Banco Santander-Chile

NYSE:BSAC

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 Banco Santander-Chile Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Emiliano Muratore. You may begin.

[Emiliano Muratore, executive]

Good morning, everyone. Welcome to Banco Santander-Chile's Third Quarter 2020 Results Webcast and Conference Call. This is Emiliano Muratore, CFO. And I'm joined today by Robert Moreno, Managing Director of Investor Relations; and our Chief Economist, Claudio Soto. Thank you for attending today's conference call. We hope you all continue to stay safe and healthy.

During the quarter, Chile has begun a gradual reopening, which so far has been working well to control the health situation. We have a lot to discuss today with various important messages. Claudio will start with an update on the economy and the macro scenario. Then we will go into the results of the bank during the quarter. And finally, we will explain how we continue to progress in our digital strategy and other initiatives.

So now I will hand the call over to Claudio.

[Claudio Soto, executive]

Thank you. Please turn to Slide 4. During the third quarter, the pandemic has been receding in Chile, allowing a gradual easing of lockdowns. The reopening strategy involves going through various phases. Stages are defined at the communal level considering not only local indicators but also regional and national information. Currently, less than 10% of the population is still in stage 1 with full lockdown.

As you can see on Slide 5, the reopening process has allowed mobility to resume, helping the economy to kickstart once again. Households have received substantial liquidity thanks to the pension fund withdrawal of about USD 15 billion, equivalent to 6% of GDP, and the government cash transfer programs. This strong injection of resources will continue to boost consumption until the end of the year.

On Slide 6, we show that the economy began its recovery slowly in June. In August, we saw a much stronger rebound, thanks to the increase in mobility and the liquidity shock. September's data show an even faster increase in activity. Retail sales are running above pre-coronavirus levels. Business confidence attained its highest standing since last October, with the overall perception of the country situation reaching optimistic territory. Export grew favored by a high copper price, and imports contracted less than in previous months. Employment has also begun to rise. As long as the pandemic remains subdued, the recovery should continue throughout the rest of the year.

On Slide 7, the economy should -- as seen on Slide 7, the economy should contract between 5% and 6% this year and recover during 2021. Inflation will remain contained as large gaps in the economy still restrain price increases. Therefore, we believe it will continue below the 3% target during 2021 and converge toward this level by 2022. With this, the Central Bank will maintain the interest rate low for several quarters.

Finally, as seen on Slide 8, the constitutional reform process has officially begun. Last Sunday, October 25, the constitutional referendum made it clear that there was a strong support for the -- from the population for a new constitution. The Approve option won by a wide margin as well as the option for a Constitutional Convention as the board in charge of writing the new text. The election of the Constitutional Convention members will take place on April 11, 2021. They will have up to a year to propose a draft that will be voted for in an exit referendum by mid-2022.

[Emiliano Muratore, executive]

Thank you, Claudio. We will now move on to explain our strong balance sheet and the results in the quarter, which started to show positive trends as the lockdowns were eased.

If we move on to Slide 10, net income in the third quarter increased 23.9% quarter-on-quarter, totaling CLP 105 billion. It is important to point out that third quarter results include additional voluntary provisions in the amount of CLP 30 billion recognized in order to increase coverage ratios, considering the uncertainty surrounding the potential impacts on credit quality of the COVID crisis.

In the quarter, the bank also recognized CLP 34 billion in regulatory provisions set aside for FOGAPE loans due to a regulatory change in these loans' expected loss models. Since August, we have seen our results recover in line with the easing of lockdowns. In the graph on the left on this page, we can see the monthly evolution of operating income net of provisions during the year, with August and September showing positive trends. This has contributed to a stronger quarterly return on equity of 11.5% compared to 9.5% in the second quarter.

On Slide 11, let us begin with the analysis of the evolution of net interest income. As of September 2020, our NII on a 9-month basis has shown strong growth of 10.5%. Our NIMs, that reached 3.7% in 3 quarter -- in the third quarter, were mainly affected by the focus on growth in low-yielding but less risky assets and the 0% U.S. inflation rate in the quarter. The good news is that inflation is expected to pick up in coming quarters which should boost NIMs back to the 4% level.

In Slide 12, we show that despite the adverse scenario for NIMs, the successful management of the balance sheet has led to strong NII growth compared to our main peers and the rest of the banking system as we have successfully managed our cost of funds. This improvement in the funding mix can be observed on Slide 13. Our noninterest-bearing demand deposits have grown 47% year-on-year and an impressive 12% quarter-on-quarter. The bank recorded for the first time a higher balance of noninterest-bearing demand deposits than time deposits in the quarter. Overall, market share and demand deposits reached 21.6% in August, increasing significantly versus last year. Overall, the solid management of our funding mix, focusing on our most cost-efficient funding products, has been vital in supporting our net interest income.

On Slide 14, we can see that the high demand of the demand deposits was common to various client segments due to growth of retail checking accounts and continued strength in the bank's transactional banking services for companies. Moreover, in the quarter, the demand deposit growth was also driven by the effect of the withdrawal from pension funds, increasing individual's account balances in the quarter and SCIB, our corporate banking area, was an important payer of these funds on behalf of the Chilean pension fund.

The average cost of our nominal peso time deposits also continue to descend as can be viewed in the graph on the left, with our time deposits now paying around 0.5%, in line with the monetary policy rate, and below that of our main competitors.

On Slide 15, we review loan growth. Loan growth decelerated in the third quarter as demand for FOGAPE COVID lines dried up and due to less demand for working capital lines on behalf of corporate. In terms of FOGAPE loans, as of the end of the quarter, the bank had disbursed approximately CLP 1.9 trillion of these loans, which represented around 10% of our commercial loan book. Demand for FOGAPE loans started strong in May and has been diminishing each month thereafter.

Lending to individuals continue to fall with consumer lending contracting, as our clients remain restrictive in their consumption behaviors. At the same time, the payment behavior [ incline ] , especially in consumer lending, has remained very healthy, leading to positive asset quality ratios as we can observe in Slide 16.

In this slide, we show the breakdown of asset quality by loan portfolio. So far, the NPL and impaired loan ratio has shown good trends, due in part to the payment holidays. It is important to point out though that in consumer loans, as of August, most of the reprogrammed loans came due and therefore the NPL and impaired loan ratio reflect very good payment behavior following the end of these payment holidays. The impaired loan ratio for the -- remained steady at 5.6%, the NPL ratio at 1.2% and the coverage ratio, including voluntary additional provisions, reached 552% for our consumer loan book.

Our strategy of focusing consumer loan growth among high income earners and the injection of emergency liquidity measures to household has helped to maintain good asset quality and consumer loans.

The coverage ratio for the whole loan book reached 199%. The NPL and impaired loan ratio remained steady quarter-on-quarter at 5.3% and 1.6%, respectively. Coverage ratio have risen across all portfolios as we created voluntary provisions to make up for any shortfalls generated by the payment holidays.

Regarding the evolution of payment holidays, Slide 17 show the evolution of these through September, which until now has been very encouraging. As we can see from this diagram, 29% of loans with payment holiday expired by the end of September, and 98% have resumed payments in a normal fashion. This includes almost all reprogrammed consumer loans.

On Slide 18, we present the calendar of maturities for reprogrammed loans in the coming months. The majority of FOGAPE loans begin to come due in December, and the average state collateral guarantee covers 78% of these loans.

In October, an important amount of reprogrammed mortgage loans resumed payments, also with reassuring trends. As of October 28, 97% -- sorry, 98% of these loans were paying normally. When comparing the early nonperformance of these clients in October to their same behavior before the pandemic, payment behavior has actually been much better. In March, for example, these same clients had an early nonperformance ratio of 4% compared to 2% now. These are very good signs and reflect the quality of the retail loan portfolio.

On Page 19, we also demonstrate how this good payment behavior is due to our prudent risk policies in recent years. In this slide, we show the evolution of the growth of impaired loans and charge-offs in the last 12 months, a good indicator of the pipeline volume of poor quality loans. In absolute terms, compared to our main competitors, we show the lowest growth rate in this indicator in -- since 2015. We also present this as a percentage of loans, and we have the lowest overall rate at 1.2%. This points to positive future trends and the cost of risk.

On Slide 20, we show how these good asset quality indicators led to a lower cost of credit in 3Q, which was 1.5%. Remember, this includes the CLP 30 billion in additional provisions and CLP 34 billion for FOGAPE loans. With this, our year-to-date cost of credit reached 1.65%.

Moving on to Slide 21. We believe that with a positive evolution of reprogrammed loans coming due, the cost of credit is expected to continue descending in fourth quarter. In fact, preliminary figures are pointing towards a cost of risk around 1%. However, our Board, considering the ongoing risk of new waves of COVID infection, has instructed management to continue recognizing additional provisions in fourth quarter. Including these impacts, the cost of risk should still be inferior to 1.3% in the fourth quarter, and the coverage ratio should continue to rise.

In Slide 22, we take a quick look at noninterest income trends. After a strong second quarter, financial transaction income decreased as a result of lower realized gains from our available-for-sale portfolio. The bank's fixed income liquidity portfolio only includes instruments that are high-quality liquid assets, such as Chilean sovereign risk and U.S. Treasury. This lowered nonclient treasury income was compensated by solid demand from client treasury products.

Fees also fell in the quarter by 1%, still affected by lockdowns and lower economic activity. Insurance brokerage and checking account fees were also hit by the new cyber-fraud law. As we will soon see, the strong acceleration in account openings should help to compensate this effect in coming quarters.

On a positive note, card -- fees from cards, credit card and debit cards, increased 47% Q-on-Q and 26% year-over-year due to higher online purchases with our cards, especially new Santander Life clients. The economics of our cards has also improved since we moved to the interchange fee model.

On Slide 23, we show the evolution of efficiency and expenses. Our efficiency ratio was 41.5% in the quarter and 40.3% year-to-date. Operational expenses remained under control increasing only 3.1% year-on-year and decreasing 1.1% quarter-on-quarter. The controlled cost growth includes the incorporation of Santander Consumer Finance last year as well as technological costs associated with our investment plan and digital initiatives.

Regarding our capital ratio on Slide 24, the bank finished the quarter with very strong ratios. Our core capital ratio reached 10.7% compared to 10% at the end of June. In August, the CMF published a new treatment for FOGAPE loans, and the risk weighting was lowered from 100% to 10%.

Our total BIS ratio, as can be seen on Slide 25, reached 15.1%, the highest ratio in the last decade, due to solid capital management during the year. On a year-on-year basis, the bank's risk-weighted assets have only increased 3.2% compared to a 22% increase in regulatory capital.

As we show on Slide 26, with these capital ratios, the Board has proposed to pay the remaining 30% of 2019 shareholders' net income that was set aside in retained earnings in April this year for a total payout of 2019 earnings of 60%. This, if approved by shareholders, this corresponds to a dividend payment of CLP 0.88 per share and is equivalent to a dividend yield of 3%, considering the share price on the date it is announced -- this was announced. This will be paid at the end of November.

In the final portion of this presentation, starting on Slide 27, we would like to update everyone on our most significant strategic and business initiatives. On Slide 28, we start out with some good news from the ESG front from Vigeo, which completed its annual ESG rating of the bank with a 94% reporting rate compared to 68% for the sector average. We scored high in various categories, including the environment, due to the decrease in our CO2 emission; labor-related indicators to our high percentage of women in the workforce; and human right indicators; as well as strong corporate governance policy.

As summarized on Slide 21 -- 29, sorry, we continue to advance in our different strategic initiatives, mainly focused on our digital [ platform with ] our USD 380 million investment plan.

As we show on Slide 30, we are also beginning a process of reopening the bank. As lockdowns have eased, 25% of our central office employees have begun to go back to the office under strict hygiene protocols. 90% of our branches are now open, including the WorkCafé. We even inaugurated a new WorkCafé in the quarter. These branches now total 54.

The real winner in 2020 has been our digital channels. We continue to increase our market share in digital clients as measured by the CMF, up to 35%, up 3 percentage points in the last 12 months. Given the strong growth of our digital offer as well as the lockdowns due to the pandemic, currently our clients are performing over 10x more transactions digitally than through branches. Our digital client base continues to grow at a strong pace increasing 11% quarter-on-quarter.

The main reason for this strong rise in digital clients and transactions, as we illustrate on Slide 31, is Santander Life and Superdigital. Superdigital has already passed 100,000 new clients. And in the third quarter alone attracted 92,000 new clients, and is well on its way to reach at least 150,000 by year-end.

Santander Life has been the real game changer in the Chilean financial system this year. In the third quarter, the amount of new Life clients was approximately 230,000 compared to 105,000 in the second quarter. At the current growth rate, Life is well on its way to reach 500,000 clients by year-end, of which more than 75% have entered the bank through a 100% digital onboarding process, mainly smartphones.

As a result, and as we show on Slide 32, our market share and checking account opening this year has been stellar. According to the latest data, we have available, which is as of July, Santander-Chile has opened on a net basis, this is the difference between accounts opened and closed, 42,000 accounts -- checking accounts on a net basis compared to a net closure of 10,000 accounts in the rest of the system. It is important to point out, this figure doesn't even include the large jump in checking account openings in August and September through Santander Life. As a reminder, in August alone and in September, Santander Life opened 60,000 to 7,000 (sic) [ 60,000 to 70,000 ] new clients.

This strong preference for our bank is also visible in the latest NPS scores. As of October, our NPS score reached 48, placing us in sole possession of the top 1 position for the first time with strong marks in image, service quality and product quality.

Finally, as we show on the next slide, our success in digital banking initiatives this year has been so outstanding that we'll be holding on November 19 our first Santander Digital Talk, hosted by our President, Claudio Melandri; and our CEO, Miguel Mata. This 2-hour event will include a visually eye-catching presentation on our digital strategy as well as a live Q&A session with Claudio and Miguel. Please don't miss this event. The official invite will be e-mailed to you soon.

In summary, on Slide 34, we believe third quarter was an inflection point. As lockdowns eased, economic activity began to slowly resume. Loan growth has not reactivated yet, but demand for COVID-19 reprogramming has decelerated. Asset quality of the reprogrammed loans coming due has been better than expected so far. The cost of credit, even with the recognition of further additional provisions, should continue to decline this year. Demand deposit growth has been stellar. Our digital channels have driven record growth levels of account opening and have led us to the #1 spot in NPS. We also finished the quarter with solid capital ratio, and the Board has proposed distributing another dividend.

Our results have slowly begun to improve. We believe NIMs have bottomed out and should rise back to more normal levels in the fourth quarter. Fees should also gradually rebound driven by card and checking account fees.

Finally, costs also remain under control. This means the final quarter is looking good -- the final quarter of this year is looking good with an expected ROE of 16% to 17%. There is still uncertainty regarding the recovery of the economy given the possible second wave of the pandemic. But we are on track to see profitability to continue to recover in 2021.

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

[Operator]

[Operator Instructions] Our first question comes from the line of Ernesto Gabilondo with Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

My first question is on the political and economic outlook. I will appreciate your thoughts on the potential second round of pension fund withdrawals. And the uncertainty on the constitutional process, given that next April there will be 100% new members. In this last point, do you see this will be balanced? Or do you see a concentration of a political party? Also given that the government has been receiving a lot of the demand and that the government has put a lot of effort to do fiscal and monetary measures, we're seeing a higher debt GDP. So do you expect a new tax reform next year? And how do you think all this will influence on presidential elections of next year? I know a lot of questions on the macro side, but I would like to know your thoughts.

And then my second question is on your provision charges and cost of risk. I know that you have been creating preventive provisions, and the cost of risk has averaged 1.6%. However, when compared to the 2009 crisis, I think the cost of risk used to be at 2.5% and the economy declined around 1.5%. So now the economy is expected to decline around 5%, 6%, and you have a lower cost of risk. So I would like to know why is this difference? And on the other hand, we have seen that 29% of your deferred clients resume payments in September and that only 2% is delayed. So again, I just want to know, if this is the reason why you are having a lower cost of risk or what should we expect going forward and considering that, I think, you have clients resuming payments in October and November.

[Emiliano Muratore, executive]

Thank you, Ernesto, for your questions. Claudio, are you around to go to the first one?

[Claudio Soto, executive]

Okay. So there are many questions, many, many things there. So let me begin with the 10% withdrawal. It's not clear yet what will happen with the second -- the proposition for a second withdrawal. It passed a first stage in the House of Deputies and they need to be approved at the full house now. Remember that this is a constitutional reform. Therefore, you need high quorums to be approved. It's not clear yet what will happen with deputies of the Chile Vamos Coalition. It's not clear yet what will the government do. They have announced some -- there are some hints that they could go to the constitutional court to avoid this project to become a law.

On the other hand, deputies from the official coalition are asking new measures on the government side in order to counteract this proposal. So there is still some uncertainty. There is certainly a chance that this proposal will go again. And that will mean an extra boost of liquidity to households. We already saw that the first withdrawal implied a huge liquidity shock that have the economy to recover in August and September and probably still during October. So in case that you have a second withdrawal, you will have a boost on consumption. But it will create, of course, more tension on the reform of the pension system that is currently being discussed in Congress.

Now regarding the constitutional process, the next stage is, of course, the election of the constitutional members, the members of the Constitutional Convention. That will take place in April. Yesterday, it was voted a law that will include for including indigenous people within the convention. So there are 155 members to be elected, plus 23 members from indigenous communities. The election system for the members of the Constitutional Convention is the same system that we have for electing deputies, where parties can present a list or a couple of parties might create a pact, so a joint list. The system works with the so-called [ don't meddle ] where you tend to penalize a division within coalition. So if coalition goes divided in several lists, it gets a penalty.

Therefore, we expect the composition of the constitution in terms of ideological position, if you want to be, not too different to what we have today in Congress. So the center should be represented by 1/3, then the more left to 1/3 and the more right-wing ideology to be represented by at least 1/3. And you have to bear in mind that there is 1/3 precondition for any norm to be included in the new constitution. Therefore, there would be coalitions between the center and the left or the center and the right in order to advance with certain proposition.

Of course, the process involves uncertainty. We will be going through a period of at least 2 years of uncertainty before electing the members and then before having the exit referendum. But in the end, it could be a positive process in the sense that we reached a common agreement on the basic rule of the game for the future. And that could be -- there is a chance to have a positive outcome there that would be beneficial for the economy as well.

So by the end of the year, we will have a presidential election. Polls suggest today that the front-running candidate is a center-right mayor of one comuna in Santiago, Joaquín Lavín. He's one of the front runners. So probably he will be one of the candidates. And today he has the highest chance to be elected. That -- of course, the campaign will be -- will have a focus on the content of the constitution, that will be part of the political campaign.

This is more or less the outlook that we see in political terms. There are several challenges ahead. But at least the process, all the violence that we saw last year, has been conducted through an institutional process, and we see now more agreement in terms of continuing with this institutional process to produce changes.

Your last question about taxes. Mr. Briones has just summoned a commission of several economies from different parties and political views from the left to the right in order to propose amendment to the current tax code. The focus will be more [ evasion ] clauses to close certain loopholes that we have currently in the tax system. The commission will have until July to propose a draft for amendment. It's very difficult to see this government going again to Congress to produce a reform. They will have very little time in office before -- after they receive the proposal. So probably this will be material for the next government [ to fix ] loopholes in the tax code as the first stage in order to increase revenues.

[Emiliano Muratore, executive]

Thank you, Claudio. Before moving to your second question, Robert will address it. I mean I would like to mention regarding the potential second withdrawal from pension funds that, leaving aside the long-term discussion and effects on pensions, definitely that's a big issue, but leaving aside that for a while, the short-term effects definitely are showing higher liquidity for households. As you can see on the Slide 5 in the webcast, almost 400,000 people in the third quarter left the negative credit bureau in Chile, meaning that definitely part of that money went to paying back debt. You can also see that in the asset quality for our balance sheet and for the rest of the system. And so -- and the second effect is consumption going up. And that's also having some pressure on inflation and prices being so low as we had in the first part of the year. So those short-term effects of the potential withdrawal, I mean higher liquidity, lower leverage for families, higher consumption and prices not so low are not negative effects for banks in the short run at the cost of definitely the pension effect that the decision could take -- could have on the long run.

[Robert Moreno Heimlich, executive]

Yes. So taking off from that. So back in 2009, the big difference is that the economy obviously contracted a lot more at this time. But the help that people have received has been much bigger this time around, okay? And that's basically what we try to show on Slide 5, as Emiliano said. Just in August and September, $15 billion was injected into the economy, basically people's pockets. And obviously some people had to use that for basic necessities, some people re-saved it and some people went ahead and continued paying off their loan obligation.

Another really important factor, there's 2 other very important factors comparing this crisis with 2009. First of all, today our coverage ratio is already at 200%, okay? And in consumer lending, which has already finished the payment holidays, it's more than 500%. Back in 2009, our total coverage ratio of NPLs was only 74%, okay? So over the last 10 years, because of internal changes and regulatory changes, we've really built up our coverage ratio. So that's a big reason why the cost of risk is trending much better this time than in the previous crisis. So I think that's really good news.

And the other thing is, remember, we've been saying for a long time, back in 2009, Santander Banefe represented probably 12% to 15% of our loan book for individuals, okay? After what happened in 2012 with the increase in -- decrease in maximum rates and other regulations, remember, we got out of that business and today Santander, the low income is less than 1% of our loan book. That's absolutely key. Also is why this time around the cost of credit is significantly -- not significantly but different to trend than when it was in 2009. So a mix of a much more proactive government this time around, a much higher coverage ratio built over the years and a significantly different loan mix has ended up in this lower cost of risk.

[Operator]

Our next question comes from the line of Juan Recalde with Scotiabank.

[Juan Recalde, analyst]

So my question -- I have 2 questions, one related to provisions and the second one related to expenses. So in terms of provisions, taking into account the positive evolution of the scale of programmed loans and the fact that you are expecting additional provisions in the fourth quarter, how should we think about provisions in 2021 in next year? What's the base case that you are working on?

And then, the second question related to expenses. So we've seen that noninterest expenses rose around 3% so far this year. And so what noninterest expenses growth can we expect in 2021? What's the base case that you are working on?

[Emiliano Muratore, executive]

Okay. Thank you for your questions. I mean regarding provisioning for 2021, that's a bit like long term under the current circumstances. So we don't want to give much guidance on 2021 yet. As you can see, our forecast for last quarter is relatively encouraging because we are seeing the cost of risk around 1.2, 1.3 even considering additional provisions. And that -- why is that the case? Because basically the situation of the portfolio and the behavior of clients in paying their debts has been so good that, let's say, the natural cost of risk is going even below pre-COVID levels, which at this time we think that it's maybe too aggressive to, let's say, not take advantage of that in order to build up some additional provisions and increase coverage.

So looking into today, 2021, as I said, it's a bit long term because we are still waiting for the evolution of the pandemic here. We haven't had a second wave yet, but there's a risk that we may have it. But it's also true that we have built a good outstanding of voluntary provision. The coverage is high. So we are, let's say, relatively comfortable looking into 2021 under a relatively benign scenario. And so it's not -- let's say, it's not easy to see a cost of risk on 2021 going above this year under a base case scenario. I think I would need some more time. Maybe for the next quarterly call we will have more visibility over a potential second wave and we can give more guidance. So we don't want to go much further than this guidance over the fourth quarter.

And regarding expenses, basically our idea is to keep the discipline on efficiency and expenses. And that means definitely not growing above inflation. I mean that's the kind of a threshold we always try to keep, to have expenses growing at or below the inflation rate. So you can expect that for the future. I mean expenses not growing above inflation or hopefully slightly below. We don't want to strangle, let's say, the investment plans and all the digital things we are doing. So that's why we never target efficiency going this extremely low we got. At the end we think that this might be bad for our business, but definitely keeping discipline on cost and not growing above inflation.

[Operator]

[Operator Instructions] Our next question comes from the line of Sebastián Gallego with the CrediCorp Capital.

[Sebastian Gallego, analyst]

I have couple of questions. Going back to the constitution, I think this is a key point and maybe just a follow-up on a previous question. I know you mentioned couple of points, but I just want to ask what are your main concerns going into this new constitution? This should be a long process. The outcome of the constitution vote was unexpected in terms of the gap between the yes and no. And I'm just wondering if you could provide more color on what are your main concerns going into the constitution process? And what could be potential game changers for the industry?

Second question is kindly related to the first one, but is more associated -- or more broad in terms of regulatory risk. We have seen regulatory risk increasing, not only in Chile but also in other countries of the region. What are your main concerns in terms of regulatory risk going forward? That will be the 2 questions.

[Emiliano Muratore, executive]

Okay. Thank you, Sebastián. Claudio, can you please comment on the first?

[Claudio Soto, executive]

Yes. Okay. So in terms of the extension of the process, it will take up to 2 years. It's already defined. The first stage is April with the election of the Constitutional Convention members. And then they will have up to a year, no more than that, to produce an outcome. And then there is the exit referendum. So the process, the extension of the process is that one. It cannot be longer than that. If the exit referendum turn out -- if people turn out a Yes to the proposal of the Constitutional Convention then we'll remain with the current constitution. That is pretty clear.

Now what are the key elements of the constitutional debate, if you follow more or less what I'm discussing several stakeholders, the first one, I would say is, the political system. Chile has a very presidential system that has been -- has created certain tension that we see currently with the parliament, but also in terms of the regional distribution of power and so on and so forth. So the first element will be on the political system, to, in a way, sort of soft out a little bit the power of the president in favor of Congress and also probably in favor of regions within the country.

The second discussion is about the so-called social rights. It's possible that the constitution will include more social rights. It's not clear yet what is the -- what will be the status of those rights, whether those will be sort of roadmaps for the political public policies in a long-term horizon or there will be some mandatory requirement for the state to sort of provide certain basic rights. The risk there is that, you start putting pressure on the size of the state and put pressure on the level of expenditure. But it's not clear yet, what will be the final outcome in that term.

Other discussion are about the recognition of indigenous people. And there might be certain discussion in terms of property, about the mining code and about the water rights. In the case of the mining code, the tradition in Chile is, it goes much beyond the constitution that we currently have. Chile has been historically a country where the mining sector is very important; therefore, we don't expect much changes there.

In terms of water rights, there have been a discussion since 8 years already going through in Congress. And probably there, there will be some amendments on what we have now in terms of giving the government or the state more tools in order to manage the use of water, and to re-ensure the uses for human consumption as the first level in terms of the different possible uses that we have with water.

I would say, those are the sort of key element of the constitutional reform. There is nothing specific about the financial industry that we can foresee in the discussion currently. Now there is, of course, the risk of the tax burden going into the future as long as the outcome of the constitutional process tend to put more pressure on fiscal expenditure and therefore eventually there will be some need of raising revenues. But that is a second round, I think, outcome of the process. What is more? I think more on top of the list is the discussion about the political system.

[Emiliano Muratore, executive]

And thank you, Claudio. Going to your second question, Sebastián, regarding regulatory risk, I agree that in this context that risk has increased. It's also, I think, true that in Chile, I think, we are a bit like ahead of that trend. I mean when you look back what has happened in the last 10 years, I was here writing a list, I have like 10 or 12 different points, from the reduction of the maximum legal rates, now the portability law, the introduction of this auctioning process for insurances, of mortgages, the automotive repayment of overdraft lines, let's say, the provision of overdraft fees, the freeze on prices, the law that, let's say, makes banks responsible for digital fraud, for clients. And also you can also include the increase in taxes that the country has had. So we have got a lot. So looking forward, it's not so easy to imagine other areas where we can have more regulatory pressures. As of today, there are only 2 initiatives being discussed; at a very early stage but being discussed. One is like a project that the Minister of Finance to the Congress in May or June regarding regulating the interchange fees. And that's not relevant for our business today because we are not yet in the [ acquired ] business. But as you know, it's one of our initiatives. So that is still in very early discussions. And we think that maybe out of that, we get some kind of regulation on interchange fees. But we feel comfortable to expect the government trying to balance all the different aspects of the payment systems and trying to promote more adoption of cards and electronic payments and all that in favor -- in contrary of cash. And that's why we don't -- we are not very concerned in that sense.

And the second is, one that was approved by the Lower House last week regarding insurances. Now it's at the Senate, the Finance Commission of the Senate. Already the Minister of Finance and the President of the Financial Market Commission, the financial regulator, were presenting and basically they stated that they see this as not good or a positive project for the system, for the economy. Basically, that project asked the banks to pay for half of the cost of the different credit-related insurances. So that's something, as I said, in early discussion, we expect that not to progress in the Senate. In general, the regulator and the government is showing their concerns. But apart from those 2 initiatives then, it's difficult to imagine other areas where we can have more regulation, apart from the ones we already have.

[Operator]

The next question comes from the line of Gabriel Nóbrega with Citigroup.

[Gabriel da Nóbrega, analyst]

I also have 2 questions. My first one is sort of a follow-up towards provisions. I understand that you're saying that 90% of the clients which have adhered to the grace period program, they are already paying. We're also having the benefits from the pension withdrawal. And you also mentioned that if there is a second pension withdrawal, this could even help more the delinquency of your clients. So I'm just wondering, if maybe you made too many provisions and if we could expect a reversal of provisions during [ 2021 ].

And as for my second question is actually related to dividends. We're seeing that your common equity Tier 1 ratio reached levels of around 10.7%. And you were guiding that we are supposed to start seeing better net income through the incoming quarters. And so I am just wondering if you could not maybe raise your historical payout ratio, which, if I'm not mistaken, has been around 50 -- some 50%; if it could not even be higher next year given the higher capital that you have and also better prospects for organic capital generation over the coming quarters.

[Emiliano Muratore, executive]

Okay. Thank you, Gabriel. I will take the first one, and I will leave the second one for Robert. And regarding provisions, I mean I think that we are not expecting any reversion of onetime provisions in the short run. I mean we have seen that in some other players in the market. We don't think that now is the time to do that. Going forward, definitely, if the pandemic begins to, let's say, get better, the second wave is not as bad as in other places here in Chile, and delinquency keeps at these levels, definitely we won't stop building voluntary provisions. And there is a chance, as I said a moment ago in time, to think about reversions but I don't see that in the near future. But as you can see, even building voluntary provisions, we expect to have cost of risk at decent levels. I'm definitely going to the previous questions, had much better levels than the 2008-2009 crisis. I mean, so, yes, I think it's fair to expect that. But in the long run, subject to these trends keeping in place. I mean the uncertainty today, we think that it's high to think about reversion provisions instead of keeping them or even increasing them if the underlying delinquency and asset quality stays as good as it's now.

[Robert Moreno Heimlich, executive]

Okay. And regarding the other question, dividend and dividend policy. You're correct. As we said in the presentation, we finished September with a core capital ratio of 10.7, that was 70 basis points higher than in June. On top of that, our total BIS ratio reached 15.1, which is the highest level since 2010. And that's why the Board is proposing an additional payout this year of 30% of 2019 earnings that we didn't pay. So remember, in April this year, we had a payout of 30%. We're paying out another 30%. So the total payout for 2019 earnings will be 60%, similar to what we paid in previous periods.

Going forward, how much we pay of 2020 earnings? Once again, everything is pointing towards going back to a more normal payout, okay? But as we said, regarding like the forecast of provisions and so forth, there's still a lot of uncertainty, okay? But if trends continue, we should be paying around 60%. We don't rule out going again to this 30-30 payout method because that gives a little more flexibility in uncertain times. But -- and on top of that, risk-weighted asset growth has been relatively low in the second half. As we said in the call we're kind of at an inflection point where there's a lot less demand for clients for emergency funding and FOGAPE loans. But we still haven't seen a reactivation of loans like the consumer. Eventually, that will come, okay? So next year, there could be a rebound in loan growth if economy continues to rebound. So -- and don't forget that in December of next year, we begin with Basel III. Everything points to, for now at least, that our Basel III ratios will be very similar to what the Basel I ratios are.

So to make a long story short, everything is point to going back to normalized payout. That's why we're paying something more now. But given the uncertainty, it's not 100% share. So -- but we should be going back to 60% payout over 2020 earnings. But once again, it depends on what happens in the next few months.

[Operator]

Our next question comes from the line of Gustavo Schroden with Goldman Sachs.

[Gustavo Schroden, analyst]

Question is regarding the loan growth. You just mentioned that we should expect a rebound in loan growth next year. I wonder if you could share with us more info about the loan growth you're expecting, especially on the mix. Should we expect a better mix for NIM next year? I mean could you elaborate more in which lines should we focus on next year?

[Emiliano Muratore, executive]

Yes. Thank you for your question, Gustavo. Yes. I mean, going forward, again, we need to talk about uncertainty, but I think that there are a couple of important points going to your question. First, this year we are showing consumer loans falling for us and for the system, I mean, because of, say, the low consumption in the economy but also the deleveraging we are seeing in households from the money they got from the government and from the pension funds. So I think that going forward we can expect consumer loans to grow, let's say, faster than the rest of the portfolio, considering the starting point, considering the form we are having this year. That should be good for NIMs. I mean the mix in that sense should be better. We think that as a whole we expect the multiplier to GDP -- I mean loan growth to GDP multiplier for next year, we expect it to be slightly below the historical terms as a whole. But then the breakdown, we do expect consumers to be -- consumer loans to be above that. And commercial loans to be below that because, on the contrary, this year, we had all the FOGAPE program that basically represents like 11% of the portfolio. So basically this year, if you factor out the FOGAPE loans, the commercial loans would have been falling also. They are not falling and they are double-digit growth because of that. So that on the other side gives a starting point relatively high, which should make commercial loans to grow below the rest of the portfolio and below consumers.

But also talking about the margins of the consumer loans, remember that all the FOGAPE loans were granted as a fixed spread of 3%. And so that going forward, the origination, we don't expect it to be, let's say, on FOGAPE loans. As you can see in the presentation, the demand for that has been going down. So the margins in the consumer -- in the commercial origination won't have this fixed price, which can give some room to also improvement in the margin on the commercial loans origination. And as a mix, we can expect to have a favorable mix on the spreads going forward because of this. And mortgages there will be the state growing relatively high until the midyear of this year. Now they are decelerating. We expect to have, let's say, a more normal growth going forward, maybe more in line with the average portfolio. And also spreads for mortgages are, say, at a decent levels compared to some years ago, where spreads were, let's say, below 100 basis points. Today, they are in better levels. And so that's -- I don't know, Bob, if you want to add?

[Robert Moreno Heimlich, executive]

Yes, that's basically -- actually -- so for NIMs, the outlook is a little better, as we said. NIMs were a little low in the second and third quarter because of all of these factors. We've been defending ourselves relatively well. Our NII is growing a lot because we have expanded the balance sheet. But next year, I would say the balance sheet maybe not even grow that much like this year as we normalize liquidity. But I think the loan mix should be better. And obviously there could be -- the rates should remain low. Our deposit cost, our interest-bearing deposits should -- the costs remain low and there could be a little bit higher inflation, which should also help NIMs a little bit as well. So I would say, in general, the outlook for loan mix is slightly better beginning next year, and for NIMs beginning already in the fourth quarter.

[Gustavo Schroden, analyst]

Very clear. Just one follow-up here. So assuming that you have probably a better NIM next year, considering information that you just said, and I mean if you have some normalization in provisions, so should we expect the ROE that is 15% to 17% next year as well?

[Emiliano Muratore, executive]

We don't want to talk much about ROE going -- next year. But yes, I mean, the part on the revenue side on the provisions are like you said, I mean, then, yes, you can do the math, and you can reach the level. But the uncertainty on cost of risk is still higher. I would say that maybe it's higher than on the NIM side, that all the forces on the NIM side are, I think, a relatively predictable, if you want, because inflation definitely should rebound and the mix effect, which was mentioned, will be there. But then to talk about the -- with a high level of uncertainty about cost of risk is too early for us.

[Operator]

I'm showing no further questions in the queue. I would now like to turn the call back over to management for closing 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. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.