Earnings Call Transcript - BSAC Q2 2025

Operator, Operator

Ladies and gentlemen, thank you for joining us. I would like to welcome you to Banco Santander-Chile's Second Quarter 2025 Earnings Conference Call on August 5, 2025. I will now turn the call over to Patricia Perez, the Chief Financial Officer. Please proceed.

Patricia Perez Pallacan, CFO

Good morning, everyone. Welcome to Banco Santander Chile's Second Quarter 2025 Results Webcast and Conference Call. This is Patricia Perez, CFO, and I'm joined today by Cristian Vicuña, Head of Strategy and IR; and Andrés Sansone, our Chief Economist. Thank you, everyone, for joining us today to review our second quarter performance and results. Today, Andrés will start with an overview of the economic environment, and then Cristian will go through the key strategy points and the results of the bank in the second 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 Andrés.

Andrés Sansone, Chief Economist

Thanks, Patricia. On Slide 4, we have our current outlook. Since our last webcast, the tariff agenda has seen several developments. After postponing the implementation of new tariffs from July 9 to August 1, the U.S. reached trade agreements with multiple economies. This includes tariffs of around 20% on several Asian countries and 15% on the Eurozone. For Chile, the 10% rate will remain in place, which corresponds to the minimum threshold established. Although there were initial threats of a 50% tariff on copper prices, the Trump administration ultimately decided not to apply it to input materials such as concentrates, cathodes, anodes, and copper crafts, all of which were excluded from the final decision. While market reaction has been relatively muted so far, trade and geopolitical uncertainty has increased. During the quarter, the peso briefly reached CLP 1,000 per dollar following the announcement of the inauguration date before returning to the CLP 930, CLP 940 range. However, renewed trade tensions have led to a depreciation of the peso, currently trading around CLP 970 per dollar, above our model-based estimate of approximately CLP 940. Long-term interest rates in Chilean pesos have declined, narrowing the spread against the U.S. counterparts. On the activity side, preliminary figures suggest GDP grew 2.9% year-on-year in the second quarter, or 3% when excluding mining. While we await the full national account report on August 18, which will also include first-quarter revisions, the better-than-expected performance in the first half has introduced an upward bias to our full-year 2025 growth forecast, currently at 2.1%. In terms of inflation, the second quarter inflation surprised on the downside due to a drop in food prices and discounts associated with Cyber Day, with the annual change reaching 4.1% in June. We expect this inflation process to continue, given the softer demand environment, both globally and domestically. Additionally, global trade diversion triggered by tariffs could reduce the prices of imported goods, supporting faster disinflation. We maintain our forecast for the U.S. at 3.6% for the end of 2025 and 3% by year-end in 2026, in line with the Central Bank's expectations, with risk tilted to the downside. Last week, the Central Bank made its first policy rate cut of the year, reducing the benchmark rate from 5% to 4.75% and signaling openness to another cut later this year. 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. On Slide 5, we present recent developments in the regulatory framework. In the context of the fiscal fact, the government announced the submission of a proposal to amend the income tax with a focus on SMEs. The reform extends most SMEs from the first category tax and also includes benefits for the middle class. The estimated cost of the measures is $1 billion annually, to be offset by higher personal income tax rates for the upper income brackets. The proposal does not include changes to the corporate tax rate for large companies. On the housing front, the mortgage subsidy bill was approved on May 20, 2025. The legislation targets individuals purchasing new homes valued at up to USD 4,000. It includes a 60 basis point subsidy on mortgage rates as well as a state guarantee of up to 60% for half the long term, covering up to 50,000 new homes. On June 19, the first auction was held, with 12 financial institutions participating and a total of USD 10 million awarded. In this initial auction, Santander secured 18.3% of the total, the highest among our peers and just below our national market share in this product. Finally, regarding the political landscape, 2025 is a presidential election year in Chile. Elections will be held on November 16, with a potential runoff on December 14. Primaries took place on June 29, with only the ruling coalition Unidad por Chile participating. Their candidate, Jeannette Jara, was elected. Right-wing parties chose not to participate in primaries. According to the latest general poll, right candidate, José Antonio Kast leads the race with 30% support, followed closely by left-wing candidate, Jeannette Jara, and central-right candidate, Evelyn Matthei, with 14%. While the presidential race has gained visibility, we must not overlook the parliamentary elections where the entire lower house and nearly half of the Senate will be renewed. Polling shows that Chileans remain highly concerned with crime, security, and the business environment. Simulations suggest that right-wing candidates may gain ground in Congress, driven by local campaigns emphasizing security. This implies that even if the left-wing candidate wins the presidency, Congress could lean right, potentially moderating more radical policy initiatives. As such, while some electoral-related volatility is likely in the near term, we believe the longer-term market impact will be limited. However, rising political polarization will likely continue to hinder the possibility of reaching meaningful agreements on legislation aimed at boosting long-term GDP growth. And with that, I will now hand it over to Cristian.

Cristian Vicuna, Head of Strategy and IR

Thanks, Andrés. This year, we have made significant progress towards our goals for 2025, which we are excited to share. As mentioned in our last call, we successfully migrated our legacy mainframe service to the cloud through our Gravity project within Santander. Since the first quarter, we have been fully operating in the cloud, an essential step in our strategy to transform into a digital bank with branches or Work/Café in Chile. Recently, we've introduced a number of innovative initiatives. We upgraded our smart POS systems, enabling merchants to conduct banking transactions such as deposits, cash withdrawals, top-ups, and utility bill payments. They can even open a simple digital account at these points of sale. Additionally, we launched Santander en tu comuna, a small transactional hub near local authorities to provide financial services to the community, enhancing our presence and accessibility for clients in their daily lives. We also introduced a simple savings account for children from birth, aiming to compete with the State Bank in this area. These initiatives are designed to increase transaction activity and strengthen our funding base. In the first half of 2025, we actively issued debt in local and international markets, in Swiss francs, Japanese yen, and U.S. dollars. We have received numerous accolades, maintaining a strong sustainability ranking with an A grade in the MSCI Sustainability Index and 19.2 points in Sustainalytics, indicating low risk. We are proud to have been recognized as the best bank in Chile by Euromoney and received the Best Private Bank award. Additionally, we achieved Top Employer certification for the seventh consecutive year, and our mutual funds received over 40 awards across various categories. Our bank produced outstanding results, achieving a 25.1% return on equity in the first six months of 2025, with a net income of CLP 550 billion, and a 24.5% return on equity in the second quarter, generating CLP 273 billion. This marks our fifth consecutive quarter with a return on equity exceeding 20%. Our performance is attributable to strong profitability across our main income sources, effective cost management, and our focus on a digital branch strategy. Our client base has grown significantly, currently at 4.5 million clients, with approximately 60% actively engaging with us, and about 2.3 million accessing our digital platforms monthly. The number of current accounts is up 10% year-on-year, contributing to a 7% and 8% increase in active and digital clients, respectively. This growth is reflected in a 12% yearly rise in credit card transactions and a 19% increase in mutual fund activity. Client satisfaction remains high. Additionally, we expanded our services for businesses, increasing the number of business current accounts by 25% in the past year thanks to our simple account offerings for smaller firms and integrated payments through Getnet. We now have over 212,000 Getnet clients, marking a 21% annual increase, and Getnet holds a 20% market share in transaction volume. Our client and product growth is driving a 16.3% year-on-year increase in fees and financial transaction results. Our key products, including account fees and mutual fund fees, remained strong in the quarter, and card fees followed positive trends seen earlier this year. Our net interest margin has stabilized at around 4.1% over the past year, improving by approximately 100 basis points. In comparison to the first half of 2024, we saw a slight increase related to currency fluctuations affecting our income adjustments. The prior year, our net interest margin was impacted by our balance sheet position due to guidance from the Central Bank. Following the final payment in July 2024, we observed significant improvement contributing to 60 basis points of net interest margin. Our stringent control over funding costs led to an additional 50 basis point improvement, although this was balanced by a decrease in interest earnings from our assets linked to the FCIC's payment and stable loan books. In the quarter, our net interest margin remained steady, in line with the positive trends of earlier in the year. Our income generation recovery and disciplined cost management have resulted in improved performance metrics. Our efficiency ratio reached 35.3%, the best in the Chilean industry so far in 2025, with a recurrence ratio of 62%, indicating that over 60% of our expenses were covered by fee generation. Operational expenses rose in the first half of 2025 due to the mainframe migration, particularly in the first quarter, but overall our cost growth has remained below inflation. We continue to seek efficiencies in our branch network by closing certain traditional branches and remodeling others for better space usage and modernizing our appearance aligned with the Work/Café concept. These adjustments and enhancements to our client engagement points, alongside our evolving digital platforms, have led to remarkable operating performance levels. In terms of credit quality and risk costs, we've seen our cost of credit rise above historical averages due to increasing nonperforming loans recently. In June 2025, similar to last year, we adjusted the valuation of guarantees in our commercial loan portfolio as part of our provisioning models review. This year, we used CLP 20 billion of voluntary provisions accrued from past years to mitigate this impact. Our nonperforming loans and impaired portfolio decreased in absolute terms and as a ratio of total loans, demonstrating improvements in asset quality and early signs of recovery. Looking at individual products, nonperforming loans in our mortgage portfolio have stabilized, while impaired loans saw a slight increase as delinquent clients renegotiated their mortgages. Overall, the asset quality of this portfolio shows clear signs of stabilization. In commercial loans, we've focused on enhancing the portfolio through renegotiation initiatives and writing off certain clients, resulting in significant declines in both nonperforming and impaired loans, with our NPL ratio now at 3.6%. Our consumer lending has remained robust, targeting mid- to high-income sectors. The CET1 ratio reached 10.9% in June 2025, well above our minimum requirement of 9.08% for December 2025, reflecting a 30 basis points increase in capital over the past year from our income generation in 2024 and 2025, adjusted by our dividend payments. We also have a 25 basis points Pillar 2 charge, with 50% fulfilled by June 2025. Recently, in July, the CMF published final guidelines for Pillar 2 in Chile, modifying metrics related to market risk in the banking book. In December 2025, banks must report new market risk metrics, with full implementation beginning with the regulatory capital report due in April 2027. Now, let's look at our outlook for the remainder of 2025. We anticipate a macroeconomic scenario with approximately 2.1% GDP growth and a U.S. variation at 3.6%, along with an average monetary policy rate of 4.9%. Considering current demand, we have reduced our loan book growth expectations to low single digits. Earlier this year, we expected a rebound in commercial loans alongside stronger growth in consumer loans. However, as we enter August, we continue to see weak demand, influenced by upcoming elections and global uncertainty. We expect our loan book to expand in low single digits. Our net interest margin is projected to remain within guidance, though the third quarter may be impacted by lower anticipated inflation. We foresee noninterest income growth in the high single digits, with further regulations on interchange fees not expected until the year's end. Efficiency levels are likely to stay consistent, in the mid-30s. Even with improvements in asset quality trends, we estimate the cost of risk to stabilize slightly in the second half, finishing the year around 1.35%. Overall, we continue to expect solid profitability for the rest of the year, targeting return on equity between 21% and 23%. This concludes the presentation, and we can now proceed to the Q&A session.

Operator, Operator

Our first question is from Ernesto Gabilondo from Bank of America.

Ernesto María Gabilondo Márquez, Analyst

I have a couple from my side. The first one will be on your cost of risk. So as of the second quarter, consumer loans represent 15% of the total loan book. So what do you see its contribution in the future? And how would you see the sustainable cost of risk for Santander-Chile? And then my second question is on your long-term sustainable ROE. As you guided, it could be between 21% and 23% for this year. But how should we think about it in the medium term? And what would be the common equity Tier 1 ratio that you will be assuming under that scenario?

Cristian Vicuna, Head of Strategy and IR

Ernesto, thank you for your questions. So regarding the cost of risk and the consumer part of the portfolio, we are seeing some healthy growth demand from credit cards that will translate into consumer loans in the medium horizon. So we expect that the consumer lending demand continues to be a little bit above our average growth of loans, right? With that in mind, we are seeing very healthy metrics from our cost of risk of the consumer lending portfolio. This is what makes us believe that we will be in this 1.35% range. So a slight improvement in the second half of the year for the portfolio. We expect to increase slightly the contribution of the consumer portfolio within the total loan book. Regarding your long-term ROE, we reviewed our long-term ROE recently, about a couple of quarters ago, from a range of 17% to 19% to above 20%. What we have seen after the pandemic period and the high interest rate environment is that most of the transformation decisions we have implemented in terms of our structure and the evolution of our digital stack are allowing us now to deliver very, very efficient levels for our retail universal bank, so mid-30s. With that in mind and allowing our fees and non-NII income to grow handsomely as we are expanding our customer base, we're confident we are going to be above 20% ROE for the long term.

Ernesto María Gabilondo Márquez, Analyst

Excellent. Just a follow-up in terms of the cost of risk. I understand 1.35 that area for this year. But looking maybe to the next years, are you expecting this ratio to remain relatively at that level, considering this slightly higher contribution in consumer loans? Or how should we think about this ratio in the medium term?

Cristian Vicuna, Head of Strategy and IR

As we mentioned in the call, we are going slightly above our long-term average. So we should have a normalization. It's not going to be a fast normalization as if the issues were coming from the consumer lending portfolio. Those issues tend to resolve faster. Issues in the mortgage portfolio tend to digest more slowly. So we are going to gradually go back to levels closer to 1.2% cost of risk. So that's going to take a couple of periods. I'm missing the part of your CET1 assumptions. So that should be closer to the 11% area. So where we are now, we feel comfortable.

Operator, Operator

Our next question is from Tito Labarta from Goldman Sachs.

Tito Labarta, Analyst

I have a couple of questions. First, regarding your loan growth, it seems there is primarily weakness in the commercial sector, possibly due to the upcoming elections. Do you anticipate that once the elections are over, loan growth might accelerate? If so, to what extent? In terms of consumer lending, you mentioned that auto credit cards are performing well. Should we expect the rest of the consumer portfolio to also see an uptick after the elections? I'm trying to gauge what kind of loan growth we might expect for 2026. Secondly, on fees, it's great to see that performance continue with healthy growth. Looking beyond 2025, given your guidance for this year, do you believe this high single-digit growth can be sustained into next year? I understand you mentioned that fees shouldn't be impacted until year-end, but do you think any new regulations could potentially affect them in 2026, as we consider longer-term fee growth?

Andrés Sansone, Chief Economist

Thank you. Let me take the fee question, and I'll pass the word to Patricia for the loan book expansion. Well, first, it's a little too early for us to start into the 2026 guidance. But let me try to give you some clues of what to expect. This year, performance has been driven by the increase in fees explained by the expansion of our customer base. That dynamic should continue, and that's why we are aiming as part of our core strategy to grow the non-NII lines handsomely and above our asset growth. So that's something that should be expected. There are a couple of moving parts that we are seeing for next year. The first one, and maybe the most important one, is the impact that can come from a further interchange fee limit on prices that we might suffer in the final quarter of this year. Right? So there are some studies being done by the Ministry of Finance and the commission that is assigned for this decision, and we expect that to come to a ruling by year-end. If you remember, our initial assessment of this interchange fee cap movement, it was about CLP 50 billion of total impact, and we only have seen half of that. So that's one thing to consider moving on to 2026. Having said that, we are still expecting that our non-NII income grows faster than the loan book. With that, I'll pass the word to Patricia.

Patricia Perez Pallacan, CFO

Thanks, Tito, for your question. Regarding the loan growth, we are seeing, on the retail part of our portfolio, as Cristian already mentioned, quite healthy growth in consumer loans. Consumer lending shows already have shown signs of a pickup with credit card loans growing around 10% year-on-year, and this should lead to more demand for installment loans. Regarding SMEs, we continue to grow strongly. On the mortgage portfolio, we are seeing that this subsidy bill that was passed in May should help to activate the real estate market and mortgage loans going forward. As you already mentioned, large corporates have grown lower than we were expecting at the beginning of the year. This is our big question mark. We think it is too early to say something regarding loan growth for next year. But obviously, the political landscape could help to reactivate all the investment projects and demand from larger corporates.

Operator, Operator

Our next question is from Pietro Nobili Ruz from BTG.

Unidentified Analyst, Analyst

My question is closely related to the previous one. I would like to understand how the economic situation over the past year has affected your total loan portfolio's structure. What steps are you taking to address this, and specifically, how do you plan to return to 17% in the consumer portfolio? Also, how long do you anticipate it will take to reach the numbers seen in previous years?

Andrés Sansone, Chief Economist

Thanks for the question, Pietro. Organically, we will try to grow our consumer lending book, but without rushing it, because nothing good comes from rushing growth in those portfolios. We have to be very, very smart and conservative lenders in that area. That's what we are trying to do. We are trying to achieve growth with a good deployment of our capital there. There may be some other initiatives that we might tap into, like we might try to rotate some risk or try to securitize some part of the portfolio if some changes in regulation are implemented that we are currently discussing with the relevant players and regulators in order to reignite the securitization system within the country. So that could help. But it's going to take a while. It's not going to be a fast movement that, let's say, we are going to converge in 24 months to that ratio. It's something that's going to be gradual. But we're taking the steps one by one.

Operator, Operator

Our next question is from Neha Agarwala from HSBC.

Neha Agarwala, Analyst

Congratulations on the results. Very quickly, what are the main risks that you see around the business with the upcoming elections? We are definitely seeing muted loan growth. But beyond that, do you see any other risks from the macro side or from any other risks on the asset quality that we should be mindful of for the rest of the year?

Cristian Vicuna, Head of Strategy and IR

Thanks for the question, Neha. Maybe, Andrés, do you have something to say here?

Andrés Sansone, Chief Economist

Yes. From the macro perspective, the main risk to Chile's outlook continues to stem from abroad, particularly U.S.-China trade dynamics. In that sense, a sharper-than-expected global slowdown, especially in the U.S., will have a meaningful negative impact on Chile's domestic economic momentum.

Cristian Vicuna, Head of Strategy and IR

As Andrés mentioned, most of our risk, Neha, is currently being assessed from abroad. We are seeing a relatively positive scenario for the political elections given the survey results that suggest a more market-friendly environment. However, having said that, the results from the primary rounds of election have actually increased the central scenario but also increased the tail scenarios, right? So a more extreme probability. So that's also something to monitor.

Operator, Operator

Our next question is from Daniel Mora Ardila from CrediCorp.

Daniel Mora, Analyst

I have just one question regarding the NPLs. I would like to understand where should the NPL normalize in the coming quarters or years? Because if you compare to the industry level, Santander's NPL is quite high. Due to this situation, I would like to understand what exactly are the reasons behind having a commercial NPL well above the industry level and also mortgage NPL well above also the industry level. I would like to understand if this was related to the bank's strategy or just the loan mix. I would like to clarify that situation.

Unidentified Company Representative, Company Representative

Thank you, Daniel. Let's take this part by part. Regarding our NPLs in our consumer lending portfolio, actually, those NPLs are really above the average of our peers and show a very healthy performance. This is the most asset part of the portfolio. So a deterioration here is what impacts the NPLs and the P&L the most. Then regarding why our commercial portfolio shows some structural higher NPLs compared to peers and industry, this is mostly because we have a higher penetration of SME lending within our total commercial loan book. About one-third of our total loan book is concentrated on SME lending. This is something that is very related to our strategy to become a universal bank. We cater to the retail customer. That's our specialization, and that's expected to continue structurally, right, to having a higher NPL ratio, but that's mostly explained by how we view ourselves as a more retail-oriented operation. Finally, regarding the situation on the mortgage portfolio, we have explained this in the past, but we have about 30% of our mortgage book that reprices on a variable rate. This is higher than the average of the industry, right? The typical lending mortgage will be originated on a 20- to 25-year fixed UF product. We have about 30% that is lent on a yearly UF rate portfolio. That's the part that suffered the most during 2023 and early 2024, where real rates in the U.S. were high, and that repricing damaged the payment capability of some of our customer base, and that's reflecting in the 2.7% NPL that we are seeing now. The good news is that the real rate scenario of the U.S. is now below 2%. So the repricing problem isn't happening anymore, and we are now focused on providing solutions to our customers so they can renegotiate and start paying again. What we are seeing now is that part of the portfolio is going to remain stable at levels of 2.7%. You can see that in absolute terms, it has remained stable for the last 6 months, and we expect to start improving in the next quarters, but that's going to be a very gradual recovery. All in all, we are still expecting some better improvement in the total NPLs for the portfolio in the second half of the year. Most of the improvement will come from the commercial portfolio, further improvements that we are expecting. But as a whole, we should still be slightly higher than the average of the industry, especially because of our composition of the commercial loan book and our SME orientation. I don't know if this helps.

Daniel Mora, Analyst

No, perfect. Very, very clear. Just to understand, so the normal level of NPL will be very close to the industry level, just to understand how far we are from a normalized level of NPLs.

Cristian Vicuna, Head of Strategy and IR

I think it's a little too soon to tell for ourselves where we are seeing the long term. But there are still some improvements to the current levels. We should be below 3% by early in 2026. That depends on how the evolution of the mortgage market and general macroeconomic scenario evolves, right?

Operator, Operator

Our next question is from Andrew Gary from Morgan Stanley.

Unidentified Analyst, Analyst

I wanted to drill down on the net interest margin a bit more. I realize this isn't an easy exercise to do, but can you try to walk us through how you're thinking about the path of NIM, at least directionally, considering your macro expectations for inflation and rates, possible loan mix shifts, and then obviously, your deposit beta. I know you said during the call that Q3 will be impacted again by lower expected inflation. But how are you thinking about Q3 versus Q4 this year and then 2026 in terms of the direction of NIM?

Cristian Vicuna, Head of Strategy and IR

Sure, Andrew. Let's first review our general sensitivities of our balance sheet. We are still carrying a long inflation $8.5 billion on our NIM sensitivity to inflation. Regarding our inflation, this translates to something about 12 basis points of inflation per 100 percentage points of U.S. variation. We have about 4 to 5 basis points of sensitivity per 100 percentage points of average monetary policy rate variations on the sensitivity to interest rates. With that in mind, we saw a negative USD 0.4 CPI news in July, and that's going to impact the July performance within the quarter. The rest of the quarter looks more normal. So in the end, we should be at the very high 3s of NIM for the quarter. Then, we expect to come back to levels above 4.0% NIM in the final quarter of the year, as the inflation path suggests market expectations for year-end. With that, we will be very close to 4.1% for the full year, so around above 4% for the year. We expect something similar for next year, as there are between 1 to 2 interest rate caps to be performed by the Chilean Central Bank in the second half of the year, in addition to the one that we saw recently. We expect monetary policy targets to reach 4% by the final part of 2026. With that and inflation converging to 3%, we should be able to sustain NIMs in the current area. We have some feedback questions that we would like for you to answer after the final questions. I don't know if Luis, we have any other questions.

Operator, Operator

Yes, we have no further questions. We just shared the survey on your screen, and your feedback will be greatly appreciated. The question-and-answer section is still open. It looks like we have no further questions. So I'll now hand it back to the Santander-Chile team for the closing remarks.

Cristian Vicuna, Head of Strategy and IR

Thank you all very much for taking the time to participate in today's call. We thank you also for your answers to our 5-question survey, and we look forward to speaking with you soon. Have a great day.

Operator, Operator

That concludes the call for today. Please note that the survey will remain open for a few minutes after the call closes. Thank you, and have a nice day.