Banco Santander-Chile

NYSE:BSAC

Earnings Call Transcript 2018-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Banco Santander-Chile Earnings Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. I would like to introduce your host for today's conference, Mr. Emiliano Muratore. Sir, please go ahead.

[Emiliano Muratore, executive]

Good afternoon, everyone. Welcome to Banco Santander-Chile's Second Quarter 2018 Results Webcast and Conference Call. This is Emiliano Muratore, CFO of the bank, and I'm joined by Robert Moreno, manager of Investor Relations; and Claudio Soto, our Chief Economist. Thank you for attending today's conference call. We are very content with the performance of the bank during the first half of 2018. During the second quarter, we were able to deliver stable results with positive trends in lending growth, reflected our focus on growth with good asset quality. For the rest of the year, we continue to see a positive macro backdrop in Chile. Claudio Soto will give us part of the details on what has been going on in the past few months and looking ahead.

[Claudio Soto, executive]

Thanks. Good afternoon to everybody [ joined ]. We have seen a general positive news coming from Chile's economy. Business confidence remained relatively high. Monthly economic activity continues on the rise, reaching almost 5% year-on-year in May. Job creation, however, has remained somewhat stagnant but should start picking up in the following months. Inflation has remained contained in the short run with the depreciation of the peso due to global tensions is pulling upward pressure. However, labor costs are low. The latter reflects capacity gaps still present in the economy and the impact of the strong expansion in the labor force in previous quarters. Despite tensions in the international front with the commercial war between the U.S. and China, the consequences for Chile have been somewhat muted until now. This is an issue that must be monitored closely.

At the beginning of 2018, we were much [indiscernible] However, we [indiscernible] Moving forward, we [indiscernible] up from our previous estimate of [indiscernible] this growth is being pushed up by an increase in investment, which should grow by 5.7% this year following a decline every year since 2014. For next year, GDP will grow at 3.3% as the comparison phase become more standard. Here, we are also assuming some mild deterioration of external scenario. Unemployment should reach 6.6% this year as job creation slowly picks up. With the depreciation of the peso and increasing the oil price at the beginning of the second quarter, we have revised up our U.S. inflation forecast from 2.5% in our last call to 2.9% now. We maintain our view that the central bank will increase its short-term reference rate by 25 basis points in December following with 3 more hikes next year. The short-term reference rate should reach its neutral level of 4% by mid-2020.

[Robert Moreno Heimlich, executive]

Thank you, Claudio. I will now give details on our strategy and results in the first half of the year. First of all, I would like to mention some changes that we made to the bank's board in the quarter, which we believe is a further step in helping to position us as a bank that is well prepared for a future competitive environment dominated by issues regarding growth and digital innovation. On April 24, we held the annual shareholder meetings where Mr. Claudio Melandri was ratified as our Executive Chairman and country head. As you know, Claudio Melandri has had ample experience within Santander, entering as the relationship manager in 1991, moving his way up to CEO and now, Executive Chairman. Shareholders also ratified Félix de Vicente, a person with vast experience in the private and public sector, especially in matters regarding entrepreneurship. Alfonso Gómez was also appointed to the board. He currently heads the Anacleto Angelini Innovation Center of Universidad Católica, the most important center for innovation and entrepreneurship in the country. Mr. Gómez also founded Apple Chile and Virtualia, the first social network in Latin America.

The board's latest incorporation was Rodrigo Vergara as independent director and first Vice President. Mr. Vergara was President of the Central Bank of Chile up to 2016 and was nominated as one of the top 5 best presidents of central banks in the world by Global Finance. With these changes, we welcome 3 new independent directors which bring with them diverse backgrounds in finance, technology and economics and will guide the bank through an ever-changing environment.

Regarding results, the first half of 2018 was a positive period for the bank with strong business activity. This was reflected in a 7.8% increase in operating income in the first half with net income attributable to shareholders increasing 4.3%. We also achieved a strong ROE of 20% in the first half. If you look at the second quarter, the same trends are visible in operating and net income with ROE for the second quarter at 20.5%. Compared to competition, we have grown our income before taxes above our main peers in the banking system in the first half, seeing an increase of 8.1% as of June 2018.

In terms of ROE, we have improved consistently in the last 2 years. At the same time, our competition in general has been seeing a decrease in their profitability. With the strategic changes we have been implementing and through organic growth, we were able to increase ROE from 17% to 20% between 2015 and May 2018.

During the quarter, we continue with our 3 objectives for healthy growth and higher profitability. We're focusing on growth in line with economy, increasing client loyalty through an improved client experience and quality of service, deepening our ongoing digital transformation by expanding the bank's digital capabilities and optimizing our profitability and capital use to increase shareholder value in time.

Regarding growth, noteworthy has been the bank's [indiscernible] checking account in order to improve our funding costs. We are particularly proud of the 12.9% growth in demand deposits year-on-year. With this, we have been able to lower the cost of our funds to 2.6% which, considering that the short-term interest rate of the Central Bank is 2.5%, is a very efficient level.

After a good year in 2017 from mutual funds, we are also starting to see a shift back to lower risk moving to instruments such as time deposits given the volatility experienced in global and local equity markets. In terms of liquidity, we also maintain strong levels with the LCR at 122.9% and the NSFR at 109%.

From our asset side, we saw strong loan growth acceleration in line with the economy, thanks to a higher level of investment and greater business confidence with our portfolio reaching a 7.7% year-on-year growth. This has led to a stronger growth in commercial loans as companies start to increase their activities and search for funding. The mortgage market has also been -- seen a boost during the year, increasing 7.5% year-on-year and 2.7% in the quarter.

Our consumer loan growth continues to be [indiscernible] Banefe which slightly dampened growth to 3.8% year-on-year. Although Banefe no longer exists, we still have some credit card exposure to these clients, which as they become due, reduces our exposure to this segment. On the other hand, during the quarter, middle- and high-income segment loans increased 2.4% Q-on-Q and 7.7% year-on-year, respectively, while loans to the lower segment fell 8.3% in the quarter and 26.9% year-on-year. Remember that during the end of last year, we launched Santander Life aimed at the mass segment giving us potential to grow in consumer loans going forward as the employment market starts to pick up. For SMEs, the bank continues to maintain a conservative stance regarding loan growth by focusing on larger and less risky SMEs that also generate nonlending revenues. All in all, we still should have 6% to 8% growth in SMEs this year.

Considering this good semester in terms of loan growth, the bank -- we are increasing our loan growth guidance from the 6% to 8% range we gave last quarter to 8% to 10% for the full year 2018.

As a result of loan growth and a positive allusion of our funding mix, net interest income rose 5.6% year-on-year, and the bank's net interest margin rose 9 basis points in the quarter to 4.5%. The inflation rate picked up in the quarter. However, as we saw higher growth from lower yielding loans such as the commercial mortgage loans, our average interest-bearing assets in turn had a lower yield. This effect was compensated by the good management of our cost of funds, which enables us to maintain our NIMs at 4.5%. We expect NIMs to remain more or less stable throughout the rest of the year as higher inflation expected in the second half and a loan mix more or less balance each other out.

In terms of our asset quality. After seeing a slight deterioration during the end of 2017 due to the economic cycle, in the second quarter, we have began to see better indicators with our NPL reducing in all main categories, reaching 2.2% of our total loans. More importantly, we have seen an improvement in our impaired loan indicator, which includes NPLs and renegotiated loans and all products, evidencing that going forward, we should continue to see positive trends in asset quality. In consumer loans, for example, the impaired loan ratio descended from 6.8% in the first q to 6.4% as of June. The coverage ratio of the whole portfolio remained healthy at 124% of nonperforming loans.

Provisions for loan losses increased 4.6% to -- in the second quarter compared to second quarter 2017 and 6.1% compared to the first quarter '18. In the first half of the year, total provision expense increased 3.3% in line with loan growth and with a 12.9% rise in loan loss recoveries. The growth in provision expenses in the [indiscernible] quarter was mainly due to a rise in provisions in commercial loans. Provisions for commercial loans increased 30% compared to first q '18 and 25.1% compared to second quarter '17, mainly explained by the provisioning and charge-offs of various specific commercial loan positions in the middle market and the growth of the commercial loan book. Overall, commercial NPL ratio remained steady at 2.6%, and the impaired commercial loan ratio decreased to 6.9% in the quarter. With this positive evolution of asset quality, our cost of credit has remained in line with initial guidance of 1.1% for the year and we expect a similar level for the second half.

This positive evolution of our cost of credit, coupled with a positive evolution of our funding mix, has more than offset the lower interest-earning asset yield. As a result, our NIMs net of risk have risen 10 basis points in the first half of the year to 3.5%, reflecting that our strong ROEs are in part due to a successful management of our returns adjusted by risk.

Regarding regulation. As a reminder, the Chilean bank regulator did not adopt IFRS 9. Instead, since 2010, they have been implementing a series of standardized expected loss models that every bank must adopt. In this respect [indiscernible] the SBIF has published the final provisioning model for commercial loans evaluated on a collective basis. For us, this provision model affects our smaller commercial client such as SMEs and individuals that have commercial loans. In total, the SBIF estimates an impact of $300 million for the whole system or 1% of equity once this model is implemented, which should be as of July 1, 2019. The SBIF also [indiscernible] implementation of this model will recognize as a onetime charge in results. To date, we are still estimating the overall impact and by year-end, we should have a clearer notion. However, we have a full year to mitigate part of the effects to our mission and pricing policies. Initially, we expect an impact similar to our market share or less than 1% of the portfolio affected by this model. The final draft of this model is available on the SBIF's website.

Regarding the second pillar of our strategy, to focus on increasing client loyalty through an improved client experience and quality of service while expanding our digital capabilities, we have also seen important advances in the quarter. In terms of client satisfaction as measured by the Adimark survey we performed, we managed to finally to surpass our peer group with a satisfaction level of 68%, 2% above our peer group [indiscernible] on the top 2 within our peers. Regarding the level of complaints as measured by the Sernac and the SBIF, the most recently published figure of client complaints show a decrease of 18% in 2017 compared to 2016. As a result of the improvement in customer satisfaction and digital innovation, client loyalty continues to rise in retail banking with loyal individual customers in the high end growing almost 8% year-over-year. Among middle-income earners, the velocity of client loyalty has also accelerated in part due to Santander Life growing 6.6% year-over-year.

As we mentioned in the previous webcast, we launched a new series of products called Life as a way of returning to the mass consumer market without increasing our risk profusely. As of June, we had 16,600 Santander Life clients using at least one of the Life products. Of all of these new clients, 70% are new to the bank. Of our new monthly total bank plan sold, 25% are Santander Life plans. Out of all the Life products, Life credit cards [indiscernible] with average transactions reaching 7 per month, showing the importance of the bank for these clients.

As employment indicators in Chile improved, we expect to grow our consumer loans, including the Life program. These improvements in client satisfaction and loyalty is leading to healthy fee growth this year. In the first half, fees increased 6.7%. In the second quarter, fee income increased 4.4% compared to the first and 9.7% compared to 2Q '17. The effects of cross-selling were reflected in the increase in loyal clients and the consequential strong growth seen in credit and debit card fees, collection fees, insurance brokerage fees and asset management. Our corporate banking also had a successful first half in DCM at advisory and investment banking.

We continue with our process of modernizing and restructuring our physical distribution network. As last year, we aggressively closed branches and ATMs as well as reduced personnel. This year, the focus has been on improving the distribution network and to continue to invest in IT. In the next 3 years, we'll be investing $360 million in technology. In terms of ATMs, we decreased the amount compared to last year. However, we have begun once again increasing the number of ATMs. Compared to 1Q '18, we increased the number of ATMs by 5.6%. Despite this increase, expenses for security and security transport services decreased 3.3% year-over-year as we have strategically chosen locations with greater security and traffic of people.

Total headcount increased due to an expansion of IT project teams. Previously, the bank outsourced some projects that will now be done in-house, producing cost savings and project efficiencies. In total, in the last 12 months as well, 7.4%of the bank's branch network has been closed. We continue to close branches that were not strategically placed as well as transforming others into WorkCafés. By the end of this year, we will have a total of 40 WorkCafés with at least 1 in every region of Chile. Not only are the WorkCafés more efficient and productive, it is now cheaper to open a WorkCafé than a traditional branch. The remaining branches continue to improve their efficiency through investments in digitization in order to lower their operational costs.

With this in mind, we should begin a process of branch expansion and expect to return to a level of 500 branches in the next 3 years. The branches will be designed to be more efficient and focused on value-added businesses here under the WorkCafé model where more traditional style that is more digital and efficient.

The amount of digital clients and transaction also continues to improve. We have a base of over 1 million digital clients and growing. And with all of the app updates and new features during last year, we were able to increase the amount of monthly transactions made to digital channels from 100 million to 210 million. Total digital clients have continued to grow, surpassing our target of 1 million. Other innovations in the first half includes our app 2.0 with more transactional capabilities and user-friendly interface. We also completed the development of our chat bot with a capacity to answer more than 1,100 different client questions. In the quarter, the bank also expanded its expenditure -- increased its expenditure in cybersecurity. This year and the next, we will be investing $15 million to $20 million in cybersecurity. Among the different initiatives in this front, the bank will execute a complete modernization of the operating system of our ATMs.

Although the [ defensors ] work with a closed network and controlled risk, the bank has decided to increase their safety and in order to reduce the risk of cloning of the magnetic chip of the cards at the ATMs. Another measure that the bank has decided to adopt is to start a process of total replacement of 1.2 million cards without chips. This will be carried out through a campaign that will invite customers to change their cards at the branches. Currently, 80% of the bank's branches already have card printers that allow the immediate emission of plastics with chips in about 5 minutes.

Finally, a series of tutorials will be made available to clients to deliver to them as much information as possible to avoid cyber fraud. These tutorials will be sent to the clients of the bank which in the first phase will be voluntary. But from April of next year, they will be mandatory to operate with the bank. All these actions all lead to imply that people take a few minutes of their time are important to reinforce security measures and thus cope with cybercrime.

We continue [indiscernible] bank in Chile, reaching an efficiency ratio of 39.6% during the first half. This reflects the various initiatives the bank has been implementing to improve commercial productivity and efficiency. In 2Q '18, operating expenses, including impairment and other operating expenses, increased 8.9% Q-on-Q and 6.6% year-over-year. The increase compared to the first quarter is mainly due to seasonality. Personnel costs remain contained. Administrative expenses increased 15.3% year-over-year in second quarter '18 due to the ongoing investments in digitization, cybersecurity and branch restructuring already described. IT expenses, for example, increased 22.7% year-on-year. Going forward, we expect to maintain an efficiency ratio at world-class levels at around 40%.

Regarding our third objective, we also continued to post healthy [indiscernible] levels and good returns for our shareholders. The bank's return on assets -- return on average equity in 2Q reached 20.5% and 20% for the 6-month period. In April, we paid our annual dividend equivalent to 75% of 2017 earnings or CLP 2.25 per share. The dividend yield considering the registered date of April 19 was 4.2%.

After the payment of the dividend, the bank's capital ratios remain solid. The bank's core capital ratio was 10%, and the total BIS ratio reached 12.8%. Additionally, in the quarter, a regulatory change issued by the SBIF was introduced that [indiscernible] methodology for estimating the credit risk weighted asset equivalent of derivatives. This lowered our core capital ratio by 11 basis points in the quarter which we expect to recover during the rest of the year. Emiliano?

[Emiliano Muratore, executive]

In summary, the first half of 2018 was a good reflection of what we want to achieve during the rest of the year. For the whole year 2018, here is some guidance. Our GDP estimate has been increased to 4%. In tandem, we have increased our loan growth estimation to 8% to 10%. Our NIMs should remain stable with higher inflation in the second half, pushing margins upward and the loan mix growth geared more towards commercial loans. Our previous cost of credit estimate was 1.1% to 1.15%, and we believe now it should remain in the lower end of this range or 1.1%. Client loyalty and higher growth of total clients will continue to drive fee income in the upper single-digit range. Finally, the efficiency ratio should reach levels around 40% with cost growing in the low single-digit range. Our statutory tax rate was increased this year to 27%. We should see our effective tax rate reach between 22% to 23% in 2018. All in, we maintain our ROE guidance at 19% to 19.5%.

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

[Operator]

[Operator Instructions] Our first question comes from the line of Thiago Batista with Itaú BBA.

[Thiago Bovolenta Batista, analyst]

I have a few questions. The first one on the provision for loan losses of the commercial segment. In your press release, you mentioned that -- you explained that the 10% increase in provision for commercial segment was counted by the middle market portfolio. Can you give us a little bit of more color about desaturation in the middle-market portfolio? And how we can forecast the provisions for the commercial provisions? If this level will continue moving forward or if you're seeing some acceleration in the provision for commercial segment. And the second question is about competition. Clearly, all the banks in Chile are becoming more positive with loan growth this year. So if you can share with us how do you see the competition? if you are seeing the competitors more aggressive or not. In each segment, they get more aggressive, so if you can give us your view about competition nowadays.

[Robert Moreno Heimlich, executive]

Okay. Thanks, Thiago. So regarding provision for loan losses, and general asset quality has been performing well even the commercial loan book. But we had in the quarter, we charged off the provision 2 or 3 specific times. We can't give any more specifics on that but -- so it's kind of like a semi one-off thing. And we're not expecting these levels of growth going forward. And you can also see that because in the commercial loans, the NPLs and the impaired loans continue to do well. So it's more of a specific -- I think one time, there was one bankrupt in the quarter and you have to do some levels of provisions and so forth. So it's relatively contained [ in ] 1, 2 or 3 clients, not in any specific sector either. It's kind of like more related to ownership than sector. So that's why we're not seeing an increase in the cost of credit going forward. And in general, we feel quite good about the evolution of asset quality.

[Emiliano Muratore, executive]

And regarding your second question about revising the loan growth upwards, that was basically explained by the better macro outlook. We are expecting, as you said, many others, competitors, are seeing similar trends. And because of that being explained by better macro and GDP growth, we don't see any significant change in the competitive dynamics. And we are increasing our loan growth but we don't expect to gain market share because of this because we expect the system on the whole loan portfolio, the system growing also faster. So it's just a matter of recognizing a better macro scenario rather than seeing competitors looking to gain market share.

[Operator]

Our next question comes from the line of Nicolas Riva with Bank of America.

[Nicolas Riva, analyst]

Just one question on Basel III. If you can give us an update on -- in terms of the implementation. When do you expect the changes to the banking law to be approved? When do you expect the regulators introduce the new risk weight? And really, what interest me the most is when do you expect then banks maybe to be in a position to start issuing 81 bonds in line with what happened in other countries in the region?

[Emiliano Muratore, executive]

Nicolas, I mean, we have had like positive news in the sense the law is still in Congress, that there was some pending issues to be agreed between the different Congress members, not related to capital, but related to the secrecy and all that in the banking law. According to the press, the consensus has been reached so we are expecting to have like many news in the next 1, 2 months in terms of approving this law. Actually, the government puts some priority, the executive power puts some priority in the legislative treatment of this law. So the law should be approved, let's say, during the next 2, 3 months. But then going to your question about timings, once the law is approved, there is 1 year for the CMF, I mean, the new commission created to put together all the financial regulators, there is 1 year for the CMF to absorb the bank in relation to the current superintendency. And after that process of absorption or merging, there is 1 year for this CMF commission to publish like the fine print of the regulation. So let's say that we are talking about 2010, that's a year where we should have news regarding the fine print of Basel III regulation in Chile. And for that reason, I don't expect to see anyone issuing high grades or 81s or any kind of this instrument before 2010. And maybe second half -- 2020, I'm sorry. Second half of 2020. I wouldn't expect to see anything before that.

[Operator]

And our next question comes from the line of Ernesto Gabilondo with Bank of America Merrill Lynch.

[Ernesto María Gabilondo Márquez, analyst]

We noticed your NII was below the loan growth. And it was this even with higher inflation levels. I don't know if it was related because you are growing also in lower yield problems such as corporate, middle markets and mortgages. So I just want to know if you think this trend should continue in the next quarters? Or do you expect to increase exposure in higher yield products to have NII above the loan growth? Secondly, you mentioned several investments that will take place in the next quarters. So I don't know if this changes your expectations for the expense line growth. How much will be the total amount of investments related to cybersecurity, the branches expansion into WorkCafés and the digital transformation? And then finally, based on EC year-over-year counts for the second half of this year. We're already expecting double-digit net growth for the full year. So I don't know if that will be reasonable with your expectations. And where do you see the sustainable ROE?

[Robert Moreno Heimlich, executive]

Okay. So regarding NII, I think this is stated in the various factors, obviously, this year since what has been really driving the economy has been investment, not so much like employment or wages. And we're seeing like a lot of companies kind of wake up after -- remember, investment in Chile fell from like 2014 to 2017 every single year. And this year, it's finally growing again at around 5%, 6%. So loan growth is really being driven by that. The other segments are growing but they're growing more or less the same they were growing in the past. There's been a big speed up in demand of loans by middle market, corporate, some larger SMEs. So I think this is good news because it reflects like the real economy doing well. But obviously, it tends deliver lower yielding. On the other hand, though, these companies [indiscernible] success in client service and cross-selling is driving checking account. So it is true that the asset yield has come down a bit but the cost of fund as well and the risk. So that's why we showed in one of the slides that the NIMs, net of risk are actually rising and that's a very good reflection of our strategy. So for this year and the second half, inflation should continue to accelerate a little bit. Remember the peso has depreciated. That would be good news. On the other hand, as we stated, we'll probably growing the mix still, a little bit more focus on commercial loans. We do expect the consumer loans to accelerate a little bit from their current levels. But all in, I would say NIMs will be around 4.5% this year, and we should finish the year with an NII growth similar to loan growth -- to average loan growth, okay? And that's our view. And then the cost of credit, 1.1%. And then you should have a slightly higher NIM net of risk. Regarding your other question in investment, yes, we are investing. This was the plan. So we're not really changing any of our guidance. As you see, our efficiency ratio in the first half is below 40. But for the full year, we're not keeping it at that level. It should be 40, 40.5. And the cost growth should be 4% or 5%, like in the low-, mid-single-digit range with good efficiencies and personnel, obviously with more growth, administrative expenses driven by the IT the reformation of the branches, cybersecurity, et cetera. So -- and all this has been more or less planned for and that's why the previous years, we did a lot of adjustments at different levels. And so overall, as we said, we're going to be investing in the next 3 years, like $360 million. This year, the investments in cybersecurity are around $12 million. Next year, it's going to grow like 30%. But overall, we think that the efficiencies we're getting with the investments are very quick and a lot of win-wins. So that's why we think cost growth should remain at the current levels and the efficiency level around 40%, not much lower than that because of the investments. And finally, your last question was regarding ROE. Just one thing, just as our ROE [indiscernible] in the year kind of also reflects not only earnings growth but when we pay the dividend. So we always pay the dividend in April and then we get our highest ROE in the second quarter usually. So from now on, for the rest of the year, we'll be accumulating capital, okay? And our core capital ratio should rise. But on the other hand, our ROE should be a little bit lower. That's why we really have -- since everything is going online, we haven't really changed our ROE guidance. So we'll be around 19%, 19.5%, and that should lead -- that we haven't changed that forecast.

[Operator]

And our next question comes from the line of Jorg Friedemann with Citibank.

[Jorg Friedemann, analyst]

Most of my questions were already responded, but let me try to do a follow-up here on the efficiency trends. I understand the -- so you need the investments for the next, I know, few years. But do you have an idea about when are you going to be able to start seeing another wave of improvement in your efficiency once everything is deployed? This is the first question. And my second question, with regards to the provisioning model that is going to be analyzed on a collective basis, I know that you're still calculating the impact and this is going to be implemented just, I know, mid-2019. But would it be reasonable to assume that you could start booking some provisions in advance to the implementation of the law taking advantage of the good asset quality momentum that you're seeing?

[Emiliano Muratore, executive]

Thank you for your question. Regarding efficiency, in the long run, and we don't expect to cut our efficiency ratio going much lower than 40% or in the high 30s percent. And we do expect a change in the composition of our expenses as we have seen that basically that the personnel and administrative expense not related to IT and that might lose share in the total expenses. But this investment cycle will be kind of endless because of this new kind of banking era we are in terms of IT and different experience to clients. So we don't see a point in time where we can change significantly the level of our efficiency ratio and go much lower than where we are now, although the composition of our expenses will keep shifting to a more invested and depreciation-related components and not rather personnel and administrative expenses. As Robert mentioned, we plan to keep -- now to start growing the number of branches and -- but the systematic and the processes of those branches, we expect them to be much different to what we have now. And the personnel expenses, composition of those new branches will be much lower than what we have now. So going to your question, we don't expect a point in time where our efficiency ratio will drop significantly. And we also believe that it might be not so healthy to go so low because sometimes, you stop investing or you stop catching up with the needed investment for the bank. And in terms of the -- when to recognize this new provisional rule. Well, definitely, first, we have to finish doing the numbers. It's not going to be later than July 2019 because that would -- the relations established but we haven't discussed yet about the timing for that. I mean, I guess we -- for the end of this year, we have to begin with the fine numbers of the impact and maybe we can discuss there the timing of that. But in terms of the phase of the credit risk cycle in the next 12 months, we don't expect any significant change. I mean, we keep expecting a relatively benign credit risk scenario for the next 12 months, so there is no hurry if you want to do it in that sense, and we'll have further information later this year.

[Jorg Friedemann, analyst]

That's perfect. If I could just make a very quick follow-up on that one. It would be reasonable to assume then that your coverage on that segment could continue to come down because it has been coming down from 145% to the levels of 122% right now, and given the consistent improvement that you are still seeing there. So would it be reasonable to assume or is there any ideal level that you might be targeting for the coverage in that particular commercial segment?

[Emiliano Muratore, executive]

We don't have a target for that, but underlying this change in the regulation, there is also a kind of shift that we are trying to do in that segment, in the SME segment, to try to move to more collateralized lending that's less risky and with lower expected loss. And in terms of that shift in composition that it's a downward pressure in terms of coverage because of the collaterals that we'll be gaining in share in that part of the portfolio. But apart from that, it's a downward pressure on the coverage that there is no other like a specific trend.

[Robert Moreno Heimlich, executive]

Yes. So it's important, as you saw, we're not growing so much in SMEs at the moment -- we're growing but not as much as other segments. And there, we're changing the composition. So we're expecting that's going to be one of the big drivers next year and probably in the second half of this year of why we're keeping the cost of credit lower, because the SMEs, which aren't deteriorating but we still think there's room, there's value to be extracted and improving the composition of that loan book. So as Emiliano stated in the next 12 months, we expect the expected loss in the SME portfolio to improve significantly. And therefore, coverage could come down because the loss would be lower.

[Operator]

And our next question comes from the line of Philip Finch with UBS.

[Philip Finch, analyst]

I only have one question. In recent years, you've been raising payouts, which has been really impressive. In your presentation just now, you said that, well, you've increased your loan growth guidance for the year to 8% to 10%. So the question is, will this impact your ability to pay out as much dividends going forward?

[Emiliano Muratore, executive]

Thank you for your question. In terms of payout, the new banking law on the Basel III is definitely an input that will -- that might affect us, as we have stated in the past. We still see the Basel III implementation as a positive for our capital base. So if that finally is the case, that will give us room to sustain this kind of [indiscernible] ratio. But as you stated, if that is not the case or if that takes longer to finally materialize, we expect with this loan growth of 8% to 10%, the payout should be around 60% to 70%, and it's unlikely to -- for us to be able to sustain the 75% if finally the loan growth goes to around 10%. So that would be the question. Basel III should be something to allow us to sustain this high payout. If not, the more long term or -- maybe not long term but the more consistent payout with this 8% to 10% loan growth should be between 60% to 70%.

[Operator]

And our next question comes from the line of Alonso Garcia with Crédit Suisse.

[Ricardo Garcia, analyst]

My first question is regarding -- or to see if you have any comments on the potential implications, especially on your Santander Life and the rest of the consumer portfolio from the migration of the CMR (sic)[ CRM ] portfolio to the bank into Banco Falabella. Do you think this could have positive implications for the business given that you will have like probably allow your addressable market and maybe other implications that you foresee from this migration? And my second question is basically just a clarification on the figures you mentioned regarding the change in provisionary requirements. You mentioned a figure estimated by the SBIF for the whole system but I didn't catch the number very well. And also, you mentioned, I think it was 1% of your loan portfolio that will be affected by this change.

[Robert Moreno Heimlich, executive]

Okay. So well, Banco Falabella apparently, will be incorporating their full credit portfolio in their [indiscernible] . and what this means is that we'll have -- we should have more information because everyone will be regulated by the bank authorities. So in general, more information is better. And today, one of the problems we had in Chile, we thought, apart from the lower end of the maximum rate and other issues with that, 30%, 40% of the consumer loan book was out of the banking system. We have a very good negative credit bureau. But the positive credit bureau was missing some information. There's been certain M&A transactions and certain movement of loan books back to like retailer banks. This is all positive for the system and for evaluating credit correctly. Because before, when a lot of people were out of the positive credit bureau, it was hard to say especially when they're just beginning the relationship, if they were going to be a good payer or not such a good payer. So we definitely view all of this as positive for the industry and bank penetration and for Santander Life. Regarding your second question, yes, the SBIF in their press release, which is on their website stated, that an impact of $300 million for the whole system and we calculate according for the loans that are -- our loan book that is under this provisioning model, the impact for us should be less than 1% of that loan book. So it might affect 1 month of provisions. But overall, the impact on the loan book is -- on this particular loan book, which is around $7 billion, is very little.

[Operator]

And our next question comes from the line of Diego Ciconi with Scotiabank.

[Diego Ciconi, analyst]

I only have one. I wanted to get some sense of your exposure to FX, other than the higher future inflation which should be positive to NIMs. What can you say was the impact of the peso depreciation in the second quarter? Did it impact loan growth or provisioning levels? And if it did, for how much?

[Robert Moreno Heimlich, executive]

Okay. So overall, we have very minute exposure to FX. We have a policy of hedging, okay? But in the quarter, there was a lot of movement of rates and different market volatility that did lower our financial transaction income. But it had really nothing to do so much with FX, more to do with rates and these type of things. Our ALCO or ALM portfolio is -- we run no credit risk there. It's all Chilean sovereign risk and we also have some U.S. treasuries and those you have to mark-to-market. Some of it goes against capital. Some of it, the realized part goes against the P&L, okay? So -- and the bottom line is depreciation had no impact but all these movements there were, especially in rates, did have an impact on the ALM portfolio. Regarding the depreciation of the peso, for example, if you have a loan in dollars, you provision over that and the amount in dollars obviously went up. So provision expense, there was a little -- a part of a reason it went up -- we didn't really discuss this too much, but -- was because of the depreciation of the peso. But on the other hand, that's offset with hedging. So there's really no net impact, okay? So provisions in part were up a little bit between the first and second because of the effect [indiscernible] the bottom line. There's no impact, okay?

[Diego Ciconi, analyst]

Okay. And how much of your loan book is in dollars?

[Emiliano Muratore, executive]

10%.

[Robert Moreno Heimlich, executive]

Like 10% of our loans, mainly short-term foreign trade loans, okay?

[Operator]

And our next question comes from the line of Neha Agarwala with HSBC.

[Neha Agarwala, analyst]

I just wanted to follow up on the new regulatory requirement for the provisioning. Could you clarify if the provisioning to that -- be made will pass through equity or through income statement in the third quarter possibly of next year? And also, would this -- could similar requirements be enforced for other segments? Like this one, I believe, is for the commercial loans. Could the regulator impose any other changes to other segments of the loan book?

[Robert Moreno Heimlich, executive]

Okay. So the [indiscernible] in their press release, explicitly stated it'll be against the income statement, okay? So any hope of it going against equity, no, it's an income statement. There's a change in estimate more than -- like IFRS 9, a lot of that was done against equity in many parts. Here this is was change in [indiscernible] goes to the income statement. And this has been a process that the regulator has been going through for a while, okay? In 2010, they published the provisioning model for the commercial loans analyzed not on a collective basis. Then they changed the mortgage. Remember, they introduced at the end of I think it was 2015 or '16, where they put a lot more importance on loan to values. Now they changed the commercial loans, analyzed on a collective basis. And the last one should be consumer loans, which will be in 2020, okay? And that -- with that they'll have finished their models, updating their models, this is kind of like instead of IFRS9 they do standardized models of expected loss, which everyone, either have to follow your own model, internal model or the SBIF [indiscernible] is more conservative. And remember, this is all part of the transition to Basel III and Basel III uses different risk weighting. But these models will also permit you, probably, especially for the loans that are not impaired, to do less risk weighting so there might be a more stringent provisioning. But on the other hand, we should get [indiscernible] through our lower density of risk-weighted assets.

[Operator]

And I'm showing no further questions at this time, and I'd like to turn the conference back over to Emiliano Muratore for any closing remarks.

[Emiliano Muratore, executive]

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

[Robert Moreno Heimlich, executive]

Thank you.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.