Banco Santander-Chile's Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 5.14 | About: Banco Santander-Chile (BSAC)

Banco Santander-Chile (ADR) (NYSE:BSAC)

Q4 2013 Earnings Conference Call

February 5, 2014 09:00 AM ET

Executives

Raimundo Monge - Director, Strategic Planning

Analysts

Thiago Batista - Itaú

Carolina Yoshimoto - Goldman Sachs

Fred de Mariz - UBS

Tito Labarta - Deutsche Bank

José Barria - Bank of America/Merrill Lynch

Operator

Good day, ladies and gentlemen and welcome to the Q4 2013 Banc Santander Chile Earnings Conference Call. My name is Allison, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes.

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

Raimundo Monge

Good morning ladies and gentlemen. Once again, welcome to Banco Santander Chile’s fourth quarter 2013 results conference call. My name Raimundo Monge, Director of Strategic Planning 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 4Q ‘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 2014 while introducing our initial forecast for 2015. We continue to be positive on the performance of the economy. Although we expect a lower growth compared to 2013, this will be mainly the consequence of; first, a reduction in investment in the copper mills reconstruction effort after the 2010 earthquake, at the same time investment in the mining sector should decelerate as various large projects to increase output and to productivity are finishing.

As we explain in a moment, these are two activities where banks had little involvement and were funded mainly through their own resources. At the same time consumption should remain at relatively high levels given the tight job market and we foresee a relatively supportive external sectors given the recovery of the U.S. and other relevant trading partners and a higher mine output.

We expect GDP growth to reach between 3.8% and 4% in 2014 and to reach close to 4.2% growth in 2015. We forecast internal demand to expand by around 4.4% in 2014 and a little bit below 4% in 2015. The Chilean Central Bank should continue to lower interest rate, which should fall to focus then by the end of the year leading to a weaker exchange rate. The depreciation of the peso should also lead to slightly higher levels of inflation and good export growth. The inflation rate measured by the variation of the U.S. and inflation linked unit which is the most relevant indicator for the Bank should rise from 2.1% in 2013 to 2.6% in 2014. All these should lead to what we think is a supportive macro environment for banks.

Regarding the economy, one of the main concern is if there is a slowdown in the Chinese economy, the Chilean economy could enter a low growth phase, while this risk is already accounted in our previous forecast. However as it can be observed in Slide 4, corporate, although being an important part of the Chilean economy representing almost 6% of exports and around 12% to 15% of GDP, has not been the driver of the Chilean economy in the recent years.

Copper exports has been mostly flat in the last two years as prices are trending down and volumes were lower, a situation that could change going forward after Santander projects will come into full production. At the same time non-copper exports, which had been growing at approximately 10% the year since 2010 should continue to do well and for U.S. and Eurozone economies tend to gather momentum and the competitiveness of export increase following our weaker Chilean peso.

In fact the weighted average of Chilean GDP growth, the weighted average of GDP growth of Chile’s main trading party is essentially expected to rise in the next few years as you can see in the slide. On the other hand, the government dependence on copper revenue has been declining since 2016, representing today roughly 7% of the government’s revenue as the government has successfully diversified its income base.

For this reason, loan growth should continue to be strong in the Chilean market. Also ’14 we’re expecting loan growth for the whole financial system to reach between 9% and 10%. The profitability of the Chilean bank at least and it’s also stabilizing due to a more normalized inflation and rate environment. The Chilean financial system has an additional strength, which is a high level of savings and liquidity.

In recent weeks there has been a great deal of concern regarding the possible effects of the Fed tapering program. We would like to remind investors that the Chilean economy has the strong liquidity levels. For example, if we were to sum the amount of money saved in banks, plus the amount saved in the Central Bank as point of source, Chilean provident funds, mutual funds and other institutional investors, we have a total stock of savings representing 1.8 times total GDP and exceeding all of the deposit bank’s that we held.

At the same time the percentage of foreign ownership in the local fixed income market is low, representing less than 5% of the total. Therefore the effect of the tapering on the Chilean banking system should be limited, given the supply of funding, the low penetration of foreign investors in the local fixed income, the high credit risk rating of Chilean bank and the strong core deposit base of the larger market players.

Now we’ll review the Bank -- how the Bank continues to move forward in its strategic objective. During the quarter, the Bank saw relevant advances in several of its strategic objectives fueled by its transformation project. The evolution of our quarterly results demonstrate the retail banking is well ahead in adapting the new strategy with a strong expansion of loans and deposits in the segments we have targeted for growth. This has been achieved with an important improvement of our CRN and quality of service and by radically changing the risk profile of our retail loan book.

We believe that we are slightly ahead of the rest of the banking system in making the necessary changes that will allow us to continue to achieve an optimum balance between our return of equity and our cost of capital. By maximizing this relationship, we should be able to expand shareholder value.

In 4Q ’13 total loans increased 3% Q-on-Q and 10.9% year-on-year. In the quarter, loan growth continues to accelerate in the market the Bank has targeted. These are, high income individuals, SMEs, and the middle market of [indiscernible]. Loans in this combined market increased 3.4% Q-on-Q and 14.6% year-on-year. In terms of products, consumer loans’ net growth and increase 5.4% Q-on-Q and 15.8% year-on-year.

The evolution of our funding base was also possible in 4Q ’13. Total deposit grew 2.3% Q-on-Q and 8.6% year-on-year. Non-interest varying demand deposits increased 6.9% Q-on-Q and 13.1% year-on-year. In the quarter, the Bank’s funding strategy continue to be focus on increasing core deposits while lowering deposits from non-expensive short term institutional sources. Client deposit, that is demand and time deposit from our retail and corporate clients expanded 3.2% Q-on-Q and 19.8% year-on-year. Client deposit now represents 86% of the Bank’s total deposit base.

The transformation initiative is also beginning to produce positive results in terms of quality of service and client satisfaction. Since the launch of Santander Select and with more intend use of the new CRM capabilities, the impact in our client base has been very positive. The amount of new clients entering the Bank increased 44% in 2013, mostly on the second half. This should reach to a 7% to 8% client base growth in 2014, which should help to drive fee income going forward.

The transformation project is also resulting in a favorable evolution of consumer loan asset quality which is a key cornerstone of our strategy to obtain higher margins net of provision. This is due to various initiative the Bank has been carrying out since 2001; first, the portfolio exchange focusing on loan growth in the higher end of the consumer market; second, improvements of our risk models; third, the revamping of the collection processes; and lastly, the focus on growing the preapproved loans.

As a result in 2013 consumer non-performing loans decreased 21% and impaired consumer loans which add -- were renegotiated loans fell 11% in the same period. Better collection efforts led to an important rise in consumer loan loss recoveries. This increased 63.5% in 2013. The Bank also concluded 2013 with its strong capital ratios. Our core capital ratio reached 10.6% at year-end 2013 and the total BIS ratio reached 13.8% at the same time. The ultimate goal of our strategy is to maximize the difference between our ROE and cost of equity. Today, we have the highest core capital among our loan peers, which allow us to grow with a solid balance sheet. On a global basis, our cost of equity is also significantly lower and can be derived from our strong credit rating.

Now we explain the evolution of our results, which also show favorable strength. In 4Q ’13 net interest income continue its upward trend and increased 22% Q-on-Q and 3.9% year-on-year. The 2.8% Q-on-Q growth of average loans and a better funded mix drove this rise in net interest income. The net-net interest margin in 4Q '13 reached 5.2% compared to 5.3% in 3Q '13 and 5.5% in 4Q '12. In order to improve the explanation of margins we have divided the analytics of net interest income between client and non-client interest income. The slight reduction in net-interest margin in the quarter was mainly due to the lower inflation rate. 4Q the variation of the [indiscernible] into U.S., an inflation index carried units was 0.95%, compared to 1.4% in 3Q '13 and 1.11% in 4Q '12. And to explain that in other calls, the bank has more assets that are under liabilities linked to inflation and result margin tend to have a positive sensitivity to the ratio’s inflation.

Regarding client net interest income margins, defined as client net interest income divided by average loans, in 4Q '13 they reached 5.6% compared to 5.6% in 3Q '13 and 5.9% in 4Q '12. The stable margin compared to 4Q ‘13 is mainly due to the higher growth of consumer loans in the quarter compared to other products. And lower client margin on a year-to-year basis was mainly due to higher growth among upper incoming divisions compared to a decrease in loans in the low income consumer segment, which the investor has higher spread. That said, the bank’s strategy is to broadly achieve a higher net interest margin, net of provision expenses by focusing the growth in the middle market SMEs on the high end of the consumer market, even though this will result in lower gross margins. Gross asset quality metric improved during 4Q of '13. Net provision for loan losses decreased 8.7% Q-on-Q and 2.6% year-on-year, despite a one-off provision set against a specific client in the corporate segment. The cost of credit reached 1.7% in 4Q '13 compared to 1.9% in both 3Q '13 and 4Q '12.

Key in this lower expense was the reduction in provision in consumer lending which decreased 19.8% Q-on-Q and 37.5% year-on-year, as a result of the various actions taken to improve credit risk in consumer lending. The bank’s total nonperforming loans ratio reached 2.9% in 4Q '13, improving 10 basis points compared to 3Q '13 and 30 basis point compared to 4Q '12. The risk index remained stable at 2.9%. The total coverage of nonperforming loans with provisions in 4Q '13 reached 99.2%, compared to 94.8% in 3Q '13 and 92% in 4Q '12. With this evolution of margins and credit risk, the bank has experienced a steady rise in net interest margins net of provisions as you can see in the slide, reaching 3.7% in 4Q '13 compared to 3.5% in 3Q '13 and flat year-on-year.

This rise was led by the higher inflation and the improvement in margins net of credit risk in consumer lending. The net interest margin of consumer lending, net of credit risk increased from 9.1% in 4Q '12 to 10.4% in 4Q '13, despite the fact that gross margins were down in the same period. Going forward the evolution of margins, net of provisions reflect various factors. First, in respect with inflation to remain at levels of 0.7% up to 0.8% per quarter, on average, with [indiscernible] fluctuations. In addition the Central Bank should continue reducing interest rates, which should help support names of our interest bearing liabilities tend to reprise after our interest earning assets.

The Chilean Congress also approved a maximum rate cut law in December 2013. The bank estimates that in 2014 this bill could lower our net interest margin by around 15 basis points, all else being equal. This estimate is only preliminary as it is difficult to estimate the speed of implementation with the reduction and the effect on loan volumes. Finally we expect provisions as a percentage of loans to decline to levels of around 1.5 -- 1.4 up to 1.5, depending on the evolution of the economy. [indiscernible] demand, operating expenses in 4Q '13 increased 2.1% Q-on-Q and increased just 1.4% year-on-year. As the transformation project is beginning to deliver not only higher commercial activity with clients, but also increasing our productivity as well. The bank increased its loans and deposit at a greater rate than the market without increasing the level of branches and headcount. This has been achieved with a higher use of CRM and the strong competitive advantage that we have in the Internet, mobile and phone banking.

The efficiency ratio reached 38.2% in 4Q ’13 compared to 39.8% in 3Q ’13 and 39.5% in 4Q ’12. All the above has resulted in strong operating income in the quarter that reached the highest level in two years. The ROE in the quarter was 30.7%. Excluding the sale of the asset managing subsidiary, the recurring ROE reached 19.7%, in line with the guidance given to analyst in previous calls.

In summary, the Chilean economy and financial systems are in good health. The lower rate environment and the uptick in inflation will also help to boost profitability in the financial system. We achieved an ROE of around 20% in the quarter and our outlook for 2014 is sound. Although, the new caps in lending and eventually higher corporate taxes will impact our results, loan growth and asset quality trends are encouraging. The funding mix continued to be improved and client deposits growth has been solid. Seems [ph] net provisions expenses are rising. These are beginning to rebound, led by promising trend client growth. The bank productivity and efficiency is improving.

At this time, we would like to answer any questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions] Please standby for your first question. Next question comes from the line of Thiago Batista with Itaú. Please proceed.

Thiago Batista – Itaú

Thanks for the opportunity. I have two questions. The first one is regarding the banking margins. As you’ve commented -- two main factors who affect the margins during this year. The first is inflation and second the lower interest rate cap. Do you believe the potential higher in U.S. variation allied with the lower bank interest rate will be able to affect the impact of the lower caps? That’s first question. The second question is about the efficiency ratio. In the quarter Santander Chile improved its efficiency ratio. Do you believe this is possible to see this trend to continue during this year, and if yes, what is your efficiency ratio target in the medium term?

Raimundo Monge

Okay, thank you very much for your question. And concerning margins, as you greatly point, there will be many moving parts and it’s difficult to give you a frame and guidance. But if you very concerned, we are formally in part, we think that margins because of these kind of our external forces, especially caps, the interest rate movement and inflation, will to large extent cancel out. There will be a slight negative impact of the three things if you combine them.

And the rest of the growth of the net interest income will come mostly from client activities, especially growth in the segmental areas and our intention to see net interest margin on the client part to be trending down, but probably very close to bottom. That’s why we’re optimistic. The only concern and to give you all information is that the caps are already in force and the other hardship [ph] expectations that we have that U.S. inflation will be higher and that rates will come down. So that’s why we prefer to be conservative instead of we will have an impact of around 15 basis points and the rest is up to inflation interest rate to compare.

But as you correctly point, they will be compensated versus it’s difficult to say whether there will be full or to a large extent, and however, we think that the growth of the net interest income will be coming mostly from client activities, given that the non-controllable forces will be very much cancelling down, will be doing themselves. In terms of efficiency, we’re today maintaining levels slightly below 40% of our cost income ratio. We think that the transformation project, which has been at the center of the changes that the bank has been doing in the last two or three years will deliver a stronger result and at the same time will allow us to increase our efficiency. And that’s why we think that ratio should trend down. And in the medium term next 2-3 years probably around to 37%, 36%, probably not lower than that because we have had experiences with the lower cost income ratio, and you start seeing side effects which are better to know.

In commercial bank, specially in retail bank as we are and having too low cost income ratio ratios has quite a consequence. So, we think that as a leading term and after the full impact of this year, and this year-end when the transformation project is visible, levels of very safe 37% can be sustained.

Thiago Batista - Itau

Okay, thanks. Thanks a lot.

Operator

The next question comes from the line of Carolina Yoshimoto. Please proceed.

Carolina Yoshimoto - Goldman Sachs

Hi, Raimundo and Robert. Good morning and congratulations for the results. I have a couple of questions as well. The first one is on tax rate, so I wanted to get a sense from you on what your expectations are regarding when the increase in corporate tax rates could take place in Chile, both in terms of timing and scope. We have heard something people saying about 30% instead of 25% and I was just wondering what your thoughts are on that?

And my second question is on competition, I know now that the transformational process is over and you have been recently focusing on higher income segments. So, I am assuming that most of the other banks have also been moved into same direction as you did. So, just wanted to get a sense on how the competition is in that segment and what have the main challenges been so far? Thanks.

Raimundo Monge

Okay. Well, concerning tax rate we don’t have at least still a very clear view because of the new government will come into power next March. However, among the first kind of promises that the new government have come is to act rapidly in passing the tax reform, which up to now the central scenario is of increasing the full year’s, the taxes up to 25%. I haven’t heard about 30% by any official source, yes. That means that for 2014, the effective rate for the bank should be around 18, a little bit high. Remember that what happen is that when you increase, and we tried to explain in the press release, when you increase the corporate tax rate, there are some tax breaks you get at the beginning because of the deferred taxes.

And that’s why the effect in 2014 will be minimum because although the corporate tax increase is close to 1.25%, if the central scenario happens, you will have, what happened in last year that we have something 4Q of 2012 wasn’t an outlier because the actual, the effective rate was below 5% simply because you recognized the benefit of the deferred taxes upfront and then you paid higher effective rate. And that’s why the taxes will impact our profitability going forward. But specifically 2014 depending on the timing it could be very minor because of this one-time benefits coming from the deferral of the deferred taxes.

So, this year we finished with a corporate tax rate of 17.5, next year it could be 18, 18.5 something like that. And then in terms of competition, what happened is that the bank, it’s a matter of emphasis, the bank was emphasizing in the last five to six years the middle to low-end of the consumer market. It’s not that we were completely out of the high-end, we think that our market during in the high-end was close to 15% and in the middle to low-end it was higher than 20. Now we have the capabilities to serve the different brackets of clients with what we think are superior tools especially in terms of credit origination and in terms of how we handle the client relationship, yes.

So, today given the price are increasingly similar with the different market players and there is very little room for discriminating prices and for pricing differently because the people have more information and more power, our competitive position has been to increase the speed in delivering and the speed of how we are tackling the needs of the client. And that’s why regardless of that everybody is of course trying to go to more or less the same client as is happening in the 100% of the market. We think we have the ability to grow faster than the rest in the target segments, because we are quicker than the rest in addressing their needs. And that’s why at the end we have moved from in a scenario of where price competition was to some extent the way to gain market share or to lose market share, if you didn’t valuate the price.

Now we are moving towards a scenario where at the given price whomever is faster to getting into the -- closer to a client could be in a position to win. And that is what is starting to happen with the bank because the rest of the competitors are doing very well, but we think we have tools now that allow us to do the trick a little bit faster than the rest.

Carolina Yoshimoto - Goldman Sachs

Alright. Thank you very much.

Operator

Next question comes from the line of Fred de Mariz from UBS. Please proceed.

Fred de Mariz - UBS

Thank you. Good morning Raimundo and Robert. Thank you for the conference. Two quick questions on my side, the first one on the cost of risk, we were at 1.7 in the quarter and you mentioned during your remarks that we could get to 1.5ish percent, just wanted to get and maybe you mentioned it and I missed it, but when do you think we can get to that level? And what exactly are you guys doing to reduce the cost of risk? Are you reducing the rates of approval or is it just because of the change in the loan mix, so just a bit more color on the provisions?

And then the second question very much in line or follow-up to the previous question on competition. Are you expecting or are you seeing any changes in the behavior of Corpbanca/Itau now that we have the deal signed between two banks, so do you think that would change the situation in the coming quarters for your clients? Thank you.

Raimundo Monge

Okay. Thank you. In terms of provision, and clearly speaking the cost of risk and provisions of loans, we think that they could trend down to 1.5 throughout the year, yes. Not every single quarter, but as a continual trend as a moving average. And that is basically because of the changes we’ve been doing especially on the retail side stronger credit organization processes, stronger recovery process, and the way we’re originating today roughly half of our consumer lending is originating via preapproved operations where we think they are efficient to go up to our clients and we offer them preapproved turns and therefore in terms of quality it tends to be much higher quality.

There was last week in the non-performing levels of consumer lending in the quarter, that is simply because we are fine tuning continuously our approval process and going to zero the non-performing loans is the business because at the end you’re leaving a lot of business out of the table. So that’s why that number shouldn’t be expected to go down and down forever, because at the end, we’ll be lending only to a very, very wealthy and the margins will suffer. That’s why our purpose has been for some time to maximize, not the gross spread or not to minimize the cost of risk, has been to maximize the gap between the two, to get our risk -- net interest margin, net of the provisions that is supporting and hopefully increasing in time. And that in the consumer side, we think we have been up to now quite successful.

In terms of competition, of course a competition the proposed merger of Itau and Corpbanca has not happened and that’s why in reality nothing has changed. But in terms of our view, we think that is good news to have stronger competitors because at the end this is an industry that relies on the trust of our clients and having a very good bank as Itau come in is always a good news especially in this medium-term process of efficient banking but iteration in Chile which must done by a solid player.

In terms of whether it will increase or decrease competition, it’s difficult to know, but Itau has been in Chile for 6 years or some, or somewhere around that, and is a player that we know that they have been doing a sensible thing and doing good business et cetera, and that’s why the moment you get a little bit concerned is with somebody completely out of the blue comes and acquires our competitor because that means that either could be bolting prices and bringing things to crazy levels or otherwise bringing clever ideas and outgrow you.

When you see inter-market and mergers, the concerns are less because size doesn’t necessarily change the competitive focus of institutions. And our view is that both Corpbanca and Itau are doing a very job today. Probably, they will keep it going forward and it’s good to have sound competitors in the market.

Fred de Mariz - UBS

Okay, thank you very much. That’s very clear. If I may follow-up just with the final question, can you remind me your gains for ROE for this year and maybe in the following the years?

Raimundo Monge

No, the ROE as we have mentioned as a moving average of 5-6 quarters to be moving at around 20% and we achieved that in fourth Q. But again, the idea is to have it as a moving trend. The actual ROE in 2013 was closer to 17.5 for the whole year excluding the sale of the asset management and that is the one that we will like to see approach in a 20% on a recurring way. So, it’s encouraging what we saw in fourth Q ’13, but of course the challenge is still to maintain it as a moving average of many quarters.

Fred de Mariz - UBS

Okay. That’s great. Thank you very much.

Operator

Thank you. The next question comes from Tito Labarta from Deutsche Bank. Please proceed.

Tito Labarta - Deutsche Bank

Hi, good morning, Raimundo. Thanks for the call. I have two questions. Just first a follow-up question to Fred’s question on ROE. You mentioned over 5 to 6 quarters, but just kind of looking at 2014, do you think that ROE 20% would be achievable for this year just given some of the pressure you’re seeing on margins albeit also fees as to, on the pressure from regulation and with the higher tax rate or potentially higher tax rate. Do you think that would offset some of the benefits we’re seeing on the expenses and asset quality side? So, just want to get a sense of, do you think that 20% is achievable for this year?

And then second question just in terms of your loan growth, you mentioned about 9% to 10% for the system. If you can maybe kind of break that down for what you’re expecting for you guys. I know in the mid to high income in SME segments, do you still expect to go faster than the market and what would that mean for your total loan growth for this year? Thanks.

Raimundo Monge

Okay. Well, in terms of ROE more or less the same idea that probably not at the beginning of next year achieving ROE, so 20% will be more difficult because we will be facing the full impact of the caps that are coming, and eventually higher rate. But in-time going more into the second half is more likely because we will be taking actions to compensate for that and inflation could -- U.S. inflation could increase and at the same time the Central Bank cap rates. And that’s why if you think on a year-on-year basis, we think that the ROE could be, if not 20, close to that, yes.

But then moving forward -- that’s we prefer to talk about trends and about moving average so that they give precise, I know you need to have precise forecast. But in our case we think that we’re very close to 20%. It could be a little bit lower, a little higher, but that’s a moving average we think can be achievable, especially in 2015 on one where we adjust to the new cap rates and once the inflation normalizes given there could be a depreciation of the Chilean peso but it’s difficult to give you an exact metric but very close to 20% of the moving average.

Actually in 2013, we really have around we have 20% but the growth rate supported by the sale of the asset management.

In terms of loan growth, we feel that, we believe that market will be growing between 9% to 10% and in our case in the target segments growth was 13%-14%, a little bit lower than this year but not meaningfully lower. And in terms of the risk, which means corporate lending and lending to the middle low-end of the consumer market, which are the -- and more heated, which are today known targeted for us, it’s difficult to say because it will depend on the pricing decisions of the rate, yes.

If we see sensible prices, we can grow very fast if we see prices that we think are dilutive, it probably would lose or not follow-up the market and not validate those prices. And that’s why well we can think today that in the target segments SMEs, middle market of corporate and middle to high-end of the consumer market, we think we can outpace the market. The risk is up to the pricing decision of the risk given that we’re focusing on profitability more than size.

Tito Labarta - Deutsche Bank

Alright, that’s very clear. Thank you, Raimundo.

Operator

Next question comes from the line of José Barria from Bank of America. Please proceed.

José Barria - Bank of America/Merrill Lynch

Good morning Raimundo. Thanks for taking my question. Most of my doubts have been answered but if I could just follow-up on two things; one, asset quality; and two, on fee income. On your guidance of provisions to average loans of reaching 1.5% over the course of the year, what does that imply for your reserve coverage ratio? That’s the first one.

And the second question is, given some of the changes we’ve seen in the regulatory environment affecting fee income, what are you expecting for growth in that line this year? Thanks.

Raimundo Monge

Okay. In terms of asset quality and the contract provisions as a portion of loans are expected to trend down. In terms of coverage, we will maintain coverage very close and slightly ahead of 100%, which not that it fairly has to be. Remember that in Chile provisions are set according to the expected losses that you have and not literally according to the non-performing loans sometimes they can diverge. But as a general rule of fund probably coverage ratios are little bit ahead of 100% of non-performing loans.

In terms of fees, fees, in that definitely were affected this year and the year before by two elements; one, where different pieces of regulations that make more difficult to collect fees; and secondly, the fact that especially in our case, we were getting out of or reducing our exposure to the low-end of the consumer market with typically our clients that tend to pay more fees than the upper-ends of the consumer market. That resulted in a drop of fees probably that bottomed in the third Q because apart from that we took a proactive stance in eliminated any fees that would be contravertial or we didn’t wanted to be having a reputation of problems with fee et cetera.

Once we finished that process and it can be seen in the figures on the fourth Q, higher client activity, which is the side products of the increased use of the CRM is starting to deliver higher fees and at the end is a matter of how many clients you start raising and that’s why although we don’t expect fees to be a definite driver of 2014 profit, we don’t see fees coming as a drag next year and probably close to zero are very single, low digit is a good bet. And especially if you take into consideration as we have stated in our press release that in one-fourth of its asset management fees won’t be recognized by the bank given that we sold the asset management company. Now we are recognizing around 75% of the fees compared to what we saw in 2013 that we recognized a 100%. But of course the intention is that after the sale, we will have better products and the growth of that line will be higher. Probably in 18 months, we will be compensating that foregone 25% by higher volumes and better quality and a better mix of funds.

So, end of the line, we think that the fees probably won’t be contributing too much on a year-on-year basis that basically do mean the second half contributing more because we have been growing our client base since the second half of the year at around 7%, 8% on an annualized basis. And that should fuel fee growth especially visible in the second half of the next year.

José Barria - Bank of America/Merrill Lynch

Okay. Thank you very much.

Operator

The next call comes from the line of Mae Oliver Riddlepower. Please proceed.

Unidentified Analyst

Hi, good morning. My question was on the fees, which was just answered and I was just wondering now as that what is your expectations and with regards to regulation is there something that they will be capped for 2014 and generate more losses in your non-interest income. And there is also talks on about a regulation on the interest rate, what is your expectation for that and for 2014?

Raimundo Monge

Okay. In terms of regulation, I will say to a large extent most of them are already, the changes that were announced in the previous government and in the discussion that was before the election have been already implemented. And it was said that the only pieces that are pending should be positive for the system, for the clients and especially for banks which means to have a consolidated credit bureau which will be good news for banks that vis-à-vis other market players.

And then the possibility of banks to have a -- to do a payroll lending which up to now has been limited to non-bank. And then Basel ratio recommendations in terms of capital controls which is something that given the high levels of capital that most banks have and Chile shouldn’t be a major concern.

In terms of new negative regulation in the program of the new government, we didn’t see big changes mostly as to implement the things that have been announced and approved in the last five years. So, it’s more to execute on consumer protection issues and things like that, but I will say that generally speaking the negative reforms have already been eliminated or implemented. And we see that on the regulatory side we could see good news coming forward, but it’s something of course, as in any market we -- you always have a changes in regulation and in a regulatory industry it’s how good you adapt the name of the game, because the changes will happen every time. But we don’t see major changes except for the credit bureau and eventually a Basel ratio implementation.

Unidentified Analyst

Alright. Thank you very much.

Operator

We have no further questions.

Raimundo Monge

Okay. Well, thank you all very much for taking the time to participate in today’s call. We look forward to speaking with you again soon. Have a good day.

Operator

Thank you for joining today’s conference. This concludes the presentation. You may now disconnect. Good day.

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