Banco Santander-Chile

NYSE:BSAC

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Banco Santander-Chile 3Q '22 Results Conference Call on the 28th of October 2022. [Operator Instructions]

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

[Emiliano Muratore, executive]

Good morning, everyone. Welcome to Banco Santander-Chile's Third Quarter 2022 Results Webcast and Conference Call. This is Emiliano Muratore, CFO, and I'm joined today by Roger Moreno, Managing Director and Head of Investor Relations; and Claudio Soto, our Chief Economist, thank you for attending today's conference call. The bank has continued to achieve strong results in the third quarter of this year with a high ROE and solid financial performance.

Our successful digital strategy and customer-oriented product offerings continues to attract new clients, indicating great growth opportunity going forward. In the quarter, the Central Bank of Chile also continued to tighten monetary policy. We will be giving a more detailed analysis of the impact this will have on our margins.

To begin, I invite Claudio Soto to give us an update on the macro scenario beginning on Slide 4.

[Claudio Soto, executive]

Thank you, Emiliano. As expected, the local economy has been slowing down since the second quarter. Activity grew 0% year-on-year in August and the next monthly print will be negative. Despite that, some sectors have been more resilient than expected. As a result, we have revised our growth estimate for the year up to 2.55%. Excess liquidity from pension fund retools and cash transfers in 2021 have been bringing a way in the context of high interest rates. The labor market has weakened with low job creation at the margin.

In turn, investment prospects remains subdued. Because of that, domestic demand will suffer a relevant contraction in 2023. In turn, the external sector would be affected by low global growth. All in all, we forecast that GDP will have a contraction close to minus 1.2%. In 2024, we will see a recovery of the economy back to trend. The current account deficit, which has been widening should start shrinking during the following months as domestic demand contracts and terms of trade stop falling. Inflation remains elevated, but has shown some signs of slowing down.

September CPI was in line with expectation and historical [indiscernible] but the October's figure will still be high. However, in the following month, we should see a real moderation due to low commodity prices and a weak economy. We estimate that the inflation will close the year so above 12.5%. And next year, it will fall to almost 6%. The Central Bank has announced that in the most likely scenario, the hiking cycle has concluded with a monetary policy rate at 11.25%. We expect the rate will remain on hold during the December monetary policy meeting.

The Board might decide to begin a [indiscernible] as soon as in their terrain, although it is more likely they start cutting at April meeting. We estimate the notary policy range will end up 2023 at around 7%, the fiscal finance has improved amid strong revenues and a sharp fall in expenditure. This year, there would be a fiscal surplus of about 1.6% of GDP and gross debt will fall back to 36% of GDP. Next year, there will be a mild expenditure expansion with gross debt climbing up to 38% of GDP. Political uncertainty remains high, but should decrease during the following quarters.

After the rejection of the constitutional drop driven by the constitutional conversion last September, different political forces are building a new agreement on how to continue this process. Until now, there is consensus on the need for a new constitution and certain borders of an eventual new text, including establishing a stronger worker state, protecting human and property rights and gratifying autonomous budgets of the state, most notably the Central Bank. In terms of the registry agenda, the tax reform has been subject to important amendments in Congress and its scope has been narrowed down. The pension reform should be sent to Congress soon.

[Emiliano Muratore, executive]

Thank you, Claudio. We will move on to Slide 8 to begin discussing our financial performance. Year-to-date, the bank's net income totaled CLP 70 billion, an increase of 29% compared to the same period last year. With these results, our year-to-date return on average equity reached 25.9%. Our net income to shareholders in the third quarter reached CLP 186 billion, increasing 5% year-on-year and decreasing 35% Q-over-Q. This fall was mainly due to lower NIMs in the quarter as inflation decelerated and interest rates continue to rise.

As we show on Slide 9, this was offset by very strong results from our business segments. The net contribution from our business segments increased 20.6% year-to-date and 23% Q-on-Q. It is important to note that the results from our client segment excludes the impact of inflation and the cost of our liquidity and therefore, presents a clearer view of the sustainable and long-term trends of our business. On Slide 10, we show the results from our largest segment, which is retail banking, that includes the results from individuals and SMEs.

The net contribution from this segment increased 9.8% year-over-year, driven by an 11% rise in revenues as client growth and higher product usage continues to drive results in this segment. On a quarter-on-quarter basis, net income from the retail banking grew 21% despite a 1.3% decline in NII. The rise in non-NII in this segment has more than offset the impact of the shift in funding mix as clients move away from demand deposits to time deposits. These positive results can be broken down to a single key factor, client growth.

As can be observed on the left of the slide, our active individual clients, that is clients that have a minimum average balance and/or interaction levels are growing 9.2% year-over-year, and our checking account customer base are growing at an impressive 23.8% year-over-year. Our SME client base is also evolving favorably with active clients increasing 16%, checking account clients are up 32% and loyal clients in the SME segment have grown 9.5% year-over-year.

As can be seen on Slide 11, one reason for this positive rise in client numbers is our NPS figure. After a slight dip in our Net Promoter Score at the beginning of the year, following some necessary changes implemented to improve cybersecurity protection. The NPS has rebounded as our digital platforms, our app, our website, contact center and work affairs continue to be highly valued by our customers.

Moreover, and as shown on Slide 12, Santander Life continues to shine as one of the best innovations introduced into the Chilean banking market in recent years. As of September, this platform had over 1 million clients and was growing 28% year-over-year. As can be seen from the graph, we started a life program in 2018, and this platform really gained traction once we launched the Quanta Life in June 2020, the first 100% fully digital checking account.

Building on this success in 2022, Santander Life also began offering clients the ability to open a dollar checking account 100% digitally for an additional fee. Santander Life clients are also rapidly being monetized with gross income from life clients increasing 62% year-over-year. Demand deposits remained high at $846 million, surpassing by many times the amount clients have deposited in similar competing platforms. On Slide 13, we show how Super Digital's client base continues to expand at a rapid pace. Superdigital is a prepaid digital product aimed at the [indiscernible] who seek a low-cost bank account. Superdigital clients have grown 69.5% year-over-year, reaching over 364,000 clients.

This growth has been helped by alliances with companies such as Cornershop and Uber as a way of attracting new clients. As we stated before, the growth of our SME client base is also accelerating. On Slide 14, we show our 2 most recent digital initiatives that are [indiscernible] banking on Life's platform to expand our presence among SMEs and microentrepreneurs Prospera and Quanta pine Life. Both platforms have been a successful way to reach new SME clients by offering a reasonably priced checking account plan for every client with no previous financial history.

The other important driver of our SME client base is Getnet, as shown on Slide 15. Getnet has already reached a market share of 15% with over 131,000 POSs sold. 89% of Getnet clients are SMEs, our target clients and 99% of the POSs are sold to the bank's distribution channels. Getnet is currently processing $388 billion in monthly sales. This product has been quick to monetize generating CLP 17 billion in fees year-to-date. Furthermore, Getnet is also churning a profit after just over a year of operations.

Moving on to the middle market on Slide 16. This segment's results have increased 29% year-on-year and 18% Q-on-Q. -- driven by positive loan spreads and a focus on green financing with over $47 billion in green loans dispersed this year. Our special interest was our involvement in the importation of 1,000 electric buses and by half of the largest Mercedes dealer in Chile for Chile's public transportation system. Non-lending activities also led to an increase in revenues with fees increasing 9.4% and treasury income 14.7% year-over-year. This led to a 19.8% increase in total income in this segment.

The results of Santander Corporate and Investment Banking or CIB have also been quite impressive this year, as shown on Slide 16, 17. The Net income grew an impressive 42% year-over-year and 36% Q-on-Q due to positive spreads on loans and deposits and strong growth of nonlending activities, such as cash management and treasury. With this, total income increased 43.7% year-on-year and 14.9% Q-on-Q.

In the quarter, we also continued advancing and achieving our responsible banking commitments as we can see on Slide 18. In 2022, we were once again awarded as the top employer award here in Chile by the Top Employers Institute. The percentage of women in managerial positions has already met the target for this year of 28% with a target of 30% by 2025. The gender pay gap is currently at 2.9%, but we are committed to reaching 2% by year-end. In sustainable financing, we accumulated more than $685 million in green financing since 2019. 28% of our energy is coming from renewable sources, and this will reach 43% by year-end, considering the operations of our new solar plants in the fourth quarter.

Moving on to the next section, detailing our balance sheet and results. On Slide 20, we start with loan growth, which grew 1.8% Q-on-Q and 8.9% year-over-year. The growth in loans is mainly due to conversion gains produced by high inflation in the quarter, which was plus 3.5% on loans denominated in U.S. and conversion gains produced by the depreciation of the Chilean peso against the dollar, which is around 4% Q-on-Q for loans denominated in foreign currency.

Approximately 20% of our commercial loan portfolio is denominated in foreign currency, mainly dollars and 50% of our loans are denominated in U.S., mainly mortgages and some commercial loans. Loans to individuals increased 11.7% year-over-year and 2.5% Q-over-Q. High-yielding auto loans continued to grow by 2.7% Q-on-Q, and we are seeing interesting trends in credit card loans, which should be a driver of growth in the fourth quarter and next year as lifestyles return to pre-pandemic levels.

During the quarter, loans in our CIB segment grew 6.6% Q-over-Q and loans to the middle market grew 2.2% in the same period as corporate sought funding in the form of bridge loans and other short-term financing products. On Slide 21, we show the evolution of our funding mix. Total deposits decreased 5% year-over-year but increased 2.4% Q-over-Q. After a strong increase in noninterest-bearing deposits in the last 2 years, we have started to see clients shifting their money to time deposits as rates rise.

As a result, high deposits increased 15.8% Q-over-Q. With this shift, we expect average funding costs to continue to rise as the monetary policy rate continues to go up. These higher rates will be eventually transferred to our loan book, but given that our interest-bearing liabilities have a shorter duration than our assets, funding costs will go up first. Moving on to Slide 22. We can see how the movements of volumes, rates and inflation have been affecting our margins in the quarter. The U.S. variation in the third quarter reached 3.5%, a decrease from 4.3% seen in 2Q, pressuring our interest earning asset yield. This was coupled with an increase in the average monetary policy rate, which rose from 7.9% to 95% to 9% in the quarter and led to a 134 basis points increase in our cost of funding.

In general, net interest income from our business segments remained strong with some Q-on-Q deceleration due to the deposit shift mix. Net interest income included in the line other mainly includes the effects of our inflation gap and the spread earned over our liquidity. Here it is evident the impact to lower inflation and higher rates had over our NIMs. Considering all of the above, NIM in the quarter was 3%, and the NIM year-to-date reached 3.7%. For the fourth quarter, we are forecasting a further decline in NIM, and we expect the NIM to reach 3.3% for the full year.

On Slide 23, we give further insights into our margins for next year. For every 100 basis point decline in inflation, our NIM fall by an average of 20 basis points. And for every 100 basis point rise in the average monetary policy rate, our NIM falls by 30 basis points in a 12-month period. Our base case scenario for 2023 is an average monetary policy rate of 9.4% and a U.S. inflation of 6.3. Under this base scenario, the NIM in 2023 should reach 3%, starting below this level in the first quarter of 2023 and rising back to levels greater than 3.5x by year-end in 2024. These lower margins in 2023 will be compensated by the strong revenue generation from our business segments and tight cost control, which should lead us to achieve ROEs between 18% and 19% in 2023, maintaining our guidance unchanged.

Moving on to asset quality on Slide 24. The rise in the NPL ratio to 1.7% in the quarter is mainly related to household liquidity levels gradually returning to post pandemic levels and a weaker economy. This has mainly affected clients who were already impaired pre-pandemic. With the end of state aid and pension fund withdrawals, these clients' loans have become nonperforming at a greater rate. However, it is important to note that the impaired loan ratio, which includes NPLs plus loans that have been renegotiated decreased from 4.7% in 3Q '21 and its second quarter '22 to 4.4% in third Q '22, reflecting that the rate at which new clients are becoming impaired remain subdued.

The coverage of NPLs as of September reached 200%, and there has been no reversals of the voluntary provisions we recognized in 2020 and 2021. As we can see on Slide 25, these overall positive asset quality indicators led to a cost of credit of 0.9%, in line with our guidance for this year. During the quarter, the Board decided to establish CLP 35 billion of voluntary provisions in light of the expected slowdown of the economy expected in 2023. Most of the voluntary provisions have been assigned to the consumer loan book. Also during the quarter, our regulator, the CMS published the draft of new standardized provisioning models for consumer loans. The consultation period for commenting on this new regulation has been extended to year-end. Our initial estimate is an increase in provisions of between CLP 100 billion and CLP 150 billion, mainly in our auto lending and credit card portfolios. We are permitted to use voluntary provisions to comply with this new regulation. On Slide 26, we move on to non-net interest income revenue sources, which continue showing exceptional growth trends. Total non-NII expanded 22.8% quarter-over-quarter and 6.7% year-over-year in 3Q '22, fee income increased 17.9% year-over-year and 12.8% Q-over-Q, driven by higher client activity and the growth of our client base as previously described, with more commissions generated from all products. These trends we expect to continue in 2023 as we continue to see strong in growth and greater client usage. In this line item, we can clearly see the strength of our digital platforms.

As shown on Slide 27, we also consider the bank's efforts to continue increasing productivity and to control costs. Operating expenses in the third quarter increased 7% year-over-year and decreased 1.6% Q-over-Q, well below inflation trends. The bank continues ahead with its $260 million technology investment plan for the years 2022, 2024. And because of these investments, we are expecting costs to grow significantly below inflation levels in 2023.

As shown on Slide 28, the bank continues with its process of optimizing the branch network. This year, we have closed 10% of our branches and have opened 10 new work on cafes that are not only a major improvement in client experience but are also more efficient. As a result of these initiatives, coupled with our digital strategy, productivity is rising significantly with volumes per point of sale increasing 13.5% and volumes per employee increasing 9% year-over-year. Moving on to Slide 29. We take a look at our capital ratios.

At the end of the third quarter, the bank reported a core equity ratio of 10.1%, up from 9.6% in June. Our shareholders' equity increased 7.6% in the quarter, which resulted in a 50 basis point increase in our capital ratios. We are on track to finish this year with a core capital ratio of around 10.5%, and we are maintaining our guidance of a dividend payout of somewhere between 50% and 60% of 2022 earnings. Finally, on Slide 30, we conclude this presentation with initial guidance for 2023.

We fulfilled our guidance for 2022, we should fulfill our guidance for 2022, achieving an ROE of 22%. For 2023, considering our base case scenario of GDP falling 1.2%, inflation of 6.3% and an average monetary policy rate of 9.4%. We should see mid-single-digit loan growth, strong client results, a NIM of 3%, non-NII rising 15% to 28%, a slight uptick in the cost of risk and a very low increase in total costs. With this, we should achieve a solid return on equity of between 18% and 19%.

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

[Operator]

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

[Daer Labarta, analyst]

My question on, I guess, asset quality and cost of risk. You mentioned a few things, but I mean, as NPLs have deteriorated a bit. Your cost of risk remains fairly low, just kind of going into next year with the economy deteriorating some more. Do you expect any significant deterioration in asset quality from here? And could that have any other significant impact on your cost of risk. You mentioned in the guidance for next year, a slight uptick. And I think there's some additional provisions you need to do. But if you can help quantify a little bit how much cost the risk can go up and how much more NPLs to go from here, particularly in the selling economy?

[Robert Moreno Heimlich, executive]

Okay, Tito hello. So in the quarter, as you said, the NPLs have been rising. What we've seen basically is as the excess liquidity, no more pension fund withdrawals, et cetera. And some people obviously have fallen back into NPL, okay? But the majority of these clients, I would say, especially in retail, are people who had shown some weakness even before the pandemic, okay? So basically, that's why if you look at our impaired loans, our impaired loans, which are NPLs plus any loans that have been refinanced and those have been still trending downwards.

So basically, people who already marked as refinanced or impaired before are some are slipping into NPLs. But the amount of new people entering impaired status, okay, is still actually falling, okay? And why is that? Because during the last 2 or 3 years, people have reduced their debt levels. And as you saw, our credit card portfolio is going to begin to grow now. But the last 2 or 3 years, it's fallen 30%. Overall, for example, the Central Bank just published its report on household finances. And you can see that in general, debt servicing levels, the household debt levels are below like 2017, 2018 levels.

On top of that, our coverage remains high, and we haven't, we still have around $290 billion in voluntary provisions in the balance sheet. So we do expect NPLs to continue to go up and probably impair loans eventually to start an upward trend. But for now, given that the economy is going to fall 1%, we think NPLs should go back to levels of 2% or slightly higher than 2%, more or less where they were in September of 2019, okay? But with the high coverage and still not expecting to use our voluntary provisions, this should translate into a cost of credit of around 1%, 1.1% next year. So I'd say there is some pressure on asset quality. But given where we're entering this cycle, it's still something that we think is absolutely manageable and not a huge threat. The other thing, as we mentioned, there's a new provisioning requirement for consumer loans that's being discussed.

The regulator published for consultation a new standardized provisioning model for consumer loans. And we have until the end of the year to discuss and present our comments, and this will probably be implemented somewhere at the end of the first quarter, beginning of the second quarter. We estimate the impact, and this could change, okay, because it's still being discussed. But we think this will more or less signify that we will have to increase the stock of provisions for consumer loans somewhere between CLP 100 million and CLP 150 billion, okay? -- and we're allowed to use voluntary provisions to meet this. So it shouldn't have, and we'll have to see this in the end, but it shouldn't have an impact on the cost of risk, but it might have an impact on the size of our voluntary provisions, okay?

In the quarter, this quarter, third quarter, we already set aside some voluntary provisions mainly for consumer loans. So the Board has also been kind of proactive knowing that the situation next year could be a little weaker. But said all of that today, we still see that the cost of risk will rise a bit but absolutely manageable with the cost of risk around 1%, 1.1% next year.

[Daer Labarta, analyst]

Great. That's very helpful, Robert. Maybe just one follow-up there. I mean if NPLs do get back to like the 2% level that you mentioned, should the cost of risk kind of rise more longer term to get closer to that? Or I mean, I know your coverage is still high. I don't know if you think about sort of should that coverage ratio continue to come down? What would be maybe either normalized coverage ratio going forward?

[Robert Moreno Heimlich, executive]

Yes. So I think the coverage ratio has come down. We still as I said, we're not forecasting the use of voluntary as the coverage of 200 includes around I think, around 15%, 20% of our stock of loan loss provisions are voluntary, and we don't expect to use them. But excluding that, basically, remember that a lot of the things that are falling into the NPL either have good collateral or they already have provisions. So that's why I think the coverage ratio will slowly begin to go down because some of the things that we already expect or have partly provisioned or they have a collateral are going to be entering NPLs.

So effectively, the coverage ratio should come down. Before the pandemic, it was around 130. So an easy way to see it long term is 130 plus the voluntary provisions. So it's probably like 150, okay? And then we have to see what happens with the voluntary provisions, okay?

[Operator]

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

[Ricardo Garcia, analyst]

My first question is a follow-up on the quality. I mean, you are mentioning NPLs would go back to the 2% or slightly higher basically a normalization in the NPL metrics. Just wanted to give us some color on what would be the main drivers for that increase. I don't know if you are mainly concerned or I mean, maybe not concerned, but you think the deterioration can come mainly from the consumer segment, the mortgage segment? Or do you have any kind of concerns on the commercial side of the group.

We have been really in the news very frequently about companies in the real estate and construction industries going in [indiscernible] or so I don't know if you could provide some color on NPLs by segment? And my second question is on loan growth for next year, 5%. It's pretty much in line with the inflation you expect. But again, I don't know if you could provide some color on how this should look by segment in the case of consumer, how much appetite you have to grow in this environment. In the case of Santander Life, you are showing very nice growth in terms of clients. But I'm not sure what's your appetite to grow in this segment next year and say anything for the commercial portfolio, which segments are presenting more demand and which segment look more attractive or at least more defensive to grow next year.

[Robert Moreno Heimlich, executive]

Okay. So in asset quality, yes, this is going to so now going to be kind of like a traditional downturn, higher rate economy coming down and employment probably will begin to rise. So there will probably be some pressure in consumer on the consumer side. The good news is that, as I said before, we've gotten out of the low end of consumer lending. The middle high end hasn't really grown. And this kind of relates to the other question that we still think that there is the fact that people are starting to travel more hotels, cars, the credit card loans will probably grow more, we don't see that's going to be a major factor in asset quality because it's all higher income.

So overall, there might be some deterioration in consumer following the normal cycle, but that's why we're also sending more voluntary provisions to that portfolio and the coverage of consumer, I think, is around 400%. So that's another thing. But this is going to be a very traditional cycle, but we're entering it with the highest some of the highest levels of coverage we've had before any downturn. And in the other segments, I would say the large corporates in Chile are very healthy. And during the pandemic, we also went through that portfolio, what case by case and either provision more for weaker positions or got rid of other ones.

So that portfolio is in very good shape. And then you have more of the SMEs, I would say they're very obviously, more elastic to the cycle, and there should be some probably some more NPL pressure there. And that's also why we're not being too aggressive in growing the SME portfolio, even though it's a key segment, and it's doing very well. As you saw, we saw in the presentation, Retail Banking is doing really well despite a little bit of pressure on the asset quality. And the key there is the nonlending. Like you said, Santander Life, we're basically growing in non-lending activities. All the new clients are generating good deposit spreads. There is some loans were very low. But basically, they're generating non-lending income, which is going to be the driver of the focus next year more than lending.

So asset quality, I would say, consumer and SMEs. But once again, we're entering this cycle with a very good portfolio structure. And in terms of the sectors, one sector that has been in the news is construction, obviously, with not much building going on, high rates. This is a sector that has been suffering a bit. We have around $730 million in construction. The NPL ratio is 2%, I believe. And so I would say, in general, our clients there are a good quality. There might be some needs of provisions there, but it's once again, it's more or less factored into the cost of risk I mentioned in the previous quarter. So it's not something that we are overexposed and feel that's going to be a big threat to us.

[Emiliano Muratore, executive]

Alonso, regarding your question about loan growth for next year, I would say that in the retail part, the consumer loan book should grow maybe above the average partially because, I mean, in this inflationary environment, I mean, like nominal volumes tend to grow. And not because as you said, it's especially increasing our appetite, but it's true that our customer base has been growing strongly through life. So now we have a lot of new clients, and we have a lot of information for in order to assess their credit quality and so we feel comfortable to offer them some great solutions.

And also the timing in the cycle when the liquidity from pension funds and from the government age, it's discipline. So the households will start to demand more credit. And so that will be a tailwind for the consumer book, and that's we plan to take advantage of that, not by being especially aggressive but by taking advantage of the more leverage that the households will be taken from a very low point of leverage where they are now. In terms of the mortgages, we don't see like real growth for next year, but the U.S. inflation will be growing the nominal value of the portfolio basically because the level of rates and the level of activity, we don't foresee especially high real growth in mortgages.

When you go to commercial lending there, also the situation depends on the segments. In SMEs, we expect the loan book to grow almost nothing or even fall. Remember that there we have all the [indiscernible] portfolio that was land during the pandemic with the government support. And so basically, that book is going away with time. So that it's a downward pressure for the book. And in terms of the rest of the SMEs, we do see all our client growth to get net as a support or tailwind for loan growth, but overall SME should be growing almost nothing. And then going upwards in the corporate, definitely, real estate is not a sector that we are planning or we have seen high dynamics for next year in terms of loan growth. And we see more on the working capital solutions and more trade-related lending.

We are not seeing a big plan for CapEx in our clients. So like big corporates or big projects. We are not expecting them for next year. And we do see all the green finance transition as a business opportunity for the commercial book. I mean, that we are seeing across the board investments from our clients to transition to see remissions or to lower their emissions and there we see we have a huge opportunity as part of the group to take advantage of that.

[Operator]

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

[Daniel Mora, analyst]

I have a couple of questions. The third one is regarding NIM. Even though you already gave us the guidance of 3.3% for this year and 3% for the next year. I would like to know what is the NIM strategy that the company is looking to implement in the next year, considering the normalization of inflation and the still hike rates. If we see the financial statements in this year, we see that there are also a negative impact coming from the accounting hedge or the use of derivatives. I would like to know if Santander is considering another strategy in 2022 to mitigate the potential contraction of margins. That will be the first question. And the second one is related to capital ratios. Do you already present that the target is above 10%. I would like to know if you feel comfortable with CET1 above 10%? Or you would like to see this figure increasing to levels close to 11% or close to that figure? Thank you so much..

[Robert Moreno Heimlich, executive]

Daniel, thank you for your question. I mean starting with the second one. Yes, I would say that 1.5% is like our CET1 target ratio by the end of the year in a fully loaded basis. So we feel comfortable to be around that 10.5%. We might be closer to 11% or close to 10%, depending on the loan growth of the moment, but the 10.5 area target is where we want to be, and that gives us enough caution or buffer to the regulatory minimums that we have.

In terms of the NIM strategy, I mean, going forward, I mean, we think that first, I mean, all the commercial or the client NIM is doing really well, as Robert showed in his presentation, even [indiscernible] in the change in mix from demand deposits to time deposit that is pressuring the commercial spread. So that is a tailwind going forward to support NIMs. And in terms of the market or the ALM NIM, we have our historical strategy of having a negative sensitivity to hiking rates in order to compensate the structural mismatch we have in U.S. or inflation on the asset side. So that has historically proven to be a compensating factor that has helped us to sustain NIM around 4% for the last few years.

And what we are seeing this year and starting next year is kind of a mismatch between the pace of the adjustment of the Central Bank interest rate to the inflation scenario. You can see that on the slide 24 that basically when the pace of the 2 variables as we had, for example, in first quarter this year, a very high inflation and not so high rate NIM went up to 4.4%.

And this last third quarter, when inflation is going down and the Santander life is still having the rate. The NIM went down to 3% and might go even lower for the fourth quarter where the rate will be big and inflation will be conversion downwards. So going forward, the strategy is to try to keep this neutral position that having a hedge to lower inflation. And what we are seeing for the next few quarters is some friction between the mismatch of the pace to the rhythm when the Central Bank will start just in a shifting rate.

At the end of the one, it's like a real rate situation where today, we have real rates of historical maximums, I mean the 1-year real rate is at 5%. That's because nominal rates are double digits and inflation expectations for the next 12 months are like around so for the next few quarters, we'll face this low NIM until the real rate start to adjust. And as Robert mentioned, by the end of next year, we expect NIM to go back to 3.5% or higher and the same for 2022. We see this as an asset temporary adjustment for the monetary situation in Chile, and that will imply like lower NIMs for the next 2 quarters.

[Operator]

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

[Ernesto María Gabilondo Márquez, analyst]

Most of my questions have been answered, but I have a couple of questions. The first one is on your effective tax rate. I believe this year could be ending around 12%. It has been benefiting because of the inflation. So how should we think about it next year? And then my second question is on your guidance for next year. So you have mentioned that you're expecting NIM pressure of around 30 basis points, but could be partially offset by the higher noncredit-related revenue you're expecting around 15% to 20% and also lower OpEx growth, which is expected to behave below inflation. So when incorporating the numbers of your guidance, for next year, I'm getting at an ROE above 19%. But at the same time, it implies relatively flat or modest earnings contraction. So I just want to double check if that is what you're expecting in terms of earnings next year.

[Robert Moreno Heimlich, executive]

Okay 23 so with the ROE [indiscernible]

[Operator]

Just a very short message. I think Mr. Emiliano I know your line was muted for the last 30 seconds. So if you don't mind, please just restart your handset, that would be very helpful for Ernesto.

[Robert Moreno Heimlich, executive]

Can you hear us hello, Sorry, can you hear?

[Emiliano Muratore, executive]

Yep. Sorry, the computer lost uh.

[Robert Moreno Heimlich, executive]

Yes. Yes. So we heard the question. So Ernesto, basically, what you're saying is correct. So next year, with the GDP falling and the Chilean economy into recession, the focus will be on our non-lending activities that are showing really strong momentum. risks, as we said, will go up a bit, but controlled. So basically, between nonlending income and a very tight control of costs, okay? we should reach this ROE to range now '18, '19, which obviously means a slight dip in net income, which I think in the scenario we're leaving globally is very good.

And that also means that in 2024, which is far away, but basically, we should have an important uptick, not only in margins but in profitability. The tax rate, effectively next year as inflation comes down, we're going to be paying a higher tax rate. So pretax, the fall is important. But next year, the tax rate should be somewhere between 17% and 18% effective tax rate, which is directly in line with the lower inflation, okay? And as time goes by and we go back to 3% inflation, if we ever go back there, the effective tax rate should be around $21 million.

[Operator]

Our final question for today comes from Mr. Jason Mollin from Scotiabank.

[Jason Mollin, analyst]

I wanted to ask about the sensitivity of your results to interest rates and inflation. If you can give us an update on where we are and particularly if rates start to decline, maybe you can give us a view, I just locked in because I thought the time just changed to 11 a.m. start time. But if you can just talk a little bit about the sensitivity of the results to rates and inflation and where we are in the cycle. And if Santander Chile will benefit as rates decline relative to the pain, I think I saw as rates increase.

[Robert Moreno Heimlich, executive]

Jason, are you able to see the presentation?

[Jason Mollin, analyst]

Yes, I can, I'm looking on that.

[Robert Moreno Heimlich, executive]

Have you seen a slide 33 now?

[Jason Mollin, analyst]

Hold on one second. Yes.

[Emiliano Muratore, executive]

Okay. So basically, there, we put like the metrics for NIM for next year, that where you can see the sensitivity to the inflation for the year and also the average monetary policy rates. Our base case there is inflation to be around like 6.3% and the average monetary policy to be around 9.4%. If you break down that NIM for the year into the quarters, you can see what you were basically mentioning that will start below that 3% because first quarter will still have rates of double digits and inflation normalizing to the single-digit territory. And when the year progresses and we expect the Central Bank to start adjusting rates either first quarter or more likely second quarter next year, we'll start the NIM expansion from the market NIM, if you want, and we expect to close the year at 3.5% or higher when the Central Bank takes the rate around like 7%, and inflation is conversion to the 6% territory.

That's on the market NIM on the client's NIM, we are seeing like very positive trends in terms of the pricing discipline and the ability to have better pricing opportunities in this higher rate environment. The pressure we are seeing in the last part of this year is that the mix the change in mix in deposits between demand deposits and time deposits that we expect that headwind to banish starting like next year. And so we see client NIM as a tailwind for the total NIM in next year.

[Operator]

It looks like we have no further questions at a good point. And maybe we'll give another minute or so for anyone else. [Operator Instructions] Okay. It looks like we have no further questions. I'll pass the line back to the management team for the concluding remarks.

[Emiliano Muratore, executive]

So thank you all very much, [indiscernible] . Thank you thanks for participating in today's call. We look forward to speaking with you soon.

[Robert Moreno Heimlich, executive]

Thank you.

[Operator]

Thank you very much. This concludes today's call. We'll now be closing all the lines. Thank you