Banco Santander-Chile

NYSE:BSAC

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Q1 2020 Banco Santander-Chile Earnings call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Emiliano Muratore Sir, please go ahead.

[Emiliano Muratore, executive]

Good morning, everyone. Welcome to Banco Santander-Chile's First Quarter 2020 Results Webcast and Conference Call. This is Emiliano Muratore, CFO, and I'm joined today by Robert Moreno, Managing Director of Investor Relations; and our Chief Economist, Claudio Soto.

Thank you for attending today's conference call. We hope you are all safe and healthy during these times. As we are working remotely, please bear with us if we experience any technical difficulties during the call.

Given the uncertainty of this ongoing crisis, we have renewed our guidance for 2020. We will not be sharing forward-looking statements, and we would appreciate to keep this in mind for our Q&A session. We look forward to sharing with you our progress during this quarter.

Before we get into the results, Claudio will explain the measures our government and local regulators have taken during this month to minimize the impact of COVID-19 on the economy.

Go ahead, Claudio.

[Claudio Soto, executive]

Thank you. Please turn to Slide 4. The government, the Central Bank and the CMF, our regulator, have taken a series of actions to support the economy and help companies to access funding during the crisis. The Central Bank cut its policy rate to 0.5%. It's technically minimum, according to the Board, and has signaled that they will keep it at this level for several months.

On Page 5, we show all the Central Bank initiatives to increase liquidity in the system. It has launched 2 liquidity facilities through banks with a funding cost set up the monetary policy rate. The total amount banks can borrow under these facilities correspond to 3% of their loan book and up to 15% if loans are directed towards SMEs. That would entail a total amount of about USD 24 billion.

One of these lines is the new loan growth conditional facility, FCIC, where banks can borrow up to 4 years, using corporate bonds and high-rated commercial loans as collaterals. The other is the liquidity credit line, LCL, where borrowing is unsecured and for up to 2 years, subject to each bank's reserves at the Central Bank. Ultimately, this credit line should provide liquidity to banks to enable them to continue financing companies and individuals.

Today, Santander has requested about USD 1.4 billion from the LCL, and we expect to withdraw from the FCIC soon. The Central Bank has also launched a bank bond purchase program for up to USD 8 billion and announced temporary adjustments to the liquidity requirements to bank, suspending the 30 and 90 days mismatch requirement and offering flexibility on the regulation and compliance with the LCR, whose limit will remain at 70% for 2020.

Turning to the government. On Page 6, we show the 3 different areas where it has focused to help during the crisis. First, liquidity relief to firms and households by deferring tax payments and transitory cut in the stamp tax. Second, household income support through cash transfers and job protection scheme, whereby firms, without saying, might retain workers while its salary is paid by the unemployment system. And third, credit support through the capitalization of both Banco Estado with USD 500 million and the guaranteed fund for small companies, FOGAPE, with USD 3 billion. It also expanded the coverage of this fund. These measures will be financed through adjustments in the existing budget, government financial assets and new debt.

As we can see on Page 7, the capitalization of FOGAPE and the extension of its coverage to companies with annual sales of up 1 million UF could benefit up to 99.8% of the firms in Chile. Under its new regulation, guarantees provided by FOGAPE, which covered between 60% and 85% of the loans, which will be restricted to finance working capital lines. They will have a maximum amount equivalent to 3 months of sale, a preferential interest rate equivalent, due to their monetary policy rate plus 3% and a term period of up to 48 months. And we also have a 6-month grace period before companies have to start paying back.

During this period, capital amortization of existing loans will be postponed. [ The FOGAPE guarantees ] will be used to raise capital, pay dividend or make investments. Santander has published preliminary step for SMEs and has improved our office banking capabilities so that SMEs can easily access these funds when they become fully available. The government expects the standard FOGAPE will allow guarantees for about USD 24 billion.

On Page 8, we also see how the CMF has issued regulations regarding the treatment of payment holidays periods and guarantees. Regarding grace periods, and only until July 31, 2020, the CMF will allow freezing of provisions of reprogrammed loans for debtors who are up to 30 days overdue. For mortgages and commercial loans, the maximum grace period is 6 months. For consumer loans, the maximum grace period is 3 months.

So far, the banking industry has received more than 800,000 requests since March. The CMF also announced the temporary extensions in the write off -- in assets received in payments and the possibility to use the excess mortgage guarantees to guarantee SME loans.

In terms of capital ratios, the CMF announced flexibility for the implementation of Basel III in Chile, postponing the phase-in until December 2021. Finally, a fraction of the FOGAPE guarantee can be considered part of Tier 2 capital.

[Emiliano Muratore, executive]

Thank you, Claudio. On Slide 10, moving forward, I wanted to highlight, first of all, our strong balance sheet, starting with our funding mix. The bank's total deposits increased 17.7% year-on-year and 7.5% quarter-on-quarter in 1Q '20. Time deposits increased 7.7% in the quarter despite lower rates. Demand deposit noninterest-bearing had a record year in terms of growth, increasing 7.3% quarter-on-quarter and 29.6% year-on-year. All of our client segments saw strong growth of checking account balances.

As we can see on Slide 11, our liquidity has increased with the LCR ratio at 205% and the NSFR at a healthy 105%. Our liquidity levels are well above the average in the system and are well above the regulatory minimum. This also shows good liquidity levels in general in Chile.

During this year, this regulatory minimum was going to increase to 80%. But the CMF has decided to freeze it at 70%. We will try to maintain it always at a very high rate. On Slide 12, we now will review loan growth. Total loans increased 12.3% in the 12 months and 5.0% quarter-on-quarter. Loans to corporate was the fastest growing segment in the quarter, led by an increase in demand for access to credit lines leading up to the COVID-19 shutdowns.

After the social unrest in the previous quarter, consumer lending was already starting to contract in line with consumer confidence and continued through the first quarter. The strong year-on-year growth is still being influenced by the incorporation of our auto lending business, Santander Consumer, in November of last year, which represented about 8% of the total consumer loan book. In the quarter, mortgages loan had a 3.6% quarter-on-quarter growth, mainly attributable to the outstanding pipeline from the increased demand for refinancing from the low interest rates in 2019.

On Slide 13, we show the evolution of asset quality over the last 10 years. The black dotted line is the cost of risk of the banking system. As you can see, in recent times, our cost of risk has lowered and is more in line with the system.

On Slide 14, we explained that the main reason for this has been a shift in our consumer loan mix. Currently, 75% of our loans to individuals are high-income clients.

Moving on to Slide 15. We can see how the shift in our consumer portfolio has resulted in an important outperformance in terms of asset quality compared to our main competitors, mainly in consumer lending. Since 2015, in absolute terms, NPLs in our consumer portfolio have fallen by 42% and in our impaired portfolio by 37%.

On Slide 16, we show our capital ratios. We finished the quarter with a capital ratio -- our core capital ratio of 9.7%, and a BIS ratio of 12.7%.

During the quarter, our capital ratios which remained healthy, continued to be affected by the depreciation of the Chilean peso. Without this effect, our core capital would have reached 10.4%. We also had an increase in Tier 2 capital since we issued a subordinated bond in the quarter. In addition, in April, the BIS ratio will be further strengthened by 2 sub bond issues in the local market for a total of USD 6 million.

Tomorrow, we will be having our Annual Shareholders Meeting remotely, where we will propose a 30% payout, lower than our usual 60%. We decided to be conservative in light of the COVID-19 crisis and to have robust capital levels to facilitate volume growth in line with the measures of the government and our local regulators. It is important to note that we already have this payout level provisions and equity, and therefore, this payout will not affect our capital ratios.

Moving into business results. On Slide 18, we show how despite the COVID-19 crisis, we continue to move forward in our business strategy. We would like to highlight that in April, we officially launched Superdigital and Klare. Just to remind you, Superdigital is our prepaid card that we offer digitally in order to increase digital transactionality in the mass segment. Klare is the first-ever digital insured tech broker in Chile, allowing people to quickly compare insurance products from different companies in order to make a more informed choice.

On Slide 19, we would also like to emphasize that with the COVID-19 crisis, our digital strategy has been more important than ever. We will be investing more rapidly in digitalization of loan approvals, especially for SMEs, given the strong demand we expect in coming months. Our contact center is functioning at 80% of capacity with our executives working from home. In terms of central offices, over 95% are working from home as well.

The lockdown has also shifted -- has shown a shift in consumer behavior. People are using our online services more frequently, while visiting physical branches less. This has led to an increase in digital clients, which reached 1.3 million as of March and purchases online have also increased 8.7%. As banks are part of the essential services defined by the authorities, over 80% of our branches are still open in areas that are not under quarantine.

On Slide 20, we show that our strong digital platforms have sustained strong client acquisition in the quarter, where we have opened 115% more accounts than in the first quarter of 2019. Cuenta Life and Superdigital have paid a large role in this increase. We also continue to lead the market and checking account openings and our market share in checking account openings surpassed 27%.

On Slide 21, we are proud to show that we reached Joint Top 1 in Net Promoter Score, NPS. This shows the improvement in the relative perception of our client service -- our clients to our service and products. Even in these stressful times, customers had to rely more on digital services and the contact center. The results obtained constitute valuable feedback to continue improving the Santander service experience.

On Slide 22, we show the evolution of our net interest margin. Our net interest margin reached a healthy 4.2% in the quarter due to strong inflation, supported by an improved funding mix.

On Slide 23, we can see that asset quality had an improvement compared to the last quarter after the social unrest. The economy recovered in January and February, leading to an improvement in asset quality in our portfolio and a lower cost of risk compared to the fourth quarter. We have not had any material impact of the COVID-19 crisis on provisions yet.

On Slide 24, we show the evolution of noninterest income. Fees started the year very strong, especially in credit card fees, checking accounts, insurance brokerage and asset management. The improvements in client satisfaction, cross-selling and acquisition of new clients has helped to bolster retail and middle market fees.

In March, the COVID-19 crisis began to reverse some of these trends as people stayed at home and corporate investment activity slowed. Our client treasury business had a good quarter, this was offset by the results of our nonclient treasury business. The effects of increasing long-term interest rates lowered the gains realized on our available-for-sale portfolio and higher volatility had a negative impact on the CVA of derivatives.

On Slide 25, we show the evolution of efficiency and expenses. Operational expenses increased mainly due to administrative expenses, as a lot of our service contracts are priced in U.S. and an increase in inflation affects these costs. Furthermore, some of our technology services are in foreign currency and the depreciation of the peso also affected them negatively. As we have more employees working from home, we also had to increase some investments in order to finance this transition. Overall, our efficiency remains very strong at 40.6% in the quarter.

To finalize, we will now move on to our summary on Slide 26. The Central Bank and the CMF have launched a series of initiatives that will help maintain liquidity and capital levels, while Chile flattens the COVID-19 curve. The government has also announced initiatives that will help both individual and companies during these times. We currently have high liquidity levels and healthy capital ratios. We proactively lowered our dividend distribution to 30% to support loan growth and our balance sheet. This loan growth will come mainly from commercial lending, while SMEs and individuals will also have the opportunity to reprogram loans subject to bank approvals. Our digital channels have proven a great asset with client growth continuing in the first quarter and more clients using these channels. Efficiency also remains solid.

At this time, we will gladly answer any questions you may have.

[Operator]

[Operator Instructions] And our first question is going to come from Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

I believe that all the loan book could be subject to the grace period, as you mentioned in the press release. So can you provide us what is the percentage of clients requesting the program in each of the segment to total loans?

And then we have seen U.S. banks, banks in Spain, with all the liquidity facilities, while they created a lot of provisions in the first quarter of this year. However, we have seen other banks in the region and in their case, considering that the grace programs will not allow you to create or anticipate additional provisions. So when do you see provisions starting to show up? And do you think this could happen between the last quarter of the year and the first quarter of 2021?

[Emiliano Muratore, executive]

Okay. Thank you, Ernesto, for your question. Regarding the percentage of the loan book, I mean so far in individuals, we have seen from 20% to 25% of the portfolio, like asking for this grace period. In the commercial part, we haven't seen so far much because all this COVID-19 program is starting like next week. We expect to have high interest from companies, but it's not in place yet. So we haven't seen any number there yet.

And regarding cost of risk and when should that like show up. I mean already in March, we had a -- if you compare the monthly figures, there was already a spike in cost of risk. So I think that we have already seen part of that. But it's -- I think it's fair to say, as you mentioned, that considering that the grace periods we are ramping to clients are from 3 to 6 months a significant part of the flows and liquidity pressures on clients will be postponed to the end of the year. So let's say that, even though cost of risk might still be higher during the rest of the year, we will have this, let's say, a big chunk of capital being due and starting by the end of the year.

And in terms of extraordinary provisions, we haven't decided on that yet. And I think that during the year, depending on how asset quality and the behavior of the portfolio evolves, we can make the call. I mean it's still early in our view because we haven't seen how this whole grace periods will finally affect the health of the portfolio and also, definitely how fast the recovery of the economy is -- and in terms of the intensity and the speed of the recovery. I mean I think that's going to be a crucial inputs to how finally the asset quality situation ends up.

[Ernesto María Gabilondo Márquez, analyst]

Perfect. And if I can make a second question, that will be in terms of loan growth. We are seeing that most of the Latin American region with some exceptions, but we have seen commercial loans picking up. We're seeing companies taking, withdrawing the approved credit lines.

However, we are also seeing that the banks will prefer to concentrate in their own client base, providing them with liquidity. But they are not granting new loans for new projects for the moment. I think they want to preserve the asset quality. So I want to know if this will be the same case for you. And how do you see the loan growth for the year?

[Emiliano Muratore, executive]

I mean yes, that's -- as you mentioned, we are seeing a very kind of decoupled reward in the sense that all the consumer part is growing less or even falling. I mean consumption is falling across the board. So I think it's expected to see the consumer part not growing much or even falling a bit. I mean -- and I would say that's the same situation for mortgages going forward.

When you talk about consumer loans, as you said, that is a completely different situation because we are seeing strong demand from corporates. I mean not just SMEs, but I would say, especially big multinational companies, let's say, increasing their demand for credit, in part because their inflows, their cash inflows definitely are weaker. So I think as you see now we're the competition -- you can already see that in the composition of the loan growth for the first quarter were -- in our Corporate and Investment banking segment, which is mainly very big multinational companies, the growth was like 30% for the quarter. And I think that, that's a kind of good opportunity for us and for the client. We are supporting them. And so that's going to be, at least for the coming weeks and months, I think a good source of loan growth.

Then when you move into smaller companies like SMEs, all these guarantees program from the government should be like the main driver for growth. It's, let's say, a significant size of the program up to $24 billion in guarantees. The guarantees are, in average, I would say, like 70% of the loan. So we are talking about total lending capacity as a system of around $35 billion or so.

And so I think that's going to be a source of loan growth going forward with this currencies program being also important for us in terms of capital consumption and also risk appetite as a whole.

And so I think that's the main things going forward. I mean the guarantees being the source for loan growth in SMEs and corporates, big corporations, still demanding credit for -- at least for a few months. And in terms of new projects, more long term, that demand has fallen. I think it's mainly all the long-term projects are in a kind of wait-and-see mode, and we don't expect much demand coming from there in the coming months.

[Operator]

And our next question comes from Jason Mollin from Scotiabank.

[Jason Mollin, analyst]

I have 2 questions. My first is on the bank's capital ratio. You mentioned in your presentation and, of course, in your release about the decline in capitalization due to FX movements. Can you talk about the sensitivity of the bank's balance sheet and operations to movements in the FX, including the capital?

And my second question is based on the measures that you talked about specifically for the lending, the state guarantees program for working capital lines. If you can talk about the implementation of that, when you might expect companies to actually get money in hand under this program?

[Emiliano Muratore, executive]

Okay. Thank you, Jason, for the questions. In terms of the capital ratio and the sensitivity to FX, the ballpark or the rule of thumb is that we have a decrease of 6 basis points in our CET1 ratio for every 10 pesos depreciation in the FX. I mean that's the kind of sensitivity. I would say that like 1/3 or 40% of those 6 basis points is coming from the loan book in dollars. I mean we have 10%, 12% of our loan book in dollar-denominated. So that's where that inflation is coming. And the other is coming from the derivative portfolio. That the credit exposure of that portfolio also fluctuates with the FX. And so that's the other big source of risk-weighted assets, inflation coming from the FX. And that was what has made us like lose more than 100 basis points of CET1 in the last 12 months. And definitely, that was one of the, let's say, main reasons of, let's say, reviewing the dividend policy for this year.

And in terms of the product for SMEs, like, your question is like next Monday, I mean, we will be beginning with the application process for these SME lines. I mean we are expecting to have today by the close of business, have the final pieces of regulation we need from a regulator in order to operate, so tomorrow is like the end of the month. I mean Friday is a holiday. And so next week, we are starting granting those loans.

[Robert Moreno Heimlich, executive]

Yes. And just one follow-up, Jason. Our balance sheet doesn't have like big FX risk. So it's hedged. So what does that mean is that when there's a depreciation of the peso, and the dollar loans go up, there's no like counterbalance on results. So the capital doesn't, okay? So that's important.

And when these dollar positions are like translated to peso, right? If they have our provisions, the provisions also rise, but that part is hedged. The only part that's not really hedged is the cost, like these tech costs that -- contracts that we pay abroad for technology. I would say that's the only part that is -- in terms of P&L is more affected by the exchange rate. And the other thing, obviously, is when the peso depreciates, there's more inflation, and that eventually leads to higher NIMs, okay?

[Operator]

And our next question comes from Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

A couple of questions. Maybe first, following up on this provision. I don't know if you've run some stress tests or just trying to think about the cost of risk.

You derisked your loan portfolio quite a bit the last several years. Your cost of risk, historically, used to be closer to 2%. The last year was getting closer to 1%. I think you were guiding for around 1.3%, 1.4% this year before the COVID-19 pandemic. And if we look at back in 2008, 2009, cost of risk was above 2%, like 2.4%, I think, was the peak.

I know it's hard to say right now. But if you can help us at least put this into perspective, right, how much could the cost of risk increase from here? What's kind of a worst-case scenario? I don't know. Just any color you can give on that would be very helpful.

And then my second question in terms of your outlook for margins. You're thinking about the different moving parts here, right? If you're growing more in corporates, lower spreads, that could negatively impact margins. FX depreciation, the higher inflation benefit margins, but maybe inflation peaked for the year and demand -- weaker demand could make inflation come down a bit. So if you can help us think about sort of all the moving parts that could impact your margin and how that's going to evolve for the year?

[Emiliano Muratore, executive]

Okay. Thank you, Tito. I mean in terms of cost of risk, I mean, I'm sorry to disappoint you that, I mean, we cannot give you like much guidance. I mean I think in the slides, in the webcast, the idea to show the past was mainly to support your rationale. I mean in the sense that today, the portfolio is significantly different to what it was in the past. I mean, like, say, much more, say, in that sense. But also it's true.

So I cannot compare in previous peaks. It's also kind of unfair in the sense that the portfolio now is quite different. But also it's true that this crisis is quite different to all the others we have seen in the past. So that's what we try to show. And that's why, let's say, I would say that we still see the composition of our loan book in relative terms to the system, and you can also like see that trend in the Slide 15 when we compare with some other peers. In relative terms, we still feel comfortable of our future cost of risk. But in absolute terms, it's something very difficult to guide. Now in the coming months, we will be having more visibility on that.

And in terms of NIMs, as you said, there are very different moving parts. There are some very really good tailwinds coming from cost of funds. I mean, first, as you can see, we are growing demand deposits at a very, very fast pace. And we are still seeing that in April, and we expect to see that also in the future. And that's for the noninterest bearing part of the deposits.

But also in the interest-bearing part, as you also saw in the webcast, we are doing pretty well because we are outperforming our peers, but also the Central bank cut rates, and that is also useful for the cost of funds. So that's the part of the tailwind.

The inflation, as you know, it's a significant part of the volatility of our NIM. That is -- that has been high in the first quarter. But when you look to the -- what the market is expecting, they're expecting like decreased inflation that would put some downward pressure on NIMs. But also, it's fair to say that uncertainty and volatility will also affect inflation. I think that today, the base case scenario, especially because of the oil price situation, is to have inflation for the rest of the year slowing down. That's also like a long shot for many people because the volatility of the market is very high, and we don't see how this -- all these constraints in the supply chain may affect also prices. So I think that that's, let's say, a downward pressure, but with some question marks.

And then in terms of the composition of the loan growth. Yes, I mean, we are seeing more growth in corporates, and we are going to see this growth in the SMEs guaranteed by the government that is going to have like a 3% NIM because the rate is already fixed. And so that in terms of the composition of the loan growth, would put also some pressure on NIMS.

But also it's important to mention that in the whole market, not just corporates, you see it across the board, cost of risk. I mean, more than cost of risk, I would say that the price of risk has risen. I mean we can see that in our bonds in the secondary market. So we are seeing like a new normal in terms of pricing that even though it's higher than before, the composition more geared to corporate and to guarantee the SMEs lending, should imply like some downward pressure on NIMs. But the volume of the loan growth kind of compensated, I think, in terms of the NII.

I don't know, Bob, if you want to complement?

[Robert Moreno Heimlich, executive]

Yes. I think it's hard to -- there's a lot of -- in the latter part of the P&L, there's a lot of moving parts now. And -- but I think independent of the movement of NIM, we think that NII could see a positive growth this year. How much? It's hard to say. Last year was basically flat. So NII didn't grow at all. But this year, there will volume. We -- there's the moving parts. So it's hard to say how much. But NII should be both by volume growth and cheap funding.

[Daer Labarta, analyst]

Great. Thanks, Emiliano and Robert, that's very helpful. Just a couple of follow-ups, if I may.

I think you had guided originally for the year and the cost of risk, like 1.3%, 1.4%. This quarter, it was around 1.2%. I mean I think it's fair to say you should be above that initial guidance. But just to understand the rationale and maybe not being more conservative and boosting provisions this quarter? I know you had a big provision in the fourth quarter or maybe you got influenced that decision. So just to understand why maybe waiting to book maybe additional provisions? That would be all...

[Robert Moreno Heimlich, executive]

Yes. So yes. It's real simple in the sense that there's so many programs coming out that we're still trying to see the impacts, okay? So that's the reason we're implementing all these programs now, and we're waiting for some guidelines. So there's still a lot of work behind the scenes. So that's why in the first quarter, there's really no clarity. And everything will be more visible in the second, okay?

So as Emiliano said, the SME program is launched now next week, which will be in May. And so there's a lot of moving parts, and that's why I think the second quarter, when we have a better feel of how all this will come, and then we'll see what -- exactly what we can and can do, okay?

[Emiliano Muratore, executive]

And also, I think it's worth mentioning that, as you said, I mean, last quarter of last year, we took like a big provision because of the social unrest in Chile. And I would say that until mid-March, situation was really kind of good and better than expected. I mean across the board. I mean in the business front, but also in the asset-quality front. So we have that huge provisions coming from last year. Behavior until mid-March was really good.

But now we are in the middle of this crisis, and now we have to figure out how to look forward. But maybe we felt like we didn't need to move so fast in terms of taking extra provision of that because we did much more information, as Robert said, but also we are coming from a quarter where we took high provisions. And then the behavior got better until the COVID crisis started.

[Robert Moreno Heimlich, executive]

Yes. So basically in Chile, the COVID crisis is an April effect, okay? So another country might have come before, but we really started to feel more of the pinch. So we'll definitely have more clarity in the second quarter, okay?

[Daer Labarta, analyst]

All right. Perfect. That's very helpful. And sorry, if I can ask one more follow-up, just on -- going back to the NII you say you could see positive growth. Just you had originally given like mid-single-digit loan growth. I mean I think it's fair to say it'll probably above that, given the growth you're seeing on the corporate side?

[Robert Moreno Heimlich, executive]

I mean it depends how much demand and supply go forward. But I mean there shouldn't be a decrease in loans this year, okay? I don't -- okay?

[Emiliano Muratore, executive]

So yes, because all these grace periods also kind of reduce the amortization of the -- for the year. So that's kind of backstop to loan growth. So yes, I think it's fair to say that, that initial guidance is still like on the table.

[Operator]

And our next question comes from Alonso Garcia from Credit Suisse.

[Ricardo Garcia, analyst]

My question is a follow-up on asset quality. I mean you mentioned that clearly you have derisked the portfolio over the past several years. And now you're in a much better -- with a much healthier quality with higher exposure to higher income individuals.

However, I just want to ask if, in general, you perceive Chile to be in a better or worse shape in terms of household and SME leverage indebtedness compared to previous crises, such as [ the civil Metro subway ], the earthquakes, just to get a sense on what's the starting point for Chilean SMEs and households as a whole?

And my second question is on capital. You mentioned in your previous update call that you were targeting core Tier 1 ratio of above 10% by the end of this year. But I don't know if that target remains in place, given the degree of Chilean peso depreciation? Or if we should expect CET1 to remain above that level by the end of this year?

[Emiliano Muratore, executive]

I mean in terms of capital, yes, that's, I would say, maybe the target, but it's -- I think that staying with our clients and supporting our clients. It goes like even, let's say, higher in the, let's say, rule of preferences. So yes, I mean, we are -- we would like to go to 10%. Definitely, the FX we will set a big part of that target if we are able to reach it or not. And I would say that we still target to be as close as 10% as possible, maybe from 9.5% to 10%. But we don't want to say to be there a restriction in the sense of supporting our clients.

It's also true that regulation is helping that. I mean all this guarantee is coming from the state. Although, in Basel I, they will be counting as Tier 2 and not as the reduction of risk-weighted assets. That will change in Basel III. And now Basel III has been postponed. So our capital position as an all-in ratio will be very strong by the end of the year. I mean it is now and it's going to be because of the Tier 2 that we have been issuing and also because the guarantees coming from the state and the SMEs portfolio also helping the total ratio.

That is not going to be seen on CET1 yet because of the Basel I framework. But that will also put a tailwind looking into Basel III numbers. So we feel comfortable, and it's not like whatever it takes target, but it will still keep it as where we would like to be.

And the other was?

[Robert Moreno Heimlich, executive]

The other question was regarding that we are effectively derisked, but how the households and some SMEs are in terms of leverage? And well, the low-income after the maximum rate, obviously, they deleveraged. So -- and also we're less exposed there.

Another thing, remember that rates are much lower today. There has been an increase in household leverage because of mortgage, okay? But that hasn't really signified a deterioration in the debt servicing ratios. In fact, probably this year, for someone who keeps their employment, given that a lot of mortgages have been refinanced at much lower rates, I would say the leverage of the household that might have gone up, but debt servicing ratios are probably coming down. And also, wage growth has been relatively decent in the last 10 years.

So I would say in households, I don't see a bigger risk today from over-leverage than the last 10 years, okay? In fact, if you take base 100, like an index of household income versus house prices, household income has grown more, okay? There's been different periods where they haven't gone at the same pace. But in the last 10 years, household income has grown more than household prices. So on that, we feel fine.

SMEs, they've been growing with the economy. We have an interesting portfolio there. It's very profitable. Obviously, with the social unrest, there were some impacts, but they rebounded very nicely in January and February, okay? And there, the key here is the government programs. Now remember, the government programs are mainly geared towards clients that have less than 30 days overdue as of March and very smaller SMEs all the way back to October. So it's really focused on those clients that clearly are showing difficulties or might have difficulties because of the recent events. If someone has been in NPLs for a while now, it's a different story, okay?

[Emiliano Muratore, executive]

And also, there we don't have to lose from sight that like almost 35% of our loan book are mortgages, right? And with the loan-to-value in the back book from 60% to 60-something percent. So that's also when -- I think when we compare in relative terms within the Chilean system, especially if you look at the comparison to other geographies, the weight of the mortgage book being under Chilean law, being like a full recourse mortgage, I think it's also a thing to consider when assessing how much the deterioration of the loan book could be.

[Robert Moreno Heimlich, executive]

And also, coverage has doubled the last decade, okay? We used to have coverage of the way we measure NPLs now 70%. Today, we're around 140%. So I mean that's why we feel, at least in relative terms, we feel good compared to the system, okay? But obviously, this all, in the end, comes down to how long this slowdown will last, and that's why it's really important to flatten the curve and get things back online safely, okay?

[Operator]

And our next question comes from Sebastian Gallego from CrediCorp Capital.

[Sebastian Gallego, analyst]

I have some questions. The first one, regarding on the business strategy and all the initiatives you pointed out in Slide 18. Can you talk about, for example, the wealth management, the acquiring business and other initiatives that may get some delays? How do you think about all these initiatives under the current scenario? Also, for example, the Work Cafe initiative, that will be helpful to understand what's your plan going forward?

Second question, probably just a follow-up on a recent question that you were discussing kind of the real estate sector and the LTVs. Do you see any risk on the actual real estate sector considering that some players in the industry have loan to values closer to 80%?

And probably the third question will be on the deposit side. I know you mentioned that it's been performing well, that probably top banks have been acting as a safe haven. But how do you see deposits evolving? And what could be probably a key risk for the deposit market at this point?

[Emiliano Muratore, executive]

Thank you, Sebastian. Going to your first question about business strategy. We mainly keep everything like in place. As you can see, even during this last few weeks, we've made the official launch of Superdigital and also Klare. The acquired business, we are waiting for a final approval from the regulator because we need to create a subsidiary of the bank to operate other banks' cards. So we are waiting for that. When we get that, we will start immediately deploying the different businesses.

Especially because under this context, all the e-commerce and all the digital proposition is key. And we are very, very confident to the digital offering we have in our acquiring business. So that's just a matter of waiting for the regulatory approval.

And even in the wealth management, yes, I mean, there's a slight postponement, if you want, but more related to they're working remotely and that it's like -- now that it's like tougher to get some things moving forward, more than kind of a market volume. I mean because, I think, the need is already there. That's an area where we have room to improve and to gain market share. And I would say that we will also be moving there quickly as far as we get more kind of normality in the operations that -- and the key parts of our strategic plan are stay there, and we are keeping them. We don't -- we don't plan to change them.

I don't know, Bob, probably...

[Robert Moreno Heimlich, executive]

The real estate. Okay. Yes. So in our loan book, I would say, around 6% of our loans, 6% to 7% are to the real estate sector. These are real estate developers, okay? Construction is higher. Because construction as a sector is a little higher because it includes real estate developers, infrastructure and concessions, okay? So I think the infrastructure, which is mainly in the private and public investments and infrastructure, should remain healthy and growing. Concessions as well, where -- and then there's the real estate sector, which we focus on a select group of real estate developers, okay, who have very good projects, but also have really good balance sheet. So until now, the past due loan ratio of our real estate developers as of March was less than 0.1%, okay? So we feel comfortable.

Obviously, I don't know the position of other players and so forth. But our real estate development portfolio isn't such a big part of the loan book. And as of March, the clients that we work with -- we work with like 20, 30 very select. And so now they've been -- they've behaved well. Okay? Obviously, sales of new apartments and houses is going to come down for a while. But -- so that's why it's really important to have good companies behind those projects.

[Emiliano Muratore, executive]

And about deposits. I don't know if there is still a strong statement to say. But I mean I don't see like big risk. I mean, on the other side, I see like good pillars to support the deposits that we are seeing so far and because first, we are -- we see some degree if we want to apply a little bit of preference to liquidity -- preference for liquidity to the people they basically make them have their money in their checking accounts. I mean we are -- we have the highest number of checking accounts in Chile. So that's like that preference for liquidity for asset kind of light quality is a good lever for us.

And also, the low rates environment in the past also has proven to be a good support for deposits because the opportunity cost for people is much lower. And also something that is good for deposits, and we are seeing it already and slightly negative for our asset management business is that in Chile there is -- I would say, a significant amount of money from people, individuals and corporates in money market funds that, that finally comes back to banks through deposits. But it's like the institutional deposits where the asset manager is taking like retail client deposits.

And now that situation is changing, as you might imagine, with the monetary policy rate at 0.5%. Even with low levels of fees in those funds, the net yield to investors is really, really low. So that create like 2 forces. One that it doesn't make, let's say, much problem to have the money in the checking account, yielding nothing. And also it's good for the clients and also for banks to have a time deposits with a yield slightly above the fund, but also positive for the bank.

So I don't see, I would say, very significant risk on the deposit side. Definitely, keeping this pace of growth, it's difficult to happen. I mean I don't see -- I mean I hope we've gotten that, but it's very strong what we are seeing so far. But I don't know probably, Bob, in the deposits, if you see any threat or risk?

[Robert Moreno Heimlich, executive]

No. No, threats. Now remember, eventually, down the line, companies are going to start investing again. So we'll start building things and their checking accounts might come down. Now obviously, if they spend, they will go into some other business and so forth. So this level is going to continue. But in the future, you'll go back to maybe some normal levels as companies obviously are trying to keep cash on their balance sheets, okay?

But remember, April is a tax payment month. So that's also a big seasonally high. Another thing what Emiliano and we've said in the call is, there's also growth in retail. And part of that has to do with the growth in account openings. We've had a very good run even in March because the digital platforms are working. The retail side, I think, still has some room to grow as we capture market share.

[Sebastian Gallego, analyst]

All right. Just a confirmation and a follow-up, maybe, if I may. On the initial question, you mentioned that 20% to 25% of people or loans as for grace period. Is that as a total loan or just for the consumer segment? I'm not sure.

[Robert Moreno Heimlich, executive]

Total individuals...

[Claudio Soto, executive]

Total individuals, consumer plus mortgages.

[Operator]

And our next question comes from Yuri Fernandes from JPMorgan.

[Yuri Fernandes, analyst]

I have a question regarding the guaranteed working capital line. If you can comment a little bit about the economics of this line, like how should we think about the spread there? I read that the rates would be around 3.5%, but I'm not that sure about the cost of funding of this line? And also, if you need to charge the same rate for all the companies independent of the size of them?

And also if you can give any color regarding this spread of this line versus an average SME spread for a normal loan, like how much cheaper is this kind of line?

And finally, should we expect Santander-Chile to engage in this $24 billion expected program in line with your market share of this system? The point is, if you do like 20%, 25% of this program, it's a sizable increase on your loan book. And I really don't know if the margins of this product, they are economically interesting, given like that's the bank, they still will be responsible for about 30% of the risk of this line.

So my question is, how are the economics here, right? Like how -- I know this maybe is not super important now given the size of the crisis. But how this program can hurt your margins and your overall profitability?

[Emiliano Muratore, executive]

Okay. Thank you, Yuri. I mean I think this quarter is like easier, I mean, you have to see it as a 3% NIM product. I mean the funding is coming from the Central Bank. The Central Bank is also providing $24 billion of funding to banks up to 4 years at 0.5%. So although the collateral, they are different. But I think it's fair to make the numbers with that cost of funds. So that leaves a 3% margin before costs, before fees, before risk, before everything. I mean like gross margin. So that's the first part.

I mean the prices is like not fixed. I mean it's like not more than 3.5% the rate. So you could expect some segment maybe being slightly below that. But I think it will be around that 3.5%. And comparing with other SMEs or other programs like this, this spread is significantly lower. So a way to see this is that as a stand-alone product, it's going to be like not a profitable product. I mean when you factor in cost risk fees because also in this economics, the one paying the fee is the bank.

So let's say, of that need, you have to deduct the fee, which is going to be like 20 basis points year-over-year or something like that. So as a stand-alone product, you don't have to see this as a very -- as a profitable product. You have to factor in a couple of important things. I mean the first is like -- is that in capital terms, is going to be like light because the guarantee from the state is going to be, let's say, computed as a mitigation. That hasn't happened so far. I mean until now, the state guarantees weren't mitigating the capital consumption. Now they will, so that is like a good part in terms of risk-adjusted by capital.

And the other that, I think, is the main idea behind this product behind this program from the government, that it's how many clients will survive or will make it through the crisis because of this? I mean that -- I think that's the big upside that it's going to be impossible to make the comparison of the scenario with or without because we have it now. But we see it as a good way to help many of our clients to get through this crisis. The terms are already set. I mean the government has been deciding the program and you don't have to see it as a way of profitability as a stand-alone basis. But looking at the broader picture, it's like a good way to help people navigate the crisis.

[Robert Moreno Heimlich, executive]

And another thing real quickly is that the definition of SME is a little bit larger than the SME, our definition. So it's true for the traditional SME we have defined in our earnings report. The spread is lower. But when you go a little bit higher into the more middle market, the spread isn't that much worse...

[Emiliano Muratore, executive]

Because I mean, here, we are talking about companies that have a total revenue of 35...

[Robert Moreno Heimlich, executive]

35 million.

[Emiliano Muratore, executive]

$35 million a year. I mean, USD 1 million. That's like a big corporate, I mean, and that they are also considered in this program. And going to the beginning of your questions, yes, I think it's fair to expect that to keep like our market share of that line. I think it's -- as of now, is a fair assumption to make.

[Operator]

And the next question comes from Piedad Alessandri from Credicorp.

[Piedad Cuevas, analyst]

I wanted to ask more specifically first about the macroeconomic assumptions you are making, if you could give a bit of your view on the macroeconomic environment for 2020?

And second, the amount of impact FX has on OpEx?

[Emiliano Muratore, executive]

Yes. And the first -- I'm sorry again to say that we are not sharing any guidance at this moment from any sorts. So we skip that part. I mean if you want to comment on the effects on OpEx?

[Robert Moreno Heimlich, executive]

Yes. So this quarter, our costs went up around -- well, one second, please. Quickly, I'll give you an indication. So there is an impact in administrative expenses. Our cost grew in 12 months, 6%, okay? Now Santander Consumer added around 3 billion peso, of which wasn't there. So if you take that out, it's around 5% or so. And so the FX was around in 12 months, I would say, it impacted growth of like 2 percentage points. So roughly 100 pesos in 12 months added around 2 percentage points to cost basically in administrative expenses, okay?

Now personnel expenses, we really did have a very good January and February. So we provisioned good variable incentives. Those 2 -- sorry, those 2 months. Obviously, that might reverse, depending how things go. So I think the pressure on costs and personnel expenses, we're not going to do any head count reductions, as sort of our President said. So the big impact will come in the future and administrative expenses. And obviously, if the peso doesn't continue depreciating significantly that cost growth should die down, okay?

So I would say about 1/3 of the costs and administrative expenses have some relation to FX.

[Piedad Cuevas, analyst]

Okay. So you could say 1/3 of your administrative expenses is in U.S. dollars, probably?

[Robert Moreno Heimlich, executive]

In euros. Okay?

[Piedad Cuevas, analyst]

Euros...

[Robert Moreno Heimlich, executive]

Because some of the tech costs are in euros as well, okay? Dollars and euros.

[Operator]

And our next question comes from Jorg Friedemann from Citibank.

[Jorg Friedemann, analyst]

I'd like to get a bit more color as possible on the grace period program. I understand that you mentioned already that a 20% to 25% of the total loans applied to the program. Just wondering if you could give us a bit more granularity about how much more you expect going forward? And how the -- you will give us visibility to check on the potential evolution of those contracts? I mean probably we are going to be a bit blind together with you during this month of grace period. But if you expect to add additional provisions, even though, they are not required to or how we are going to understand the impact only when the grace period is over? This is the first question.

And the second question, I was looking into Page 10 of your MD&A. And you mentioned in terms of fee income that you already got initial impacts from the COVID crisis. But when I look into this table, the split among the different segments of your business. I just see significant contraction on a year-over-year basis in the SCIB segment, which I think is related to the slowdown of investment banking. Is it fair to assume that additional pressure should be concentrated, especially in retail going forward? Or how do you see that evolving in the coming quarters?

[Emiliano Muratore, executive]

Okay. Thank you, Jorg. I mean regarding your first question -- the first question. What I'd tell you is that the speed of people asking for this grace period because you have to consider that for individuals, I mean consumer loans and more the like the product or the solution was already like available. And so this 20% to 25% is what we have seen so far. And the speed we are seeing in this last few days, weeks is very, very low. I mean what we had was like a huge amount of people like lining up, if you want to get the grace period. I mean we get them in the first mainly 2, 3 weeks. And now the base is like much lower. So we can expect some growth number. I mean basically it can only grow. But I will say that it's going to be so relevant, the growth from what we have seen so far. Assuming what we have seen in Chile, that it's now a stage where the government is moving into kind of new normal and trying to push the economic activity to recover and to start again and so on.

And in terms -- and then you have SMEs, the whole commercial lending, where if you want the solution, it's going to be only available next week. I mean yesterday was the first late auction. So they are, as I said before, we are going to be really starting Monday. We -- I would assume that like a high level of demand. But also it's true that from the client point of view and from the corporate point of view, this is not like a free option, if you want, like a free lunch. Because if you get this money, you have to restrict your dividend policy and you have like some use of proceeds restriction that it's, let's say, I think that could make some clients think twice before borrowing.

And so -- and definitely, now during the second quarter and the rest of the year, seeing how the evolution of the portfolio -- the evolution of the crisis goes I think that those will be like the inputs to decide if we should move to, let's say, higher provisions. Even though the regulation would give us some room that so far, we haven't move there yet. About this, you want to?

[Robert Moreno Heimlich, executive]

Yes. And regarding the fees, yes, in the first quarter, you're correct. SCIB is corporate Investment banking. And they actually -- I would say they are more affected in the first quarter by the slowdown and the social unrest, okay? The trend probably won't really improve for a while. And in retail, we had -- once again, we had a really good January and February. And then March, things started to slow down.

So yes, especially like in credit card spending. The good news is that we're getting clients. People are using more of the online purchases. But if you look at the actual monetary purchases of credit cards and debit cards are coming down in April. So that's going to have some impact. Remember, we changed from the 3-part model to the 4-part model on credit cards. That is also helping us a little bit. We're not charging more to commerce, but the economics of our credit cards are a little bit better. So that could help to absorb some of the shock. But you're correct in saying that the trends we saw in -- especially in January and February in credit and card usage are going to come down in the second quarter.

Sorry, did you mention additional provisions to answer that part?

[Emiliano Muratore, executive]

Yes.

[Robert Moreno Heimlich, executive]

Yes. Okay.

[Operator]

And I'm showing no further questions. I would now like to turn the call back over to management for closing remarks.

[Emiliano Muratore, executive]

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

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.