Banco Santander-Chile

NYSE:BSAC

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon and welcome to Banco Santander-Chile's First Quarter 2023 results Conference Call. We are joined by Emiliano Muratore, Claudio Soto, Cristián Vicuña and Robert Moreno.

I will hand over to Emiliano to begin the presentation.

[Emiliano Muratore, Chief Financial Officer]

Good morning, everyone. Welcome to Banco Santander-Chile's first quarter 2023 results webcast and conference call. This is Emiliano Muratore, CFO and I'm joined today by Robert Moreno, Head of Investor Relations, Cristián Vicuña, Head of Strategic Planning and Claudio Soto, Chief Economist. Thank you for attending today's conference call. Today, we will be discussing the trends and results seen in the first quarter, while tight monetary policy continues to squeeze margins, our successful digital strategy and customer-oriented product offering continues to drive strong results from our business segments.

To begin, I invite Claudio Soto to give us an update on the macro scenario beginning on Slide 3.

[Claudio Soto, Chief Economist]

Thank you, Emiliano.

Given the continuous adjustment process after [indiscernible] of 2021. GDP grew by 2.4% in 2022 and contracted 2.5% in the first quarter of this year in response to tight financial conditions, and a contracted fiscal policy.

High interest rates have drained away excess liquidity from past pension fund withdrawals. The labor market remains relatively weak with low employment growth and an increasing unemployment. Real wages have contracted due to high inflation.

Political uncertainty fell after the referendum that rejected the constitutional proposal of the constitutional convention last year. However, it remains relatively high as compared with historical levels. In this context, we expect that GDP will have a mild contraction this year of around minus 0.25% before returning to trend next year. Domestic demand will remain subdued, while the external sector will benefit from the reopening of China. Overall, the outlook for activity is better than what we previously estimated.

With domestic demand and better terms of trade will help recovering the external accounts. During the first quarter, the trade balance reached 7.5 billion surplus and historical record. For the year, we expect a current account deficit of 4% of GDP down from the 9% of GDP deficit of last year.

High copper prices, lower political uncertainty and the global depreciation of the dollar has strengthened the Chilean currency. Inflation, although remains elevated, has begun to fall in line with our past forecast. More CPI increased 11.1% year-on-year and during the second quarter, CPI, annual changes should reach a single digit.

The slackness of the economy, the appreciation of the currency and the fall of fuel prices will keep pushing down inflation, which we expect will be running at 5.1. U.S. variation by the year's end.

The central bank has kept its monetary policy rate at 11.25%. Although the last inflation report had a relatively hawkish tone, we accept that the condition for initial cycle will be met at the beginning of the third quarter, as the following core inflation becomes entrenched.

Given the high level of the monetary policy rate, once the board begin cutting, they will proceed at a fast pace. As a result, we expect the monetary policy rate to finish the year between 7.5% and 8% above our previous estimate. Our baseline scenario assumes that the proposal for a new pension fund withdrawal that is currently being discussed in Congress is not approved.

On Page five, we have some of the reforms that are in the agenda of the government. One of the most important ones, the tax reform was rejected in Congress last March. Currently, the government is trying to build an agreement for a new tax proposal. In the meantime, the discussion for increasing the mining royalty has advanced.

The pension reform is still pending and should be announced during the second semester. The reduction in the number of duty hours from 45 to 40 was approved during March. The new regulation introduces some more flexibility in the labor market and contemplate a five-year transition for the hours reduction.

This week, the new interchange fee for credit and debit cards were officially published. The transition from the current fees to the new ones will be gradual and will start in six months time.

Also, this year, the government has launched, they have got the scheme for SMEs and have a scheme offering state guarantees for the first time mortgage buyers. Last week, the government announced a new national strategy for [indiscernible], involving the participation of both public and private companies, the use of greener technologies and looking to add more value added in the production process.

Finally, the constitutional process has continued has schedule. The expert commission is preparing a preliminary draft for a new constitution that should be sent to the Constitutional Council in June. The members of this council will be elected on May 7. The final text will be subject to a referendum with mandatory participation on December 17, 2023.

[Cristián Vicuña, Head of Strategic Planning]

Thank you, Claudio.

In my presentation, page five, six, I will like to start first by reviewing an update on the bank strategy. Our purpose like the rest of Global Santander's is to help people and business prosper with the mission of being the best financial services company, acting responsibly and gaining the loyalty of our clients, shareholders, collaborators and communities. Our style of doing business is simple personal and fair. And our day-to-day behavior with all the stakeholders is summarized by the team's acronym.

And where do we envision ourselves by 2026. We see ourselves as the leading financial services company to deliver our clients, collaborators, communities and shareholders. We will focus on being obsessed for our clients, their progress and their experiences. For our collaborators, we seek to maintain a committed on high performance team. For the community, we expect to be leaders in social and sustainable finance. And finally, for shareholders, we seek attractive and predictable returns, and three, the leading bank in terms of profitability, efficiency and recurring risk-free revenues in Chile.

We want to achieve this plan through four pillars of our strategy under the Chile first. First, to be a digital bank with branches, [indiscernible] bank with work office. The rich customers, with state-of-the-art technology and the best level of service. Second, with specialized and value-added services for our corporate and wealth management businesses, that focuses on value-added transactional trade and advisory products and services. Third, always searching for unexplored growth opportunities. We want to break paradigms in the banking sector, finding new business opportunities and leading the sustainable transformation of our clients. And finally, a key enabler an organization that is agile, collaborative, and with a high performance and diverse cultures were exceptional people can advance based on merit.

As we can see on Page nine, we are also fully committed to diversity. For example, as of April, we are the Chilean company with the highest percentage of women among the board. Amongst all [indiscernible]. Moreover, 56% of the bank's total employees are women and the percentage of women in the top managerial positions has increased from 18% in 2019, to currently 32%.

Another key innovation launch in the first quarter of 2023 was the Work/Café Expresso, in this newly fully transactional branches it takes on average less than five minutes to perform a transaction with the highest level of security for our customers, and the state-of-the-art technology with facial recognition and digital terms. All of this combined with the great service experience of our Work/Café Expresso Santander style. We have opened four Work/Café Expresso centers in Viña, [indiscernible], Santiago Centro and [indiscernible], where we serve over 50,000 people weekly. The NPS of these branches is an eye opening 96.

The Work/Café Expresso allows us to keep updating our branch network while improving waiting times on NPS. At the same time, other traditional branches surrounding the Work/Café Expresso will be 100% dedicated to value added services. Currently 28% of Santander Chile's branches do not perform transactional services and are completely paperless, improving efficiency and productivity, loan and deposit volumes increased 22% year-over-year and in the same indicator per employee rose 9.3% in the same period.

On Page 12, we show how life continues to shine, with clients growing 17% year-over-year, and total revenue generated by life increasing by 40%.

Moving on to Page 13, we show how life success has permitted the bank in a short period to achieve a market share of approximately 25% of checking account balances in Chile. Now our aim is set on the large pocket of site and saving account deposits. This market in Chile totals $24 billion in deposits, in which we only have a 1.8% share of savings accounts and a 7.7% share of the side account market.

In order to capture a greater share of these markets. In the first quarter of 2023, we launched Más Lucas, this is 100% digital product that includes an interest bearing site account plus a saving account. The onboarding process is 100% digital, and there are no password, only facial recognition. And the account number is very easy to remember. Chile's country code 66 plus your national ID number. This account has no fixed or variable cost and accepts deposits for up to CLP 5 million.

Moving on to Page 15, we show how the success of Getnet continues. Our acquirer has sold more than 177,000 POSs with a 17% market share in points of sales and a 7% in total purchases according to our estimates, fee totaled more than CLP 10 billion in the quarter and are growing more than 200%.

In the first quarter, we also introduced a new specialized attention model in in our middle market segment for the agriculture, automotive and Multi-Latinas sector, which encompasses Chilean middle market corporations seeking to internationalize. This new specialized attention model seek to enhance our growth and market share in these highly attractive sectors of the Chilean economy, which are intense not only in lending, but also non-lending products as well.

Another point to highlight was the progress made in our commitment to the objectives of sustainable finance and the environment. We have a market leading range of sustainable products that help care for climate change with Santander [indiscernible], and in 2022, we managed to support numerous customers with sustainable operations in our business and corporate banking business.

In total, in 2022 with both sustainable trades both social and environmental, for an amount of $230 million, 390% more than in 2021, making us the leader in this approach in Chile. We believe that this will be one of the fastest growing areas in the coming years.

The success in sustainable finance has also been achieved in all our responsible banking objectives are shown on the next slide. We achieved our goals in gender, environmental, social and educational targets. This has resulted on being ranked the number one in the main sustainability indexes such as Sustainalytics, MSCI. We are also the only Chilean bank including the Dow Jones Sustainability Index for global emerging markets.

In terms of NPS, we continue to have an indicator above the other half of our main peers in the first quarter of 23. We did see a slight dip in our results. This was due to the ongoing changes in our app to improve cybersecurity. We are fully committed to return to the number one spot. The Work/Café Expresso should be key, as the improvements of these models in terms of NPS at the branch level are substantial.

Now, I will turn it to Robert who will discuss our results.

[Robert Moreno, Head of Investor Relations]

Thank you, Cristián.

Moving on to Page 22. Net income in the first quarter totaled 136 billion decreasing 42% year-over-year and increasing 33% quarter-on-quarter, in the quarter the bank's margins continued to be negatively affected by the high interest rate environment, the banks ROE in the quarter reached 13%.

On the other hand, our business segments continued to show solid growth with an important expansion in net interest income and fees with costs and risks under control. The net contribution from our business segments that excludes the Corporate Center and ALM increased 30% year-over-year. The result of Santander net corporate and investment banking or CIB have remained impressive, increasing 76.7% year-over-year. Net contribution for the middle market of corporates increased 31% year-over-year both of these commercial segments experienced an important rise in deposits spreads, as well as high growth of fees and Treasury income.

The results from retail banking rose 10.5% year-over-year, also driven by rising deposits spread and greater fee income coupled with higher productivity levels.

In terms of loan growth, in the first quarter loan growth accelerated as the economy feels the effects of tight monetary policy, slowing inflation rates and depreciation of the peso. During the quarter, the CIB segment decreased 1.2% q-on-q influenced by translation gains or translation losses caused by the 6.5% appreciation of the peso on the quarter. This also explains the 1.0% q-on-q decrease in loans in our middle market segment.

As mentioned, during the quarter, we launched specialized attention models for the agriculture, automotive and multi-Latinas sectors to enhance loan and income growth in the sector. Retail Banking loans grew 1.1% q-on-q led by consumer loans which in turn were driven by good demand for credit card and auto loans. Origination of new mortgage loans has decelerated with the slowdown of inflation and high interest rates.

As for SMEs, the demand for new loans remained subdued as clients continue to pay back the rapid loans disbursed in 2020 and 2021. A new [indiscernible] program was launched by the government in April to support mortgage growth to household and lending to SMEs. We maintain our guidance of year-over-year loan growth of 5% to 6%.

Liquidity levels remained strong in the quarter, the bank's total deposits increased 3.7% q-on-q. The increase was driven by time deposits that increased 9.9% q-over-q. Bonds issued increased 17% year-over-year, and 2.3% for the quarter. During the first quarter, the bank has issued various bonds in the local bond market in order to take advantage of the inverted yield curve to control funding costs. The bank's liquidity coverage ratio which measures the percentage of liquid assets over net cash outflows at the end of the quarter was 182% well above the minimum. At the same day, the bank's net stable funding ratio, which measures the percentage of liquid assets financed through stable funding sources reached 113%. Also, well above the current legal minimum set for this ratio.

In terms of margins, the bank's NIM in the quarter remained stable q-over-q at 2.2%. The variation of the U.S. continued to decelerate while short-term interest rates remain high. Both of these factors continue to weigh on the bank's NIM. As shown on the slide, this is mainly a phenomenon that affects our non client NIM, or the net interest margin from our ALM activities, including the U.S. GAAP and our liquidity. The client NIM, which is defined as NII from our business segments over interest earning assets has increased as deposit and loan spreads have risen.

On Slide 27, we give further insights into our margin for the rest of 2023. For every 100 basis points decline and inflation our NIM falls on average by 15 to 20 basis points and for every 100 basis points rise in the average monetary policy rate, or NIM falls by around 30 basis points. We have updated our base case scenario for 2023 with our latest internal forecast by increasing the expected average monetary policy rate from 9.2% to 10.4% this year, and the U.S. inflation of 5.1. Under this base case scenario, the banks NIM in 2023 should reach 2.4%.

Moving on to asset quality on Slide 28 The rise in the NPL ratio to 1.9% is gradually returning to pre-pandemic levels at f household liquidity, and gradual returns to normal and the economy feels a squeezed from high interest rates. The coverage of NPL as of March 2023 reached 186% and there has been no reversal of the voluntary provisions.

As we can see on Slide 29, these overall positive asset quality indicators led to a cost of credit of 1.2% in 2023, in line with our guidance for this year.

On Slide 30, we move on to non-net interest income revenue sources, which continue showing exceptional growth trends, income from fees and treasury rose 33.8% year-over-year and 20% q-on-q driven by higher usage of products in all segments. We expect these trends to continue for the rest of the year.

As shown on Slide 31, we can see the bank's efforts to continue increasing productivity and to control costs. Operating expenses decreased 1.2% year-over-year and 8% q-over-q. The bank continues ahead with its 260 million technology investment plan for the years 2023 to 2025. And because of these investments, we're expecting costs to fall in absolute terms in 2023.

Moving on to Slide 32, we also observe a positive evolution of our capital ratios. At the end of the first quarter, the bank recorded a core equity ratio of 10.5. It is important to point out that in March 2023, the bank changed its policy for provisioning and dividends. In March, the bank provisioned the full dividend which was paid out in April 2023, equivalent to 60% of 2022 earnings following the board's approval of set dividends.

Last year, the full impact of the dividend was recognized in April. Therefore, the two equity basis are not entirely comparable. As a result value-added for our shareholders measured as the growth in book value plus dividends disbursed increased 23.7% year-over-year.

On Slide 33, we will conclude with some guidance. Despite 2023 being a somewhat more challenging year on the macro front, we believe our strong headline activities will continue to expand. Coupled with this, we will continue with our investment program which focus on digitalization and optimization. We also expect client growth to remain robust, led by Santander Lite, Getnet and now Más Lucas.

In terms of loan growth we expect mid-single digit growth with a focus on all segments, NIM should contract to 2.4% with solid client NIMs as the monetary policy rate comes down, we expect NIMs to rebound. Non-NII growth should surpass 20% this year on the back of strong client acquisition and usage figures. Cost control will be a major focus, and we expect a decrease of low single digits in our total cost base. Asset quality should deteriorate somewhat but the cost of risk will remain at a manageable level of 1.1%, 1.2%.

In summary, we start the year with ROEs in low teens. As the year progresses, ROE should improve for the full year and for the full year we are guiding an ROE of 15% to 17% lower than initial guidance. This is mainly due to higher average short-term interest rates, partially offset by strong client profitability numbers or long-term ROE expectations remain unaltered at 17% to 19%.

With this, I finish my presentation and now we will gladly answer any questions you may have.

[Operator]

Thank you. We will now move to the question-and-answer section. [Operator Instructions]. So our first question comes from [indiscernible] at Scotiabank. Your line is open. Please go ahead.

[Unidentified Analyst]

Hi, thank you for taking my question. My question is related to the NIM. So the NIM expectation has declined and now you are valuing for around 2.4% NIM for 2023? I was wondering what kind of NIM can we expect for 2024, I've just tried to get a sense of what a more normalized level of NIM can be? Thank you.

[Emiliano Muratore, Chief Financial Officer]

Hello, Juan. Thank you for your question. I mean, the more normalized NIM would be like around like 4% that's when monetary policy it's like on a normal level. That's we don't see that happening before 2025 maybe so in 2024 would be like in the middle from where are we are this year at around 2.4, 2.5. So next year being around 2.3, -- 3.3, 3.5, all depending on the pace on the path of the monetary policy rate. But that would be like the trend going forward.

[Operator]

Thank you. So our next question comes from Neha Agarwala from HSBC. Please go ahead.

[Neha Agarwala, HSBC]

Hi. Thank you for taking my question. Could you please explain once again, what led you to reduce your guidance for ROE for this year? Is it just the interest rates which are higher than expected previously? Or is it something else?

Regarding the NIM from the market, when do you think that will normalize be close to zero, if nothing else, by early 2024 seems right now? Could you please confirm? Thank you.

[Emiliano Muratore, Chief Financial Officer]

Yes. Hello, Neha. Thank you. Thank you for your question. So the adjustment in NIM name guidance basically is like -- if we look at the heat map the way we call that chart, on the previous call, basically, what we did is, we moved to the new average monetary policy rate and the new inflation. So let's say that it just related to the delay in the interest rate cuts that we were expecting before and now we are expecting a bit later. So there is not more than updating to the new macro scenario. We are expecting now. And so in terms of the non-clients and NIM go into neutral, again will depend on the level of interest rate and according to the pace we are expecting for the central bank to cut rates that should be more around this the second half of next year.

[Neha Agarwala, HSBC]

Perfect. And any regulatory changes that we should expect this year or next year that could impact the bank? Thank you so much.

[Emiliano Muratore, Chief Financial Officer]

There is nothing in agenda. I mean, now we have the interchange fees already known and the transitioning period announced. So there are there are no regulatory issues being discussed at this moment that we ambition that could affect us in the coming months.

[Operator]

Thank you. We have a question from Tito Labarta from Goldman Sachs. Please go ahead.

[Tito Labarta, Goldman Sachs]

Hi, good morning. Thank you for the call and taking my questions. A couple questions. Just to understand a little bit, the ROE evolution, and the timing of when you expect the rate to come down? Because as long as rates remain high, the ROE should be relatively low, just given the guidance. So should we expect sort of first half of the year you will be below that ROE guidance of 15% to 17%? And then, maybe 3Q and 4Q you start to go above that? And then, could you clarify when do you expect rates to start to come down in Chile? And then my second question is on your fee income, which is very strong. Is that growth that we're seeing sustainable? How long can you continue to grow the fee income at that pace? Thank you.

[Emiliano Muratore, Chief Financial Officer]

Hello, Tito. Thank you for your question. Regarding the timing for interest rate cuts, our base case scenario is assuming a cut in July, I mean, small cut but the cut in cycle starting in the third quarter and then continuing during the year. So with that path, the trajectory of ROE will be the one you mentioned. I mean basically first half below the average for the year and third quarter starting to rebound together with the NIM when the central bank start the relaxing cycle and keep going up during the fourth quarter as the additional cuts are made.

[CristiánVicuña]

So Tito, this is Cristián, regarding the fee question, of course this year is spectacular for us with more than 20% growth or over 15% to 20% growth. So this looking really good. This is very linked to our customer growth base and the performance of our Getnet initiatives and life initiative. So for the upcoming year, we of course expect to grow strongly, hopefully better than the market. But I'll say that 20% figures for the long run are not what we expect normally. So we'll say, larger than 10%, but not 20.

[Operator]

Thank you. Our next question comes from Carlos Gomez from HSBC. Please go ahead.

[Carlos Gomez, HSBC]

My question asked and answered. Thank you.

[Operator]

Okay. Thank you. So our next question then comes from Daniel Mora at Credicorp. Please go ahead.

[Daniel Mora, Credicorp]

Hi, good morning, and thank you for the presentation. I have a couple of questions. The first one is regarding the NIM. Your rates explained a decrease in the guidance. But I would like to understand what will be the strategy of the derivatives that are currently impacting the net interest income, I mean the hedge of interest rates? Are you waiting for them to decrease that increase of rates will improve the position of the derivative? So are you going to wait for the expiration date of these assets? What is the strategy there? And the second one is regarding fees, very strong performance in the first quarter without considering the effect of the new regulation of interchange fees. Do you expect these to continue in the coming years, the current pace of growth? And I would like to understand what is in the order fees in the first quarter, because we observe a strong increase in order fees. Thank you so much.

[Emiliano Muratore, Chief Financial Officer]

Thank you, Daniel for your question. I mean, regarding the strategy, I mean, definitely that portfolio will have the margin improvement when interest rates start to fall. Today as you saw our expectation for monetary policy average for the year is like 10.4, when you look at what the market is, pricing is slightly higher than that I mean, like 10.6 or so. So that's why we are not like logging in that or fixing that level, because we do expect that the trajectory will be slightly lower and faster than what the market does imply. And that's why the strategy basically it's like to wait, to rates to fall and to follow our path, which is now a slightly lower than what the market was expecting.

I mean, late last November, the market was on the opposite side, I mean, was implying a more dovish trajectory to our view and that in that moment, we closed part of that sensitivity, securing a more dovish path. But today, we don't see that opportunity, because our scenario is on the lower part compared to what the market is expecting. And on the fees, I will let it to Cristián to comment.

[CristiánVicuña]

All right. So regarding the fees, similar to previous question, we expect a very strong 2023. And then to grow a little slower, but better than the market. So probably something a little higher than 10, but not the same 20 that we are expecting for the year. And regarding your question on the order fees, is mostly related to corporate investment bank advisory fees on M&A and restructuring.

[Operator]

Thank you. Our next question comes from [Oliver Tuzo] [ph] at UBS. Please go ahead.

[Unidentified Analyst]

Yes. Thank you guys for taking my question. Actually, I just have one related to the operating expenses, because the bank revised downwards the guidance for this year with the expectations for a negative growth in costs. So could you please just clarify a little bit more of the drivers behind this performance? And if you could add to it, if we could expect like a drop of 1% to 2% or maybe 5% of the operating expenses? That would be helpful. Thank you.

[Emiliano Muratore, Chief Financial Officer]

I mean, no, I mean, it's not like minus 5%. I mean, it's like more on the low single digit fall that we are expecting. On the drivers, the combination of things. I mean, first, all the fraud control that we are doing, I mean, all the product expenses that we have on the bank are in the other operating expenses. And that's something that we have been making good progress and that number has improved. And it's going to help the long road for the lawn -- the [indiscernible] for this year. And then, all the work we are doing in the branch networks, optimization and also the transformation.

I mean, you saw the Work/Café Expresso initiative, which is also -- apart from driving NPS app, because clients are also happy, it's a very efficient way to deal with the transactionality coming forward clients. And in general terms or the digitalization of the bank, all the Más Lucas, and all the life initiatives we are doing are taking productivity app by having new client growth, new client acquisition and client revenues, and having cost under control. I don't know Cristián, if you want to add on that.

[CristiánVicuña]

I will say that when we expect we expect this new initiatives to keep us -- from allowing us to update the branch network as a whole. And we see further improvements and how we deploy our study.

[Operator]

Thank you. Our next question comes from Yuri Fernandes at JPMorgan. Please go ahead.

[Yuri Fernandes, JPMorgan]

Thank you guys. I have a first one regarding expenses. It has been very good and have been delivering on these closing branches, reducing a little bit the headcount. But we are seeing a super strong [local] [ph] fee, right? And I think part of that fee is like some administrative expenses, they should be somewhat related, right. Like technology's software, like, I don't know. My question is, how sustainable is for you to keep such a good level of G&A growth? I understand the guidance is negative for this year. But my question is, should we see more investment in 2024? Like, how comfortable are you that this year is not a one off? Because you kind of built some provisions on costs last year, and we should see like a pickup in the coming years? That's the first one.

I have a follow up regarding the margins just a curiosity on FCIC instruments. I think the FCIC, they explain part of your margins, right, like a part of your strategy on asset liability management. And when your FCIC instruments they should mature? I don't know I think that are different mature dates, depending on the program. So not sure if March not sure if this is July 2024. So just trying to understand when should we start to see like your FCIC instruments getting paid. Thank you.

[Emiliano Muratore, Chief Financial Officer]

Okay. Thank you, Yuri for your question. I mean, regarding expenses, I mean, that definitely you should not expect costs falling in the following years. I mean, this is -- in that sense, this year is going to be a one-off. Our usual target and what we have done basically, every year, I would say in the latest period is to have costs growing below inflation. I mean, that is like the starting point for our strategy. So inflation will be in the mid to low single digits going forward. And that's where we want cost to be the composition of that cost will be shifting to what you mentioned, I mean more on amortization of technology investments and digital initiatives. I mean, I'm taking advantage of the improvements in the footprint of the branch network because we'll be having like less square meters, all this strategy of Work/Café Expresso will help us to reduce the square feet of branches and that will help in that cost. And also all the digitalization will increase the productivity per employee and so yes, I mean, in that sense, it's a one off the performance in cost for this year.

It's part of the discipline, we think we need to have with revenue pressure we are having coming from margin so this is going to be a tight here on that and we are delivering on that. And going forward we should expect to go back to a more normalized pace of course growth slightly below inflation.

And regarding the FCIC, I mean FCIC basically matures, half of it in April, and half of it in July next year. And as you said, I mean, considering our strategy that basically has that liability floated, the maturity itself won't have significant impact for us, because basically, we have already been the floating cost of that. So that we will be benefiting from interest rates going down starting the same day that the interest rates start to fall. And so when the maturity happens, considering that we are already floated at the level of rates, that will be a bad moment. I mean, I don't know let's say six, seven, or whatever percent, we have in a mid-next year. For us, it won't have an impact because we are already with the liability at that level. I know if I explained the situation.

[Yuri Fernandes, JPMorgan]

If I understood like the liabilities floating, but your assets, they are not floating for that right. You bought, I don't know, fixed rating from it's on that. So like the materials, correct me if I'm wrong, but maybe the maturity of that six would be a tailwind for your margins? No?

[Emiliano Muratore, Chief Financial Officer]

No. It's not -- this is not going to be a significant tailwind because we already have -- I just said I mean, we're talking on the liability side, then we have the assets repricing in this context, and we are already seeing repricing on the asset side that will help us that.

[Robert Moreno, Head of Investor Relations]

Yuri, it's Robert. It's a tailwind in the sense that rates come down into tailwind, okay. And when and when it expires and should be a tailwind. And if depending where rates are okay, but in itself today it's not you see it'll be a tailwind when rates start to go down. Okay?

[Yuri Fernandes, JPMorgan]

No, perfect, guys. Thank you. If I may a third one just touching on asset quality. If you can provide some color for us, like the trains, we are seeing like some worsening on consumer. So just like your overall view on asset quality. Thank you.

[Emiliano Muratore, Chief Financial Officer]

Yes. I mean, asset quality as you saw on the on the slide, basically, we are normalized in terms of NPLs and impaired loans. Impaired loans is still below pre-pandemic levels. And that what we see for the year, I mean, there's 1.1%, 1.2%, because of risk for the year, is consistent with having a similar to pre-pandemic levels of asset quality. We are like, confident that we can't be there, we still have the voluntary provisions as a way to cope with a more degraded scenario in case that happens. But as you saw first quarter because rate scores up 1.2. And we think that we can, we can keep up that level for the rest of the year, which is definitely higher level of customer risks to the one we had this last couple of years, but consistent with a more normalized scenario that that, in a certain sense, is a bit of the flip side of the slower pace of rate high of rate cuts that we are seeing consistent with a not so weak economic scenario, that is also, let's say, reflected in the asset quality, which is normalized into pre-pandemic, but not in extreme or harder way.

[CristiánVicuña]

One thing that has been clarified to us regarding asset quality here is that the adjustment in the consumer portfolio of the new regulation that was being discussed. It's been delayed. So we don't expect this happening in 2023.

[Emiliano Muratore, Chief Financial Officer]

At least not before late this year. I mean, maybe next year.

[Yuri Fernandes, JPMorgan]

No, that's good news, guys. Thank you and congrats on the cost control.

[Operator]

Thank you. Our next question comes from [indiscernible]. Please go ahead.

[Unidentified Analyst]

Thanks for the presentation. I have two questions. The first one is related to earnings and then the monetary policy is expected to stay high and clearly expected. How do you expect him to behave in principle before a year from now, when scenario [indiscernible], I mean it's an upward slope and some level of reflection as opposed to portfolio? Because new material is least suspected in the previous months and going forward in one would expect that in the news should we cover off the portfolio in prices adjust to the monetary policy.

[Robert Moreno, Head of Investor Relations]

Okay. So, yes, we just say this is correct. We have some fineness in the NIM because of the high rates but effectively and you can see some of this already in the client NIM. The client NIM is hard to forecast. But you can see that our client NIM which is basically the net interest margin of our business segments, okay, is rising because a the repricing their assets, okay? So, we're getting hurt more by the increasing cost of deposits, but assets are slowly beginning to reprice and spreads are rising. Even a loan growth isn't helping too much, for that repricing you need quicker loan growth, but there has been definitely an increase in loan spreads, and also deposit spreads, okay?

This is important, every money we get in and checking account the spread rises with rate. So, those are both tailwinds to our margin. So, effectively next year, a little bit what Emiliano said before, as smart as rates go down, probably we'll get -- our funding base will get cheaper, the assets will be still repricing. And then, obviously, you still have the headwinds of lower inflation. But all in effectively NIMs, it should bottom out, and if everything goes as good as we expect in the second or third quarter, and then slowly begin to recover next year, as Emiliano said, 3.5 around there, and then in 2025, probably reached equilibrium rate and inflation, right, should we go back to our historical levels of around four?

[Unidentified Analyst]

And the second question is about great expense. You said previously, but you expect that some year for breaking spec is already spent, maybe growing at 0% or maybe a bit. But in the first quarter operating expense grew by 13%. So how do you arrive to the consolidated figure, if the remaining quarters as it is?

[Emiliano Muratore, Chief Financial Officer]

Yes. I think that when we talk about total expenses, we are included in other operating expenses when you factor that in that total number felt like 1.2% in the first quarter. And I think that is like the line that you have to factor in and we are talking and that's what we talk about other expenses, including other operating expenses.

[Unidentified Analyst]

So it's personnel, mediation and others. Okay.

[Emiliano Muratore, Chief Financial Officer]

In the first quarter, that number fell 1.2%.

[Unidentified Analyst]

So what line of operating expense?

[Emiliano Muratore, Chief Financial Officer]

Okay. So when we talk about our operating expenses, just as they show up in the financials now, which is personnel, administrative, depreciation, amortization and other operating expenses. The big item that's falling is other operating expenses, which has a lot to do with the improvements we have made in cybersecurity and the lower cost of our cyber fraud insurance. And there's also an interesting reduction in personnel, okay?

[Operator]

Thank you. And we have a question from Ernesto Gabilondo from Bank of America. Please go ahead.

[Ernesto Gabilondo, Bank of America]

Thank you. Hi, good morning, Emiliano and Robert. Most of my questions have been answered. So just have a couple of questions. The first one is a follow up in your net income guidance or your ROE guidance. When we incorporate the ROE of 15%, 17%. This implies earnings contraction between 15% to 25% this year. So just wanted to double check if that sounds reasonable. And I believe last time you were expecting a modest earnings contraction. So as you have explained it, the delay in lower interest rates has mainly be the key reason for lowering the guidance.

And then my second question is on your effective tax rate. We have seen the banks have benefiting from time inflation before, having lowers effective tax rates, both now that we're thinking of a more normalized inflation level, how should we be thinking about the effective tax rate in the next few years?

[Emiliano Muratore, Chief Financial Officer]

So yes, thank you very question [indiscernible]. I mean, your assumption, I call it like reasonable, but it's consistent with ROE, a guidance to be around like 15% fall in net income. And, yes, I mean, basically, the biggest driver to our adjustment in guidance of NIMs and ROE has to do with the monetary cycle, normalizing later than what we were expecting. So we see this as the process of normalization of NIMs, and ROE taking longer than we were expecting, and that's in turn for 2023 will have, let's say an impact for one or two quarters of that delay. And in the third quarter, starting the normalization process and moving forward and also being closer to normal in 2024, and definitely in 2025. And the second was tax effective. Bob, you want this?

[Robert Moreno, Head of Investor Relations]

Yes. So they're effectively as rates and inflation go back to normal, the tax rate should rise. The ROE should also rise. And so today we're paying like 12%, 13%, effective tax rate, there's different effects, inflation is still high. The lower note in income also lower the tax, but effectively, by next year, if inflation is back to lower than six single digit levels. We shouldn't be going by 20, I would say 2024, we should be roughly close to the 18% effective tax rate 2025. Probably around 21, 22, it should stay around there.

Sorry. And one quick thing regarding your first question is true that the net income falls, but we do see slight rise in book value. I think that's a key point to make that we try to explain it a bit in one of the slides, but book value given the way rates and inflation are moving, which might have a negative impact on NIM, but in capital has been positive. So our book value is growing. And I think that means we're still creating value.

[Operator]

Thank you. I'm not seeing any more questions. So perhaps I can hand back to Emiliano for closing remarks.

[Emiliano Muratore, Chief Financial Officer]

Yes. So, Robert, the floor is yours.

[Robert Moreno, Head of Investor Relations]

Okay. Thank you, everyone. Just as a final note after 30 great years, today is my last day at Santander Chile, I decided to move on to other projects. I would like to thank the investor and analysts community for your support. Cristián Vicuña along with [Rowena] [ph] and Claudio will keep you guys covered. For me, it has been an honor to be your IR guy. Please feel free to keep in touch and I'll be sending an email soon with my details. Thankyou, everyone bye.

[Emiliano Muratore, Chief Financial Officer]

I want to publicly thank Bob for his commitment and his terrific job during this 30 years. Without any doubt, he made a huge positive impact on Santander Chile and the Chilean banking sector as a whole. He will be deeply missed. I wish him the best of luck with his new stage. And on this emotional note, I thank you everyone for joining us today and we look forward to speaking with you soon again.

[Operator]

Thank you. That concludes the call for today. Thank you and have a nice day.