Banco Santander-Chile's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.25.13 | About: Banco Santander-Chile (BSAC)

Banco Santander-Chile (NYSE:BSAC)

Q3 2013 Earnings Call

October 25, 2013 11:00 AM ET

Executives

Raimundo Monge – Director, Strategic Planning

Robert Moreno – Manager, IR

Analysts

Thiago Batista – Itaú BBA

Tito Labarta – Deutsche Bank

José Barria – Bank of America/Merrill Lynch

Saul Martínez – JP Morgan

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter 2013 Banco Santander Chile Earnings Conference Call. My name is Towanda and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to, Raimundo Monge, Director of Strategic Planning. Please proceed, sir.

Raimundo Monge

Thank you, very much and good morning to all of you, ladies and gentlemen. Welcome to Banco Santander Chile’s third quarter 2012 results conference call. My name Raimundo Monge, I’m the Director of Strategic Planning of the Bank and I’m joined today by Robert Moreno, Manager of Investor Relations. Thank you for attending today’s conference call, in which we will discuss our performance in 3Q of ‘13. Following the webcast presentation, we will be happy to answer your questions. Before we get into more details regarding our results, we would briefly give our latest update on the outlook for the Chilean economy in 2013 and 2014. We continue to be positive in the performance of the economy, but we have adjusted downwards our growth expectations for 2013 and 2014, due to lower growth of investments. We expect GDP growth to be around 4.2% up to 4.4% this year and to be close to 4% next year.

As expected, the central bank has begun lowering interest rates, cutting them 25 basis points in October. We expect one or two more rate cuts of about 25 basis points in 2014. Inflation also as expected has become to rebound this quarter and reach 1%. For 2014, we expect U.S. inflation to be closer to 3%. Loan and deposit growth has also been following the recent economic trends. Loan growth accelerated slightly in the quarter as consumer spending remains strong, but we expect this to slow down in 2014. Corporate lending, also accelerate as companies look to the local market for financial need as external sources for loans became more expensive. For 2014, we expect loan growth to be closer to 10% for the financial system as a whole. Now we will review how the Bank continues to move forward in its strategic objective.

During the quarter, the Bank show important advances in all its strategic objectives. We have seen throughout 2013 an acceleration of our loan growth, core deposit growth and more recently, client based growth. All of these have been fueled by the important transformation we are implementing in our retail banking business, led by the Bank’s customer relationship management platform, or CRM and lower cost credit tools. We believe, we are ahead of the rest of financial [indiscernible] in making the necessary changes in our business model and processes, that should allow us to have a bit of performance that our main peers in a slightly more challenging economic, regulatory and competitive environment. As far as these transformation projects, in 2012, we launched a new CRM that gladly [ph] has been showing positive results. Today, 100% of our branch employees are using these platforms. The results are encouraging.

For example, those employees who are heavy users of CRM tools and capabilities are currently granting 60% more consumer loans, both in terms of number of operations and volumes, than those account offices that are still low users of CRM. The same issue [ph] for checking accounts where intensive users are opening 60% more, banking – checking accounts than loan users. At the same time, the clients being brought are less risky but we still have [indiscernible]. These commercial activity increases are starting to be visible in different volume growth rate. For example, in after income segment, total loans are growing 12% year-on-year, despite our lack of focus on mortgages and deposits are at 26% year-on-year.

Apart from the CRM, the launching of the Santander select business models has been well received by clients. These platforms should be the cornerstone of our growth in high income banking segments going forward. The transformation project is also beginning to produce positive results and quality of service and client satisfaction, which is our second strategic objective. The number of clients entering the Bank has nearly doubled, since the beginning of the year. We have also reduced client churn rate. As a result, this client growth, which is the first quarter average close to zero, has risen to approximately 25,000 clients per month by the end of 3Q of 2013. These should lead to about 7% to 8% client based growth in 2014 and should be a key driver in the growth of fees going forward.

Finally, as part of our third strategic goal, managing risks conservatively, our different risk metrics are rolling out as planned. Consumer loan, assets quality has reduced again in the quarter. Consumer non-performing loans decreased 111% Q-on-Q and 25.6% year-on-year. The coverage of non-performing loans reached 339% in the third quarter. At the same time, the amount of repair consumer loans has [indiscernible] favorably. The ratio of impaired consumer loans to total consumer loans reached 10.3% as of September 2013 compared to 13.1% as of September 2012. These tend to be a leading indicator for the evolution of future charge-offs in this product. The recollection efforts led to an important in consumer loan loss recoveries. These increased 80.7% in 2013. This should be another driver of our profitability going forward.

Our loan [ph] business activities in the South are also starting to reflect this improvement. In the 3Q of ‘13, total loans increased 2.8% Q-on-Q and annualized rate of 11% and close to 10% year-on-year in line with our SMEs. In the quarter, the loan growth remained strong in the market the Bank is targeting, high income individual, small and middle priced enterprises and middle market of companies. Loans in these combined markets increased 3.1% Q-on-Q and 14.4% year-on-year. By sub-segment, loan to high income individuals led growth and increased 3.7% Q-on-Q and 12.4% year-on-year. This is in line with the Bank’s strategy of expanding loan volumes selectively and with our relentless focus on the strength of net of provisions. The evolution of our funding base was also positive in the third quarter.

Total deposit grew 2.3% Q-on-Q and 6.1% year-on-year. In the quarter, the Bank’s funded strategy continue to be focused on increasing core deposits while lowering deposit for more expensive short term in additional sources. Core deposits expanded 4.2% Q-on-Q and 18% year-on-year. Among core deposits, the bulk of growth came from individuals. These deposit increased 3.5% Q-on-Q and 21.8% year-on-year. Core deposits now represent 85% of the Bank’s total deposit base. It is important to note that as the central bank continues to cut interest rates, our focus on core deposits should help support net interest margins. Core deposit tends to be cheaper than institutional deposits and generally have a shorter contractual ratio. Therefore, as rates decline, our interest bearing liabilities will reply [ph] quicker than our interest earning assets.

The Bank’s margin are also beginning to benefit from the Bank’s strategy. In the third quarter, net interest income increased 15.7% Q-on-Q and 20.5% year-on-year. Loan growth, a better funding mix and high inflation rates drove this rise in the interest income. The net interest margin NIM in 3Q13 reached 5.3%, compared to 4.7% in both 2Q ‘13 and 3Q ‘12. The volatility of our total net interest margin and income is mainly due to the quarterly inflation – fluctuations [ph] of inflation. The 3Q13, the variation of the Unidad de Fomento, an inflation indexed of currency unit, was 1% compared to negative 0.1% in the 2Q13 and negative 0.2% in the 3Q of ‘12. The Bank has more assets than liability related to inflation and as a result, margins have a positive sensitivity to variations in inflation. The gap between assets and liabilities index with the UF, average approximately CH$3.4 trillion in 3Q ‘13. This implies that 100 basis point change in inflation, our net interest income increases or decreases by ‘13 or CH$1 billion, all other factors being equal.

Client net interest margin, defined as client net interest income divided by average loans, reached 5.6% in 3Q decreasing 20 basis points from previous quarters. These lower client margins was mainly due to the higher growth of corporate loans and lower growth in the low ends of the consumer market. Nevertheless, as it has been mentioned in previous call, our key goal at the time is to gradually achieve a higher client margin, net of provision expense, even though this could result in lower gross client margin. In consumer lending for example, gross spreads are down 190 basis points in the last year, but spreads net of provision expense, have increased 60 basis points in the same period. For the remainder of 2013 and 2014, the evolution of margins should reflect various factors; first, we expect the net inflations to normalize at a constant [ph] rate of approximately 0.7% 0.8% per quarter with seasonal inflation. In addition, the central bank reduced interest rates by 25 basis points to 4.75. As the central bank continues to cut rate, our focus on core deposits should sell [indiscernible] retail margins since our liabilities price factors therefore increasing our margins.

The stronger operating trends we have in this slide were partially offset by the reduction in fees which are still being affected by changes in reparations. The good news is that, as we just showed, the client base and commercial activities are all trading upwards, which we believe will lead to fee growth in 2014. The added accounts and balancing effects has been a 17% drop Q-on-Q in the amount of financial reflections net early due to lower margin volatility. All of the above, resulting in operating profits increasing 7.8% Q-on-Q and 13.6% year-on-year, which is the highest level in the last eight quarters. The Bank’s non-performing loans ratio fell from 3.1% in the 2Q of ‘13 to 3% in the 3Q of ‘13 and the risk index was stable at 2.9%. Total coverage of non-performing loans in 3Q ‘13 reached 94.8% compared to 91.3% in the 2Q and 98.3% in the third quarter of 2012.

Despite these positive trends, net provision of loan loss in the quarters increased 11.3% Q-on-Q while decreasing 19.2% year-on-year. At the same time, cost of credit increased 10 basis points reaching 1.9% in the 3Q of ‘13. The rise in provision expense was mainly due to one-time events in commercial lending. During the quarter, the Bank lowered the risk rating of various clients in the middle market segment, which signifies approximately CH$4 billion higher provisions. This was not effective statistical phenomenon, but occurred among clients in various sectors. The second driving force was stronger loan growth led to higher loan loss provisions as the Bank turned up provision in recognized provisions once the loan is granted. Costs are also rolling as planned. Operating expenses were flat Q-on-Q as the Bank continues to wrap up its investment program in the transformation projects. The 10.9% year-on-year increasing of the interest expenses was mainly due to high investment technology and systems and higher client service cost in retail banking.

As a consequence, the efficiency ratio reached 39.8% in 3Q ‘13 compared to 42.5% in 2Q ‘13 and 41.9% in 3Q ‘12. Despite a larger loss in the other income and expenses line compared to 2Q ‘13 and 3Q ‘12, net income attributable to shareholders totaled CH$101 billion in the third quarter increasing 17.8% compared to the second quarter ‘13. These resulted in our ROE close to 19% in the quarter. In summary, the Chilean economy we believe is in good health with a moderate slowdown of provision. On the other hand, a lower rate environment and an uptick in inflation are helping to boost profitability. Loan growth and asset quality trends remain positive. The funding mix continue to improve and core deposit growth has been solid. Net interest margin rebounded with higher inflation. Asset quality trends are encouraging and core growth was flat. Fees are a trending [ph] matter that the positive evolution of our client base should boost the growth in 2013. That is why we believe the Bank’s dividend outlook is solid, as the transformation process should help to support our growth and efficiency going forward.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Your first question comes from the line of Thiago Batista with Itaú BBA. Please proceed.

Thiago Batista – Itaú BBA

Hi Raimundo and Robert. Thanks for the opportunity. I have just two questions, the first one regarding the impact of reduction of [indiscernible] rate. I know that the response Chile but could you give us some additional details or some additional color on the impact of this reduction in the [indiscernible] rate? This is the first question. The second question about the ROE, during the last conference call, your comments that ROE will probably be around 20% in the medium term. When you compare with 3Q of 18.6%, what you believe that your main drivers of this increase in profitability? Would it be lower provisions, better efficiency, higher fees, what do you believe will be the main driver of these increases in profitability?

Raimundo Monge

Okay. In terms of the impact of lower rates, Robert?

Robert Moreno

Okay. Basically [indiscernible] it’s very simple clearly roughly 100 basis points fall in the short term interest rate in a period of about one year inflation where the impact was immediate. It takes longer, these things reprise the liabilities reprise. The benefit for net interest income is roughly around $50 million $60 million in the four months period okay? If it falls 100 basis points in an average in a year the impact is roughly $50 to $60 million for full year.

Raimundo Monge

Then in terms of ROE well, we still believe that the average of seven eight quarters we kind of feel our ROE is approaching the 20%. And the main important there would be two or three number one, technically provisions should trend down as a proportion of loans because we are coming from a normally high period of provision expense, due to the different changes in the market conditions. And secondly because we’ve been moving upwards in terms of the growing factor in the lower risk categories which should have an impact. Remember that, as we mentioned in the call, our target is to increase our net interest margin asset provisions. A process that is starting to get very clear in consumer lending and we expect should be clear in loans and commercial lending going forward.

The second driving force is volume. We’ve been growing for some time in the target markets at rates of 13% 14% and we think it can be sustained in 2014. And in terms of total growth of lending which includes apart from the target segments mortgages and lending to large corporations and lending to the lower end of the consumer market, dependent on the prices that we see in the market. But we are today in line with the rest of the market and now expectations for 2014 is not only to pay our market share but increasing in those segments that we’re targeting the most. And the third driving force would be fee income because it has been very sluggish and actually we have been reducing our total fee income impart due to regulations, impart due to that we are delineating fees that can be perceived as commercial for the standpoint. Remember when you’re growing fast, it’s better to raise these [indiscernible] a little bit annoying from the standpoint of the client. And that’s why at the end, as we try to state in the call, there is a clear link between client base and fee growth. The more client you get, the higher after a lag of eight, nine months the fees you can collect. And that’s why it’s encouraging that we are seeing growth in the client base approaching 25,000 clients per month, which is roughly an annualized rate of 7% 8%, which we think will be sustained indirectly and that will be definitely was the driving force.

And lastly among the drivers of the growth, is the full implementation and that we are able to squeeze all the capabilities of this transformation process specially the CRM and the different changes we’ve been doing in the commercializing areas. As we try to state [ph] in the call, I mean in the webcast, we have encouraging figures and we have encouraging trends that if sustained, we think will allow us to unveil higher than average profitability and probably upgrading the market in both segments are relevant to growth, because we think combined with the new tools we have ready for approval, will give the Bank the ability to withstand a more challenging economic, regulatory and competitive environment because we have done our homework. We think we are in a better position to cope with that more challenging environment.

Thiago Batista – Itaú BBA

Okay. Thanks a lot.

Operator

And your next question comes from the line of Tito Labarta from Deutsche Bank. Please proceed.

Tito Labarta – Deutsche Bank

Hi good morning Raimundo and Robert. Thank you for the call. So I guess a bit of the follow up to the previous question on return on equity. Just in terms of timing and how soon you think you can get to that 20% or so ROE? And just to be may be a little bit more specific I think, particularly in terms of provisioning levels coming down a bit. We saw they were still a bit elevated in the quarter. I understand part of it was due to the middle market segment, but when do you think you see the provisioning levels come down a bit? Particularly, in this quarter we saw asset quality improve, so I’m surprised that the provisions were still a bit high. And then also in terms of fee income, I understand the regulation is impacting that, but it looks like fees dropped quite a bit this quarter and definitely not growing in line with clients. If you can, may be just give us some more color and why there is a big drop this quarter? Is there is anything extraordinary you did or why your fees fell more in this quarter than they have in previous quarters? Thank you.

Raimundo Monge

It is difficult to give you a precise timeline. Remember that this quarter, the ROE was benefited by higher than normal inflation, but also we think higher than normal provisions and at the same time lower than normal financial treasury related activity with clients yeah? So that’s we think we are very close, if not 20, very close to within that level. And going forward, as we commented in the previous question, the good point are that this transformation process is delivering results and we are updating the market in those segments that we wanted in terms of clients etcetera. The only one certainty we have going forward are number one; the caps the maximum rate that is very close to be approved by Congress which will make a bent in our negative margins, we put in the press release of around 15 basis points in our net interest margin going forward. But we feel we have no clarity because apparently, the [indiscernible] will be phased out in stages. And secondly the government realizes that these lower rates are decreasing the banking penetration, but eventually will reverse the level of rates.

So that’s why you think we are bringing in our estimation but that is, I will say one of the concerns we have going forward. The second is that very likely whomever, face power in Chile we have elections by the end of the year, it’s very likely that it will be increasing corporate taxes. So that’s why, we will be more and more definitely we’ve approach in ROE and close to 20% because the commercial banks meet well and because the transformation process is doing well and delivering results even faster than what we were anticipating. And the two caveats are number one, probably higher taxes; number two, the internalization of these maximum caps that we have our impact in our margins going forward.

Tito Labarta – Deutsche Bank

Okay thanks. And just…

Raimundo Monge

Then in terms of asset quality, asset quality has been improving yeah, but usually what happens is that the impacting your prices or moving to safer segments, is quicker than the impact in terms of your provision because you’d have to, to some extent, the changing mix lags, the provision lacks a little bit the change in the mix. But we are comfortable in our concerns, we’re basically in the consumer side and there we’re seeing positive declines. In this quarter, we think we have extraordinary items related to mid-sized companies, that work to a large extent one off because the companies are doing well, investment levels are doing well, sales are doing well. But there were some big companies that were pertinent to strengthen our provisioning levels.

So we think that this should be bleat in the radar, but we have the comfort that going forward, the asset quality should be stable or improving. And as a consequence provision levels should be stable or at least not growing in line with the growth of net interest income. Remember that since we changed our models growth if linked with provisions because we are setting provisions upfront and not waiting and seeing client say, I’m kind of – That’s why that the relevant metric is not absolute provisions but the provisions of the proportion of the loans and the proportion of net interest income yeah?

In terms of fees, again, given that we are having strong growth in the lending lines and the deposit lines etcetera, today fees are very much in the spotlight and nobody wants to be perceived as a more fee intensive guy in town. That’s why we have been prudent trying to comply with all the new regulations, but at the same time, taking into considerations that fees are sensitive points in the customer relationship that we have with our clients. And that’s why we are focusing much more use of such type of fees and given our clients’ value for their money. And that’s why once we settled into the new parameters of fees, we are certain that we will start seeing growth in that lines specially by second half of next year. We don’t count them as being our positive growth driver for 2014, but at least we don’t count them to be a drag as had indicated in 2013.

Tito Labarta – Deutsche Bank

Okay. Thank you. Just a couple of follows ups in terms of the, you mentioned that there is a lag in provisioning levels. How long would you say that lag is? Is it a month, a quarter just want to get a sense of when we can see improvements there? And then also on the fees, would you also say there is a bit of a lag because first you get the clients and then you can start to see the growth in fees? So as the client base grows then the fee growth will follow after that? Just to clarify that.

Raimundo Monge

Yes, in the case of provision well it actually depends on the needs and depends on the type of customers. But if you see the one-time provisions within this quarter, it’s not very happening yeah? And in terms of fees, usually clients think like nine up to 12th month to be contributing on a net basis on the provisional side and that’s why this should be good news probably about toward the end of the 2014, not before.

Tito Labarta – Deutsche Bank

Okay great. Thanks, Raimundo.

Raimundo Monge

[indiscernible]

Operator

Your next question comes from the line of Fred Moritz [ph] with UBS. Please proceed

Unidentified Analyst

Hi good morning, everyone. Good morning Raimundo and Robert for the call. Couple of follow ups on the theme of asset quality. On the first one, you mentioned that provisions remained – were quite high in the quarter and that was mostly because of SMEs and middle market and in your press release you mentioned it was across the board, there was no specific sector. Could you just give a bit more color in terms of why you think the provisions were high? Is it something in your origination that was wrong? Is it something you have to change with your non-officers? Just to get a little bit of color on this. And on the same theme of asset quality, we’re seeing obviously some large retailers, one big retailer in Chile particular having some issues. And I wanted to know, if this could cause an uptick in provisions as well if you have exposure? And the second follow up is really on the previous question on provisions, just wanted to make sure I heard properly, are you expecting provisions to come down in the fourth quarter already or do you think this can take a bit longer? Thank you.

Raimundo Monge

Okay. In terms of fees sorry in terms of specific positions, we’re coming from a very low level in provisioning in commercial lenders in companies lending almost zero, the level of provision that we have been facing in the last, I would say 12 months or so. And that’s why it shows as a jump, but actually I would say it’s more of a kind of a normalization of the level coming from a low level in absolute terms yeah? Remember that again if you have zero provisions, it seems to be consumer lending to – you’re leaving part of your business out. This is a risky business and there is nothing wrong as long as you charge at the correct prices which we think we are trying to do that. And that’s why these provisions don’t concern us very much. Part of it is some specific clients as you point where we have exposures, opportunity – we kind of comment on particular terms with particular clients. But there have been a number of stories of companies and that’s why we preferred to take the precautions before the ratio is more concerning [ph].

So relatively a relax view of how the market is closing, but of course when you set fewer provisions against a bit part of the loan portfolio, whenever you start selling provision it chose as a jump. Nevertheless, if you take 12 month view, the fact that provisions on the consumer side have been sitting them down and the fact that commercial lending to start beating up because we’re going fast and because of course in time some specific position can deteriorate, negative total provisioning will be relatively stable and will be little bit lower than the growth of our own loan book yeah? And that’s why at the end, our kind of metric that we follow these provisions over loans which should be going down, because loan growth should be accelerated as we saw before compared to the previous the 24 month. And at the same time, provisions be more flattish or at least growing but less rapidly than and loans and therefore the ratio coming down which is what you should expect given that we are entering with the segment.

Unidentified Analyst

Okay that’s very clear. Thank you.

Operator

And your next question comes from the line of José Barria with Bank of America. Please proceed.

José Barria – Bank of America/Merrill Lynch

Hi Raimundo and Robert. Most of my questions have been answered but just wanted to look into loan growth specifically. Obviously, with the income acceleration in this quarter, but you’ve mentioned that we’re expecting a moderate slowdown in the economy in Chile, in the quarters ahead. Given these two sort of diverging sort of paths, do you think that we can continue to see loan growth trending close to or above 10% or are you preparing for slight deceleration from there given what’s happening in the economy?

Raimundo Monge

Okay well in terms of the target segments with fee income growth rates 10% 12% going forward. And for the remaining part of the loan portfolio, it’s a little bit of uncertain because there we have been purpose pulling the brake in the case of mortgages in the case of lending to large corporations because low profitability that we can get. If [discernible] lends money to a large corporation if likely to maintain ROEs in higher fee income we have been delivering. And something similar with mortgages because today the prices that we see in the market with mortgage is very low and that’s why it’s not a solution for us. And therefore the total loan book although, we think it could be growing at 10% to 11%, if you see prices very tight and very – and we think that makes sense to lot of the capital activities, we think this is growing in this both segments. The total loan growth is a little bit uncertain because it depends on the price and the efficiency of the rate. But when we do have the power to and the focus is on the target segments and that’s why we think that and there are the segments where the net interest income net of – are much higher. That’s why at the end, it’s strategy base, we’re pursuing profitability over which is something we’ve been doing the last seven eight years.

José Barria – Bank of America/Merrill Lynch

Okay. And with regards to the NIM, understanding that you are growing in more sort of higher yielding segments, but we’ve also seen a very strong quarter in terms of U.S. inflation in margins. Would you say that the level that we saw – the overall NIM level that we saw in 3Q was probably a peak for you based on how strong U.S. inflation was?

Raimundo Monge

Yes of course. We believe as we do that the next year inflation should be moving closer to 2.9% 3% that means 0.7% 0.8% inflation from quarter and this quarter it goes around 1%. So both are normally high inflation supportive for our margins. But again, we expect our net interest margin to be – at the end inflations beyond our control and although those people believe that inflations we don’t count that as a source of validation, it’s simply a fact of life and supportive of margin the higher, the better. But we are really putting focus in some on client margins and there would be some trending down in the client net interest margin that will be more than compensated for lower provisions. And that process is starting to be more clear in the consumer side, just one that’s more concerning one year two years ago and we expect it to be basically in the rest of the business of the Bank in the near future.

José Barria – Bank of America/Merrill Lynch

Perfect, that’s great.

Raimundo Monge

Because of net interest margin probably coming down from 5.3%, but at the moment more stable.

José Barria – Bank of America/Merrill Lynch

Got it. Specifically on NIM after provisions, what was it this quarter and what do you think, we can get as we see the dynamics playing out?

Raimundo Monge

This quarter the net interest margin net of provisions might have been close to 3.4% or 3.5%. You think that can be trending up in time specially when support trends in consumer lending and we are able to be more selective in the commercial side. Remember that, we have been changing our approval tools and evaluate for our clients and that’s why we believe we can be increasing in time. If you deliver that, if you maintain growth of 13% in the target segment and you maintain provisions [indiscernible] it can be creative [ph] at the bottom line.

José Barria – Bank of America/Merrill Lynch

Great. Thank you very much, Raimundo.

Operator

Your next question comes from the line of Saul Martínez with JP Morgan. Please proceed.

Saul Martínez – JP Morgan

Hi guys. I’m going to play devil’s advocate a little bit and I hope this doesn’t come across as overly confrontational. But I’m having a hard time reconciling the numbers with the optimism and when I look at, I mean the ROE was fine this quarter but it was done as you mentioned with a fairly elevated level of inflation. Net interest income from the client activity is hardly growing at all, in spite of the fact that you’re kind of well into your way in terms of your strategy targeting selected business segments in spite of that, in spite of presumably these segments having a risk grant profile, the cost of risk I know there are transitory factors involved. But the cost of risks seemingly remain very elevated which all seemed implied that your marginal ROEs in your credit business have been fairly poor lately. Can you just help me understand why – what you’re seeing and I know you’ve addressed it a little bit but, what you’re seeing and that gives you optimism that your risk adjusted returns will indeed begin to improve and in terms of your credit business? And if my analysis and my thought process is wrong let me know why it is that way?

Raimundo Monge

[indiscernible] What we see was there were major changes in the overall operation environment in Chilean bank. After going through many prevailing model was the goal down market both in the quarter side and on individual side, for a number of reasons there are being major changes. And that has resulted in a margin compression that compares to the levels that you saw, because in the previous days, you see that they lower you went, the high prices you cover incremental risk and the incremental cost will go in the market. That situation today is more difficult to do because of revelations and because of changes in consumer behavior etcetera. And that’s why we thought that we needed a major transformation in our business models and across – and our decision was change our credit mix model, to take into consideration this new environment and to increase our commercial productivity by means of given tools, because I think [indiscernible] a model base would it higher than average performance. That process has resulted in the last two years of in a slowdown of the bank because we were taking care of many activities in order to change that the way we do business. And at the same time, we saw low inflation so that combination of course affected our performance and affected our performance a little bit more than the rest, because we were most rated bank in Chile.

Now why we are increasingly encouraged, it’s because we have finished those transformation efforts. They are starting to deliver results and those results are starting to be visible in the commercial lines. Of course these are positives that cannot be measured on a quarter by quarter basis, but fact that we are increasing the level of lending in the target settlements, the fact that we are increasing clients, the fact that we are increasing core deposits, make us believe that going forward we should achieve a high level of performance compared to last year [ph]. And then on the risk side at the time of how you calculate the economic value, the discount rate was a little bit slower, because we are operating at a much higher capital base than historically and therefore it’s much less than ever than before. And also we’re moving into higher risk into lower risk categories. And that’s why from an evolution standpoint, we are saying that we are in the sources of delivering increasingly high ROEs but at the same time it’s much lower risk in this for our stakeholders yeah just to give an appropriate example.

Apart from the change in the mix, we are not since last – we have a more profitable a 100% of our revenue comes from client activity and that’s why the nature of the revenues are better quality than say [indiscernible] depends to the bank on activities or to compensate or to our profitability. So it’s simply the optimism that we are trying to convey, is simply our reflection that we are seeing the ending of this process transformation and the early results of this is still different figures that the Bank including not only financial figures but also client accretion, quality of service, employee morale and things like that and targeting this on a quarter by quarter basis but at the end resulting higher value creation for shareholders.

Saul Martínez – JP Morgan

Why is NII not – I’m sorry why is NII from client activities not growing even on a year-on-year basis even though your growth and your targeted portfolio is growing well 14% 15%?

Raimundo Monge

Basically a reflection you are growing in the safer categories within your clients and that’s why, we decided to be on the consumer side your gross spread are trending down but at the same time your provision expense and [indiscernible] starting to go down. If you applied that philosophy and that expected results to the rest of the loan growth, we expect that with lower gross spreads we can achieve high profitability than before, simply because the amount of provisions even that we are moving to the more safer pieces of the market, will be lower than before. And that will be a reflection that we’re growing the safer categories of generating the revenue with a safer categories of clients which should have an effect on the side [indiscernible]

Saul Martínez – JP Morgan

Can you remind me how much of your loan book is represented by your target segments?

Raimundo Monge

The risk is just, if you do the calculation the risk is simply that the mortgages we’re putting efforts but we don’t want to leave the market in large people lending at the low end of the consumer market is same. So we don’t think that the growth would be zero negative simply that we want to put too much effort in that and keeping our commercial efforts on the rest of the categories. The target segments are roughly 60% of the loan book but net interest margin converted by additions tends to be higher than the rest.

Saul Martínez – JP Morgan

Okay. So the higher proportion of after provision NII than safety?

Raimundo Monge

Yes that’s right.

Saul Martínez – JP Morgan

Okay. Thank you.

Raimundo Monge

And at the same time, what we are seeing that trend offers a higher provision net interest income of the net interest margin.

Saul Martínez – JP Morgan

Okay. All right. Thank you very much.

Operator

Your next question comes from the line of Timothy Pools [ph] with Morningstar.

Unidentified Analyst

Hi guys. Thanks for taking my call. I just have two questions for you, kind of going back to the loan and loan mix. Just kind of wondering, how long do you expect to see much stronger growth in these targeted segments? And really what I’m wondering is, when can we see more balanced growth throughout the entire portfolio? And then my second question regarding to your loan to deposit ratio, it’s now standing at 104%. I guess I’m wondering where you think that might level off over the long term or if you have a range or goal for that number? Thanks.

Raimundo Monge

In terms of loan growth, the gap will narrow as soon as we see prices in the market for those activities that today have relatively low yield. We think reflection that Bank has been pursuing is profitability driven for many years focusing on its capital, allocating capital only where you see good profitability at the other side. That means your total market share bounces simply as a reflection that your focus is on the more profitable categories between the total markets. So it’s something that we’ve been doing for many years. We don’t have it we have a small bank probably make sense rush it a little bit, but once you have as we have a market of 18%, we think it’s better to move to an average level with your pricing to optimizing the use of capital and try to grow as profitable as you can.

In terms of loans to deposit it’s ahead of 100% but that is basically because mortgages are funded given that they are 20 25 year mortgages, you never fund it by short term deposits. So what you do is you issue both to match the duration and the sensitivity of your mortgage portfolio. And therefore if you exclude mortgages from the loans, the loan mortgage lending over the positive has been very close to 100% and that has been historically another feature of the market. Most of the banks do have more loans than deposit reflection that mortgages are really funded by deposit, because they are 20 years fixed rate and therefore their interest rate could be very high if you fund it using short term deposits. So it’s a feature of the market. At the end, it’s around our kind of floating loans are very similar are very close to 100% our short term deposits and the fixed mortgages are funded through fixed bonds.

Unidentified Analyst

So I guess just a follow up do you see a kind of stabilizing right here or I guess which direction do you expect it to go if any?

Raimundo Monge

No very similar to very close moving around a 100% especially now that the authorities are launching a new [indiscernible] market is open for Chilean banks which will add extra layers of flexibility for balance sheet management and to funding of mortgages. So it tends to be very stable. In Chile, the feature is that we have a very high savings rate close to 33% 34% GDP and therefore it’s a very good market where funding at the end is what that matter it’s not a big concern of the bank. The bank makes very easy money on the deposit side because of the high liquidity value that you have.

Unidentified Analyst

All right. Well thanks.

Operator

And your next question is a follow up from the line of Thiago Batista with Itaú BBA. Please proceed.

Thiago Batista – Itaú BBA

Thanks. Just regarding the fees I wonder when you said the fees will not drag the results next year, are you considering the phase of the asset management. And when do you believe this transaction will be concluded?

Raimundo Monge

Yes we believe if the sales proceed, we will have an impact because instead of getting 100% of the fees, the Bank will be getting depending on the fulfillment of some save target close to 75%. So that will have an impact but of course, it’s part of the price that you are paid from a group of companies that are joining forces that have a large asset manager. In terms of the timing of the sale is uncertain as we put in our press release. The board has approved and found convenient the transaction and they also that the bank will receive also positive by two external consultants that we hired to give an opinion about the transaction but the timing at the end it will be through our shareholder meeting that approves the transaction. But the timing is uncertain because this is a global transaction that is done in – and therefore we are spending what happens with rest of the units will be involved in this transaction.

Thiago Batista – Itaú BBA

Okay. Thank you.

Operator

And at this time, there are no further questions.

Raimundo Monge

Okay great. Thank you very much for taking the time to participate in today’s call. We look forward to speaking to you again. Have a good day.

Operator

Thank you for joining today’s conference. That concludes the presentation. You may now disconnect and have a great day.

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