Banco Santander-Chile

NYSE:BSAC

Earnings Call Transcript 2017-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Banco Santander-Chile's Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference may be recorded. I would now like to introduce your host for today's conference, Mr. Emiliano Muratore, Chief Financial Officer. Sir, you may begin.

[Emiliano Muratore, executive]

Good afternoon, everyone. Welcome to Banco Santander-Chile's Fourth Quarter 2017 Results Webcast and Conference Call. This is Emiliano Muratore, CFO; and I'm joined today by our special guest, Matias Sanchez, Corporate Director of Retail Banking; Robert Moreno, Manager of Investor Relations, and our Chief Economist, Claudio Soto.

Thank you for attending today's conference call. We are very content with the performance of the bank in 2017, and we have interesting developments in retail banking, which we would like to share with you today. I'd first pass it on now to Claudio for a brief overview of the Chilean economy during the quarter and our expectations for the rest of the year.

[Claudio Soto, executive]

Hello. Last year ended optimistically. Chile's [ economic ] scenario is favorable, with strong and synchronized growth from our [ main 3 partners ] and the important surge in the copper price. Domestic confidence has improved substantially, reaching positive figures not seen since mid-2013. Job creation remains sturdy.

Last quarter, employment grew by 2.3%, and the unemployment rate came down to 6.4%. We are going to start growing at the southeast, favored by soft consumer prices. [indiscernible] indicators of activity point to a year-on-year GDP expansion of 2.7% in the last quarter of 2017, above the previous quarters. Recent figures in activity in the labor market plus [indiscernible] condition and improvement in confidence point to a gradual economic recovery in 2018 pushed by an increasing domestic demand.

On the political front, Sebastián Piñera was elected President in December, with a broad public support. His focus on the recovery of economic growth has helped improve the economic outlook. For all these reasons, growth is expected to reach nearly 3% this year and slightly above trend in 2019. The unemployment rate will favorably fall amid a positive job creation and are still expanding labor force. For 2018, we also expect U.S. inflation to increase to 2.7%, while the Chilean Central Bank is expected to maintain flat rate at around 2.5%, probably increasing it by 25 basis points in the last part of the year.

This combination of higher inflation and a rapidly low interest rate is usually a positive factor for bank margins. However, if the increasing peso continues to appreciate, we may have to adjust downward our inflation outlook for this year. All in, we are optimistic with the evolution of the Chilean economy, which should fuel greater demand for loans.

[Robert Moreno, executive]

Thank you, Claudio. Now, I will give further detail into our results and implementation of our strategy. 2017 was a record year for Banco Santander-Chile. Net income attributable to shareholders totaled CLP 565 billion, increasing 19.6%. Our return on average equity reached 19.2% in the year, in line with guidance. In a year with low inflation and higher taxes, these positive results were driven by client activities, reflected in the 17.0% increase and the net contribution from our business segments, which was led by a 28% increase in net contribution from our Retail Banking segment.

Some additional highlights of the year. Our NIM was stable at 4.4% as an improved asset and liability mix offset lower inflation. Provision expenses fell 12.8%, fees grew almost 10%, and cost increased less than 2 -- 3%. This leaves us on solid footing for 2018, which should be a year with higher growth levels. It's also important to point out that our positive expansion of ROE was not an industry-wide phenomenon. In fact, the majority of our main competitors have seen ROE compression in the last few years.

In the fourth quarter, net income attributable to shareholders totaled CLP 135 billion, increasing 24% year-over-year. The bank's return on average equity in the quarter reached 17.8% in 4Q '17, up from 15.3% in the same quarter of last year. This rise in net income and return on equity compared to fourth quarter '16 was notable, considering the similar levels on inflation in both quarters. Compared to third quarter '16, net income decreased 1.9%, mainly due to a decrease in treasury income.

In terms of strategy, we made important advances this quarter in all of our strategic objectives. As seen on the slide, our strategy has circled around focusing our growth on those segments with the highest risk-adjusted return, increasing client loyalty through an improved client experience and quality of service, deepening our ongoing commercial transformation by expanding the bank's digital banking capabilities, and optimizing our profitability and capital to increase shareholder value and time.

Regarding business growth, the fourth quarter was rather sluggish due to the election period and the appreciation of the peso in the quarter. Therefore, our focus was more on asset and liability management than growth. This was clearly reflected in our loan and deposit mix.

As loan growth slowed in the quarter, the bank optimized its funding structure by reducing time deposits and increasing noninterest demand deposits. Total deposits decreased 0.9% quarter-on-quarter, with demand deposits growing 6.8%. At the same time, the bank's equity increased 6.9% year-over-year, which also reduced the need for expanding our interest-bearing liability.

Simultaneously, the ratio of the bank's free funds, this is noninterest-bearing demand deposits plus equity, to interest earning assets increased from 33.2% at the end of last year to 34.9% in 4Q '17.

The bank also successfully placed a 3-year bond of $500 million at a spread of 72 basis points above U.S. Treasury rates in the quarter with a coupon of 2.5%, the lowest rate ever obtained by the bank in a senior offering abroad.

Going forward, as a result, in 2017, the average cost paid on total deposits, time plus demand, improved from 2.3% in 2016 to 1.9% in 2017, resulting in a key factor for defending our profitability in a low-inflation environment.

Total loans increased 1.9% in the year and decreased 0.1% quarter-on-quarter, with growth mainly coming from high-yielding retail banking and middle-market segments. In the quarter following the presidential election, the peso appreciated significantly, resulting in a translation loss on loans denominated in dollars, which is approximately 10% of the loan book. At the same time, our GCB segment saw a reduction in very low-yielding interbank loans. For these reasons, loans in GCB fell 21% Q-on-Q.

As a reminder, more than 90% of income in the segment is generated by non-lending activities, and the net segment contribution of GCB was up 2.3% in 2017.

On the other hand, loans and higher-yielding segments posted positive growth. In the middle market, loans increased 2.4% Q-on-Q, loans to SMEs increased 1.4%, and retail banking loans increased 1.8% Q-on-Q. Most importantly, the bank completed its process of downsizing Santander Banefe, our division for the mass consumer market, and launched Santander Life, our new business proposition for middle-income clients. This initiative is a new way of relating to the community and customers to a new generation of digital products. In a moment, our Head of Retail Banking will get into more detail regarding this development.

In 2018, we expect loan growth to accelerate to levels between 6% and 8% as the speed of economic growth gains momentum.

As a result of the growth and funding strategies just described and the higher inflation rate in the quarter, net interest income increased 9.1% Q-on-Q and 9.4% year-over-year. The net interest margin increased to 4.6% compared to 4.2% in 4Q '16, despite both quarters having a similar inflation rate, reflecting stable client margins, a cheaper funding mix and a positive management of the net GAAP and inflation index assets.

In the quarter, net interest income from our business clients -- business segments increased 3.5% year-on-year and fell 1% quarter-on-quarter. The decline compared to 3Q '17 was mainly due to a fall in retail banking. This, in itself, was due to a decrease in the spread earned over credit cards. In the quarter, we had record level of purchases with credit cards, especially among nonrevolving clients. This generated higher fees but lowered the spread on cards. Just to give you an example, fees from cards grew 14% Q-on-Q.

At the same time, our net interest margin net of risk was 3.6%, up 20 -- 30 basis points from the third quarter and 50 basis points from the fourth quarter of last year. The higher NIM in the quarter more than offset the higher cost of credit. In 2017, the overall evolution of asset quality was positive, despite low economic growth and slightly higher unemployment levels. For the full year 2017, total provisions declined 12.8%, mainly due to the benefits and risk from the bank's shifting loan mix towards middle- and high-income clients and the downsizing of Banefe. Provision expense in 4Q increased 4.6% Q-on-Q and decreased 12.4% year-over-year. The cost of credit in the quarter was 1.1%, and for the whole year, it was 1.1% as well in line with guidance.

In the fourth quarter, there were some deterioration of asset quality as the positive impacts of the changing asset mix was outweighed by the negative impacts of lower economic growth in the year. We expect these trends to be temporary as the economy recovers.

The NPL ratio increased slightly to 2.3%. However, the bank's expected loss ratio or risk index, measured as loan loss allowances over total loans, remained stable at 2.9%. And the growth rate of impaired loans also stabilized, which is a good proxy for future growth of NPLs.

Regarding our second strategic objective, I will now turn the call over to our corporate Director of Retail Banking, who will guide us to the changes and accomplishments of this segment and introduction of Santander Life. Matias?

[Matias Sanchez, executive]

Hello, everyone. I'm Matias Sanchez. I'm the Head of Retail Banking in Santander Chile. And for me, it's a pleasure to share with you our innovation and transformation plan to face this interesting moment in the Chilean banking industry. First, let me start out with some history.

2012 was a breaking point year for Santander Chile. In that time, the bank had solid results based on a successful strategy centered on increasing brand penetration in the mass market. But this strategy had unexpected outcomes the following years. A good analogy can be that Santander-Chile was like an American muscle car, high interest rates, high net interest margin, but high nonperforming loans and high cost of customer attraction as well.

For instance, in 2012, 7% of our loan book and 20% of our branches were represented by Santander Banefe, our mass market brand. The bank's return of equity in that year was 90%, the NPL is 3.2%, and the net interest margin was 5.1%. Not bad.

But as you may know, the market condition changed overnight. Some events occurred that put our business model under pressure. First, La Polar scandal triggered some changes in the consumer loan industry, mainly the Dicom Law that erased 60% of the negative credit borrow, creating a huge difficulty for evaluating new credit behavior. All the regulation that severely restrict fee hikes, and the new law that put a cap on maximum interest rates, lowering 2,000 basis points in only 2 years.

So as the market changes, so did we. Our first goal was to assist the bank away from the mass consumer market and to begin to focus on the other segments, lowering our credit risk, but with the challenge of improving margin at the same time. As you can see in the graph, the bank increased its exposure to the high end of the consumer market, from 59% in 2013 to near 70% of loans to individuals currently.

In the lower end, the ratio decreased from 7% to 3%. And at the same time, we completed the process of downsizing and eliminating Santander Banefe, closing more than 100 branches and reducing the sales force by more than 2,000 people. Today, we can probably say that the process of closing Banefe is a study case for how to execute an extensive cost reduction with minimal impact on customers, systems and profitability.

In addition to this, the bank consumer satisfaction levels were reaching an all-time low in 2012, especially when compared to our main peers in the Chilean market. Our digital innovation plus better incentive plans and the intense training resulted in a extraordinary evolution of customer satisfaction. We achieved our goal of closing the customer service gap with our peers according to [indiscernible] Santander also became the most recommended bank in 2017 by its clients, moving from fourth to first place, according to a study conducted by [indiscernible]

But in our opinion, our successful plan, transformation plan, was also supported by important innovation in online and digital banking service. Our first important innovation was NEO CRM in 2012, our industry-leading client relationship management system. The bank reorganized all of its client data under a single CRM platform that allow us to give each client the same offers and service whatever channel they conducted and ran through. Today, we are the leader in the Internet banking. Our site is very transactional and simple, easy to use. So we became the most popular home banking site in Chile with 35% market share, twice the market share of our main competitors.

Every month, 1 million different people use our online banking, and they do more than 22 times a month. The bank also continues to innovate in mobile banking through our APP. For example, in October of 2017, we launched our digital onboarding platform whereby nonclients can become customers by our end-to-end digital process in only a few minutes.

How does it work? Well, the bank's information system now are linked to several [ poly ] databases, and therefore, with some very few simple questions, the bank can check a new customer identity, the credit background and real incomes, simply using Touch ID technology or facial recognition. These technological tools help us to reduce the cost of opening a new account and also assure quick and trustworthy risk verification.

On the other hand, we decided to adopt a digital strategy, which means the best of both worlds. Digital and physical at the same time, and in balance.

In 2016, the COO asked me to design a complete new branch experience that should increase our income, reduce operational cost, and most importantly, to achieve a real first-class experience. Based on this idea, we created the WorkCafé Santander, a complete, high-tech and high-touch experience.

In terms of income, WorkCafé is 20% more productive. That is traditional branch and double the customer's attraction. In terms of cost, WorkCafé has, for example, 3 salesmen for its administrative people against 1-to-1 in the traditional branches. Only this allow us to reduce the direct cost to income at those branches to 15%. And talking about customer experience, WorkCafé customer satisfaction is over 82%, 10 points more than the traditional network. And if we focus only in the customers who usually go to the branch, the satisfaction rises to 96%.

In our humble opinion, WorkCafé is one of the most relevant innovation, not only in the local banking market, even in Santander Group as well in the last 20 years.

In 2017, we launched 20 WorkCafés, and we expect to reach 40 by the end of the year.

And last but not least, on December 17, we announced the launching of Santander Life, our innovative value proposition for the middle and mass market income segments. This unprecedented initiative represent another way of relating to the community and customers through our new generation of digital [ cloud ] that rewards positive credit behavior.

The back into the mass market responds to 2 motives: First of all, the improving economic outlook in Chile; and secondly, the technological innovation of [indiscernible] that now permit us to acquire new customers through our low-cost digital onboarding platform.

Since being launched, Santander Life has been a huge success, and we are currently selling 200 Life accounts a day, which is better than we expected. In order to have better understanding, we have prepared a short video for all of you.

[Presentation]

[Robert Moreno, executive]

Okay. Thank you, Matias. And I hope that gives a little bit insight on what is Santander Life, which is going to be, we hope, a very important way of dealing with the middle income mass market.

And now just to complete the presentation, I'll briefly go over the fees, costs, capital, and then we'll get ahead to the questions.

In the fourth quarter, the fees decreased slightly 2.6% quarter-on-quarter, increased 5% year-on-year. And during the year, we continue to have a very strong growth in client loyalty and satisfaction. And in the quarter, the biggest contributor of fee income was credit cards, as we mentioned before. In the quarter, higher consumer expenditure triggered a 13.9% Q-on-Q rise in credit card fees. The Q-on-Q decline in overall fees was mainly due to the decrease in ATM card fees, as we have been optimizing the ATM network, which was negatively affects fee income but has a positive impact on cost and efficiency. Just to give you an example, cost related to the transport of cash and security fell 1.7% in 2017.

In the quarter, the bank also continued to transform a [Foreign Language] Excuse me, operator?

[Operator]

Yes?

[Robert Moreno, executive]

Are we still online?

[Operator]

Yes.

[Robert Moreno, executive]

Okay, I'll continue. Sorry. In the quarter, the bank also continued to transform the distribution network. During fourth quarter '17, we finished closing all of the Banefe branches and accelerated the pace of opening of our new WorkCafé format. In total, in the last 12 months, 11.3% of the branches has been closed. We also eliminated 28% of our ATMs and reduced headcount by 2.5% in the year.

As a result of all of the above, the bank's efficiency ratio reached 40.8% in 2017 compared to 42.7% in 2016. The low growth of cost is a direct consequence of the various initiatives the bank has been implementing to improve commercial productivity and efficiency. The success of our ongoing digital and branch transformation is also resulting in higher labor productivities.

Finally, some insights regarding our capital and dividends plan. The bank concluded the year with strong capital ratio. The core capital ratio reached 11%, 45 basis points higher than 12 months ago. A higher and more sustainable ROE is permitting the bank to generate better capital ratios, and therefore, we should be able to sustain a decent dividend payout ratio, which should be at levels of 70% to 75% of 2017 earnings, which would place our growth dividend yield, considering yesterday's closing price, between 4% and 4.3%. The final 2017 payout will be proposed by the board at the end of March. And now I'll turn it over to Emiliano for some guidance.

[Emiliano Muratore, executive]

Well, in summary, 2017 was a good reflection of what we have been seeking to achieve through our strategy, despite lower inflation and higher taxes. 2018, here -- for 2018, here is some guidance.

Loan growth should be in the range of 6% to 8%, with a focus on retail and middle market. This, coupled with stable interest rate and a slightly higher inflation, should be good for NIM and net interest income. The main potential downside for this outlook is if the peso continues to appreciate and inflation expectation are lower.

Client loyalty and higher growth of total clients will continue to drive fee income. But remember that ATM fees will continue to fall. This, in turn, will be compensated with lower security and transportation costs.

Finally, the efficiency ratio should improve to levels between 40% to 40.5%, with cost growing in the low single-digit range. We expect the cost of credit to remain stable between 1.1% to 1.2%. We also have one more corporate tax rate increase, which should push up our effective tax rate by rise 1.5% to 2% next year. All in, we continue to expect similar ROE to that obtained in 2017.

Finally, Santander-Chile has decided to host an Investor Day. Given the brighter outlook for Chile, we would like to present a thorough update on our business and digital strategy on behalf of our top management, including our CEO, Claudio Melandri and Matias Sanchez. We will be hosting 2 events, one in Chile on May 24; and one in the New York Stock Exchange on June 1. So please mark your calendars. We will hope you can attend.

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

[Operator]

[Operator Instructions] And the first question will come from the line of Thiago Batista with Itaú Global.

[Thiago Bovolenta Batista, analyst]

Thiago Batista speaking. I have one question about Santander Life. You're talking a little about it, and probably, it is still in early stage. But you showed in these slides that the share of low income loans has dropped a lot to about 2%, if I'm not wrong. In the medium term, how much big from Santander Life can it be? And so in terms of loans, how much we can see these low-income segment increasing because of Santander Life? And to be clear for me, what is the size -- what's the focus of Santander Life? Is it more really on the low, low income? Or more in the middle income individuals?

[Robert Moreno, executive]

Okay. Yes. So basically, in Santander Life, it's more, I would say, what we call now middle income, from people who make over CLP 400,000 disposable income a month, okay? And so when you see the graph at the low end, we're not going to grow that percentage. We're going to grow the middle income, okay, from the cutoff of CLP 400,000 and above, okay? So that's the focus of Santander Life. So it's basically low middle income to -- it's open to anyone to upwards. But the very low end, where Banefe was more focused, we're probably not going back into that segment. And this is -- and hopefully, you can maybe appreciate in the video, this is a completely different way of banking in that sector. And as we said, we resolved a lot of the issues of credit scoring, of cost and so forth. But we don't have any, like, specific forecast. This is kind of like a very new, innovative thing. What we do say until now is that it's gone better than we expected. And we're selling around almost 200 products a day. So until now, it's going well, but we don't have a specific forecast. But I would say that the portion of the loan book to individuals that's middle income should no longer start -- stop -- should stop falling because it wasn't only a fall in the low end, it was a fall in the middle. So I think there's going to be more balance between middle and high going forward.

[Operator]

And the next question will come from the line of Carlos Macedo with Goldman Sachs.

[Carlos Macedo, analyst]

Carlos Macedo here from Goldman Sachs. One question on asset quality. It seems like your NPLs got a little bit worse sequentially, and it wasn't -- it was pretty much across the board. Your guidance for 2018 is for a stable cost of risk. What should we see -- expect for the path of NPLs going forward given that the economy is reacting? Is this just a blip in the radar? Or is it a cycle? How should we think about this? And one more question, just a follow-up on guidance. Again, 6% to 8%. The commercial book did fall a lot in the fourth or the large corporate. How should we break down that 6% to 8% guidance? Is it going to be something like 10% for individuals and 6% for corporate? How should we think about it?

[Robert Moreno, executive]

Okay. So regarding NPLs, we believe it's kind of -- more of a blip than a trend. In the beginning of last year, there was, if you remember, the impaired loans started to grow a bit, but the NPLs didn't. So basically, as we said in the call, with the change in the asset mix was more relevant for NPLs or asset quality than the situation of the economy. As the year progressed, I would say the weight of like the slow economic growth started to influence a bit the NPL ratio. But at the same time, if you look at the impaired loans, more recently, they stabilized. So basically, we have like a blip that started beginning of the year. And now, it's moving to NPLs, and then it should flow through the charge-offs and leave the bank. And since the impaired, the velocity of growth on impaired loans has stabilized. That's why we believe it's a blip. So obviously, this depends a little bit on the economy effectively recovering, which until now, it has. So going forward, I would say the cost of credit should be a little bit higher in the beginning of the year to begin normalizing towards the end of the year, okay? I think that's going to be the flow. And regarding loan growth, I would say the 6% to 8% is really more -- everything besides corporate, probably retail, individuals growing more, consumer loans growing a little more than that. And then there's the whole corporate banking, which, if a large project -- project finance or a large bridge loan that has a good spread and make sense, this could easily turn around. And as you saw, we fell 22% in the quarter. It could turn around 15%, 20% in the quarter. So I would say that 6% to 8% is a little more everything besides corporate, and corporate could be anywhere from 0% to 20%, depending on the size and the profitability. In the quarter, for example, we reduced interbank, some interbank operations that were really generating very, very low spreads. So take the loan growth as everything besides GCB, closer to 8%, maybe more. And then the question mark will be corporate, which can be anyone's guess. But as I said there, it will depend on profitability.

[Operator]

And the next question will come from the line of Ernesto Gabilondo with Bank of America Lynch.

[Ernesto María Gabilondo Márquez, analyst]

Three questions from my side. The first one is, what are you expecting in terms of structural reforms that could help to see a higher GDP growth? And where do you see loan growth evolving in the long term? For my second question is in terms of OpEx. I know you have provided guidance for the efficiency ratio of 40% to 45%. But given the efforts to reduce branches, to promote digital channels, what should we see the expenditures growth in this year? And finally, given an expected better macro -- better operating trends, with higher margins, stable cost of credit and OpEx, is it reasonable to expect double-digit growth in net earnings in 2018?

[Robert Moreno, executive]

Claudio Sotto, our economist, will answer your first question.

[Claudio Soto, executive]

Okay. So in terms of structural reforms, the new government has announced that it is intending to modify the tax reform, lowering corporate taxes towards 25% gradually, and also reintegrating the corporate tax system. Broadly, that will occur slowly over time. The new government do not have majority in Congress, therefore, they need to reach agreements in order to pass the legislation thesis. Despite of this, it is very likely that through administrative staff -- administrative actions, the government can foster and provide an impulse on investment, in particular, in terms of approvals of large investment project in mining and energy. That will be key to lift investment during the year, which is the key behind the company and growth that is expected by us and by the market in general. In terms of the long-term growth, we're estimating that the trend upwards should be going up 3% roughly. If the government succeeds in terms of lifting its investment, probably we could see an increasing long-term growth to 3.5%. But this is something that we have to see yet.

[Emiliano Muratore, executive]

And Ernesto, going to your second question about expenses, I mean, we definitely expect expenses to grow below the revenue rate of growth. I mean, in the range from 3% to 5%, and that's why we see cost of income falling slightly from 2017 level. And in terms of bottom line growth, I mean, I would go back to the guidance of ROE, I mean, where we expect a similar level of ROE to what we have in 2017.

[Operator]

And the next question will come from the line of Jason Mollin with Scotiabank.

[Jason Mollin, analyst]

On your strategy of reducing the physical distribution network and making it more efficient, where are you in that process in terms of 385 branches and 900 approximately ATMs? Can we see those numbers continue to decrease? And you did talk -- the second question would be on the mix that you talked about, the lower segment remaining kind of where it is or being small. But what -- in the next couple of years, what is the target in terms of the mix between the high end and the middle?

[Matias Sanchez, executive]

Okay, in terms of branch structure or network, we think we have completed the bulk of our branch and ATM rationalization. Within middle -- in the digital, actually, that I told before, which is a perfect combination between the best digital model with the best physical one. So our goal in the next 5 years is we will open 100 new branches and finance this opening with better productivity and reduced cost in the same network. During the 2018, we'll continue transforming branches into WorkCafé and hope to finish this year with a total of 40 WorkCafé branches. At the same time, we will continue to digitalize back-office functions to make the branches more productive. We, also, in the fourth quarter, extended the business hours of our branches that close to -- at 2:00 p.m., and now they are open until 6:00 p.m., so we are getting more profitability in that.

[Robert Moreno, executive]

So that's important in a sense that -- so now, we should be in the process of opening branches. But the idea is not to change the kind of cost guidance we've given. Basically, the cost of opening branches, there'll be some transformation, the WorkCafé will be paid through with the efficiency. So in general, we're launching Santander Life. We're doing the things with the WorkCafé, we should be opening branches over the next 5 years. So we are preparing for greater growth, but with a bank that is very different internally. And regarding the mix, it's hard to say, it depends on economic growth. But as we said before, I don't think -- we don't think the middle income will continue to shrink as a percentage of the loan portfolio to individuals, okay? And probably, the low end will depend on more structural reforms, how well the digital banking process evolves, so forth. But for now, as I said, we're focusing on CLP 400,000 and more, and that's the -- and all the segments above that will be a focus for us, all the way to private banking.

[Jason Mollin, analyst]

And what about market share by segment? If we're looking at -- I believe, part of the strategy in this growth in your own mix was also increasing your share of, let's say, high-income deposits or high-income segment loans. How has that been evolving? And are you where you want to be, the bank, where it should be?

[Emiliano Muratore, executive]

Yes. I mean, I think that we have done well in gaining market share in the high-income segments, and we expect to keep that share. I mean, maybe not increasing more than what we have done, but staying there. And definitely, in the middle income in the U.S., begin gaining market share with this new Life proposition. And we are more than -- around 70% of the new Life account we are opening in our new clients. I mean, the rest -- the 30% is former clients that like transforming to the Life package, but it has been proven to be a good hook to new middle market clients, so I expect it to gain market share there, especially in lending -- in consumer lending. I mean, the high-income deposits market is very, very competitive here in Chile in terms of pricing, so that's where we don't like to play like so hard in terms of competing on price. And that's part of the deposit base is, as I said, very sensitive and more volatile in terms of market share where we wouldn't like to have the cost of funding worsening. So -- but in terms of loans in the U.S., definitely, keeping market share in high individuals and gaining on middle-income individuals.

[Operator]

And the next question will come from the line of Alonso Garcia with Crédit Suisse.

[Alonso Garcia, analyst]

Actually, I have a couple of follow-ups. The first on Santander Life. Do you think that through this strategy probably, but have you seen at the moment other banks moving back to the mass consumer market as well? Or do you think you're being sort of first mover back to this segment? And lastly, on cost of risk. I mean, cost of risk has come down from 2% some years back to only 1.1% last year. You are guiding for stable cost of risk for this year. So considering the recent trend on cost of risk, the pickup expected in economic activity in Chile, but also your return to the mass market, what level should we think for the sustainable -- as a sustainable basis going forward, I mean, beyond this year?

[Matias Sanchez, executive]

Yes, we don't -- honestly, we don't know exactly what the other banks will do in the future. We only see that the things they are doing now are the same things that we did 2 or 3 years ago. So our focus now is to take advantage of this 2 or 3 years in order to gain profitability and market share in that segment.

[Emiliano Muratore, executive]

Yes. I mean, we kind of expect them to follow us. But we think that we are ahead maybe 2 years, because they are still in the process of restructuring or rethinking the distribution model for the low incomes individuals, where we have already finished that and we are in the new phase. It's still to be seen what they would do. In terms of cost of risk...

[Alonso Garcia, analyst]

Okay. Sorry, just before moving to cost of risk. Sorry. So this is from banks, but from the side of retailers, have you observed probably more -- or retailers speeding up the pace of origination once that economic activity seems to be moving upwards? Or do you think retailers are still not changing their behavior?

[Emiliano Muratore, executive]

I mean, today, the only relevant player coming from the retails -- retailers in terms of lending is Falabella because Walmart is selling their business to BCI. So one, you have La Polar and some other smaller players that -- just Falabella is the one outside the banking sector. And yes, I mean, the trends in cost of risk for some of the -- of those players in the recent past was not the best. So I guess that if economic activity definitely picks up, we can see them like growing more aggressively, but with the whole system growing also higher at a faster pace. So I won't -- we don't expect retailers gaining share from banks. I mean, like I said they'd be opposite. I mean, the banks will keep like gaining maybe through inorganic means as the one with Walmart and BCI, but we don't see retailers gaining share. And I'm going to answer your question about cost of risk. As we said, we expect cost of risk in the range from 1.1% to 1.2%, so let's say, from stable to slightly higher than 2017. Definitely, economic activity should be good for asset quality and that we don't expect to go lower than the 1.1% that we did last year. And so this increase in the share of middle-income individuals can get us slightly higher to the 1.2%. But that's the kind of range we see with the portfolio we have now. Because as you said, a few years ago, we were at 2%, but the mix of the portfolio was dramatically different. So with the portfolio we have now and the expectation we have for the economy in the next 3, 4 years, we think that the current level of cost of risk is sustainable.

[Operator]

And the next question will come from the line of Nicolas Riva with Citi.

[Nicolas Riva, analyst]

I guess my only question is a follow-up on Santander Life. Given that you're going back to the mid- and low-income consumer segment, how should we think about the expected impact, both in terms of net interest margins and also in terms of credit cost? Because I guess, you could have some upside risk for margins but maybe sometimes a risk for credit cost.

[Emiliano Muratore, executive]

I mean, yes. The point is that Santander Life has this kind of meritocracy component that it's very virtuous from the great behavior point of view. So as the video tried to explain, I mean, the people behaving good are getting great benefits, and some of those benefits are a cut in the rate they are paying. So what we see is that, definitely, as a portfolio, considering that the customers take some time to reach this kind of good behavior level where they get the higher benefits. When they reach that level, you have that squeeze in revenues because the spread goes down. But also, you know that it's someone who has been paying well for the last 24 months. So at the end of the day, from this great behavior point of view, it's a high-income individual. I mean, it's someone like who is kind of safe. So in the long term, the whole business, we expect to have that kind of positive virtuous circle that will have higher cost of risk or higher risk than the average of the whole portfolio, but definitely much better than what you would expect for that segment, if you haven't, this kind of incentive, to pay on time. So we see that in this segment, it's important to try to be the first option of payment. Because sometimes, these people are short of cash. I mean, they have different debts to pay. So this whole incentives of Life may that be maybe the first, if not the first, one of the first options for them to pay. And that would be virtuous from the cost of risk point of view. But definitely as a consumer portfolio, that portfolio will be above the average, but not so bad as without incentives would be.

[Operator]

And the next question will come from the line of Tito Labarta with Deutsche Bank.

[Tito Labarta, analyst]

Just one follow-up, I guess, also on Santander Life a bit. Looking more on the deposit side rebalancing, we did see deposits fall last year. And so with Santander Life, I mean, is the focus going to be more on the lending side there? Is there any focus on trying to get some deposits from these middle-income customers to grow your deposit base again? Or if you can give some color there on what you think how deposits will evolve as well, given we saw particularly time deposits fall almost 9% on the year.

[Emiliano Muratore, executive]

Well, regarding Life, it's definitely more on the lending side, that's the -- it's a proposition because basically it's what that segment needs. I mean, it's very demanding on borrowings and not necessarily in savings. So that new line of business is much more biased to the asset side than the liability side. And in terms of the evolution of deposits, last year, I mean, as I said before -- I mean, the institutional, you might be aware that half of the time deposits in Chile in the whole system, half of that is coming from institutional investors, I mean, pension funds, mutual funds. So that's very hot money, price sensitive, where we don't want to fight on price. I mean, when you look at the retail time deposits, and when I say retail, the deposit not traded on the secondary market, that it's something that exists here in Chile. In that market, we are close from 20% to 21% market share. I mean, the deposit coming from the, say, buy-and-hold clients, basically retail are more stable ones. So that's the market share we target today but it's in line with the market share we have on the asset side. And the rest is, when you look at the pension funds or mutual funds where market share is below 10%, and that's a fight we don't want to give, because I think that we can get longer money from the markets through bonds or through syndicated loans at the same levels we are paying for short-term deposits on an institutional here in Chile. So as a whole, the time deposit market line is going to be volatile because of these institutional components. But when you look at the retail part, it's better. I mean, we keep the 20% market share, and we are also taking care of the cost of funding. And similar to what I've mentioned on the institutional, it will happen on private banking or high-income individuals where the market is sometimes being like too aggressive on pricing. And we are more selective on that, trying to migrate that money to mutual funds or from some other off-balance sheet investment that are good for the clients and not necessarily increase our cost of funding. So as I said, the retail deposit should be doing well, I mean, especially the ones below private banking. And the rest is much more price dependent. I mean, if the pricing market -- the pricing situation gets not so competitive, maybe we will begin growing more.

[Robert Moreno, executive]

And remember, we have very strong liquidity ratios. So we've been preparing for Basel III for a long time. So our LCR and SFR are quite high. And that leaves us trying to quell that. Sometimes we can be a little more picky on the funding side because we have strong liquidity ratios.

[Operator]

And the next question will come from the line of Sebastián Gallego with CrediCorp Capital.

[Sebastian Gallego, analyst]

I only have one question, actually. We have seen large declines in terms of loans for the global corporate banking, and we also have seen some declines in fees for this segment. Can you comment a little bit on the strategy for this segment since we have talked a lot about the retail portfolio?

[Robert Moreno, executive]

Okay, so our corporate banking, the big focus there is obviously profitability, okay? So regarding loans, and loans is probably their least profitable product, okay? So for example, if you look in the earnings report, you'll see that their net interest income grew, I believe, it was like 5%, even though loan volumes, I don't know what the average was, but the period-end loan volumes fell like 20%. So that shows you that you can follow that the asset side and still grow the net interest income there, which means their NIMs went up quite significantly last year. And that's because how great -- we just have -- around 90% of their income is from non-lending activities. And what does that mean? There's a positive spread they make on deposits on cash management, okay, and then the fee side and the treasury. So last year, I would say, they did a very good job on the net interest income, on the non-lending cash management, on treasury, except for maybe the last quarter. And the fees, the fee started out very strong in the first half. That's a little bit deal-driven, financial advisory, issuing bonds, cash management, specific services. And then the pipeline kind of dried up a bit in the second half, okay? So that's why -- and we believe this year and as the economy recovers, there should be a pickup in the fee-based side and on the deposit side as well as the treasury, okay? And the loan side, it will depend, obviously, on profitability, okay? But as the infrastructure projects start to come online and these types of things tend to be a little bit more profitable, and then we could also see more loan growth going forward. So effectively, I would say, the fall in loan growth wasn't very relevant to their business line, but the fact that kind of the deal pipeline did affect a little bit the second half and we expect, as the economy recovers, that will recover as well.

[Operator]

And the next question will come from the line of Neha Agarwala with HSBC.

[Neha Agarwala, analyst]

Question is on the other operating income line. Even taking out the one-off income from the banks last year, this line came out to be very strong for 2017. Where should we expect this line to be in the coming years? The average range for the other operating income over the last few years have been about CLP 20 billion. So what should we expect for the coming years? My second question is on the net interest margin. How much expansion have you budgeted for this year for 2018? How much do you think the dividends could grow versus 2017?

[Robert Moreno, executive]

Okay, yes. So there's 2 lines there that sometimes can be difficult to follow, other operating income and other operating expenses, okay? And during 2017, in other operating income in the third quarter was positively affected by a one-off from a company we consolidate but we don't own, okay? So all of that gain is eliminated in minority interest, okay? Besides that, the other operating income includes, for example, there's a big component there, which is the gain from repossessed assets. We had a relatively good year in selling repossessed assets, and prices of real estate is -- are quite nice in Chile, so that turned out well. And there was also some reversal of what we call noncredit contingencies. Basically, legal issues as in -- for example, in other operating expenses, we also recognized the big charge in the second or third quarter for future severance payments. And as we started effectively recording those severances and expenses, we also reversed the provision, so that was also in other operating income. So -- and also the bank did a very good job, but this is among one of the many things we worked on in terms of operational risk. We did a significant job of reducing operational charge-offs, mistakes, vandalism, et cetera, et cetera. That's also cut fraud, all of these things helped to improve the other operating income. So that's also like an area we worked a lot on. Going forward and if I remember correctly, you should -- what I would do is look at the 2016 other operating income and operating expenses, and that will give you a better idea of more normalized levels, okay?

[Emiliano Muratore, executive]

Regarding net interest income, I mean, in terms of margin, I mean, we are expecting NIM to be between 4.4% to 4.5%, I mean, maybe slightly higher than 2017 because of inflation basically, because last year, the inflation was relatively low, 1.7% U.S. variation for the year. I mean, for 2018, we are expecting that to be 2.7%, 2.8%, so we'll now see some upwards movement in NIM. And because of inflation, that's basically stable. I mean, not higher than 4.5%. And then with loan growth in the 6% to 8% range, with spread NII to be in that range, I mean, from 6% to 8% growth.

[Neha Agarwala, analyst]

So if I can follow up that 2017 was a very good year in terms of declining provisions, which basically had your 20% growth in earnings for the year. Now for 2018, the challenge to grow earnings would come from both higher taxes and that provisions will likely grow this year. So what, in your view, would be the main driver for the bottom line growth in 2018, after having a very good year in 2017?

[Robert Moreno, executive]

Yes. So basically, 2017 was a very good year. It was more of a bottom-up story, right? Low top line growth, and from thereon, lower provisions, higher fees and good control of costs. We expanded ROE. This year, we expect still good trends in fees, in costs, probably a little bit better in the treasury side. And -- but it is true that this year, it's more top line growth, more probably provisions not falling, but maybe a little bit higher NIM and more loan growth. So the big difference between last year and this year was -- is, this year, we're going to be pushing for more growth. And that's why part of the reason why, in this call, we wanted to show you something at Life and we're going to grow a little more in branches. And we're doing -- so it's going to be a little bit more consolidating a lot of things we've been preparing in the past few years.

[Operator]

And the next question will come from the line of Yuri Fernandez with JPMorgan.

[Yuri Fernandes, analyst]

Most of my questions were answered, but I had just a follow-up on the future loan growth, like for 2018, 2020 when the economic gain -- outlook improves. How much growth can you see for Chile overall? Like how fast, like on a nominal loan growth, nominal GDP, can you increase your loan book? Because looking to the first period return, the -- I think you used to grow about 2x the nominal GDP, something close to 12%, 14%. And given the higher penetration in Chile today, not sure if you can continue growing that quickly. So just your take or look on like -- not on 2018, but for future years, how fast can you grow? And with that growth, try to justify the current valuation of the banks?

[Emiliano Muratore, executive]

I mean, we think that the multiple there is basically like 1.8x the real GDP plus inflation. That's something that we expect to maintain. I mean, the high penetration in Chile is a little bit tricky because when you break down that, basically, it's influenced by lending to big corporates and the mortgage market, which is big in amount. But when you look out at the lending to individuals, consumer lending, SME lendings, it's not particularly so high the penetration, so we don't see that as a restriction to give the multiple. And if the economy goes to grow, I don't know, close to 4% and the Central Bank does the job to keep inflation around 3%, okay, there you have the nominal GDP from 6% to 7%, and you can go -- you can see the banking sector growing loans in that maybe low double-digits rate. I mean, for that price, you need to have GDP growing close to 4%, so it's something that -- it might happen. I mean, we don't see the penetration as a drag on -- I mean, we don't see it as a significant drag to reduce the multiplier we haven't seen in the past. And so if we take the -- that scenario of economy, nominal GDP around 6% to 7%, yes, you can see loans growing in the low double-digits rate. But that's something to be seen subject to macro -- I mean, to GDP and to inflation, because we are placed in a scenario, not only in Chile, but globally, with low inflation. And so we expect the Central Bank to be able to take the inflation rate again to the 3% area. That is still to be seen.

[Operator]

And the next question comes from the line of Philip Finch with UBS.

[Philip Finch, analyst]

My question's really related to your digital initiative, which clearly are making good progress. Can you share with us the percentage of retail transactions that are being done through digital channels today compared to those in branches? And where do you think this could go to in the next 2 or 3 years? And related to that side, in one of your slides, you showed that cost assets last year was 2%. Through your digital initiatives, do you see this coming down much lower? And if so, to what level?

[Claudio Soto, executive]

Yes. Today, I will say for customer loans, for example, in online channels, is the 20% -- 22% exactly for all our sales in consumer, for example. And there is a very important question that loans in online channels are 60% higher in their spread. So that mix, obviously, is very interesting for us, okay? And we see that these numbers can maintain in the future and even improve, but you can't know exactly where it is the future, because now we are changing every day and we are innovating around on that time. So we are now -- we are happy to -- with the numbers, and we are working in improvement. And then on the second question...

[Robert Moreno, executive]

The cost assets. No, I mean, our asset base should start to grow a little more. And so we think cost will grow below assets this year, probably next year, if our forecast come true, so that the cost of assets should improve, okay, not only the efficiency. And just to kind of reinforce what Matias said, in -- so in terms of consumer loans amounts, it's like 20%. But in terms of operations, it's like 40%. So the loans we sell online are a little smaller, but they have 60% higher spread, okay? So it kind of shows you the difference. At the branch, they tend to sell larger loans, right? They're working more with the clients. There's more price negotiation. While online, they tend to be very quick, good spread but lower amounts, okay?

[Philip Finch, analyst]

Great. That's helpful. Just a quick follow-up, you may have mentioned this earlier. The branch reduction of 11% last year was very impressive. Is that a scope for more branch closures going forward?

[Robert Moreno, executive]

More than branch closure, branch transformation. We have some branches that, for example, were basically payment centers, which we want to reduce. We want to continue growing the WorkCafé. So as we mentioned in the presentation, we want to open in the next 5 years...

[Matias Sanchez, executive]

There'd be 100 new branches. And maybe this year, 20 more branches. As Robert said, it's more than a transformation model. The branches became a business center, a bunch of business centers. And that's the idea. We are working in that idea 2 or 3 years.

[Operator]

And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Robert Moreno with closing remarks.

[Robert Moreno, executive]

Well, thank you very much for being with us today, and then we'll talk in the next call. Thank you.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude your program. You may all disconnect. Everyone, have a wonderful day.