Banco Santander-Chile

NYSE:BSAC

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Banco Santander-Chile Q2 Financial Results Conference Call. [Operator Instructions] The format of the call today will be a presentation by the management team followed by a question-and-answer session.

So without further ado, I would now like to pass the line to Mr. Emiliano Muratore, the CFO. Please, go ahead, sir.

[Emiliano Muratore, executive]

Good morning, everyone. Welcome to Banco Santander-Chile's Second 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, Chief Economist from our research team. Thank you for attending today's conference call. We hope you all continue to stay safe and healthy.

We have a lot of good news for you today. Claudio will start with an update on the economy and macro scenario, beginning on Slide 4 with important upward revisions to our GDP forecast. Then we will -- this will be followed by a review of our record-high second quarter results and the amazing progress we are making in our digital strategy and other initiatives. Finally, we will close with more good news regarding our guidance.

Now I will hand the call over to Claudio.

[Claudio Soto, executive]

Thank you, Emiliano. As we mentioned in the last quarter, Chile was going through a new wave of contagion in April. As we can see on Slide 4, there was another wave in June. So during the third quarter, a substantial part of the Chilean population was in lockdown. By the end of July, almost 14 million Chileans had received at least 1 dose of the vaccine and 12 million had received the full treatment against COVID, representing more than 60% of the total population. Consequently, we have seen a substantial reduction in positivity rate of PCR test and contagion have declined in the recent weeks, leading to an opening of the economy and a fast decrease in the population under full lockdown. Chile has benefited from good external conditions. Our main trade partners are growing fast and terms of trade have improved.

On Slide 5, we can see that the copper price has remained high, having increased almost 50% on average since December 2019. The improvement in sanitary condition is also helping the economy in the short run. Mobility has been normalizing, reaching pre-pandemic levels. And with this, the economic activity has also rebounded, growing 18% annually in June. However, employment continues to dip with a decrease in the labor force participation rate despite an increase in job offerings.

On Slide 6, we have our estimation for this year and 2022. We estimate GDP will grow between 7.5% and 8.5% this year, favored by the opening of the economy, good external conditions and liquidity injections to households through pension funds withdrawal and fast transfers by the government. In 2022, growth will moderate as fiscal impulse fades away.

After robust inflation at the beginning of 2021, there was some slowdown due to muted food and services prices. Going forward, the strong dynamic of consumption will put some upward pressure on prices and inflation should accelerate by the second part of the year, closing at around 3.9%. In July, the Central Bank began reducing its monetary impulse increasing the monetary policy rate from to 0.5% to 0.75%. We expect them to continue this trend with the MPR reaching 1.25% by the end of the year. Medium and long-term interest rates have also increased in response to a better outlook for growth this year, stock flow adjustments related to the third pension fund withdrawal in May and fiscal pressures on the bonds market due to cash need by the government.

Robert, you may continue.

[Robert Moreno Heimlich, executive]

I want to explain our strong balance sheet and results. Moving on to Slide 8. Quarterly net income in the second quarter of '21 totaled CLP 185 billion, our highest-ever quarterly results, which increased 119% compared to the same quarter last year. It is important to point out that second quarter '21 results include an additional provision of CLP 18 billion recognized for increased coverage ratios considering the uncertainty still surrounding the potential impacts on credit quality of the COVID-19 crisis, especially maybe a future evolution of the Delta variant, which still hasn't arrived in Chile, but you never know. Strong client growth, 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 reached 21.6% and surpassed 20% for the third consecutive quarter.

On Slide 9, we can see how the bank has significantly outperformed our peers in net interest margin, efficiency and, ultimately, return on equity. This clearly shows that our results are not just due to a post pandemic recovery, but also due to our efforts on many fronts. One of the most important drivers of our results was net interest income, as can be visualized on Slide 10. Despite asset growth being focused on lower-yielding and less risky assets, we still managed to obtain a 13.1% increase in NII with a strong net interest margin that reached 4.2% driven by an improved cost of funding and a high inflation -- UF inflation of 1.1% in 2Q '21. For the second half of the year, we expect slightly lower NIMs than the levels reached in the first half, but still above 4%. Going forward, we expect UF inflation for the next quarters of around 0.8 to 0.9 for quarter. This will lower asset yields, but we also expect a decrease in the growth rate of noninterest-bearing liabilities as current growth rates are difficult to sustain.

The Central Bank has started to increase the monetary policy. And as Claudio mentioned, we expect further increases, reaching 1.25 by year-end. Both of these effects should increase slightly funding cost. On the other hand, we are expecting the asset mix to begin to improve with greater loan growth. All in, for the full year 2021, NIM should be around 4.1%.

As we can see on Slide 11, the bank outperformed the market and evolution of NII, NIMs and NIM net of risk, especially since the onset of the pandemic. We generated $520 million, more NII than our main competitor in the last 12 months, reflecting not only our better balance sheet management, but also the strong growth of time deposits, especially checking accounts and the improvement in our cost of funding. As of May 2021, we are generating a net interest margin 50 basis points higher than all of our competitors and a NIM net of risk 20 basis points higher, including the recognition of even more voluntary provisions in 2021.

As we can observe on Slide 12, the growth of noninterest-bearing demand deposits has been a key for us, growing 12.8% in the quarter and 42.8% year-over-year. This was due to high growth of retail checking accounts, continued strength in the bank's transaction of banking services for companies, the positive impact of the third withdrawal from pension fund and the emergency family income that more than 80% of Chilean households are now receiving.

On Slide 13, 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 and increasing 15% Q-on-Q and 52.5% year-over-year. With this growth, our market share in demand deposits reached 21.4%, placing us solidly in the #2 spot in this product.

On Slide 14, we review loan growth. Total loans increased 0.5% Q-on-Q as loan growth remained subdued due to high liquidity levels at the corporate and household. Loan growth in the quarter was mainly driven by lending to individuals than SMEs. Among SMEs, the main driver was the FOGAPE Reactiva Program. In January, the government launched a second phase of FOGAPE -- of FOGAPE Reactiva with some important differences compared to the initial program. Reactiva loans can be used to invest in new projects and not just for working capital. The average yearly rate for FOGAPE Reactiva is approximately 8.4% compared to 3.5% for the original FOGAPE program and maturities can reach up to 8 years.

As of June 2021, the bank had disbursed CLP 731 billion to the -- in FOGAPE loans, while the total FOGAPE loan book reached CLP 2.4 trillion at the end of June. Loans to individuals increased 1.3% Q-on-Q and 4.7% year-over-year. Residential mortgages increased 8.7% year-over-year and 2.3% Q-over-Q. Consumer loans decreased 1.1% Q-over-Q as high household liquidity has kept demand low for this product. A bright spot in consumer lending in the quarter was our auto lending subsidiary, Santander Consumer Finance. Auto loans were up 29% year-on-year and 9.8% Q-over-Q. Profits from our auto lending business were up 200% year-over-year.

Moving on to asset quality on Slide 15. In this slide, we show the breakdown of asset quality by loan product. The NPL and impaired loan rates continued to show positive trends after the expiration of payment holidays. The coverage ratio of NPLs remain at 252%. The NPL and impaired loan ratio decreased to 4.9% and 1.3%, respectively. These positive trends were seen across the different products as well.

Regarding evolution of payment holidays on Slide 16, as of June 2021, less than 1% of the total loan book was still under a payment holiday. And of the loans where the payment holiday has expired, 98% have resumed payments and only 2% have shown some level of impairment. Of the FOGAPE loan book, including the Reactiva Program, 97% of this loan book is without payment holiday and only 1% are overdue on their payments. It is important to point out that the FOGAPE Reactiva in 2 quarter -- for the FOGAPE Reactiva, we did not give payment holidays, but do not rule out this option in the future.

As we can see on Slide 17, these positive asset quality indicators led to a cost of credit of only 1.1% in the quarter, including the recognition of CLP 18 billion in additional provision. We now have in our balance sheet CLP 168 billion in voluntary provisions to cover unexpected events in 2021 and forward. We have not yet reversed any additional provisions. It is important to point out that in April 2021, we also recalibrated some of our internal consumer loan expected loss models amounting to a cost of CLP 28 billion in provisions in third month. Given the good performance of our portfolios and the high coverage, for the full year, we are again improving our guidance for the cost of risk of 1.1% to 1.2% to 1.0% to 1.1%.

On Slide 18, we take a quick look at noninterest income trends. Fee income had a solid quarter, increasing 1.4% Q-o-Q and 11.2% year-over-year. Fee income was driven by strong opening of checking accounts, greater client loyalty, the rise in insurance brokerage, especially through our digital platforms and a good rebound in various other products and services. Furthermore, Getnet, our acquiring business that we launched in the first quarter of this year, is already contributing CLP 1 billion in fees in the quarter. Total income from financial transactions increased 41.7% Q-over-Q, mainly due to robust client treasury activity. This was offset by a loss in non-client treasury income. We continued to perform various liability management operations which lowered current results in this line item, which should have a positive impact on NIM going forward.

The rebound in revenues in the quarter was also accompanied by good cost control, as shown on Slide 19. Operating expenses increased 2.3% year-over-year, below the rate of inflation. The year-on-year growth of administrative expenses is due to costs associated to the launch of Getnet and the advance of our other digital initiatives in line with our $250 million investment plan for the year 2021, 2023. The bank's efficiency ratio reached an impressive 37.5% year-to-date and 37.4% in the quarter.

Regarding capital ratio, on Slide 20, the bank finished the quarter with a core capital ratio of 10.1% and a total BIS ratio of 14.7%. It is important to remind investors that our capital ratios as of June 21 are net of the 60% dividend payout of 2020 earnings that the bank made in April of this year. This lowered our core capital ratios, our ratios in total, by 50 basis points. The total BIS ratio reached 14.7% at the end of June. For the rest of the year, we expect risk-weighted assets to accelerate as loan growth picks up, and we estimate a payout of 50% to 60% of 2021 earnings depending on the velocity of risk-weighted asset growth. With the current share price and our estimated profitability for this year, we expect a solid dividend yield between 5% and 6%. Once again, this will depend on the velocity of loan and risk-weighted asset growth.

On Slide 21, we give an update regarding Basel III. The phasing of Basel III has commenced and will be fully in place by December 1, 2025. Beginning the first quarter of 2021, banks can already include as 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 502 billion of sub-debt from Tier 2 to Tier 1. The inclusion of market and operational risk-weighted assets will begin in December 2021. We also present in this slide our assumptions for the phasing of Basel III and the minimum required for the bank. This includes the various buffer, our assumptions for Pilar 2, an additional buffer to be set by the bank's Board. In summary, by the end of this year, we expect the minimum core capital ratio required for us to be around 8.6% and a total BIS ratio of 12.8%. According to our estimates, we should be well above these levels at year-end.

The final portion of this presentation, starting on Slide 22, we will give an update on our most significant strategic initiatives. On Slide 23, we start by reviewing our strategic objectives for our main stakeholders. This quarter, we would like to focus on the inroads we made regarding gender equality and our efforts related to be the best bank for our customers, gaining their loyalty by leading in digital excellence and experience.

On Slide 24, we show how in 2Q '21, the bank achieved a milestone regarding gender equality by becoming the first bank in Chile to be certified by the Ministry of Women and Gender Equality as a company that provides equal opportunity policies and practices within the organization. To achieve this feat though, a company must have tools in place to create a gender-equal environment and a balance between work and personal lives. This in line with the UN Social Development Goals which includes achieving gender equality. Another valuable achievement was that we were also confirmed as a constituent of the FTSE4Good index series. This index is designed to measure the performance of companies demonstrating strong ESG practices. We are excited to continue to share with you our progress throughout the years and improving our ESG initiatives.

As shown on Slide 25, we have finally set a date for ESG talk. Please save October 14, 2021 in your calendar, where various members from the Board and executive team will participate followed by a live Q&A session. We hope you will be able to participate. Moving on to Slide 26. During the quarter, our key digital initiatives continued to advance with great success. This has led to an important improvement in profitability, drive client growth and satisfaction.

On Slide 27, we show how Santander Life and Superdigital are still our heavy-duty products and bringing in new clients to the bank. Total Life clients increased 238% year-over-year. And in 2Q '21, Life opened almost 118,000 new checking accounts, reaching a total of 729,000 clients. Life continues to be the biggest game changer in Chile and digital banking market, leading to high client growth, rapid monetization and low client acquisition costs. A large part of these clients continue to be digitally onboarded with a marginal cost close to $1.

Superdigital also continued to show a positive performance and has continued to sign alliances with brands as a way of opening up its client base. Now Superdigital has an alliance with Cornershop as well as -- where shoppers can opt to receiving their salary on the app with special discounts in gasoline, similar to the alliance with the Uber. Clients are also able to receive payments from the government directly to their Superdigital account, a key feature during this time. At the end of June 2021, we already had close to 182,000 clients with record account openings in the quarter.

Further good news came from Getnet, our new acquiring business, as shown on Slide 28. Getnet was officially launched in February 2021 and has already sold over 28,000 POSs, well surpassing our 20,000 goal for the year. An important fact to highlight is that 99% of the clients that have Getnet are SMEs, our target market. Moreover, 63% of the clients have auto-installed their new POS, which demonstrates the efficiency of Getnet systems. Our NPS score for this product is also strong at 80 points, helping to improve the overall NPS score of the SME segment. This product has been quick to monetize with already CLP 1 billion generated in fees since its launch.

On Slide 29, we show how our digital insurance brokerage platforms also had a positive quarter. Klare continued to expand its product offer and now brokers insurance for medical emergencies, oncology and has launched a new life insurance that incorporates pension savings as well. The amount of alliance with insurance companies also continue to expand. Autocompara shined in the quarter. The sale of auto insurance policies increased 25% year-over-year, with policies sold achieving a 13% cost reduction compared to other platforms.

On Slide 30, we show how we continued forward with our $250 million investment plan for the years 2021, '23, mainly focused on digital initiatives and automatization. The bank is in the process of transforming its branch network focusing on the Work Café model and closing less productive branches that have low client flow. With these investments, productivity continues to rise with volume defined as loans plus deposits per branch increasing 10.5% (sic) [ 10.7% ] year-over-year and volumes per employee rising 11.7%. In June 2021, the bank reached an agreement with Servipag, a franchise with over 200 cash payment centers across the country where clients can cash and deposit checks and pay loans among other cash services. This should free up the branches for more value-added services going forward and help us to accelerate the digitalization of our branch network.

On Slide 31, we show how this improvement in our digital offer is pushing upward our Net Promoter Score. The graph on this slide demonstrates how the bank's NPS has improved during the pandemic as our clients have found high value in our digital product offering. We have overtaken our peers and are well established as #1 for NPS in Chile.

On Slide 32, we also show the tangible results of our initiatives to the record amount of current account opening. Compared to our peers with the latest information available from the CMF, Santander has opened -- has had a net opening of 501,755 accounts compared to only 217,000 for the rest of the system, excluding us. With this, we have been able to increase our market share by almost 6 percentage points in 12 months from 22% to 28% in just 1 year.

In summary, on Slide 38, all of these efforts are translating into high client growth and increased client loyalty. Total clients grew 13% year-on-year. Digital clients increased 39% to almost 1.9 million clients and total clients with the current accounting, including checking and debit, increased 45%. Of our total clients, almost more than half are digital clients, meaning they use their online accounts for transactions to check balances among other services. The next step is to improve loyalty. Total loyal clients grew at an impressive 8% year-over-year. And with the inroads made in digital channels and NPS, coupled with the full reopening of our physical network, there is ample room for cross-selling in coming quarters.

To conclude on the next slide, we give some update on our guidance. The positive results achieved these last 2 quarters permits us to be more optimistic than we were previously, and we have revised our outlook for this year. Regarding loan growth, this should accelerate as the year progresses, with the new cash transfers from the government through the emergency family income that should last up to September 2021. Loans should remain in the low single digits, but rapidly accelerating in the last quarter of this year and in 2022.

NIMs will remain at the 4.1% level as we previously mentioned, slightly higher than our previous guidance. Asset quality is clearly showing positive trends, and we have improved our cost of credit guidance from 1.2% to a level between 1% and 1.1%. 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 always remain the main threat to this forecast. We expect costs to grow in line with inflation and an efficiency ratio of around 38%. Finally, all this said, we have risen our ROE expectation from 16% to 18% to 19% to 20%.

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

[Operator]

[Operator Instructions] Our first question comes from Mr. Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

A couple of questions. Maybe one, following upon the loan growth. We understand you expect this to accelerate in the fourth quarter. But maybe want to take a little bit in 2022, right, because you have a strong recovery in GDP this year, but you have the cash transfers which kind of keeps the loan growth. What kind of GDP growth would you expect for 2022? And how would you see loan growth in 2022? And then second question on the capital. You're well above the minimum right at 10.1%. You expect with Basel III that minimum being 8.6%, but by 2025 on the chart here, you expect that to go to 10%. So do you think you have to operate with a higher level of capital from like the 10.1% you have today over the next 5 years? Just to get a sense of is this 10% like the right level, we have to operate around 11%. What do you think is the right level for capital given the increasing requirements for Basel III?

[Robert Moreno Heimlich, executive]

Okay. Tito, so yes, so the loan growth, first, I'll start with GDP. So next year, GDP does slow down the growth rate because government spending is decreasing very high. I don't remember the exact figure, but I think it's above 20%. But we do think that next year employment should begin to improve, investments should be higher. So all that and with lower cash transfers and these things and a more kind of normal economy, this will lead to higher loan growth.

So this year, even though the economy is growing probably close to 8%, the economy is growing 2% or 3% in real terms, going back to more normalized multiplier effects, that should lead to loan growth 6% to 8% next year and probably much better loan growth in consumer and probably on the commercial side. Mortgage has remained pretty healthy throughout the pandemic. So that's basically the answer to the first question. A normalized multiplier loan growth next year, probably beginning at the end of this year, with GDP growing 2% to 3% with a multiplier of 1.5 in real terms plus inflation of around 3% to get single high-digit loan growth next year.

[Emiliano Muratore, executive]

Tito, regarding your second question about the capital. It's important to mention that, that 10% that is on Slide 21, already includes 100 basis points of what we call management buffer. So that's -- they are already factoring in there a prudent cushion above the expected regulatory minimum. So having said that, above 10% we are comfortable. I mean, we do expect to be in the low run between 10.5% to 11% or slightly higher than where we are now. But it is also true that with the profitability we are creating and generating, we expect to build that remaining capital in the coming quarters of the year. So above 10%, we are okay. And maybe we will be moving between 10.5% to 11% as a long-term CET1 ratio. And that implies that in terms of long-term payout, maybe the long-term payout is around 50 rather than 60 or 70 we have had in the last few years in order to keep that 10.5% to 11% CET1 target ratio.

[Daer Labarta, analyst]

Great. That's very helpful. So maybe just one follow-up then. In terms of the ROE, I know you increased the guidance for this year. But do you think that 19% to 20% is sustainable? Or is this year supported a bit by relatively higher inflation or cost of risk? I know you lowered the guidance, but is that 1% to 1.1% sustainable? So just thinking about long-term ROE, and if you can sustain this level or you get back to maybe 17%, 18%? Just your initial thoughts on that.

[Emiliano Muratore, executive]

We're seeing like it's difficult to sustain these levels of ROE as long-term ROEs basically because we have to remember that our interest rates are going up and that's led to pressure our cost of funds. As you said, the inflation now, it's relatively high. It might stay where it is for a while. But with the inflation conversion to 3%, that will also pressure our NIM and NII. And in terms of cost of risk, as you also mentioned, we are at very low level. We think that we're going to stay there for a while. And we don't see a 20-plus percent ROE as a long-term ROE.

[Operator]

Our next question comes from Mr. Juan Recalde from Scotiabank.

[Juan Recalde, analyst]

My question, the first one is related to fee income. So you mentioned that the fees were helped by Superdigital, Santander Life and also Autocompara. So I was wondering if you could help us quantify this or to know what -- how big are the fees that are generated by these type of products or what growth you have seen in the fee generated by those products or in the medium term, what size of fees you expect to raise from those products? And the second question is related to the higher competence income. And based on our calculations, there was a negative impact of around I think CLP 109 billion. So I was wondering if you could talk a little bit about the drivers of that and whether that can be expected it to be reversed.

[Robert Moreno Heimlich, executive]

Okay. So regarding fee income, effectively, we've been opening more accounts, selling more -- especially Autocompara, more car sales. All this you can see -- in the end, Santander Life is the big driver of fees, I would say. And Superdigital is more of a pass-through where we're getting good clients, eventually move them, if they're good clients, to other platforms of the bank. Santander Life should be generating this year around -- between fees, net interest fee income between -- around CLP 60 billion to CLP 70 billion, okay? So most of that is fees. But more than fees -- most of it is fees and non-risk income. So it's the spread we get over the checking account balances. Life already has around CLP 400 billion, CLP 500 billion checking account balance, plus the fees. So that's the bulk of the CLP 70 billion or so that Life is generating in income a year.

There's a lot of space to grow on the lending side when -- [indiscernible] loan demand and also when we start [indiscernible] more open to lending to the middle income. Life has advantage of having the MERITOLIFE program where we have really good information regarding credit scoring. So Life today is the big generator of income is the fees, which you basically see in card fees and checking accounts fees. Now in card fees, the really interesting thing, not only with Life but Superdigital is that there's indications that when they open these products, we become their main bank quickly because that is really driving, especially debit card fees, okay? So a lot of this online purchasing going to shops physically, debit card fees are growing very strongly because of the greater usage and those are the new Life and Santander and Superdigital clients.

Autocompara and other insurance, you can see on the insurance brokerage last year. It's still not growing year-over-year because in May of last year, remember, we started -- we had to adjust some of the prices of our products especially fraud insurance, we had to recognize a bigger cost there. But if you look on the quarter-on-quarter, which is a more clean growth, we're growing almost at a 12% annualized basis, and that's where you see the impact especially of Autocompara. Also the -- and the good thing with insurance brokerage is that as we start to sell more loan products, some loan products also come with insurance, that's also going to push that line. So I think insurance brokerage is going to continue to grow.

So basically, we should continue to see good growth in card fees and Getnet and insurance brokerage and in checking account. Checking accounts, there is a flat fee. These products aren't very expensive from a flat fee basis, but that should begin to add on. Remember, last year, we also had to reduce our checking account fees for some clients because some of these products included a cyber fraud insurance, which we had to eliminate. So once -- as the year progresses, that effect is going to be washed away and you're going to see the full growth rate of the new clients.

So that's why I think fees are -- have a good outlook going forward. The only negative is regulatory. I don't think anything will come out this year. The law that establishes the governance for interchange fees is already passed, okay? So they're going to fix the interchange fees. But now the CMF, the Central Bank and the Fiscalia Nacional Economica, I believe, have to set up a committee define interchange fees. We don't know what the levels are yet, at least it's a technical committee, but these will be published next year. They have 6 months. So that could lower fee growth, obviously, but overall fee growth looks positive going forward.

[Emiliano Muratore, executive]

And regarding your second question about the [indiscernible] in the quarter, I mean that number is coming out -- coming from the valuation, the mark-to-market of our available for [ sale ] portfolio, it's our ALCO portfolio. That is the portfolio we use to manage the interest rate risk of the balance sheet and has been one of the crucial parts of sustaining the NIMs and NII performance. We have had these last 12, 18 months. And the negative number -- our ALCO portfolio is 100% risk-free. I mean we only have sovereign bonds. So we don't see that as a loss. We see that more like an opportunity for us that is showing the -- that today, at current rates, considering the increase in long-term rates that was produced in part because of the pension fund withdrawal and also in part because of the change in the monetary policy from the Central Bank and also in part because of the behavior and the performance of interest rates across the globe. We are seeing there is an opportunity cost -- definitely that will reverse in the future. I mean it's just a matter of time. Our -- the average duration for the portfolio is 4 years.

So basically, that number will go back to 0, basically will become a positive going forward in the last years. It's difficult to say if this is the worst, I mean, or if we can have long-term rates even higher than where it is. Generally speaking, people don't see further room for rates to go up because they are now really high, and the slope of the curve is quite significant. So if rates stay where they are, we will be reverting that number like soon. And if rates go up a bit more in the short -- in the coming months, we will have maybe a slightly more negative numbers this quarter or this year, and we'll start reverting that starting next year to, let's say, go back to 0 as the time passes and the portfolio decays.

[Robert Moreno Heimlich, executive]

And just to add on quickly. We see that our NII has been growing. We get a very nice risk return on this position. And also on Basel III today, these assets, which as Emiliano said, are all Chilean sovereign, risk weighted at 10%, then it's going to go down to 0. So on a risk-weighted basis, Basel III, we're getting a very nice spread with 0 risk weighting. So that's why we feel also comfortable that this is a high -- very good in terms of risk return reward for us.

[Operator]

Our next question comes from Mr. Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

Congratulations on your results. My first question is on provision charges. As you mentioned in the fourth quarter of 2019, you have been building additional provisions of around CLP 168 billion. We have seen that the programmed loans have shown moderate deterioration, lockdowns are starting to ease and then pension withdrawal has helped to maintain asset quality under control. I understand that you are still concerned about the third, fourth wave. But when do you think there could be a possibility to release those provisions. Do you think this could happen by year-end? Or it should be more next year?

Then my second question is, if you can elaborate on your NIM expectations. So you continue to have high inflation, which is positive for NIMs. But on the other hand, you're also having -- or starting to have higher interest rates that could be putting pressure in your cost of funding. So what should we expect for NIMs through the year considering these 2 variables?

And then my last question is on your ROE. As you mentioned, it has been improved to 19%, 20% this year from 16%, 18% before. So I think this positions the bank as the best one in terms of ROE among the Andean banks, again, already at 19%, 20% this year. So where do you see the long-term ROE for the bank?

[Emiliano Muratore, executive]

Okay. Thank you, Ernesto, for your comments -- your questions. Regarding provisions, we don't see any relevant chance of reverting voluntary provisions in the coming months. And in any case, we would also be considered to revert that maybe in the opposite scenario to the one you were describing. I mean we don't -- we would use the voluntary provisions basically if the worst case scenario or if the situation deteriorates. And we think that the scenario for what the voluntary provisions were built is showing up, we would consider to use that. If that's not the case and the situation stays as it is now or better, we will keep that extra coverage for the rainy days looking forward.

Even -- and also if the situation keeps improving and maybe because of an additional pension funds withdrawal or because of additional help from the government to the households, we still see the underlying cost of risk at low -- when I say low, I say, I don't know, 40 or 50 basis points of cost of risk, we would consider to build even extra voluntary provisions to keep a not-so-low cost of risk because, at the end, we don't think the cycle of the COVID crisis is over. We are more advanced in that cycle, but we want to have a caution and a reserve to act in case the situation gets better, but we don't foresee to reverse voluntary provisions in, let's say, in a good case scenario.

Regarding NIMs, as you said, there are many moving parts, but inflation is relatively high and it's expected to stay high, which is good for NIMs. But the Central Bank increasing the interest rates is not good for our NIM and considering their outlook, they will be increasing the rates relatively aggressively in the next 12, 18 months, so that will pressure our NIM. And then you have on the mix side is like 2 realities. On the asset side mix, we should have a tailwind for NIMs because, at the end, today, we are mainly growing in mortgages and state-guaranteed loans. So spreads are basically very low. And when the consumer activity, let's say, revives and we start to grow in that part of the portfolio, we will have good news on the NIM on the asset side.

On the liability side, it's the opposite because, definitely, time deposits will be more costly because interest rates are going up, but also the mix effects, we might -- we should see demand deposits stop growing at the pace they are growing now. And we can see some migration, if you want, from demand deposits to time deposits, considering that opportunity cost is higher, and that will also, let's say, hit our -- impact our cost of funds. So as we included in the guidance, our NIM expectations are -- factoring in all these things are slightly lower than where we are now and going towards like 4% as, let's say, a more stable level of NIMs and not staying around 4.2% or 4.3% where we have been lately. And do you want to take the ROE?

[Robert Moreno Heimlich, executive]

Yes. So yes, just to [ tie ] directly into the NIM expectations of -- think of it that we have 4.2, 4.3 NIMs, which are obviously very good, well managed. But that is a big driver in the ROE to reach these ROEs of around 20% this year. So in the long term, with the normalization of the NIMs in the next few years, and it depends on loan growth, other factors, but around 4%, the long-term ROE is closer to 17%, 18%, okay?

[Ernesto María Gabilondo Márquez, analyst]

Just a follow-up in terms of the potential release of extra provisions. So it could happen more next year, if you are not seeing more waves related to COVID-19, right?

[Robert Moreno Heimlich, executive]

No. Basically, let's say -- I'll give you an example. The Delta variant in Chile comes, and it's a really bad scenario, okay? But we know that it's temporary, okay? So the new vaccines will come, we'll get another shot, whatever. There, you might use it, okay? So basically, we're saving these provisions if there's another outbreak and we have a temporary, once again, increase in risk and that will permit us to use the cushion, more than releasing the -- going forward, if everything goes well and our cost of risk remains at 1%, we could keep those for another unexpected event that we consider temporary, okay? So if nothing happens and all goes well, we might not use them, okay? And, right, our cost of risk it should go to 1%, okay?

[Emiliano Muratore, executive]

I think you'd see them more as a kind of backstop for us for, let's say, really bad cost of risk scenarios because we will definitely tap them to, let's say, contain that extremely high cost of risk rather than using them to show extremely low cost of risk because we are having the voluntary provision.

[Ernesto María Gabilondo Márquez, analyst]

Okay. Understood. So you will keep it for another difficult event.

[Emiliano Muratore, executive]

Exactly.

[Robert Moreno Heimlich, executive]

Yes.

[Ernesto María Gabilondo Márquez, analyst]

Yes. Perfect. And then just a follow-up in terms of NIM. So NIMs could be kind of stable, considering high inflation, and that offsetting the higher interest rates and the cost of funding. But then, I would say 12 months later, we can start to see the benefits from the increase in interest rates, right?

[Robert Moreno Heimlich, executive]

Yes. Basically, eventually, you get more loan growth. Yields will go up again. So that's why, I mean there'll be volatility 1 quarter or another in NIM. But overall, around 4% versus the 4.2%, 4.3% we're seeing now.

[Operator]

Our next question comes from Mr. Sebastián Gallego from CrediCorp Capital.

[Sebastian Gallego, analyst]

And congratulations on very strong results. I have some questions. The first one, just a follow-up and maybe if we can go deeper on the rationale behind the way you see accelerating growth -- loan growth as the year progresses. Why do you see that in a scenario where we could potentially see another round of pension fund withdrawals in Chile. We could see an extension of the [indiscernible] support. We could see just a fading effect from the FOGAPE loans. And you also have presidential and the constitutional process going on. I just want to get a sense on why do you see the accelerating progress on loan growth.

Maybe second question would be related to an investment plan. If you could elaborate on how much have you expend as of today, considering your investment plan from 2021 to 2023. And maybe, if I may, the third one, if you could elaborate a bit more on current regulatory risk beyond the interchangeable fee that you recently discussed.

[Emiliano Muratore, executive]

Sebastián, thank you for your question. I mean, regarding loan growth, I would say that, that's the guidance we are providing, implies no further pension fund withdrawals and no further help from the government, I mean, on top of the ones already announced. And I would say not a significant impact from the Delta variant. So that is -- I would say that it's -- and you can argue, as you pointed out that, that is a relatively risky scenario in the sense that it might be too optimistic because -- optimistic from the loan growth point of view because now they're looking for pension fund withdrawal discussion in congress and also the government has stated that they will keep the helps coming for the time that it's needed. So yes, I think it's fair to argue that if any of those things happened, either additional pension funds withdrawals or more fiscal help from the government, we can see a delay in that rebound in lending.

So that's the -- it's true that, that would be bad for loan growth, but it would be good for inflation, cost of risk, and, I would say, NIM coming from inflation and also cost of risk. So it's not, let's say, such a bad scenario for us. And you can expect the loan growth rebound to happen when all these things stop happening, I mean, all this withdrawals or fiscal stimulus from the government.

[Robert Moreno Heimlich, executive]

And yes, just to add on real quickly, there's also the growth of investments. So GDP is fluctuating because of the government help and consumption, but investments should be accelerating. So you're going to see a rebound in commercial loan. In fact, we're starting to see that in the bank currently. So there's also the third event, which is the external growth of the world economy. So that will definitely have an impact on investment, okay? Regarding the...

[Claudio Soto, executive]

One element -- an additional element is that, last year, we saw an increase in deleverage because the contraction typically was much stronger than the evolution of loans. But we have seen previous year the process of deleveraging. Our estimation of loan growth are consistent with deleveraging process to go back to the situation we had previous to the pandemic that is more or less what is implicit here. So still somehow lower growth of loans than GDP in the next few months, but then picking up as this deleveraging process ends up -- stops.

[Robert Moreno Heimlich, executive]

And then regarding investment plan, it's more or less even now 1/3 per year. So we've had more or less 1/3 of those $250 million we're going to spend this year. A lot is going to automatization, digitalization among other products. But I think this year, the focus is automatization, and to make the back office processes and the center offices, corporate center all much more and more efficient. And then in the next few years, we'll be seeing a bigger transformation of branches and, obviously, launching of new products and services. So there's a lot of interesting things coming.

Regarding regulatory risks, we mentioned the regulation of interchange fees. So that's a reality. We -- how they're -- they're setting up the governance of how to do that. I think, as we said before, an important thing there is that this is done by technical committee. So the process -- there will be an impact, but we don't know how much. But I think the whole process, in the end, should -- is better than what we initially thought, but we have to wait until next year when -- they have 6 months to figure these things out. Other regulatory risks, well, in the last call, we talked about the VAT tax reductions. Fuel -- I don't know -- Claudio, I don't know if you have any update regarding the taxes and how could that maybe impact inflation, if there's any new things there?

[Claudio Soto, executive]

No. What was voted this week was the reduction of the tax on fuels, but it was rejected in the House. We feel that there is little chance that tax reduction in fuels and fee reduction will pass the congress.

[Emiliano Muratore, executive]

Yes. And in terms of regulatory risk, I mean apart from the interchange fees that we will know them maybe later this year or early next year, but then when you go to the traditional playbook of potential regulations affecting banks, here in Chile, we are relatively advanced. I mean we have gone through most of them, I mean, from interest rate cuts. I mean we also now have Basel III implemented with capital requirements going up, we have the freeze on fees. So at the end, apart from the interchange fees, there is nothing on the table right now. It's not so easy for us to foresee any potential piece of regulations to the ones that we have already known and are already in place.

[Operator]

Our next question comes from [indiscernible] 58:44 from UBS.

[Unknown Analyst]

I have 2. The first one, as you know, Santander Brasil released yesterday their quarter results with the consolidated bank's earnings separate from Getnet. So we know that the acquiring company basically started its operation in Chile at the beginning of this year as new sales strategy. Could you share with us some potential numbers that Getnet could achieve in Chile, I mean, after the guidance revision and your conversation with the market participants. How much is the clear market share of the company in terms of financial volume transaction? And how much it could reach in the following years? And if you could talk about the share -- the market share number of POS, I would appreciate it as well.

[Emiliano Muratore, executive]

Okay. Thank you for your questions. In terms of Getnet, I mean that has been a really successful story for us in terms of -- market share in terms of transactions is still like, I would say, building up. And then we also have to consider that we are in the middle of the pandemic. We are still to launch the e-commerce leg of Getnet. Definitely, that has been a drag. But even with that drag, we have already reached 15% market share in terms of POS in basically 4 months. We are growing at a very good pace. And also, it's important to mention that, at the beginning, we started basically using the existing clients and then -- Santander clients to sell POS, but now this has been a very successful strategy to capture new clients. I mean we are capturing new clients to the bank and also including Getnet in their solutions.

So our ambition in that market is high. I mean we expect to keep growing market share and definitely be one of the relevant players in the acquired markets, which is a very, let's say, active market here now in Chile because there are a few other banks who have announced to enter the market. But I think we have some kind of advantage of first-mover advantage and -- in growing faster and earlier. And we expect to be one of the leaders there.

[Unknown Analyst]

Sorry, we want to reach 15% market share? Our market share now is like 3%.

[Emiliano Muratore, executive]

No, POS is 15. Yes, 15.

[Robert Moreno Heimlich, executive]

Okay. 3% in terms of transactions.

[Emiliano Muratore, executive]

Yes. Yes. Yes. We already have -- I mean because -- today, we have roughly 30,000 POS installed. Active POSs from Transbank are around [ 200,000 ] plus. Basically, Transbank was the only relevant player. So let's say, we are already close to 15% in terms of POS. And the share in transactions and activity will only go up when the pandemic, let's say, goes away. And also when we implement the e-commerce solution, that will definitely be a game changer because they are, as we all know, a big part of the economy now. It's operating in e-commerce. And having that part of the solution, it's a big drag, but we expect to go out to the market with that in the coming weeks.

[Unknown Analyst]

Okay. Sorry, just for me to have a clear view on it. It's 15% in terms of POS and 3% in terms of financial transactions, is that right?

[Emiliano Muratore, executive]

Yes. And that's in part because of the early stage we are and also because we haven't gotten into big retailers and big -- 99% of the clients are SMEs. So money-wise, that number will stay low as far as we don't get into the big retailers with, let's say, the big amounts of transactions and sales.

[Unknown Analyst]

Okay. Okay. And do you have any potential projectable guidance for a potential market share in terms of financial transactions? [indiscernible] 15%?

[Emiliano Muratore, executive]

As I said, we are -- our ambition is high, but it's also important to have the right economics. And today, let's say, with the current market conditions, considering the MPRs that the big retailers are getting and the interchange fees in place, it's not profitable to get into that. So in -- when we get the right economics in terms of MPRs on interchange fees to get into that, we can expect to be also one of the leader players in terms of transactions and not only POS, but as I said, that will depend on having the right economics. As of today, basically, it's possible to make money, and we will get into that and we can expect to have a big number of market share in transactions when the economics to get into big retailers are the added weight.

[Unknown Analyst]

Okay. And my second question, I would like to talk about operating expenses, more specifically about the branches. As we could see in the release -- in this quarterly release of the bank [indiscernible] the number of the branches in this quarter. Given all the ramifications of the combined spread, what could you tell us about the second half and the next year in terms of its [ physical ] strategy? So in other words, in some of the bank's pipeline to reduce even more these number of branches. And if you could also put the role of Work Café on this context if you have such thoughts?

[Robert Moreno Heimlich, executive]

Okay. So as you saw on the slide, we showed branches have fallen by 6% or so. Mainly, what we've done more recently is we closed Santander Select branch for the middle, high income grade. Basically because these branches -- first of all, most of them weren't at the street level. And given the pandemic and given the advance of digitization in Chile, these branches -- a lot of people didn't go to these branches. So there was a lot of room to consolidate square meters. The main closures have come from there. In fact, we've gone from 34 to 13 Select branches on a -- so that's obviously a key area where we're going to continue to evaluate given the behavior of clients, okay?

And the other thing we've done, we've opened a couple of Work Cafés. Now the Work Café is going to speed up again when they can reopen. The Work Cafés are working. The front office is working. Their business is open, but the coworking spaces are still closed. So I think when we continue banking with the pandemic, we're going to reopen the coworking. It takes like 2 weeks to get that thing running -- up and running. So that would probably be an important milestone in the second half of this year. And then we're going to continue with the process of branch transformation. And here -- the key thing with the Work Café apart from being a really nice format where a lot of people come to the Work Café to do business. The Work Café also has a very nice digital format, which in itself is very profitable, okay?

So going forward, we're going to use the lessons learned from the Work Café to continue transforming the rest of the traditional branches. Some of them will have a big co-working space, some of them will not. But the digital format of not having that many human tellers, having no back office, no bulks, that is something that is already developed in the Work Café format. But at the same time, if these branches -- these new digital branches look smaller and more efficient are very productive, we could open -- actually increase openings in the future. What is clear is that things will be more efficient and the square meters will fall, but not necessarily the number of branches, okay?

So overall, there is going to be a big process in the next few years of the digital transformation. We have like of the 344 branches, 272 are what we call traditional standards, like the old branch where there's a lot of work to do, and that's where the bulk of our investments going forward are going to be. And another important thing we mention is this agreement with Servipag. So this agreement is actually very important because today, a lot of branches -- we're very strong in cash management. So let's say, we have a large construction company. They pay their workers with Santander, but a lot of these workers, still an important portion, do not have a checking account or a debit card account or they prefer just to receive their monthly salary in cash.

So at the end of the month or the day they're paid, we have a lot of our branches, which are cluttered. So this agreement with Servipag will permit a lot of people who do things at our branches will have 200 more cash payment centers to pay bills, to get their salary, to pay loans, et cetera. So this will really permit us to move forward more rapidly in the transformation of our branches, okay? So that's going to be an important process going forward, which will permit us to be more and more productive and definitely lower square meters. I don't know how many branches will be closed, but definitely, the branches will be much more effective and much more productive.

[Operator]

Our final question today looks to be from Mr. Abraham Martinez from Fitch Ratings. It looks like we have no further questions. I'll pass the line back to the management 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. We will now be concluding the call and closing all lines.