Raimundo Monge Zegers - Director of Strategy Planning
Banco Santander Chile (SAN) Q3 2007 Earnings Call November 5, 2007 9:00 AM ET
Welcome to the Banco Santander Third Quarter 2007 Earnings Release Conference Call. As a reminder this call is being recorded. If you have not received a copy of today's release please call Robert Moreno at 011-562-320-8284. For opening remarks and introductions I will now turn the call over to Mr. Raimundo Monge. Please go ahead, sir.
Raimundo Monge Zegers - Director of Strategy Planning
Good morning ladies and gentlemen. Welcome to Banco Santander-Chile's third quarter 2007 results conference call. I'm Raimundo Monge, Director of Strategic Planning and I'm joined today by Robert Mareno, Manager of Investor Relations and Strategy.
Thank you for joining us to discuss the banks results and the market outlook for the bank. Afterwards we will be happy to answer your questions. Next to slides, before we begin analyzing the bank's third quarter results, a brief commentary on the recent events affecting the Chilean economy and the bank's general outlook.
In the third quarter of 2007 inflation jumped well-above market expectations fuelling a rise in short-term interest rates, while long-term rates descended. The overnight reference rate set by the Central Bank increased 25 basis points to 5.75% during the quarter. At the same time, long term rates descended and exchange rate appreciated. This inflationary shock was mainly due to the rise in international fuel prices and the harsher than normal winter which caused a strong rise in food prices. We expect inflation to remain relatively high in the fourth quarter of 2007 but slowing down in 2008.
Next slide, at the same time, the world financial markets were rocked by the sub-prime prices. It is important to remind the investor community of Chile's strong market fundamentals as reflected in the strong growth of international results, the ample surplus and low government debt, the relatively low volume debt compared to exports, and the high current account surplus.
Most analysts expect that the sub-prime crisis should have a relatively small direct impact on the local financial market if at all. Next slide, you should be on page 5 of the webcast, given the solid fundamentals of Chilean economy, we remain optimistic about growth prospects for 2008 and 2009. The expansion of the economy is being driven mainly by the increase in general demand along with the export sector.
In 2007, internal demand is expected to grow around 7.8% in real terms followed by an expansion of 7% in 2008 and 6.5% in 2009. The main drivers of internal demand are private consumption and investments. Within this growth... with this growth, GDP is expected to expand between 5% and 5.5% in the next two years.
Next slide, this growth in internal demand and the expansion of employment levels, should help to sustain loan growth, conception and investment are the main drivers of loan growth in the Chilean finance system. In the last 7 years, elasticity of real loan growth versus internal demand has been 1.4 times in average with the higher elasticity for individual lending that is 2.2 times. In simple terms and given the current growth conditions, the size of the Chile financial market as a whole is expected to double in no, no terms during the next seven years while the retail lending market should double in the next five years. These provide an attractive operational environment for the bank.
With this positive outlook in mind, we'll now review our strategic objective for the period 2007, 2009 and discuss our three quarter 2005... 2007 results in detail. Next slide, three quarter 2007 figures reflect Santander-Chile's continuous focus on profitability and it's determination to have sustainable ROE's going forward. In this period, the Bank obtained its highest ever quarterly income which totaled Chilean pesos 85,196 million that is 45 Chilean cents per share and $0.92 U.S. per ADR in line with First Call consensus. At least with a cent an increase of 24% on an annualized basis compared to the previous quarter.
The bank ROE in the quarter reached 26.1% the highest among Chile's top banks. As we will detail in the rest of the presentation the positive three quarter results were mainly driven by strong operating trends which make them outstand in terms of quality. We believe this quality is a direct consequence of the thorough implementation of our corporate strategy.
Next slide, we should be in page 8 of the webcast. As we have discussed in previous calls our strategy center on four basic drivers. First we are focusing on profitable growth allocating our capital through small productive uses which during the last four years has been expanding our retail banking activities. As the largest bank in Chile with the largest distribution network and client base, we believe the bank has the strongest competitive advantage in the retail segment. At the same time we are conscious that retail banking is a risky business and as a consequence we are focusing on risk adjusted profitability target with our pricing strategy that takes into consideration the different risk levels of the segment attended as a way to maintain high margin.
Secondly, we have been developing a number of actions to have more clients to increase cross selling and expand product usage. With over 2.7 million clients, we envision strong cross selling potential by improving client services and more segmented commercial approaches. We are also leading the process of increasing the banking penetration in Chile so, our client base should continue to expand at a rapid pace. Cross selling ratios also improve as more improved as more people develop deeper relationship with the banks.
Finally creating incentives to our customers to prepare and be fair and use our product has been center of our marketing efforts. Simultaneously, we have continued to be focused on proactively managing asset quality in order to balance growth in retail banking with a normally stationed provisioning levels. We believe that in order to maintain a successful long-term presence in retail banking it is necessary to have solid asset quality, advanced model for correctly determining risk levels, and an effective collection process.
Finally, we maintain our leadership in cost control and efficiency. We expect to continue growing at a solid pace, investing and expanding our distribution capabilities. Part of this growth has been and is going to be financed with productivity gains, which should allow us to sustain our world class efficiency levels.
Next slide, as mentioned before, the spurt in inflation resulted in rising short term rates and falling long-term rates. Despite this fact, our funding mix improved reflecting the proactive management of our balance sheet in order to expand margins. Time deposit decreased 1% Q-on-Q but the bank issued U.S. $460 million in long-term local senior bonds in the quarter to lengthen degradation of liabilities in light of rising short term rates and falling long term real rates. At the same time the ratio of average non-interest bearing liabilities to interest earning assets reached 24.5% in the third quarter 2007 compared to 21% in the same period of 2006. These rise in free funds counterbalance in part the negative impact of rising short-term rates of funding costs.
Next slide, in 3Q '07 the bank remains steadily focused on expanding the loan portfolio in those areas that contribute to expanding ROE's. Total loans increased 2.1% Q-on-Q and 12.1% year-on-year. Retail lending expanded 4.2% Q-on-Q and 15.9% year-on-year. In the quarter the Bank focus on strengthening risk adjusted markings in the segments which had some impact on growth rates specially in consumer loans.
Loans to individuals increased 3.7% quarter-over-quarter and 14.6% year-on-year driven mainly by a residential mortgage loans. The bank has been working throughout the year on developing the retail banking model that gives sustainable and adequate profitability to shareholders in the short and long-term. Lending to individuals continues to be a strategic priority for the bank. The verifications introducing the pricing our risk models should allow the bank to grow at a healthy rate with stronger management. Going forward, we also expect a rebound in growth in the corporate and middle market segments and market share should rise not only in lending to individuals but in other segments as well.
Next slide, you should be in page 11 of the webcast. The bank continues to focus on increasing margins and profitability. As a result, in the third quarter 2007 net interest income adjusted for inflation hedge increased 22.7% quarter-on-quarter and 34.2% year-on-year reaching a record level of Chilean pesos 223 billion in the quarter. In order to neutralize the impact of our margins of our globally high levels of inflation the Bank hedged broader based inflation index, part of it's index... inflation index asset liability gap with derivatives. The result of this hedge is included in the net gain from training and mark-to-market.
To have a more recurrent view of the bank's net interest income of margins, the result of this hedge is subtracted from the net income figures. The record high adjusted net interest income was driven by a combination of solid margin expansions, that improved asset mix, the high inflation rate in the quarter, and the positive evolution of non-internal bearing liabilities at the same.
Next slide, with this growth of net interest, the net interest margin reached a record level of 6.2% in the third quarter 2007 increasing 100 basis points quarter-on-quarter and 150 basis points year-on-year. These margins is also adjusted for inflation hedge.
Next slide, our focus on product profitability is also reflected in the evolution of our net interest income compared to the rest of the Chilean financial system. In the past three years, Santander-Chile has continuously outperformed the market in terms of the growth of net interest income compared to the growth of loans. These reflect the Bank's pricing and growth discipline which has meant improving profitability targets over market share, per say. As of September 2007, our net interest income growth continues to out pace that of the Chile financial system as a whole as it can be seen in the slide.
Next slide, the bank is also getting solid results in its second in strategic drivers, client base, cross selling, and product usage. The total number of clients increased 15.2% year-on-year to 2.7 [ph]. These rising client base has been driven by the growth in our retail checking account base. Market share in checking accounts reached 27.8% as of August 2007, the latest figure available compared to 26.7% as of August 2006.
In this 12 month period, the bank has been able to open 50% of all new accounts opened in the Chile market. A greater amount of clients with checking account coupled with continuous improvement in client service has led to better cost saving ratios. The amount of middle operating income clients that used at least three other products increased 19.7% during the year as of September 2007.
Next slide, page 15. The bank also continued to invest in expanding its distribution network to support client activities. As of September 2007 the bank distribution network totaled 425 branches and 1800 ATM's increasing at 15.5% and 22.2% year-on-year respectively. We expect similar expansion of the distribution network in 2008. One third of the bank branches have been in the last 3 years so, we are just starting to have a positive impact in our revenue base.
Next slide, you should be in page 16 of the webcast. The lager client base, higher cross selling, and product usage standard and the broader distribution network were important drivers for fee income growth. Next the income increased 5.6% quarter-on-quarter and 17.8% year-on -year in the third quarter of 2007 with strong and sustainable growth in most of the bank's products and services. Notable has been the increasing key products such as checking account, credit cards, and mutual funds, asset management fees.
Next slide, the bank's risk premium is stabilizing as it can be observed in this slide. In the third quarter, the bank's net provision expense increased 1.8% quarter-on-quarter. This slight rise in provision expense was mainly due to an increase in net provisions in retail banking in line with loan growth in this business segment. As mentioned, in previous releases, provisions are expected to increase due to the growth of lending to higher yielding and riskier retail segments, which although more... have more risk than other line of businesses, have been also pushing our call revenues, our markings to new highs.
The banks continue to display sound asset quality indicators as a result of the proactive management of asset quality and the strengthening of the trading policies and processes. Coverage of past due loans reached 187% at September 2007. The positive loan ratio as of September 30, 2007 reached 0.88%. The ratio of net provision expense over total loans remained steady quarter-on-quarter at 1.4 % in the third quarter 2007.
Next slide, the banks continue to have a world class efficiency ratio. We reached a record low of 34.7 in the third quarter 2007. In the same period, operating expense increased 6.9 Q-on-Q and 18.4% year-on-year. Personal expenses increased 6.9% Q-on-Q and 19.1% year-on-year in the same period mainly as a result of a 12.8% year-on-year rise in headcount. This increase was mainly focused on front office positions as the Bank expand it's distribution network. Santander SuperCaja and the merger of this sub brokerage also added approximately and 200 new employees to headcounts. Additionally, in the quarter, the inflation triggered an automatic increase in personal wages.
For the 9 month period ended September 30, 2007, the efficiency ratio reached 36.1% compared to 36.6% in the same period in 2006. Next slide, in summary, 3Q, 07, as figures, show high quality results and strong operating trends, reflecting our strategic focus on profitability, cross selling, control of asset quality and efficiency. Core revenues increased 19.2 % Q-on-Q and 30.9 %, year-on-year. As the bank continues to show strong result in its retail banking business and a continued focus on maximizing risk adjusted profitability.
At the same time net operating income, increased by 18.8 % Q-on-Q and 24.5 % year-on-year, and also reached our record level of 153 billion Chilean pesos. This strong performance was partially offset by some non-operating items. Going forward, we have a positive outlook for the bank, we are optimistic on the Chilean economy and expect a relatively high expansion of this internal demand. We are keeping our focus on profitability by maintaining a strict control over stress. We also expect cross selling to grow at current levels, which should boost our net interest income and fees. We expect asset quality to remain sound, but as mentioned, loan loss provision could increase in line with the rise of retail banking activities.
Finally we will continue to invest in our distribution capabilities throughout '07 and through '08 while the efficiency ratio should improve. At this time, we will gladly answer to answer any questions you might have.
Question And Answer
[Operator Instructions]. It appears there are no questions.
Raimundo Monge Zegers - Director of Strategy Planning
Okay. Well, thank you, 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.
That does conclude today's program. We appreciate your participation. Have a wonderful day.
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