Q4 2022 Banco Santander-Chile Earnings Call
Speaker 2: Thanks for watching!
Speaker 3: D pro to pro to. So pro to he pro pro that.
Speaker 4: Thank you.
Speaker 5: Good morning and welcome to Banco Santander Chile's fourth quarter 2022 results conference call. I will now hand over to Mr Emiliano Moratore to begin the presentation.
Speaker 6: Good morning and welcome to Banco Santander Chile's fourth quarter 2022 results conference call. I will now hand over to Mr Emiliano Moratore to begin the presentation.
Speaker 7: Good morning everyone. Welcome to Bantu Santander Chile's fourth quarter 2022 results webcast and conference call.
Speaker 8: This is Emisiano Muratore, CFO , and I'm joined today by Robert Moreno, Head of the Investor Relations, Christian Bicunia, Head of Strategic Planning, and Clare Soto, chief economist.
Speaker 9: Thank you for attending today's conference call. Today we will be discussing the trends and results seen in the fourth quarter and give some insight into our expectations for this year.
Speaker 10: Our successful digital strategy and customer-oriented product offering continues to attract new clients, indicating great growth opportunity going forward.
Speaker 11: To begin, I invite Claudio Soto to give us an update on the macro scenario beginning on slide 4. Thank you.
Speaker 12: Thank you Emiliano.
Speaker 13: The economy has continued slowing down, although at a slower pace than expected.
Speaker 14: According to the latest figure of the central bank, GDP grew 2.7 percent in 2023, above our previous estimate of 2.25.
Speaker 15: Consumption has been more resilient than expected and investment has rebounded as postponed projects were resumed in second part of last year.
Speaker 16: Also, a weak peso has helped the external sector of the economy.
Speaker 17: Going forward, we forecast the economy will continue slowing down as financial conditions remain tight.
Speaker 18: While political uncertainty has moderated, it is still relatively high and will continue to continue with appreciation investments.
Speaker 19: On the other hand, the economy will benefit from the reopening of China, which has pushed at copper prices.
Speaker 20: All in all, we estimate the economy will contract between 1 and 1.5%.
Speaker 21: In 2024, we will see a recovery back to its trend.
Speaker 22: The labor market remains relatively weak and employment has been oscillating around 8% total employment is still below its pre-pandemic trend.
Speaker 23: This year, the unemployment rate may increase slightly as the economy moderates.
Speaker 24: The current account deficit, which was widening until the third quarter of last year, should start shrinking during the following month as domestic demand contracts and general trade improved.
Speaker 25: The pressure remained elevated but has shown some signs of slowing down.
Speaker 26: December CPA was in line with expectations after a negative surprise in October and a positive one in November .
Speaker 27: finishing the year with at 12.8% increase year-year.
Speaker 28: During the first quarter, CPI will continue increasing fast, in part due to seasonal factors.
Speaker 29: But from the second quarter onwards, we will see a moderation due to the slackness of the economy, the appreciation of the currency and the fall of your prices.
Speaker 30: As a result, we expect the CPI inflation will be running at 4.75% by the year 2020.
Speaker 31: The central bank concluded its hiking cycle with a monetary policy rate at 11.25 percent in October .
Speaker 32: We expect the board will begin an issue sighting during the second quarter as inflation mandrels.
Given the high level of the monetary policy rate, once they begin cutting, the board will proceed as a first piece.
As a result, we expect the monetary policy rate to finish the year between 6 and 6.5%.
The government position improved in 2022 amidst strong revenues and a sharp fall in expenditure.
All in all, the fiscal balance ended with a surplus of 1.1% of GDP, somewhat lower than what we were expecting.
Gross depth increased moderately up to 37 percent of GDP.
This year there will be a mild expenditure expansion with cross-depth climbing up to 39% of GDP. As a result, public finance will remain in good shape.
On slide 5 we have the details of two of the main reforms of the government, a tactful form and a pension reform.
So far, progress has been slow.
For them to advance in Congress, a political agreement must be done with the position, was a majority in the Senate.
Therefore, the discussion on these reforms will require certain compromises by the government.
We do not expect they are going to be approved anytime soon.
On the 4th of January of 2023, the new Fintech law became officially allowed.
It updates the relation of financial industry recognizing the existence of new business models based on technology.
According to the law, new technological players will be under the regulation perimeter of the CMF.
Also, the law regulates open finance, establishing that consumers are the owners of their financial self information.
Although there are pieces of regulation that are still due by the CMF, we consider this new law a step forward that opens different opportunities for the financial industry.
On slides 6 and 7, we have some details about the nucleotintrusion process, which should be finished by the end of this year.
This new process entails proposing a new constitution with a defined framework of main ideas.
The new text is expected to be ready by November 2023 and there will be a referendum with mandatory participation on December 17th, 2023 to accept or reject this new draft.
Thank you, Claudio. We will now move on to slide nine to begin discussing our positive client and business trends.
Here today the bank's net income totaled $809 billion, an increase of 3.8% compared to the same period last year.
With these results, our year-to-date return on our average equity reached 21.6 percent in line with our guidance.
Our net income to shareholders in the fourth quarter reached 102 billion, weaker than previous quarters and mainly due to lower NIAMs in the quarter as inflation decelerated and interest rates continued to rise.
As we show on slide 10, this was offset by very strong results from our business segment.
The net contribution from our business segment increased 19.7% year-to-date, with all segments presenting a significant rise in profitability.
It is important to note that the results from our client segments include the impact of inflation and the cost of our liquidity, and therefore present a clear view of the sustainable and long-term trends of our business.
Moving on to slide 11, the results of Stantander Corporation Investment Banking or CIV have been impressive during the year. Total net contribution from this segment increased 49.3% year over year, driven by an increase in all profit lines items.
net interest incomes was 49.1% year-over-year due to the increase in loans and a higher spread earned over deposits.
Also noteworthy was the year-on-year increase in treasury income of 44.4 percent and 19.8 in fees income. In line with this segment's focus on non-lending income.
Net contribution from the middle market increased 30.6 percent year over year with an increase in total revenues of 20.4 percent due to a 19 percent growth in net interest income as a result of a better loan and deposit spread and volume growth.
Additionally, commissions increase by 25% or 7% in line with the greater client activity with the bank.
On slide 12, we show the results from our largest segment, which is Rital Banklin.
which include the results from individuals and SMEs.
The net contribution from this segment increased 6.2% year over year.
The margin increased 9% year-over-year due to a better mix of funding and loan growth.
This in this segment strongly increased by 15.1% year-over-year, layered by card fees due to higher usage.
and increase customer base.
as well as speed generated by GEDNIP.
provisions increase 43.9% year-over-year mainly due to a normalization of asset quality of our retail loans after historically low levels of non-performing loans due to increasing liquidity of our clients during the pandemic.
Operating costs increase in a controlled manner by 3.2 percent year over year as the market continues its digital transformation generating greater operating efficiencies.
These positive results can be broken down to a single key factor, client growth. As can be observed on the left of this slide are active individual clients, that is clients that have a minimum average balance and interaction levels are growing 7.2% year over year.
and our Checking Account customers are growing at an impressive 13.5% year over year. SME client base is also evolving, probably, with active clients increasing 14.6%, Checking Account Clients are up 29.4%.
and loyal clients have grown 7.4% year over year. As we show on slide 13, the success of some tender lights among individuals is now being replicated in the SME market. This clearly demonstrates the versatility of this digital platform.
With minimum additional investments, life has opened a new segment of growth in the market that previously was unable to digitally open a checking account.
Not only is life growing quickly, it is also rapidly monetizing as we show on slide 13.
Total life clients increased 22% in 2022. With active clients increasing 30% and loyal clients growing 21% year over year.
The major innovations in 2022 were the expansion of the S&E market and the ability to open a US dollar checking account 100% easily for an additional fee.
Santander's Life's clients are also rapidly being monetized with gross income from Life Crimes increasing 44% year over year.
Demand deposit remained high at $931 million, surpassing by many times the amount clients have deposited in similar competing platforms.
The other important driver of our SME client base is GEDNET, as shown in slide 15.
GEDNED has already sold some 157,000 POS. 91% of GEDNED's clients are target clients and 99% of the POS are sold through the bank's distribution channels.
GATNET is currently processing 580 billion in monthly sales.
This product has been quick to monetize, generating 27 billion pesos in fees year to date.
During 2022, GEDNET launched e-commerce attracting some 8,500 business with some 5 billion pesos in transactions in the month of December . On slide 16, we show how we continue to innovate and evolve our brand solutions.
In the fourth quarter of 2022, we launched the Work Affairs Startup. This is an initiative that aims to offer an integrated solution to all the entrepreneurial needs, and especially to increase bank penetration, carrying out pilot programs with the bank, and even offering financing.
It is directed at companies that have three main characteristics. Firstly, for them to be in shading activities and presenting an accelerating growth. Secondly, the technology is part of the value proposal, and third, that the proposal will be scalable to a real problem.
Thanks to all these initiatives, we can see on slide 17 how we consistently continue to lead our main competitors in net promoter score. After a slight dip in our net promoter score at the beginning of the year, following some necessary changes implemented to improve cybersecurity protection, the NPS has rebounded to our digital platforms app. this year.
website, contact center, and work affair continue to be highly valued by our customers.
In 2032 we also fulfilled all of our banking targets as can be seen on slide 18 and are well on our way to fulfilling all of the goals we set for 2025.
On slide 19, we highlight some of our most recent achievements.
Once again, we received the top employer certificate for the fifth consecutive year. This positions us as one of the companies with base labor conditions in Chile.
Secondly, our ESG rating on behalf of SoSt Analytics was significantly upgraded. We improved our rating from 29.9 million risk to 15 low risk, reaching the best score among Chilean banks.
Thank you, Christian, for that excellent highlight of our strategy. We will now move on to the discussion of the balance sheet and results. Moving on to slide 21.
We start with loan growth, which grew 5.5% year over year, and remained flat in the quarter. During the quarter, loan growth was subdued mainly as a result of the translation loss produced by the 12% quarter on quarter appreciation of the Chilean peso against the dollar.
Approximately 20% of our commercial loans are denominated in foreign currency mainly dollars especially in the middle market segment.
The large corporate segment continued to grow by 3.4% Q&Q and 32% year over year due to various successful large loan operations and the fact that large companies continue seeking short term financing through corporate loans because of the fixed local fixed income market.
remains somewhat illiquid. Retail banking loans grew 1.8% Q&Q and 5.5% since December 2021. With loans to individuals increasing 11% year-over-year and 3% quarter-over-quarter, consumer loans increased 62 ANGEL generator jobs based on accped305.10 Arizona- ClinEBX tax
almost 5% quarter to quarter and 6% compared to the close of 2021.
This was driven by an increase of 23% in the year by Santander Consumer, our subsidiary that sells auto loans, and a 20.6% increase in credit cards.
During the pandemic, credit card loans decreased 7% as clients reduced large purchases such as travel and hotels which deals credit card loans.
At the same time, many clients paid off credit card debt with the liquidity of paying from government transfers and pension fund withdrawals.
In fourth quarter, 22, as household liquidity levels returned to normal and holiday travel resumed, credit card loans began to grow again. This trend will continue to be visible in 2023.
Origination of new mortgage loans has fallen as inflation and rates remain high. As for SMEs, the demand for new loans remains moderate after a strong increase in 2020 and 2021 for the FOGAPI programs.
Given above, SME's segment loan book decreased 5.7% to 2.2% and 20.6% your year as SME's????s redeployed for capital ????????st et there long enough that makes 3.3% off of revenue craziness
For 2023, despite negative GDP growth, we expect loans to grow in the mid-single-digit range.
Consumer loans will continue to be led by the rebound of credit card loans. SMEs will probably benefit from a new Volgapet program to be announced soon. At the same time, we expect similar growth rates as the average portfolio in our corporate segment.
On slide 22, we show the evolution of our funding.
Total deposits decreased 3.4% year-over-year and 4.3% quarter-on-quarter as the bank focuses on reducing funding costs.
The central bank continues to raise the monetary policy rate, which reached 11.25%, and the yield curve is sharply inverted. In order to control funding costs, we have been maintaining our market share and demand deposits, while replacing wholesale time deposits with longer term funding sources that today are much cheaper than time deposits.
Moving on to slide 23, we can see how the movements of volumes, rates, and inflation have been affecting our margins.
The UF variation continued to decrease from the highs of mid 2022 and reached 2.5% in the quarter. This was coupled with an increase in the average monetary policy rate. Both of these factors drove down the banks' name to 2.2% in the quarter and 3.3% for the full year.
As shown on this slide, this is mainly a phenomenon that affects our non-client name, or the net interest margin from our ALM activities, including the UF gap and our liquidity.
The client name, which is defined as the NAI from our business segment, over interest earning assets has and will remain stable in 2023.
On slide 24, we give further insight into our margins for this year.
where every 100 basis points decline in inflation are named falls on average by 20 basis points.
And for every 100 basis points rise in the average monetary policy rate are NIM followed by 30 basis points.
Our base case scenario for 2023 is an average monetary policy rate of 9.2 and a UF inflation for the full year of 5.3.
Under this base scenario, the bank's NIM in 2023 should reach 2.8%.
starting below this level in the first quarter of 2023, and rising back to levels of 3.6% by the end of this year.
Moving on to active quality on slide 25, the rise in the NPL ratio to 1.8% in the quarter is mainly related to household liquidity levels gradually returning to the post-economic levels and the softer economy. This has mainly affected clients who are already in paired pre-pandemic. The coverage of NPL
As of December reached 185% and has been no reversal of the voluntary provisions.
As we can see on slide 26, these overall positive asset quality indicators led to a cost of credit of 1% for the full year in line with our guidance.
for the year. During 2022, our regulator, the CMS, published the draft, the new standardized provisioning model for consumer loans.
We expect this new model to be implemented in the second half of 2023. Our initial estimate is an increase in provisions of between 100 and 150 billion pesos, mainly in our auto lending and credit card portfolios.
We are permitted to use voluntary provisions to comply with this new regulation.
During the fourth quarter, we saw cost of credit picking up, reaching 1.2%.
This was mainly due to specific clients in the middle market segment and construction sectors. Given the trends in our economic outlook for this year, we are updating our guidance for cost of credit for 2023 to 1.1 to 1.2%.
On slide 27 we move on to non net interest income revenue sources which continue showing exceptional growth trends. Feed income increased 16% year over year and 1.2% Q over Q driven by higher client activity, new products such as get net and the growth of our time base as previously described.
We expect these trends to continue in 2023.
As shown on slide 28, we can also see the bank's efforts to continue increasing productivity and to control costs. Many expenses increased 6.7% year over year and decreased 5.7% year over year.
will be low inflation trends. The bank continues ahead with its $260 million technology investment plan for the years 2022, 2024. And because of these investments, we're expecting costs to grow significantly below inflation levels in 2023.
As shown on slide 29, the bank continues with its process of optimizing the branch network.
This year we have close 12% of our branches and have opened 11 new work-a-phase. They're not only a major improvement in client experience, but are also more efficient.
As a result of these initiatives, coupled with our digital strategy, productivity is rising significantly.
with volumes per point of sale increase in 16.2% and volumes for employee increasing 8.5% Euro a year.
Moving on to slide 30, we observe an excellent evolution of our capital ratios. At the end of the fourth quarter, the bank reported a core equity, a CET1 ratio of 11.1%, up from 9.2% in December 2021.
Our total CHE1 increased 20.6% compared to a 0% rise in risk-weighted assets year-over-year.
Despite lower net income, falling rate and inflation expectations benefited OCI and equity and therefore both value growth has outstripped net income, a trend that should be also visible in 2023.
With its high capital level, we expect to maintain our historical payout of 60% over 2020 learners. This still requires final board and shareholders approval on April 2023. With this payout, our current dividend yield is close to 8%.
At slide 31, we will conclude with some guidance. Despite 2023 being a somewhat more challenging year on the macro front, we believe our strong client activities will continue expanding. Coupled with this, we will continue with our investment program, which focuses on digitization and automation.
We will continue investing to improve our leading MPS scores as well. We also expect client growth to remain robust as in 2022 led by Santa's dead light and GetNet.
In terms of long growth, we expect mid single-digit growth with a focus on all segments, and non-NII to expand by at least 15%.
NIMS should contract to 2.8, but with solid client NIMS. As the NPR comes down, we expect NIMS to rebound to 3.6 by year-end. Asset quality should deteriorate somewhat, but the cost of risk will remain at a manageable level of 1.1 to 1.2%.
Cost control will be a major focus and we expect low single digit expansion of cost.
Regarding capital, book value growth should continue and as we mentioned we currently have an attractive dividend yield.
In summary, we will start the year with ROEs in the low team.
As the year progresses, ROE should improve and for the full year we are guiding an ROE of 18%. With this I finish my presentation and we will gladly answer any questions you may have.
Thank you. We will now move to the question and answer section.
If you would like to ask a question, please press start to on your phone and wait to be prompted.
So our first question comes from Yuri Fernandez from JP Morgan. Please go ahead.
Hi guys, thank you for the presenter for asking questions. I have a first question regarding your ROE guidance, the 18% you are calling for 2023. And Robert is very clear the path, right, like a more challenging first half and ROE is improving the second half.
But when we look to the margin guidance that basically implies 50 degrees on your needs from 3.3 to 2.8, we have a hard time getting to the 18% for the full year because you have around 50 billion pesos, 50 trillion pesos on interest in any assets and these pressure margins.
It costs them 200 billion, 250 billion pesos on your NII. And with the other numbers like GNA, the things we have, it's hard to get to those 18%. So my question is, where is the source here, right? It's lower taxes, maybe higher fees, other than very good...
for
2022 or 3.3 for the full 2023 it will be 2.8. That's a 50 basis point so NII will will probably fall. So the good so that's the say the difficult part as we said before the ALM is...
is the main response, well for that, the client name should be relatively stable. As here, the key thing for NII is the velocity at which the central bank lowers monetary policy. On the one hand, we know that for that to happen in place, it comes down. That's kind of a headwind, but that's only a headwind in the very short term.
If that triggers a rapid decline in rates, the faster that goes down, the better. Okay, so today, think of this as more a play on rates falling than inflation is coming down. So the faster rates come down, the better it will be for outlook for NIMS, but given the base scenario, that's 2.8%.
Provision should grow a bit, but under control. And then from there on, we should have quite good news. Okay, so first of all, it's fees. Okay, fees we're expecting is that 15, 20% growth, the same, that includes fees and treasury. Okay, we continue to see. This is something we try to stress, but we'll continue with Kune in the beginning of our presentation.
individual checking your grounds I think believe by like 20. So everything that's product usage, get med, that's good news. And then there's cost. And when we talk about cost we're talking about personnel, administrative, depreciation, and other operating expenses.
and in other operating expenses, we should have, including those items, we should have a very, very low growth of cost. Obviously, we've talked about 2%. It could be even lower. So there's a... probably the difference in your model is other operating income and other operating costs.lam Cambodia
which we're going to see a big improvement. There, for example, we have...
lot of insurance, cyber costs. We did a lot this the 2022 to improve that so a lot of things are going to come down there as well. So that's going to be a big boost to the bottom line to get to the 18th.
Taxes, no taxes with lower inflation, we'll be paying like $16, $17. But overall everything that's not margin is going to leave, we feel confident with the 18% ROE.
No, that's super clear, Robert. So, Nien, maybe a little bit of cost of risk, the detractors and all the other lines helping you to have a better 2023. I have a second one regarding capital and by the way, congrats. I guess our capital position was under pressure. We saw 2021 had a lot of mark to mark.
equity shareholders actually suffering a little bit. But this was a good quarter for capital. So if you can explore a little bit more, what drove the RWAs down? I guess you comment on some derivatives strategy and also the mark to mark. So basically it's clear the message, right? You keep it a 60% payout on dividends, but could we see, you know, ongoing capital improvements and similar levels? Like what did the...
Again, explain a little bit the change and what should we wait ahead for your capital position. Thank you. Hello, Juli. Thank you for your question. So in the quarter basically the main source of risk-related assets, contraction, let's people soils the things that made...
is the standard model, the more basic approach to Basel III. So basically that penalizes the more sophisticated business as the one we have. We are the leaders in the derivatives market in China by far. So...
The bigger the book, the bigger the...
That is what it assets and that's without considering the real sensitivity or the real risk of the books. So basically what we have started in the fourth quarter and we plan to keep for this year, it's a big program of compression of positions of in basically netting down or netting down.
our inflation on hatches, I mean the fall in the inflation in the second part of the year and then the recent months also helped the market of our inflation on hatches. So, going forward, we are still like optimistic about our capital position, we still see some room in
efficiency in the risk of the asset coming from market risk. So that will be a tailwind for this year. Book value also, like doing well in this new scenario of inflation moderating, interest rate also going down. So going forward, we think that we're going to
Even with that, the CED-1 should be at 10.5 or higher, which would be like the highest CED-1 after dividend in the recent year.
We are optimistic going forward in terms of capital book value and resorted assets.
trend. That's a pretty clear. Thank you very much.
Thank you. Our next question comes from Carlos Gomez from HSBC. Please go ahead.
Hello, good morning. Thank you for taking my question. In the past, you have talked about have to provision more for that. Any changes in that and what is your expectation? are in Princo-Mula.
Going back to the initial question about the margin, I mean, you emphasize a lot that rates are going to come down and what the impact is going to have. What if rates stay up and, you know, they don't decline as you expect? Would that be positive or negative for you? And could you give us an order of magnitude? Thank you.
Thank you for your questions. In terms of the new provisioning for consumer loans, no change. We still are expecting an impact between 100 and 150 billion pesos in the Everdeen tests done, compared to this period. A person taking brand new software AP simple calls, or in this industry every single day if she did,
seen it now for the second half or maybe last quarter of this year, but no change so far in the impact we are foreseeing. And in terms of your question about the sensitivity to interrupt rates, definitely if the rates go down at a slower pace or it would be...
words for us and the opposite if they go down at the foster base and that's why we included the hit map we call it on the slide 24 where there you can have the different impacts at different inflation and monetary policy rates. I mean there you can see that in case we the monetary policy, the average monetary
say put in what you think the average monetary policy rate would be. We include this two axis chart basically because
Inflation definitely will also be different if rates are different. So that's why we think that it's important to have both sensitivity in the same chart to play if you are more on a hockish side, higher inflation and higher rates. What would happen? And if you are more on the...
the garbage side what would happen with lower inflation and lower rates.
Thank you very much and this is very clear and thank you very much for showing this slide. To what extent can you change this?
during the year. I mean this is your structural position presumably as of now. If you change your view, if you think rates are going to evolve in a different way, can you change this in the next two or three months or is this set for the rest of the year?
this is your structural position presumably as of now. If you change your view, if you think rates are going to evolve in a different way, can you change this in the next two or three months or is this set for the rest of the year?
I would say that the midpoint is the same for the name of the year.
It would be like around there, I mean, what we can change. And if you compare this chart to the one we showed last quarter, you will see that the sensitivity to inflation went down, because basically we reduced the UF gap. So we...
Now basically we kind of secured higher levels of inflation so now we have less risk to that. At the end managing this is a matter of what.
What projectory or features rate the market has implied in the prices because basically we can change this by by adapting the sensitivity by paying fixed rate or receiving fixed rates And basically today we see that what the market is implying it's close to our base case scenario
the market starts discounting a more hawkish or dovish scenario that make us, let's say, take a position there. But so far we expect to have this position at least for the first part of the year. And that's what a crayfish looks like no thought out of this4 market. No argument made, let's not over direct Uniball. Let's see if they're open to same price, probably one naked wing or you know, somebody saying why.
starts discounting a more hawkish or dovish scenario that makes us, let's say, take a position there. But so far we expect to have this position at least for the first part of the year. Thank you so much.
Thank you. Just a reminder, if you'd like to ask a question, please press star two. Our next question comes from Tito Lavada from Goldman Sachs. Please go ahead.
Hi, good morning. Thank you for the call and for taking my question. I guess a follow-up to UD's question on the ROE guidance, and sorry to ask on a little bit more short-term basis, but even getting to that low teens for next quarter, maybe if you can help us think, how do you think the interest rates will evolve? What do you expect?
rates to start to come down and also even the evolution a little bit on on the inflation because you know Team inflation should probably be lower in one cube a rate still not coming down So not not even sure how the margin would improve next quarter to get to that low Teen ROE particularly because this quarter you had the negative tax rate
As we said, the names in the fourth quarter are like 2.2. They should be like 2, 2.2 in the first quarter. At the same time, remember there's a lot of seasonality and cost in the first quarter, so that's going to help. But effectively, the ROE in the fourth quarter was in the...
in the 10% range. In the first quarter there's a lot of moving parts, but the margin is slightly lower, provisions should be stable or lower, fees more or less the same and costs are seasonably lower as well. Overall, mainly I think an observatory entry until the end of the year, at this point,
the first quarter and also there's what I was talking with Yudhi, I think cost is going to be a big difference. So in the end you end up having a very similar net income in the first quarter and then going on basically what we have is the seasonality of the rate.
And here, I think I'll turn it over briefly to cloud if you can mention that, and then I'll wrap it up.
In terms of inflation, in the first quarter we would have two things that are important to have in mind. First of all, there was a change in taxes on services that will impact the CPI in January . That would be transitory. There was a – there would be a hike in prices. The last month or so, you'd see a rise in market Blast.
due to this one-off and that will help with the UF. And then in March we usually have high inflation in Chile because of seasonal – NFL
factors. So, you know, we have a first quarter with a relatively high CTI. Then the decision for cutting rate by the central bank will be done. We expect during the second quarter there are three meetings in the second quarter, so it could be in any of those meetings.
But at that moment, we expect in Fesil we'll be going down in a very clear trend. And that will help the central bank to cut a rate in a very rapid fashion. You have to have in mind that the monetary policy rate in Chile is...
particularly high. If you compare Pius cyclists for trades or if you compare to other countries, the tightening in China was very aggressive and therefore we expect also the cutting phase with the very big sensual, which is by a very large number of PMHS diamonds with this combined
Yeah, so basically it is all like.
first quarter names around two and then as we follow what we expect to be the base scenario and rates and inflation. Second quarter inflation, UF inflation is always season a little bit higher but basically in you know in names of like 2.6 2.7 in the second quarter third quarter 2.9
fourth quarter 3.6 more or less that depends on your interest on acid earning growth as well. Okay so we are seeing some volume growth as we said 5-6 percent overall you get a name of like 2.8 for the for the for the for the full year and as we said before this coupled with you know very good non-NII
risk rising a bit, but it also a lot of things on the cost. So this gives you an idea of the sensitivity we talked about, that it's quite sensitive to the fall and the monetary policy and there's a big difference between first quarter, names and fourth quarter.
Okay. Another thing that there's also a little detail, but something I wanted to mention that we still have.
a significant amount of liquidity held in the held to maturity portfolio. And that all comes due in 2024. So basically there we have, remember that's the collateral against the central bank lines. We took cheap funding from the central bank. We had a hold collateral. Some of that is held to collect. This also doesn't affect our, our volatility of equity.
in 2024, we should also have a jump in and in, even with inflation coming down. And given that, we finished the FSEC program, our Health to Collect portfolio should be reprised at a higher rate. Basically in 2024, once again, it's quite far away.
kind of travel through this first half, okay? But from then on as a central bank a Loer's rates and obviously in 2024 when the when the central bank financing comes due a rates should definitely have an upward trend. Sorry nymphs an upward trend Great thanks Robert and Claudio is very clear. Just one quick follow up, I guess Should we also expect a negative tax rate in one queue like we saw this quarter or? Okay, so regarding the negative tax rate basically the turnover some make up.
taxes are complicated but a simple answer. Even though the, remember that for tax purposes in Chile you still do inflation accounting not in our financial books but in our tax books everyone, every company, every person you still do tax accounting. So our equity continues to grow because of inflation. Okay, so basically that monetary correction.
of capital was larger than let's say net income. So that's why you have a reversal of tax in the fourth quarter. And
It should be so very low because we're still having some inflation and our book value has been growing. As you saw, as we mentioned before, our book value for different reasons has been expanding at a faster pace and the book value is readjusted for tax purposes.
by price level restatement. So, said that our tax rate should kind of have a similar trend as ROE.
We're starting out low and then you know paying much higher tax. I don't know if it'll be negative but you know the tax rate should be you know very low single digits or low teens and then slowly rising as a year and finishing in the year on an average of like 17%.
But once again it should be relatively steep like the ROE.
it should be relatively steep like the ROE. Ok, perfect. That's very clear, robert. Thank you.
Thank you. So, next question comes from Anand from White Oak Capital. Please go ahead.
Thank you for the opportunity. Two questions from my end.
won the 260 million dollar Capex
Can you give us a?
Some details around it. What is it about and
in which quarters do you
I intend to spend this.
Sorry, you're asking about our investments?
Yeah, the 260 million.
Okay, other investments that you're talking about what is that?
Okay, so basically we usually do an investment plan.
that expands three years. So we're in the middle of our $260 million investment plan that we announced.
in 2022, sorry, for 2022 to 2024, it's roughly equal per year. And that's just.
digital, okay? Obviously there's other investments and fix that, whatever, but basically that entails the transformation of the branch work, automation, everything that's the new robots, taking a lot of the systems and products to the cloud. So basically it's a bit overhauled.
in line with the digital transformation that a lot of companies and banks are doing worldwide. For us it's very important because obviously with margins coming down we're cost conscious. We're doing a lot to control costs but the idea here is not to touch the technological part.
cut costs today and then have to reinvest or invest more in the future. So basically we have been reducing branches, headcount has been coming down a bit, there's other costs, initiatives, but the whole investment plan which is transformation of the branch office, the front end, transformation of the back end operations, which means a lot of automization and digitization.
and other technological improvements is what is covered by that plan, which is $260 million total and roughly one-third per year. And then maybe by the end of this year, we'll announce a new plan for the next three years. Okay. And from the corporate tax perspective.
given the current changes in the constitution being contemplated.
Is it fair to expect that this corporate tax rate of 17 would not continue and it should rise in the future? by a certain percentage point and if yes, then what if the
expectation you have for the increase in corporate tax rate.
Okay, so in Chile the corporate tax rate is $27 in your tax book. So we're only paying $27 in our tax account, but when you look at it our financial and remember that for tax accounting you have to invest for inflation account and basically what that means for banks is that
your equity is increased by inflation every year. So if you have equity of 100, 10% inflation at the end of the year, your equity in your tax books goes to 110. That additional 10 is the tax loss in your tax books. So that's why the effective tax rate is lower than the statutory tax rate.
with inflation around three to four percent, our effective tax rate should be around 21 percent.
And that should be the normal in line with the 27% corporate tax rate plus the monetary price level restayment of equity. Okay? And in terms of the discussion about the constitution or the tax reform, it is not under discussion and increase in the corporate.
tax rate. I mean the discussion goes in other direction more on the on the personnel and the wealth tax and all that but no no discussion so far on increasing the corporate tax rate.
Sure, thank you and all the best.
Sure, thank you and all the best. Thank you.
Thank you. So we have one more question from Marielle Abreu from T-Rote Price. Please go ahead.
Hi, thank you for the time. I have two questions. If you can remind us what are your refinancing needs for this year and next.
And how do you plan to cover for those?
Are liquidity conditions still pretty favorable overall? I don't know if you can comment about that. The second question is on asset quality. I'm looking at – Are some asset
your non-performing loans and it almost doubled for consumer. The increase was also pretty meaningful even for commercial mortgages. Is that all explained by the change in liquidity conditions or is there something else?
So, we are like – like, comfortable with that, and we plan basically to use the same mix we are – general, thaw pop.
We have been using lately between deposits coming from clients and institutional investors, some of them, some of the funding lines from banks abroad and I'm very active on the...
on the capital markets, domestically and abroad, I mean more on the private placement side, even though this last few...
days, weeks, I mean the public capital markets abroad have improved like dramatically and so now even public transactions in the US market and other public markets could be an option on the Layered
on the funding needs for this year. We are quite comfortable and about the liquidity conditions the capital market, the domestic capital market is...
in better shape than just to be in the middle of the pension fund withdrawals and all that tension the market had. Now the situation is better even though the total sizes of the transactions are not the ones we had in the best moment of the market, but the situation is...
But public markets abroad also are improving and that gives us much more flexibility either to tap the domestic or international markets for our funding needs which are below the average on a yearly basis. And Bob, you want to comment on asset quality? Yeah. So asset quality regarding consumer lending, that's really the rebound at post-EECE.
low and clearly this is a direct result of normalizing liquidity and the levels of last year were extremely low. The good news is that we still have very high coverage. We haven't touched the voluntary provisions and for good or for worse, we're going to add on $120 billion, $150 billion more of provisions and consumer obviously.
redirecting voluntary is not going to have an effect on the P&L, but the consumer coverage is going to be under the year at very high.
Morrigades, I think it's very similar. Yeah, even I think mortgage, there is some impact of the higher inflation and rate, especially higher inflation.
We always talk about the good news on margins, but obviously higher inflation results in higher mortgage payments and there was a little bit of impact there. Once again, still very low and we have much higher coverage and the value of collateral.
It's still quite good even though it's done very conservatively. In commercial loans, a bit the same, but in commercial loans there has been some sectors with a little more weakness. And as we said in the presentation and in the management commentary, I would say particularly in the core of the construction sector.
without being not even near a crisis, there has been some weakness in the construction sector and that drove up provisions, especially in the middle market. In the middle market, it's a broad segment but it includes everything that's construction and real estate. The real estate developers have been very, very, I'd say healthy. But when you have very little construction going on with high rates, obviously.
construction companies of all sectors are probably the ones that are suffering the most in Chile. We have like 1% of our loan book, I believe in construction. So that will be a weakness probably for a while until rates go down and until real estate developers begin their projects again.
So basically, and then there's the segments like, you know, restaurants, all of that, those are coming out of the pandemic, getting better but still weak. And then with the recession, you know, it's kind of hard to go through a pandemic and now a recession. So some of those sectors, which once again, they're like, you know.
1% of the loan book, but there there should be some weakness as the economy slow down.
So therefore, that's why we finished the year with a cost of credit of 1%, but in the last quarter 1.2 and
We think for this year the average will be 1.1, 1.2. So once again arise but still we have a lot of coverage, we haven't touched our voluntary provisions. So we think that 1.1, 1.2 is quite realistic.
Thank you very much.
Thank you. We have a question from Daniel Morar de la at Critical Capital. Please go ahead.
Hi, good morning and thank you for the presentation. I have just one question and it's regarding derivatives. What is the strategy regarding derivatives? For example, if we see the first three quarters of 2022 when you see the accounting hedge of interest rate risk.
it represents only 48% of the total interest expense without considering their adjustment net interest income.
So, considering also that the reivatives decrease from 17 trillion Chilean pesos to 11 in this quarter, what will be the effect of these on margins going forward? What will be the strategy for derivatives? What will be the effect of the decreasing derivatives for margins going forward?
the balance. What is the biggest is what we do with clients. Okay? A client needs a forward, one interest rate, 12 and that is all managed with him.
with advanced risk metrics, et cetera. And those are basically matched on the asset liability. But given that we're a big bank where a lot of clients come to ask for protection, especially against unique social issuancelightic risk caveat.
against FX movements. So our derivatives and we'll do what Emiliano said before in Chile, the accounting for derivatives.
Basically, you have the asset and liability, okay, and there isn't much netting, okay? So basically, when the Chilean peso depreciated, that inflates the asset and liability of our derivative volumes, but the net doesn't really change, okay? So the big growth you saw in the derivatives as a percentage of assets and liabilities was because
as a bank that does a lot of forward derivatives, especially with clients and these type of things, the depreciation of the peso leads to an inflation of that volume, absent liability, and then when the peso appreciates, that comes down, okay? And also the compression we have been performing in order to net that out and to reduce the decrease in business.
So I just bow with a some moment, I think we're having one or two technical difficulties.
Please bear with us just a moment we've lost the host but we're just trying to recap now. Thank you.
Thank you for your patience. If you just hold on for a few more minutes, we're just reconnecting the host. Thank you.
Apologies for the delay, we're still trying to reconnect the host.
you can please continue to be patient or try and reconnect them now. Thank you.
So, there you go.
Where's the quot?
Okay, sorry I connected, I was really inspired but now I don't know where I left off. So basically I was talking about when the TESO appreciates the volume, mass, and the reliability of derivatives fault.
Do you know if anyone tell me where I left off?
I'll just summarize it up.
And then we have the UF gap. So we control the UF gap using cashflow hedges and those are the asset is in mark to market withdrawn mortgages, but the derivative is against equity. Okay, so that explains during 2022, why part of the year we had a loss in OCI because as inflation expectations went up.
that produces a loss. But as inflation expectations go down even though there's an impact on margins, the book value grows. So there's another reason for book value growth because of these cash flow hedges.
Basically, and that's always going to be that way, but as long as long-term inflation expectations remain anchored with the central bank, what the central bank wants, that shouldn't be a noise. And you have big sharp turns in inflation expectations.
And then there's a third type of derivative, which is a derivative we use in order because as remember we always talk about where long inflation and we're also short liability sensitivity to rates. Part of that sensitivity to short term rates is also done through hedging. Okay, but those type of hedges...
are not recognized against equity, the cost of those hedges or those swaps are recognized in net interest income, both the cost of that and the mark to market.
So when you look at our NII, you're going to see that last year, 2022, we had a big increase in what is inflation because we increased the inflation gap. Well, we also as a policy, we go long inflation, but we don't like to be on both sides of the equation. We're going to go long inflation and long rates because...
If inflation goes down, rates usually go down, maybe not at the same moment, okay? But our biggest fear here is that if inflation goes down, rates will go down. So basically, through what we have today is a situation where we see that inflation is going down and therefore rates should begin to go down, okay?
therefore this year if rates begin to go down not only will you have a decrease in funding costs but also that increase in the value of that of that of those swaps which is also included in NII will also start to reverse. Okay so long story short with inflation and rates coming down you're going to see
an improvement in the book value because of the OCI and you're going to see an improvement in margins.
in the book value because of the OCI and you're going to see an improvement in margins. I don't know if that was clear or not.
Yes, perfect, very clear, thank you so much. Thank you so much for the explanation. Thank you. So we have a question from Alonso Aramburu from BTG Pacdoual. Please go ahead. Hi, I'm Alonso Aramburu from BTG Pacdoual.
Yes, hi, can you hear me? Yes. Yes, okay, thanks. Yeah, I wanted to follow up on the return on equity. Clearly, it's going to be lower in the first half of the year, increasing in the second half. For you to get to 18%, you probably need to be closer to 20% towards the second half of the year. And you're talking about potentially margins being even higher in 2024. So.
My question is, when you look at your sustainable ROE potentially in a mid-cycle situation with rates, let's say, around four or five of normalized inflation, should we think that your sustainable ROE is now above 80 percent? When this trend and this momentum 2024 looks like it would be probably closer to 20 percent.
Okay. Yeah.
Basically, we've always stated that the long-term ROE is 17-19% because it's always hard to tell the future now.
But basically as we said, if we go back to normal rate and inflation with margins going back to their historical standards,
you know, what we don't know is things like unexpected legislation or things like that, okay, or risk is going to be, but you know, if everything goes back to normal, we don't have any like surprises, a 19% ROE in the long term is absolutely feasible, okay. We keep the range 17-19 to take an account of unknowns, but clearly, you know...
going back to normal levels of inflation and rates and if our strategy continues to be successful, 19% ROE, the high end of that range is clearly absolutely feasible for the long.
to normal levels of inflation and rates and if our strategy continues to be successful, 19 percent ROEs, the high end of that range is clearly absolutely feasible for the long term. Thank you.
Thank you. We have a follow-up question from Anand from Whitehead Capital. Anand, please go ahead. Thank you for the opportunity. Three questions.
The credit cost for the full year, the guidance is 1.1 to 1.2
In terms of quarterly, do we have any expectation of whether it will be like frontloaded or backloaded? That is question one.
Okay, it should be front-loaded, maybe second and third, but as I said, this has a lot to do with the development of the economy. So as we're seeing the weaker economy now and then picking up at the end of the year, sometimes there's lags in asset quality, but I would say that it's going to be probably higher in the beginning of the year coming down towards the end.
So basically, as we said, we 1.2.
maybe a little bit higher in the beginning and then going down to one, 1.1, okay? So it doesn't change too much like the margins, for example.
Perfect. Secondly, when you were answering the previous question on derivatives, there was an explanation about three different aspects. First was about the line predicted derivative, the last one was about.
our balance sheet we are long inflation and short. So in the middle you explained about the US.
If possible can you explain it once, I couldn't just ask.
If possible, can you explain it once?
Chilean banks are very plain vanilla, but we have this special thing called the UF, which is the currency, it's basically inflation-linked vessels. And the bank, by the nature, most long-term loans in Chile are indexed to inflation. As a result, since banks usually are taking deposits, which in Chile are either non-interest bearing or tying deposits and tying deposits.
tend to be a stable source of funding but very short contractually. So think of it this way, we're capturing nominal pesos and we're lending a US. So we're lending inflation-length and we're mainly capturing pesos that are not inflation-length and this produces the inflation gap.
Okay, and if we do nothing, the inflation gap goes very, very high and that would indicate the bank would be taking on too much, too much interest rate risk and so we have a cap. We put a cap on how large the inflation gap could be.
In order to control that gap, you can issue inflation-linked bonds, which we do, but there's not enough in the Chilean market. So the other way to control the inflation gap is through the derivatives. And those are the derivatives that...
We do under cash flow hedging and according under so we're basically you do is is you take a Bundle of mortgages and you take a derivative and we basically lower we lower that or we control the uf gap Okay, so it's very it's it's it's cheap subreddits bit. You take a derivative in return because you can keep doing some thing job
It's very efficient, basically. It's very well documented. But since that is technically defined as a cash flow hedge, that cash flow hedge by accounting rules everywhere under IFRS has to go against equity to vote. So if we did a bond, you would have the asset and abilities.
matched and you would have no mark to market. If you don't use a bond and you have to use derivatives, the accounting forces you not to mark to market the asset but the derivative. And that's the part that goes under equity. Going a little bit further, remember that under Basel III, those cash flow hedges don't go under CET1.
So as we phase in CET1, these cash flow hedges will have no impact on capital, but today in Chile we're not there yet in terms of the phasing in. So this impacts capital and impacts CET1 even though later on the CET1 will not be impacted by these cash flow hedges. So as inflation expectations come down, we should see that impact of these derivatives.
fall or have less impact than capital and under Basel III in the future this will have zero impact either positive or negative. I don't know if that makes it more clear or not.
No, that's perfectly clear. Many thanks. And the last question is, this derivative of these three varieties are a reasonable part of overall operation. From the counterparty risk perspective,
How do we get confidence that the counterparties are good enough to kind of honor this? So can we give us a sense of who are the counterparties, are these international investment banks, central bank in some case or domestic corporate? So how do we get confidence that these derivatives will be honoured?
if there is excessive volatility. Yeah, so. Hello, can you hear me? Yeah, yeah I can hear. So the big chunk of the loan book, because as Robert said, we have this activity with clients with what are basically.
The counterpart is one of our clients, either corporate, sometimes SME, sometimes big corporates. Depending on the profile of the client and the sophistication of the clients, some of them do have collateral agreements that basically have like daily permission and posting of
collateral for the precision. And in that sense, basically we assess the
equivalent credit risk of the reutives as a loan to the client. So that is part of our credit risk management with clients. I mean, some of them use their lines with the reutives. And if we aren't alone, maybe we don't have a space for...
for the derivatives and the other will run. So, it's just on the client basis, it's just part of the great exposure management we do with any client and derivatives, it's just another product that we factor in in that exposure. And then, when we, let's say, um...
We hedge or we go to the market to hedge that exposure to clients. There we, the counterpart are basically banks. I mean, either domestic or international banks, depending on the product for a special swap. Sometimes it's a local bank and for a dollar swap, usually it's...
an international counterpart but it's there we have all of them with collateral agreements with CSAs on with daily revision and daily market and we'll say either cash or very high quality collateral.
when you have bilateral trading and then you have a significant part of the devoration through clearing houses like SCH or CME and and even we have a comder which is the the local TCF here in
From the credit exposure point of view, the derivatives portfolio is quite secure because it's either collateralized on a daily basis or managed as any other exposure to clients within our risk management policies.
Thank you. Just one follow-up. We have in our financial statements when we publish them from the full year, but...
We always include a table that shows the derivatives and has some liabilities which won't have the threshold and the collateral and the big majority do daily margin calls. So that's a really good...
So basically we put that because we want to make sure that people feel comfortable that you know this is this is this is
Correctly, not sure I have a follow-up if I may want it.
Yeah, yeah, yeah, probably. Yeah, so of the overall derivative book how much is exchange traded versus
Yeah, yeah, yeah, absolutely. Yeah, so, of the overall derivative book, how much is exchange traded versus, you know, Balacra?
I don't have the number here in mind. But I would say that 80% or more has a daily daily post-imic collateral and CSA. That's in that note I was talking about. That's important.
We have also daily market calls. The difference is if you are doing it on a cleaner house or you are doing it on a capital basis, but even bilaterals are highly collateralized. Yes, threshold zero. Basically every day.
So yeah, that portfolio, especially the client, we have no trouble. There's a lot of moving parts, but.
So yeah, that portfolio, especially the client, we have no trouble. There's a lot of moving parts, but basically the client business is...
The trend there is to go to more clearly, centrally clear the derivatives. Sure, sure. And lastly, from a capital consumption perspective, all these derivative assets on the balance sheet, what percentage of capital is consumed by these or what is the risk-aided asset that comes from these derivative assets? I mean the total exposure for market risk in our case is around like 15-17% of the risk-aided asset, which is large but again, because we are under the...
the standard approach on the Basel III. So, if you look at our market risk exposure under the European Basel III version, which is the one we report to our company, our risk-related assets for market risk are like 1.4.
what we see here in Chile. So if you look at our risk weighted assets on the Chilean version, market rates represent 15-20% of the risk weighted assets. But if you see that same picture under the European version that allows the use of these thermal models that are the ones we use.
to manage our derivative business. That goes to one-fourth basically, and four or five percent of the ratio of gas. Thank you very much. You are very patient and you are very comprehensive. All the best.
Okay, all the best, but do you? Okay, so, well, yeah, we, I think we'll conclude here.
If anyone has more questions or comments, please contact us. Thank you very much everyone and talk to you soon.
That concludes the call for today. Thank you and have a nice day.
That concludes the call for today. Thank you and have a nice day.