates short term rates is around 25 30 basis points. So.
In the first quarter I think the average monetary policy rate must have been around for the second quarter seven but in the third and fourth quarter. The average monetary policy rate is going to be roughly around 10%, okay. So you're not gaining anymore.
<unk> unless inflation continues to surprise on the upside, but now youre going to see the bulk of the effect of the rise of rates. Okay. So with those sensitivities you more or less get that in the net interest margin for the year of $3 seven and work of this change is if inflation goes higher in rates don't change.
So if inflation ends up at 13, let's say and rates still say 10, we get another <unk>.
30 basis points more of NIM. Okay. So that is kind of the equation we're looking for.
For the second half of this year.
Remember that also inflation of has an impact on the effective tax rate, yes. So.
That's amplified the effect I mean, the let's say the higher than placement from our base case will imply.
Lower effective tax rates on the opposite so that's about it.
We see it now and then when you look at market prices.
Service on the different scenario inflation of around 12 looks like.
<unk> view.
Bill.
Great. Thanks, Robert Thanks, Emiliano that's helpful.
Sorry, a follow up on this but.
I think in your comments mentioned inflation, reaching 13% in August and September rates already for three Q Youll, probably running ahead of that expectation to some extent. So you would expect some kind of decline in inflation, probably for the fourth quarter. So yes.
On a year on year basis, remember that inflation is starting to pick up late last year. So that's why the sequential year over year tends to go down from where we are now because.
Last quarter of last year was already was already high.
Yes.
From July to October we see prints that are on average 1%.
Greece months from the minus 80 basis, and then November and December .
C much softer monthly CPI.
About two 4% on average.
Yes.
Okay perfect. Thank you.
Thank you very much the next question comes Fernand.
Fernandez from Jpmorgan. Please go ahead, Sir your line is open.
Thanks, everybody.
Regarding asset quality.
We saw an increase in Npls this quarter.
The higher new NPL formation, and Youre, moving a little bit your coverage ratio.
My question is what should we see going forward like should npls keep the deteriorating no debt economy.
We have much higher inflation.
And if any PL. This of course, we keep the deterioration deteriorating where should they land isn't.
Normalization to pre Covid levels are you concerned that this may go higher like what is the message the hurdle for asset quality going forward. Thank you very much.
Okay, Yes.
Youre correct. So the Npls went up in the quarter.
Not so much impaired loans, so what does that mean basically is that.
People, who are already impaired, meaning they were restructured or there are more than one day overdue they floated down to two two NPL status. So the.
So that's a good thing in the sense that given that that more people are not really entering impaired in people who are impaired.
Our entering Npls base.
It basically means that it's good for the cost of credit because we really have a high coverage, meaning that people were impaired or going to NPL.
I already have deteriorated expected loss and therefore, the provision taken okay. So.
Thats why we should continue seeing some NPL deterioration going forward.
Should eventually by the end of next year I would say.
Sometime next year reach pre pandemic levels, which I believe was an NPL ratio of around one 8%. Okay. Remember, we're coming off of all time lows.
So I think thats going to be a normal process also we are expecting I said the economy was going to grow like 0.5. This year. The economy is going to grow like one 5%.
Claudia said by next year, it could actually have a recession that could actually be negative okay.
So all in we expect the cost of credit we're not changing that we still think it's.
Because of the high coverage.
It should remain at 091 percent.
Cost of credit, but npls should slowly gradually return to pre pandemic levels of of around one 8%.
So a coverage level should go down further okay and this is without taking into account any reversal yet of the voluntary additional provisions we have taken okay.
There are also some some.
For example in the first quarter you saw mortgages fall very.
A lot of NPL, but we did a lot of coverage. So we knew there was going to be a shift in the npls in mortgage okay. Because we saw that in early nonperformance. So thats good because in the first quarter, we already took the necessary provisions to cover the mortgage so I don't see mortgage npls rising very much going forward.
And the coverage ratio.
Basically back went back to where it was at the beginning of this year. So.
I think there is.
We did a very good move in the first quarter of anticipating that that increase in npls.
So that's basically the summary, I don't know if that was clear.
That's also quickly Robert Thank you very much and if I may just a second question regarding deposits right and I guess this is totally expected we have seen demand deposits decrease the cost of opportunity given higher rates, but my question is how do you see these movements.
The same pace as we were expecting this faster than you expected. So basically what is the view for demand deposits versus total deposits going forward and all that should normalize in 2023 do you believe you can keep a buffer helping your margins because I guess, we discussed in the previous questions a lot about inflation.
And rates, but I guess on the liability side. You also had the pressure right like your funding costs would go up.
Because of the mix right.
Yes.
We think that the.
The fall in the one <unk> will start to slow down basically because whether we are seeing is that the full is.
Mainly concentrated on individuals basically people spending the money.
Gods from the pension fund withdrawals from the fiscal stimulus through Covid spending, let's say it was taking advantage of the higher level of rates have been or let's say reacting to the higher opportunity cost.
All of the rates, so thats processes finance amendments.
It's not.
Let's say <unk>.
Unlimited that that are in the money so that will be slowing down I would think that maybe by the by the end of the year that process should like normalize how we're going to start to have like a normal pace of growth we go.
The effect of the opportunity the opportunity cost of rates basically will be already they are and that will be that.
Shifting should.
Kind of finished.
And the starting forward from there we should have like a more normal pace of growth of deposits.
I'm on on demand deposits on the on the ship them basically waning, but by the end of the year.
Again of the next year on a boat.
We talked about the sensitivity to rates and that also includes the shift so.
Another reason the nims a little tighter in the second half is because of this shift okay. So so I guess.
That's a really good point, youre, making where not only the <unk>.
<unk> is what it is but also you have a lot of people are flowing to time deposits. We haven't seen this rate of markets here in Chile.
And everything is kind of still a lot of risk aversion and you can take a 10% 12% time deposit.
Sure.
And assured.
Profitability for the clients. So yes. That's included basically in our in our NIM outlook. It includes this shift.
And also there is an effect on the same direction related to the asset side in the sense that people still have liquidity. So basically they are not borrowing much and that's why you see origination volumes in the consumer side.
Falling flat to falling by the one.
They basically spent the money or they don't have more money. They will also.
Demand deposits will top volume and also there will be more let's say.
<unk> to consumer credit so we will start to originate assets at higher rates. So at the end that process happening by the end of the year beginning of next year, we'll have that double positive effect.
Negative FX will will stop.
Just the last thing on this.
Hard to say because there's a lot of translation gain in loan growth okay.
If you eliminate that apart from auto loans.
Finally credit card loan started to grow in the quarter Okay.
Credit card and auto loans in nominal peso. So in terms of real origination we saw.
Honestly in two products.
Out of loans and credit card, which is basically people returning to more normal so basically in line with <unk> that you should see and those are coming out at good spreads, but you will see the impact of that on Nims in next year Okay.
Perfect. Thanks Emiliano Robert.
Very much. Our next question comes from Ernesto <unk> from Bank of America. Please go ahead, Sir your line is open.
Hi, Good morning, Raimundo Amo Cloudier, Robert Good morning, everyone.
My first question.
Longer.
<unk>.
Considering the higher road.
Economic recession.
Wondering more about the loan growth for next year.
Yeah.
For next year.
<unk> will be the segment that could help with demand.
With Google one that could be more retirement.
And then my second question for me home asset quality also considering.
The economic recovery.
Tax reform.
Reform.
The economy.
You pointed out of the ongoing.
We will need approval.
Lower copper prices.
You are no longer having good.
Please go ahead ma'am.
About the asset quality.
Thank you.
Okay.
So.
Loan growth.
Obviously this year, it's growing a lot of it influenced now by the depreciation of the peso in inflation and in originations are.
Yes.
Originations.
Lead to a lower lower low actual loan growth. Okay. So next year.
With the economy flat or negative growth okay.
We should see loan growth probably in the mid to low single digits. Okay. The good news there and linking this to your question about resilience I would say that.
A lot of loans that were very subdued in growth because of the excess liquidity and households.
Should drive growth next year, mainly consumer group I think there is.
And also even though there might be a slight recession unemployment should and continue to improve our average client.
In terms of depth servicing reach in terms of household depth overall.
It's still much better than it was actually even before 2018 okay.
So the average health of our clients without being very aggressive in loan growth there should be room to grow the retail loan book Smes have been basically they grew a lot 2000, 2000 2021 because of the holdup at this year, there's been more of a actually.
Actually the Smes normalizing their balance sheet situation paying off some of these loans. So I think there should be some.
Moderate SME growth next year.
And mortgages if rates start to come down and inflation starts to come down there could be real originated growth. This year originations are down it's basically.
Inflation so.
Basically I think there will be growth in the retail loan growth, but basically overall with low single digit loan growth and in terms of asset quality, yes.
Yes, as you said on the one hand, theres going to be lower growth, but on the other hand as I said, we still have our average clients still has very good asset quality indicators.
In terms of pain they remember.
Some people have spent their excess liquidity a lot of our clients paid off their depth or save their months. Okay. So.
I think that in this recessionary cycle, there will be a.
As I mentioned before an uptick in npls and our npls going back to pre pandemic levels.
But we still currently even with our.
GDP guideline, we're still seeing the cost of credit, 0.91% and on top of that.
We still have our additional voluntary provisions, which.
Or are there and we're not thinking of using them, but but theres still available.
Okay. Thank you very much Robert.
Chuck if you can.
Continued to see medium term Roe.
Between 17 and 19%.
Yes, basically we maintain that view on long term Roe.
Perfect. Thank you very much.
Okay. Thank you very much. Our next question comes from Mr. Alonso Garcia from Credit Suisse. Your line is open shop and go ahead.
Hi, Good morning, Thank you for taking my question.
We will open up with quality.
I don't know if you could comment on your exposure to certain industry, where you see.
Alright.
The current macro environment.
Having in mind the real.
Industry, given the higher interest rates.
He'll be insurance industry, given all the noise that we have been seeing with these operators.
The ones I have in mind.
You could comment on this or any other.
Sector, where you could see.
Particularly high risk in this environment for your commercial portfolio. Thank you.
Okay, so regarding our our exposure.
So in the health industry, it's really low we have a 10% market share in aesop with it.
And it's not significant.
It probably require maybe require more more more.
Provisions, but I would say nothing that jeopardizes, our our outlook.
And then in and then real estate and construction.
I would say, it's around 5%, 6% of our loan book and there. The good news is that in.
Those are the companies we deal with first of all the Npls are still ridiculously low so.
Second of all the companies we deal with in those sectors still have very strong balance sheets.
And we tend to to deal with well established.
Real estate and construction firms.
And that have good balance sheets so.
I would say construction in Chile has been slowing down I would say, that's a little bit more tricky sector.
An increase in provisions mainly mainly among small construction businesses.
But overall those arent a big part of our loan book, Okay, but the large construction companies I think have a very solid balance sheets, we probably wont be growing but we don't see a major threat. There and then the real estate developers our client mix. There is actually very good and they've managed very well the cycle.
Selling and getting rid of inventory having good cash.
No.
Overall.
There will be an increase in risk in those sectors, but I would say nothing that that jeopardizes, our our cost of credit outlook also remember during the pandemic in 2020 'twenty one we set a lot of provisions.
In the corporate area. So any weakness we saw in the loan book any more than a sector.
Client basis.
Cleaned up during the pandemic so.
Any weaker client that we saw that either wasn't going to make it to the pandemic or we're going to have difficulty in a recession, we increased our provision. So so that's why I think even during this downturn and we're entering it with I think a very healthy corporate loan book, which is in the end, where the where you always try to avoid big surprises in the retail.
You can manage it in terms of the.
The scoring models for the problems come on a larger company has problems, but there I think we were very confident that that we're entering this cycle with very very good coverage of that loan book.
Okay.
Thank you Richard if I may a follow up.
What is needed for you too.
Decide to using somewhat leased additional provisions that you have created since 2002.
NPL ratio or.
Or contraction in GDP, you would need to see to.
To make use of those.
Additional provisions that I think thats, what part of your guidance you wouldn't be using correct.
Yes.
I would say that the base scenario is not using them basically that's a board decision.
Decision.
There hasn't been set.
A specific target of NPL of lesser risk.
You were asking I would say that the idea of those provisions basically was to prepare for.
Really high levels of risk coming out of the pandemic from the macro situations. So a willingness backed the usage of those provisional unless we are significantly high in terms of cost of risk managed significantly higher definitely above pre pandemic levels.
Let's say on Houston that voluntary provision on us as a way to smooth or to offshore that extraordinarily high level of risk.
Why it was what created better as I said I mean, so far of the base case is that we are planning to reverse any of that.
And.
And basically it will be.
From the board when to use it but the spreads is basically that I mean do you use it as a.
As a way to to absorb.
Sure.
Ordinarily high levels.
Special risks.
Very clear thank you very much.
Okay. Thank you very much our final question comes from Noah <unk> from HSBC. Please go ahead.
Hi, congratulations.
Thank you for taking my session I guess is there any quickly about.
The outlook for 2020.
The earnings have benefited a lot from high inflation next year as inflation eases off.
Is there anything that the bank can do to offset the impact on margins from a more modest levels of inflation maybe.
Maybe a high fee income growth.
Would you say.
Low single digit.
Anything that you can do how do you see the earnings degradation.
Thank you so much.
Hello.
Thank you Bob for your question I mean talking about going into Q3, we think thats still a bit early to talk much about the guidance for next year basically because as you were saying inflation on rates are going to be key drivers for the.
Revenue for margin basically bottom line evolution.
When you say, what the bank can do I cannot add that what the central bank can do I mean in the sense that.
In that scenario of inflation.
Basically going down from let's say low double digit to low teens. If you wanted to mid single digits or something like that.
We would expect the central bank to start cutting rates and that's going to be as a counterbalancing effect on our margins.
The Big question is the.
They say that pays some the rhythm on how aggressive the falling inflation is on how aggressive the central bank is reacting to react to that so, but basically I would like to.
Some more months I mean, maybe next next call to discuss more.
2023 in that sense because at the end it will be the combination of that.
Fast how low the inflation goes down and how the central bank reacts to that that from let's say the PR financial sensitivity point of view as you said all the non NII revenues are doing really well I mean, we expect wholesale to be growing healthy.
Frontline in fees as we are doing now and also from the our markets.
You saw the numbers in chicken a gown special checking accounts with dollar tree and a balance that's doing greater vessel from the non NII point of view, we are let's say confident and positive on the on the outlook for next year.
Our commercial activities with clients is doing really well on all the initiatives we are doing in the digital front.
Helping to sustain that and from the more NII financial point of view.
I would like to wait a bit more visibility on that let's say eastern cycle or the Dolby cycle that is.
<unk> carbon.
Anytime in the future are dependent on local and international conditions.
Great.
Okay.
Just real quickly.
Also our costs, obviously theres the inflation, but as you saw in the second quarter, we sped up we've already closed 10% of our branches. There is a lot of efficiencies.
We're working on as well so productivity should rise.
<unk> said, our client business is doing really well, we're adding I believe 60000 clients a month or so.
And our new clients. So there is a lot of room there in terms of cross selling and another thing is important is that.
In the second quarter, obviously inflation was a big deal, but when you exclude that the growth of non non credit related income has been very strong. So I think thats really going to sustain our results next year.
Very helpful. Thank you.
Okay.
Thank you very much looks like we have no further questions at this point I'll pass the line back to the management team for the concluding remarks.
Thank you Michael and thank you all very much for taking the time to participate in today's call. We look forward to speaking with you again soon.
Thank you very much. This concludes today's call will now be closing Holden I think you have a good day goodbye.
Alright.
Hello.