Banco Santander Chile Q3 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Banco Santander-Chile 3Q '22 Results Conference Call on the 28th of October 2022. The format of today's call will be a presentation by the management team followed by a question-and-answer session. So without further ado, I would now like to pass the line to Mr. Emiliano Muratore, the CFO of Banco Santander-Chile. Please go ahead, sir.

Good morning, everyone. Welcome to Banco Santander-Chile's third quarter 2022 results webcast and conference call. This is Emiliano Muratore, CFO, and I'm joined today by Robert Moreno, Managing Director and Head of Investor Relations; and Claudio Soto, our Chief Economist. Thank you for attending today's conference call. The bank has continued to achieve strong results in the third quarter of this year with high ROE and solid financial performance. Our successful digital strategy and customer-oriented product offerings continue to attract new clients, indicating great growth opportunity going forward. In the quarter, the Central Bank of Chile also continued to tighten monetary policy. We will be giving a more detailed analysis of the impact this will have on our margins. To begin, I invite Claudio Soto to give us an update on the macro scenario beginning on Slide 4.

Thank you, Emiliano. As expected, the local economy has been slowing down since the second quarter. Activity grew 0% year-over-year, and the next monthly print will be negative. Despite that, some sectors have been more resilient than expected. As a result, we have revised our growth estimate for the year up to 2.55%. Excess liquidity from pension funds withdrawals and cash transfers in 2021 have been draining away in the context of high interest rates. The labor market has weakened with low job creation at the margin. In turn, investment prospects remain subdued. Because of that, domestic demand will suffer a relevant contraction in 2023. In turn, this external sector would be affected by low global growth. All-in-all, we forecast that GDP will have a contraction close to minus 1.2%. In 2024, we will see a recovery of the economy back to trend. The current account deficit, which has been widening, should start shrinking during the following months as domestic demand contracts and terms of trade stop falling. Inflation remains elevated but has shown some signs of slowing down. September's CPI was in line with expectations and historical patterns, but October's figure will still be high. However, in the following month, we should see a gradual moderation due to low commodity prices and a weak economy. We estimate that inflation will close the year above 12.5%, and next year it will fall to almost 6%. The Central Bank has announced that in the most likely scenario, the hiking cycle has concluded with a monetary policy rate at 11.25%. We expect the rates will remain on hold during the December policy meeting. The Board may decide to begin unleashing recycling as soon as they're generating meetings. Although it is more likely they start cutting at April's meeting. We estimate the monetary policy rate will end 2023 at around 7%. The fiscal balance has improved amid strong revenues and a sharp fall in expenditure. This year, there will be a fiscal surplus of about 1.6% of GDP, and gross debt will fall back to 36% of GDP. Next year, there will be a mild expenditure expansion with gross debt climbing to 38% of GDP. Political uncertainty remains high with two degrees during the following quarters, mostly due to the rejection of the Constitution process driven by the constitutional convention last September. Different political forces are building a new agreement on how to continue this process. Until now, there's consensus on the need for a new constitution and certain borders of an eventual new tax, including establishing a stronger welfare state, protecting human property rights, and ratifying autonomous bodies of the state, most notably the Central Bank. Regarding the legislative agenda, the tax reform has been subjected to important amendments in Congress, and its scope has been narrowed down. The pension reform should be sent to Congress soon.

Thank you, Claudio. We will now move on to Slide 8 to begin discussing our financial performance. Year-to-date, the bank's net income totaled Ch$707 billion, an increase of 29% compared to the same period last year. With these results, our year-to-date return on average equity reached 25.9%. Our net income to shareholders in the third quarter reached Ch$186 billion, increasing 5% year-over-year and decreasing 35% quarter-over-quarter. This fall was mainly due to lower net income in the quarter as inflation decelerated and interest rates continued to rise. As we show on Slide 9, this was offset by very strong results from our business segments. The net contribution from our business segments increased by 20.6% year-to-date and 23% quarter-over-quarter. It is important to note that the results from our client segments exclude the impact of inflation and the cost of our liquidity, and therefore present a clear view of the sustainable long-term trends of our business. On Slide 10, we show the results from our largest segment, which is retail banking. This includes the results from individuals and SMEs. The net contribution from this segment increased 9.8% year-over-year, driven by an 11% rise in revenues as client growth and higher product usage continue to drive results in this segment. On a quarter-on-quarter basis, net income from retail banking grew 21% despite a 1.3% decline in net interest income. The rise in non-net interest income in the segment has more than offset the impact of the shift in funding mix as clients move away from demand deposits to time deposits. These positive results can be broken down to a single key factor, client growth. As can be observed on the left of this slide, our active individual clients, that is clients that have a minimum average balance and/or interaction levels, are growing 9.2% year-over-year, and our checking account customer base is growing at an impressive 23.8% year-over-year. Our SME client base is also evolving favorably, with active clients increasing 16%, checking account clients up 32%, and loyal clients in the SME segment growing 9.5% year-over-year. As can be seen on Slide 11, one reason for this positive rise in client numbers is our net promoter score figure. After a slight dip in our net promoter score at the beginning of the year following some necessary changes implemented to improve cybersecurity protection, the net promoter score has rebounded as our digital platforms, our app, our website, contact center, and work affairs continue to be highly valued by our customers. Moreover, and as shown on Slide 12, Santander Life continues to shine as one of the best innovations introduced into the Chilean banking market in recent years. As of September, this platform had over 1 million clients and was growing 28% year-over-year. As can be seen from the graph, we started a life program in 2018, and this platform really gained traction once we launched the Santander Life in June 2020, the first 100% fully digital checking account. Building on this success in 2022, Santander Life also began offering clients the ability to open a $1 checking account 100% digitally for an additional fee. Santander Life clients are also rapidly being monetized with gross income from life clients increasing 62% year-over-year. Demand deposits remain high at $846 million, surpassing by many times the amount clients have deposited in similar competing platforms. On Slide 13, we show how Superdigital's client base continues to expand at a rapid pace. Superdigital is a prepaid digital product aimed at the unbanked who seek a low-cost bank account. Superdigital clients have grown 69.5% year-over-year, reaching over 364,000 clients. This growth has been helped by alliances with companies such as Cornershop and Uber as a way of attracting new clients. As we stated before, the growth of our SME client base is also accelerating. On Slide 14, we show our two most recent digital initiatives that are piggybacking on the life platform to expand our presence among SMEs and micro-entrepreneurs, Prospera and Cuenta Pyme Life. Both platforms have been a successful way to reach new SME clients by offering a reasonably priced checking account plan for every client with no previous financial history. The other important driver of our SME client base is Getnet. As shown on Slide 15, Getnet has already reached a market share of 15% with over 131,000 POSs sold. 89% of Getnet clients are SMEs or target clients, and 99% of the POSs are sold to the bank's distribution channels. Getnet is currently processing 388 billion in monthly sales. This product has been quick to monetize, generating Ch$17 billion in fees year-to-date. Furthermore, Getnet is also turning a profit after just over a year of operations. Moving on to the middle market on Slide 16, the segment's results have increased 29% year-on-year and 18% quarter-over-quarter, driven by positive loan spreads and a focus on Green financing with over 47 billion in Green loans disbursed this year. A special interest was our involvement in the importation of 1,000 electric buses on behalf of the largest Mercedes dealer in Chile for Chile's public transportation system. Non-lending activities also led to an increase in revenues with fees increasing 9.4% and treasury income 14.7% year-over-year. This led to a 19.8% increase in total income in this segment. The results of Santander's net corporate and investment banking or CIV have also been quite impressive this year, as shown on Slide 16 - 17. Net income grew an impressive 42% year-over-year and 36% quarter-over-quarter due to positive spreads on loans and deposits and strong growth of non-lending activities such as cash management and treasury. With this, total income increased 43.7% year-on-year and 14.9% quarter-over-quarter. In the quarter, we also continued advancing and achieving our responsible banking commitments, as we can see on Slide 18. In 2022, we were once again awarded as the top Employer Award here in Chile by the Top Employers Institute. The percentage of women in managerial positions has already met the target for this year of 28% with a target of 30% by 2025. The gender pay gap is currently at 2.9%, but we are committed to reaching 2% by year-end. In sustainable financing, we accumulated more than 685 million in Green financing since 2019. 28% of our energy is coming from renewable sources and this will reach 43% by year-end, considering the operations of our new solar plants in the fourth quarter. Moving on to the next section detailing our balance sheet and results. On Slide 20, we start with loan growth, which grew 1.8% quarter-over-quarter and 8.9% year-over-year. The growth in loans is mainly due to conversion gains produced by high inflation in the quarter, which was plus 3.5%. On loans denominated in U.S. and conversion gains produced by the depreciation of the Chilean peso against the dollar, which is around 4% quarter-over-quarter for loans denominated in foreign currency. Approximately 20% of our commercial loans portfolio is denominated in foreign currency, mainly in dollars, and 50% of our loans are denominated in U.S., mainly mortgages and some commercial loans. Loans to individuals increased 11.7% year-over-year and 2.5% quarter-over-quarter. High yielding auto loans continued to grow by 2.7% quarter-over-quarter, and we are seeing interesting trends in credit card loans, which should be a driver of growth in the fourth quarter and next year as lifestyles return to pre-pandemic levels. During the quarter, loans in our CIB segment grew 6.6% quarter-over-quarter and loans for the middle market grew 2.2% in the same period as corporate saw funding in the form of bridge loans and other short-term or short-term financing products. On Slide 21, we show the evolution of our funding mix. Total deposits decreased 5% year-over-year but increased 2.4% quarter-over-quarter. After a strong increase in non-interest bearing deposits in the last two years, we have started to see clients shifting their money to time deposits as rates rise. As a result, time deposits increased 15.8% quarter-over-quarter. With this shift, we expect average funding costs to continue to rise as the monetary policy rate continues to go up. These higher rates will eventually be transferred to our loan book, given that our interest-bearing liabilities have shorter duration than our assets; funding costs will go up first. Moving on to Slide 22, we can see how the movements of volumes, rates, and inflation have been affecting our margins in the quarter. The U.S. variation in the third quarter reached 3.5%, a decrease from 4.3% seen in 2Q, pressuring our interest-earning asset yield. This was coupled with an increase in the average monetary policy rate, which rose from 7.95% to 9% in the quarter and led to a 134 basis points increase in our cost of funding. In general, net interest income from our business segments remained strong with some quarter-over-quarter deceleration due to the positive shift mix. Net interest income mainly includes the effects of our inflation gap and the spread earned over our liquidity. Here it is evident the impact the lower inflation and higher rates had over our net interest margins. Considering all of the above, net interest margin in the quarter was 3%, and the year-to-date net interest margin reached 3.7%. For the fourth quarter, we are forecasting a further decline in net interest margin and we expect it to reach 3.3% for the full year. On Slide 23, we give further insights into our margins for next year. For every 100 basis points decline in inflation, our net interest margin falls by an average of 20 basis points. And for every 100 basis points rise in the average monetary policy rate, our net interest margin falls by 30 basis points over a 12-month period. Our base case scenario for 2023 is an average monetary policy rate of 9.4 and U.S. inflation of 6.3. Under this base scenario, our net interest margins in 2023 should reach 3%, starting below this level in the first quarter of 2023 and rising back to levels greater than 3.5 by year-end and in 2024. These lower margins in 2023 will be compensated by the strong revenue generation from our business segments and tight cost control, which should lead us to achieve return on equity between 18% and 19% in 2023, maintaining our guidance unchanged. Moving on to asset quality on Slide 24, the rise in the non-performing loan ratio to 1.7% in the quarter is mainly related to household liquidity levels gradually returning to post-pandemic levels and a weaker economy. This has mainly affected clients who were already impaired pre-pandemic. With the end of state aid and pension fund withdrawals, these clients' loans have become non-performing at a greater rate. However, it is important to note that the impaired loan ratio, which includes non-performing loans plus loans that have been renegotiated, decreased from 4.7% in 3Q '21 and its second quarter '22 to 4.4% in 3Q '22, reflecting that the rate at which new clients are becoming impaired remained subdued. The coverage of non-performing loans as of September reached 200%, and there have been no reversals of the voluntary provisions we recognized in 2020 and 2021. As we can see on Slide 25, these overall positive asset quality indicators led to a cost of credit of 0.9%, in line with our guidance for this year. During the quarter, the Board decided to establish Ch$35 billion of voluntary provisions in light of the expected slowdown of the economy anticipated in 2023. Most of the voluntary provisions have been assigned to the consumer loan book. Also, during the quarter, our regulator, the CMS, published the draft of new standardized provisioning models for consumer loans. The consultation period for commencing this new regulation has been extended to year-end. Our initial estimate is an increase in provisions of between Ch$100 billion and Ch$150 billion, mainly in our outer lending and credit card portfolios. We are permitted to use voluntary provisions to comply with this new regulation. On Slide 26, we move on to non-net interest income revenue sources, which continue showing exceptional growth trends. Total non-net interest income expanded 22.8% quarter-over-quarter and 6.7% year-over-year in 3Q 2022. Fee income increased 17.9% year-over-year and 12.8% quarter-over-quarter, driven by higher client activity and the growth of our client base, as previously described, with more commissions generated from all products. These trends we expect to continue in 2023 as we continue to see strong client growth and greater client usage. In this line item, we can clearly see the strength of our digital platforms. As shown on Slide 27, we also can see the bank's efforts to continue increasing productivity and controlling costs. Operating expenses in the third quarter increased 7% year-over-year and decreased 1.6% quarter-over-quarter, well below inflation trends. The bank continues ahead with its $260 million technology investment plan for the years 2022 to 2024. And because of these investments, we're expecting costs to grow significantly below inflation levels in 2023. As shown on Slide 28, the bank continues with its process of optimizing the branch network. This year, we have closed 10% of our branches and have opened 10 new Workcafes that are not only a major improvement in client experience but are also more efficient. As a result of these initiatives, coupled with our digital strategy, productivity is rising significantly with volumes for point-of-sale increasing 13.5% and volumes per employee increasing 9% year-over-year. Moving on to Slide 29, we take a look at our capital ratios. At the end of the third quarter, the bank reported a core equity ratio of 10.1%, up from 9.6% in June. Our shareholders' equity increased 7.6% in the quarter, which resulted in a 50 basis point increase in our capital ratios. We are on track to finish this year with a core capital ratio of around 10.5%. And we are maintaining our guidance of a dividend payout of somewhere between 50% and 60% of 2022 earnings. Finally, on Slide 30, we conclude this presentation with initial guidance for 2023. We fulfilled our guidance for 2022, achieving an ROE of 22%. For 2023, considering our base case scenario of GDP falling 1.2%, inflation of 6.3%, and an average monetary policy rate of 9.4%, we should see mid-single-digit loan growth, strong client results, a NIM of 3%, non-net interest income rising 15% to 20%, a slight uptick in the cost of risk, and a very low increase in total costs. With this, we should achieve a solid return on equity of between 18% and 19%. With this, I finish my presentation and now we will gladly answer any questions you may have.

Thank you very much for the presentation. Thank you very much. Our first caller question comes from Mr. Tito Labarta from Goldman Sachs. Please go ahead, sir. Your line is open.

Hi, good morning, Robert, Emiliano, thank you for the call and taking my question. My question is on asset quality and cost of risks. You mentioned a few things that I mean, as NPLs have deteriorated a bit your cost of risk remains fairly low. You're just kind of going into next year. With the economy deteriorating some more, do you expect any significant deterioration in asset quality from here? And could that have any other significant impact on your cost of risk? You mentioned in the guidance for next year slight uptick. And I think there are some additional provisions you need to do, but if you can help quantify a little bit how much cost the risk can go up and how much more NPLs can go up from here particularly in a slowing economy? Thank you.

Okay, Tito, hello. So in the quarter, as you said, the NPLs have been rising. What we've seen basically is that the excess liquidity—no more pension fund withdrawals, etc. And some people obviously have fallen back into NPL. But the majority of these clients, I would say, especially in retail, are people who had shown some weakness even before the pandemic. So basically, that's why if you look at our impaired loans, our impaired loans, which are NPLs plus any loans that have been refinanced, those have been still trending downwards. So basically, people who are already marked as refinance or impaired before are slipping into NPLs. But the number of new people entering impaired status is still falling. And why is that? Because during the last two or three years, people have reduced their debt levels. And as you saw, our credit card portfolio is going to begin to grow now, but for the last two or three years, it's fallen 30%. Overall, for example, the central bank just published its report on household finances. And you can see that in general debt servicing levels and household debt levels are below like 2017/2018 levels. On top of that, our coverage remains high. And we still have around CLP290 billion in voluntary provisions on the balance sheet. So we do expect NPLs to continue to go up and probably impaired loans eventually, to start an upward trend. But for now, given that the economy is going to fall by 1%, we think NPLs should go back to levels, you know, 2% or slightly higher than 2%, more or less where they were in September of 2019. And with the high coverage and still not expecting to use our voluntary provisions, this should translate into a cost of credit overall of 1%, 1.1% next year. So I say there is some pressure on asset quality. But given where we're entering the cycle, it's still something that we think is manageable—another huge threat. The other thing, as we mentioned, there's a new provisioning requirement for consumer loans that's being discussed. The regulator published for consultation a new standardized provisioning model for consumer loans. We have until the end of the year to discuss and present our comments. And this will probably be implemented somewhere at the end of the first quarter beginning of the second quarter. We estimate the impact, and this could change because it's still being discussed. But we think this will more or less signify that we will have to increase the stock of provisions for consumer loans, somewhere between CLP100 billion and CLP150 billion. And we're allowed to use voluntary provisions to meet this. So it shouldn't have an impact on the cost of risk. But it might have an impact on the size of our voluntary provisions. So in the quarter, this quarter, third quarter, we already set aside some voluntary provisions mainly for consumer loans. So the Board has also been kind of proactive, knowing that the situation next year could be a little weaker. But said all of that, as of today, we still see that the cost of risk will rise a bit, but absolutely manageable with the cost of risk around 1%, 1.1% next year.

Great, that's very helpful, Robert, thanks for the color. Maybe just one follow-up there. I mean, if NPLs do get back to the 2% level that you mentioned. Should the cost of risk kind of rise more longer-term to get closer to that? Or I mean, I know your coverage is still high. I don't know if you think about sort of—should that coverage ratio continue to come down? What would be maybe either normalize coverage ratio going forward?

Yes, so I think the coverage ratio would come down. We still, as I said, we're not forecasting the use of voluntary provisions; the coverage of 200 includes around 15% to 20% of our stock of loss provisions as voluntary. And we don't expect to use them. But excluding that, basically, remember that a lot of the things that are falling into the NPL either have good collateral or they already have provisions. So that's why I think the coverage ratio will slowly begin to go down, because some of the things that we already expect or have partly provisioned or that have collateral are going to be entering NPL. So effectively, the coverage ratio should come down. Before the pandemic, it was around 130. So an easy way to see it long term is 130 plus the voluntary provisions, so it's probably like 150, okay. And then we have to see what happens with the voluntary provisions.

No perfect, great. Thanks a lot, Robert.

Thank you very much. Our next question comes from Mr. Alonso Garcia from Credit Suisse. Please go ahead. Your line is open.

Hi, good morning, everyone. Thank you for taking my question. My first question is a follow up on the quality. You're mentioning, NPL can go back to the 2% recycled tire. Basically, a normalization in the NPL metrics. Just wanted to get some color on, what would be the main drivers for that increase? And mainly concerned, or maybe not concerned, but do you think digital versions can come mainly from the consumer segment, the market segment? Or do you have any kind of concerns on the commercial side of the group? We have been reading in the news, very frequently about companies in the real estate and construction industries going bankrupt or so. So could you provide some color on NPLs by segments? And my second question is on loan growth next year 5%. It's pretty much in line with the inflation you expect, but again, I don't know if you could provide some color on how this should look by segment. In the case of consumer, how much appetite you have to grow in this environment? In the case of Santander Life, you're showing very nice growth in terms of clients. But, again, not sure what's your appetite to grow in the segment next year? And the same thing for the commercial portfolio— which segments are presenting more demand? Which segment looks more attractive or more defensive to grow next year? Thank you.

Okay. So in asset quality, this is going to be kind of like a traditional downturn, you know, higher rates, economy coming down, and unemployment probably will begin to rise. So there will probably be some pressure on the consumer side. The good news is that, as I said before, we've gotten out of the low end of consumer lending; the middle high end hasn't really grown. And this kind of relates to your other question that we still think that there's the fact that people are starting to travel more—hotels, cars, you know, credit card loans will probably grow more. And we don't see that's going to be a major factor in asset quality because it's all higher income. So overall, there might be some deterioration in consumer following the normal cycle. But that's why we're also sending more voluntary provisions to that portfolio and the coverage of consumer I think is around 400%. So that's another thing. But this is going to be a very traditional cycle, but we're entering it with the highest levels of coverage we've had before any downturn. And then the other segments, I would say, the large corporates in Chile are very healthy. And during the pandemic, we also went through that portfolio on a case-by-case basis and either provisioned more for weaker positions or got rid of other ones. So that portfolio is in very good shape. And then you have more of the SMEs, I would say they're obviously more elastic to the cycle. And there should be probably some more NPL pressure there. And that's also why we're not being too aggressive in growing the SME portfolio, but no, it's a key segment. And it's doing very well, as you saw, we saw in the presentation, retail banking is doing really well, despite, you know, a little bit of pressure on the asset quality. And then the key there is the non-lending. Like you said, Santander Life, they see a growing number of non-lending activities. All the new clients are generating, you know, a good deposit spread; there are some loans, but very low volume. Basically, they're generating non-lending income, which is going to be the driver of focus next year, more than lending. So asset quality, I would say consumers and SMEs, but once again, we're entering the cycle with a very good portfolio structure. And in terms of the other sectors, one sector that has been in the news is construction, obviously with not much building going on—high rates. This is a sector that has been suffering a bit. We have around $730 million in construction; the NPL ratio is 2%, I believe. And so I would say, in general, our clients, there are in good quality. There might be some new provisions there, but it's once again, it's more or less factored into the cost of risk I mentioned in the previous quarter. So it's not something that we are overexposed to and feel that it's going to be a big threat to us.

Hello Alonso. Regarding your question about loan growth for next year, I would say that in the retail part, the consumer loan books should grow maybe above the average. And then partially because, I mean, in this inflationary environment, nominal volumes tend to grow—not because, as you said, it's an especially increase in our appetite, but it's true that our customer base has been growing strongly through life. So now we have a lot of new clients and we have a lot of information to assess their credit quality. So we feel comfortable to offer them some great solutions, and also the timing in the cycle when the liquidity from pension funds and from the government age is decreasing so households will start to demand more credit, and also that will be a tailwind for the consumer book that we intend to take advantage of by not being especially aggressive, but by taking advantage of the more leverage that households will be taking from a very low point of leverage where they are now. In terms of the mortgages, we don't see real growth for next year, but U.S. inflation will be growing the nominal value of the portfolio basically because of the level of rates and the level of activity—we don't foresee especially high real growth in mortgages. When you go to commercial lending, the situation also depends on the segments, and in SMEs, we expect the loan book to grow almost nothing or even fall. Remember that we have all the COVID portfolio that was lent during the pandemic with the government support, and so basically that book is going away with time, so that it's downward pressure for the book. In terms of the rest of the SMEs, we do see all our client growth through Getnet as support, or they will for long growth, but overall SMEs you should expect to grow almost nothing. And then, moving upwards in the corporates, definitely real estate is not a sector that we are planning to, or we have seen high dynamics for next year concerning loan growth. We see more on the working capital solutions and more trade-related lending. We are not seeing big plans for CapEx from our clients. So, like big corporates or big projects, we are not expecting them for next year. And we do see all the green finance transition as a business opportunity for the commercial book. We are seeing across the board investments from our clients to transition to zero emissions or to lower their emissions. And we have a future opportunity as part of the group to take advantage of that.

Great, thank you very much.

Thank you very much. Our next question comes from Mr. Daniel Mora from Credicorp Capital. Please go ahead, sir. Your line is open.

Hi, good morning, and thank you for the presentation. I have a couple of questions. The first one is regarding NIM. You already gave us the guidance of 3.3% for this year and 3% for next year. I would like to know what is the NIM strategy that the company is looking to implement in the next year considering the normalization of inflation and still higher rates. If we see the financial statements in this year, we see that there is also a negative impact coming from the accounting hedge or the use of derivatives. I would like to know if Santander is considering another strategy in 2023 to mitigate the potential contraction of margins. That will be the first question. And the second one, related to capital ratios, do you already present that the target is above 10%. I would like to know if you feel comfortable with that one above 10% or do you want to see this figure increase to levels close to 11% or close to that figure? Thank you so much.

Hello Daniel, thank you for your question. I mean, starting with the second one there, I would say that 10.5% is like our targeted ratio by the end of the year on a fully loaded basis. So we feel comfortable being around that 10.5%. We might be closer to 11% or closer to 10%, depending on the moment. But the 10.5% area target is where we want to be and that gives us enough cushion or buffer to the regulatory minimums that we have. In terms of the NIM strategy, I mean going forward, we think that first, I mean all the commercial clients' NIM is doing really, really well, as Robert showed in the presentation. Even contradictory, the change in mix from demand deposits to time deposits is putting pressure on the commercial spreads. So, that is a tailwind going forward to support NIMs. And in terms of the markets or the ALM NIM, we have our historical strategy of having a negative sensitivity to hiking rates in order to compensate for the structural mismatch we have in UF or inflation on the asset side. So that has historically proven to be a compensating factor that has helped us to sustain a NIM around 4% for the last few years. What we're seeing this year, and starting next year, is kind of a mismatch between the pace of the adjustment of the central bank interest rates to the inflation scenario. You can see that on Slide 24, where basically, when the pace of the two variables—we had, for example, in the first quarter of this year, very high inflation and not so high rate; the NIM went up to 4.4%. And this last third quarter, when inflation is going down and the central bank is still hiking rates, the NIM went down to 3%. It might go even lower for the fourth quarter, where the rate will be big, and inflation will be contracting downward. So going forward, the strategy is to try to give this neutral position by having a hedge against lower inflation. What we are seeing for the next few quarters is some frictions between the mismatch of the pace to the rhythm of when the central bank will start adjusting a certain rate. At the end, if you want it is like, a real rates situation where today we have real rates at historical maximums. I mean, the one-year real rate is at 5%. That's because nominal rates are in double digits and inflation expectations for the next 12 months are around 6%. So for the next few quarters, we will face this low NIM until the real rates start to adjust. And then, as Robert mentioned, by the end of next year, we expect NIM to go back to 3.5% or higher, the same for 2022, which is just a temporary adjustment for the monetary situation in Chile. That will imply lower NIMs for the next two quarters.

Perfect, thank you so much, very clear.

Thank you very much. Our next question comes from Mr. Ernesto Gabilondo from Bank of America. Please go ahead, sir.

Thank you. Hi, good morning Emiliano and Robert. Most of my questions have been answered, but I have a couple of questions. The first one is on your effective tax rate. I believe this year could be ending around 12%. It has been benefiting because of inflation. So how should we think about it next year? Then my second question is on your guidance for next year. So you have mentioned that you're expecting NIM pressure of around 30 basis points, but could be partially offset by the higher non-credit related revenue you're expecting around 15% to 20%? And also lower OpEx growth, which is expected to behave below inflation. So, when incorporating the numbers of your guidance for next year, I'm getting at an ROE of 19%. But at the same time, it implies relatively flat or modest earnings contraction. So just want to double-check if that is what you're expecting in terms of earnings next year? Thank you.

2023, okay, so with the ROE.

This is a very short message. I think Mr. Emiliano, your line was muted for the last 30 seconds. So if you don't mind, please just restart your answer. That will be very helpful for Ernesto. Thank you. Please go ahead.

Can you hear us? Hello.

Can you hear us?

Yes.

Sorry, the computer locked, yes. So we heard the question. So Ernesto, basically, what you're saying is correct. So next year, with GDP falling and the Chilean economy into recession, the focus will be on our non-lending activities that are showing really strong momentum. And risks, as we said, will go up a bit, but controlled. So basically, between non-lending income and a very tight control of costs, okay, we should reach this ROE in the range of 18% to 19%, which obviously means a slight dip in net income, which I think in the scenario we're living globally is very good. That also means that in 2024, which is far away, we should have an important uptick not only in margins but in profitability. The tax rate effectively next year, as inflation comes down, we're going to be paying a higher tax rate. So pretax, the fall isn't important. But next year, the tax rate should be somewhere between 17% and 18%, the effective tax rate, which is directly in line with the lower inflation.

No, super clear. Thank you very much, Robert.

Okay, thank you very much. Our final question for today comes from Mr. Jason Mollin from Scotiabank. Jason, your line is open. Please, go ahead, sir.

Hi, I wanted to ask about the sensitivity of your results to interest rates and inflation. If you can give us an update on where we are, and particularly if rates start to decline, maybe you can give us a view— I just logged in. Because I thought the time was changed to 11 a.m. start time? But if you can just talk a little bit about the sensitivity of the results to rates and inflation and where we are in the cycle. And if something there, Chile will benefit as rates decline relative to the pain, I think I saw as rates increase? Thanks.

Hello, Jason. Are you able to see the presentation?

Yes, I can. I'm logging.

Are you seeing Slide 23 now?

Hold on one second, yes.

Okay, so basically, there we put the metrics for NIM for next year that you can see like the sensitivity to the interest to the inflation for the average monetary policy rates. Our base case there is inflation to be around like 6.3% and the average monetary policy to be around 9.4%. If you break down that NIM for the year into the quarters, you can see what you were basically mentioning—that we'll start below that 3%. Because the first quarter will still have rates at double digits and inflation normalizing to the single-digit territory. And when the year progresses, we expect the central bank to start adjusting rates either first quarter or more likely, the second quarter next year. We'll start the NIM expansion from the markets NIM if you want, and we expect to close the year at 3.5% or higher when the central bank takes the rates around like 7%. And inflation is converting to the 6% territory that's on the market NIM. We are seeing very positive trends in terms of the pricing discipline and the ability to have very pricing opportunities in this higher rates environment. The pressure we are seeing in the last part of this year is the change in mix of deposits between demand deposits and time deposits, that we expect that headwind to vanish starting next year. We see clients NIM as a tailwind for the total NIM next year.

That's helpful. Thank you very much. I am looking at the presentation now, that's great. Thank you.

You're welcome.

Okay, thank you very much. It looks like we have no further questions at this point. Maybe we'll give another minute or so for anyone else to start with any additional questions. Okay, looks like we have no further questions. I'll pass the line back to the management team for the concluding remarks.

So thank you all very much for taking the time to participate in today's call. We look forward to speaking with you soon.

Thank you.

Thank you very much. This concludes today's call. We'll now be closing all the lines. Thank you.