Banco Santander-Chile(BSAC) - 2023 Q3 - Quarterly Report

Management Commentary Overview This section presents PwC Chile's review of the Management Commentary and highlights the forward-looking nature of the report Independent Professional Review Report PwC Chile reviewed the 6M23 Management Commentary, finding no material modifications needed for CMF compliance, though it was not a full audit - The review concluded that no material modifications are needed for the Management Commentary to align with CMF requirements[4] - The review was conducted in accordance with Chilean auditing standards and was significantly less in scope than a full audit[365] Forward-Looking Statements This document contains forward-looking statements about future business and economic performance, subject to various risks and uncertainties - The report includes forward-looking statements concerning future business and economic performance, which are subject to risks and uncertainties[5] - Key risk factors include macroeconomic trends, market movements, competitive pressures, technological developments, and customer creditworthiness[5] Section 1: Key information This section summarizes the bank's 6M23 financial results, key indicators, and competitive market position, highlighting profitability declines and market leadership Summary of results 6M23 net income attributable to shareholders decreased 49.6% YoY to Ch$262,870 million, with ROAE at 12.9%, mainly due to lower NIM - Net income attributable to shareholders decreased 49.6% YoY to Ch$262,870 million in 6M23, with an ROAE of 12.9%[402] - The decrease in net income was mainly due to a lower Net Interest Margin (NIM) caused by slowing inflation and higher funding costs[402] - Despite the profit decline, net fee income increased by 38.5% YoY, and the net contribution from business segments grew by 38.8% YoY[8][375] Key financial information June 2023 key financial indicators show declining profitability (ROAE 12.9%, NIM 2.1%) and asset quality (NPL 2.1%), but strong capital ratios Key Financial Indicators (Jun-23 vs Jun-22) | Indicator | Jun-23 | Jun-22 | Variation | | :--- | :--- | :--- | :--- | | Profitability | | | | | Net Interest Margin (NIM) | 2.1% | 4.1% | (197) bp | | Return on avg. equity | 12.9% | 28.7% | (1,583) bp | | Asset Quality | | | | | NPL ratio | 2.1% | 1.5% | 67 bp | | Coverage of NPLs ratio | 165.0% | 227.8% | (6,280) bp | | Cost of credit | 1.19% | 0.87% | 33 bp | | Capital | | | | | Core capital ratio | 11.0% | 11.1% | (12) bp | | BIS ratio | 17.5% | 17.8% | (26) bp | | Clients | | | | | Total clients | 3,737,056 | 4,028,551 | (7.2%) | | Active clients | 2,186,435 | 2,081,909 | 5.0% | Market Capitalization (YTD) | Indicator | Jun-23 | Jun-22 | Variation % | | :--- | :--- | :--- | :--- | | Net income per share (Ch$) | 1.39 | 2.77 | (49.6%) | | Net income per ADR (US$) | 0.70 | 1.20 | (41.9%) | | Market capitalization (US$ million) | 8,895 | 7,750 | 14.8% | Competitive position Banco Santander Chile leads the Chilean market in key loan and account categories, maintaining high investment-grade credit ratings - The bank is the market leader in total loans (17.3% share), mortgage loans (21.1%), consumer loans (19.4%), current accounts (27.5%), and credit card purchases (23.2%)[407] - The bank holds high credit ratings from multiple agencies, such as A2 from Moody's, A- from S&P, and A+ from JCR, all with a Stable Outlook[14] Section 2: Business environment This section details Chile's weakening economic conditions, moderating inflation, anticipated interest rate cuts, and significant political and regulatory developments Operating environment Chile's economy faces weakening demand and a weak labor market, with moderating inflation and anticipated Central Bank interest rate cuts - Domestic demand is weakening, leading to a downward revision of the 2023 GDP growth forecast to -1.0%[385] - The labor market remains weak, with near-zero job creation and contracting labor demand, potentially pushing unemployment above 8%[15] - Inflation is decreasing, with the annual CPI expected to fall below 4% by the end of 2023. The Central Bank is expected to start cutting the MPR, forecasting a rate of 7.25% by year-end[16][387] Economic Forecasts | Indicator | 2022 | 2023 (E) | 2024 (E) | | :--- | :--- | :--- | :--- | | GDP (real var. % YoY) | 2.4% | (1.0%) | 2.0% | | CPI Inflation | 12.6% | 3.9% | 3.0% | | Monetary policy rate (year-end) | 11.25% | 7.25% | 3.75% | Political and Regulatory Environment Chile is undergoing a constitutional process, approved a new mining royalty tax, proposed pension reform, and implemented new interchange fee limits - A new constitutional process is underway, with a mandatory referendum on the new draft scheduled for December 17, 2023[389] - A major tax reform was rejected, but a new mining royalty tax was approved in May 2023, expected to collect 0.45% of GDP starting in 2024[21][47] - A pension reform bill proposed in November 2022 aims to create a mixed system with an additional 6% employer contribution to a social security fund[391] - New, lower interchange fee limits for debit, credit, and prepaid cards were approved and will be implemented gradually through November 2024[23][392] - The Fogaes Law was enacted to provide state guarantees for housing and construction financing, as well as for working capital and investment for SMEs[24][50] Section 3: Segment information This section analyzes the net contribution of Retail, Middle Market, and CIB segments, which collectively grew 38.8% YoY, alongside a significant loss in Corporate Activities Results by segment 6M23 total net contribution from business segments grew 38.8% YoY, driven by strong revenue, while Corporate Activities reported a significant net loss Net Contribution by Business Segment (6M23, Ch$ million) | Segment | Net Contribution | Change YoY | | :--- | :--- | :--- | | Retail Banking | 338,022 | 21.0% | | Middle market | 212,321 | 38.0% | | CIB | 207,144 | 84.5% | | Total Business sub-segments | 757,487 | 38.8% | | Corporate activities | (461,393) | (473.4%) | | Total | 296,094 | (55.8%) | Retail banking Retail Banking's net contribution grew 21.0% YoY, driven by increased net interest income and fees, despite a 57.4% rise in loan provisions - Net contribution increased 21.0% YoY, driven by a better funding mix, loan growth, and a 29.3% surge in fees[61] - Loans in the segment grew 2.4% YTD and 1.3% QoQ, primarily led by mortgage loans and credit cards[60] - Provisions rose 57.4% YoY, reflecting portfolio growth and the normalization of asset quality as the economy slows[61] Middle market Middle Market's net contribution grew 38.0% YoY, fueled by a 21.6% rise in total revenues and a 35.4% decrease in loan loss provisions - Net contribution grew 38.0% YoY, supported by a 22.8% increase in net interest income from better spreads and volume growth[35] - Loan loss provisions fell 35.4% YoY, mainly because higher-risk loans from sectors like construction were eliminated from the portfolio during 2022[35] Corporate Investment Banking (CIB) CIB's net contribution surged 84.5% YoY, driven by strong income and fee growth, though quarterly performance saw an 11.3% QoQ decline - Net contribution increased 84.5% YoY, with total income up 53.0%. This was driven by a 76.9% rise in net interest income and a 54.1% increase in fees[431] - Deposits grew 12.5% YTD, driven by higher demand for time deposits in CLP due to attractive rates[37] - Net contribution decreased 11.3% QoQ, primarily because of lower revenues from financial transactions following an exceptionally strong 1Q23[68] Corporate center/ Financial Management The Corporate Center reported a net loss of Ch$461,393 million in 6M23, primarily due to margin compression from higher funding costs and lower investment returns - The segment recorded a net loss of Ch$461,393 million in 6M23, primarily due to margin compression from higher funding costs and lower returns on the investment portfolio[39][433] - The net loss widened by 4.6% QoQ in 2Q23 as high interest rates and lower inflation continued to negatively impact margins[70] Section 4: Balance sheet and results This section provides an in-depth analysis of the bank's balance sheet, including loan and deposit growth, capital adequacy, and income statement performance, highlighting NII decline and strong non-interest income Balance Sheet Analysis As of June 2023, total loans grew 1.3% YTD, deposits rose 4.1% YTD with a shift to time deposits, and the bank maintained strong capital ratios Loan Portfolio Breakdown (Ch$ million) | Loan Type | Jun-23 | Var % YTD | Var % QoQ | | :--- | :--- | :--- | :--- | | Consumer loans | 5,411,860 | 2.4% | 1.3% | | Residential mortgage loans | 16,407,125 | 4.3% | 2.4% | | SME | 3,556,013 | (3.6%) | (0.6%) | | Total Gross Loans | 39,362,284 | 1.3% | 0.6% | - Total deposits increased 4.1% YTD, driven by a 14.7% rise in time deposits as clients sought higher yields, while demand deposits fell 5.8%[115][135] - The bank maintained strong capital adequacy, with a CET1 ratio of 11.0% and a total BIS ratio of 17.5% at the end of June 2023[139] - Total equity increased 6.3% QoQ and 1.2% YTD, reaching Ch$4,287,883 million, influenced by earnings and a lower negative impact from valuation adjustments[138] Income Statement Analysis In 6M23, NII fell 44.5% YoY due to lower inflation and higher funding costs, offset by strong non-interest income and effective cost control - Net income from interest and readjustments decreased 44.5% YoY in 6M23, primarily due to lower inflation (UF variation of 2.8% in 6M23 vs. 6.8% in 6M22) and higher funding costs[144][157] - Net fee income grew 38.5% YoY, driven by increased client activity, higher card usage, and contributions from Getnet. The recurrence ratio improved to 60.6% from 40.5%[152] - Credit loss expenses rose 42.4% YoY, with the cost of credit increasing to 1.19% from 0.87% as asset quality trends back toward pre-pandemic levels[162] - Operating expenses fell 7.5% YoY, reflecting solid cost control and productivity gains, although the efficiency ratio worsened to 45.4% due to lower operating income[98][185] - Income tax expense decreased 71.5% YoY due to lower pre-tax profits and a lower effective tax rate (8.3% vs 14.0%) resulting from the monetary correction of the capital tax base in a high CPI environment[76] Section 5: Guidance This section outlines the bank's financial targets for 2023, including expected loan growth, NIM, non-interest income growth, cost of credit, ROE, and CET1 ratio 2023 Guidance For FY2023, the bank expects approximately 5% loan growth, a 2.3% NIM, 20% non-interest income growth, and an ROE of around 15% Full Year 2023 Guidance | Indicator | Guidance | Key Factor | | :--- | :--- | :--- | | Loans | Approx. 5% growth | Economic growth | | NIM | 2.3% | Inflation, MPR reduction speed | | Non-NII | Growth of 20% | Client growth and product usage | | Costs | Negative growth vs 2022 | Inflation, productivity, investment | | Cost of credit | 1.1 - 1.2% | Asset quality normalization | | ROE | Approx. 15% | Rate and inflation scenarios | | CET1 | > 10.5% | ROE, RWA growth, dividend policy | - The bank maintains its long-term ROE expectation in the range of 17%-19%[80] Section 6: Risks This section details the bank's management of credit, market, liquidity, and operational risks, including asset quality trends, strong liquidity ratios, and operational loss increases Credit Risk Credit risk management focuses on economic slowdown, with the NPL ratio increasing to 2.1% and impaired loan ratio to 5.4%, reflecting asset quality normalization - Provisions are estimated using expected loss models, classifying commercial debtors into Normal, Substandard, and Impaired portfolios based on creditworthiness[82][85] Asset Quality Ratios | Ratio | Jun-23 | Dec-22 | Jun-22 | | :--- | :--- | :--- | :--- | | NPL ratio | 2.1% | 1.8% | 1.5% | | Impaired loan ratio | 5.4% | 4.8% | 4.7% | | NPL coverage ratio | 165.0% | 185.3% | 227.8% | | Expected loss ratio | 2.8% | 2.7% | 2.7% | - The loan portfolio is diversified, with the largest exposures to mortgage (45.0%), social services (30.2% of commercial loans), and commerce (17.3% of commercial loans)[178] Market and Liquidity Risk The bank actively manages market risks, maintaining strong liquidity with LCR at 153.3% and NSFR at 108.5%, both well above regulatory minimums - The bank maintains strong liquidity, with an LCR of 153.3% and an NSFR of 108.5% as of June 2023[116][184][201] - High-Quality Liquid Assets (HQLA) amounted to Ch$6,573,100 million, primarily composed of Level 1 assets like government bonds[197] - Interest rate risk for the trading portfolio is managed using Value at Risk (VaR) limits, with the consolidated average VaR at US$5.54 million as of June 30, 2023[203][204] - The bank has more assets than liabilities indexed to the UF (inflation-indexed unit), creating a positive sensitivity to moderate inflation rises, which is managed within established limits[205] Operational Risk Total operational losses increased 31.4% YoY, primarily due to higher client/product, processing, and fraud-related losses Operational Risk Losses (Ch$ million) | Loss Category | Jun-23 | Jun-22 | Change % | | :--- | :--- | :--- | :--- | | Fraud | 1,567 | 1,387 | 13.0% | | Labor related | 2,977 | 2,997 | (0.7%) | | Client / product related | 468 | 44 | 972.6% | | Processing | 2,311 | 1,245 | 85.7% | | Total | 7,500 | 5,707 | 31.4% | Section 7: Credit risk ratings Banco Santander Chile maintains strong investment-grade credit ratings from international and local agencies, all with a stable outlook Credit Ratings Banco Santander Chile maintains strong investment-grade credit ratings from international and local agencies, all with a stable outlook International and Local Credit Ratings | Agency | Rating Type | Rating | | :--- | :--- | :--- | | International | | | | Moody's | Bank Deposit | A2/P-1 | | Standard & Poor's | Long-term Issuer Credit | A- | | JCR | Foreign Currency Long-term | A+ | | Local | | | | Feller Rate | Long-term deposits | AAA | | ICR | Long-term deposits | AAA | Section 8: Stock Performance This section provides an overview of the bank's shareholding structure, dividend policy, and key stock performance indicators as of June 30, 2023 Shareholding and Stock Information As of June 2023, Santander Group holds 67% of shares, with 33% free float, and the bank maintains a 60% dividend payout policy - The shareholding structure consists of 67% held by the Santander Group and 33% free float[212] Stock Information as of June 30, 2023 | Indicator | Value | | :--- | :--- | | ADR Price (US$) | 18.85 | | Local Share Price (Ch$) | 37.94 | | Market Cap (US$ million) | 8,895 | | P/E (last 12 months) | 10.0x | | P/BV | 1.73 | | Dividend Yield | 6.8% | - The bank has a consistent dividend policy, paying out 60% of the previous year's earnings[236] Annex 1: Strategy and responsible banking This annex details the bank's strategic framework, commitment to responsible banking and ESG goals, and progress in digital transformation and client focus Strategy and Culture The bank's strategy, guided by 'The Santander Way,' focuses on customer-centric processes, technology, and high performance through its 'Chile First' initiative - The bank's guiding model is 'The Santander Way,' with a mission to earn loyalty by acting responsibly and a style defined as Simple, Personal, and Fair[237][260] - The 'Chile First' initiative focuses on developing an outstanding operation based on technology, customer-focused processes, specialization in corporate services, and attracting top talent[264][240] Responsible Banking and ESG Santander is committed to responsible banking with goals including financially empowering 4 million people and achieving carbon neutrality, reflected in strong ESG ratings - The bank has 10 responsible banking goals, including financially empowering 4 million people by 2025 (2.7 million achieved by June 2023) and achieving carbon neutrality in operations by 2025[269] - Progress has been made on gender equality, with women holding 30.3% of management positions and the gender pay gap reduced to 2.1%[244][269] - The bank holds strong ESG ratings, including an 'A' from MSCI and is included in the FTSE4Good index[293] Digital Transformation and Client Focus The bank's digital strategy has resulted in nearly 2 million digital clients, optimized branch networks, and a top-ranking Net Promoter Score (NPS) - Digital clients reached nearly 2 million, representing 90.5% of active clients. Digital onboarding initiatives are key to growth and financial inclusion[273][297] - The bank's market share in checking accounts is 27.4%, and it has a 38.2% share in US dollar checking accounts, driven by easy online opening[274] - The branch network is being optimized, with a 16.1% YoY decrease in branches and a shift to the Work/Café model. This has improved productivity per employee by 6.8% YoY[305][281][282] - The bank holds the top position in Net Promoter Score (NPS) among its main Chilean peers[308] Latest events and material facts The bank approved a 60% dividend payout, actively issued bonds, agreed to sell its stake in Transbank, and faced a fine for not reporting suspicious transactions Corporate Actions and Events The bank approved a 60% dividend payout, actively issued bonds, agreed to sell its stake in Transbank, and faced a fine for not reporting suspicious transactions - A dividend of Ch$2.57 per share, representing 60% of 2022 profits, was approved at the April 2023 Shareholders' Meeting[318][335] - The bank has actively issued bonds in local (CLP, UF) and international (USD, JPY) markets throughout 2023 to manage its funding[320][323][325] - Shareholder banks, including Santander, have agreed to sell their stake in Transbank as part of a move to a four-part payment system model[321] - The Supreme Court applied a fine of 800 UF to the bank for not reporting suspicious transactions in a timely manner[447] Financial Statements Annexes This section provides detailed consolidated financial statements, including the balance sheet, income statements (YTD and quarterly), and a quarterly evolution of main financial ratios Annex 2: Balance Sheet This annex provides the detailed consolidated balance sheet as of June 30, 2023, showing the composition of assets, liabilities, and equity Consolidated Balance Sheet Summary (Ch$ Million) | Item | Jun-23 | Dec-22 | % Chg. | | :--- | :--- | :--- | :--- | | Total Assets | 68,681,981 | 68,164,604 | 0.8% | | Financial assets at amortized cost | 42,933,416 | 42,560,431 | 0.9% | | Total Liabilities | 64,394,098 | 63,926,232 | 0.7% | | Deposits and other demand liabilities | 13,272,010 | 14,086,226 | (5.8%) | | Time deposits and other time liabilities | 14,892,389 | 12,978,790 | 14.7% | | Total Equity | 4,287,883 | 4,238,372 | 1.2% | Annex 3 & 4: Income Statements (YTD and Quarterly) These annexes present detailed year-to-date and quarterly income statements for 6M23, 2Q23, 1Q23, and 2Q22 Income Statement Summary - YTD (Ch$ Million) | Item | Jun-23 | Jun-22 | % Chg. | | :--- | :--- | :--- | :--- | | Net income from Interest and readjustment | 530,992 | 957,550 | (44.5%) | | Net fee and commission income | 265,856 | 191,969 | 38.5% | | Total operating Income | 967,703 | 1,252,458 | (22.7%) | | Credit loss expenses | (231,587) | (162,602) | 42.4% | | Income attributable to shareholders | 262,870 | 521,257 | (49.6%) | Annex 5: Quarterly Evolution of Main Ratios This annex provides a time-series view of key financial data and performance ratios over the last five quarters (2Q22 to 2Q23) Quarterly Ratio Evolution | Ratio | 2Q22 | 4Q22 | 1Q23 | 2Q23 | | :--- | :--- | :--- | :--- | :--- | | Net Interest margin (NIM) | 4.5% | 3.9% | 2.2% | 2.0% | | Efficiency ratio | 38.0% | 52.4% | 44.4% | 46.3% | | Return on avg. Equity | 31.7% | 10.1% | 13.3% | 12.6% | | Core Capital ratio (CET1) | 9.6% | 11.1% | 10.5% | 11.0% | | NPLs / total loans | 1.5% | 1.8% | 1.9% | 2.1% |