EX-99.1 2 s106026_ex99-1.htm EXHIBIT 99.1

 

Exhibit 99.1

 

 

 
 

 

 

 
 

 

 

 

Section 1: Key consolidated data

 

Balance Sheet (Ch$mn)  Mar’17   Mar’16   % Change 
Total assets   36,708,538    34,847,695    5.3%
Gross customer loans   27,452,651    25,725,961    6.7%
Customer deposits   20,108,828    19,802,170    1.5%
Customer funds   25,598,561    24,498,094    4.5%
Total shareholders’ equity   2,968,491    2,821,692    5.2%

 

Income Statement (Ch$mn)  Mar’17   Mar’16   % Change 
Net interest income   318,575    312,873    1.8%
Gross revenues before provisions for loan losses   441,149    415,374    6.2%
Provision for loan losses   (73,862)   (77,926)   (5.2)%
Op expenses excluding impairment and other op. exp.   (168,780)   (166,006)   1.7%
Income before tax   180,226    155,702    15.8%
Consolidated net income   143,018    126,040    13.5%

 

Profitability and efficiency  Mar’17   Mar’16   Change bp 

Net interest margin (NIM) 1

1

   4.2%   4.5%   -30bp
Efficiency ratio2   40.0%   41.6%   +160bp
Return on avg. equity   19.5%   18.1%   +140bp
Return on avg. assets   1.6%   1.4%   +20bp
Core Capital ratio   10.8%   10.6%   +20bp
BIS ratio   13.7%   13.5%   +20bp
Return on RWA   2.1%   1.9%   +20bp

 

Asset quality ratios (%)  Mar’17   Mar’16   Change bp 
NPL ratio3   2.2%   2.5%   -30bp
Coverage of NPLs  ratio 4   135.5%   122.5%   +130bp
Cost of credit5   1.1%   1.2%   -10bp

 

Structure (#)  Mar’17   Mar’16   Change (%) 
Branches   415    470    (11.7)%
ATMs   1,288    1,529    (15.8)%
Employees   11,229    11,793    (4.8)%

 

Market capitalization  Mar’17   Mar’16   Change (%) 
Net income per share (Ch$)   0.76    0.67    13.5%
Net income per ADR (US$)   0.46    0.39    15.6%
Stock price (Ch$/per share)   41.37    32.57    27.0%
ADR price (US$ per share)   25.08    19.35    29.6%
Market capitalization (US$mn)   11,816    9,116    29.6%
Shares outstanding (millions)   188,446.1    188,446.1    0.0%
ADRs (1 ADR = 400 shares) (millions)   471.1    471.1    0.0%

 

1 NIM = Net interest income annualized divided by interest earning assets.

2. Efficiency ratio: Operating expenses excluding impairment and other operating expenses divided by Operating income. Operating income = Net interest income + Net fee and commission income + Total financial transactions, net + Other operating income minus other operating expenses.

3. Capital + future interest of all loans with one installment 90 days or more overdue divided by total loans.

4. Loan loss allowance divided by Capital + future interest of all loans with one installment 90 days or more overdue.

5. Provision expense annualized divided by average loans.

 

  1
 

 

 

Section 2: Summary of results1

 

  Net income increased 31.1% QoQ and 13.5% YoY in 1Q17. ROAE reached 19.5%

 

Net income attributable to shareholders in 1Q17 totaled Ch$142,375 million (Ch$0.76 per share and US$0.46/ADR), increasing 31.1% QoQ and 13.5% YoY. The Bank’s ROAE2 expanded 140bp compared to 1Q16 and reached 19.5%, above initial guidance. This was achieved despite a lower inflation rate in the quarter and a higher corporate tax rate.

 

The rise in the Bank’s ROE was driven by a solid growth of client revenues leveraged on a lower cost of credit and improved efficiency. This is reflected in the 31.9% YoY rise in net contribution from our business segments3. This was led by a 54.3% increase in net contribution from our Retail Banking segment4.

 

 

 

  Loans up 6.7% YoY. Loan growth among Middle & High-income earners grew 8.8% YoY

 

Total loans increased 0.9% QoQ and 6.7% YoY in 1Q17. Retail banking loans increased 0.4% QoQ and 6.8% YoY. Loans to individuals increased 1.2% QoQ and 7.6%. Consumer loans increased 1.3% QoQ and 8.7% YoY and mortgage loans increased 1.5% QoQ and 8.0% YoY. The Bank continued to prioritize growth among middle and high-income individuals. Loan growth among Middle and High-income earners increased 1.5% QoQ and 8.8% YoY.

 

  Rate cut drives shift of time deposits towards fee generating mutual funds

 

Total customer funds (deposits plus mutual funds) managed by the Bank decreased 0.5% QoQ and grew 4.5% YoY. Non-interest bearing demand deposits were 1.7% down QoQ and increased 4.7% YoY, outstripping time deposit growth, which also improved the funding mix. In 1Q17, the Chilean Central Bank cut interest rates 50 basis points. This resulted in lower funding costs and a switch away from time deposits to fee generating mutual funds. As a result, time deposits decreased 3.4% QoQ and 0.2% YoY. On the other hand, Mutual funds brokered by the Bank increased 9.2% QoQ and 16.9% YoY.

 

 

1.The information contained in this report is unaudited and is presented in accordance with Chilean Bank GAAP as defined by the Superintendency of Banks of Chile (SBIF).
2.ROAE: Return on average equity: annualized quarterly net income attributable to shareholders divided by average equity attributable to shareholders in the quarter. Averages calculated using monthly figures.
3.Net operating profit is defined as Net interest income + Net fee and commission income + Total financial transactions - provision for loan losses – operating expenses.
4.Retail banking = Individuals + Small and Mid-sized companies (SMEs).

 

  2
 

 

 

 

  Core capital6 ratio reached 10.8% as of March 2017. Dividend payout of 70% approved by shareholders

 

The Bank’s Core capital ratio reached 10.8% at the end of 1Q17, 30bp higher than the levels at year-end 2016 and 20bp higher than the core capital ratio in 1Q16. The total BIS ratio7 reached 13.7% as of March 2017. The YoY growth of RWA was 3.3% compared to 6.7% for loans. This relatively high level of capital and efficient growth of RWAs allowed the Bank’s Board to propose the distribution of 70% of 2016 earnings as a dividend, which was approved by shareholders on April 26, 2017. The dividend yield, considering the share price on March 31, 2017, was 4.2%.

 

  Sound asset quality indicators in the quarter. Cost of credit at 1.1%

 

Asset quality remained relatively stable in the quarter. On a YoY basis, the NPL ratio decreased from 2.5% in 1Q16 to 2.2% in 1Q17, in line with the Bank’s loan growth strategy of focusing on those segments with the highest return, net of risk. This also had a similar effect on the cost of credit, which descend to 1.1% in the quarter compared to 1.2% in 1Q16 and 1.3% in 4Q16. Compared to 4Q16 the NPL ratio increased 10bp mainly due to seasonal factors and high growth in retail banking segments compared to a reduction in wholesale lending. In 2017, we expect Non-performing loans to rise moderately due to sluggish economic growth and a weakening job market, but the loans entering NPL status already have a high coverage ratio, therefore, the cost of credit should remain relatively stable. For these reasons the Bank’s expected loss ratio or risk index, measured as Loan Loss Allowances (LLA) over total loans improved to 2.9% as of March 2017 compared to 3.0% at year-end 2016 and 1Q16.

 

  Client NIMs, net of risk rise 20bp to 3.7%.

 

A key driver of profitability in the quarter was the rise in client NIMs, net of risk. In 1Q17, Net interest income from our business segments (Client NII8) increased 1.2% QoQ and 6.5% YoY. Client NIMs9, which excludes the impact of inflation and the ALCO’s liquidity portfolio, reached 4.8% in 1Q17 compared to 4.8% in 4Q16 and 4.9% in 1Q16. Despite the change of the loan mix towards less riskier segments, the Bank has managed to sustain client NIMs by increasing the retail loan book as mentioned above. At the same time, funding costs have improved, which also kept client margins elevated. In addition, the cost of credit is falling. Provision for loan losses decreased 15.8% QoQ and 5.2% YoY in 1Q17. The cost of credit in the quarter was 1.1% compared to 1.3% in 4Q16 and 1.2% in 1Q16. This is a direct result of the de-risking strategy enforced by the Bank. As a result, Client NIMs, net of risk increased 20bp in 1Q17 compared to 1Q16.

 

 

 

6. Core capital ratio = Shareholders’ equity divided by risk-weighted assets according to SBIF BIS I definitions.

7. BIS ratio: Regulatory capital divided by RWA.

8. Client net interest income is net interest income from the Bank’s reporting segments that includes net interest income from the Retail, Middle-market and GCB segments, excluding GCB’s Treasury division. Non-client NII is NII from Bank’s inflation gap, the financial cost of hedging, the financial cost of the Bank’s structural liquidity position, NII from treasury positions and the interest expense of the Bank’s financial investments classified as trading, since NII from this portfolio is recognized as financial transactions net.

9. Client net interest income divided by average loans.

 

  3
 

 

 

  Greater customer loyalty & satisfaction fueling solid fee growth

 

In 1Q17, fee income increased 15.3% QoQ and 15.6% YoY. This solid growth of fees was mainly driven by higher corporate banking activity and the steady improvement in customer satisfaction, which is attracting new clients and increasing cross-selling ratios. Loyal customers10 in the High-income segment grew 11.5% YoY. Among Mid-income earners, loyal customers increased 7.9% YoY. Loyal Middle-market and SME clients grew 12.2% YoY.

 

  Efficiency ratio improves to 40.0%. Sustained rise in productivity

 

The Bank’s efficiency ratio reached 40.0% in 1Q17 compared to 41.6% in the same period of last year. Operating expenses grew 1.7% on a YoY basis. The relatively low cost growth is a direct consequence of the various initiatives that the Bank has been implementing to improve commercial productivity and efficiency. Personnel expenses decreased 0.3% YoY in 1Q17. Total headcount has decreased 4.8% in the last twelve months. Administrative expenses also decreased 0.4% YoY in 1Q17. The Bank’s digital transformation and new branch formats are starting to sustain productivity gains and improved customer satisfaction. In total, in the last twelve months, 11.7% of the Bank’s branch network has been closed and 15.8% of our ATMs were eliminated. This has been replaced by an increase in transactions through channels such as internet, mobile and phone banking and greater productivity in the existing branch network.

 

 

10. Clients with >4 products plus minimum usage and profitability levels.

 

  4
 

 

 

Summary of Quarterly Results

(Ch$ Million)

 

   Quarter   Change% 
   1Q17   4Q16   1Q16   1Q17 / 1Q16   1Q17 / 4Q16 
Net interest income  318,575   316,649   312,873   1.8%  0.6%
Net fee and commission income   72,823    63,137    62,991    15.6%   15.3%
Total financial transactions, net   36,732    37,547    34,262    7.2%   (2.2)%
Provision for loan losses   (73,862)   (87,713)   (77,926)   (5.2)%   (15.8)%
Operating expenses (excluding Impairment and Other operating expenses)   (168,780)   (178,016)   (166,006)   1.7%   (5.2)%
Impairment, Other operating income and expenses, net   (5,982)   (16,009)   (11,023)   (45.7)%   (62.6)%
Operating income   179,506    135,595    155,171    15.7%   32.4%
Net income attributable to shareholders of the Bank   142,375    108,633    125,439    13.5%   31.1%
Net income/share (Ch$)   0.76    0.58    0.67    13.5%   31.1%
Net income/ADR (US$)1   0.46    0.35    0.39    15.6%   30.5%
Total loans   27,452,651    27,206,431    25,725,961    6.7%   0.9%
Deposits   20,108,828    20,691,024    19,802,170    1.5%   (2.8)%
Shareholders’ equity   2,968,491    2,868,706    2,821,692    5.2%   3.5%
Net interest margin   4.2%   4.2%   4.5%          
Efficiency ratio2   40.0%   44.3%   41.6%          
Return on equity3   19.5%   15.3%   18.1%          
NPL / Total loans4   2.2%   2.1%   2.5%          
Coverage NPLs   135.5%   145.4%   122.5%          
Cost of credit5   1.1%   1.3%   1.2%          
Core Capital ratio6   10.8%   10.5%   10.6%          
BIS ratio   13.7%   13.4%   13.5%          
Branches   415    434    470           
ATMs   1,288    1,295    1,529           
Employees   11,229    11,354    11,793           

 

1. The change in earnings per ADR may differ from the change in earnings per share due to exchange rate movements. Earnings per ADR was calculated using the Observed Exchange Rate (Exchange rate for the last trading day of the quarter taken from the Central Bank of Chile) for each period.

2. Efficiency ratio: Operating expenses excluding impairment and other operating expenses divided by Operating income. Operating income = Net interest income + Net fee and commission income + Total financial transactions, net + Other operating income minus other operating expenses.

3. Return on average equity: annualized quarterly net income attributable to shareholders divided by Average equity attributable to shareholders in the quarter. Averages calculated using monthly figures.

4. NPLs: Non-performing loans: total outstanding gross amount of loans with at least one installment 90 days or more overdue.

5. Cost of credit: annualized provision for loan losses divided by quarterly average total loans. Averages calculated using monthly figures.

6. Core capital ratio = Shareholders’ equity divided by risk-weighted assets according to SBIF BIS I definitions.

 

  5
 

 

 

Section 3: YTD Results by reporting segment

 

Net contribution from business segments rises 31.9% YoY in 1Q17

 

Year to date results

(Ch$ Million)

 

   Retail Banking1   Middle market2   Global corporate
banking3		   Total
segments4		 
Net interest income  238,971   65,455   24,248   328,674 
Change YoY   6.7%   6.1%   4.8%   6.4%
Net fee and commission income   52,175    9,143    10,642    71,960 
Change YoY   14.2%   -2.3%   50.2%   15.9%
Core revenues   291,146    74,598    34,890    400,634 
Change YoY   8.0%   5.0%   15.5%   8.0%
Total financial transactions, net   5,045    3,008    17,449    25,502 
Change YoY   24.0%   -40.6%   59.6%   27.1%
Provision for loan losses   (71,551)   (3,129)   557    (74,123)
Change YoY   -13.6%   23.4%   7.7%   -12.6%
Net operating profit from business segments5   224,640    74,477    52,896    352,013 
Change YoY   17.7%   1.2%   27.0%   15.0%
Operating expenses6   (128,668)   (22,293)   (14,520)   (165,481)
Change YoY   0.0%   0.9%   4.2%   0.4%
Net contribution from business segments   95,972    52,184    38,376    186,532 
Change YoY   54.3%   1.3%   38.4%   31.9%

 

1. Retail consists of individuals and SMEs with annual sales below Ch$2,000 million.

2. Middle-market is made up of companies with annual sales exceeding Ch$2,000 million. It also serves institutions such as universities, government entities, local and regional governments and companies engaged in the real estate industry with annual sales exceeding Ch$800 million.

3. Global Corporate Banking, GCB: consists of foreign and domestic multinational companies with sales over Ch$10,000 million.

4. Excludes the results from Corporate Activities.

5. Net op. profit is defined as Net interest income + Net fee and commission income + Total financial transactions - provision for loan losses.

6. Operating expenses = personnel expenses +administrative expenses + depreciation.

 

Net contribution from our business segments rose 31.9% YoY in 1Q17 compared to the same period of 2016. These results exclude our Corporate Activities, which includes, among other items, the impact of inflation on results, the impact of movements in the exchange rate in our provision expense and the results from our liquidity portfolio.

 

The net contribution from Retail banking increased 54.3% YoY. Core revenues (net interest income + fees) increased 8.0% YoY driven improvements in customer loyalty that fueled fee income. This rise in revenues was furthered leveraged on the 13.6% decrease in provision expenses and 0% cost growth as productivity continued to rise.

 

Net contribution from the Middle-market increased 1.3% YoY in 1Q17. Core revenues in this segment grew 5.0%, led by a 6.1% increase in net interest revenue. This was offset by lower financial transactions and higher provision expenses.

 

Net contribution from GCB rose 37.3% in 1Q17. Core revenues increased 19.4% YoY driven by a 61.7% rise in fees. The Bank’s strength in cash management services and financial advisory fees has driven income in this segment.

 

  6
 

 

 

Section 4: Loans, funding and capital

 

Loans

 

Loans up 6.7% YoY. Loan growth among Middle & High-income earners grew 8.8% YoY

 

Total loans increased 0.9% QoQ and 6.7% YoY in 1Q17. Retail banking loans increased 0.4% QoQ and 6.8% YoY. Loans to individuals increased 1.2% QoQ and 7.6%. Consumer loans increased 1.3% QoQ and 8.7% YoY and mortgage loans increased 1.5% QoQ and 8.0% YoY. The Bank continued to prioritize growth among middle and high-income individuals. Loan growth among middle and high-income earners increased 1.5% QoQ and 8.8% YoY.

 

Economic growth remained subdued in 1Q17, but consumer confidence has been improving and unemployment figures have remained relatively stable. For this reason, we expect that lending in the higher yielding Middle-income segment to accelerate as the year progresses. We will also be expanding our new distribution and client model for the different retail segments, which should lead to a more efficient growth model.

 

Loans by segment

(Ch$ Million)

 

   Quarter   Change% 
   1Q17   4Q16   1Q16   1Q17 / 1Q16   1Q17 / 4Q16 
Total loans to individuals1  14,950,433   14,774,460   13,892,590   7.6%  1.2%
Consumer loans   4,502,447    4,446,803    4,141,786    8.7%   1.3%
Residential mortgage loans   8,747,324    8,619,356    8,099,477    8.0%   1.5%
SMEs   3,722,927    3,664,223    3,453,809    7.8%   1.6%
Retail banking   18,673,360    18,438,683    17,346,399    7.6%   1.3%
Middle-market   6,534,707    6,491,751    6,142,987    6.4%   0.7%
Global Corporate Banking   2,162,457    2,192,391    2,155,131    0.3%   (1.4)%
Total loans2   27,452,650    27,206,431    25,725,961    6.7%   0.9%

 

1. Includes consumer loans, residential mortgage loans and other commercial loans to individuals.

2. Total loans gross of loan loss allowances. Total loans include other non-segmented loans and includes interbank loans. See Note 3 of the Financial Statements.

 

Retail banking loans increased 1.3% QoQ and 7.6% YoY. Loans to individuals increased 1.2% QoQ and 7.6% YoY.  Consumer loans increased 1.3% QoQ and 8.7% YoY and mortgage loans increased 1.5% QoQ and 8.0% YoY.  The Bank continued to prioritize growth among middle and high-income individuals.  Loan growth among middle and high-income earners increased 1.5% QoQ and 8.8% YoY. Loans to the higher yielding SME segment also continued to expand at an attractive rate. Loans to SMEs increased 1.6% QoQ and 7.8% YoY. 

 

Loans in the Middle-market increased 0.7% QoQ and 6.4% YoY. In GCB, loans decreased 1.4% QoQ and grew 0.3% YoY. The results in the middle-market banking and GCB (See Section 3) were positive in 1Q17, despite lower loan growth due to an increase in non-lending revenues and greater customer loyalty. In GCB this is mainly due to a strong increase in non-lending revenues such as cash management, investment banking and treasury services for clients. These segments were also affected by a slow start in economic growth, especially in January and February. We expect a reactivation of loan demand in this segment beginning in 2Q17, in line with some early indicators that the Chilean economy should expand at a slightly higher pace in 2017 compared to 2016.

 

  7
 

 

 

Funding

 

Rate cut drives shift of time deposits towards fee generating mutual funds

 

Total customer funds (deposits plus mutual funds) managed by the Bank decreased 0.5% QoQ and grew 4.5% YoY. Non-interest bearing demand deposits were 1.7% down QoQ and increased 4.7% YoY, outstripping time deposit growth, which also improved the funding mix. In 1Q17, the Chilean Central Bank cut interest rates 50 basis points. This resulted in lower funding costs and a switch away from time deposits to fee generating mutual funds. As a result, time deposits decreased 3.4% QoQ and 0.2% YoY. On the other hand, Mutual funds brokered by the Bank increased 9.2% QoQ and 16.9% YoY. This, in turn, had a positive impact on fee income in the quarter.

 

Funding

(Ch$ Million)

 

   Quarter   Change% 
   1Q17   4Q16   1Q16   1Q17 / 1Q16   1Q17 / 4Q16 
Demand deposits  7,408,618   7,539,315   7,079,271   4.7%  (1.7)%
Time deposits   12,700,210    13,151,709    12,722,899    (0.2)%   (3.4)%
Total Deposits   20,108,828    20,691,024    19,802,170    1.5%   (2.8)%
Mutual Funds brokered1   5,489,733    5,026,068    4,695,924    16.9%   9.2%
Total customer funds   25,598,561    25,717,092    24,498,094    4.5%   (0.5)%
Bonds   7,411,645    7,326,372    5,727,832    29.4%   1.2%
Adjusted loans to deposit ratio2   102.3%   98.5%   98.3%          
LCR 3   158.3%   157.4%   131.7%          
NSFR 4   106.7%   109.0%   108.6%          

 

1. Banco Santander Chile is the exclusive broker of mutual funds managed by Santander Asset Management S.A. Administradora General de Fondos, a subsidiary of SAM Investment Holdings Limited.

2. (Loans - portion of mortgages funded with long-term bonds) / (Time deposits + demand deposits). The Bank’s mortgage loans are mainly fixed-rate long-term loans that we mainly finance with matching long-term funding and not with short-term deposits. For this reason, to calculate this ratio, we subtract residential mortgage loans in the numerator of our ratio.

3. Liquidity Coverage Ratio calculated according to ECB rules. Chilean LCR ratios are still under construction.

4. Net Stable Funding Ratio calculated using internal methodology. Chilean LCR ratios are still under construction.

 

Liquidity levels remained healthy in the quarter. The Bank’s adjusted loan to deposit ratio was 102.3% and both the LCR and NSFR ratios continued to be ample. These sound levels of liquidity allowed the Bank to improve deposit spreads in 1Q17. In the quarter, the Bank continued to fine-tune the pricing policy of time deposits. This has helped to improve client margins despite the shift in the loan mix to less risky / lower yielding assets.

 

  8
 

 

 

Shareholders’ equity and regulatory capital

 

ROE at 19.5%. Core Capital ratio at 10.8%. Payout set at 70% of 2016 earning

 

Equity

(Ch$ Million)

 

   Quarter   Change% 
   1Q17   4Q16   1Q16   1Q17 / 1Q16   1Q17 / 4Q16 
Capital  891,303   891,303   891,303   0.0%  0.0%
Reserves   1,640,112    1,640,112    1,527,893    7.3%   0.0%
Valuation adjustment   6,763    6,640    474    1326.8%   1.9%
Retained Earnings:   430,313    330,651    402,022    7.0%   30.1%
Retained earnings prior periods   472,351    0    448,878    5.2%   —%
Income for the period   142,375    472,351    125,439    13.5%   (69.9)%
Provision for mandatory dividend   (184,413)   (141,700)   (172,295)   7.0%   30.1%
Equity attributable to equity holders of the Bank   2,968,491    2,868,706    2,821,692    5.2%   3.5%
Non-controlling interest   29,987    29,341    30,556    (1.9)%   2.2%
Total Equity   2,998,478    2,898,047    2,852,248    5.1%   3.5%
Quarterly ROE   19.5%   15.3%   18.1%          
YTD ROE   19.5%   17.1%   18.1%          

 

Shareholders’ equity totaled Ch$2,968,491 million as of March 31, 2017. The Bank’s ROE in 1Q17 reached 19.5%, above guidance. The Bank’s Core capital ratio11 reached 10.8% at the end of 1Q17, 30bp higher than the levels at year-end 2016 and 20bp higher than the core capital ratio in 1Q16. The total BIS ratio12 reached 13.7% as of March 2017. The YoY growth of RWA was 3.3% compared to 6.7% for loans. This high level of capital and efficient growth of RWAs allowed the Bank’s Board to propose the distribution of 70% of 2016 earnings as a dividend, which was approved by shareholders on April 26, 2017. The dividend yield, considering the share price on March 31, 2017, was 4.2%.

 

Capital Adequacy

(Ch$ Million)

 

   Quarter   Change% 
   1Q17   4Q16   1Q16   1Q17 / 1Q16   1Q17 / 4Q16 
Tier I (Core Capital)  2,968,491   2,868,706   2,821,692   5.2%  3.5%
Tier II   792,549    789,001    773,581    2.5%   0.4%
Regulatory capital   3,761,040    3,657,707    3,595,273    4.6%   2.8%
Risk weighted assets   27,492,643    27,237,835    26,608,992    3.3%   0.9%
Tier I (Core Capital) ratio   10.8%   10.5%   10.6%          
BIS ratio   13.7%   13.4%   13.5%          

 

 

11. Core Capital ratio = Shareholders’ equity divided by Risk-weighted Assets (RWA) according to SBIF BIS I definitions.

12. BIS ratio: Regulatory capital divided by RWA.

 

  9
 

 

 

Section 5: Analysis of quarterly income statement

 

Net interest income

 

Client NIMs stabilizing at 4.8%. Total NIM affected by lower inflation compared to 1Q16

 

In 1Q17, Net interest income, NII, increased 0.6% QoQ and 1.8% YoY. The Net interest margin, NIM reached 4.2% compared to 4.2% in 4Q16 and 4.5% in 1Q16. In order to improve the explanation of margins, we have divided the analysis of Net interest income between Client net interest income and Non-client net interest income13.

 

Net Interest Income / Margin (Ch$ Million)

 

   Quarter   Change% 
   1Q17   4Q16   1Q16   1Q17 / 1Q16   1Q17 / 4Q16 
Net interest income from business segments  328,674   324,823   308,758   6.5%  1.2%
Non-client net interest income   (10,099)   (8,174)   4,115    —%   23.6%
Net interest income   318,575    316,649    312,873    1.8%   0.6%
Average interest-earning assets   30,381,349    29,901,912    27,801,471    9.3%   1.6%
Average loans from reporting segments1   27,246,674    26,952,880    25,432,034    7.1%   1.1%
Avg. net gap in inflation indexed (UF) instruments2   4,350,466    4,729,829    3,947,572    10.2%   (8.0)%
Interest earning asset yield3   6.9%   7.0%   7.5%          
Cost of funds4   3.2%   3.3%   3.3%          
Client net interest margin5   4.8%   4.8%   4.9%          
Net interest margin (NIM) 6   4.2%   4.2%   4.5%          

Quarterly inflation rate7

   0.5%   0.5%   0.7%         
Central Bank reference rate   3.00%   3.50%   3.50%          

 

1. Average loans from business segments. Excludes loans not assigned to any business segment

2. The average quarterly difference between assets and liabilities indexed to the Unidad de Fomento (UF), an inflation indexed unit.

3. Interest income divided by average interest earning assets.

4. Interest expense divided by sum of average interest bearing liabilities and demand deposits.

5. Annualized Net interest income from business segments divided by average loans.

6. Annualized Net interest income divided by average interest earning assets.

7. Inflation measured as the variation of the Unidad de Fomento in the quarter.

 

Client NII. In 1Q17, Net interest income from our business segments (Client NII) increased 1.2% QoQ and 6.5% YoY. Average loans from reporting segments increased 1.1% QoQ and 7.1% YoY. Client NIMs (defined as Client NII divided by average loans), which excludes the impact of inflation and the ALCO’s liquidity portfolio, reached 4.8% in 1Q17 compared to 4.8% in 4Q16 and 4.9% in 1Q16. Despite the change of the loan mix towards less riskier segments, the Bank has managed to sustain client NIMs by increasing the retail loan book as mentioned above. At the same time, funding costs have improved, which also kept client margins elevated. We expect Client NIMs to remain relatively stable for the rest of the year and, as the cost of credit should continue to improve in 2017 (see next Section), this should result in Client NIMs, net of the cost of credit to increase 10-20bp in 2017.

 

 

13. Client Net interest income: NII from the Bank’s reporting segments that includes NII from the Retail, Middle-market and GCB segments, excluding GCB’s Treasury division. Non-client NII: NII from Bank’s inflation gap, the financial cost of hedging, the financial cost of the Bank’s structural liquidity position, NII from the available for sale portfolio and the interest expense to fund the Bank’s trading investment portfolio. The interest from the Bank’s financial investments classified as trading are recognized as Financial transactions net.

 

  10
 

 

 

Non-client NII. The Bank has more assets than liabilities linked to inflation and, as a result, margins go down when inflation decelerates and vice-versa. Currently our sensitivity to a 100 bp shift in inflation is approximately 15bp of NIM. In 1Q17, the variation of the Unidad de Fomento (an inflation indexed currency unit), was 0.5% compared to 0.5% in 4Q16 and 0.7% in 1Q17. As client NIMs have remained relatively stable, the variation of total NIMs was mainly due to the variation of inflation in the periods being analyzed. The UF inflation in 1Q17 was the same as in 4Q16 and hence a similar result from Non-client interest income. Compared to 1Q16, non-client interest income decreased Ch$14 billion due to a 20bp decline in quarterly UF inflation and lower yields on the Bank’s financial investment portfolio.

 

Going forward, quarterly NIMs should improve and the average NIM for 2017 should finish at a level similar to the one achieved in 2016. As mentioned, Client NIMs should be stable. Total UF inflation in 2016 was 2.7% and we expect a similar level of UF inflation in 2017 (compared to an annualized rate of 2.0% in 1Q17). At the same time, the Bank’s liabilities have a shorter duration than asset, so a 100bp average yearly fall in short-term interest rates would result in a 12bp rise in NIMs. Therefore, deposit costs should continue to fall as the lower rate environment is absorbed. This will be partially offset by the lower yield obtained over the Bank’s liquidity portfolio.

 

 

Asset quality and provision for loan losses

 

Sound asset quality indicators in the quarter. Cost of credit at 1.1%

 

Asset quality remained relatively stable in the quarter. On a YoY basis the NPL ratio decreased from 2.5% in 1Q16 to 2.2%, in line with the Bank’s loan growth strategy of focusing on those segments with the highest return, net of risk. This also had a similar effect on the cost of credit, which descend to 1.1% in the quarter compared to 1.2% in 1Q16 and 1.3% in 4Q16. Compared to 4Q16 the NPL ratio increased 10bp mainly due to seasonal factors and high growth in retail banking segments compared to a reduction in wholesale lending. In 2017, we expect Non-performing loans to rise moderately due to sluggish economic growth and a weakening job market, but the loans entering NPL status already have a high coverage ratio, therefore, the cost of credit should remain relatively stable.

 

  11
 

 

 

 

Provision for loan losses (Ch$ Million)

 

   Quarter   Change% 
   1Q17   4Q16   1Q16   1Q17 / 1Q16   1Q17 / 4Q16 
Gross provisions  (43,056)  (60,675)  (47,612)  (9.6)%  (29.0)%
Charge-offs1   (50,124)   (46,071)   (48,169)   4.1%   8.8%
Gross provisions and charge-offs   (93,180)   (106,746)   (95,781)   (2.7)%   (12.7)%
Loan loss recoveries   19,318    19,033    17,855    8.2%   1.5%
Provision for loan losses   (73,862)   (87,713)   (77,926)   (5.2)%   (15.8)%
Cost of credit2   1.1%   1.3%   1.2%   -10bp   -20bp
Total loans3   27,452,651    27,206,431    25,725,961    6.7%   0.9%
Total Loan loss allowances (LLAs)   806,005    820,311    784,103    2.8%   (1.7)%
Non-performing loans4 (NPLs)   594,855    564,131    639,981    (7.1)%   5.4%
NPLs consumer loans   106,597    99,721    93,712    13.7%   6.9%
NPLs commercial loans   327,342    316,838    365,245    (10.4)%   3.3%
NPLs residential mortgage loans   160,916    147,572    181,024    (11.1)%   9.0%
Impaired loans5   1,667,145    1,615,441    1,642,087    1.5%   3.2%
Impaired consumer loans   299,071    288,584    288,037    3.8%   3.6%
Impaired commercial loans   951,514    929,169    935,144    1.8%   2.4%
Impaired residential mortgage loans   416,560    397,688    418,906    (0.6)%   4.7%
Expected loss ratio6 (LLA / Total loans)   2.9%   3.0%   3.0%          
NPL / Total loans   2.2%   2.1%   2.5%          
NPL / consumer loans   2.4%   2.2%   2.3%          
NPL / commercial loans   2.4%   2.3%   2.7%          
NPL / residential mortgage loans   1.8%   1.7%   2.2%          
Impaired loans / total loans   6.1%   5.9%   6.4%          
Impaired consumer loan ratio   6.6%   6.5%   7.0%          
Impaired commercial loan ratio   6.9%   6.7%   7.0%          
Impaired mortgage loan ratio   4.8%   4.6%   5.2%          
Coverage of NPLs7   135.5%   145.4%   122.5%          
Coverage of NPLs non-mortgage8   172.1%   182.3%   155.8%          
Coverage of consumer NPLs   282.0%   300.9%   285.3%          
Coverage of commercial NPLs   136.3%   144.9%   122.6%          
Coverage of mortgage NPLs   36.8%   41.4%   38.0%          

 

1. Charge-offs corresponds to the direct charge-offs and are net of the reversal of provisions already established on charged-off loans.

2. Annualized provision for loan losses / quarterly average total loans. Averages are calculated using monthly figures.

3. Includes interbank loans.

4. Total outstanding gross amount of loans with at least one installment 90 days or more overdue.

5. Include: (a) for loans individually evaluated for impairment: (i) the carrying amount of all loans to clients that are rated C1 through C6 and, (ii) the carrying amount of all loans to an individual client with at least one NPL (which is not a residential mortgage loan past due less than 90 days), regardless of category; and (b) for loans collectively evaluated for impairment, the carrying amount of all loans to a client, when at least one loan to that client is not performing or has been renegotiated.

6. LLA / Total loans. Measures the percentage of loans that banks must provision for given their internal models and the SBIF’s guidelines.

7. LLA / NPLs.

8. LLA of commercial and consumer loans / NPLs of commercial and consumer loans.

 

For these reasons the Bank’s Expected loss ratio or Risk index, measured as Loan Loss Allowances (LLA) over total loans improved to 2.9% as of March 2017 compared to 3.0% at year-end 2016 and 1Q16. This also explains the increase in consumer loan NPL ratio from 2.2% at year-end 2016 to 2.4% as of March 2017 and the fall in coverage of consumer loans from 300.9% as of December 2016 to 282.0% at the end of 1Q17. The Impaired consumer loan ratio reached 6.6% flat QoQ and 40bp lower than in 1Q16.

 

In part, due to the same, Provision for loan losses decreased 15.8% QoQ and 5.2% YoY. The cost of credit in the quarter was 1.1% compared to 1.3% in 4Q16 and 1.2% in 1Q16. By product, the evolution of Provision for loan losses in 1Q17 was as follows:

 

  12
 

 

 

 

Provision for loan losses

(Ch$ Million)

 

   Quarter   Change% 
   1Q17   4Q16   1Q16   1Q17 / 1Q16   1Q17 / 4Q16 
Consumer loans   (51,860)   (44,454)   (46,918)   10.5%   16.7%
Commercial loans1   (21,332)   (41,846)   (26,644)   (19.9)%   (49.0)%
Residential mortgage loans   (670)   (1,413)   (4,364)   (84.6)%   (52.6)%
Provision for loan losses   (73,862)   (87,713)   (77,926)   (5.2)%   (15.8)%

 

1.Includes provision for loan losses for contingent loans.

 

Provisions for loan losses for consumer loans increased 16.7% QoQ and 10.5% YoY in 1Q17. As mentioned in previous earnings reports, the Bank has been enforcing a strategy of lowering exposure to the low-end of the consumer loan market. This has entailed an active policy of charging-off loans in the lower income segment and restricting loan restructuring. We expect lower provisions for consumer lending for the rest of 2017, given the aforementioned rise in coverage plus the change in the consumer loan mix, improvements in admission policy and more efficient recovery efforts. The 8.7% YoY growth of the consumer loan book also drove this increase in provision expense.

 

Provisions for loan losses for commercial loans decreased 49.0% QoQ and 19.9% YoY. The QoQ decrease was mainly due to high levels of provisions in 4Q16 due to the downgrades of loans in the Global corporate banking segment and the Middle-market. Compared to 1Q16, the lower provision expense was due to the improvements in asset quality. The commercial NPL ratio reached 2.4% compared to 2.3% in 4Q16 and 2.7% in 1Q16. The Coverage ratio of commercial NPLs reached 136.3% as of March 2017.

 

Provisions for loan losses for residential mortgage loans totaled Ch$670 million in the quarter. The Impaired mortgage loan ratio reached 4.8%, 20bp higher QoQ and 40bp lower YoY. The NPL ratio of mortgage loan was 1.8% in 1Q17 compared to 1.7% in 4Q16 and 2.2% in 1Q16. The Coverage ratio of mortgage NPLs reached 36.8% as of March 2017. Including collateral, the coverage ratio of mortgage NPLs reached 125.2% as of March 2017.

 

As a result of the lower cost of credit and the stable Client spreads, Client NIMs, net of risk increased 20bp in 1Q17 compared to 1Q16.

 

 

  13
 

 

 

Net fee and commission income

 

Greater customer loyalty & satisfaction fueling solid fee growth

 

In 1Q17 fee income increased 15.3% QoQ and 15.6% YoY. In retail banking fees increased 6.4% mainly driven by rising client loyalty and cross-selling. This in turn has been driven by improvements in customer satisfaction, the success of our new WorkCafé branches in attracting new clients and cross-selling the existing client base and innovative digital product offers launched in the quarter. Loyal individual customers (clients with >4 products plus minimum usage and profitability levels) in the High-income segment grew 11.5% YoY. Among Mid-income earners, loyal customers increased 7.9% YoY. By products, the biggest contributors to fee income growth were credit card fees and asset management brokerage fees.

 

Fee Income by client segment

(Ch$ Million)

  

   Quarter   Change% 
   1Q17   4Q16   1Q16   1Q17 / 1Q16   1Q17 / 4Q16 
Retail banking1   52,175    48,492    49,054    14.2%   7.6%
Middle-market   9,143    7,509    7,735    (2.3)%   21.8%
Global corporate banking   10,642    6,275    6,580    50.2%   69.6%
Others   863    861    (378)   (2.2)%   0.2%
Total   72,823    63,137    62,991    15.6%   15.3%

 

Includes fees to individuals and SMEs.

 

Fees in the Middle-market grew 21.8% QoQ, however decreased 2.3%YoY as this segment was affected by lower economic growth. This was compensated by the rise in customer loyalty in this segment, especially via non-lending products and services that are fee intensive. Loyal Middle-market and SME clients grew 12.2% YoY.

 

Finally, the Bank continues to produce strong results in the Global corporate banking segment. Fees in this segment increased 69.6% QoQ and 61.7% YoY. The strength of the Bank in providing value added non-lending services such as cash management and financial advisory services continues to boost fees in this segment.

 

 

1. Loyal high income and middle income customers with 4 products plus a minimum profitability level and a minimum usage indicator. all differentiated by segment. SME + Middle-market cross-selling differentiated by client size using a point system that depends on number of products, usage of products and income net of risk.

 

  14
 

 

 

By products, the evolution of fees was as follows:

 

Fee Income by product

(Ch$ Million)

  

   Quarter   Change% 
   1Q17   4Q16   1Q16   1Q17 / 1Q16   1Q17 / 4Q16 
Credit, debit & ATM card fees   14,691    11,676    14,184    3.6%   25.8%
Asset management   10,081    10,149    8,928    12.9%   (0.7)%
Insurance brokerage   10,057    10,368    9,659    4.1%   (3.0)%
Guarantees, pledges and other contingent op.   9,487    8,997    9,284    2.2%   5.4%
Collection fees   8,926    8,023    7,961    12.1%   11.3%
Checking accounts   7,920    7,921    7,848    0.9%   (0.0)%
Brokerage and custody of securities   2,200    2,053    2,040    7.8%   7.2%
Other   9,461    3,950    3,087    206.5%   139.5%
Total fees   72,823    63,137    62,991    15.6%   15.3%

 

Total financial transactions, net

 

Results from Total financial transactions, net was a gain of Ch$36,732 million in 1Q17, decreasing 2.2% QoQ and increasing 7.2% YoY. It is important to point out that the Bank does not run a significant foreign currency gap. The Bank’s spot position in foreign currency is hedged with derivatives that are either considered trading derivatives or hedge accounting derivatives. Derivatives that are considered trading are marked-to-market in net income from financial operations. Hedge accounting derivatives are mark-to-market together with the hedged item in net foreign exchange results. This distorts these line items, especially in periods of a strong appreciation or depreciation of the exchange rate.

 

Total financial transactions, net

(Ch$ Million)

  

   Quarter   Change% 
   1Q17   4Q16   1Q16   1Q17 / 1Q16   1Q17 / 4Q16 
Net income (expense) from financial operations1   1,276    (74,850)   (179,699)   —%   —%
Net foreign exchange gain2   35,456    112,397    213,961    (83.4)%   (68.5)%
Total financial transactions, net   36,732    37,547    34,262    7.2%   (2.2)%

 

1. These results include the realized gains of the Available for sale investment portfolio, realized and unrealized gains and interest revenue generated by Trading investments, gains or losses from the sale of charged-off loans and the realized gains (loss) or mark-to-market of derivatives.

2. The results recorded as Foreign exchange gain mainly include the translation gains or losses of assets and liabilities denominated in foreign currency as well as from our hedge accounting derivatives.

 

  15
 

  

 

 

In order to understand more clearly these line items, we present them by business area in the following table:

 

Total financial transactions, net by business

(Ch$ Million)

  

   Quarter   Change% 
   1Q17   4Q16   1Q16   1Q17 / 1Q16   1Q17 / 4Q16 
Client treasury services   23,568    21,104    20,001    17.8%   11.7%
Non client treasury income1   13,164    16,443    14,261    (7.7)%   (19.9)%
Total financ. transactions, net   36,732    37,547    34,262    7.2%   (2.2)%

 

1. Non client treasury income. These results include the income from sale of loans, including charged-off loans, interest income and the mark-to-market of the Bank’s trading portfolio, realized gains from the Bank’s available for sale portfolio and other results from our Financial Management Division.

 

Client treasury services revenues rose 11.7% QoQ and 17.8% YoY. This movement of client treasury revenues, which usually makes up the bulk of our treasuring income, reflects the demand on behalf of clients for treasury products mainly for their hedging needs. The Bank has had a good year in Debt Capital Markets that has also led to cross-selling of products in our market making business, which is reflected as client treasury income.

 

Non-client treasury revenues decreased 19.9% QoQ and 7.7% YoY. Falling local interest rates produced positive mark-to-market gains from our liquidity fixed income portfolios in the quarter. As a reminder, 1Q16 results in this line had an extraordinary gain of Ch$6bn from the tendering of two international bonds.

 

  16
 

  

 

 

Operating expenses and efficiency

 

Efficiency ratio improves to 40.0%. Sustained rise in productivity

 

The Bank’s efficiency ratio reached 40.0% in 1Q17 compared to 41.6% in the same period of last year. Operating expenses, excluding Impairment and Other operating expenses, decreased 5.2% QoQ and grew 1.7% YoY. The QoQ decline is mainly due to seasonal factors. The relatively low cost growth, below the YoY variation of the CPI Index despite the fact that the most of our expenses are adjusted by inflation, is a direct consequence of the various initiatives that the Bank has been implementing to improve commercial productivity and efficiency. The success of our on-going digital and branch transformation is resulting in higher labor productivity.

 

Operating expenses

(Ch$ Million)

  

   Quarter   Change% 
   1Q17   4Q16   1Q16   1Q17 / 1Q16   1Q17 / 4Q16 
Personnel salaries and expenses   (92,676)   (101,306)   (92,967)   (0.3)%   (8.5)%
Administrative expenses   (58,482)   (57,898)   (58,694)   (0.4)%   1.0%
Depreciation & amortization   (17,622)   (18,812)   (14,345)   22.8%   (6.3)%
Operating expenses1   (168,780)   (178,016)   (166,006)   1.7%   (5.2)%
Impairment of property, plant and equipment   (184)   (139)   (37)   397.3%   32.4%
Branches   415    434    470    -11.7%   -4.4%
Standard   265    267    278    -4.7%   -0.8%
WorkCafé   6    3    0    —%    100.0%
Middle-market centers   8    8    8    0.0%   0.0%
Select   53    53    54    -1.9%   0.0%
Banefe & other payment centers   83    103    130    -36.2%   -19.4%
ATMs   1,288    1,295    1,529    (15.8)%   (0.5)%
Employees   11,229    11,354    11,793    (4.8)%   (1.1)%
Efficiency ratio2   40.0%   44.3%   41.6%   -160bp   -430bp
YTD Efficiency ratio3   40.0%   42.7%   41.6%   -160bp   -270bp
Volumes per branch (Ch$mn)4   114,811    109,029    99,337    15.6%   5.3%
Volumes per employee (Ch$mn)5   4,243    4,168    3,959    7.2%   1.8%
YTD Cost / Assets6   1.8%   1.9%   1.9%   -10bp   -10bp

 

1. Excluding Impairment and Other operating expenses.

2. Efficiency ratio: Operating expenses excluding impairment and other operating expenses divided by Operating income. Operating income = Net interest income + Net fee and commission income + Total financial transactions, net + Other operating income minus other operating expenses.

3. Loans + deposits over total branches.

4. Loans + deposits over total employees.

5. Operating expenses as defined in footnote 1 above, annualized / Total assets.

 

Personnel expenses decreased 0.3% YoY in 1Q17. Total headcount has decreased 4.8% in the last twelve months. Total volumes (loans plus deposits) per branch increased 15.6% YoY and 5.3% QoQ. At the same time, total volumes per employee increased 1.8% QoQ and 7.2% YoY. In 2Q17, another wave of management changes will be executed and as a result, the Bank will recognize a one-time charge of up to Ch$11 billion in April or May 2017 in the line item Other operating expenses. With this and other measures, the Bank expects to maintain low single digit cost growth throughout this year and the next.

 

  17
 

  

 

 

Administrative expenses also decreased 0.4% YoY in 1Q17. The Bank’s digital transformation and new branch formats are starting to sustain productivity gains and improved customer satisfaction. Therefore, the Bank accelerated its branch closure plan in the quarter by closing 19 branches, mainly in the Santander Banefe segment. The Bank also continued to remove money losing ATMs. In total, in the last twelve months, 11.7% of the Bank’s branch network was closed and 15.8% of our ATMs were eliminated. An increase in transactions through channels such as internet, mobile and phone banking have replaced this. Simultaneously, we transformed 4 more branches into our new WorkCafé format that is significantly more productive than a traditional branch. At the same time, we continue to re-model the standard branches to a new multi-segment format that is also more efficient. The effectiveness of the Bank’s CRM has also increased productivity, as well as the implementation of other digital initiatives.

 

 

1 Volumes= Loans+ Deposits

 

Amortization expenses increased 22.8% YoY. This rise was mainly due to the investment in software and digital banking the Bank is carrying out as part of our plan to improve productivity and efficiency.

 

  18
 

  

 

 

Other operating income, net & corporate tax

 

Other operating income, net, totaled a loss of Ch$5,798 million in 1Q17. This decrease can be explained by a greater recovery of repossessed assets previously charged off and a greater recovery of other operational charge-offs. 

 

Other operating income, net and corporate tax

(Ch$ Million)

  

   Quarter   Change% 
   1Q17   4Q16   1Q16   1Q17 / 1Q16   1Q17 / 4Q16 
Other operating income   13,019    4,456    5,248    148.1%   192.2%
Other operating expenses   (18,817)   (20,326)   (16,234)   15.9%   (7.4)%
Other operating income, net   (5,798)   (15,870)   (10,986)   (47.2)%   (63.5)%
Income from investments in associates and other companies   720    764    531    35.6%   (5.8)%
Income tax income (expense)   (37,208)   (27,126)   (29,662)   25.4%   37.2%
Effective income tax rate   20.6%   19.9%   19.1%          

 

Income tax expenses in 1Q17 totaled Ch$37,208 million, an increase of 37.2% compared to 4Q16 and 25.4% compared to 1Q16. In 3M17, the Bank paid an effective tax rate of 20.6% compared to 19.1% in 3M17. The rise in the effective tax rate was mainly due to: (i) the higher statutory tax rate. The statutory corporate tax rate in 2017 increased to 25.5% compared to 24.0% in 2016 and; (ii) the lower CPI inflation rate in 3M17 (+0.5%) compared to 3M17 (+0.7%), which results in a lower price level restatement charge to taxable income, since for tax purposes the Bank must readjust its capital for inflation. The Bank’s effective tax rate should be approximately 20%-21% in 2017 and the statutory corporate tax rate will rise again to 27.0% in 2018.

 

YTD income tax1

(Ch$ Million)

  

   Quarter   Change% 
   1Q17   1Q16   1Q17 / 1Q16 
Net income before tax   180,226    155,702    15.8%
Price level restatement of capital2   (6,570)   (7,445)   (11.8)%
Net income before tax adjusted for price level restatement   173,656    148,257    17.1%
Statutory Tax rate   25.5%   24.0%     
Income tax expense at Statutory rate   (45,959)   (35,582)   29.2%
Tax benefits3   8,751    5,920    47.8%
Income tax   (37,208)   (29,662)   25.4%
Effective tax rate   20.6%   19.1%     

 

1. This table is for informational purposes only. Please refer to note 12 in our interim financials for more details.

2. For tax purposes, capital is indexed to CPI inflation. The statutory tax rate is applied over net income before tax adjusted for price level restatement.

3. Mainly includes income tax credits from property taxes paid on leased assets as well as the impact from fluctuations in deferred tax assets and liabilities.

 

  19
 

 

 

 

Section 6: Credit risk ratings

 

International ratings

 

The Bank has credit ratings from three leading international agencies. In 4Q16, Moody’s reaffirmed our ratings with outlook stable and Fitch and S&P placed our outlook on negative following a similar action on the sovereign ratings.

 

 

Moody’s   Rating
Bank Deposit   Aa3/P-1
Baseline Credit Assessment   a2
Adjusted Baseline Credit Assessment   a2
Senior Unsecured   Aa3
Commercial Paper   P-1

 

Standard and Poor’s   Rating
Long-term Foreign Issuer Credit   A
Long-term Local Issuer Credit   A
Short-term Foreign Issuer Credit   A-1
Short-term Local Issuer Credit   A-1

 

Fitch   Rating
Foreign Currency Long-term Debt   A+
Local Currency Long-term Debt   A+
Foreign Currency Short-term Debt   F1
Local Currency Short-term Debt   F1
Viability rating   a+

 

Local ratings

 

Our local ratings are the following:

 

Local ratings   Fitch Ratings   Feller Rate
Shares   1CN1   1CN1
Short-term deposits   N1+   N1+
Long-term deposits   AAA   AAA
Mortgage finance bonds   AAA   AAA
Senior bonds   AAA   AAA
Subordinated bonds   AA   AA+

 

  20
 

 

 

 

Section 7: Share performance

As of March 31, 2017

 

Ownership Structure:

 

Total Shareholder Return

Santander ADR vs. SP500 (Base 100 = 12/31/2016)

 

ADR price (US$) 3M17

 

3/31/17:   25.08 
Maximum (3M17):   25.45 
Minimum (3M17):   17.99 

 

Market Capitalization: US$11,816 million

  

P/E 12month trailing*:   16.5 
P/BV (3/31/16)**:   2.7 
Dividend yield***:   4.5%

 

*Price as of Mar 31, 2017 / 12mth. earnings
**Price as of Mar 31, 2017/Book value as of 3/31/17
***Basedon closing price on record date of last dividend payment.

 

Average daily traded volumes 3M17

 

US$ million

 

Total Shareholder Return

Santander vs IPSA Index (Base 100 = 12/31/2016)

 

Local share price (Ch$) 3M17

3/31/17:   41.37 
Maximum (3M17):   42.38 
Minimum (3M17):   34.65 

 

Dividends:

 

Year paid  Ch$/share   % of previous year’s
earnings		 
2014:   1.41    60%
2015:   1.75    60%
2016:   1.79    75%
2017:   1.75    70%

 

  21
 

 

 

 

Annex 1: Balance sheet

 

Unaudited Balance Sheet

 

   Mar-17   Mar-17   Dec-16   Mar-16   Mar-17/Mar16   Mar-17/Dec-16 
   US$ Ths1  

Ch$ Million

   % Chg. 
Cash and deposits in banks   2,769,648    1,828,411    2,279,389    1,416,135    29.1%   (19.8)%
Cash items in process of collection   1,213,192    800,901    495,283    1,043,906    (23.3)%   61.7%
Trading investments   586,509    387,190    396,987    155,369    149.2%   (2.5)%
Investments under resale agreements   -    -    6,736    -    —%   —%
Financial derivative contracts   3,787,915    2,500,630    2,500,782    2,990,214    (16.4)%   (0.0)%
Interbank loans, net   533,022    351,880    272,635    31,896    1003.2%   29.1%
Loans and account receivables from customers, net   39,830,899    26,294,766    26,113,485    24,909,962    5.6%   0.7%
Available for sale investments   4,253,475    2,807,974    3,388,906    2,686,185    4.5%   (17.1)%
Held-to-maturity investments   -    -    -    -    —%    —% 
Investments in associates and other companies   37,114    24,501    23,780    20,861    17.4%   3.0%
Intangible assets   89,551    59,118    58,085    51,660    14.4%   1.8%
Property, plant and equipment   377,916    249,485    257,379    234,468    6.4%   (3.1)%
Current taxes   -    -    -    -    —%    —%
Deferred taxes   557,859    368,276    372,699    324,477    13.5%   (1.2)%
Other assets   1,568,417    1,035,406    840,499    982,562    5.4%   23.2%
Total Assets   55,605,517    36,708,538    37,006,645    34,847,695    5.3%   (0.8)%
                               
Deposits and other demand liabilities   11,222,458    7,408,618    7,539,315    7,079,271    4.7%   (1.7)%
Cash items in process of being cleared   912,365    602,307    288,473    873,455    (31.0)%   108.8%
Obligations under repurchase agreements   310,760    205,151    212,437    51,423    298.9%   (3.4)%
Time deposits and other time liabilities   19,238,079    12,700,210    13,151,709    12,722,899    (0.2)%   (3.4)%
Financial derivatives contracts   3,474,527    2,293,744    2,292,161    2,784,208    (17.6)%   0.1%
Interbank borrowings   2,259,584    1,491,687    1,916,368    1,316,766    13.3%   (22.2)%
Issued debt instruments   11,227,043    7,411,645    7,326,372    5,727,832    29.4%   1.2%
Other financial liabilities   361,020    238,331    240,016    224,888    6.0%   (0.7)%
Current taxes   37,638    24,847    29,294    11,799    110.6%   (15.2)%
Deferred taxes   17,606    11,623    7,686    6,307    84.3%   51.2%
Provisions   491,675    324,584    308,982    316,637    2.5%   5.0%
Other liabilities   1,510,714    997,313    795,785    879,962    13.3%   25.3%
Total Liabilities   51,063,469    33,710,060    34,108,598    31,995,447    5.4%   (1.2)%
                               
Equity                              
Capital   1,350,132    891,303    891,303    891,303    —%   —%
Reserves   2,484,416    1,640,112    1,640,112    1,527,893    7.3%   —%
Valuation adjustments   10,244    6,763    6,640    474    1326.8%   1.9%
Retained Earnings:   651,831    430,313    330,651    402,022    7.0%   30.1%
Retained earnings from prior years   715,510    472,351    -    448,878    5.2%   —%
Income for the period   215,667    142,375    472,351    125,439    13.5%   (69.9)%
Minus: Provision for mandatory dividends   (279,346)   (184,413)   (141,700)   -172,295    7.0%   30.1%
Total Shareholders' Equity   4,496,624    2,968,491    2,868,706    2,821,692    5.2%   3.5%
Non-controlling interest   45,424    29,987    29,341    30,556    (1.9)%   2.2%
Total Equity   4,542,047    2,998,478    2,898,047    2,852,248    5.1%   3.5%

 

1. The exchange rate used to calculate the figures in dollars was Ch$660.16 / US$1

 

  22
 

 

 

Annex 2: Quarterly income statements

 

Unaudited Quarterly Income Statement

   1Q17   1Q17   4Q16   1Q16   1Q17/1Q16   1Q17/4Q16 
   US$ Ths1  

Ch$ Million

   % Chg. 
Interest income   793,698    523,968    526,330    518,729    1.0%   (0.4)%
Interest expense   (311,126)   (205,393)   (209,681)   (205,856)   (0.2)%   (2.0)%
Net interest income   482,572    318,575    316,649    312,873    1.8%   0.6%
Fee and commission income   174,647    115,295    112,187    104,508    10.3%   2.8%
Fee and commission expense   (64,336)   (42,472)   (49,050)   (41,517)   2.3%   (13.4)%
Net fee and commission income   110,311    72,823    63,137    62,991    15.6%   15.3%
Net income (expense) from financial operations   1,933    1,276    (74,850)   (179,699)   -%    -% 
Net foreign exchange gain   53,708    35,456    112,397    213,961    (83.4)%   (68.5)%
Total financial transactions, net   55,641    36,732    37,547    34,262    7.2%   (2.2)%
Other operating income   19,721    13,019    4,456    5,248    148.1%   192.2%
Net operating profit before provisions for loan losses   668,246    441,149    421,789    415,374    6.2%   4.6%
Provision for loan losses   (111,885)   (73,862)   (87,713)   (77,926)   (5.2)%   (15.8)%
Net operating profit   556,361    367,287    334,076    337,448    8.8%   9.9%
Personnel salaries and expenses   (140,384)   (92,676)   (101,306)   (92,967)   (0.3)%   (8.5)%
Administrative expenses   (88,588)   (58,482)   (57,898)   (58,694)   (0.4)%   1.0%
Depreciation and amortization   (26,694)   (17,622)   (18,812)   (14,345)   22.8%   (6.3)%
Op. expenses excl. Impairment and Other operating expenses   (255,665)   (168,780)   (178,016)   (166,006)   1.7%   (5.2)%
Impairment of property, plant and equipment   (279)   (184)   (139)   (37)   397.3%   32.4%
Other operating expenses   (28,504)   (18,817)   (20,326)   (16,234)   15.9%   (7.4)%
Total operating expenses   (284,448)   (187,781)   (198,481)   (182,277)   3.0%   (5.4)%
Operating income   271,913    179,506    135,595    155,171    15.7%   32.4%
Income from investments in associates and other companies   1,091    720    764    531    35.6%   (5.8)%
Income before tax   273,004    180,226    136,359    155,702    15.8%   32.2%
Income tax expense   (56,362)   (37,208)   (27,126)   (29,662)   25.4%   37.2%
Net income from ordinary activities   216,641    143,018    109,233    126,040    13.5%   30.9%
Net income discontinued operations   -    -    --    -           
Net income attributable to:                              
Non-controlling interest   974    643    600    601    7.0%   7.2%
Net income attributable to equity holders of the Bank   215,667    142,375    108,633    125,439    13.5%   31.1%

 

1. The exchange rate used to calculate the figures in dollars was Ch$660.16 / US$1

 

  23
 

 

 

Annex 3: Quarterly evolution of main ratios and other information

 

(Ch$ millions)            
  Mar-16   Jun-16   Sep-16   Dec-16   Mar-17 
Loans                    
Consumer loans   4,141,786    4,239,461    4,311,786    4,446,803    4,502,447 
Residential mortgage loans   8,099,477    8,321,626    8,471,975    8,619,356    8,747,324 
Commercial loans   13,452,772    13,602,948    13,807,911    13,867,465    13,850,836 
Interbank loans   31,926    236,532    276,703    272,807    352,044 
Total loans (including interbank)   25,725,961    26,400,567    26,868,375    27,206,431    27,452,650 
Allowance for loan losses   (784,102)   (795,405)   (812,707)   (820,311)   (806,005)
Total loans, net of allowances   24,941,859    25,605,162    26,055,668    26,386,120    26,646,646 
                          
Deposits                         
Demand deposits   7,079,271    7,238,303    6,913,452    7,539,315    7,408,618 
Time deposits   12,722,899    12,997,791    13,126,798    13,151,709    12,700,210 
Total deposits   19,802,170    20,236,094    20,040,250    20,691,024    20,108,828 
Mutual funds (Off balance sheet)   4,695,924    4,881,450    5,269,815    5,026,068    5,489,733 
Total customer funds   24,498,094    25,117,544    25,310,065    25,717,092    25,598,561 
Loans / Deposits1   98.3%   99.0%   100.4%   98.5%   102.3%
                          
Average balances                         
Avg. interest earning assets   27,801,471    28,628,066    28,979,918    29,901,912    30,381,349 
Avg. Loans from reporting segments   25,432,034    25,980,829    26,550,078    26,952,880    27,246,674 
Avg. assets   34,754,591    35,195,160    35,869,635    36,163,077    36,629,695 
Avg. demand deposits   7,181,633    7,280,495    7,132,397    7,094,735    7,370,951 
Avg equity   2,772,379    2,714,063    2,755,631    2,833,913    2,914,173 
Avg. free funds   9,954,012    9,994,558    9,888,028    9,928,649    10,285,124 
                          
Capitalization                         
Risk weighted assets   26,608,992    26,876,727    27,130,807    27,237,835    27,492,643 
Tier I (Shareholders' equity)   2,821,692    2,704,685    2,794,109    2,868,706    2,968,491 
Tier II   773,581    781,772    786,936    789,001    792,549 
Regulatory capital   3,595,272    3,486,457    3,581,046    3,657,707    3,761,040 
Tier I ratio   10.6%   10.1%   10.3%   10.5%   10.8%
BIS ratio   13.5%   13.0%   13.2%   13.4%   13.7%
                          
Profitability & Efficiency                         
Net interest margin (NIM)1   4.5%   4.6%   4.5%   4.2%   4.2%
Client NIM2   4.9%   4.8%   4.9%   4.8%   4.8%
Efficiency ratio3   41.6%   43.8%   41.1%   44.3%   40.0%
Costs / assets4   1.9%   1.9%   1.9%   1.9%   1.8%
Avg. Demand deposits / interest earning assets   25.8%   25.4%   24.6%   23.7%   24.3%
Return on avg. equity   18.1%   17.1%   17.7%   15.3%   19.5%
Return on avg. assets   1.4%   1.3%   1.4%   1.2%   1.6%
Return on RWA   1.9%   1.7%   1.8%   1.6%   2.1%

 

  24
 

 

 

(Ch$ millions)            
   Mar-16   Jun-16   Sep-16   Dec-16   Mar-17 
Asset quality                         
Impaired loans5   1,642,087    1,645,082    1,594,267    1,615,441    1,667,145 
Non-performing loans (NPLs) 6   639,981    566,177    556,965    564,131    594,855 
Past due loans7   353,610    340,761    336,337    324,312    330,207 
Loan loss reserves   784,102    795,405    812,707    820,311    806,005 
Impaired loans / total loans   6.4%   6.2%   5.9%   5.9%   6.1%
NPLs / total loans   2.5%   2.1%   2.1%   2.1%   2.2%
PDL / total loans   1.4%   1.3%   1.3%   1.2%   1.2%
Coverage of NPLs (Loan loss allowance / NPLs)   122.5%   140.5%   145.9%   145.4%   135.5%
Coverage of PDLs (Loan loss allowance / PDLs)   221.7%   233.4%   241.6%   252.9%   244.1%
Risk index (Loan loss allowances /  Loans) 8   3.0%   3.0%   3.0%   3.0%   2.9%
Cost of credit (prov expense annualized / avg. loans)   1.2%   1.3%   1.4%   1.3%   1.1%
                          
Network                         
Branches   470    468    464    434    415 
ATMs   1,529    1,484    1,406    1,295    1,288 
Employees   11,793    11,653    11,557    11,354    11,229 
                          
Market information (period-end)                         
Net income per share (Ch$)   0.67    0.62    0.65    0.58    0.76 
Net income per ADR (US$)   0.39    0.37    0.39    0.35    0.46 
Stock price   32.57    31.92    34.04    37.26    41.37 
ADR price   19.35    19.37    20.69    21.87    25.08 
Market capitalization (US$mn)   9,116    9,126    9,747    10,303    11,816 
Shares outstanding   188,446.1    188,446.1    188,446.1    188,446.1    188,446.1 
ADRs (1 ADR = 400 shares)   471.1    471.1    471.1    471.1    471.1 
                          
Other Data                         
Quarterly inflation rate10   0.7%   0.9%   0.6%   0.5%   0.5%
Central Bank monetary policy reference rate (nominal)   3.50%   3.50%   3.50%   3.50%   3.00%
Observed Exchange rate (Ch$/US$)  (period-end)   675.10    661.49    659.08    660.00    662.66 

 

1. Ratio =( Loans - mortgage loans) / (Time deposits + demand deposits)

2. NIM = Net interest income annualized divided by interest earning assets

3. Client NIM = Net interest income from reporting segments annualized over average loans

4. Efficiency ratio =(Net interest income+ net fee and commission income +financial transactions net + Other operating income +other operating expenses) divided by (Personnel expenses + administrative expenses + depreciation). Excludes impairment charges

5. Costs / assets = (Personnel expenses + adm. Expenses + depreciation) / Total assets

6. Impaired loans include: (A) for loans individually evaluated for impairment, (i) the carrying amount of all loans to clients that are rated C1 through C6 and (ii) the carrying amount of loans to an individual client with a loan that is non-performing, regardless of category, excluding residential mortgage loans, if the past-due amount on the mortgage loan is less than 90 days; and (B) for loans collectively evaluated for impairment, (i) the carrying amount of total loans to a client, when a loan to that client is non-performing or has been renegotiated, excluding performing residential mortgage loans, and (ii) if the loan that is non-performing or renegotiated is a residential mortgage loan, all loans to that client.

7. Capital + future interest of all loans with one installment 90 days or more overdue.

8. Total installments plus lines of credit more than 90 days overdue.

9. Based on internal credit models and SBIF guidelines. Banks must have a 100% coverage of risk index.

10. Calculated using the variation of the Unidad de Fomento (UF) in the period.

 

  25