Q1 2013 Banco Santander - Chile Earnings Conference Call
Apr 26, 2013 AM EDT
BSANTANDER.SN - Banco Santander-Chile
Q1 2013 Banco Santander - Chile Earnings Conference Call
Apr 26, 2013 / 03:00PM GMT
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Corporate Participants
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* Raimundo Monge
Banco Santander - Chile - Director of Strategic Planning
* Robert Moreno
Banco Santander - Chile - Manager of IR
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Conference Call Participants
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* Carlos Macedo
- Analyst
* Thiago Baptista
- Analyst
* Daniel Abut
- Analyst
* Jose Barira
- Analyst
* Saul Martinez
- Analyst
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Presentation
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Operator [1]
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Good day, ladies and gentlemen, and welcome to the Banco Santander - Chile earnings conference call. My name is Ursula, and I will be your operator for today. At this time all participants are in listen-only mode. Later we will facilitate a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Raimundo Monge. Please proceed, sir.
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Raimundo Monge, Banco Santander - Chile - Director of Strategic Planning [2]
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Thank you very much and good morning ladies and gentlemen. Welcome to Banco Santander - Chile's first Q '13 results conference call. My name is Raimundo Monge, Director of Strategic Planning at the Bank, and I'm joined today by Robert Moreno, Manager of Investor Relations.
Thank you for attending today's conference in which we will discuss our performance in the first quarter of 2013. Following the webcast presentation, we will be happy to answer your questions.
Before we get into more details regarding our results, we will briefly give an update of our outlook about the Chilean economy and its financial system in 2013. We continue to be optimistic on the performance of the economy and expect GDP to rise around 5.2% in 2013. This is going to be driven by an increase in private investment and consumption.
Inflation is expected to rise slightly, but remain under control and this should lead to a steady interest rate environment. Unemployment remains low with positive job creation figures and wage growth. In summary, we expect a sound macroeconomic outlook for this year and for 2014 as well.
This should lead to a good growth in the financial system which we expect to reach between 10% to 12% this year and the following. The profitability of the system though should remain more or less the same or fall slightly below last year results.
Despite the positive macro environment the microenvironment for banking, while still positive, remain challenging and the higher effective rate will reduce the growth of the bottom-line. As of February 2013, the results of the Chilean banks have fallen 20% due to lower margins and higher risks.
Therefore it is important for banks not only to be concerned about excelling in the short term, but to begin to adapt to the challenges the system will be facing in terms of regulations, fees, cost, and higher capital levies.
Now we will review our strategy and performance in the first Q of the year. As we have stated in previous calls, our strategy takes into account this positive macro outlook and also incorporates our continuous efforts to confront the challenges facing retail banking.
We believe that we are ahead of the curve and probably a little bit more advanced than the rest of the system in making what we see are necessary steps to allow us to have increasing profitability in this more challenging and competitive environment.
We remain fully committed to deepening our focus on retail banking by strengthening client relationship with the sound growth of our balance sheet, solid levels of capital, and high liquidity. We will continue to expand our business while improving efficiency through (inaudible) gains and managing risks conservatively.
These three strategic objectives are being [attacked] through the Bank's transformation plan. This is the largest overhaul and reorganization of the Bank's retail banking activities in almost a decade. It is important to understand the recent results reflecting part of the short-term costs of implementing this strategy which affected our loan growth provision expenses and cost in 2012.
Nevertheless, these efforts is starting to yield its expected results and we're beginning to see improvement in various area as we will see in the rest of this presentation.
In terms of loan growth, in the first Q of '13, we saw a healthy growth in those segments we are currently targeting, high-income individuals, SMEs, and the middle market of corporates.
While total loans increased 1.2% Q-on-Q, loan growth in this segment increased at an annualized rate of close to 12%, maintaining the solid expansion seen in the fourth Q of 2012. These segments have shown steady pricing and risk trends which bodes well for margins and provisions going forward.
In the first Q of '13, we also saw a positive evolution of our funding base. Even though total deposits were flat Q-on-Q, all deposits, which are all deposits from non-institutional sources, continued to expand at a solid rate. As a result, core deposits increased 7.4% Q-on-Q and 12.4% year-on-year and now represent 83% of our total deposits.
We expect to continue with this strategy of focusing on core deposits throughout 2013. This is also reflected in the evolution of our funding cost. Historically, Santander has had a slightly more expensive cost of funds than its main competitors.
This gap was closed during 2011 and 2012, and we are now beginning to open a positive gap in our favor. The transformation initiative is also beginning to produce positive results. The Bank is currently going through many internal changes which are starting to deliver encouraging results.
Just some examples; in the first of '13, the percentage of consumer loans that were sold via the Bank's new CRM pre-approval system compared to direct one-on-one sales has improved from 35% in 2011 to 46%. This means relationship managers are selling to clients that had been previously analyzed and approved.
Among other benefits, those sales require provision expense that is almost half to similar consumer products sold through a one-on-one process. At the same time the Bank's Internet and phone banking capabilities are also growing at a strong rate.
The percentage of consumer loans sold through our alternative channel has increased to 36% in the first Q of '13, up from 20% by the end of 2011, with a lot of room for further improvement. These loans apart from requiring a lower provision expense have origination costs which are close to half of the same consumer loan granted in a regular branch.
The Bank has also been investing in improving client services by revamping internal processes and Bank office functions. The results of these initiatives are also beginning to appear.
According to the latest information made public by both the Superintendencia of Banks, SBIF, the main bank regulator, and the SERNAC Government Consumer Protection Agency, we are among the top larger banks in Chile in terms of fewer complaints and fastest response time.
Other measurements regarding client satisfaction and Bank recognition are also showing positive trends.
Our financial results are slowly beginning to reflect these changes. However, this was obscured this first quarter by the volatility of the inflation rate which negatively affect our net interest margin.
In the first Q of '13, the variation of Unidad de Fomento, an inflation index currency unit, was 0.1% compared to 1.1% both in fourth Q '12 and the first Q of 2012. It is important to point out that the Bank has more assets than liabilities linked to inflation, and as a result margins have a positive sensitivity to variations in inflation.
The gap between assets and liabilities indexed to the UF average approximately $7.5 billion in the first Q of this year. This imply that for every 100 basis point change in inflation, our net interest income increases or decreases by approximately $75 million all other things being equal.
Therefore, the Q-on-Q decline in inflation has been explained to a large extent by the sharp reduction in non-client net interest income in the first Q of '13 compared to both fourth Q '12 and first Q 2012.
For the rest of 2013, the evolution of margins should reflect various factors. We expect inflation to normalize at an annual rate of approximately 2.4% up to 2.5% for 2013, that is 0.7% inflation per remaining quarter subject of course to further revision.
In 2013, the negative effect of possible regulations regarding maximum rate may have a negative impact on our margin. The final law regulating this change is still being discussed in Congress, and there is no clarity as to when it will be approved.
To counterbalance this, we expect greater loan growth and stable evolution of client net interest margins, net of provision expense.
Net provision for loan losses in the quarter increased 2.7% Q-on-Q and 18.6% year-on-year. Coverage of total non-performing loans in the first Q of '13 reached 91%. Excluding residential mortgage loans that have a lower coverage ratio due to the value of residential property collateral, the coverage ratio of the remaining loan book reached a healthy 113%.
At the same time, the cost of credit, which is our provision expense divided by total loans, was flat at 1.9% within the range mentioned in previous calls, and slightly below historical levels. Non-performing loans levels were also flat in the quarter.
Net provision expense in consumer loans which represent 63% of total provision expense decreased 1% Q-on-Q and 3.8% year-on-year. Consumer non-performing loans decreased also 2.7% Q-on-Q, and the coverage of them or these non-performing loans reached 236% in the first quarter of this year.
At the same time, the amount of impaired consumer loans, that is consumer non-performing loans plus renegotiated consumer loans has evolved favorably. These tend to be a leading indicator for the evolution of future charge-offs.
We believe these trends are starting to reflect the positive impact of the different measures carried out by the Bank to improve coverage of risk. This included focusing loan growth on the higher end of the consumer market, tightening admission policies, improving the collection process, and updating the consumer provisioning models.
With concerns about the quality issue in the middle and low end of the consumer market increasingly behind us, and with better admission tools fully in place, we think the Bank is in a sound position to accelerate consumer loan growth in the coming quarters.
Operating expenses in the first Q '13 increased 7.7% year-on-year. This was mainly due to the 9% increase in administrative expenses as the Bank continued with its transformation projects aimed at enhancing productivity in retail banking.
Rent expenses also have been rising since the Bank has sold most of the branches and now rent them. Branches are risk-weighted at 100% and therefore from a capital perspective it is more efficient to rent them than to own them.
Moving forward though, administrative expenses should grow at a slower pace as many of these projects are close to be concluded.
The 3.1% year-on-year increase in personnel expenses in the first Q reflect the rise in headcount plus the rise in salaries due to inflation in 2012. As of March 2013, our headcount totaled close to 11,700 employees, an increase of 0.9% compared to first Q '12.
The main area of personnel growth has been in the Bank's collection area, which have been partially offset by lower headcount at (inaudible) sales force.
Our headcount remains favorable for the remainder of the year, personnel expenditure should also see moderate growth in the coming quarters.
In summary, ROE in the first Q reached 15%, but with a relevant rebound in results since last December, as inflation began to normalize on a monthly basis, and more importantly loan growth and client activity began to accelerate in retail banking.
This commercial growth is not only stronger than most recent trends, but also of a better quality in terms of risk-adjusted returns.
The Bank also finished the quarter with solid capital levels to sustain the recent growth trends. Core capital reached 10.9% and the Bank's BIS ratio reached 13.9% at the same date. The Bank's Board may also submit for shareholder approval on April 29 its annual dividend equivalent to 60% of the 2012 net income. If approved, it will represent a dividend yield of 3.8% to our shareholders.
In summary, the Chilean economy is in good health which should lead to continuous volume growth, but at the same time, we are confronting a change in retail banking environment with (inaudible).
Loan growth is beginning to accelerate, especially in the section we're targeting this year, and we have seen slightly better prices even in the mortgage business where spreads were abnormally tight in 2012. The funding mix continued to improve and our transformation initiatives are beginning to sprout healthy green shoots.
Net interest margins should rebound as the year progresses, especially net of provisions as asset quality and consumer lending improves. Cost growth should also continue to decelerate and efficiency should improve.
Finally, as a reminder, the income tax rate in Chile will rise in 2013 for all companies and therefore focus should be kept on the pre-tax earnings. As a consequence, we are maintaining our outlook for 2013 as first Q figures were in-line of our Q-on-Q expectations due to the low inflation pattern.
At this time, we will gladly answer any questions you might have.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Carlos Macedo.
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Carlos Macedo, - Analyst [2]
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I have a couple of questions both related to the outlook you have for the remainder of this year. Of course, as you said, things will improve gradually during the year. I just want to get a little bit more color from you on the pace of that improvement, particularly on the client net interest income as you mentioned before and as it relates to the provisions also for loans there.
How quickly do you think that will turn, because right now your margins are still declining there and provisions are still up? Do you think that's something that will happen as early as the second quarter or are you looking more towards the second half of the year, maybe the third quarter, the fourth quarter to see something -- some better news there?
Also more or less in the same vein, you're still -- your fee revenues are still declining on a year-over-year basis. Of course, as you implement this new model CRM, you should see that kind of rebound. Is that something that you expect will happen -- could happen as early as the second quarter or is it something that we should wait until the second half of the year to see? Thanks.
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Raimundo Monge, Banco Santander - Chile - Director of Strategic Planning [3]
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Okay. Well, thank you for your question. In terms of the outlook, our general outlook is positive for this year as a whole. Yes, of course, the first Q was impacted by seasonality. This is the holiday season in the Southern Hemisphere, plus inflation which was abnormally low.
But looking into more client activity, as you correctly point, we think that our client margins will be relatively sluggish, and that is basically because although we're aiming at lower risk categories, we are still growing faster in the middle of those lower-risk segment, SMEs, and the middle part of the consumer part.
So that's why the mix should be supportive in addition to that. So we think that client margins should be stable or slightly going down, but we don't see meaningful changes in that dimension.
At the same time, loan growth we expect to be resuming faster than overall results because as you know average loans is what makes net interest income to gather momentum and the fact that last year we grew less rapidly than what we expect to grow this year means that probably net interest income will be growing more fast well into the second half of the year and contrary to that volumes will be growing probably this second Q you will see stronger loan growth across the board especially in the segments we are targeting.
We have seen growth there of around 12% since fourth Q of last year and that trend was maintained this Q and probably we'll see that the whole loan growth including mortgages and to some extent the large companies where basically we have been lagging on purpose, we are seeing some symptoms of more reasonable prices in the market as we stated.
That's why we think that we are on-track to grow this year very close to the margin 10% to 11%, and with high growth in the segments that we are targeting. In terms of provision, that also will be -- we think the provision as we've stated last call, on a year-on-year basis, will be slightly lower than last year and that process will be especially difficult throughout the second half of the year.
That's why we think that the overall trend is solid -- increasingly solid growth favors on the lending and deposit side on second Q, stronger results in the second half.
In terms of your final point, fees, we think this year won't be a driver of growth and that has to do with the fact that last year we were reducing our client-base in the lower end of the consumer market which is one that was generating more fees and we're growing fast in that segments, but today with the new rules that we see in the market, that process is increasingly difficult.
And that's why -- what we have been doing is reducing our client-base in that segment due to the risk concerns with (inaudible) to that which have an impact in fees. But we have been replacing by middle to upper-end consumer.
In March, for example, for the first time we saw a healthy net growth of total client-base, meaning that at least for this month and we think that this is a trend that should sustain throughout the year, we will be increasing our total client-base even though we still are flattish or slightly down in the client-base in the low end of the consumer market.
Historically, fees are very linked to the client-base and that's why we saw last year a flattish growth on fees and we will see that process probably throughout this year, and then in 2014 fee income should be a positive driver of growth.
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Carlos Macedo, - Analyst [4]
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Okay. So I understand you'll see the turn in the provision adjusted client margins probably some point this year. But -- on second half of the year most likely, but on the fees --
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Raimundo Monge, Banco Santander - Chile - Director of Strategic Planning [5]
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Yes.
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Carlos Macedo, - Analyst [6]
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-- it's probably it's a 2014 kind of theme?
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Raimundo Monge, Banco Santander - Chile - Director of Strategic Planning [7]
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That's right, that is the point.
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Carlos Macedo, - Analyst [8]
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Okay, perfect. Thank you, Raimundo.
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Operator [9]
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Thiago Baptista.
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Thiago Baptista, - Analyst [10]
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I have two questions. My first question is regarding the efficiency ratio of the Bank. Santander Chile (inaudible) in terms of expenses in this quarter and my question is what is the level of efficiency ratio that you are targeting in the middle term?
And my second question is a follow-up of Macedo's question regarding asset quality. You already comment that there has also been expenses we will probably post as well contraction this year, but in terms of NPL ratio, are you expecting an improvement in NPL ratio or a reduction in NPL ratio in other segments or more focused on the consumer segment?
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Raimundo Monge, Banco Santander - Chile - Director of Strategic Planning [11]
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Okay. In terms of efficiency, we think that we will be throughout the year improving it because of the lower growth of cost given that we are finishing a number of activities related to the transformation project that we've been carrying out in the last year-and-a-half.
Secondly, well, headcount will be to a large extent flat, and therefore we don't see pressures coming from there. Actually the transformation process precisely is aiming to increase commercial productivity by giving better tools for having the client relationship for evaluating clients and for approving all the origination of loan.
So that's why we think that efficiency will come down. How fast, we think that in the next two years it should be steadily coming below 40% no doubt, and then how low we plan to get it, probably not lower than 37% - 38% because we have discovered that when you go as slow as that, you tend to have problems of quality of service, problem-solving, different measures that are negative for the business.
So that's why efficiency as a target is sound when you have it in a very high level. But once you have efficiency levels below 40%, you are more careful in terms of balancing efficiency by itself with quality of service, employee turnover, and things -- other metrics are relevant for the healthiness of the business and the medium-term outlook of the business.
In terms of the second part of your question, provisions, we tend to follow the cost of credit measure as a way to proceed. Today, in the last two quarters has been at around 1.9% -- provisions are -- with respect to 1.9% of our loans we expect that figure to come down throughout the year. Historically it has been around 2% and that's why we think that the concerns we had about asset qualities in the last two years, especially after the [Labolar] case and changes in the regulations, that some of them were negative in terms of a behavior, are to a large extent behind that, and that's why these figures will come down.
And additionally given that we expect growth to accelerate relatively across the board, that also will be reducing the ratio. So we think that, again, banks tend to, at the end of the day, be macro-players and the fact that we expect a relatively sound macro environment make us believe that as long as we don't have new realms of micro changes that at least nobody foresees for this year, the evolution of provision will be sound and we will have a stronger credit cost ratios going forward.
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Thiago Baptista, - Analyst [12]
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Okay. Thank you.
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Operator [13]
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Daniel Abut.
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Daniel Abut, - Analyst [14]
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Raimundo, a quick question on your underlying ROE. In the past you have been very clear that you didn't expect given the structural changes in the market and the effect of how will you operate a bank with a lower leverage now that you are now going to go back to the high ROEs in the mid-20% of the past, but that you thought something, the 20% - 201% range was achievable.
And in fact last year, in three of the four quarter of last year, you did achieve an ROE in the low 20%, but there was one quarter where the ROE was very low because of the inflation issue, 10%, which produced at the year as a whole (inaudible) you are falling a bit short of that 20% target, I think the ROE of the year as a whole was a touch below that.
Given that this year, you got it up to a start of 15% ROE, do you think you can make it up in the rest of the year or most likely we will end up a bit short of that 20% - 21% target and we will have to wait until 2014 to see it?
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Raimundo Monge, Banco Santander - Chile - Director of Strategic Planning [15]
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Yes -- no, of course with 0.1% inflation in the quarter, achieving a 20% ROE, especially given that last year we didn't grow very strong and we did increase our client-base, actually we maintained our client-base flattish is very unlikely.
However, if you simply do the calculation that we were doing or saying, okay, let's calculate our net interest margin with a normal-like inflation of 0.6% or 0.7%, there you will see that ROE is very close to 20% even in the first Q, which has not been stellar because of a holiday season and things like that.
So that's why we think that again as a moving average we should be moving by the end of the year, if you take the average of three or four quarters to cancel out the negative and positive that we will see on the inflation side, that can create value for shareholder, but it's a fact of this market.
We think we can go very close to 20%, again as a moving average and that will be especially visible we think in the second half of the year, yes. Just to give you an example, in the second Q, we already have more inflation than in the whole -- the inflation of April, the relevant inflation of April is two or three times higher than all inflation we had in the first Q, yes.
But again, the inflation moves the quarter-on-quarter figure, but the underlying profitability of the Bank, we think that with a normalized inflation between 2.5% to 2.4% has been even this quarter and was last year on average similar to the 20% trend.
And again as you correctly point, whenever we have more clarity or more risk appetite, we can gear more our balance sheet and go back to higher ROEs (inaudible). The problem is that with inflation bouncing very heavily between quarters, of course that produce a noisy accounting result. But then the line trends are moving very close to 20%.
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Daniel Abut, - Analyst [16]
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So you're saying, Raimundo, that the next three quarters assuming that inflation normalizes, the next three quarters we will likely see your ROE in the 20%-plus level for the year as a whole, well, it will be affected by this first quarter, so the year as a whole will likely be a little short, but for the next three quarters you should be at 20% of this level?
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Raimundo Monge, Banco Santander - Chile - Director of Strategic Planning [17]
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At least that is our basic assumption. The only uncertainty as we state in our press release is that if -- depending on how the maximum rate, what is the final draft of that regulation could have a short-term impact et cetera, but in general terms given that we expect inflation to be at least neutral going forward or supportive, second that we are starting to grow faster in the high-yielding categories and third that those provisions and costs will be flattish, or in the case of cost, growing much slowly than last year, and in the case of provision, hopefully it's flattish or going down, we think that that will gear our growth and therefore maintain these underlying profitability.
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Daniel Abut, - Analyst [18]
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Thank you, Raimundo.
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Operator [19]
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[Jose Barira].
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Jose Barira, - Analyst [20]
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I have two questions. The first one is with regards to overall growth at Santander versus industry. Looking at the data through February, it looks like the system was growing closer to 12%, but Santander is growing at about 7%.
So I wanted to know, you said that you expect this year to be more along the lines or in the range of what the industry loan growth is. Why has Santander's loan growth been so much lower in the first quarter and how do you expect to catch up to the industry in the remaining part of the year?
That would be the first question. And the second is with regard to Basel III implementation in Chile and changes to the banking law to allow for that, can you give us any idea what developments there have been along those lines? It seems to be delayed in Chile and if you have any color, what could be the impact on your capital levels after that is announced? Thank you.
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Raimundo Monge, Banco Santander - Chile - Director of Strategic Planning [21]
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Okay. Well, in terms of loans, as we have stated in the last call and this, the market is growing, as you point, at around 2%, but that has been to some extent a result of mortgage business growing very fast and lending to large companies, also growing in many cases.
So that's why the main difference that we have in terms of our pattern of growth and the rest of the system is that because of price concerns we have been following the pricing of loans in the mortgage business and in the large corporate business, yes, and that's why if you deduct mortgages and the large corporations as we do it in our press release and in the webcast, our growth is not very different from the rest of the system.
So again our perceived slowness is to a large extent desirable from a shareholder's standpoint because we're not locking capital in what we think are low-yielding activities, but only concentrate our bullets in where we think more revenue and more sustainable revenue can achieve.
Today in the margin we are seeing better news in the mortgage business to some extent, and in the corporate business it's very specific because it depends on how much revenue you can collect on the non-lending side with those companies whether you do the business with them or not.
And that's why it's difficult to know whether it's sensible or not to lock capital at the prevailing rate, yes? So end of the story, we think that in the relevant parts of the market, the ones that really pass our filters of risk-adjusted return, we're growing 11.5% - 12%, very much in-line with the overall market and in the parts we're lagging is basically mortgages and lending to the large corporate which we think that going forward, as long as many of our competitors are running out of fresh capital, they will start taking second thoughts about how low prices can get in those type of business.
And that's why we're optimistic that at some moment of time -- and we have some preliminary hints that that is starting to happen -- prices will be more in-line of what our models request.
In terms of -- but again, remember that Santander Chile for the last, I don't know, eight years or so has been focusing on share of revenues and shares of net income more than in share of volume, because again we can grow very rapidly in mortgage, but without any contribution to our stakeholders, which is I think in this moment useless, and that links to the second part of your question which is capital requirements.
There what we have seen is the indications that Chile plans to move in that direction, but in a relevantly slow pace. The regulators have been relatively clear that they don't see any shortage of capital in the banks as a whole.
I don't know whether some of them may have to increment their capital, but the general figures are sound and that the process will be implemented in the original lines of Basel III taking five, six years to be fully in place, yes.
In our case we don't know the final -- remember that Basel is a recommendation for the local regulators of how to, well, to calculate their ratio et cetera. Depending on the peculiarities of the market, you have different weights for different type of categories of assets.
In our case, since we follow the ones that are used in Spain, our Basel III capital ratio will be lower than our 10.9% today at around 10% more or less, but that is to a large extent linked to the new category of risk, operational risk that is not included in Basel I recommendation.
So for practical purposes, we don't have new requirements of capital due to market risk or credit risk, the two categories that are taken care in Basel I, at least in the Chilean Basel I, and the only increment of capital is due to a new category of risk that is incorporated, the operational risk.
And that's why we think that we are -- the fact that -- as we put in the webcast that we are among the largest banks, the most capitalized bank is having an impact in our expected ROE, but at the same time it will be very beneficial if these new category requirements are fully in place.
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Jose Barira, - Analyst [22]
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Thank you very much. Just two very quick follow-ups on those two points. On the first one, given that commercial and mortgage seem to be sort of [leading] the in growth in the system and that you've decided to not necessarily participate there because it's not as attractive from a risk-return perspective, do you still think that you can grow at the same pace of the industry that, I guess, would imply that you are growing at a much faster pace in other segments?
So just your thoughts on that. And the second is, can you remind us what is the minimum capital requirement for you from the regulator -- I understand that it's different from what it is for the rest of system given your size -- where that is now and if you expect that to maybe change with the new capital rules?
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Raimundo Monge, Banco Santander - Chile - Director of Strategic Planning [23]
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Okay. Well, in terms of growth, at the end remember that in our case loan growth is the result of the implementation of our profitability-driven strategy, and that's why we intend to grow -- in terms of commercial power to some extent, we are very good at growing, (inaudible) simply that if the rest of the market players as we think that we consider to be low-yielding, we prefer to stop growing in those pieces of the market.
And that's why we have been to some extent, if you take a long-time series, our market share in terms of loan spent to move faster than our market share in terms of revenues or net income simply a reflection that we don't follow the market when we think that prices are not sound.
And that's why today the basic assumption is that prices will be more sensible going forward and that we can keep pace with the market. If not, we probably will be going faster than the rest in the segments that we have been targeting, yes, which we're growing today at around 12%, and in the mortgage and large corporate segment, we don't care very much whether we lose market share because today is very low-yielding unless you are able to cross-sell the client which is increasingly more difficult given the change in regulation.
And that's why the temptation here is to say, okay, I will grant the mortgage very cheaply, even below our cost of fund, in anticipation of cross-selling the client, but the problem is that today that process is very difficult and that's why we prefer to cross-sell the client first and then to give the mortgage and not the other way around which can be diluted for shareholder purposes.
In the case of -- in terms of our Basel, we have the capital requirements as stated in terms of Basel, the full Basel ratio, including core capital and subordinated debt. Today for banks that have more than 20% market share, you need to have a minimum Basel ratio of 11%. Today we're close to 14%. And then for banks that have between 15% and 20% of the market, the Basel ratio is 10% and for the rest is 8%.
And that's why today you see those favors in -- the core capital ratio for all of the system is 10%, which is relatively high, and that's why according to the payments done by the Superintendent of Banks and other regulators, they don't see any constrain in adapting Basel III.
And simply the process will take some time because they wanted to adapt very well to the peculiarities of the market. But we don't see as a relevant change, and if there comes a change, it will -- probably will be adapted in a relatively long period of time.
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Jose Barira, - Analyst [24]
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Perfect. Thank you very much for your answer. It's very detailed.
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Operator [25]
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(Operator Instructions) Saul Martinez.
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Saul Martinez, - Analyst [26]
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Most of my questions have been answered, but just, Raimundo, on the outlook for rate caps, you've been talking about that for quite a long time and obviously because of various issues I suspect -- the concerns around what it might mean for bankerization, it really hasn't moved through Congress. Can you give us -- and as there any sort of update on where it stands in legislative process and whether in fact there is a chance that it does not get implemented?
And secondly, on your comment in an earlier question about ROEs going to 20% as a moving average, I just wanted to make sure I understood that, meaning if we look out over three quarters, you're going to have some ROEs, sometimes you'll have ROEs obviously depending on inflation and other transitory factors below 20%, sometimes you'll have above 20%, but by year-end, the average over the previous quarters will be 20%. Is that the basic concept underlying what you said?
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Raimundo Monge, Banco Santander - Chile - Director of Strategic Planning [27]
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Okay. In terms of the caps of rate, as you correctly point, there's no clarity today. I will say that the good news is that we have seen a more decisive intention of the government to move the consolidation of the credit bureaus and the payroll lending also has been moving faster than these caps.
And that's why we think that at the end because of the concerns that many agents including the central bank have about the negative effect in terms of bankerization that domestic caps will have that probably the project will be -- I think that the decision is taken to approve and to have some kind of lower caps, but at the same time, to compensate that, having better information, having the ability of other agents to do payroll lending to compensate for those effects.
And that's why at the end, we think we are moving to a more favorable scenario where you will have more information about clients, probably the cost of collecting and evaluating clients would be lower and in addition to that lower caps.
But those lower caps will be less binding if the three projects are approved, if not at the same time, more closely in time. But our view is that the decision is taken to move the three projects and basically to approve it, yes.
So -- but the most negative case was the one that we have highlighted before, that is first to have the caps in place and nothing else moving. Today that scenario is less likely and it's more likely that we will have the three projects coming together.
The other movement which is on relative terms good for banks is that the Superintendencia and the Central Bank have highlighted new rules for non-banks credit card issuers which are moving the industry into being less fragmented and where everybody will be playing according to the same rules.
That's why we think that at the end of the day, the concern that we have had at some moment of time are less active today and that we probably, one year, one year-and-a-half, we will have a more integrated credit card business and consumer lending market with better information about clients, the ability to do payroll lending, and at the cost of lower cap.
But those caps hopefully would be less binding given that you will have more information and less cost of dealing with the client. And that's why we are increasingly more in favor about the outlook of that market and that's why we are starting to grow faster -- (multiple speakers).
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Saul Martinez, - Analyst [28]
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If I can just interject before -- this is an election. Is it likely given that these three projects could be moving together, is it likely that this will get pushed back into 2014 and beyond?
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Raimundo Monge, Banco Santander - Chile - Director of Strategic Planning [29]
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Yes, it's very difficult to know.
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Saul Martinez, - Analyst [30]
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Okay.
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Raimundo Monge, Banco Santander - Chile - Director of Strategic Planning [31]
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But the authorities are very committed and probably want to get that done hopefully within the current administration. But you have a point there that probably the second half, the attention of politicians will be in other parts, yes.
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Saul Martinez, - Analyst [32]
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Okay, thank you. And then on the ROE, did I understand it correctly?
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Raimundo Monge, Banco Santander - Chile - Director of Strategic Planning [33]
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Yes, it's simply -- to give a sense of an upward trend in our ROE, and that in some periods, as you point, we will have probably higher than 20% and other periods lower than 20%, approaching 20% is not in the pipeline in the third quarter more in the fourth quarter.
But we don't have concerns because again, when you have growing lending volumes in 12% growth in the more profitable risk-adjusted segments and you have stable or slightly lower provisions, and then you have cost increasingly stable, you have a big boost in terms of the operational leverage than you can get in your balance sheet.
And that's why -- again, it's not a firm estimation, but it's simply to give the sense that we expect profitability to go up as provisions are stable and the cost increasingly going down and volumes, lending volumes start to grow as we saw it in March.
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Saul Martinez, - Analyst [34]
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Great, thanks a lot.
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Operator [35]
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There are no further questions at this time.
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Raimundo Monge, Banco Santander - Chile - Director of Strategic Planning [36]
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Okay, well, thank you all very much for taking the time to participate in today's call. We look forward to speaking with you again soon. Have a good day.
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Operator [37]
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Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.
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