Banco Santander-Chile

NYSE:BSAC

Earnings Call Analysis

Banco Santander Chile Q3 2023: Strategic Gains Amid Challenges

Banco Santander Chile, in its Q3 2023 earnings call, portrayed a digital transformation journey with consistent growth in its digital client base bolstered by initiatives like Santander Light and Mas Lucas. Amid weak economic activity and a contracting economy by 1% in the first half and expected closure at -0.5% for 2023, the bank remains committed to strategic pillars prioritizing digitalization, specialized services, innovation, and organizational roles. It maintained cost efficiency, outperforming competitors, and achieved an NPS lead. Its operating segments saw a 33% net contribution increase, with retail banking showing strong growth fueled by a larger client base. The bank's net income declined by 55% year-over-year, but it demonstrated robust cost control and projected an ROE of high-teens for Q4. Looking ahead to 2024, the bank anticipates positive GDP growth, lower inflation, and mid-single digit loan growth, aiming for a 3% to 3.5% NIM and an ROE of 17-19% long-term.

Introduction to Banco Santander-Chile's Q3 2023 Performance and Outlook

In their third quarter of 2023 earnings call, Banco Santander-Chile's management team detailed the bank's navigational strategies in challenging economic conditions such as lower inflation rates and elevated interest rates. While these conditions presented obstacles, the bank's dedication to digital innovation and customer-focused services helped it sustain business growth. There is an anticipation for lower funding costs and improved margins due to the Chilean Central Bank's interest rate reduction strategy.

Economic Climate and Inflation in Chile

Chile has experienced economic turbulence with the activity showing signs of weakness. Consumer spending saw a downturn, affected by decreased liquidity and a strained labor market. Although employment rates hovered around 9%, investment levels stayed relatively flat due to significant projects in the mining and energy sectors. The economy contracted by 1% in the first half of the year and is on track for a slight annual contraction by year-end. Inflation, which hit a high of 14% in August 2022, has eased to around 5.1% due to factors such as falling commodity prices, currency appreciation, and contracting domestic demand. It is projected to settle close to 4.7% by the end of 2023, with expectations of convergence to the central bank's 3% target by late 2024.

Strategic Commitment to Digital Banking and Business Operations

Santander-Chile has strengthened its approach with four strategic pillars summed under 'Chile First': transforming towards a digital bank while maintaining physical hubs, providing specialized value-added services to certain client segments, fostering innovation and growth, and committing to diversity and high-performance culture. Notably, their digital accounts Santander Light and Mas Lucas have shown remarkable success. To support their digital evolution, the bank has reduced its physical branch presence by 17% compared to the previous year.

Client Satisfaction and Sustainable Banking Initiatives

The Net Promoter Score (NPS) indicates a leading customer satisfaction rate with the bank's digital and remote channels and contact centers performing strongly. As for responsible banking, Santander has committed to sustainability through its Santander Verde Initiatives, having disbursed over $270 million for green finance in 2023. The bank also successfully issued its first ESG bond, demonstrating a firm dedication to green financing and responsible banking practices.

Financial Performance and Loan Portfolio Trends

Despite a 55% decrease in accumulated net income year-over-year, the bank's equity increased alongside growth in tangible net asset value (TNAV) and dividends per share. Business segments outside the corporate center have seen a significant 33% increase in net contribution year-over-year. Loan growth showed diversification, with retail banking loans and mortgage loans experiencing increases, while SME lending evidenced signs of recovery. The bank's liquidity levels remain solid, with a substantial liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), well above regulatory minimums.

Interest Margins, Cost of Funding, and Asset Quality

The bank's net interest margins (NIM) were impacted by decreased inflation, but showed positive signs towards recovery as the Central Bank reduced the monetary policy rate. With expectations for interest rates to continue falling, the NIM is forecasted to rebound to between 3% and 3.5% in 2024. Asset quality metrics have indicated slight increases in non-performing loan (NPL) ratios, although the coverage remained strong. The NPLs for commercial loans, particularly in the SME sector, exhibited more significant deterioration.

Non-Interest Income, Operating Expenses, and Capital Ratios

The bank has seen robust growth in non-interest income, driven by fees and treasury services, although regulatory changes are expected to slow fee growth slightly in subsequent years. Operating expenses demonstrated a downward trend year-over-year due to branch closures and other cost-control measures. Capital ratios remained healthy post-dividends, with future requirements, including counter cyclical buffers, being well within the bank's projections. The anticipatory steps will ensure compliance with rising regulatory capital demands.

Guidance for 2024 and Long-term Prospects

For the fourth quarter of 2023, the bank anticipates increased inflation and interest rate reductions that should contribute to the recovery of margins. ROE is expected to be in the high-teens. With GDP growth projected at 2% for 2024 and inflation estimated around 3%, loan growth could reach mid-single digits. Costs of risk should stabilize around 1.2%, aligning with the expected economic cycles, keeping costs in control in relation to inflation. The bank targets a return to normalized levels of ROE between 17% and 19% for the long-term.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and Gentlemen, thank you for standing by. And I would like to welcome you to Banco Santander-Chile 3Q 2023 results conference call on the 3rd of November 2023. At this time all participant lines are on listen-only mode. The format of the call today will be a presentation by the management team followed by a question-and-answer session.So, without further ado, I would like to pass the line to Mr. Emiliano Muratore, the CFO of the company. Please go ahead, sir.

[Emiliano Muratore, executive]

Good morning, everyone. Welcome to Banco Santander-Chile Third Quarter 2023 Results Webcast and Conference Call. This is Emiliano Muratore, CFO and I'm joined today by Cristian Vicuna, Chief of Strategic Planning and Investor Relations; and Carmen Gloria Silva, our Economist.First, I want to express my gratitude for your presence on this quarterly meeting. Today our primary focus is to discuss our performance during the third quarter. We faced challenges such as lower inflation and innovative interest rates. Despite of the old days, our steadfast commitment to digital strategies and customer-centric product has enabled us to deliver on customer experience and business growth.The Central Bank of Chile has continued a rate reduction strategy as Carmen Gloria will elaborate on shortly. We anticipate this move will have a positive impact on our funding costs and margins in the quarters to come. We look forward to a more in-depth discussion of this development as we delve into the specifics of our quarterly results.

[Carmen Llanos, executive]

Thank you, Emiliano. On the Slide 5, I present a summary of the macro overview in the country. The economic activity remains weak. The adjustment cycle initiated last year, after a strong overheating in 2021 has continued this year.Private consumption has had a sharp decline due to the withdrawal of liquidity and a weak labor market. While the labor force participation has been increasing since the pandemic, it's still below its historical quarters, and unemployment rate remains at high levels around 9%. Investment on the other hand, has tended to remain flat. The progress of large projects in mining and energy sectors has compensated for the contraction in real estate investment.In the first half the economy contracted by 1% annually and expected to end 2023 with an annual variation of minus 0.5%. In 2024, economic activity will grow again, although at a moderate pace, reaching around 2% driven by less stringent local financial conditions.The declining consumption has allowed the country's external accounts to improve. The current account deficit was 9% of GDP in 2022, and we project it will be 3% of GDP at the end of this year. The inflation has decreased rapidly after reaching a maximum of 14% in August 2022, it ended at 5.1% last September.This reduction has been due to three main factors. First, the fall in the national commodity prices. Second, the appreciation of the exchange rate during the first half of the year. And third, the contraction of domestic demand because of restricted financial conditions.Going forward, inflation will continue to decrease, but at a slower pace, due to more demanding comparison bases, the rebound exhibited by oil prices because of Middle East tension, and the sharp depreciation of the pesos since the beginning of July, even beyond its fundamentals. We estimate that inflation will close in 2023 with a variation close to 4.77% in US terms.In 2024, the process of convergence to the Central Bank 3% target will continue. So, the CPI will be around at that figure in the last quarter of next year. The Central Bank began the monetary normalization cycle with 100basispoint decrease in July, followed by another cut in September and October, bringing the monetary policy rate to 9%.The Board has decided to slow the pace of rate cuts, taking into account the deterioration of external financial conditions. It also suspended both the foreign exchange reserve accumulation plan and the unwinding of its forward short position. After this decision, the exchange rate has appreciated significantly. And in our basis scenario, it will continue to fall to close this year around CLP 875.For the next meeting in December, the Central Bank will continue with the monetary normalization process. Although the pace in the rate cuts will be contingent to the evolution of external risks. If volatility decreases, the monetary policy rate will end at 8.25%.In 2024, cuts are expected to continue. However, if the first scenario of higher for longer prevails, and there is no change in U.S. monetary policy, it will be difficult for the Central Bank of Chile to lower the interest rate beyond 5.5% due to a limited interest rate differential.The country's fiscal accounts have deteriorated. This year, we will see an increase in public expenses of around 2.2%, in construction and revenues. This will lead to a fiscal deficit close to 2.5% of GDP and the public debt will be around 40% of GDP, still well below other economies in the region.In more general terms, boosting medium term economic growth is crucial. This requires transversal agreements that allow the implementation of a pro-growth agenda, and reduce current political and economic uncertainty. The closure of the constitutional process as well as the progress of structural reforms that promote savings and productivity are essential in this regard.

[Emiliano Muratore, executive]

Thank you, Carmen Gloria. Turning our attention to Slide 9. Let me begin by reiterating our commitment to our 4 key strategic pillars encapsulated under the umbrella Chile First. First, we're seeing a transformative journey towards becoming a digital bank. This evolution is not just about embracing cutting edge technology, it's about maintaining a physical presence through innovative Work/Cafes. These spaces will serve us more than just customer touch points. They will be dynamic hubs fostering connectivity, equipped with state-of-the-art technology and a dedication to exceptional service, our Work/Cafes are defined to be defined banking experience.Our second pillar is centered on providing specialized value-added services, tailored to our corporate middle market of private banking clients. Our commitment is to deliver premium transactional trade, foreign exchange, and advisory products and services, ensuring our clients receive a top-notch experience.In our third pillar, we are committed to fostering innovation and propelling growth. We are not content with the status quo. We aim to lead the change in redefining the banking landscape. We actively seek out new business opportunity, pioneering the sustainable transformation of our clients. By challenging conventions, we aim to drive growth and cultivate success.Lastly, we place great importance on the role of our organization. To realize our objectives, we are dedicated to building an agile, collaborative and high-performance group too. We recognize that diversity is our strength and individuals will flourish based on merit. We are constructing a thriving community where talents are nurtured and innovative ideas are highly valued.On Slide 10, we have witnessed remarkable success in our digital products, exemplified by our ability to consistently grow our digital client base. Key initiatives such as Santander Life and more recently, Mas Lucas have been instrumental in achieving this.Our Santander Life account has now attracted over 1 million clients. It offers a simple current account while also providing the opportunity to access additional products through our digital platforms, including time deposits and mutual funds. As these clients meet our risk criteria, they can access credit lines and loans.Mas Lucas, introduced in March of this year has exceeded our expectations. It currently accounts for over 30% of our new account opening per month. Notably, the onboarding process for Mas Lucas is entirely easy, featuring facial recognition technology and no password requirements. These accounts come with no fixed or variable costs, and accept deposits of up to CLP 5 million.The success of our digital strategy has also allowed us to enhance our branch innovations. Many of you have experienced our Work/Cafe branches. These are branches equipped with coworking spaces.Furthermore, we have fortified our branch network with Work/Cafes Espressos branches, a format that focuses on the consolidating cash operations into transaction hubs, while maintaining a Work/Cafe ambience. This includes a state-of-the-art technology behind the scenes to ensure our customers enjoy an efficient and secure banking experience. We are pleased to announce that we have already opened 4 Work/Cafe Expressos centers in New Guinea, Rancagua, Santiago, with 3 more Expressos branches planned for the end of the year.On Slide 11, our ongoing commitment to digitalization and simplification is evident in the significant reduction of our branch footprint. As of September, our total branch network stands at 245 -- 254 branches, representing a 17% reduction compared to September 2022.Notably, 31% of our branches no longer have human tellers. Instead, they serve as business centers that prioritize advisory services, new business opportunities and a superior customer experience. Simultaneously, our productivity has seen profit gains with loans and deposit volumes per branch increasing by 23% year-over-year, a 6% rise in the same metric per employee, during the same period.Moving to Slide 12. Our commitment to SMEs remains robust, bolstered by our joint offerings with Getnet. Our digital life accounts for SMEs continues to drive a 17% year-over-year increase in total SME clients with more than 370,000 SME clients in our pool. Moreover, there has been 16% year-over-year increase in active SME clients. When considering current accounts for businesses as reported by the CMF, we have seen a remarkable 33% increase capturing almost 35% of the market as of July 2023.GetNet, our acquiring business has also made significant contribution in attracting more SME clients. GetNet continues to focus on companies of various sites, enhancing customer experiences through integrated payment solutions. Currently, it operates more than 148,000 point-of-sales terminals across the country, with substantial demand from SME clients. More recently, GetNet has expanded into larger clients requiring a host solution, thereby offering a more integrated payment system for a sophisticated clientele. In the first 9 months of the year, Getnet generated fees totaling 32 billion and a net income of almost CLP 6 billion.Slide 13 illustrate the results of our commitment to productivity through a dedicated and skilled workforce. Our strategy has resulted in a cost structure that is more efficient than our competitors, enabling us to serve our clients at a lower cost. In terms of recurrence, our fees generated by customers now cover over 55% of our expenses, a notable increase compared to our industry average of 41%. Our cost represents only 1.1% of our assets compared to 1.6% of the ones in the industry.The operating cost to serve our loan is 2.3%. Our cost per branches stands at CLP 3,215 million, significantly lower than the industry average of CLP 4,296 million per branch.The cost per current account is of CLP 0.4 million per account less than half the industry average of CLP 800,000 per account. These key performance indicators underscore our organization's transformation towards agility, collaboration and high performance.On Slide 14, we are pleased to report the progress in our Net Promoter Score, NPS. In the last quarter, we achieved a score of 58 points, creating a 3 point lead over our closest competitor. Our NPS score is based on feedback from more than 60,000 surveys measuring over 30 NPS metrics across various service channels on a daily basis. This invaluable feedback allows us to proactively manage and improve our client service.Our digital and remote channels continue to receive very high levels of satisfaction from our clients, with our ATP and website achieving scores of about 70 points. Our contact center is also highly regarded as outperforming our peers.Slide 15 emphasizes our commitment to responsible banking objectives, highlighting progress made in areas such as diversity and inclusion. We offer a comprehensive range of sustainable products to address climate change through Santander Verde initiatives. In 2022, we supported numerous customers with sustainable operations in our business and corporate banking divisions. So far in '23, we have disbursed over $270 million for green finance. We believe this will be one of the fastest-growing areas in the coming years.On Slide 16, we are delighted to announce the issuance of our first ESG bond under our ESG framework with a particular focus on green mortgage. This issuance marks a milestone as it is the first Chile's issuance with green mortgage stated as the use of proceeds.The private placement amounted to JYP 8,000, approximately USD 53 million for a 2-year term. Currently, we have a growing portfolio of approximately CLP 86,000 million in green housing that complies with the highest Housing Energy Certifications by the Ministry of Housing and Urban Planning in Chile.We offer preferential interest rates to client choosing rehousing, and we also contribute to conservation and consolidation projects in Chile. This issuance reinforces our commitment to advancing our responsible banking goals and green finance, reflecting the growing demand for such instruments, both locally and internationally.This year, the prestigious Euromoney has named us Best Bank in Chile for 2023, and we have extended their recognition to Best Bank SME Bank, Best Bank for Corporate and Social Responsibility, and Diversity and Inclusion in Chile.Furthermore, our advances in sustainability have been recognized by prominent sustainable indexes, with solid ratings from Sustainalytics and MSCI. We are also the sole Chilean bank included in Dow Jones Sustainability Indexes for global emerging markets.Now let's talk about the strength in our results and balance sheet. On Slide 18, we show our results this year so far. Our operating segments that exclude the corporate centers and ALM continued to perform well with a 33% year-over-year increase in their net contribution, with an important expansion in NII and fees with costs and risk under control, demonstrating the results of our strategy across segments. The accumulated net income as of September 2023 totaled CLP 319 billion, decreasing 55% year-over-year.On the other hand, the book value of our equity increased 8.5% year-over-year with TNAV per share and dividend per share growing 15%. With those 2 effects of net income and equity, the accumulated return on average equity reached 10.4% in the first 9 months of 2023.The results of Corporate and Investment Banking or CIB have continued to be impressive, increasing 68.5% year-over-year. Net contribution from the Middle market of corporates increased 27% year-over-year. Both these commercial segments experienced an important rise in deposit spreads as well as high growth of fees and treasury income. The focus of these segments continued to be non-lending activities driving profitability.On Slide 20, we can see that regional banking results increased 21.6% year-over-year, driven by the greater client base and more activity by our clients. Our active individual clients increased 2.9% year-over-year and legal volumes increased 2.5%, while our active SME clients have grown 15.7% compared to September last year. The margin increased 20.8% year-over-year due to a better mix of funding and loan growth.Fees in this segment increased strongly by 21.1% year-over-year, driven by card fees due to greater usage and in the increase in the client base, as well as the fees generated by GetNet.Provisions increased 60% year-over-year due to normalization of the liquidity of our clients in recent periods. Operating costs increased in a controlled manner by 3.7%, as the bank continues its digital transformation, generating operating efficiencies.In terms of loan growth, in the third quarter, we started to observe solid changes in loans. Retail banking loans grew 5.4% year-over-year, and 1.6% in the quarter. Mortgage loans grew 9% year-over-year, and 1.5% quarter-on-quarter, higher than the effect of the U.S. variation in the quarter and demonstrating a slight pickup in origination of new mortgages.Consumer lending grew 7.8% year-over-year, mainly due to credit card growth after quarters of contraction. Between the end of '19 and '21, these loans decreased 7%, as clients reduced large purchases such as travels and holidays, which fuel credit card loans. At the same time, many clients pay off credit card debt with the liquidity obtained from government transfers and pension fund withdrawals.At the end of 2022, a household liquidity levels returned to normal and holiday travel resume, credit card loans begin to grow again, increasing total balance compared to pre-pandemic levels. In the recent months, credit card growth -- loan growth has started to decrease, while installment loans have grown, reflecting a better indebtedness mix of our clients.SME lending showed signs of a recovery, growing 3% quarter-on-quarter after several quarters of contraction. The Covid Fogape loans are now finishing and therefore, we are seeing a reactivation in demand for loans, as well as impact from the expansion of the SME client base through our digital accounts and Getnet.Our Middle Market segment decreased 4.9% year-over-year, and grew almost 3% on the quarter. This quarterly increase is mainly due to the effect of translation gains on the loans in denomination in dollars, mainly for our import and export clients, around 20% of our commercial loans are in U.S. dollar and Chilean peso depreciated 11.1% in the quarter. This also explained in part the 7.6% increase in the CIB in the quarter. Overall, loans have grown 3.1% year-over-year. And next year, we expect the reactivation of the economy to help loan growth reach mid-single digits.Liquidity levels remained strong in the quarter. The bank's total deposits increased 1.4% in the quarter and 0.9% year-over-year. The increase was driven by time deposits that increased 5.1% quarter-on-quarter and 13.6% year-over-year, mainly due to an increase in large corporate deposits as the high interest rates remain attractive to clients. While our demand deposits have decreased 11% on the year, our market share in demand deposits have increased from 18.9% to 19.7%.Bonds issued increased 11% year-over-year and 3.5% in the quarter. During the year, the bank has issued bond in U.S., Chilean pesos, U.S. dollars and Japanese yens, taking advantage of attractive opportunities in the various fixed income markets locally and abroad.The bank's liquidity coverage ratio, LCR, which measures the percentage of liquid assets over net cash outflows as of September 30, 2023, was 192% well above the minimum. At the same date, the bank's net stable funding ratio, which measures the percentage of liquid assets financed through stable funding sources, reaches 14.4%, also well above the current regulatory minimum set for this ratio.On Slide 23, we have a simplified balance sheet to help explain the different sensitivities on our structural balance. On the asset side, we have around $45 billion in loans, of which nearly 60% is linked to inflation. On the liability side, the bank does have some deposits and bonds in U.S. However, we also use derivatives to control our exposure to inflation.At the beginning of the pandemic, the bank received a fixed rate credit line from the Central Bank as part of the FCIC program, which we swapped to variable rate in 2020. The FCIC is to be paid in 2 installments during 2024, on April 1 and July 1. and so, the Central Bank has announced a liquidity deposit program that offers Central Bank instruments at floating monetary policy rate with maturities on the FCIC payment dates.These instruments, which we have recently started purchasing in October, will be classified as held-to-collect, this measure will help the Chilean Banks to better manage their liquidity in the lead-up to the FCIC payments.For us, the payment of the FCIC will not have a significant impact on our NII, as we will be replacing a variable rate liability with funding at the current market rates.In terms of our net interest margin ratio, we should see an improvement as the denominator, our interest-earning assets decreased as we use our liquid assets for the payment. Lastly, it is important to mention that our time deposits, some $17 billion have a maturity of 30 to 60 days in general. This means that with the rate decreases the cost of funding decreases quickly. And now that the rate cuts have started, we expect the pass-through of our cost of funding to happen quickly.In terms of margins, the bank's NIM in the quarter reached 1.6% and 2% year-to-date. As shown on this slide, this is mainly a phenomenon that affects our nonclient NIM or the net interest margin from our ALM activities, including the U.S. GAAP on our liquidity. The client NIM, which is defined as the NII from our business segments over interest earning assets has increased the deposits and loans price have risen. The bank is well positioned for a fall in real rates.The sensitivities to inflation and interest rates remained stable to the previous quarters with our 100 basis points drop in inflation will pressure down our NIMs by 15 basis points, and 100 basis dropped in the average interest rates will increase our NIM by 30 basis points over a 12-month period.The variation of the U.S. in the third quarter was very low, up 0.3% compared to 1.4% in the second quarter of '23 or 3.4% in the same quarter last year. This pass-through of the lower variation in the U.S. to our margin is immediate and pushed our margins downwards.Meanwhile, the Central Bank of Chile started to reduce the monetary policy rate, first at the end of July by 100 basis points to 10.25% and then in September to 9.5%. This led to an immediate improvement on our interest income. However, this was not enough to mitigate the negative impact from the low inflation. The Central Bank cut the rate a further 50 basis point last week to 9%, and of our 10 deposit base we price it with -- and with higher expected U.S. variation in the fourth quarter, our NIMs will show sign of recovery in the 4Q and into next year. For 2024, we expect our NIMs to rebound toward 3% to 3.5%, depending on the evolution of rate cuts in Chile.Moving on to asset quality on Slide 25. The NPL ratio rose to 2.3%, slightly above pre-pandemic levels as household liquidity levels return to normal, and the economy feels the squeeze from the high interest rates.The coverage of NPLs as of September 2023 reached 158%, and there has been no reversal of the voluntary provisions. Our impaired loan ratio, which includes the NPLs and restructured loans reached 5.5%, still below pre-pandemic levels, but showing the same upward trend.On Slide 26, we show the asset quality by loan product over the last 4 years. As displayed, we now have higher coverage for all our products, while the NPL ratio has been rising, the impaired ratio remains under control for consumer and mortgage loans.Our commercial loan book is showing more signs of deterioration with NPLs reaching 3% on the impaired ratio of 7.7%. As we can see on the graph on the right, most of the fact is concentrated on the small and medium companies. As a reminder, these SME loans account for around 9% of our total loan.As we can see on Slide 27, overall, our cost of credit has stayed in line with guidance at 1.2% year-to-date. In the graph on the bottom left, we can see how the cost of risk per segment is now similar to where we were before the pandemic, back in 2019.On Slide 28, we move on to noninterest income revenue sources, which continue showing exceptional growth trends. Income from fees and treasury rose 20.4% compared to a third quarter in 2022 and decreased 8.2% quarter-on-quarter after a particularly strong second quarter for free from financial advisory in the other lines, which was not repeated to the same extent. In general, our fee income is benefiting from higher usage of products in all segments. We expect these trends to continue in 2023.The gradual implementation of the new interchange fee regulation started in October and will reduce fee growth in the fourth quarter, we estimate a negative impact in fees in 2024 of about CLP 25 billion and CLP 47 billion in 2025. Considering this impact for 2024, we expect these line items to grow around 10% with strong growth from clients and products, mitigating the interesting change fee impact.As shown on Slide 29, we also can see Bank efforts to continue increasing productivity and to control costs. Operating expenses decreased 7.7% year-over-year and increased 4.1% quarter-on-quarter. The quarterly increase in personnel expenses is due to the slower rate that we have been closing some branches, which has reduced severance costs in the quarter.Meanwhile, our administrative expenses grew 8.4%, mainly due to increased expenses related to technological developments in the quarter. As a reminder, the Bank continues ahead with its $260 million technology investment plans for the year '23 to '25. And because of these investments, we are expecting costs to fall in absolute terms in 2023.Moving on to Slide 30. We observed a positive evolution of our capital ratios. At the end of the third quarter of '23, the Bank reported a core equity ratio of 10.7% and a BIS ratio of 17.1%, after the distribution of annual dividend that amounted to 60% of the '22 earnings.In May, the regulator announced that from the next year, the Chilean banks will need to include a countercyclical buffer of 0.5%, this, together with the conservation buffer of 2.5% and the systemic buffer of 1.5% means that our minimum fully loaded CET1 will be 9.0% in December 2025. Below on the right, we summarized the requirement levels by our regulators, including the potential buffer requirements and additional capital.On Slide 32, we conclude with some guidance. Our strategy as a diesel bandwidth work offense will continue to provide us with a greater diesel client base with solid fee growth and impressive operating efficiencies.For the fourth quarter of this year, we expect a higher inflation compared to our 3Q, reaching around 1.6% compared to 0.3%, and we expect an average monetary policy rate of 9.1% compared to the 10.4% in the third quarter. With this, our margins will start to show signs of recovery, along with robust client NIMs. After several quarters of impressive growth, our non-NII will finish the year slightly dampened in the -- due to the initial impact of the lower interchange fees on card businesses.Our cost of risk should remain around 1.2%, with our NPLs continue to trend upwards slightly. Costs will remain under control. With all this, we should reach an ROE of high teens in the fourth quarter.For 2024, our macro expectations are more positive with an estimated GDP of 2% with inflation around 3% and a monetary policy rate ending the year '24 at 5.5%. With this, we expect loan growth to reach mid-single digits as the economy reactivates.As rates continue to fall, our margins will continue to recover, reaching a range of 3% to 3.5% in 2024, depending on the evolution of rate cuts.Non-NII should be growing around 10% with good customer growth trends but impacted by lower interchange fees. Cost of risk should be stabilizing during the year around 1.2% with asset quality following the economic cycle. Costs should be growing in line with inflation while maintaining best-in-class levels and the effective tax rate will be normalizing. With all of this, our ROE for 2024 will be recovering toward normalized levels, and our guidance for long-term ROE remains between 17% and 19%.With this, I finish my presentation, and now we will draw the answer any questions you may have.

[Operator]

[Operator Instructions]Our first question comes from Mr. Yuri Fernandes from JPMorgan.

[Yuri Fernandes, analyst]

I have a question regarding fees. You have been doing a very good job on fees, and we all know that fees can be very good for ROEs in the long run, like you don't allocate a lot of capital for most of those business, right? So, what is the outlook for fees here? For sure, not the 30% base. At least, this is not what we believe. You have the interchange, you discussed this in the presentation. But for 2024 or 2025, do you think fees should continue to grow well above loans? Any soft guidance you can provide for that line? And then I can ask a second question.

[Cristian Vicuna, executive]

This is Cristian. So, thank you for the question. So yes, we are convinced that we can continue delivering fee growth higher than our loan growth. And this is mostly because our strategy is structured towards increasing our customer base and focused on transactional products such as FX transactions and fees.So Getnet is also pushing our fees lines toward that goal. So, the amount of SMEs that we are growing and increasing the customer base is also explaining why our fees revenues are growing consistently.

[Emiliano Muratore, executive]

And also, I would add that our focus on customer satisfaction and NPS, it's a lever that, as you said, in the long run, can sustain the figure, because at the end you need to be able to provide a service sort of product that the client is willing to pay. And as you saw in our performance, we have been doing great also to in that front of customer satisfaction.

[Yuri Fernandes, analyst]

So something like fees growth is reasonable for this line going ahead, like mid-teens something like that. I think it's a good guess for the fee line growth?

[Cristian Vicuna, executive]

Mid-teens, considering the interchange fees, pressure looks like challenging that we will try to be in the double-digit area and as high as possible.

[Yuri Fernandes, analyst]

And like on -- still on this operating efficiency metrics, on the cost side, again, you did a very good job. I know margins, it's harder for you to control, but on expenses, you have been delivering a lot. What is the outlook here? Can you continue to grow? I think below inflation is officially our speech. If you can provide more color on cost side, what are the big plans for 2024?

[Cristian Vicuna, executive]

Yes. As you said, I mean, usually, our cost strategy is to have them growing below inflation. I mean this year, they are actually like falling, I mean, significantly with low inflation. So, in a certain sense, that provides some kind of headwind going forward. We still target to be below inflation. We talked in the guidance of cost around inflation, but our intention is to keep growing in the low single digits and hopefully below inflation.

[Yuri Fernandes, analyst]

And final one, capital. Are you comfortable with this 10.7, like any change on the dividend payout policy or no? It's a matter of ROE moving up and helping you to re-compound on capital.

[Cristian Vicuna, executive]

Yes. No, we don't see any change in the payout of policy. I mean that 10.7, it's kind of low in the sense that it was pressured by the FX that it was at its peak, close to peak, by the end of September, and also some short-term risk-weighted asset inflation both in the quarter. So, by the end of the year, we expect to be again above 11%. And so, we are comfortable in that area. And we think that we can sustain the payout policy we have been having these last few years.

[Operator]

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

[Daniel Mora, analyst]

I have just a couple of questions. The first one is, can you mention what will be the steps considering the expiration of the FCIC, the liquidity line provided by the Central Bank, and the different effects on the accounts on the balance sheet and the financial results? This should resolve the negative performance of derivatives that is impacting the NII in 2023? Or can we expect further impacts after the expiration of the FCIC?

[Cristian Vicuna, executive]

So regarding the effects of the maturity of the FCIC in our balance sheet and results, roughly speaking, we have around like CPL 6 trillion in that facility. And also, roughly speaking, half of that is maturing by the end of March and the other half by the end of June. So, I think you can expect that at least like 3 quarters of the total amounts will imply a reduction in the balance sheet.I mean, basically, we already have more than half of that money in liquidity like waiting to pay the maturity of that liability, and we expect to increase that amount of liquidity at least to 3/4 of the total amount by the time that it's maturing.So, you'll have asset and liability falling in, roughly speaking, around 10% of the current balance sheet. So, in terms of ratios that would imply a reduction in the denominator for NIM. So that's in the math will take down our NIM.In terms of NII, considering that most of that is already floated at market rates, and that's the same market rates that the liquidity and the assets are yielding. So, in terms of NII for us, it will be nonmaterial, the maturity of the FCIC.So, you can't expect a jump in NII because of the maturity. You do can expect an improvement, jump in NII because of rates going down, because at the end, the lower the rate is the better for us because of that liability and the positioning of the balance sheet.So that is like roughly speaking, in our case, the impact of that majority. I mean a nonrelevant impact in NII, neither positive or negative, and a reduction of the balance sheet as a whole and impacting the different ratios where total assets or total liabilities are used.

[Daniel Mora, analyst]

But just to clarify, the current negative position that you have on derivatives that is impacting the net interest margin, should decrease with the aspiration of the FCIC, right? Because you have the swap to variable rates.

[Cristian Vicuna, executive]

Actually, it will decrease and it's decreasing as interest rates go down. So that's the main factor for that negative to phase out or to disappear. I mean like interest rates going down rather than the maturities itself.

[Daniel Mora, analyst]

And my second question is regarding the NPLs of the commercial segment, even though you explained that SMEs that just represent 9% of the total loan portfolio is pushing this indicator app. Do you feel comfortable with the current performance? Is this the normal levels of the SMEs considering the structural performance of the portfolio? Or should we expect an improvement in these figures given the improvement of the economy in the next year? What will be the normal level of the NPLs for the commercial segment?

[Cristian Vicuna, executive]

This is Cristian again. So, regarding your question, we are seeing the impact in our commercial portfolio, mostly in the upper part of the SME market and the lower part of the Middle Market, right? So, like a smaller part of the large corporates and the upper part of the SMEs.Specifically, we are seeing impacts in 3 -- roughly 3 sectors. So, Agro, especially in the central part of Chile due to the heavy rains associated with the Nino effect between July and September. Some impact in HoReCa, hotels, restaurants and casinos, that's also suffered for the last 4 years. And we are also seeing pain points in the construction and real estate developer market. So those are the 3 segments that are the main point of concerns.The rest of the segments or the rest of the industries are looking quite normal, I would say, considering the current state of the economy and the cycle.So, we expect some recovery in the -- particularly in the second half of 2024, especially product assisted with the Agro portfolio. But it's all subject to further news, and we have monitored very closely the situation in those specific industries.

[Operator]

We'll now be moving to Ms. Neha Agarwala from HSBC Global Research.

[Neha Agarwala, analyst]

Just a quick one on your loan growth. We expect loan growth will still be mid-single digit for next year. But where do you think the loan growth is going to come from? If you can give us some color regarding the segmental growth? That would be very helpful. And my second question is on policy rate. What is the risk in your view regarding rates actually not reaching 5.5% for next year being higher than that? Is that a risk? And what would be the impact of that on your bottom line, in your view?

[Emiliano Muratore, executive]

Regarding loan growth, I mean just to try to give some color on the breakdown of that mid-single digit loan growth. We think that mortgages considering that inflation will be going down, I mean, to the 3% area. And also here in Chile, as in the rest of the world, the long-term rates have gone up significantly these last few months, weeks. So, we expect at this level of rates, demand for mortgages to go down a bit. So, I would say that mortgages should be, let's say, kind of below the average of loan growth. And then on the consumer side, kind of the opposite. I mean because we still have the liquidity from the pandemic, like going away. So, people have like a higher borrowing needs, if you want. And also, rates are going down.So, in terms of -- and consumer lending, it's much more linked to short-term rates rather than long-term rates. And we think that also should create a negative, let's say -- a positive elasticity of people like demanding more loans and so consumer to be on the upper part. And also in SMEs, I mean, after the phaseout of the FOGAPE program, that is a kind of a negative drag on that portfolio that is going down after the pandemic, you're going to have the SME portfolio going above the average.Then when you go into more middle to large corporates, that will depend a lot on how investment is progressing in the economy as a whole. I mean, we don't expect investment to grow too much. And so, they are -- you might be more on the average of that mid-single-digit growth for next year.I'm sorry, that's -- can you hear me?

[Neha Agarwala, analyst]

Yes. That was super clear.

[Emiliano Muratore, executive]

Okay. And so, when we go in to your second question regarding the risk or the path for monetary policy rates, I mean, so definitely having a terminal at an average rate for the -- our base case scenario gives us an average rate of around 6.5% for 2024.So, the higher that average the worse for us, and the opposite, if it is lower, that's why this guidance of NIMs for 2024 is such a large, I mean, we talked about 3% to 3.5%. And basically, with our base case scenario, we should be like in the middle of that range for the NIMs, for the year.And then you have that sensitivity, which had pointed that 100 basis points higher should impact like 30 basis points that NIM. So, just in rough numbers and average monetary policy rates of 7 should take us closer to 3 for the year, and an average closer to 6 should take us closer to the 3.5 NIM for the year.

[Neha Agarwala, analyst]

And the ROE range is 17% to 19% for next year?

[Emiliano Muratore, executive]

Actually, that's the long-term target. Next year, we'll be moving towards that range. To be in that range or not, will depend again on the path of the monetary policy rate.

[Operator]

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

[Ernesto María Gabilondo Márquez, analyst]

My question is just a follow-up on the ROE expectations, can you hear me? No?

[Emiliano Muratore, executive]

Yes, now, we can. We lose you. Can you hear us?

[Ernesto María Gabilondo Márquez, analyst]

Okay. Sorry, yes, I can hear you.

[Emiliano Muratore, executive]

Okay.

[Ernesto María Gabilondo Márquez, analyst]

I was saying that my question is a follow-up on the ROE. You were saying that you're expecting this medium ROE guidance of 17%, 19% in the medium term. But would it be reasonable to start getting to the low end of this medium-term guidance range in 2024? So, for example, even if what you were mentioning the NIMs, if you go to a level of 7% in the interest rates, and NIMs at 3%, at that level would it be reasonable to start getting into the 17% ROE? Or you will need to get more into the interest rate of 6% and a NIM of 3.5% to start getting into the ROE of 17%, next year?

[Cristian Vicuna, executive]

This is Cristian. So, we are expecting a somehow lower first half of the year, especially the first quarter should not be as positive as the second half of the year. So, in order to get to the levels of ROE that we are mentioning, we are probably going to be requiring to be in the 3.5-ish NIMs. And that probably could happen in some of the final quarters of the year, but not for the complete year.

[Ernesto María Gabilondo Márquez, analyst]

And then just a second question. Can you remind us if you have still an excess in provision charges? And where do you see your reserve coverage ratio for the next years?

[Cristian Vicuna, executive]

Yes. I mean, regarding the voluntary provisions, yes, we still have like CLP 295 billion on voluntary provisions, that's the total balance. And remember that part of that will be used to cover the new regulation regarding provisioning for consumer loans, and then the new standard model that the regulator is proposing. I mean there were news regarding that. I mean, they published like the second proposal or the second draft for consultation, which is, let's say, softer than the first one. I mean, they were basically receiving the comments from the industry and the market.And so, at the first graph, we were expecting an impact between like CLP 100 billion or CLP 150 billion in provisioning. Now we see that like much lower, around like CLP 90 million will be the impact. So yes, I mean, we still have this almost CLP 300 billion of voluntary provisions. 1/3 of that will be used by 2025 to cover this new provisioning model from the -- for the consumer portfolio and the rest is there basically to cope with, let's say, potential part of deterioration of our cost of risk or our NPLs.

[Emiliano Muratore, executive]

One point of clarification is that our coverage will not be impacted by this new consumption measure, no, consumption provisioning measure because it will -- it's a general provision that we allocated to consumer loan portfolio. So, no deterioration in the coverage ratio for this.

[Ernesto María Gabilondo Márquez, analyst]

So do you expect to keep the same coverage ratio for the next years?

[Emiliano Muratore, executive]

Yes. Yes. Yes.

[Operator]

Our final question today comes from Nicolas Riva from Bank of America.

[Nicolas Riva, analyst]

I have a question regarding your expected bond issuance promotional market for 2024. So, you have a senior bond maturity in January 2025 for about $750 million. I want to confirm if the idea would be to refinance that in the international market? And also, if you were to come to international market in 2024, if it would be specifically in the senior format given that you have already placed AT1 capital with our brand company? And especially also, if you expect maybe additional dollar funding needs in 2024, given the expected pickup in economic and loan growth in Chile next year?

[Emiliano Muratore, executive]

Yes, regarding the format, definitely, it would be like senior. I mean, we don't plan any hybrid because we have already our AT1 outstanding and initially is like the Group's policy to place hybrids, especially AT1s with the brand. So, it would be definitely the senior format.And regarding the potential of going to the public market in the U.S., that's something we follow closely on a regular basis. I mean even though the credit markets and -- and in general, the spreads in the U.S. are not bad, let's say, are not too high. But then when you do the math considering the basis swap to local currency, which is at the end, our ending currency.You can see that the polling markets abroad have been around 100 basis points more expensive than domestic market. Domestic market has lost some, let's say, liquidity and depth in the last few years, but it's still available. We have been able to issue good amounts in the last few quarters.So, I think it's a possibility. I don't see it as a given because even when you look at the other markets as maybe the Swiss market and some markets in Asia, they are more favorable than the U.S. Definitely, the U.S. has the size benefits where you can get, let's say, a higher size which without much difficulty.But I think it's something that might happen during the next year, but I wouldn't put it as a given. I mean, it will depend on the market prices and how our liquidity position and loan growth progresses.

[Nicolas Riva, analyst]

One, just a follow-up. So, you said right now, you see a differential of about 100 basis points in favor of issuing locally rather than issuing offshore and then swapping back to Chilean pesos, right?

[Emiliano Muratore, executive]

Yes. Yes, factoring in all the cost, expenses, withholding and everything. When you look at it on all in basis, it fluctuates like every day, because the basis swap has been quite volatile. But recently, yesterday and in the last few days, we have seen the swaps -- the basis swaps going down and that, let's say, create a pressure upwards on the synthetic cost of funding abroad.

[Operator]

Okay. Thank you very much. We see no further questions at this point. I'll pass the line back to the management team for concluding remarks.

[Emiliano Muratore, executive]

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

[Operator]

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