Banco Santander-Chile (NYSE:BSAC)
Q4 2015 Earnings Conference Call
February 2, 2016, 09:30 ET
Raimundo Monge - Corporate Director, Strategic Planning
Robert Moreno - IR Manager
Ernesto Gabilondo - Bank of America Merrill Lynch
Catalina Araya - JPMorgan
Guilherme Costa - Itau BBA
Philip Finch - UBS
Jason Mollin - Scotiabank
Victor Galliano - Barclays
Jose Burmester - Itau Asset Management
Welcome to the Banco Santander-Chile Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Raimundo Monge, Corporate Director of Strategic Planning. Please go ahead.
Thank you very much and good morning ladies and gentlemen. Once again welcome to Banco Santander-Chile's fourth quarter 2015 results conference call. This is Raimundo Monge, Director of Strategic Planning and Robert Moreno, Manager of Investor Relations joins me today. Thank you for attending today's conference call in which we will discuss our performance in 2015 and the fourth quarter of this year. Following the webcast presentation, we will answer your questions.
We will begin this presentation by giving a brief update of the outlook for the Chilean economy in 2016. Even though there is a lot of uncertainty, the broad consensus is that Chile's economy should grow at a similar pace in 2016 than in 2015. We expect growth to be between 2% and 2.3%. Unemployment figures have been fairly resilient but we do expect a slight uptick in employment in 2016. Inflation will depend on the evolution of the exchange rate which has been very volatile and therefore we're forecasting a broad range between 3% and 4% for this variable. Finally, with this outlook we only expect a 25 basis point rise in interest rates if at all during the year.
Clearly the mining sector has been dragging the economy in 2015, a situation that should remain in 2016 but there are other sectors that are expected to show encouraging growth trends. As can be seen on the slide in page 4 of the webcast the ex-mining sectors of the economy should deliver a growth rate of their combined output in the range of 2.5, 2.6 to 2.6 this year and the following.
These sectors tend to be more reliant on banks for financing while the mining sector has little exposure to them. The stability of unemployment has also led to positive momentum in retail banking activity. Finally, lower energy prices, the depreciation of the currency and a relatively stable combined growth of Chile's main trading partners should fuel growth on export-oriented activity. All in, this is translating into a relative supportive operational environment for banks. For this reason, our expectation for loan growth in 2016 has not yet changed and we foresee that loans should be expanding between 8% to 9% in 2016.
Now we will give further details into the success we had this year in our core client businesses. In 2015 the bank made important advances in all of its strategic goals. As we will see in the rest of the presentation, the bank showed positive balance sheet growth and results in those segments it has been targeting, mostly retail banking and middle market.
This has been achieved by the improvements in customer loyalty and service which has helped to boost loan growth, checking accounts and to a lesser extent fee income in those segments. At the same time, our strategies resulted in better asset quality metrics in those segments which brightens the outlook for our cost of credit in 2016 and 2017. Finally, we also finished the year with the best capital ratios among our peers which should allow us to continue growing at an interesting pace and to pay a good dividend to our shareholders.
Loan growth continues to be focused on mid to higher income individuals, small and middle sized enterprise SMEs and the middle market of corporate, segments that in our current microenvironment tend to deliver a higher risk-adjusted profitability. Total loans increased 0.3% Q on Q and 10.5% year on year in the fourth quarter. Retail banking loans, that includes loans to individuals and SMEs, increased 3.6% Q on Q and 12.1% year on year.
Loans to individuals increased 3.9% Q on Q and 12.9% year on year, led by growth of loans to the higher income segment that increased 18% in 2015. Loans to SMEs increased 2.4% Q on Q and 9.2% year on year with loan growth focused on relatively larger SMEs that also generate non-lending income.
This was partially offset by a 3.5% Q on Q decrease of loans in the middle market and a 12.3% Q on Q decline in lower yielding loans volume in our global corporate banking unit. During the quarter spreads in this segment tightened, resulting in a temporary pause of our loan growth in this area.
The bank's strategy of focusing equally on lending and non-lending businesses has also led to strong deposit growth. Total deposits increased 4.2% Q on Q and 15.7% year on year in the quarter. Deposit growth has been led by demand deposits that expanded 10.7% Q on Q and 13.5% year on year. The rise in demand deposit in the quarter also helped to mitigate the negative impact of rising short term interest rates on our funding costs. The bank deposits have grown at double-digit rates in all segments as the bank continued to improve client loyalty and service indicators. Solid growth of demand deposit has been supporting the steady growth of non-lending revenues this year.
In the fourth quarter of 2015, the bank achieved positive net client growth for the 11th consecutive quarter but with a greater focus on improving customer loyalty. Only 15% of our customer base meets our new loyalty standard, reflecting the large potential for further growth. Loyal individual customers defined as clients with four or more products plus a minimum usage and profitability levels in the mid-high income division increased 6.3% year on year.
In the quarter, the growth rate of loyal individual customers decelerated due to a proactive reduction of clients in the mass-market. Among middle market and SME clients total customers grew 11.2% year on year. This solid evolution of our loyal customer base has been achieved by a steady improvement in our customer satisfaction indicators.
In 2012 when we began our transformation process we set a goal to close the customer satisfaction gap between us and our main peers measured as the percentage of clients who consider the bank customer satisfaction as good or very good minus those who rate the bank poorly in an independent survey done twice a year for banks. As of October 12, 2015, the latest date at which this survey was realized, we have almost reached our sales imposed target.
As can be seen in the graph in the right side of slide 12, we have consistently been closing the difference between us and our main peers in that year. This has been achieved by a strength of our new CRM, the improvement in our branch layout and the strength of our digital bank services, especially the Internet.
In this same slide we also include at the latest date this information was published by the Superintendency of Banks our market share in Internet banking among private banks. This figure is quite high for us, reflecting the strong market share we have in transaction analysis of our clients. We believe the improvements made in terms of client relationship has been a key achievement in 2015 and will be the basis for profitable growth in the following year.
Another relevant achievement in 2015 was the improvement in the loan mix and asset quality which is another key element of our strategy. The bank's total nonperforming loans improved to 2.5% in 2015 compared to 2.8% in 2015. Total coverage of nonperforming loans ended the year at 117% compared to 109% at the end of 2014. Impaired consumer loans, defined as consumer nonperforming loans plus renegotiated consumer loans to total consumer loans, reached 8% in 2015, down from 9.3% by year-end of 2014, the lowest levels since 2010. Overall asset quality trends in commercial lending were also positive in 2015, especially among SMEs following the actions taken last year to stabilize asset quality in this segment. The commercial nonperforming ratio reached 2.6% by year-end 2015, improving from 3% by the end of 2014.
The average ratio of commercial nonperforming loans increased to 129% compared to 108% a year earlier. In mortgage lending similar trends were seen. In order to further improve our asset quality metrics we have steadily been shifting our loan book. Currently 62% of our consumer loan book is in the high-end of the consumer market and only 10% in the low-end compared to 52% and 15% at the end of 2012. The change in consumer loan mix reflect the focus on preapproved loans to our CRN, the upgrade of our credit models and the strengthening of our collections area.
Despite this improvement, the bank's Board and management has proactively decided to further reinforce consumer loan refinancing policies due to expected rise in employment in 2016. This should increase charge-offs in the short term and reduce our exposure to the lowest end of the consumer loan segment which we have been gradually exiting in the past three years.
This in time should allow the bank to further increase the profitability of its retail banking unit, reduce nonperforming consumer loans, boost coverage and maintain a positive outlook for asset quality in 2016 and beyond. We're aiming at achieving a cost upgrade of around 1.4% to 1.5% in 2016 and 1.2% to 1.3% by 2017. The bank also concluded the fourth quarter with strong capital ratios. The core capital ratio reached 10.3%. This is 100% tangible common equity and the bank's Basel I ratio reached 13.4% at the same day.
As can be observed in slide 16 of our webcast we have the best capital ratios compared to our main peers. If the bank's dividend payout ratio remains unchanged at 60% as it has been the case in the past five years the dividend yield would be around 4.8% with 2015's closing share price. Our focus on profitable growth has allowed us not to issue a single share in the last 14 years.
With this, we conclude our section on strategy and focus in our 2015 financial results. The bank's net attributable to shareholding for in Q4 2015 totaled CLP83.783 billion. As we anticipate in our previous call 4Q 2015 results include a nonrecurring pre-tax provision of CLP50 billion related to number one, the new provisioning requirements regarding mortgage loans and two, other one-time provisions recognized in the middle market and global corporate banking segment.
With this result the bank's net income attributable to shareholders in 2015 totaled CLP48.878 billion for the full-year. The bank's stated ROE was 17.1% or 18.1% adjusting for the pre-tax voluntary provision for the new provisioning requirement, both ratios in line with the guidance given in the third quarter 2015 earnings call. In the fourth quarter of 2015 net interest income and net interest margin were affected by the lower quarterly inflation rate. The bank has more assets than liabilities linked to inflation and as a result margins have a positive sensitivity to variations of inflation.
Client net interest income which stripped this effect, increased 1.1% Q on Q and 7.1% year on year, driven mainly by loan growth and the improved funding mix. Client NIMs which exclude the impact of inflation, reached 4.8% in the fourth quarter 2015 compared to 4.9% in 3Q 2015 and 5% by the end of 2014. This trend was mainly associated to the shift in asset mix to less riskier segment which is supporting our client NIMs net of provisions.
For the full-year 2015 client NIMs net of provisions reached 3.4% compared to 3.5% in 2014. This reduction was mainly due to the extraordinary provisions recognized in global corporate banking. Client NIMs net of provision in retail and middle market were stable at 3.5% in 2015 as the shift in the loan mix and better funding mix offset lower loan spreads. Going forward we expect client NIMs net of risk to stabilize or slightly improve given the sound asset quality indicators in retail and expected improvements in corporate bank.
Net fee income in the quarter was negatively affected by weaker market activity which reduced fees from investment banking and brokerage income. For the full-year 2015 fees increased 4.6%, the highest growth since 2011 when regulatory changes affected this line item. Fees in retail banking grew 8.8% in the year and in the middle market fees grew 5.5% in the whole year, in line with the steady advances made in customer loyalty and service.
Issues continue to boost fee income in 2015 into 2016. As we already mentioned, 4Q 2015 results include a nonrecurring pre-tax provision of CLP50 billion related to a one-time voluntary provision of CLP35 billion directly related to the regulatory changes regarding provision models for mortgage loans and substandard consumer and commercial loans analyzed on a collective basis. This charge was lower than initially expected but in the quarter the bank decided to proactively strengthen the coverage of some specific clients in the settlement and non-bank financial services industry for a total provision of CLP15 billion.
In summary and despite some one-time charges in the second half of this year, most of the bank business unit showed positive operating trends in 2015. Net operating profits from business segments increased 8.6% year on year in 2015. Net operating profits on retail banking increased 10.6% year on year and 17.9% in the middle market.
This shows that our strategy has started to deliver better and more resilient client results. These positive results were partially offset by lower results in our global corporate banking impacted by higher provisions. Operating expenses increased 9.5% Q on Q and 17.3% year on year. The efficiency ratio reached 41.3% in 2015. Personal salaries and expenses increased 11.6% Q on Q and 19.9% year on year. The rise in labor cost was mostly due to non-recurrent severance expenses of CLP6.3 billion recognized in fourth Q of 2015. Throughout 2015 the bank has been optimizing its headcount structure to control costs going forward.
For the full-year 2015 severance payment increased by CLP23 billion compared to 2014. Excluding this item, total cost increased 7.3% in 2015 and the adjusted efficiency ratio was 39.9. And administrative expenses increased 2.8% Q on Q and 6.7% year on year. The growth of administrative expenses was mainly due to greater business activity and has resulted in higher system and data processing costs. This was partially offset by lower expenses related to the branch network following the reduction in Banefe branches and other payment centers. Streamlining of the branch network and headcount together with our digital banking strategy should generate lower cost growth in 2016.
In summary, 2015 results showed positive recurring trends in our business segment. Our reported ROE was 17.1% but adjusting for the pre-tax voluntary provision of CLP35 billion recognized in 4Q 2015, our adjusted ROE was 18.1%. We have been steadily implementing our corporate strategy and achieving our business target.
In addition, we also ended the year with a stronger balance sheet, higher coverage ratio and strong capital level. This is important since it paves the way for what we foresee as a sound 2016. Moreover, the bank's current financial condition should allow us to be prepared for a further deterioration of the world economy if that is the case.
At this time we will gladly answer any questions you might have.
[Operator Instructions]. And our first question comes from Ernesto Gabilondo of Bank of America Merrill Lynch. Your line is now open.
I have three questions. With your macro assumptions, how much reduction in basis points should we expect in the net interest margin for this year considering tougher competition and the potential reduction and inflation rate and how much growth are you expecting for net interest income? Secondly, considering lower severance payments, greater productivity in the branch network and higher usage of digital banking services, where should we expect the efficiency ratio for this year? And finally, what should be the effective tax rate and how much net earnings growth are you expecting for this year? Thank you.
In terms of the net interest margin if you add -- there are two effects that are affecting the evolution of net interest income. First is the lower inflation because the bank has a positive sensitivity to inflation, so the lower the inflation, the more that impact has. And secondly is the effect of changes in rates that have again negative and possible effect because the higher the rate the more our demand deposits are profitable but in the short term it tends to compress margins.
According to macro assumptions we foresee a reduction of the total net interest income of something between 10 to 15 basis points next year. However, on the client side as we stated in the call or in the script we foresee net client spreads to be stable if not slightly rising. Because remember that in 2015 a big proportion of the rise of the lending volumes was due to mortgages which tend to be very low yielding.
So the switch in the composition of the loan growth should be supportive for client and margins going forward. So all-in, net interest margin if inflation drops to something close to 3%, 3.2% it would be a drop of a further drop of 10 to 15 basis points in our margins or if inflation is more in the higher end of our target the impact in our margins should be very small.
In terms of cost income, if you strip the effect of this post-control plan that we have launched in 2015 where we have mostly seen the negative side of the plan by means of severance payments on the order of CLP23 billion, our cost income, the underlying cost income is around 40%. We foresee that figure to be visible in 2016 as well.
In terms of the tax rate -- although the stated tax rate will rise to 24% we foresee we could achieve an estate or an effective tax rate closer to 19%, 20%. That will mean that will be a rise in our tax burden. We're not giving a very clear guidance in terms of profitability because of the many uncertainties that we have. But we think that as we have been mentioning before our ROE should be moving depending on the many pieces that are moving in the range closer to 17, 17.5 for this year.
And our next question comes from Catalina Araya of JPMorgan. Your line is now open.
I just have a question related to asset quality. You stated that middle market would be a continued focus in 2016 if I understood correctly but in the previous two quarters we've had additional provisions related to this segment. So I just want to understand how we should think about loan-loss provisions in 2016 and in general cost of risk for the whole bank. Thank you.
Yes. In terms of asset quality, again in the central microenvironment which is basically to grow between 2%, 2.3% we shouldn't foresee big problems. We don't have specific sectors that we're concerned. This final quarter given that we have a very solid year we probably made strength in the coverage ratio of the only sector that is producing some sore points which is the salmon industry because of many unrelated or many industry-specific issues and a single borrower in the large corporate banking side.
We don't foresee pending issues in terms of asset quality. And the fact that the underlying trends which are mostly in mind in the consumer side are solid and are encouraging make us believe that as we stated our cost of credit this year should be dropping to something close to 1.4%, 1.5% with nonperforming loans very similar if not slightly lower by the end of next year compared to the end of the year.
So we think that again the mix effect that still has room to improve asset quality metrics will be compensating the drag of the economy. And remember that the economy has been fairly impacted by the mining sector where banks have very little activity.
So remember that the mining industry hires less than 1% of the workforce. So even if you add the contractors and the suppliers at [indiscernible] the effect in jobs has been very negligible and has been more visible in the exchange rate which at the same time is producing opportunities for non-corporate supporters and for the economy in general. Because the corporate price has been also followed by a very low oil price which is benefiting the rest of the industry, especially export-oriented activity but also companies that are producing for the local market.
So that's what we think that again there are hedges in the economy that makes us believe that the external conditions won't be a negative in 2016, that probably in the internal front most of the changes will come from the political side where we hope to see more trust between the business community and the government and that should in time and improve the confidence levels which are very low. So we don't foresee big changes neither on the negative side nor on the positive side. But if that is the case as we stated it should be at relatively supported macro and operational environments for banks as was the case this year.
And sorry, can you just repeat the loan growth guidance for this year?
We foresee that in our case it will be very similar to the market, something between 8% to 9%. And most of the reduction compared to this year we finished close to 10% will come on the mortgage side because there are one-timers that will be reduced in 2016 compared to 2015. So for the rest of the lines the consumer, commercial, etc., relatively similar growth rates and more little growth on the mortgage side compared to 2015 given a total of between 8% and 9%.
And our next question comes from Guilherme Costa of Itau BBA. Your line is now open.
I have two questions. First, could you share with us the breakdown of loan growth for 2016? And second, I know that you mentioned for the NPOs you expect a flat number in 2016, but could you comment if you expect any deterioration in any segment, for instance if you expect that consumers could deteriorate more than mortgage or commercial? Thank you.
Okay, as I mentioned we don't foresee relevant changes in the growth rate or in the lending side neither by segment nor by product except for mortgages where in mortgage growth in 2015 was fueled by some tax breaks that will be eliminated starting this year. So we said that we don't foresee big changes.
The only concern is in the large corporate segment that loan spreads tend to be fairly volatile. And in our case given that our strategies focus around profitability we tend to slow down a little bit earlier than the rest. And that's why we have in the bank that has never raised capital in the last 14 years.
We're the only bank that has been in a position not to request further capital to their shareholders. And that's why in the corporate side we tend to be very cautious in terms of capital deployment because loans in that segment are very low yielding. And we tend to make most of our revenue in the non-lending side.
So that's what we think that the growth in the retail and the mid-market should be similar to what we saw in 2015. And on the corporate side it's more a reflection of the cost of capital that the rest are willing to pay. If it is below our threshold we simply stop growing as we had been growing doing, you saw that in the third Q and the fourth Q as well. So it's a profitability strategy. So we have some implicit targets for growth but the most binding targets are in terms of profitability.
In terms of nonperforming loans, we don't foresee again changes, relevant changes. The only one is the ones that we have announced that in the low-end of the consumer market we want to get hopefully a little bit quicker out of that segment or reduce our exposure because given the current macro environment that segment doesn't fulfill our profitability criteria. That can expand, as we saw a glimpse in the fourth quarter, can expand nonperforming loan levels. But at the same time we will reduce the impaired loans level which includes that plus the charge-offs.
So what we're doing is taking advantage of the relatively solid underlying profitability of the banks to accelerate getting out of that segment, a process that we started in this year and probably will keep trying to do as long as we have relief in terms of unexpected positive events. But all-in, the stable asset quality indicators and in the margin improvement, especially on the provision side given that we don't foresee to repeat the one large client that we had to provision in the corporate side, we don't foresee to further strengthen the coverage in other sectors as we mentioned before.
And our next question comes from Philip Finch of UBS. Your line is now open.
Thank you for the opportunity to ask a couple of questions. First is really relating to your Tier 1 ratio where we're seeing good improvements, core Tier 1 at 10.9%. So the question is how much higher do you want us to go, what is the optimal level of capital you would like on a Tier 1 basis. Related to that, can you give a quick update on where we stand in terms of the new banking law?
My second question goes back to cost growth, what is your expectations for cost growth this year? And I didn't catch the outlook for efficiency ratio or cost income ratio for this year. Thank you.
Okay, in terms of capital today we don't have a specific target. We of course want to be have a comfortable position in terms of capital, that's why we tend to deploy capital only where we expect a certain profitability. And that explains why our loan growth, especially in the large corporate segment, tends to be probably more volatile than other peers are willing to deploy capital in relatively low yielding activity.
The uncertainties related to the implementation of Basel III because although we're fully compliant with European central banks targets both in terms of capital and in terms of liquidity we don't know which will be the final nitty-gritty to be implemented in Chile. So temporarily we foresee we will maintain a higher than basically required level of capital, especially Tier 1, in anticipation of surprises that could eventually come in the discussion of this bill in Congress.
Regarding that discussion, there are a lot of -- there are a lot of reforms are under discussion in the government and probably this one being quite relevant is not as pressing as for the political system as others have been. So we probably will see some light throughout 2016 but it's very difficult to know whether it will be first half, end of the year.
So up to now the draft that has been sent is not concerning but you never know what could eventually happen in the discussions going forward. So that's why we prefer to keep a cushion of quote, unquote excess capital in anticipation of some surprises that could come on that discussion. In terms of cost growth, we think that after the cost-reduction plan that we launched at the middle of the year which we have seen the negative side of it by means of a high level of severance payments, etc., our cost growth should be slowing down throughout the year. This year if you strip that effect it was like 7% something growth.
Next year could be around 5%, 5.5% with a measure that we have that assets. Apart from that the branch optimization is also helping and the increased usage of alternative distribution mechanisms and the increased use of the CRN are also feeling in that direction. If that is the case our cost income, our stated cost income, should finish the year probably around 40%, down from 41.3% this year.
[Operator Instructions]. And our next question comes from Jason Mollin of Scotiabank. Your line is now open.
My question is related to the new provisioning or this voluntary provisioning for the change in the regulation related to mortgages. Can you talk a little bit about, obviously we know that there's a regulatory change, but can you talk about whether the bank thinks that this change will actually result in through the cycle in higher losses in the mortgage book? Have you felt comfortable with the models that you were running and the provisioning that you were making? And I just want to confirm two details on that.
One, I believe I saw in the press release that these provisions will be included in loan-loss allowances which they are not in the fourth quarter but will be in the first. And that we'll see no more provisions related to this regulatory change going forward.
Yes, two things. The first is that as we've talked before, Chile is in the process of fully implementing Basel III which again in the plain-vanilla version allows banks to have internal models. So that's why we think that the final stage of implementation of Basel III will be to allow banks to use internal models that are monitored by the regulator, etc.
In the meantime the Superintendent of Banks decided to force banks to use either the internal models or this standard model whichever was more binding. Binding in the sense of requiring higher levels of provisions. And that's why in our case, although we feel comfortable with our provisioning model, we had to take additional provisions to comply with the standard model which was more binding than our internal models.
In time we think that we will eventually go back to internal models because the back testing. And all the tests that are followed internally and by the different regulators, remember that we're regulated directly by the European Central Bank, by the Superintendent etc. make us believe that our models are sound enough for evaluating asset quality in the mortgage portfolio. So we think that this is more of a transitory provision.
In terms of moving from voluntary provision to allowance is simply a technicality because the implementation of this new model has to be by January 1. And that's why as we close our books in December 31 we leave it as a voluntary provision but starting January will be reflected as a required provision. So we think that again you never fail to be too conservative.
We think that the superintendent is correctly trying to make banks be as prudent as possible. And we think a fair price to pay to have a solvent system and a solvent industry. But again we think that in our case probably it's not fully required and we feel comfortable with our internal model.
And our next question comes from Victor Galliano of Barclays. Your line is now open.
Yes, my main questions have been answered, but just follow up here looking at the revenue line I mean you have fairly weak sort of fee and commission growth coming through in 2015. To what extent can you say that you're sort of repositioning your digitalization, etcetera? How is that going to impact your fee and commission going forward? Is this -- are you at risk of maybe cannibalizing some fees or do you think on the contrary that actually your repositioning and your new channels will help you grow that fee and commission number in 2016? And do you have any sort of guidance or range on that? Thank you.
Yes, well if you take the results for the whole year, fees in the retail banking are growing, grew 8.8% which is a relatively high figure, the highest figures that we have shown in many years. So you see ups and downs depending on extraordinary issues that we highlighted in the press. But generally speaking fees in that segment tend to move in line with loyal customers and the customer base in general.
So that's why we foresee that that growth of 8.8% for the year can be sustained in the retail segment going forward. Something lower happens in the middle market where fees are more dependent on one-timers, large bond issues and kind of market-related ratings, corporate rating, etc. And because it is most obviously seen in the large corporations where the bulk of fees are one-timers and that's why they tend to be more volatile, etc.
So all the changes that the bank has been doing in terms of new tools for handling the client relationship, etc., etc., are aimed at increasing demand deposits which we have been fairly successful this year and fees which of course will take more time because it's a learning process and it's something that even the softer macro conditions it's a little bit more difficult to achieve it. But all-in we think that if this year fees grew 4% something next year we can see them growing in the 6%, 7% range, again hoping that market conditions won't deteriorate from the relative low level activity that we saw this year.
And our next question comes from Jose Burmester of Itau Asset Management. Your line is now open.
My first question is related to this new notification make the definition of the standard consumer commission loans that was around CLP16 billion. Can you please talk a little bit about what is the implications of these modifications?
I beg your pardon. Can you repeat the question?
Sorry, sorry. Robert clarified the question. Yes, we think the 35 there are two things. One is that you have to filter all your mortgage portfolio according to the loan-to-value and according to the delinquency levels. And that resulted in a charge of CLP20 billion. The remaining is because apart from that you have to mark all other positions that client might have in commercial lending or in consumer lending the fact that the model is force you to also provision other positions that the client might have.
And that resulted in the rest of the provisions we're setting. Because although this is a standard model for setting provisions in the mortgage business, it has the additional requirement that those clients that have some trouble in the mortgage also have to be further provisioned in other lines of businesses that they might have with banks. And that explains the remaining CLP15 billion.
And my last question is related to the commercial portfolio and last year's we have seen Chilean extraordinary growth in the real estate and in the mortgage loans. And I would like to ask you how do you see the real estate companies if you see any deterioration this quarter and what is your exposure to this sector?
Yes, the answer is that of course we foresee that the overall activity for real estate companies will be reduced in some cases in a visible way because of their rush to build houses in 2015. In our specific case our exposure to real estate is around 3% of the loan portfolio.
We're very concentrated in operators that have a long track record, for example in the case of the earthquake where it was one of the largest earthquakes on record, these companies were able to comply with the clients and to maintain a healthy financial condition. So we don't foresee these being larger than the earthquake we saw in 2010 and that's why we don't foresee problems.
On the mortgage side, we don't foresee again a big drop in activity because what you have to register by the end of last year was the contract to buy the house, but not necessarily the house would have been actually built and therefore the mortgage activity will be slowing down in time and probably will be more visible in 2017 than in 2016 because you close the deal by the end of last year but then you have 1 or 1.5 years to build the house or the apartment, whatever and later once you have all the approvals you set the mortgage.
And that's why we think that it will be a gradual process, it will be visible but we don't expect this year mortgages to go to zero or real estate activity going to zero. It will be gradual in time this year and to a large extent in 2017.
And relating to this topic, how do you see the construction sector, specifically the building construction sector and what's your exposure to the sector?
In the commercial side is very small because in our case we basically finance houses more than real estate sector or the commercial sector, etc. Then to compensate for that the government is pushing a program of public investment to compensate for that.
So we think that again there are different realities, especially smaller companies will probably be in a weaker position than larger companies where we tend to focus. But many of them have a real estate division and a construction division that probably will be more involved in infrastructure and things like that. So in our presentation we highlight that the construction sector will reduce activity but we still see positive growth this year and in 2017.
So you have to be careful but it's a sector that again has proven to be resilient and we saw that very clearly after the earthquake which was a major situation and our clients didn't see any stress after that condition. And the current condition has been very much anticipated because it's something that has been under the screen for many years now. And as a consequence we think these clients have enough time to adapt and to adjust and that's why we don't foresee hopefully surprises coming from there.
Sorry, I didn't get it. What's your exposure to this sector?
In total, it's like about construction is about 7% of the loan book. But all that half of that is infrastructure, another 30%, 40% is homebuilding and then the other very small part is commercial real estate. We have very little exposure to commercial real estate.
Yes. And in the case of house the bulk of our exposure to homes is first houses. We rarely finance projects that are second homes in the beach or somewhere where people won't be actually living. So historically the delinquency levels have been very low. But again we have increasingly been concentrated in relatively fewer names, those that have a proven track record.
Sorry, I didn't hear clearly. Can you please repeat the exposure? You said 7% --
Yes, the total exposure to construction is around 7% of the loan book. Among that half is infrastructure which is mostly linked to the government and the other half is mostly a home building, first homes and the like. And we have a remaining, a very small part that is real estate commercial property. But I would say it's less than 1% maximum.
So, sorry, 7% construction and then you have a 3% --
Okay, 7% and then you have 3% more in the real estate, is that correct?
No. 7% in total where half of that exposure is for infrastructure and half of that 7% is for home building. There is a minor portion in between which is commercial real estate that it is very immaterial. So, the total exposure to construction is 7%.
Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Monge for closing remarks.
Okay, 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.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.
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