Banco Santander Chile Q2 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Banco Santander-Chile 2Q 2024 Results Conference Call on the 2nd of August, 2024. At this time, all participant lines are in listen-only mode. The format of the call today 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 second quarter 2024 results webcast and conference call. This is Emiliano Muratore, CFO, and I'm joined today by Cristian Vicuna, Chief of Strategic Planning and Investor Relations; and Carmen Gloria Silva, our Economist. The agenda for today is the following: first, Carmen Gloria will discuss the macro scenario, then Cristian will review the strategy and results of the second quarter and guidance for the year, and finally, we will have a Q&A session. Now I pass it on to Carmen Gloria.

Thank you, Emiliano. The Chilean economy has continued to show signs of recovery, although at a more moderate pace. Following a better-than-expected performance at the beginning of the year, the preliminary estimate for GDP growth for the second quarter is just 1.6% annually. This result has been influenced by transitory factors, such as the decline in educational services and the calendar effect. However, the seasonally adjusted activity index exhibited growth consistent with its strength. Domestic demand has been gradually recovering, especially in consumption, while investment performance has remained weak. The contribution of the mining sector to activity growth has been substantial, and the external impulse is greater, given the higher international copper prices and better terms of trade. The labor market continues to gain momentum with the participation rate approaching pre-pandemic levels. Real wages continue to rise, which, along with employment growth, have been supporting private consumption. Looking ahead, we estimate that the economy will continue to grow. However, the recent lower level of activity has led us to revise the annual GDP estimate downward this year, from 2.8% to 2.5% and 2.4% for 2025. The exchange rate appreciated by 4% in the second quarter, but exhibiting high volatility. The most important drivers were the rising copper prices and the shift in risk appetite from global investors. In the baseline scenario, we estimate that the local currency will continue a gradual process of convergence toward its equilibrium values, led by expectations of a greater interest rate differential, hovering at a level slightly below CLP900 as of December this year. In the first half of 2024, inflation followed the predicted trend with a decline in both the total and core indexes. This reflects a moderate pass-through of the depreciation of the peso in the first month of the year and the increase in oil prices. Inflationary pressures are expected to rise in the coming months due to the anticipated adjustment in electricity rates and the rebound in domestic demand. Therefore, the CPI estimate has been raised from 3.9% to 4.3%, which means a U.S. variation of 4% this year and to 3.4% for 2025. Inflation is expected to reach the 3% target in the first quarter of 2026. The Central Bank continued with the rate-cutting process during the first half of 2024, accumulating a decline of 250 basis points in the monetary policy rate. In this week's meeting, the Board held a rate at 5.75% and highlighted that it would gather the bulk of the cuts we're seeing for this year. In the Central scenario, the rate will be reduced further over the two-year horizon. With this, we estimate a reduction of between 25 basis points and 50 basis points for the following meetings of the year, bringing the rate close to 5.25% by December 2024 and to its neutral value of 4.25% in the first quarter of 2026. On Slide 5, we present the advances in the relevant regulatory framework. The Tax Compliance Bill aims to increase tax revenue by 1.5% of GDP and reduce tax evasion and avoidance. This bill is currently being discussed in the Senate, where it has received support from opposition parties and was approved in general terms. Meanwhile, the pension system reform is still undergoing an intense negotiation process in Congress to gain approval. The government presented new proposals related to the distribution of the 6% additional contribution, considering 3% to individual accounts and 3% to solid IP. The first impressions from opposition parties suggest that there's still a long way to go to reach an agreement. In July, the CMF published the regulatory framework for implementing the Open Finance System. The rule becomes effective 24 months after publication and considers the progressive submission of information to be shared by banks and payment card issuers within the next 18 months with an additional 18-month period for the rest of the participants. Recently, changes to the fraud law were approved with the aim of containing self-fraud. The responsibility remains with the issuer, but now the client must file a compliance report before requesting a refund. It also establishes situations where reimbursement can be suspended and thresholds for reimbursement are reduced. Finally, the consolidated debt registry law was published in June and will become effective in 21 months.

Thank you, Carmen Gloria. Turning our attention to Slide 7. Let me begin by reminding you of our commitment to our Chile First strategy. We aspire to lead the Chilean banking industry in terms of contribution to its various stakeholders. This strategy we have named Chile First with four pillars. The first two pillars focus on what we want to become and the second two pillars on how we want to do it. So, first and foremost, we are engaged in a transformative journey towards becoming a digital bank with branches. Our transformation into a digital bank is not only about adopting cutting-edge technology but also about having a friendly physical presence through our innovative work/cafes. These spaces are more than just places to interact with retail customers. They are dynamic hubs that promote connectivity for both customers and potential customers. With advanced technology and our commitment to excellent service, our work/cafes are designed to redefine the banking experience. The medium-term objective is to reach 5 million customers and 450,000 SME clients. Our second pillar is centered on providing specialized value-added services tailored to some business segments. Our commitment is to deliver premium transactional trade, foreign exchange, sustainable finance, and advisory products and services, ensuring our clients receive a top-notch experience. Examples of this include our corporate investment bank, our specialized attention model for commercial banking, our Santander Consumer business that offers car financing, and Getnet, our acquiring business. In our third pillar, we are committed to fostering innovation and propelling growth by challenging the status quo and creating new business opportunities. A good example of this is the disruption we incurred in Chile with the four-part model, wherein we introduced our acquiring business, Getnet, to the market. So, we aim to lead the change in redefining the banking landscape. We actively seek out new business opportunities, pioneering the sustainable transformation of our customers. By challenging conventions, we aim to drive growth and cultivate success. Lastly, we place great importance on the role of our organization. To realize our objectives, we need the best talent. We are dedicated to building an agile, collaborative, and high-performing culture. We recognize that diversity is our strength, and individuals will flourish based on merit. We are constructing a thriving community where talents are nurtured, and innovative ideas are highly valued. The outstanding success of our digital products has been firmly established during 2023 with the continued growth of our digital client base. Key initiatives such as Santander Life and, more recently, Mas Lucas have been instrumental in achieving this. The Mas Lucas account was launched in March '23 and is the first 100% digital sight and savings account for the mass market. In recent months, we have launched our Mas Lucas account for young people too. In total, there are now more than 177,000 Mas Lucas accounts with activity, exceeding our expectations, with an average of 15,000 new accounts opened per month. Notably, the onboarding process for Mas Lucas is entirely digital, featuring facial recognition technology with no password requirements. This account comes with no fixed or variable costs and accepts deposits of up to CLP5 million. On Slide 9, we can see how the advances of our digital strategy are allowing us to continue the transformation of the branch network through work/cafes to improve productivity. Our bank's work/cafe branches are expanding to cater to the specific needs of our clients. We have launched three types of new work/cafe formats. Successful Work/Cafe Expresso consolidates cash operations into transaction hubs while maintaining our work/cafe ambiance. This is a great initiative as it provides an efficient and secure banking experience for our customers. We have already opened seven of these branches, positively impacting the communities that use them with better levels of experience, extended hours, and increased security. We also have our Work/Cafe Startup which offers a comprehensive solution to all the needs of entrepreneurs and especially aims to increase banking usage, carry out pilot programs with the bank, and even offer financing. This is a great way to support entrepreneurs and help them grow their businesses. Finally, we have launched Work/Cafe Inversiones, a dedicated asset management work/cafe, especially for investment advice for clients and non-clients independent of their income situation. In this branch, we offer weekly talks about different investment products or economic trends to provide advisory services and, in this way, support financial education. At the bottom of the slide, you can see how the use of digital channels and the transformation of our branch network has led to a new level of branch footprint, decreasing 15% in 2023 and a further 1% in 2024 to a level of 244 branches as of today. Notably, 35% of our branches no longer have human tellers, with these branches providing value-added services like our traditional work/cafe. At the same time, our productivity has continued to improve with loan and deposit volumes per branch increasing 10.2% year-over-year and a 6.7% rise in the same metric per employee during the same period. On Slide 10, we can see how we have rolled out key initiatives to meet company needs and add value to their businesses. Our digital life account for SMEs is low cost and simple to open. It continues to prove popular with a 29% year-over-year increase in current accounts for businesses, as reported by the CMF, capturing 37.2% of the market as of April 2024. Getnet, our acquiring business, continues to be an important driver for capturing new clients. Our range of payment solutions integrated with the banking services such as current accounts have attracted smaller merchants, and we are now expanding into larger, more sophisticated clients using a host-to-host solution, providing a more integrated payment system. Currently, there are more than 227,000 active Getnet point-of-sale terminals across the country, serving a total of 170,000 clients, including some 140,000 SMEs. During the first semester of 2024, Getnet generated fees totaling CLP29.9 billion and a net income of CLP7.7 billion. On Slide 11, we would like to highlight the latest products that we have launched in the last quarter. As we briefly mentioned a few minutes ago, we have launched the Mas Lucas account for 12- to 17-year-olds, free of charge with monthly interest gains. This is a 100% digital sight account with a debit card. With this, we aim to attract clients as they begin their banking relationship, delivering digital products that allow for debit cards and in-line transfers. We also launched a complementary health insurance with the UC Christus medical center, where they implemented a revolutionary medical model for Chile. Clients have access to a primary care doctor who is available for both in-person and online consultations and who refers patients to the appropriate specialist, maintaining a holistic view of the patient, encouraging prevention and reducing waiting times for specialists. In June '24, we opened our AutoCompara platform up to non-bank customers. AutoCompara is a digital platform to compare car insurance in a transparent and efficient way, allowing people to make an informed decision before purchasing insurance. This is one of the few platforms available in Chile with this service. We also market our foreign exchange platform. We can currently make currency transfers to 28 countries online through the platform. These transfers are safer and faster than SWIFT transfers and are free of charge for our customers. On Slide 12, we are pleased to show that we have been very consistent in leading the market in terms of customer recommendation, Net Promoter Scores, NPS, sustaining levels of around 60 points. Our NPS score is based on feedback from over 50,000 surveys measuring over 30 NPS metrics across our various service channels on a daily basis. This invaluable feedback allows us to proactively manage and improve our client service. Our digital and remote channels continue to receive very high levels of satisfaction from our clients, with our app and our website achieving scores of about 70 points. Our contact center is also highly rated, outperforming our peers. On Slide 13, we can see how we are recognized as leaders in our industry. This year, Euromoney has awarded us with the Best Bank in Chile for SMEs and ESG. ALAS20, an initiative that evaluates the public disclosure of sustainable development, positioned us in first place in Sustainability in Chile. Regarding our sustainability rankings, we continue to lead the industry with Sustainalytics improving our rating to 14.1%, the best among Chilean banks. Now let's talk about the trends in our results and balance sheet in 2024 and in the second quarter. On Slide 15, we show a robust rebound of profitability and return over average equity in the second quarter of the year. As we can see, we reached an ROE of 20.7% in the quarter, and net income in the quarter totaled CLP218 billion, an 81% increase compared to the first quarter of this year. With this, our ROE year-to-date improved 285 basis points year-over-year to reach 15.8%, well within our guidance for 2024 with net income increasing 28.6% year-over-year. These notable results are mainly due to our improvement in our main income lines, as we will see in the coming slides, with operating income improving 19.4% in the quarter, driven by better margins. On Slide 16, we can see the trends in our loan book. Our retail loans continue to grow steadily with loans driven by consumer and mortgage, while commercial loans contracted 5.5% in the quarter. This contraction in the commercial loan book is in part due to a change in our consolidation perimeter; Bansa, a company dedicated to financing automotive dealers, is now excluded from the consolidation of the bank, decreasing the commercial loan book by 1%. Furthermore, the commercial loan book has been impacted by lower economic activity. Mortgage loans grew in line with the U.S. variation, while consumer lending was driven by credit cards and auto loans, with the latter in part explained by a loan portfolio purchased by our subsidiary Santander Consumer. Overall, our loan book follows the economic cycle, and we expect modest growth for the full year. Regarding our funding, we see that time deposits decreased 5% in the quarter in response to the fall in short-term rates in Chile, while our demand deposits also fell 2.1%, leading to an overall decrease in our deposit base of 3.7% in the quarter. Despite this quarterly reconstruction, our total deposits increased 4% on a yearly basis. However, we have seen our clients strongly preferring mutual funds, where we are the exclusive broker of Santander Asset Management. Mutual funds increased 39% year-over-year and close to 8% in the quarter, achieving a high growth of AUMs. Furthermore, the bond issuance went up, taking advantage of local and global fixed-income markets. During the pandemic, we obtained CLP6.2 trillion in credit lines from the Central Bank of Chile. This credit line had two deadlines: one on April 1, representing 55% of the credit line; and the second installment and final one on July 1. We used the liquidity deposit program provided by the Central Bank to make this payment with no liquidity issues on making these payments. On Slide 18, for the second quarter of 2024, we achieved a net interest margin of 3.6% and 3.1% year-to-date, confirming our recovery as planned. Our net interest income grew 54.5% year-on-year and 26% in the quarter. The NII in the second quarter benefited from higher interest income as the lower monetary policy rate reduced our funding cost to 5% in the semester, down 2% in the same period last year. This improvement in cost of funds is explained by the falling short-term rates from an average rate of 11.25% in the first semester of 2023 to 7% in the first semester of this year. Our liabilities tend to have a lower duration than our assets, and therefore, when rates fall, the cost of our funding falls faster than the asset yield. Our net readjustment income improved 81.8% in the quarter after a weak start to the year as the U.S. variation increased from 0.8% in the first quarter to 1.3% in the second quarter. Year-on-year, the U.S. variation was less than in 2023, and therefore, we saw a year-over-year decrease in this line. The first payment of the FCIC reduced our interest-earning assets by around 5% in the quarter and contributed to the improvement in our NIM ratio. We expect our NIM to keep recovering in the next quarters and to reach between 3.3% and 3.5% for the 2024 full year. This considers a U.S. variation of around 4% for the year with an average monetary policy rate of around 6%. With this, our cost of funds should continue to improve in the coming months, and we will see a further reduction in interest-earning assets with the second payment of the FCIC that we made on July 1, driving the improvement in the NIM calculation. Regarding asset quality, we see that our NPL and impaired ratio is rising. The slight deterioration in the asset quality ratio is mainly explained by the effect of the economic cycle on both the numerator, our clients' payment behavior, and the denominator, the slower growth of our loan book. The June figure for consumer loans NPLs was 2.4%, and the mortgage NPLs was 1.6%, while our commercial portfolio NPL was 3.8% for the quarter. As we can see, most of the NPL growth is explained by commercial loans and to a lesser extent by the mortgage loan book in the semester. The growth in commercial loans NPLs is explained largely by some particular names in the agricultural industry and some real estate companies, most of them already considered in the impaired portfolio. In general, all mortgage loans and some commercial loans have guarantees reducing the risk exposure. Our impaired loan ratio reached 6.2% at the end of June. This ratio includes NPLs, restructured loans, and customer deterioration in the commercial single mix. The coverage ratio of our NPLs, when including voluntary provisions in prior years, reached 138% in June. Since the pandemic, the composition of our loan portfolio has changed, with the weight of mortgage loans increasing from around one-third to over 40% of the loan book due to the strong growth of the US-denominated loans in recent years. As mortgages are backed by a property, they need less coverage, so the change in loan mix will require less total coverage. Our consumer loan book coverage is high, at 354%, while commercial portfolio coverage is at 123% and the mortgage portfolio coverage is 69%, with strong collateral and a solid loan-to-value. Moving on to cost of credit on Slide 20. The cost of credit was 1.25% in the quarter and year-to-date. As shown, our cost of credit has increased slightly along with the changes in asset quality and has also remained contained, thanks to the high levels of collateral. As a heads-up, in July, the bank will recognize a one-time provision of CLP18 billion for the commercial portfolio due to a model adjustment in the valuation of guarantees. This represents approximately 2% in additional stock of commercial provisions and concludes the CMF review from the third quarter of 2023. With all this, we reaffirm our estimation that the cost of credit will stay around 1.3% for the full year following the economic cycle and labor market conditions. Next, we look at the non-NIR revenue sources. Fee income increased 6.5% on a quarter-on-quarter basis as our clients use our digital platform more for our main products. The small year-on-year decline is mostly because of the effect of the interchange fee regulation that started in the last quarter of 2023. Income from financial transactions went down year-over-year, mainly because of lower income from derivative contracts after a strong comparison base last year. In the second quarter of this year, results in this line improved due to better results from our liquidity portfolio. Our core expenses increased 4.2% year-over-year, consistent with inflation, and grew 4.7% in the quarter, mainly due to a seasonality in personnel expenses in the first quarter related to the holiday season. Though, as we can see in this line, it decreased 8.5% year-on-year, mainly due to a decrease in the number of employees. Our administrative expenses have increased in the year due to outsourced services indexed to inflation, or in foreign currency, such as our services related to technology. In the first quarter of this year, we recorded a one-time operating expense of CLP17 billion related to restoration provisions. This is aligned with our strategy related to branch network transformation and the progress of digital banking. As a result of our controlled expenses and improved financial income, our efficiency ratio was 37.6% in the quarter and 42.1% year-to-date. During 2024, the bank is continuing to concentrate on the implementation of its $450 million investment plan for the years '23 to '26 for technology projects and branch renovation. Moving on to capital. At the end of June, the bank reported a BIS ratio of 17.4% and a core equity ratio of 10.6%. In the past shareholders' meeting, the Board was granted the authority to raise the dividend payout provision above the legal minimum of 30% for 2024 and onwards. So, in June 2024, the bank increased the dividend provisions to 60% of our 2024 income. This 60% is in line with our historical dividend payout. And with this, our equity base was reduced and our capital ratio was impacted by 26 basis points. As a reminder, we currently do not have a Pillar 2 requirement. However, it is important to mention that the measurement of the market risk on the banking book will continue to be discussed by the regulator and capital charges may be made in the coming years. Finally, on Slide 25, we conclude with a review of our 2024 guidance. Based on our current macro expectations for 2024, we have updated our guidance for several line items. Loan growth remains dependent on the economic cycle, and we continue to expect mid-single-digit growth for the full year. Given the increased estimate of the US variation and better evolution of the recovery of our NIMs, where we have already reached a year-to-date figure of 3.1%, we are increasing our NIM guidance to the range of 3.3% to 3.5% for the full year. Our fees should reach a growth of mid-single-digits considering the second stage of the implementation of the interchange fee regulation in the fourth quarter of this year. With financial income back on track, our efficiency ratio should return to normalized levels of high-30%s. As discussed, we expect our cost of risk to remain around 1.3% for the year. With the ROE year-to-date already at 15.8% and our expectations for the second half of this year, we are upgrading our guidance for 2024 ROE to a range of 17% to 18%. This signals the return of our performance to historical levels as we expect 2024 to finish within our long-term ROE range for very high teens. With this, I finish the presentation and hand over to Emiliano Muratore.

Thank you, Cristian. Now, we will welcome your questions, please.

Our first question comes from Mr. Yuri Fernandes from JPMorgan. Please go ahead, sir.

Thank you. Hi, Emiliano. Good morning, Cristian. Congratulations on the quarter. Cristian, I guess you already mentioned Bansa during the presentation, but can you provide more details about why it is no longer consolidated within the bank? I know it is small, but just to understand the moving parts of the Bansa deconsolidation, where is this going? Like, are you still consolidating any kind of equity income from this investment? Just any color on this? And then I can ask a second question. Thank you.

Hello, Yuri. Bansa was the entity responsible for floor plan financing for our dealers related to the auto loan business. Due to legal restrictions, neither the bank nor its subsidiaries can engage in stock financing, which is why Bansa handled that aspect. Since we rely on Santander Consumer Finance for auto loans, we don’t perform stock financing independently; instead, it supports the retail side of our auto business. This is why, from an accounting standpoint, Bansa was consolidated into Santander Consumer Finance, a subsidiary of the bank. However, neither the consumer finance division nor the bank has any ownership stake in Bansa. We were only consolidating the asset and liability balances, while 100% of Bansa's results were reported under minority interest. Now, Bansa is more reliant on the lending company that funds its operations than on its prior commercial relationship with Santander Consumer. Consequently, according to accounting rules, it needs to consolidate into the funding company instead of Santander Consumer, which was previously its commercial partner. This change affects the consolidated view of assets and liabilities but does not impact net income or return on equity, as all results were accounted for under minority interest. I'm not sure if I was clear enough.

No, that's clear. But just to be clear, do you receive any money, like any compensation on that, like the consolidation? Like, is this kind of a sale or...

No, it's not a sale because there was no ownership of Bansa, neither from the bank nor Santander Consumer. I mean, Bansa is, let's say, owned by other parts of the Santander Group. So basically, it was a pure accounting consolidation because of the commercial, let's say, dependence on Santander Consumer to do the stock finance. But there was no ownership of Bansa, neither the revenues nor the costs of that activity.

Got you. So, we never owned the company. We're just consolidating for this regulation. Now you're no longer consolidating, but we were never the owner, you're just consolidating for...

Never the owner, no. So, if you look, even though the number is small, that, let's say, part of the minority interest that was taken out of the consolidated net income, now it will be smaller because we don't have to take out Bansa apart. And before it was, let's say, 100% taken out on the minority interest line.

No, super clear. Now, a little bit more structural question on loan growth. I know we are not discussing 2025 yet, but I think in 2024, it's pretty clear, like the trends are better margins, you are doing very well on efficiency. Cristian and Emiliano, what can you expect on growth in Chile? Because over the past many years, we have been seeing very timid loan growth? And I don't know, like can you anticipate, I don't know, loan growth accelerating even further in 2025? Any kind of color on your expectations for maybe the industry like for us to maybe see high-single-digit? Like, what could we think about loan growth and where the growth will come from? Will it continue to be retail? Will it continue to be auto loans? Where can we be more positive on growth here? Thank you.

Yes. Regarding loan growth, the past few years saw a very slow pace of growth, which was even lower when adjusting for the indexation effect in the US in real terms. It is important to note that this occurred in a context of low GDP growth, alongside significant liquidity injected into households through pension fund withdrawals and government support during the pandemic. Looking ahead to 2025, with GDP expected to grow around 2.4% to 2.5% in real terms and inflation anticipated to be between 3% and 3.5%, we expect GDP to grow by about 5%. Therefore, we anticipate a return of the loan growth multiplier to above 1%, although not as high as it was in previous years when it neared 2%. We expect overall system growth in nominal terms to be in the high-single-digit range, about 7% to 8%, driven by consumer lending, particularly in auto loans, which is an important part of our business. Several factors contribute to this expectation: improved GDP growth and activity, significantly lower interest rates than in the past, and the normalization of household liquidity, which had been exceptionally high over the last two to three years. As households return to a more typical situation, their propensity to borrow is likely to increase. On the consumer side, we remain positive. In terms of mortgages, we look to the US and inflation as foundational for the total balance growth. With much lower rates expected, we foresee real estate market improvements, possibly by the second half of next year, as long-term rates stabilize and decrease from current levels. In the commercial sector, we see positive tailwinds linked to growth from Getnet in SMEs, providing us with valuable insights into client activity and flows. Thus, we are optimistic about loan growth prospects in commercial lending related to SMEs and the payments ecosystem. However, there is some uncertainty in commercial lending related to capital expenditure, as investment improvements are expected to be modest moving forward. Overall, we anticipate the system to grow in the range of 6% to 8%, and we expect to fall within that range as well.

No. Super. Very good answer. Thank you guys, and again, congrats on the ROE improvement lately. Thank you.

Thank you.

Okay. Thank you very much. Next question comes from Beatriz Abreu from Goldman Sachs. Please go ahead, ma'am. Your line is open.

Hi, everyone. Good morning, and thank you for taking my question. I guess just a quick follow-up on the Bansa loans just to make sure that we understand. So, does that explain the contraction in the corporate CIB line? How much of the Bansa loans exclusion can be explained in that line just because of the big drop there quarter-over-quarter? And then just a second question on asset quality, right? So, NPLs did increase quite a bit this quarter. I guess, what gave you comfort to keep the cost of risk guidance at 1.3% this year? Is there any chance that you will have to increase provisions going forward in addition to this $18 billion one-time additional provision for commercial loans that you mentioned? Thank you.

Thank you, Beatriz, for your question. Regarding Bansa, it was part of the middle market segment and not included in the CIB, so it doesn't account for the CIB decline. The decrease is more related to the concentration within the CIB, which has larger transactions, some of which were not renewed this quarter. While Bansa is significant, it does not represent the majority of the decline in the middle market. It involved a CLP250,000 portfolio that was deconsolidated. The trends in commercial lending related to the middle market and the CIB are primarily due to a lack of demand for credit, as well as regularities in the CIB segment where several syndicated loans that originated in a lower interest rate environment during the pandemic expired without renewal. Bansa is a factor, but not the main cause of the decrease. Regarding the cost of risk and asset quality, we are currently at a high cost of risk compared to the past, and we expect this level to remain. The 1.25% year-to-date will likely persist through the rest of the year, indicating we do not foresee an improvement or reduction in cost of risk, given current portfolio behaviors. The interest rates are currently providing some breathing room for consumers regarding their payment obligations in both the consumer and mortgage sectors. We anticipate remaining around CLP40 billion in net provisions monthly, leading us to a cost of risk around 1.3% for the year, reaffirming that estimate despite the one-off provision.

To add to Emiliano's answer, we are seeing mild improvements in the job market in terms of unemployment figures. And that makes us also be somehow a little more confident on our turnaround coming in the next semester or final quarters of the year.

That's very clear. Thank you so much.

Okay. Thank you very much. Our next question comes from Mr. Eric Ito from Bradesco BBI. Please go ahead, sir. Your line is open.

Hi, good morning, and thank you for the presentation. I have just one question regarding the asset quality indicators. When do you expect to see the NPLs start decreasing? Especially in the commercial segment, you already explained that this. The performance of the NPL has been explained by agriculture and real estate. But I want to understand if those segments are under control, and you now expect in the second half of the year and in 2025 to see an improvement? And also, I would like to understand what will be a normalized figure of NPLs considering the portfolio structure that you're having, the increase in SMEs, the increase in consumer auto loans? What will be a normalized figure of NPLs when economic activity recovers and rates and inflation normalize? Thank you so much.

Thank you, Daniel. Addressing your second question first, we anticipate that the normal range of non-performing loans (NPLs) for our current portfolio will be in the low-2% range, specifically between 2.2% and 2.4%. This slightly exceeds the figures we had at the start of the pandemic, which were just above 2%. This increase is primarily due to a greater share of small and medium enterprises (SME) in the commercial portfolio, as well as an expected growth in our consumer loan portfolio. Therefore, we expect this range to represent a stabilized figure for NPLs. Regarding the timeline for a turnaround in the commercial portfolio, it's important to note that part of the increase in the impaired ratio is linked to a reduction in the total size of the loan book this quarter. As a result, the impaired ratio of 8.6% and the NPLs at 3.8% may appear higher than they actually are, given the decrease we experienced. However, we are not observing a significant rise in the overall impaired volume or NPL figures, and there are indications that the rate of increase in these figures is slowing down. This leads us to believe that we are approaching a turning point, particularly in terms of absolute figures, with expectations for improvement within the next six to nine months.

Perfect. Thank you so much.

Okay. Once again, we will unmute Eric Ito's line. Eric Ito, Bradesco BBI, please go ahead, sir. Your line is open.

Hello, can you hear me?

Yes, please go ahead.

Good morning, everyone. Thank you for the opportunity to ask a couple of questions. First, I'd like to discuss the expectations for 2025. You've provided some insights on loan growth, but I would appreciate a quick follow-up on net interest margin. This year, there seems to be quite a bit of volatility in net interest margins due to fluctuations in interest rates and the impact from FCIC. However, looking ahead to next year, we anticipate lower funding and inflation, and we don't expect FCIC to be a concern anymore. I would like to know your expectations for net interest margins in 2025, taking into account the loan mix you foresee. My second question relates to the efficiency ratio, particularly concerning fees. I understand that the full effect of the interchange rate cap will be realized in 2025, and you estimate an impact of CLP50 billion for the entire year. I would like to get your perspective on how much we can expect fees to increase in 2025. Thank you.

Hello, Eric, thank you for your question. I will take the first one and I'll leave the second one for Cristian. So, regarding NIM outlook for 2025, as you said, I would say that maybe the biggest source of volatility for next year would be the level of inflation that should be slightly below what we have this year. So that's going to be a headwind for NIM. But as you can see in the quarterly evolution, our NIM during the second quarter was like 3.6%. So going forward, we expect to be around that level. The inflation in the second quarter was relatively high. So going forward, it should be below that level. With that, we see the second semester with a NIM level of 3.6%, 3.7%, and that takes us to this 3.3%, 3.5% full year for 2024. So for 2025, as I said, inflation should be a headwind, and interest rates should still fall in the short part of the curve and maybe, let's say, between 50 basis points to 100 basis points in the next 12 months. So that will take the yield curve to recover some positive slope. That's also going to be positive for NIM. In terms of loan growth and loan mix, that also should be kind of positive. So, even though it's still early to call, we do see NIMs next year to be around the level that we'll have during the second half of this year, let's say, 3.5%, 3.7%, subject to the evolution of inflation and rates.

Thank you, Emiliano. In response to your question about fees, Eric, the primary factor driving our fee growth is the increase in our customer base and the rise in customer interactions. This is reflected in our checking account growth both year-over-year and quarter-over-quarter. This sustained growth has also positively influenced our card fee figures. Considering the impact of the interchange fee cap from the first half of the year, the growth in card transaction volume and fees is quite significant. We anticipate that Getnet will continue its growth, albeit at a slightly reduced pace. Additionally, we are identifying opportunities in the asset management sector, as customers are expressing interest in seeking higher-yielding assets by moving away from the time deposits they made in 2022 and 2023 during the period of high monetary policy rates. Given these factors, we expect our fee growth to slightly exceed our stable net interest income growth. Therefore, we are aiming for a high-single-digit growth in fees for the upcoming year, which will also account for the impact of card fees, resulting in an overall mid- to high-single-digit growth.

Great. And just a follow-up, if I may. You mentioned that customers are moving out from time deposits. Could you just recall us what's the cost of funding regarding these time deposits compared to the mutual funds that they are migrating to? Thank you.

The current rates for time deposits are quite similar to those of mutual funds. However, money market mutual funds typically have an average duration of 60 to 90 days and don't mark their net asset value to market, which causes a delay in reflecting interest rate changes. During a sharp decline in interest rates, mutual funds may provide higher returns until rates stabilize. Over the next three to six months, mutual funds are likely to continue offering higher yields until rates level off. After that, by the end of this year or early next year, interest rates should start to rise again, which will encourage investors to extend their duration, typically through fixed-income mutual funds instead of longer-term deposits.

Very clear. Thank you.

Okay. Thank you very much. It looks like we have no further questions at this point. I'll pass the line to the management team for their concluding remarks.

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

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