Banco Santander-Chile

NYSE:BSAC

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. We would like to welcome you to Banco Santander Chile Third Quarter 2021 Conference Call on the 29th of October 2021. [Operator Instructions] The format of today's recorded call will be a presentation by Banco Santander Chile management team, followed by a question-and-answer session.

So without further ado, I would now like to pass the line to the CFO of the company, Mr. Emiliano Muratore. Emiliano, please go ahead, the floor is yours.

[Emiliano Muratore, executive]

Good morning, everyone. [Technical Difficulty] Okay. Sorry for that.

Good morning, everyone. Welcome to Banco Santander Chile's Third 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. Yet again, the bank has achieved top results with a strong ROE and solid financial performance, thanks to the success of our digital strategy and other initiatives. But before we get into our results, Claudio will start with an update on the economy and macro scenario beginning on Slide 4.

[Claudio Soto, executive]

Thank you, Emiliano. Since our last call, sanitary conditions in Chile have improved substantially. Despite the recent surge in daily COVID cases due to the Delta variant, new infections remain relatively low. And the mortality rate has receded. That has occurred in a context where more than 75% of the population have received a full immunization program and 25% have got the booster.

As a result, the state of emergency that ended in September has not been renewed, and most of the sanitary restrictions have been lifted. The economy has surpassed its pre-pandemic level and has reached its potential, although with some heterogeneity across sectors. Growth has been led by consumption pushed by government cash transfers and pension fund withdrawals. Investment has also recovered but has not yet reached its trend. Employment continues subdued with a labor force that is still substantially below its pre-pandemic level.

Going forward, we should see further progress in employment as the sanitary condition allow people to resume their participation in the labor market. Overall, we have revised upward our growth estimate for the year from 8% to 11%. In 2022, growth will moderate to a range between 1% and 2% as the fiscal impulse fades away and base effects kick in. Inflation has accelerated in response to external cost-push and one-off hikes in prices of certain services.

For the next few months, we should see further increases in inflation due to a buoyant demand, a depreciated currency and higher fuel prices. We forecast CPI inflation will close the year at 6.3%. And next year, we'll end up between 4% and 5%, converging to the 3% target in 2023. The Central Bank has accelerated the reduction of its monetary inputs by increasing the monetary policy rate twice since our last call, one by 75 basis points and other by 125 basis points. Thus, the monetary policy rate has reached 2.75%, significantly above our initial estimate. For the last monetary policy meeting of the year in December, we expect the Central Bank will increase the monetary policy rate by another 75 basis points so that it reaches its neutral level by the end of the year.

During next year, the monetary policy rate may rise further but the Central Bank will graduate the size of future monetary tightening according to the evolution of domestic demand. Medium and long-term interest rates have also increased substantially, not only in response to expected tighter monetary policy, but also because of the possibility of a fourth pension fund withdrawal and the uncertainty regarding the political process in Chile.

In this context, the peso has depreciated despite favorable copper prices. The government has begun the legislative procedure for the 2022 budget. It considers a significant reduction in expenditures minus 22.5% to reach a public deficit of 2.8%. With this, gross public debt will remain below 40% by the end of next year.

The political situation in the country is challenging. In a few weeks, there will be presidential and parliamentary elections. The results of the presidential election are still wide open and government program of some candidates have been mutating in recent weeks. In parallel, the constitutional convention has approved its internal regulation, ratifying the 2/3 requirement to approve any article. This month, they have begun writing the content of the constitutional text, which should be finished by June 2022.

[Emiliano Muratore, executive]

Thank you, Claudio. We will now move on to explain our strong balance sheet and results. Moving on to Slide 8. In the third quarter, our net operating income increased 1.2% Q-on-Q and 233.7% -- sorry, 33.7% on a year-on-year basis. Quarterly net income in third Q totaled CLP 176 billion, an increase of 68% compared to the same quarter of last year. Compared to the second quarter, net income decreased 5%, mainly due to higher other operating expenses.

Net operating income, on the other hand, increased 1.2% Q-on-Q. Year-to-date net income increased 63% with our ROE increasing from 12.5% as of September 2020 to 21.1% for September 2021. Strong client growth, higher net interest income, a strong growth of fee income, improvements in asset quality and cost control drove these results.

On Slide 9, we can see how the bank has significantly outperformed our peers in net interest margin, efficiency and ultimately, ROE, demonstrating that these impressive results are just -- are not just related to post-COVID reaction, but also due to the successful execution of our strategy, especially on the digital front.

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 13.9% year-on-year increase in NII, with a strong NIM of 4.1% in the quarter. U.S. inflation in the quarter reached 1.3%. This has triggered the Central Bank to increase the monetary policy rate, as was mentioned by Claudio previously.

Consequently, our cost of funds have started to rise, and this lowered our NIMs by 10 basis points Q-on-Q. This was compensated in part by the acceleration of loan growth in the quarter. Going forward, we expect the monetary policy rate to continue to increase, which should put downward pressure on our NIMs. On the other hand, and especially in the fourth quarter, U.S. inflation should continue to accelerate, reaching levels greater than 2% for the next quarter. For this reason, NIMs in 4Q should rebound from current levels, and we forecast a NIM level of around 4.2% for the full year 2021.

As we can observe on Slide 11, total deposits grew 16.2% year-on-year and 1.3% Q-on-Q. In previous quarters, we had seen a strong increase in noninterest-bearing demand deposits, leading to a 24.9% year-on-year increase. Time deposit growth accelerated in the quarter, growing 6.2% compared to June, with the increase in interest rates making this product more attractive.

However, as we can see on Slide 12, the interest rate we're paying on this product remains well below that of our peers and far below that of the monetary policy rate, demonstrating our successful management of our cost of funds. Also on this slide, we show on the right-hand side that while there has been a slowdown of demand deposits from our larger commercial clients, growth of retail demand deposits remained solid in the quarter.

On Slide 13, we review loan growth. Total loans increased 3.1% Q-on-Q and 2.5% year-on-year as loan growth among large corporates, started accelerating in the quarter as large corporate stop funding in the form of corporate loans as the bond market remained illiquid. Our Middle Market segment also saw signs of reactivation with loans growing 2.7% Q-on-Q, driven by the acceleration of economic activity in the quarter. Translation gains from the depreciation of the peso and the U.S. also added to loan growth.

Loans to individuals increased 2.6% Q-on-Q and 7.4% year-over-year, driven by mortgage loans that continued to grow solidly at 3% Q-on-Q, and loans from our auto lending subsidiary increased 17.5% as auto sales in Chile have shot upward.

In previous quarters, the SME loan book has seen strong growth due to the FOGAPE and FOGAPE REACTIVA Program. In the third quarter, demand for this product continued to decelerate, leading to a contraction of lending to SMEs. As of September 2021, the bank had disbursed CLP 892 billion to the FOGAPE REACTIVA Program, while the total FOGAPE loan book reached CLP 2.4 trillion.

Regarding grace period, payment holidays in general, 99.5% of these grace periods are over. And only 0.4% of all loans that had previously had a grace period or payment holidays are impaired.

Moving on to asset quality on Slide 14. In this slide, we can see how the evolution of asset quality remains solid. The NPL and impaired loan ratio continued to show positive trends after the expiration of payment holidays. The coverage ratio of NPLs remained high at 259%. The NPL and impaired loan ratio decreased to 4.7% and 1.2%, respectively. These positive trends were seen across the different products as well. As we can see on Slide 15, these positive asset quality indicators led to a cost of credit of only 1.1% in the quarter.

On Slide 16, we take a quick look at noninterest income trends. Fee income had an outstanding quarter, increasing 12% Q-on-Q and almost 20% year-over-year, reflecting the fruits of our digital strategy and strong results from corporate banking. Fee growth was driven by the strong opening of checking accounts, thanks to the popularity of our Life and Superdigital product offerings.

Card fees increased 35% year-over-year due to greater card usage, while insurance brokerage also grew through our digital platforms. Furthermore, Getnet, our acquiring business that we launched in the first quarter of this year has already contributed more than CLP 3 billion in fees since its launch.

Total income from financial transactions decreased 17% Q-on-Q. Client treasury activities continued to perform solidly, growing 5.8% Q-on-Q and 17% year-over-year. This was offset by a loss in non-client treasury income due to the execution of various liability management operation to improve NIMs going forward that resulted in initial loss mainly arising from the unwinding of interest rate hedges.

The rebound in revenues in the quarter was also accompanied by good cost control, as shown on Slide 17. Operating expenses decreased 1.4% year-over-year despite higher inflation in the quarter. The year-on-year growth of administrative expenses is due to costs associated to the launch of Getnet and the advance of our digital initiatives in line with our CLP 250 million investment plan for the years 2021, 2023.

The depreciation of the peso and the rise in inflation has also negatively impacted our expenses. Despite this, the bank's efficiency ratio reached an impressive 37.7% year-to-date.

Regarding capital ratios on Slide 18, the bank finished the quarter with a core capital ratio of 9.6% and a total BIS ratio of 14.2%. At the same time, in October, the bank became the first Chilean bank to issue an AT1 perpetual bond under the new Basel III regulations. The issuance was for USD 700 million. And with this AT1 instrument, in October, our Tier 1 ratio will increase by 1.6 percentage points.

With our current profitability, we estimate a payout of 50% to 60% of 2021 earnings to be paid out in 2022. We do not rule out that we could pay this dividend in 2 tranches next year. With the current share price and the forecast for loan growth and ROE, this would signify a current dividend yield of between 5% and 6% for the bank shares.

On Slide 19, we can see the requirement of the transition to Basel III year-by-year. The phase-in of Basel III has commenced and will be fully in place by December 2025. The inclusion of market and operational risk-weighted assets will begin in December of this year. By the end of this year, we expect the minimum core capital ratio required for us will be 8.6%, including an additional buffer set by our Board with a total BIS ratio requirement of 12.8%.

In the final portion of this presentation, starting on Slide 20, we will give an update on our more significant strategic and business initiatives.

Moving on to Slide 21. During the quarter, our key digital initiatives continue to advance with great success. This has led to important improvements in profitability, client growth and satisfaction.

On Slide 22, 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 126% year-over-year and in 3Q '21, Life opened over 90,000 new checking accounts, reaching a total of 822,000 clients. Life clients also generated through September 2021, CLP 49 billion in revenue, which shows how this product line not only has a high growth rate, but also a rapid monetization.

Superdigital saw record client growth in the quarter, helped by alliances with companies such as Cornershop and Uber as a way of attracting new clients. At the end of September 2021, we reached 215,000, a 95% year-over-year increase. Further good news came from Getnet, our new acquiring business, as shown on Slide 23.

Getnet was officially launched in February and has already sold over 40,000 POS, and we sold 19,000 just in the third quarter. An important fact to highlight is that 93% of the clients that have -- that are in Getnet or SMEs, our target clients. In just 8 months, Getnet already has a market share greater than 15% in POSs. Our NPS score for this product is also strong at 74 points, helping to improve the overall NPS score of the SME segment. This product has been quickly -- has been quick to monetize with already CLP 3 billion in fees -- generated in fees since its launch.

On Slide 24, we show how our digital insurance brokerage platforms also had a positive quarter. Klare continued to expand its product offer with 28,000 insurance policies sold in the third quarter. Coming soon, a new cycle -- cyclist and new insurance product for cyclist.

Autocompara also shined in the quarter. The sale of auto insurance policies through this platform increased 32% year-over-year.

On Slide 25, we show how the bank continues its process of transforming its branch network, focusing on the Work Café model and closing less productive branches that have low client flow. The Work Café are beginning to reopen, and we recently opened a new Work Café in Puerto Natales, Patagonia. Another 8 Work Cafés are set open during the rest of 2021. With this change in our branch format, coupled with our other digital initiatives, productivity continues to rise with volumes per branch increasing 16.6% year-over-year and volumes per employee rising 16.7% in the same period.

On Slide 26, we show the tangible results of our initiatives through the record amount of current account openings compared to our peers with the latest information available from the CMF, Santander has opened 630,000 net current accounts compared to only 403,000 accounts in the whole system combined without us. With this, we have been able to increase our market share by almost 7 percentage points in 12 months from 22% to 29%.

We also 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 are now solidly established as #1 for NPS in Chile with high points as well in product quality, contact center and our web page.

On Slide 27, we show how these efforts are translating into record client growth, with the introduction of digital products, coupled with higher NPS scores in a span a few months, we quickly surpassed the 4 million client mark.

On Slide 28, we show that the year-on-year growth of clients has been driven across the board with total clients growing 14% year-on-year, digital clients increasing 39% and total clients with a current account increasing 45% year-over-year.

On Slide 29, we get into our -- some of our recent developments in the ESG world. Vigeo just finished its annual review of the bank with a rating that puts us in the advanced category with 62 points, evolving from the last time we were overviewed by Vigeo, where we had -- we were qualified as robust. We have moved from robust to advanced. This is important because today, according to Vigeo's analysis and scoring system, we are #3 among all EM retail banks .

Regarding the ESG topics as well on Slide 30. We would like to remind you that you're all invited to our next ESG Talk, taking place on Tuesday, November 16 at 08:50, New York Time a.m., where top management, including the CEO and the President of the bank together with other members of the Board and management will present the fascinating updates we have made in these themes and what is to come ahead. There will also be a live Q&A session, we hope to see you there virtually and make sure to sign up.

To conclude on the next slide, we update our guidance for 2021. The positive results achieved in these last 3 quarters permits us to be more optimistic than we were previously, and we have again revised upward our outlook for this year.

As inflation and loan growth continued to gain momentum, we expect to finish 2021 with a NIM of 4.2%, up from 4.1% expected previously. Cost of credit should remain in the range of 1% to 1.1%. We are increasing fee growth to greater than 15% for this year based on the strong client trends already mentioned.

Cost growth should remain below inflation and efficiency between 37% and 38% is what we are now forecasting. Taking all of this into account, we are revising our guidance for ROE upwards to 21% for 2021.

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

[Operator]

[Operator Instructions]

Your first question comes from Marlon Medina from JPMorgan.

Once again, first question comes from Mr. Marlon Medina from JPMorgan.

Okay. We'll go to the next question. Next question is from Mr. Carlos Gomez from HSBC.

[Carlos Gomez-Lopez, analyst]

Congratulations on the result. A couple of simple questions. The first one is at this point in time and given your experience, you had a cost of risk of about 1.1% in the last few quarters. Where do you think that with your current business mix is your normal cost of credit? And when do we get there? Is that a 2022 event? Or does it come later?

And second, and again, I understand it's difficult to project now, what do you think your loan growth is going to be for the next 2 or 3 years?

[Emiliano Muratore, executive]

Okay. Carlos, thank you. Regarding the cost of credit, obviously, you've seen our asset quality has done very well. Our coverage is quite high. Now we do expect more loan growth to slowly flow in. So we think that a normalized cost of credit without considering any type of movements on additional provisions, okay? We would like to keep that stock of voluntary provisions there for any large unexpected event in the future. So our normalized cost of credit would probably be around 1%.

And regarding loan growth, so remember, last year, we had a rather high loan growth during the pandemic given the different programs, especially SMEs this year since there's been a really high level of liquidity in companies. And in households, households have gotten a lot of money from pension funds, from direct subsidies, from the government. So that had kept loan growth subdued.

As these programs come to an end, we think loan growth should slowly recover, okay? As we said in the last call, and as you saw in the third quarter, loan growth should finish the year around 3% or 4% for the full year. And then going forward, I think slowly as the pandemic ends and we enter kind of like a normal economic cycle, loan growth should return to the normal multiplier level.

So in general, in Chile, if GDP -- loans to GDP grew around 1.5x in real term -- real terms, and then if you add on inflation, you more or less get the nominal rate we're expecting in the next 2 to 3 years. So if the economy grows 2% or 3%, we should be getting roughly around 6% -- 5% to 7% nominal loan growth in normal years, okay?

[Operator]

We will just try once again to open Marlon Medina's line from JPMorgan. [Operator Instructions]

Next question is from Mr. Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

Emiliano, Claudio and Robert and all your team. Thanks for your presentation and the opportunity. My first question is on the political landscape. Do you think that the voting on the fourth pension withdrawal could be delayed after the elections? And can you provide who are the candidates leading the polls on the presidential elections?

My second question is on your expectations for the net interest income, the NIMs next quarter and next year? Considering your expectations on interest rates for the rest of the year and next year and also the ones for inflation, where do you see the NIM pressure next year? And when do you see them recovering after the repricing of the loan book? Is this something that we can see maybe at the end of 2022? Or it should be likely more in 2023?

And then my third question is on your mid-term ROE expectations. Considering that 21% this year, well above the pre-pandemic levels, and that you will continue to see high dividend payments, don't you think that the 2022, 2023 ROE should be more around the 19%, 20%?

[Emiliano Muratore, executive]

Claudio, can you take the first one, please?

[Claudio Soto, executive]

Yes, sure. Can you hear me? Yes?

[Emiliano Muratore, executive]

Yes.

[Claudio Soto, executive]

Regarding the first question, whether the fourth pension fund withdrawal could be voted after the election? Is not yet clear.

Today, in a while, we will know the schedule of the Senate for next week. At that moment, we will know whether it has been put on schedule to be voted next week. If that doesn't occur, there are high chances that it will be voted after the first round. And given that the chances that it will not be approved are higher.

Candidates leading polls currently are to the left Gabriel Boric, and then on the center right is Kast. In some polls Kast appears as the first one, but in other poles, he appear second to Gabriel Boric. And Yasna Provoste the candidate from the Christian Democratic Party is currently in third place in most of the polls.

[Emiliano Muratore, executive]

And so regarding your questions about NIM. As you mentioned, the -- there the 2 main factors are inflation and also the short-term interest rates going up, so this last quarter, for this year, as Robert mentioned, we are expecting like the quarterly NIM to be maybe between 4.5% to 4.6%, I mean considering the level of inflation we'll have in the quarter, and that will take the full year NIM around 4.2%. First quarter next year should be, let's say, similar considering the inflation expectations we are expecting for the first quarter. But it's also true that the interest rate will keep going up.

The Central Bank, we expect them to hike another 75 basis points in December. And so considering all that, we do expect, next year NIM to be lower than this year. I mean, around like 4%. I mean -- and if inflation doesn't stay around 4.5%, 5%, but we can get slightly below that 4% for the full year. And we do expect by 2023 to have the repricing on the asset side showing up and also and being able to, again, build a NIM from 4% to the upwards trajectory starting in 2023.

And regarding our ROE expectations, it connects a lot with the NIM issue. I mean we still expect -- we still see our long-term ROE range from 17% to 19%. And if next year, because of the inflation scenario, we are able to sustain NIMs above 4%, it's, let's say, reasonable to have a slightly higher expectation to be in the upper part of that range, as you mentioned, but it's going to be mainly related to what's happening on the NII front.

[Ernesto María Gabilondo Márquez, analyst]

Super helpful, Claudio and Emiliano. And just a last question on the digital landscape. We have been following all your digital initiatives. And we have been recently seeing that Getnet in Brazil was listed. So are you exploring something similar to happen in Chile? And on the other hand, we have seen that BCI is exploring to launch a digital bank. So is it in your plans to do something similar? Or do you expect to keep the digital transformation within the traditional -- within the traditional bank? I'm just saying you this because investors tend to give different valuations to payment companies and to digital banks.

[Emiliano Muratore, executive]

Yes. I mean regarding Getnet, as you saw, I mean, the numbers are quite impressive. We are really happy with the speed we have got in that business. And there is no discussion yet regarding ownership of listing. We are just focused on growing and growing faster gaining market share, I mean, taking advantage of being the first mover, you can say in entering that market after Transbank in our priority there is to keep growing, growing fast and gaining market share. And in the future, if there is any discussion regarding ownerships or listing, we will discuss it with you, but they are not present at this moment.

[Ernesto María Gabilondo Márquez, analyst]

And the digital?

[Emiliano Muratore, executive]

Okay. So yes, so basically, you're all familiar with our digital initiatives. Obviously, I think they've all been very, very successful. Santander Life is clearly the key here. And Santander Life is slowly transforming itself into our digital bank inside the bank. So basically, today, Santander Life has been very much focused on the middle income segment. It's growing very strongly. And I think a really key thing about Santander Life, unlike a lot of other digital banks that are just beginning, it has rapidly monetized. So as we said before, already through September, Santander Life is generating income of almost CLP 50 billion, okay. Santander Life, unlike a lot of these other digital platforms in Chile, digital debit cards already has checking account balances probably above $500 million, okay, which is probably all the other digital debit cards in Chile, including Superdigital combined, okay?

And Life also has a loan portfolio, which hasn't been very aggressive, but it should slowly start to become to grow more and more. Life is going to be launching new products, okay? And so basically, Life inside the bank is going to be expanding and is slowly transforming into our digital bank. But until now, it's not going to be a separate entity, okay? It's going to be inside the bank, very much integrated with the rest, but clearly taking over different products and segments, okay?

[Operator]

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

[Juan Recalde, analyst]

So my first question is related to Getnet. I think that the fees generated by this business were around CLP 2 billion in this quarter. So -- and the growth was pretty significant. So my question is, what do you think is the, -- could be a more normalized level of fees for Getnet? Should we expect this CLP 2 billion to continue or it will be much higher? What do you think about that?

And then the second question related to the expenses, expenses look under control. But I saw that the other operating expenses were up around 76% quarter-on-quarter. You mentioned that the drivers in the release that the drivers were provisions for non-credit contingencies and also insurance related to cybersecurity related to Santander Life. I was wondering whether this -- the amount of operating expenses that we saw in this quarter is going to stay at similar levels? And also if you can quantify what part of those are operating expenses are related to provisions of non-credit contingencies and what part are related to insurance -- cybersecurity insurance?

[Emiliano Muratore, executive]

Thank you for your question. I mean, regarding Getnet, it's we are in the fast growth phase of the business. I mean we are growing fast in POS and also consider that the economy is also in the opening phase, I mean leaving lockdowns behind. So I think that we will stay -- we will keep growing -- growing fast in that it's not so easy to imagine what's the stable level of fee will be because, as I said, we are -- we are targeting fast growth there. So you can expect fees from Getnet to keep growing as we grow in the number of client POSs and also the amount of sales that merchants are having in this opening pace of the economy.

So you can expect growth to stay there for a while. And I think we still have some, let's say, quarters ahead before we can stay -- we can talk about an expectation level of fees from Getnet.

[Claudio Soto, executive]

And just to add on to what Emiliano said, I think in our digital talk last year, we mentioned that we're looking at around $20 million in fee income from Getnet, okay? So I don't know what exchange rate we use, but let's say, CLP 16 billion it would be more a normal level versus. So we see a lot of growth. And as you see in the figures, we're growing very quickly, okay?

Regarding your other question. Yes, the other operating expenses, there's a lot of things there, and I'll explain that line. First of all, yes, there are provisions for non-credit contingencies. So given that there's still risk regarding the pandemic and other -- not the pandemic is not only credit risk. So we set aside CLP 7 billion there, okay? On top of that, remember last year, there was like a cybersecurity fraud law. So before we were very active in selling different kind of cybersecurity insurance for clients.

A lot of that was prohibited or watered down, so the bank has -- and the banks have to cover a larger percentage of that. So we have an insurance policy for that, basically. The actual amounts of frauds have gone down, okay, per client, but the kind of this insurance policy, the price goes up because the amount of clients are rising.

So unlike a fraud for client basis and the actual number of frauds, it's coming down. But since the client base is growing so strongly, it's adding on to that costs. So it's kind of like an indirect cost because of the strong client growth, okay?

And then the other thing there, remember that we still own 25% of Transbank, okay? And even though we discontinued this in 2019 as a discontinued operations, given the losses Transbank has been recognizing, we decided to kind of like do a catch-up and recognize some of the losses Transbank has been accumulating, okay? So that was around CLP 3 billion. The good news is that Transbank new fee schedule was approved, I think, by the courts. So the most likely thing is that Transbank's profitability should begin to turn around.

And finally, remember that the auto lending is growing very strongly in Chile. So Santander Consumer Finance, our subsidy for auto loans has had a very large increase in net income, okay? So inside Santander Consumer's P&L an important cost is what they pay the dealers. We have a very strong joint venture with one of Chile's largest car dealers, which is SKBergé, okay? So as their net interest income is rising, as their loan growth is rising, also what we pay to SKBergé for the joint venture is also rising, and that's there as well, okay? So -- but that is also included in Consumer Finance's P&L.

So despite the increase in that cost, the earnings of Santander Consumer are growing very strongly. So those are the factors. What do you expect going forward? I would say the Transbank thing shouldn't be repeated. The provisions for other contingency is around CLP 10 million, which shouldn't be repeated. But if we continue to grow strongly in auto loans and in client base, the rest should be recurring, okay? But it has other benefits and other lines, obviously.

[Operator]

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

[Yuri Fernandes, analyst]

I have a first question regarding the OCI, like you're available-for-sale. The results, they were very good. But when we look to the shareholders that's like equity decreased in the quarter. And I guess, this is related to the sharp increase in interest rates in Chile, right? Like we look to the 10-year. It was a massive run. So my question here is, what should we expect here going forward? I saw that there were some reclassification from your available-for-sale portfolio to held to material. So can you explore this topic a little bit? I think that would be important for us, like what should happen in the [indiscernible]. And I have a second question regarding payments. Just some follow-ups. -- like regarding Transbank, if you have any update regarding to sale? And regarding interchange fee caps, any update on that topic?

[Emiliano Muratore, executive]

Yuri, thank you for your question. I mean, regarding OCI, as you mentioned, I mean, the main driver of that has been the sharp increase in interest rate affecting the valuation of our ALCO portfolio. We actively manage our interest rate risk and mainly because of that, we were able to sustain our NIMs above 4%, I mean, significantly higher than our peers during this last 12 to 18 months when the cycle was -- of with very low ALCO in and going down.

Now the cycle changed and then changed quite dramatically in the timing. I mean, very, very fast change with the Central Bank increasing the rate. That -- I think that part of the monetary I would say, the typical monetary cycle because also inflation is going up, and that's a positive for us. But maybe the different component this time has been the pension fund withdrawals that basically forced pension funds to dispose all kind of assets, including domestic bonds, and so that put a high pressure on rates and affected the value of ALCO portfolio.

Going forward, definitely, to project the potential further increase in long-term rates. It's difficult to see increases similar to the ones we have seen so far, I mean, because when you compare Chilean rates to other Latin American countries and other EM countries, we are already, let's say, similar to countries with a much higher level of inflation and much higher level of risk. So I personally think that there is not much room yet to have rates going up. But also it's true that in the short run, there could be some temporary volatility coming from the pension funds withdrawals, I mean the fourth withdrawal is still to be decided.

The interest rates were, I don't know, 40, 50 basis points higher a few weeks ago, then they went down because now you can argue that the market is pricing at not so certain probability of the fourth withdrawal to be approved. And if it's not finally approved, I think we're going to expect interest rates to go down a bit.

So let's say, summing all that up, going forward, that number will definitely tend to 0 because the time will pass. At the end, we can -- you can see that as a kind of opportunity cost that even though we don't see that as any potential real loss, but it's showing that today, we could buy those assets at higher yields and that time value of money will be decreasing when time passes and that negative number will be going to 0 basically having a positive OCI for the coming years.

Regarding the classification, as you saw in our numbers, there's a part of the portfolio that is roughly 25%, 30% of the portfolio that it's basically being used to fulfill their reserve requirement, the technical reserve requirements that it's liquidity requirement that every bank has when your demand deposits exceed 2.5x your total equity, including Tier 2. So in our case, considering how fast, how high we grew. In demand deposits, we are having a, let's say strong requirement of that case. So we need to fulfill that by having sovereign bonds.

And also, we did collateral for the Central Bank facilities that were implemented last year to provide liquidity to the system as part of the COVID-compensating measures. So that part of the portfolio that is definitely held to maturity because we don't have an option either to, let's say, take the collateral out of the Central Bank, neither to not fulfill the technical reserve requirements.

We are having them to maturity. And basically, what we did was to reflect that new business model into the accounting treatment of that part of the portfolio basically changing those assets from available-for-sale to held to maturity and that's what you saw on the -- on our financials. And regarding payments, Claudio?

[Claudio Soto, executive]

Yes. So we have no update on the sale of Transbank. So what we did do is we updated kind of like the valuation in the P&L. So we don't have any backlog in sense of like -- we were fully reflecting Transbank's book value in our books. We own 25% of that. But there's no other further update on the sale there.

Regarding interchange fees. Well, as you know, the law was passed that governs, they're going to fix interchange fees. The commission is working. They already started publishing how some of -- what they're looking at, their methodology, but there is no -- nothing yet that they haven't stated anything yet regarding where actually interchange fees will end up.

So I think by March or February, we should have more clarity, but they're working 100% on that. So it's coming for sure by February or March and probably in the next call, we might have a more clear update. But clearly, that will have an impact on card fees next year, right? We don't know how much yet. And the good news is our people are using their cards more intensively, client is growing. And in the long term, the fixing of interchange fees will probably one, permit acquirers, it will be better numbers for acquirers like Getnet; and two, it will probably, therefore, permit the acquiring business and the usage of cards to expand even further, okay?

[Yuri Fernandes, analyst]

No, that's super clear. You can use the acquired, natural hedge, right, like a higher net for the acquired portfolio?

[Emiliano Muratore, executive]

Yes. Net-net, you lose in the beginning, okay? But in the long term, it should let the market expand more.

[Operator]

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

[Ricardo Garcia, analyst]

Most of my questions have been answered. But just wanted to check with you, if there is any regulatory change that you are aware of, either at the Senate level or at the Congress or at the Constitution of Assembly that will affect the banking system?

And my second question would be regarding the higher interest rate scenario in Chile. I mean, so far, we have seen mortgages continue to grow nicely. I just wanted to hear from you is that the margin you're seeing slower demand on that product given the higher rate scenario going forward?

[Emiliano Muratore, executive]

Claudio, can you comment on regulatory agenda?

[Claudio Soto, executive]

Yes. Well, the main initiatives in Congress right now, one is the fintech law that is at the very early stages that includes also the regulation of open banking. And then there is a law that was introduced in Congress that puts another cap to the DCM, the cap on the maximum rate you can charge on credit. It makes -- the law makes some adjustment so that it might be cut even further. Those 2 initiatives are at the very early stages in Congress and there are many initiatives in Congress that begin its procedure, but then after a while, they do not continue.

There were many initiatives in Congress that were related to the pandemic that were attached to the declaration of state of emergency. Since the state of emergency was not renewed, those initiatives are now not on the table.

[Ricardo Garcia, analyst]

Sorry, one thing. And Claudio regarding the it's in constitutional convention or anything if there's any other?

[Claudio Soto, executive]

Yes. Well, regarding the constitutional convention, as I mentioned at the beginning, they began writing the text just a few weeks ago. So we are, again, at a very early stage yet. We will have more insights by the first or second quarter of next year. Having said that, the constitutional convention will write down the blueprint of the constitution, which is a very big set of rules. All the details have to be then defined in common law that will take place to occur.

[Emiliano Muratore, executive]

And regarding your question about long-term interest rate on the mortgage market, I mean, definitely, the mortgage market has been affected by 2 main factors. First, the interest rate significantly higher, I mean, 300, 400 basis points higher than a few months ago. And also that because of this new environment, many banks, including us, reduce the maximum tenure you can ask a mortgage, I mean, from 30 to around 20 years. So basically, those 2 factors are, let say, making the payments, where the monthly payments go up by 30%, 40%, even 50% depending on the segments and the tenors and that is definitely putting pressure on people in the total amount of money they can borrow in order to keep a reasonable relationship between the monthly payment and their salary or their income.

So definitely, if we don't see a normalization, I would say, a reduction in long-term interest rates. I think it's going to be very difficult to keep this double-digit growth in mortgages, and that growth will slow down, and will, let's say, force people to collect a higher amount of money for their down payments in order to get into the house. At the end, that's, let's say, will normalize, and you will see that shock to be diluted in time, but we are in the middle of that adjustment where you can expect loan growth from mortgages to slow down in this new rate environment.

[Ricardo Garcia, analyst]

And just a follow-up on the first question. Regarding this proposal in Congress to reduce the interest rate cap further. I don't know if you could provide some more color on, and of course, I understand, you're in very early stage at this point that not everything that gets Congress gets approval. But I mean, if you could comment on the likelihood that you see for it to be approved, who is supporting this law? If it has found further support in Congress or anything that could help us assess its likelihood of being approved or not eventually?

[Claudio Soto, executive]

I will touch up on that. As I mentioned, it's a very -- it's at very early stages in discussion. In the past, we have had initiatives like that, more than one -- more than once. And those initiatives just fade away are not -- they do to not transform into law. This initiative was put to be discussed Congress in the context of a more broad law in term of consumption -- consumer protection. I see that has at now low probabilities of going through. There are many issues in discussion in Congress right now. And this is not really at the top priority in the political agenda. So I think as it happened in the past, I see that there are -- up to now low chances that this will effectively be transformed into law.

[Emiliano Muratore, executive]

And also building on Claudio's comments, I agree with his view, considering that also what we just commented on mortgages, I mean, that has resonated on the, let's say, I would say, political environment.

And in general, the sense that now people cannot access mortgages as easy as they were accessing them before -- that's I think it's, let's say, people are kind of worried and putting a lower cap on interest rate would also affect credit supply more on the consumer side and also, I don't see that in this moment, there is much room to keep, let's say, restricting or putting pressure on credit supply because that could fight back because at the end, people need to borrow for their investment plans, for their future plans. And I agree that today, I don't see a high chance of that moving at least fast.

[Operator]

Our next question comes from Mr. Manuel Mora from CrediCorp Capital.

[Unknown Analyst]

I just have one short question. We observed that during the year, the large corporate segment has presented reversal of provisions. Can we expect further reversal of provisions in any other particular segment?

[Emiliano Muratore, executive]

Okay. Yes. So basically, this year, the large corporate segment has seen a reversal of provision. And that well, 2 things there. First of all, last year, and these are -- we present information by segment. Remember, any voluntary additional provisions, we don't assign to a segment. They have like they're assigned to our product. But in the segment P&L, they're not included, okay? So in last year, during the pandemic, obviously, we were worried about a lot of different segments, different companies, and we downgraded -- we were very, very conservative in downgrading and set aside required provisions for the corporate segment, okay?

This year, first of all, a lot of those worries didn't pan out. So companies have improved their rating, and that has resulted in a reversal. And second of all, remember, as we mentioned in the second quarter, I believe, we sold 2 or 3 of our largest impaired loans, which had a high provision. So when you sell those loans, obviously, you reverse the provision. So going forward, the large corporate segment today, has a very, very good asset quality. And given that the economy is recovering, we don't expect a large charge of provisions coming out of the corporate.

A large reversal probably not either because those are a reflection more of the selling of these loans. In other segments, no, I would say not a reversal because as the loan growth grows, remember here, every loan is born with a provision. So I wouldn't see any reversals in any of the other segments, okay?

[Operator]

Our next question comes from Bovolenta from UBS.

[Thiago Bovolenta Batista, analyst]

The first, congratulations for the operational dynamic the bank is showing when compared to the other Latin American banks. But my question is about the Getnet operations in Chile. I noticed that a lot of [indiscernible] question about it. I just -- I was just wondering if you could share with us some data related to the acquirer operations Chile, in terms of [ PPV ] market share and also point of sale, I mean, there are some figures on the press release, but in terms of market share, Robert, if I'm not wrong, mentioned that the market share in POS is 50% nowadays.

Can you just please confirm this? Did the market share in terms of [ PPV ] increased in comparison to the last quarter and how much is it?

[Robert Moreno Heimlich, executive]

Okay. So yes. So there Getnet has just started. So in terms of POSs, our market share, I believe, today is greater than 15%. If we calculate in Chile, there's around [ 230 ].

[Claudio Soto, executive]

[ 200,000 ] before we enter the market in active POS. And today, we are reaching like 50,000. So yes, I mean, from 15% to 20% market share in active POS.

[Emiliano Muratore, executive]

In active POSs, remember that around -- we have a lot of small SMEs. A lot of them didn't have a POS. So I think we're expanding the market more than getting -- more than people switching. Some of our clients have switched to our POS. But I think a majority of our clients that didn't have a POS before. So that's very good also from like a margin perspective. But from a total purchase value, I would say today, our market share is probably around 4% or 5%, but growing rapidly, okay?

[Claudio Soto, executive]

Yes, because also it's important to mention that until last month, we weren't entering into the big merchants because Transbank still had their fees fixed. And basically, the big merchants were having a low fee that was not attractive to us, so we weren't entering that part of the market. Now that has changed because Transbank finally got the approval to review their fee schedule. And so now we are entering into bigger merchants. And also, it's important to mention that until September, we didn't have our e-commerce solution still operating, basically, it was all physical transactions.

And as you can imagine in this new post-COVID being out of e-commerce was a big drag for us, and that is already part of the past. I mean we are also offering the e-commerce solution, and that will also help us to increase the market share in the amount of sales.

[Thiago Bovolenta Batista, analyst]

That was very helpful. And my second question -- just wanted to know more about the brick-and-mortar branches of the bank, especially Work Café. With this positive outlook for the number of supply changes as you presented on Slide 4. What is the strategy going forward on this physical channel bank, there are some tension to open and optimize some administrative costs. And if you could give guidance or give us few metrics or numbers, it would help us a lot.

[Emiliano Muratore, executive]

Okay. So yes, so basically, we're in this investment plan that has different branches. You could say different aspects to it, okay? So we have the whole digital initiatives, Life, Superdigital, Klare, et cetera, et cetera. And part of our strategy is also changing and renewing and modifying significantly the physical network, okay?

We've always talked about our digital strategy, okay? So our strategy is very much a mix between a strong digital and a strong physical network. But the physical network, clearly evolving profoundly over the next few years. And the key to that is our Work Café. Today, we basically have, I would say, 3 type of branches. The traditional branch, the traditional branch like you see in most countries, human tellers, back office, account managers and people standing in line, okay?

Then we have the Work Café branch and then we have the Santander Select, which is the branches for more the mid-high end, the mass wealthy as you could call it. So when you look at our figures, we clearly -- the focus of branch closures has been with Santander Select. We've closed most of them. Those are obviously a segment of clients that don't go to the branch. So you don't need to have all these branches. And a lot of the people, in fact, that work at Santander Select are shifting to the Work Café. The Work Café has the -- it's very efficient, okay? It's much more efficient than a traditional branch. It doesn't have human tellers. It doesn't have a significant back office. It doesn't have cash, okay?

So the branch is fully dedicated to business, okay? So another thing is in a traditional branch. You might have 3 or 4, you might have space for 3 or 4 relationship managers. In a Work Café, you have space for around 15 to 20, okay? So in a similar space, you have 4 or 5x more relationship managers, and you have a much nicer format where our Work Café are in something we call the Work Café community, which is basically a place where mid-market SMEs can go and do business, okay? And where anyone can go and hang out, have a good coffee, see the Internet and do business, okay?

So the idea basically in the end is to slowly reduce the traditional branch network format. But in order to do that, you have to begin to be able to eliminate some transactions at the branch, okay? A lot of our branches, when you see a long line or something, it's usually non-clients going to get their check, get a cashier's check, getting paid their salary or paying a bill, okay? So that is obviously part because we're very strong in cash management. And so one way to get people out of the branches who are doing these low value-added services is for those people to be able to get their salaries online. So that's where Superdigital and Life play a very important role.

For us to go to a company sign alliances and say, okay, today, you're paying workers, a lot of these workers don't have a checking account, and say, look, don't pay them anymore. you start continue paying them through Santander's transactional service but deposit them directly through Superdigital or Life, okay? And that way, you remove people.

Another thing is, as we mentioned in the last quarter, we signed an agreement with Servipag. Servipag has around 200 branches where people can go and cash a check, get paid, pay a bill. So we uncluttered the branches, okay? So the idea here is that we don't have a specific number of how many branches we can reduce. But definitely, the square footages will fall and the amount of branches, which will be shifting away from this kind of like back-office, old traditional style will all be evolving to this more advanced format where basically, you go to the branch to do business and not to do non-value-added services, okay?

[Thiago Bovolenta Batista, analyst]

So Robert, putting all together, do you expect the OpEx, especially the administrative expenses to expand above or below the current expectations for the inflation rate of the last year?

[Robert Moreno Heimlich, executive]

Yes. So that's in the end, if you look at our costs, you can see this is resulting. So we've done a lot of investments, but you see that cost despite the inflation are at a low growth rate, okay?

So our idea is to continue that trend, okay? Obviously, inflation since 2/3 of our costs are indexed either to inflation or the exchange rate, the depreciation of the peso and the acceleration of inflation puts pressure. But with the OpEx that we have, which has a very, I think, high return, a rapid return and it has a very high productivity contribution. Our goal in the next few years is to continue growing our cost at or slightly below inflation, okay?

[Operator]

Our final voice question followed by a couple of text questions. This one is from Mr. Brian Flores from Citi.

[Brian Flores, analyst]

Just a quick follow-up on the politics side. Have you heard of any initiatives by any of the candidates you have mentioned? Sorry, can you hear me?

[Emiliano Muratore, executive]

Yes. Yes, We can hear you. Go ahead.

[Brian Flores, analyst]

Just any initiatives on any of the candidates, you mentioned Boric and/or Kast, that could create certain uncertainty for international investors. It could be capital gains or it could be a particular raise in corporate tax rates? Anything on this that you have heard and that is relevant on your point of view?

[Emiliano Muratore, executive]

Claudio?

[Claudio Soto, executive]

Yes. Well, let me give you some context. This government a couple of months ago, introduced a bill to improve pensions and attached to that bill, there was changes in the tax code, including capital gains, taxes on stock transactions that currently are excluded from -- taxes are excluded from capital gain transaction in the stock market, and that bill already introduce them. Now the bill has not gone through further discussion right now, we are in the middle of political campaign, and we have the election right now. So it's very unlikely that bill go further.

Boric, in his program, has a very broad tax reform included. His program is changing. He had the program until 2, 3 weeks ago, but then he is producing a new program that is not yet there. But in the original program, he has in order to increase revenues for the government at this broad tax reform that includes lowering evasion aviation basically, increasing taxes or closing certain loopholes. A tax on wealth that currently we don't have a tax on wealth. So that is more like a personal tax and also increases in the corporate tax system but that is part of a much broader package in term of the tax reform.

The other leading candidate, José Antonio Kast does not have a tax hike in his program. He rather have some cuts in taxes in his program. That is more or less what I have in mind, specific things for the financial sector not included in none of the programs. Boric had initially in his program, a revision of international treaties, but his campaign is backing -- is moving away from that proposal that was originally his program, but I think now he is not supporting this idea of revising international treaties that could introduce a noise again regarding international investments.

[Operator]

We have a couple of text questions which I will now read out. Perhaps starting with the first one, regarding fixed income and bond markets, should we expect to see you in the bond market next year, either for the AT1? If so, is the Transbank will have parent by parts of the deal. You are soon having ESG Day. What is the appetite for potential ESG labeled bond?

[Emiliano Muratore, executive]

Yes. So regarding the last part, I mean, we are expecting to finish our ESG framework by the end of the year, maybe early next year. And with that in place, definitely, we will try to get as much as we can of our funding from the market in ESG-labeled format that -- for that, we think that it's important to have a robust and very formal framework in order to avoid any kind of greenwashing argument or so. So and that's why we have been working and we will comment later next month in our ESG Talk about that. And I'm not sure AT1.

Yes. I mean we did AT1 last week, I mean, the parent company participated 100% on that. That has been the policy in the group. With that, we reached our 1.5% of risk-weighted assets in AT1. And we have covered the AT1 needs for the next, I don't, few years. I mean, with risk-weighted assets growing maybe in 2, 3 years, we can consider doing another transaction like that. But for the time being, will be done with AT1 issuances.

[Operator]

There's about 5 or 6 questions related to the mortgage segment. I will try to group them. The first one is considering the hike on long-term rates, the mortgage loan growth, do you see the mortgage segment slowing down in 2022? And how has it been paving in October?

The second one, very related to this, how will the recent increase in interest rates affect the bank and the industry?

[Emiliano Muratore, executive]

I, mean regarding mortgages, I mean, I wouldn't say that mortgages would fall, but definitely growth to slow down in October. We have already seen like 20% less of number of mortgages being sold or being signed. And with that, reduction in the new origination growth would be slower, but I don't know if it will reach a point where the outstanding will be falling. And the new interest rate environment, I mean, the Central Bank hiking rates, higher inflation, It has opposing impacts for banks.

I mean usually, banks have this loan inflation exposure in the short run, high inflation is positive, but that usually comes with a higher short-term interest rate, and that hits the NIM, and especially in the short run because you have faster, shorter tenure liabilities repricing and it takes between 1 to 2 years to have the repricing on assets compensating the initial shock.

But so far, the impact for us has been like positive because the tightening cycle from the Central Bank has just began and inflation figures have been quite high. And that's why for next year, we can expect, let's say, a lower level of NIMs because the Central Bank will keep hiking rates and inflation should be lower than this year.

[Operator]

Okay. Our Next one is related to the mortgages. We saw the bank and others introducing shorter terms for mortgages in recent weeks. When do you think the bank will consider reintroducing the 30-year mortgages under what scenarios? And in line with this, what are the related risks for the construction sector in the coming months, considering the buyers potentially pulling out of transactions?

[Emiliano Muratore, executive]

Yes. I mean, I don't have any specific timing for that. I mean going back to 30 years will depend on how the market situation evolves in terms of level of rates and also access to capital market in the domestic market. So as of now, we are staying at no longer than 20 years, and I don't have a specific timing to define when to go back to 30 years if we finally do it because it will depend on how the market evolves.

And from a contractions market, we have seen that, in general, the markets quite self adjust. And so basically, we expect the number of new projects to slow down and in order to avoid creating an oversupply of square meters into the market. And so we don't have any specific concern regarding that, we think that the sector has gone through other situations like this for different reasons, and it has been able to adjust the supply of new projects to the new environment.

[Claudio Soto, executive]

Just adding on to what Emiliano said, during the pandemic, there wasn't very much construction. So today, the inventory or number of months before inventory would expire is very low. So there's not an over -- in fact, we're on the opposite side of the cycle, very little inventory available.

[Operator]

Perfect. Thanks very much for all this time for questions. We are seeing no further questions at this point. I'll pass the line back to the team for the concluding remarks.

[Robert Moreno Heimlich, executive]

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

[Operator]

Thank you very much. This concludes today's call. We'll now be closing all the lines. Thank you, and have a good evening.