Banco Santander-Chile

NYSE:BSAC

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Santander-Chile's First Quarter 2021 Results Call. [Operator Instructions]

So without further ado, I would now like to pass the line to Emiliano Muratore, the CFO of Santander-Chile. Emiliano, the floor is yours.

[Emiliano Muratore, executive]

Good morning, everyone. Welcome to Banco Santander-Chile's First Quarter 2021 Results Webcast and Conference Call. This is Emiliano Muratore, CFO, and I'm joined today by Robert Moreno, Managing Director of Investor Relations; and Claudio Soto, our Chief Economist from our research team. Thank you for attending today's conference call. We hope you all continue to stay safe and healthy.

During the quarter, Chile faced a second coronavirus wave, but the successful vaccination program should enable a wider reopening and economic recovery soon. We have a lot to discuss today with various important messages. Claudio will start with an update on the economy and macro scenario, beginning on Slide 4. Then we will go into the results of the bank during the quarter. And finally, we will explain how we continue to progress in our digital strategy and other initiatives.

So now I will hand the call over to Claudio.

[Claudio Soto, executive]

Thank you, Emiliano.

During the last quarter, Chile has confronted another wave of contagions, reaching a new peak in the first part of April. However, the vaccination process has proceeded fast. By mid-April, the country had vaccinated more than 7.5 million people and almost 40% of the target population has already received 2 shots. This and the massive lockdowns imposed in March have begun to reduce the rate of contagions. Despite this, we estimate a return to a new normal will occur only by the middle of the third quarter. The government has implemented a new set of measures to support households' concerns, including direct cash transfers and a new guaranteed program for SMEs.

On Slide 5, we can also see how the country has benefited from a substantial improvement in its term of trade. Copper has reached its maximum level in a decade, while our export prices have also [ weakened ]. A better external outlook plus the fast deployment of vaccines have led to a substantial upward addition to growth this year. While during the second quarter, we might see a mild downturn, in the third quarter, the commission recovered to its prepandemic levels. For the year, we estimate GDP will grow between 6% and 7%, a similar range as published by the last inflation report by the Central Bank.

The labor market has remained weak. There are almost 1 million or 10% fewer jobs than before the pandemic and the speed of job creation has slowed down. Despite a couple of upward surprises, inflation is still contained due to the [ acceleration ] of the economy and the currency appreciation in recent months.

On Slide 6, we show our forecasted inflation and rates. Going forward, we expect prices will slowly accelerate as the economy recovers. In spite of this, we estimate the Central Bank will keep its monetary policy rate unchanged during the whole year and then will begin hiking just in the first quarter of next year. Medium and long-term interest rates have begun to rise in response to external interest rate increases and the better outlook for the Chilean economy.

Last week, the Congress approved a constitutional reform to allow for a third pension fund withdrawal. We estimate the total amount that would be withdrawn, it's about CLP 17 billion, 6 percentage point of GDP, similar to the amount available in each of the previous 2 reforms. According to estimate by the Central Bank of Chile, a sizable share of the resources from past pension fund withdrawals are being used to reduce debt and increase all type of savings. [ Less than 20% ] has been spent in consumption or investment. Still, there are a large amount of banking accounts that could easily be translated into expenditure. That puts another risk for both activity and inflation.

In the short run, the reported portfolio adjustment by [ ASP ] will reduce some financial price volatility. Interest rate will move up as we have seen in recent days and the [ Chile rate ] could appreciate. The Central Bank has announced a liquidity program to contain such volatility. In particular, we have reopened the special securities buyback program for banking bonds and term deposit, with resources for up to USD 10 billion. Also, the [ reporting done ] for banks will be extended until August 2021.

This week, the Chamber of Deputies approved the constitutional amendment for a new transitory wealth tax on the superrich and a reduction in VAT. The bill has now to go to Senate. They finally approved the reduction in VAT would have an important downward, short-term impact on prices and will entail an extra boost to consumption that might create inflationary pressures in the medium term.

[Emiliano Muratore, executive]

Thank you, Claudio. We will now move on to explain our strong balance sheet and results, which showed strong trends in the quarter.

Moving on to Slide 8, net income in the first quarter of '21 totaled CLP 182 billion, an increase of 26.2% compared to the first quarter of last year. It is important to point out that these results include an additional provision of CLP 24 billion recognized in order to increase coverage ratios, considering the uncertainty still surrounding the potential impact on credit quality of the COVID-19 crisis. The higher net interest income, a rebound in fees and improvement in asset quality and cost control drove our results. The bank's return on equity surpassed 20% for the second consecutive quarter.

One of the most important drivers of our strong results in 2020, can be seen in Slide 9, was net interest income. Despite asset growth being focused on low-yielding and less-risky assets, we still managed to obtain an 11% increase in NII with a strong NIM that reached 4.2%. U.S. inflation was strong at 1.1%, although lower than the previous quarter. Going forward, we expect U.S. inflation for the quarter to average around 0.8% to 0.9% per quarter. They should be positive for NIMs, but there are some important headwinds that must be mentioned. These are: a decrease in noninterest-bearing liabilities as current growth rates are difficult to sustain; the velocity at which short-term rates begin to rise; the rate of change in the loan mix as the economy begins to recover; and the incorporation of lower VAT taxes for some products that could lower inflation expectations in the short term. For these reasons, our NIM expectations for the full year remain at around 4%.

As you can see on Slide 10, the bank outperformed the market and evolution of NIMs and NII, especially since the onset of the pandemic. Our NIM outpaced all of our main competitors. Our NII increased 10 point -- increased more than 11% during the last 12 months compared to a decline of 0.3% for the rest of the system and a decline of greater than 8% for our main competitor. This reflects not only our better balance sheet management, but also the strong growth of client deposits, especially checking accounts.

As we can observe on Slide 11, noninterest-bearing demand deposits increased 42.2% year-over-year due to high growth of retail checking accounts, continued strength in the bank's transactional banking service for companies and the positive impact of the second withdrawal from pension funds.

On Slide 12, on the right-hand side, we show how this growth of demand deposits occurred across all segments with demand deposits in retail banking leading the way, an increasing 6.2% Q-over-Q and 50.6% year-over-year. With this growth, our market share and demand deposits reached 21.4%, placing us again in the #1 spot in this product.

Simultaneously, as shown on Slide 13, the bank continued to enforce strict price discipline and CLP deposits, improving our time deposit funding cost in nominal pesos, both in absolute terms and compared to our main peers. In the first quarter, the average quarterly cost of our CLP deposits was 0.39%, below the monetary policy rate and lower than our main peers.

On Slide 14, we review loan growth. Total loans increased 0.4% year-over-year and 0.3% Q-over-Q. Loan growth remains subdued due to the ongoing lockdowns and high liquidity levels, both at the corporate and personal level. Loan growth was mainly driven by the SME segment, which increased 1.5% Q-over-Q and 20.8% year-over-year. In the quarter, CLP 241 billion were dispersed under the new FOGAPE REACTIVA Program. In January, the government launched a second phase of FOGAPE called FOGAPE REACTIVA with some important differences compared to the initial program. FOGAPE REACTIVA loans can be used to invest in new projects and not just for working capital, the average yearly rate for a FOGAPE REACTIVA alone is approximately slightly above 8% compared to 3.5% for the original FOGAPE and maturities can reach up to 8 years.

Loans to individuals decreased -- increased 2% year-over-year and 1.4% Q-over-Q. On the other hand, consumer loans decreased 2.3% Q-over-Q and 11.4% as ongoing lockdowns and withdrawals from pension funds has kept demand low for these products.

A bright spot in consumer lending in the quarter was Santander Consumer Finance. Auto loans were up 6% year-over-year and 7.2% Q-over-Q. Profits from our auto lending business were up 129% year-over-year. Mortgage loans increased 8.7% year-over-year and 2.1% Q-over-Q. Long-term interest rates have remained relatively attractive, contributing to the sustained growth, especially among high-income earners, and this has driven mortgage growth. In the middle market and SCIB, loan trends were similar to previous quarters as demand for working capital lines waned and new project development has still not gained momentum. Our strategy with these segments continues to focus on nonlending activity. This has resulted in an improved funding mix with high growth of demand deposits, driving net interest income in the middle market and SCIB to increase 25.7% and 38.8%, respectively, in 1Q compared to 1Q of last year.

Moving on to asset quality on Slide 15. In this slide, we show the breakdown of asset quality by loan products. The NPL and impaired loan ratios continued to show positive trends after the expiration of payment holidays. The coverage ratio of NPLs continued to rise to 257%. The NPL and impaired loan ratio decreased to 5.1% and 1.3%, respectively.

Regarding the evolution of payment holidays on Slide 16, as of March 2021, less than 1% of the total loan book was still under a payment holiday. 86% of FOGAPE loans were under normal payment schedules and only 14% still had a payment holiday with an overdue ratio of 1%. It is important to point out that for the FOGAPE REACTIVA loans we gave in the first quarter, we did not give payment holidays, but do not rule out this option in the future. For the rest of the loan book, for which a payment holiday was granted, 99% of these loans have resumed their normal payment schedule with an impaired loan ratio of only 2%.

As you can see on Slide 17, these positive asset quality indicators led to a cost of credit of only 1% in the quarter, including the recognition of CLP 24 billion in additional provisions. We now have in our balance sheet CLP 150 billion in voluntary provisions to cover unexpected events in 2021. We have not yet reversed any additional provisions. It's also important to point out that in April 2021, we will be recalibrating some of our internal consumer loan expected loss models. This will signify a cost of around CLP 25 billion to CLP 29 billion in provisions in April, including this, the cost of credit for the second quarter is still expected to be around 1% as all asset quality indicators remain robust. Therefore, we will have a small jump in provisions in April, normalizing in May and June and the full quarter, shouldn't be any major rise. For the full year, we have improved our guidance from 1.2% to 1.3% cost of risk to 1.1%, 1.2%, which is still conservative as we wait for the full effect of reopening and vaccines.

On Slide 18, we take a quick look at noninterest income trends. Fee income had a good quarter, increasing 9.3% Q-over-Q and 1.4% year-over-year. Fee growth was driven by strong opening of checking accounts, greater client loyalty, the rise in insurance brokerage, especially through our digital platform and a good quarter for [ SCIB ] and investment banking activities. Total income from financial transactions increased 29.1% year-over-year, mainly due to higher client treasury income. This was offset by a loss in nonclient treasury income, various liability management operations were executed in the quarter, which lowered current results, which would -- which should have a positive impact on NIMs going forward.

The rebound in revenues in the quarter was also accompanied by good cost control, as shown on Slide 19. Operating expenses increased 1.5% year-over-year, and the bank's efficiency ratio reached 37.6%. The rise in administrative expenses in the quarter was driven by costs associated with the launch of Getnet and greater overall activity as we prepared for the reopening of the economy.

On Slide 20, we see how this low growth of cost is leading to greater productivity. We continue forward with our CLP 250 million investment plan for the years '21 to '23, mainly focused on digital initiatives and automatization. In the quarter, the bank continued the process of transforming its branch network, focusing on the work of their model and closing less productive branches that have low client flow. With these investments, productivity continues to rise with volumes defined as loans plus deposits per branch, increasing 8.5% and volumes per employee rising 8.7% year-over-year.

Regarding capital ratios on Slide 21, the bank finished the quarter with high capital ratios. Our core capital ratio reached 10.9% compared to 10.7% at year-end 2020. Our total BIS ratio reached 15.4%. At the Annual Shareholders Meeting held yesterday, a dividend of 60% of 2020's net income was approved and paid today.

On Slide 22, we give an update regarding Basel III. The phase-in of Basel III has commenced, and we will be -- and will be fully in place by December 2025. Beginning this quarter, banks now include its AT1 capital subordinated debt for up to 1.5% of risk-weighted assets. These will be gradually replaced with perpetual bonds in the following years. Under these new requirements, we have transferred CLP 502 billion of subordinated debt from Tier 2 to Tier 1. At the same time, core capital now includes minority interest. The new weighting of risk-weighted assets and the incorporation of operational and market risk will begin in December 2021.

We also present in this slide our assumptions for the phase-in of Basel III and the minimums required for the bank. This includes the various buffers, our assumptions for Pilar 2, which are still not known, and the additional buffer to be set by the bank's Board. In summary, by the end of this year, we expect the minimum BIS ratio required of us will be 12.8%, rising to 14% by 2025. According to our estimates, we should already be above these levels at year-end.

In the final portion of this presentation, starting on Page 24, we will give an update on our most significant strategic and business initiatives. Key advances were made in Life, Superdigital and our digital insurance platform, and we finally launched Getnet with great success.

On Slide 25, we show Santander Life continues to be the main contributor to client growth. Total Life clients increased 239% year-over-year. And in the first quarter, Life opened 127,000 checking accounts. Life already has more than 611,000 clients, 75% of which were digitally onboarded. The marginal cost of acquiring a new client through digital onboarding continues to decline and now is approximately $1.

Superdigital opened a record amount of debit -- prepaid debit accounts in the quarter, providing an attractive alternative for unbanked Chileans to manage the money received from government initiatives during the pandemic. At the end of March, we already had close to 150,000 clients.

Further good news came from Getnet, as shown on Slide 26. Getnet was efficiently launched in February 2021. Client reception has been positive. Getnet has already sold over 16,700 POSs to date to more than 14,000 clients as of April. Moreover, 65% of the clients have auto installed their new POS, which demonstrates the efficiency of Getnet systems. A star feature has been the deposit of sales receipts of the 5x daily, including weekends.

On Slide 27, we show how our digital insurance brokerage platforms also had a positive quarter. Klare continued to expand its product offer and now brokers online health and dental insurance and signed alliances with various new insurance companies. Autocompara also shined in the quarter. The sales of auto insurance policies increased 55% year-over-year, consolidating their leadership in this market.

Moving on to Slide 28, we show how the success of our digital initiatives has led to a 31% increase in digital clients, a 9% rise in loyal clients. And we continue to open 3x more checking accounts than the rest of the banking system combined. This has been accompanied by a strong improvement in our NPS score to 54 points, cementing our leadership in this indicator. This reflects that our strategy is working on all fronts in terms of client growth, client satisfaction, productivity and profitability.

Moving on to Slide 29, we update our most recent achievements in ESG. During this quarter, there were some major events to highlight in this matter. Our rating under MSCI was ratified as A, being a leader, especially in the ESG pillars of human capital development and financing environmental impact.

We also published our Integrated Annual Report for the year 2020. For the first time, our Integrated Annual Report complies not only with the GRI Standard but also SASB, placing us at the forefront of ESG transparency.

Santander-Chile won first place in Great Place to Work ranking for the year 2020 for companies with over 1,000 employees. The bank achieved an average score of 92 points. This is notable considering the pandemic and lockdowns. This also reflects that not only have we transformed in a digital sense, but culturally as well.

In terms of our environmental footprint, on Slide 30, we also show how we greatly reduced our environmental impact last year. Every significant metric showed a double-digit reduction. Teleworking clearly had an impact on these figures. And this has taught us how a lot can be achieved while consuming a lot less.

On Slide 31, we also show that we made progress in our ESG funding strategy. In the first month of this year, we issued 2 Women SME Bonds for a total of $150 million. The object of the -- the objective of this transaction is to contribute to the growth of small- and medium-sized businesses with annual sales less than CLP 2 billion owned and operated by women. These 2 private placements are our first approach to sustainable bonds.

We are very content with our advances in ESG, and as displayed on Slide 32, we announced that in the second half of this year, we will hold our first Santander-Chile ESG Talk, with a similar format as our successful Digital Talk. We will be sending a save the date with additional information soon.

To conclude, some update on guidance for 2021, given the progress made in the first quarter. So we're on Slide 33. The positive results achieved this quarter permits us to be cautiously optimistic for the rest of the year, but there are still risks in the road. Regarding loan growth, these should accelerate as the year progresses. With a new pension fund withdrawal, growth should remain in the low single digits.

We see NIMs for the rest of the year at around 4%. We expect the U.S. inflation of 3.7% for the full year 2021, while the monetary policy rate should remain at 0.5%. This should be positive for NIMs but this could be partially offset by a decrease in noninterest-bearing liabilities as current growth rates are difficult to sustain, the velocity at which short-term rates begin to rise, the rate of change in the loan mix and the incorporation of lower taxes for some products that could temporarily lower inflation expectations.

Asset quality is clearly showing positive trends, and we have improved our cost of credit guidance from 1.3% to 1.4% to a level between 1.1% and 1.2%. Fee growth should be another important driver due to the reopening of the economy and the success of our various digital initiatives. We expect fees to rise 8% to 10% this year, possible regulatory changes remain the main threat to this forecast. We expect costs to grow in line with inflation, and we have improved our efficiency ratio outlook to 38% to 39%. Finally, all of this said, we have risen our ROE expectations for this year from 15% to 16% to 16% to 18%.

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

[Operator]

[Operator Instructions] Our first question comes from Mr. Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

Now my first question is on the economic and political outlook. So there's a [ pretty held ] forward withdrawal on pension funds, which I think continue to be very positive for the asset quality of the bank, but it is also becoming a structural problem -- sorry. I don't know -- there was music. Can you hear me?

[Operator]

Ernesto, please go ahead with your question.

[Ernesto María Gabilondo Márquez, analyst]

Okay. So I was talking about these forward withdrawal on pension funds and saying that it will continue to be very positive for the asset quality of the banks. But I think it could also become a structural problem. We have seen in media that a potential for withdrawal would be equivalent to 6 years of savings. So I remember that the social unrest happened because of the low savings once people retire. So I would appreciate your thoughts on this.

And then on the other hand, we are seeing very good economic activity, as you pointed out, high commodity prices. Chile is facing the faster vaccination in the region. So why did you -- decided to build additional provision charges? And also when you're expecting a lower cost of risk for the year, what do you need to see to release provisions at some point? And what could be that potential amount?

[Emiliano Muratore, executive]

Okay. Thank you, Ernesto, for your question.

Claudio, can you please cover the first question?

[Claudio Soto, executive]

Yes. Sorry. I had an interruption. Can you summarize the question for me? Sorry.

[Robert Moreno Heimlich, executive]

I'll summarize it. And if you want to -- the talk of the fourth pension fund withdrawal, which is a fact -- sorry, the third. And basically, the question is how you view it. On the one hand, we see a lot of good news on the economic activity. But on the other hand, they're -- the pandemic is leading a lot of structural problems in the savings and the pension, fiscal. So how you think all of that is going to factor out in growth and on the political side? And then there's another question about provisions, which we'll answer.

[Claudio Soto, executive]

Yes. Okay. Well, we had experienced from last year where the withdrawal of funds from the pension accounts had an important impact on activity. We saw adverse surprises in growth during the third and fourth quarter last year. It was very clear when you break down the figures for GDP. There, you can see, for example, the retail sector being very strong. Today, actually, the growth numbers for March and sales, retail sales went up very, very strong at almost 25% year-on-year, which is reflecting that consumption has been relatively robust in this month. And the withdrawal will provide support to income so that you can sustain a relatively solid consumption going forward.

It's true though, and this has been shown by the Central Bank, that the large amount of the money withdrawn from pension accounts have been used to reduce debt, on the one hand, and also for new type of savings, so new types of savings and also a lot of money in current accounts. So I mentioned in my presentation that there is this upward risk that if all of a sudden, all that money that is in current accounts goes to expenditure, we may have a [ short to ] expenditure that may, on the one hand, produce a more fast recovery of the economy, [ this is the pandemic condition allowing ], and also, we may have some inflationary pressures in the short run.

Now in the medium term, of course, these pension fund withdrawals, they might affect the domestic savings, and that is an important issue. You have to have in mind, in any case, that we are in the middle of a discussion about the new pension reform and also the discussion about the constitutional change. And I think within that discussion, the country has to set up the conditions for a new pension system. What is clear is that you need more contribution. I think that it is pretty clear that you need more contribution. So it's not that clear what will happen in the medium term with savings.

It's true that in the short run, savings have been declining. Although I have to say that the high copper price helps a lot because it makes fiscal savings, on the other hand, more robust. We are estimating the fiscal deficit for this year between 3.5% and 4%, which is not particularly high, considering the amount of fiscal expenditure that has been deployed to help families and companies.

So it's very difficult at this moment to be more clear about the relation of savings in the medium term. It is clear though that there will be a reform to the pension system. And in that reform, you might have an outcome that at least can sustain the savings that we have now.

[Emiliano Muratore, executive]

So thank you, Claudio.

So going to your second question, Ernesto, about provisions. Basically, the reason why we took the voluntary provisions in the first quarter is because, as we said in the past, we don't -- we think the crisis is still going on. I mean this is not -- it's not finished yet. And before the pandemic, in first quarter of last year, we were basically having a 1% cost of risk coming around that. So we don't feel comfortable to -- even though the behavior of the portfolio is being really good, I mean, we don't feel comfortable at this moment of the crisis to keep showing cost of risk significantly below the pre-COVID levels. I mean it's difficult to argue that we can be as low as we are seeing today compared to pre-COVID. And that's why the 1% cost of risk of first quarter was built between 1 -- 2/3 of that of, let's say, natural or underlying cost of risk can be added by voluntary provisions.

In the second quarter, as Robert mentioned, we are having this recalibration that will add a one-off to cost of risk. So basically, we are going to be around 1% again with this one-off, so no need to build voluntary provisions in order to be around 1%. So talking about potential reversals of those voluntary provisions that should happen when the -- let's say, the higher cost of risk produced by the COVID crisis shows up. But we don't see that happening in the near future, I mean, among other things, because of the withdrawals from pension funds and also all the state, the government hub to households and families. So a good -- I think in the near future, it's -- I would rule out reversals of voluntary provisions. And maybe we can see further voluntary provisions, in case for the second half, we continue to see this healthy and extremely good behavior of the portfolio.

It's fair to say that it's a conservative approach, but we think that the way to do banking is, I mean, to be conservative, and we don't -- even though vaccination is doing extremely well, it's also true that the number of cases and new cases is still in the middle of the third wave and we are expecting to -- those numbers to go down. So a vaccination should be the big support for recovery and opening in the second half, but we prefer to still be prudent and conservative in the way we manage coverage and the stock of voluntary provisions.

[Ernesto María Gabilondo Márquez, analyst]

This is super helpful. Let me make just one last question on the evolution of NIMs for the next quarters. I don't know if I heard correctly, but you're expecting a reduction in VAT, and that will help to improve consumption and that, of course, could translate into higher consumer loan growth. So you'd want to be clear on that. And then you pointed out that it could also bring high inflation and then that eventually could lead to higher rates. So how are your thoughts on NIMs in the next quarters? And if you experience at some point higher rates, what will be the impact in the short term?

[Emiliano Muratore, executive]

Okay. So in terms of the NIMs, basically, we were expecting flat NIMs for the rest of the year, I mean like around 4% because, as you said, there are some tailwinds there regarding NIMs. I mean, first, it's like inflation, I mean, not only in Chile but also in the rest of the country, there is a kind of upward pressure to inflation. And also, all this consumption fever that we are seeing out of the pensions with rollouts and also all the help from the government. And also, as you said, the potential reduction of the VAT tax, that should sustain and take up consumption, and that should be good for inflation.

It's also true that the interest rate going up, especially in the first phase of the tightening cycle, where we should see the short term moving up faster and sooner than the long end of the curve. So that kind of flattening of the curve is going to hurt our NIM, but that -- we don't see that happening this year. It's more an issue for 2022.

But the VAT reduction, a potential VAT reduction that it's a piece of -- is a law or a project that it's in Congress that came out this week, that's going to have a short-term downwards pressure to inflation. I mean, basically, because prices go down because the VAT is lower. You -- it's difficult now to see how the final outcome of the law is going to be. It's true that as it is right now, it's -- the fiscal impact is significant and then around like $6 billion a year. So it's difficult to say, at this moment, what's going to come out from Congress as the final approach.

So -- but it's going to have this 2 stages impact. And then the first inflation is going to be lower and then down. Maybe by the third quarter, we should expect that impact on U.S. for the third quarter of this year. But then at -- in the medium to long run, it's, let's say, a stimulus to consumption to families, and that's -- should sustain prices as the second derivative of the move. But -- and so that's why we are seeing that potential risk to NIM for the rest of the year. It's -- I would say it's a one-off first because it's -- the law is proposing like a temporary reduction of VAT. So the VAT should go up back in 2023. So in a 2-year horizon, the effect will be neutral. And also in the meanwhile, we are going to have this upwards pressure to inflation because of higher consumption.

So last week, I would say that the 4% for the rest of the year was pretty like fair expectation to have. Now it might be lower for this year because of the VAT reduction, but that should recover from 2022 and onwards. In order to also compensate the potential headwind coming from interest rates going up, I mean that's going to be a headwind but the jump for the increase in inflation because of all the consumption situation should compensate that in the -- let's say, in the 12 to 24 months' horizon.

[Operator]

Our next question comes from Ms. Neha Agarwala from HSBC.

[Neha Agarwala, analyst]

Congratulations on the results. I wanted to ask, is there any regulatory changes that you anticipate which could impact your fee income growth? I believe you mentioned that as attached to your guidance.

[Robert Moreno Heimlich, executive]

Yes. As we said, there's always something coming up, new, and that's why we always try to give a broad range in our guidance because there's a lot of good news coming from the economic side from the bank, what the bank is doing. But there is this noise specifically regarding fees. I would say one piece of legislation everyone should be looking out is a potential fixing of the interchange fees, okay, for credit cards. We don't -- that -- I think that the law is rather technical. The good news is it's in quite technical hands and so I think the outcome should be something relatively decent, but that is something you have to keep your eyes on to see what levels they end up actually fixing interchange fee.

Obviously, that could impact card fees from card -- credit cards. But at the same time, that could actually be -- and once again, we have to see what the final outcome is. Could be positive for Getnet, okay, bad for our -- as a card issuer, positive for Getnet, especially as Getnet is growing. And obviously, this market is probably going to grow a lot because of Getnet; because of people taking on more cards, both debit and credit; because of online banking, digital; et cetera. So that's it, basically.

The main thing regarding fees is to keep an eye out on how this legislation evolves. And as we said, that's something that every day we recommend looking at the newspapers and see what comes up and then -- and to follow this.

[Emiliano Muratore, executive]

And to build on Robert's comment, it's -- I mean, it's true that there -- potential effects of the interchange fee could impact the fee revenue, but it's also true that we are going to -- we'll need to review the whole economics of the card issuance business. And so I think we can also manage that impact on the revenue expenses and -- but on the fee expenses and in the sense of the kind of mileage programs or all the loyalty programs that we have to -- with our cards and our clients. Those are sustained on the current environment of interchange fee. If the interchange fees changes, so we'll need to review the full economics of the business.

[Operator]

[Operator Instructions] Our next question comes from Sebastián Gallego.

[Sebastian Gallego, analyst]

Hello, can you hear me?

[Emiliano Muratore, executive]

Yes.

[Operator]

Yes, please go ahead.

[Sebastian Gallego, analyst]

Okay. Yes. Thank you for the presentation, and congratulations for the nice results on the first quarter. I have a couple of questions. The first one, your guidance on loan growth shows a low single digit but accelerating as the year progresses. I just want to go deeper on the consumer segment because why are you so positive that loan growth on personal loans will pick up in a scenario of high liquidity and further withdrawal? Is it just the vaccine rollout and some other economic progress? Or are you looking to have a kind of a more aggressive strategy or risk appetite or you have more risk appetite?

And second question, I would like to understand better on ROE guidance. It is true and you have done great on operating results and therefore, high ROE. But it is also true that part of that higher ROE is explained by higher leverage on your balance sheet. Can you go over that point? And how do you see leveraging your balance sheet declining for the following years?

[Robert Moreno Heimlich, executive]

Okay. Thank you, Sebastián. So yes, regarding loan growth, as we said, we're talking about low single digits for the full year. So we're not really expecting a huge increase in loan. But definitely, we expect that when the economy starts to reopen and if all that goes as planned, there has to be some reversal. You saw up to now, in the last 12 months, consumer loans are falling more than 11%, 12%. So what we're saying there, basically, is there will be a stop to that fall, a stabilization and then things will slowly start to begin to grow. But it's not really part of our big risk appetite. I think it's just more of an end to the decrease in that loan book, okay?

And one important point is that we have seen some -- in general, people have not been using their credit card. So -- and whatever people use their credit card, obviously, for many different things, but there's 2 or 3 items that are usually very, very big. And one of them is traveling, okay? So when you see people start to travel more, reopening, people start to use more their credit card, and yes, so we think that's going to be a major thing. And the other thing is that we've already seen a pickup in auto loans, okay? The only loan product that grew in the consumer loan book was auto loans. And we actually had a spectacular quarter in the auto lending business, which also triggered a really nice quarter in the auto insurance business. So that's basically with loan growth. We're not seeing a major acceleration but enough to reach by year-end a low single-digit growth.

[Emiliano Muratore, executive]

And about your second questions about ROE and the impact of leverage there, I mean, it's -- you're right, if you look at the pure -- from a pure accounting point of view, leverage is higher and ROE has been going down. But when you look at them on a risk-weighted look, that is not the point. That's not the case. I mean our CET1 ratio is actually, I would say, in the higher part or higher range of the last 4, 5 years. I mean between 10.5% or to 11%.

So going forward, we don't expect the leverage to go down. I mean we don't need it from the -- to comply with Basel III. So it's not going to be an issue for us. So the reason for that accounting higher leverage, if you want, is that we -- today, we have definitely a higher number of low or zero weighting assets, basically government bonds, and then that has to do with the amount of liquidity in the markets and also the environment for interest rates where you can get an attractive carry out of those securities.

So that might change in the future. And if that's the case, we would like reduce that part of the balance sheet, even though the weighting for capital consumption is zero. So it's more an opportunistic stance, if you want. But on a risk-weighted basis, I mean, we don't expect leverage to play a role in ROE going forward. And it should be neutral from where we are now.

[Sebastian Gallego, analyst]

Perfect. Very clear. And if I may, just to ask you one last thing on efficiency. You brought down again your efficiency target to a -- pretty much a very good level of 38%, 39%. Is this something coming from new initiatives? Can we see even a lower number? Or would you say that, that would be probably the bottom that can be achieved?

[Robert Moreno Heimlich, executive]

Okay. So -- well, we brought down -- or improved our efficiency outlook because I think cost growth has been lower than we expected and income growth was higher. I think the cost growth line will continue. We put there in line with inflation around 3%, 3.5% in the end or -- so I think that's pretty -- it's not easy to achieve, but we have more control of that, which is kind of the uncertainty regarding this ratio is more on the income side.

But on the cost side, if you look at our numbers, you see that personnel expenses have been relatively flat. And even though a lot of wages or all the wages are indexed to inflation, I think the improvements in productivity we do there has a lot to do with investments in technology, changing the branch network. Those are -- or have been really big drivers. So I would say, the main reason around our improvement in guidance regarding cost and efficiency is productivity. And you can see that especially in personnel. While on the admin side, we continue to reflect some of the investments, launching of Getnet and so forth.

So how far can it go? Well, in the end, it really depends a little bit more on the income side. But I think costs, we can maintain this low level of cost growth for the next few years, and that's at least our goal.

[Operator]

Our next question comes from Mr. Jorg Friedemann from Citibank.

[Jorg Friedemann, analyst]

Can you hear me well?

[Operator]

Yes. Please go ahead.

[Jorg Friedemann, analyst]

So I have 2 questions. The first, I got positively impressed with your fee income guidance even though we are in the bottom of this 8% range. And you mentioned that Getnet might be positively impacted from the new regulations that affect interchange. But until when can we really count with Getnet revenues consolidated by Santander-Chile? As you know, Getnet is being spun off in Brazil as the headquarters in Spain launched this global platform. So how would Chile fit this global strategy? This is the first question.

And the second question is related to the effective tax rates that we expect to be at about 21%. This seems low and especially considering that as long as I understand, the effective tax rate in the first quarter was slightly higher, so could expect even lower than 20% rates for the coming quarters.

[Robert Moreno Heimlich, executive]

Okay. So regarding fee income and Getnet, well, we're obviously well aware of the situation in Brazil of Getnet and the spin-off. Remember, we just started this business. It's a subsidiary of the bank. And obviously, for the next few years, as we grow this business and gain traction, it should remain as part of the bank and any other future operation down -- way down the road, obviously, will be done with taking in the interest of all shareholders. So for now, obviously, there is no plan of a spin-off here in Chile.

I can't speak further down on the road. But today, the idea is to grow again that to be an integral part of our business and integral part of our product line, to grow and to how that contributes to our bottom line. And that's the situation we're managing today regarding Getnet, which once again is doing quite well. But it just started and it has -- even though Chile is not small, but we have 16,000 POSs. So again, that has a lot of potential, and we think it's going to contribute. And then the plan is just to be an integral part of the bank's product line.

Regarding the tax rate, remember, and as a general rule, in Chile, the corporate tax rate is 27%, but in the bank's tax books -- and Chile and in tax accounting, we still do inflation accounting, okay? And for banks, since we have a lot more capital than fixed assets and we readjust our capital in our tax books for inflation, and that produces a lower net tax rate, okay? It produces a tax loss, but the adjustment of capital due to CPI. And that's why we usually pay a rate lower than 27%, okay? And usually, when we have inflations around 3%, the effective tax rate is more or less 21%, 22%.

Second of all, there is some seasonality in our tax rate. They usually -- the seasonality depends on inflation. But let's say we had the similar inflation in every quarter, just because we pay our taxes in April and we get some rebates and some tax credits usually in the second quarter, if the -- if inflation is going to be high in the second quarter plus the normal lower rate we usually pay in the second quarter, the second quarter is always lower and then you have normal third and fourth quarter. So when you add all of that together, you get an average around 21%, okay?

[Operator]

Our next question comes from Mr. Yuri Fernandes from JPMorgan.

[Yuri Fernandes, analyst]

A very clear presentation as always and very good results. I had a first question, a follow-up on Getnet. You provided the presentation some expectations for market share, right, like 15% market share in 3 years. My question is market share in [ TPV ] or market share in POS? Like because, I guess, the focus of you, it's basically SMEs, right, the strategy for Getnet. So maybe I don't know if this 15% is well volumes, but we may have more than 15% of the number of POS. Or no, this 15% is the number of POS that were discussed in the presentation and maybe our share in [ TPV ] may be slightly -- is slightly lower. So that's the first.

And a follow-up here to is what is the market share in SMEs in Chile? Because maybe, okay, this is the target for 3 years, but maybe the potential for Getnet is bigger just based on your net growth, let's call it, natural market share on SMEs, right? So that's the first question.

My second question is also related to fees. Very good guidance, and I understood that most of the growth will come from the credit business, Getnet, like I guess that's the avenue for growth in fees. But what else can we expect to hear? Like what can you help us to understand on other potential upsides on investment, insurance? I know we disclosed some new ventures like Klare and things like that, but I think they are pretty small still. But what else can drive fees up?

[Emiliano Muratore, executive]

Okay. So thank you, Yuri, for your question. I mean about Getnet, I mean, the target of 15% is -- I would say that's more that number of POS is like number of merchants. I mean we are -- as you said, we are targeting SMEs. So it's, say, the number of shops in the system is not about volumes and it's not about big retailers at this moment in this stage of the development. So we don't target one company with 1,000 POS. I mean we would rather go for 1,000 shops with 1 POS each. So that's the target.

And you're right. I mean the ambition in the medium to long term is much higher than 15%. I mean 15% is like the near term, the initial targets. I mean we are doing extremely well in that sense. I mean we think that we can reach the 15% market share really fast. And as you said, in order to go with our natural market share in SMEs. There is an opportunity and room for growing beyond that. But it's just a matter of timing, if you want. I mean the 15%, it was like the initial milestone, and we'll definitely want to go higher than that when we reach that first milestone.

[Robert Moreno Heimlich, executive]

I'll take the other one. Okay. So regarding SMEs, our market share, it's hard to run clear figures regarding SMEs and everything kind of defines it differently. But our -- remember, we define SMEs are companies that sell less than CLP 2 billion. That's more or less $3 million a year. So it's a very small company, okay? And we calculate -- we are -- we believe we have the largest in Chile. And when we look at kind of like our FOGAPE market share, it was around 23%. And I think that's a good indication. Like -- we have like 23% to 25% of the SME market, what we define as SME. That is kind of the natural market share. Obviously, there's all types of businesses. They are not all our merchants, but that is definitely our market share, we believe, in small businesses in the local market.

Regarding fees, so remember, in this quarter, we made CLP 75 billion. Last year was prepandemic, so we don't grow. But if you take that CLP 75 billion and you just kind of put a similar figure for the second, third and fourth quarter, you more or less get to the 8%, okay? So that's why in this quarter, we think was really good in fees because we're still in the pandemic, kind of, and we're already at the same levels of fees we had at the beginning of last year, which was just the very beginning of the pandemic.

And where are we seeing growth? Well, obviously, the new products are key. Obviously, Getnet will slowly begin to start to generate. But I think in the beginning, more importantly, will be Santander Life, okay? Santander Life is going to be generating fees because Santander Life has a really interesting model, which tends to monetize rather quickly, okay? So Life is rather hassle-free in the sense they don't charge for transferring, they don't [ put you maximum allowance ], they don't charge you for minimum balance. But you can take our money free from the ATM and whatever, but they charge you a fixed fee of around CLP 2,400, okay? So the more Life clients we get, the more fees, that flat fee that we earn, okay?

So Life has a very good product. It's very simple. It doesn't have hidden fees. It just has this flat fee. So the more we grow Santander Life, we're going to get an initial fee, which really helps to cover costs. As we said today, the marginal cost, the marginal direct cost for Life is around CLP 800, okay? On top of that, Life will then -- clients who are approved can get a credit card, so then we were able to get loans there. The credit card [ wells ] have merchants, et cetera. So I think Life will be a big growth.

And the other big growth should come from insurance brokerage. And I think this quarter kind of showed that. I think the big star in the quarter was Autocompara. Autocompara is that -- is this platform. It's semi-digital because you can buy fully onboard, but a lot of people have questions and need help. So it does have a good call center platform as well. But Autocompara is a clear example of how -- when car sales started to rebound in Chile, a part of the pension fund withdrawals went to buy cars, and [ we were looking for auto insurance ], okay?

Asset Management should improve. I remember that as rates rise -- rate -- rising rates has different effects, but it should improve the average fee for some of our funds and people should start to invest again [ and ] more risky and more [ recently ].

And finally, our corporate banking had a weak fee last year. This year, we haven't seen loan growth. We did start to see interesting movements, some different types of projects and investment banking. There was like an initial wave of business and not generated fees. So that's where we think fees will come from growth. I think there's -- and that's why we have that in guidance.

[Yuri Fernandes, analyst]

So pretty clear, Robert. If I may, just a follow-up here on fees. Any plan of the banking opening a marketplace or something like that, like a more retail view? Because like as you said in the presentation, right, like you are going to the platform kind of model for some business like the insurance broker, like the auto broker, all those things. Any idea on the marketplace, something like that?

[Emiliano Muratore, executive]

Well, yes, I mean that's the trend we are trying to follow in the medium to long term. I mean trying to go to a more platform strategy and insurance is -- that may be the most evident example because we cannot [ underwrite in ] insurances. So basically, we always try to go as open as possible. We do have this partnership with Zurich, but also when we went to -- with Klare, we began opening the platform. And so the idea, we are doing some pilots and experiments more on the -- if you want retail part, I mean through selling by phones and all other products offering at the same time, financing for that or miles with our loyalty program. So yes, I mean, the idea is to go into the right direction and trying to get into the platform dynamics of the revenue, but we are at the early stage, and we'll try to progress in that direction.

[Robert Moreno Heimlich, executive]

We have something called the Work Café community. The Work Café will have this market platform, okay? So where people can -- or SMEs can offer or start to offer, and we offer SMEs other products. So that's really important. We have the Work Café community, which we've talked a little bit about in the Digital Talk. But I think when the reopening comes, we'll have that a little more advanced.

[Emiliano Muratore, executive]

And that's why what Robert was saying about Life is crucial. I mean because at the end, you can talk about marketplace platform or ecosystem. And at the end, the ecosystem of Life is growing extremely fast, fast. I mean we have now more than 0.5 million new clients. And Robert was talking about fees like the management fee that people pay for that account. But also when you look at -- we can show the breakdown in the future. When you look at what's happening in card's fee, the debit card fees are growing extremely fast. And that's because people -- the Life account, they are using their cards to pay. And then you look into the potential of all the dollar ecosystem, there are a huge wave of integration now in Chile or there has been in the last few years. So when you look at that people and the potential for them to have one account in peso, one account in dollar and all that, the transactions that you have in that combining those 2 accounts, so at the end is building different building blocks and trying to build the ecosystem as big and as wider as possible.

[Operator]

Our next question comes from Mr. Alonso Garcia from Credit Suisse.

[Ricardo Garcia, analyst]

So my question is on cost of risk. One is at [ after education ]. I just wanted to clarify that you are not including reversal of provisions in your 1.2 -- sorry, 1.1% to 1.2% guidance? And second on cost of risk would be what level do you see as a normalized cost of risk going forward, considering that you see attractive growth in retail -- in the retail segment in the coming years with Santander Life and the different initiatives? So this 1.1%, 1.2% be like a new normal going forward?

And my second question on ROE is very similar to that point on cost of risk. I mean after 16% to 18% ROE this year, what do you see as a sustainable level for ROE going forward?

[Emiliano Muratore, executive]

Yes. Thank you, Alonso, for your questions. I mean in terms of cost of risk, I mean, yes, we have not included any reversal of voluntary provisions into that guidance. So -- and regarding -- so about that, the level after -- or at the underlying level of cost of risk, we think that this area where we are now, 1.1%, 1.2%, is similar to what we have pre-COVID. And so we don't expect the normal new cost of risk to be after the crisis and then to be above that. It could be in line or slightly lower, we think. And why is that? Because we think that after the crisis, people will tend to be a bit more conservative in their approach to borrowing and to savings and all that. So we think that after the crisis, the cost of risk should be in line or slightly below the one we had pre-COVID, even though that's still to be seen, and it's a bit early to make a strong call. But that's our view so far.

And in terms of ROE, yes, I mean the range from 16% to 18% is relatively big, and it depends on many moving parts, one of them being the inflation for this year and the final effect from the bad reduction. But we think that the long-term ROE can be in that range, too. I mean it's -- it would be consistent with the target for this year and also looking further.

[Operator]

Our final voice question comes from Mr. Brian Flores from Citibank.

[Brian Flores, analyst]

Just a quick follow-up on the level of sustainable ROE. Can you repeat the figure? I have some interference.

[Emiliano Muratore, executive]

Yes. I said that the 16% to 18% range for this year can also be the long-term range ROE.

[Operator]

Thank you very much. We are seeing no further voice questions at this point. I'll pass the line back to Santander-Chile team for their concluding remarks.

[Emiliano Muratore, executive]

So 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]

Thank you. This concludes today's call.