Banco Santander Chile Q1 FY2025 Earnings Call

Ladies and gentlemen, thank you for being here. I would like to welcome you to Banco Santander-Chile First Quarter 2025 Earnings Conference Call on May 8, 2025. At this time, I would like to hand it over to Patricia Perez, the Chief Financial Officer. Please proceed.

Good morning, everyone. Welcome to Banco Santander Chile's First Quarter 2025 Results Webcast and Conference Call. This is Patricia Perez, CFO, and I'm joined today by Cristian Vicuna, Head of Strategy and IR; and Andres Sansone, our Chief Economist. Thank you, everyone, for joining us today to review our first quarter performance and results. Today, Andres will start with an overview of the economic environment, and then Cristian will go through the key strategy points and the results of the banks in the first quarter of the year. After that, we will have a Q&A session where we will be happy to answer your questions. So let me hand over to Andres.

Thanks, Patricia. On Slide 4, we have our current outlook. Since the last webcast, the trade conflict has increased uncertainty in global financial markets. In Chile, the peso briefly reached CLP 1,000 per dollar after the announcement in the Liberation Day before returning to the CLP 930, CLP 940 range, with our model suggesting it should be closer to CLP 960, CLP 970. Long-term interest rates in Chilean pesos fell by around 30 basis points and short-term rates in both pesos and inflation-linked U.S. also decreased, reflecting lower growth expectations and reduced inflationary pressures. Although the trade war poses a risk to Chile, given its high integration into global trade, the direct impact of U.S. tariffs is limited. Chile received the basic 10% tariff and the key products like copper and wood were excluded. However, the indirect effects—how it will affect business and consumer confidence—could impact local investment and consumption. Despite this challenging environment, the Chilean economy started the year with strong momentum. The monthly activity index for March exceeded expectations and the economy grew by 2% in the first quarter compared to last year. Activity remains heterogeneous with export sectors, tourism, and investment in machinery leading the way, while construction still lags. Due to the external shock, we now expect GDP to grow 2.1% in 2025, down from the original forecast of 2.4%, and 1.7% in 2026, down from 2.1%. On inflation, the first quarter inflation closed in line with expectations, slightly below 5% with core inflation showing clear signs of moderation. The inflation convergence process should continue and could accelerate due to weaker global and local demand. Additionally, global trade diversion triggered by tariffs could reduce the prices of imported goods, supporting faster disinflation. We downgrade our forecast for the UF to 2.6% for the end of 2025 and 3% by year-end in 2026 with risk still to the downside. The Central Bank kept the policy rate at 5% during the last meeting and maintained a cautious tone due to external risks. However, with inflation slowing and activity weakening, we expect the Central Bank to resume cuts in June. In our base scenario, the policy rate will close 2025 at 4.5% and reach 4% in 2026, which is close to its neutral level. Finally, the Ministry of Finance published its public finance report of the year, highlighting a delay in reaching the structural deficit target. The original target of a minus 0.5% GDP deficit for next year is now expected to be met only in 2028. According to the 2024 national account, the structural deficit reached 3.3% of GDP, exceeding the 1.9% goal set in the fiscal policy decree. For 2025, the new target is 1.6% above the original 1.1%, with convergence now postponed to 2026. While the report reflects an effort to control spending and increase transparency, the overall fiscal situation remains tight. On Slide 5, we present recent developments to the regulatory framework. The tax reform proposed by the Ministry of Finance, which sought to reduce the corporate income tax from 27% to 24% and increased personal income taxes, has been officially withdrawn from the legislative agenda. Meanwhile, the Senate approved a temporary reduction in the SME income tax rate, lowering it from 25% to 12.5% for 2025 and 2027, and to 15% in 2028. Progress has also been made on the Mortgage Subsidy bill, which passed its second constitutional stage following the Senate Finance Committee's approval to proceed with the legislation. The initiative seeks to reduce the excess supply of housing thereby stimulating the real estate and construction sectors and reviving mortgage credit flows. The benefit is aimed at individuals purchasing new homes for sale valued up to 4,000 UF and includes a 60-basis point interest rate subsidy and a state guarantee covering up to 60% of the loan amount for half of the long-term, with a cap of 50,000 eligible housing units. Regarding politics, only the ruling coalition, Unidad por Chile, will hold primary elections on June 29. The right-wing parties have opted not to participate. According to the latest current poll, center-right candidate, Evelyn Matthei, leads the presidential race with 22% support, followed by the right-wing candidate, Jose Antonio Kast with 13% and center-left candidate, Carolina Toha, 11%.

Thanks, Andres. On Slide 7, we highlight our key messages for the first quarter of this year. During the quarter, the net profits of the bank reached CLP 278 billion, a 131% increase compared to the same quarter last year. Our return on average equity reached 25.6% with a best-in-class efficiency ratio of 35%. Our fees and financial transactions grew very strongly, 17% and 40% year-on-year, respectively, thanks to the success of our digital strategy, where we have seen a strong demand for our products such as mutual funds, which have grown 20% year-over-year. With this, our recurrence levels reached 61.9%. Also, our NII increased 42% with a NIM of 4.1%, thanks to our balance sheet structure and relatively high inflation in the quarter. Furthermore, on April 22, our shareholders approved a dividend distribution of 70% of our 2024 profits at CLP 3.19 per share and a dividend yield of 5.4%. Behind this success is our strategy that we have been implementing over the last few years. Thanks to our digital products, we now have over 2.3 million digital clients and 4.3 million total clients, and we are very well regarded for customer service among peers, where we obtained a Net Promoter Score of 57 points over the last six months. This quarter, we migrated our core banking systems to the cloud through the Gravity project, and we are now operating 100% on the Cloud, an important stepping stone for the digital transformation of our bank. Furthermore, we were recognized as the best private bank in Chile by Euromoney. On Slide 8, we can see the advantages of our strategy of being a digital bank with Work/Cafe. As you can see, we have continued optimizing our branch network with 34% of our branches without human sellers. Recently, we have been launching the Santander in Europe community, simple branches facilitating access to depository ATMs and other banking services such as daily bill payments on top-up phones and metro cards, as well as opening accounts in a coffee area. We continue to simplify our products, reducing the total number of products in our system by 31%. The simplification of our product offering aims to provide simpler products to our clients but also reduce system complexities and standardize operations. Here in the graph on the bottom, you can see how the digital transformation is leading to strong client acquisition since 2019. We have gained some 900,000 clients, while our digital clients have increased by 1.2 million clients, driven by our digital initiatives such as Life and Mas Lucas. 60% of our customers are active users, meaning that they use their account on a monthly basis. These active users and our digital customers are growing 7% year-over-year, while our total clients grew 9%. As of March 2025, we are ranked first for customer service. On Slide 9, we can see how our strategy is translating into results through higher fee generation, which grew 17% year-over-year. Getnet, our acquiring business, continued to show strong growth, attracting more clients with over 200,000 customers, an increase of 25% in the last 12 months, with over 20% market share in number of transactions. There is a strong incentive for our Getnet clients to open an account with us, such as having their sales deposited up to 5 times per day—a differentiating feature in the payment systems in Chile. With this, we have quickly become market leaders in business current accounts, increasing 25% year-on-year. The larger client base is leading to important increases in other products as well. Our current accounts have been increasing 10% year-over-year, with growth in dollar accounts particularly strong as it is easy to contract through our APP, reaching a market share of almost 40% where these new clients comply with our risk appetite, they are given credit cards. So this, along with a reduction of cash in the Chilean economy, is leading to the 10% growth in credit card transactions in the last year. We are first for volume of credit card purchases in the Chilean market. Also, with the lower interest rates and a simple straightforward investment platform available for all our clients, we have seen a shift from our time deposits to mutual funds that we broker. Here, our mutual funds are best in the industry, and the overall AUMs we broker have increased 20% year-over-year. Our fees generated from clients represent more than 60% of our core expenses. Compared to the rest of the Chilean banking industry, we are far above the average. Our efficiency was also at first-class levels of 35%, best among our peers. Let us review the financial results. On Slide 11, we can see the impressive improvement in our results over the last 12 months. Our quarterly ROAE, which is 25.6%, marking the fourth consecutive quarter above 20% and a historic high for quarterly net income. Our net income attributable to shareholders increased by 131% year-on-year, mainly due to higher income growth from a lower cost of funding and higher fees on financial transactions. Compared to the fourth quarter, net income grew 0.5% despite lower inflation and higher provisions that were more than offset by higher fees and lower operating expenses, all managing to sustain these impressive levels of profitability. On Slide 12, our non-interest income is growing 23.4% year-over-year as a result of continuing expansion of the client base and the usage of digital products and platforms. Our main products continue to grow very strongly. Of note, our card fees show an annual growth of 37.6%. The second interchange fee cap is on hold until the commission concludes their review and makes a decision, which we would expect to be later this year. Here, we can also see the financial impact of Getnet that continues to do very well, attracting more business clients and also larger corporate clients with greater transactional volume. Income from financial transactions increased strongly year-on-year, mainly due to gains from exposure to foreign currency and local and offshore client pressure. On Slide 13, we review the evolution of our net interest margin over the last 12 months. As you can see, the recovery of our NIM has been driven by the improvement in the cost of funding. Compared to the fourth quarter, the slightly lower U.S. variation affected our income for U.S. readjustment, leading to the slightly lower margin and NIM in the quarter. Given our current macro expectations, we expect our net interest margin to stay around these levels for the rest of the year. We also displayed the growth of our funding base. Our total deposits remained stable year-on-year and decreased quarter-on-quarter after high liquidity of our corporate clients that then drained in the first week of the year. As interest rates fall, clients are moving to more attractive mutual funds managed by Santander Asset Management. With the growth in customer deposits, we have improved our loan-to-deposit ratio in recent years, reaching 130% as of March 2025 and 97% when adjusted for the portion of our mortgage loan financed through long-term bonds. Our liquidity coverage ratio and net stable funding ratio remained well above regulatory limits. On Slide 15, we can see our loan book. Our loans contracted slightly in the quarter compared to December 2024. In large part, this is due to the appreciation of the Chilean peso in the quarter, which contributed to a contraction of commercial loans and slower dynamics in the mortgage market. Consumer lending continued to grow well, although it was affected by the high growth at year-end due to the seasonality of credit card loans, which has now normalized. Our loan-to-loan book continues to grow more robustly with our Santander Consumer subsidiary benefiting from the growth of alliances with dealerships over the last year. In terms of segment growth, the Retail segment growth was led by consumer lending, with the slower mortgage growth affecting the total overall growth of this segment. Our Wealth Management and Insurance segment saw impressive growth over the last 12 months, with high wealth clients increasing their demand for credit. Our middle market segment saw a slight pickup in demand, while our Corporate Investment Bank loan book has contracted due to less demand from the general macro environment. On Slide 16, we review our efficiency that has been consistently improving, reaching 35% in the first quarter with recurrence levels of 62%. Total operating expenses are decreasing 1.8% year-on-year and 3.3% in the quarter. All of this is supported by a decrease in other operating expenses as costs incurred last year related to branch restructuring were not repeated in 2025, and we had lower fraud expenses due to the change in the law in May 2024. Core support expenses, salaries, administration, and amortization grew 9% year-on-year, driven by the 5.9% quarterly increase. This pickup was particularly in administrative expenses, where we recognized greater costs related to technology as we reach the final stages of our migration of our mainframe to the cloud. All in all, efficiency in the quarter is within our guidance and one of the best in the industry. On Slide 17, we show our cost of risk and payment behavior of our clients. In the first graph, we can see the evolution of our card fully provision expense and cost of risk. As shown in the graph on the right, our NPLs that are 90 days overdue increased during 2024, mainly in our mortgage and commercial loan books, while our consumer loan book remained relatively stable. Our impaired loan portfolio, which includes NPLs plus restructured loans, has also increased significantly in the same portfolios, especially mortgages. It is important to note that asset quality ratios are affected by weaker loan growth. However, the graphs also indicate that the increase in volumes is starting to slow down. And during the first quarter of 2024, we started to see early signs of asset quality stabilizing with improvements in our commercial loan book. On Slide 18, we can see how we maintain strong capital ratios well above our regulatory minimum. Our capital ratios as of March 2025 include a provision for a dividend payment of 70% of the 2024 earnings and 60% of the 2025 earnings year-to-date. In April 2025, the CMF announced that we are now required to establish 25 basis points for Pillar 2 requirements. We have to establish half of this by June 2025 and the remaining half in the next two years, which will be reviewed according to the results of the evaluation of the patrimonial adequacy of each year carried out by the CMF. 56.3% of this charge has to be composed of core equity Tier 1. Therefore, our all-in fully loaded requirement for December 2025 will be 9.08%. As you can see, we have more than sufficient capital to cover this, and it has not affected any strategic decisions. In fact, on April 22, our shareholders approved the 70% dividend payout. So our latest dividend payment was CLP 3.19 per share, our historic high, with a dividend yield of 5.4%. So now let's move to our current expectations for the rest of 2025 on Slide 20. Firstly, we are considering a macro scenario of GDP growth of around 2.1% with the U.S. variation of 3.6% and an average monetary policy rate of 4.8%. With this, we expect our loan book to grow mid-single digits, adjusting for the effects of our generate-to-distribute model. With our current macro expectations, our NIMs should remain around 4% throughout the year. Given the delay in the interchange fee regulation, we have increased our non-NII guidance to growth of high single digits. Our efficiency levels should remain around current levels, so around mid-30s. Considering where we are in the credit cycle and the initial slowdown in the creation of non-payments, we are guiding a stable cost of risk of around 1.3% with the second semester improving compared to the first semester of this year. With this, we are increasing our guidance for 2025 to returns over average equities of above 21%. With this, I finish my presentation. So now let's start with the Q&A session.

So we'll start with Ernesto Gabilondo from Bank of America. Please go ahead. Your line is now open. Sorry, Ernesto. If you can check if your microphone may be muted on your end. Can you hear me now?

Good morning, Patricia and all your team and thanks for the opportunity to ask questions. My first question will be on the economic and political outlook. I would like to hear your thoughts on what will be the key topics or the challenges that will need to be addressed by the new administration. And on the other hand, how do you see the potential impact for Chile due to the tariffs? And then my second question is on your new NII—or sorry, non-NII growth expectation. Can you break it down in terms of fees and financial results? And my last question will be on competition from fintechs or new entrants. We have seen Tenpo credit card fintech in Chile already trying to accelerate its process. So I wanted to hear your thoughts if you are seeing Tenpo as a key competitor or still not a big competitor? And also, if you can share if you are hearing something about Mercado Pago or any other type of competitor. Again, I just want to understand who is with the competition from new fintechs and new entrants in Chile?

Thanks, Ernesto. So let's start with the economic and tariff question. So I'll pass the line to Andres for this question.

Okay. Regarding the impact of the tariff on Chile, the direct impact of the new U.S. tariff on Chilean exports is more or less limited. We know that key products such as copper and wood have been excluded, and Chile remains subject to the base 10% rate. However, the indirect effects are more significant. We know Chile is a small open economy, so there will be lower external demand, which will affect exports. But more importantly, the key transmission challenge is through business and consumer confidence. This will eventually deteriorate consumption and investment by the end of the year, which is why we are expecting to grow 2.1% this year, down from the original forecast of 2.4%, and 1.7% next year, down from 2.1%. On the political side, the upcoming presidential election has brought renewed focus on economic growth. There is now broader recognition across much of the political spectrum of the need to improve productivity, accelerate investment, and enhance regulatory certainty. The recent pension reform achieved through cross-party agreement has helped reinforce that perception of institutional functionality. In terms of electoral dynamics, the current polls suggest that Matthei is likely the frontrunner, as center- and centrist voters appear to have shifted in direction while staying within a framework of stability and gradual reform.

And I'll take the other two questions, Ernesto. Regarding the non-NII growth, the main driver in the increase in our guidance is the delay from the implementation of the second reduction in the interchange fee of credit cards. We are now expecting this to happen, if it's going to happen this year, by the final quarters of the year. So with that, we are thinking that the initial impact that we were expecting of around $20 million to $25 million in less card fees is out of the equation for this year. Thus, we are increasing guidance. Regarding our financial results, we are also expecting to sustain the rates we have been seeing in the last two to three quarters, so around something between $60 million to $70 million per quarter. But that's very dependent on the macro and market scenarios, right? So you have to take into consideration that. Regarding the competition, we have seen the Tenpo movement. That's something interesting to watch. Tenpo has applied for a banking license, so they are going to start fulfilling public data by the next semester, and that will provide a clear perspective on how that operation is growing. Nowadays, there's little public data, so we have seen some little balance sheet—not very relevant. They have a couple of million open accounts but little balance sheet and several years of investments. We know they have a good experience and a good platform, but we haven't seen a relevant competition from Tenpo yet. Mercado Pago is also something very interesting to watch. They are a relevant competitor in the acquiring business and in digital payments through Mercado Pago. They applied for a banking license in Argentina last year, and that's something very differentiated from what their strategy has been so far. They haven't done that in Chile yet, but that's also something to watch. And that's really all I can say about the competition.

So we'll now be moving to the next question from Beatriz Abreu from Goldman Sachs. Please go ahead. Your line is now open.

Hi, good morning. Thank you for taking my question. My first question is on asset quality. So your NPL ratio remained stable this quarter, but mortgage NPL still went up a little bit. If you could give us a little bit more color on how you're seeing asset quality trends throughout the year? And if you have seen any improvements into Q2 already? And my second question is regarding expenses. We saw that there was an increase in the quarter related to the mainframe migration to the Cloud, as you explained in the call. Do you have any other tech transformation expenses on the pipeline for this year? And what kind of expense growth should we expect for this year and on a more normalized basis going forward?

Thanks for the questions. So regarding asset quality, as you mentioned, what we're seeing is a stable quarter in terms of NPLs. We have a positive perspective on our consumer portfolio, so that's working well. We are also seeing initial good trends on the commercial part of our loan book. So that's also something that we think is going to show better trends, especially regarding NPLs and impaired ratios. The mortgage part of the portfolio is still slightly deteriorating. We are seeing a slowdown in the growth trends, so we expect to reach a plateau during the second or third quarter, mostly in the second semester. We will not see a turnaround yet in that part of the portfolio, but there will definitely be a slowdown in the growth of NPLs in that part of the portfolio. All in all, for the total portfolio, we expect to show better totals in terms of NPL and impaired ratio for the full year compared to last year. We also are expecting a cost of risk within our guidance, but we are going to see a slightly higher cost of risk in the first half of the year and then better performance in the second half of the year. This is how we expect this part of the portfolio to perform. Regarding expenses, we are in a type of transformation. There are going to be several other platforms that we are going to be renovating and updating during the next years. However, none of those platforms is as relevant as the Gravity project. Most of those will be absorbed through our business-as-usual capital expenses and investments. What we're seeing now is just the final stage of the implementation of Gravity. This quarter, we were managing two core systems at the same time. In April, we turned off the legacy system, which is going to help improve a little the administrative figures. Overall, we are very confident that we're going to achieve a cost of income of around 35% for the full year, so around mid-30s.

So we are now moving to the next question from Neha Agarwala from HSBC.

Can you hear me now?

Now it's better.

Perfect. Very quickly, what are the main risks that you see for this year? And if you could give us some more color about how should the NIM evolve through the quarters for this year as well as next year? We expect, I think, inflation to come down a bit more in 2026. So we believe some of the pressure on NIM is postponed to 2026 versus what we expected for this year. If you can give us some more color on that, that would be very helpful.

Thanks for the question, Neha. Patricia will answer your questions.

Thanks, Neha, for your question. Yes, as Cristian showed on our guidance, we are expecting a NIM of above 4%. Regarding risks, we are not seeing downside for this year in terms of interest rates. Inflation probably will slow down during the second part of the year, but we have already considered that in our base scenario. So we are confident in that guidance for this year. Regarding next year, we are expecting less inflation—definitely less inflation than this year. We are expecting around 3%. But as I mentioned, we are confident that we can keep delivering good levels of NIM and more structural levels at this point.

So regarding your main risks for the year, complementing what Patricia was mentioning, we are not seeing relevant risks to our guidance from the local macro scenario, but the volatility that has been displayed in markets due to all the international trade news and the tariffs that have been implemented by North America is something to monitor. Most of our risk sources, as we assess internally, are coming from the external commercial scenario.

That's great. If I can just one last question. What do you think is a more normalized ROE level for the bank? Would it be closer to 20% or between 18% to 20%, as you have said in the past?

So regarding our ROE, before the pandemic and during the pandemic, we sustained a long-term ROE of between 17% to 19%. We recently updated that to above 20%. We are pretty confident that we are going to be able to sustain levels of above 20% in ROE. We are not reassessing yet that medium-to-long-term guidance.

So now we'll move to the next question from Daniel Mora from Credicorp. Please go ahead, Daniel. Your line is now open.

Hi, good morning and thank you for the presentation. I have three questions, if I may. The first one is regarding loan growth. With the reduction in the GDP estimates, what are the expectations for loan growth by segment this year? And do you expect to see double-digit loan growth maybe in 2026? The second question is regarding capital. Do you see any impact on the bank's strategy or dividend payment coming from the new capital requirement related to Pillar 2 and the potential increase that we might see in the countercyclical buffer? The third one is what will be the main reasons behind the normalization of ROE for this year to figures close to 21% after a positive 26% in the first quarter? Considering that you maintain the NIM and have increased the non-net interest income guidance along with loan growth, it seems that will remain stable. What will be the main drivers for this normalization?

Thanks, Daniel, for your questions. I will take the first two, and then Cristian will take the ROE question. So regarding loan growth, we're expecting, as we mentioned, mid-single digits. The retail part of the loan book is behaving quite well. In terms of the SME portfolio, consumer lending, we are seeing good behavior and good figures for this year, primarily driven by credit cards. For mortgages, we expect that the second part of the year will bring better growth, and the question mark is corporate loans, as we are still seeing weak demand in that part of the loan book. Next year, I would say we still need to see how the risk evolves coming from abroad. According to our base scenario, we consider moderate GDP growth for next year. At this point, it is difficult to anticipate double-digit loan growth for next year. Regarding capital, yes, we received this 20-basis point charge or requirement from the CMS related to the market risk in our banking book risk portfolio, Pillar 2. We must comply with this requirement 50% during this year. As Cristian mentioned, 56.3% must be composed of core capital. This gives us a minimum regulatory requirement of 9.08%, and we do not see any risk or impact on our strategy regarding this new requirement.

So regarding your ROE question, what we are actually doing is increasing our guidance for the year. We have a very clear picture that we will be above the 21% mark. We understand that there is going to be a slightly lower performance in terms of NIMs, especially in the third quarter, as we are seeing the projected path of inflation for the year. But out of that, we are not seeing an ROE rationalization. We expect an ROE of above 21%. So yes, I hope this clarifies.

Our next question comes from Ewald Stark from BICE Inversiones. Please go ahead. Your line is now open.

Hello, good morning and thanks for taking my question. Could you provide some guidance on how you expect asset density to evolve over the coming quarters?

Can you clarify a little on what you are mentioning about asset density?

Risk-weighted assets or total assets? How do you expect them to grow in the next couple of quarters?

We think the ratio of risk-weighted assets to total assets is going to remain stable. We are not seeing any signs of movement. If there were to happen any movements, it would probably be something that's going to happen on the derivative part of the assets in our portfolio that have some movements, but we think it's not material. So we expect to have the asset stable from what we are displaying now.

Yes, complementing Cristian, I would say that the composition of our asset growth and market risk, if you want, should be stable during the rest of the year. The only thing that could change that composition is a regulatory change that we don't foresee in the coming months. But it's true that the CMS is reviewing some part of the rules.

Ladies and gentlemen, we would like to take this opportunity to share a very brief survey on your screens. Your feedback will be greatly appreciated. It looks like we have no further questions from the audience. So I would like to pass the line to the Banco Santander-Chile team for concluding remarks.

Thank you very much for joining us today. We expect to be with you back again for our second quarter results in early July.

Thank you very much.

Thank you. Thank you, everyone. This concludes today's call. Thank you, and goodbye.