Q1 2014 Banco Santander - Chile Earnings Conference Call
Apr 30, 2014 AM EDT
BSANTANDER.SN - Banco Santander-Chile
Q1 2014 Banco Santander - Chile Earnings Conference Call
Apr 30, 2014 / 03:00PM GMT
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Corporate Participants
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* Raimundo Monge Zegers
Banco Santander - Chile - Director of Corporate Strategy
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Conference Call Participants
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* Saul Martinez
JP Morgan - Analyst
* Frederic de Mariz
UBS - Analyst
* Jose Barria
Bank of America/Merrill Lynch - Analyst
* Tito Labarta
Deutsche Bank - Analyst
* Thiago Batista
ITAU BBA Securities - Analyst
* Claudia Benavente
Scotiabank - 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 First Quarter 2014 Banco Santander Chile Earnings Conference Call. My name is [Genaida], and I will be your operator for today.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If at any time you require operator assistance, please press star followed by zero and we will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Mr. Raimundo Monge, Director of Corporate Strategy. Please Proceed.
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Raimundo Monge Zegers, Banco Santander - Chile - Director of Corporate Strategy [2]
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Thank you very much and good morning, ladies and gentlemen. Once again welcome to Banco Santander Chile First Quarter 2014 Results Conference Call. My name is Raimundo Monge, Director of Corporate Strategy and I'm joined today by Robert Moreno, Manager of Investor Rations.
Thank you for attending today's conference call in which we will discuss our performance in the first Q of 2014. 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 you a related update on the outlook for the Chilean economy in 2014 and 2015. We continue to be positive on the performance of the economy although a slowdown is expected especially in the first half of the year.
In 2014, we're expecting a GDP growth of around 3.4% up to 3.6% with internal demand decelerating to around 3%. This is mainly due to the reduction in investment levels which we expect to pick up pace again in the second half of the year especially infrastructure investments.
The slowdown in investment in the mining sector will also be partially offset by [greater] mining production. At the same time, consumption should contain relatively high levels given the tight job market and we foresee a relatively supportive external sector given the recovery of the U.S. and the Eurozone, and other relevant trading partners.
The Chilean Central Bank should continue to lower interest rates which should fall to around 3.5% by the end of the year. This should also lead to a weaker exchange rate.
Depreciation of the peso should also lead to slightly higher levels of inflation and good export growth. The inflation rate measured by the variation of the U.S., an inflation [leg] unit and the most relevant indicator for the bank should rise from 2.1% in 2013 to close to 3.5% in 2014.
All in, this should represent a relatively supportive market environment for banks. For this reason, loan growth should continue to be stronger in the Chilean market. In 2014, we're expecting loans in the finances system to grow between 9% up to 10%.
Deposits also have maintained their steady growth considering the lowering of interest rate. The profitability of the Chilean Banking System is also stabilizing due to a more normalized inflation and interest rate environment.
Now we will review how the bank continues to move forward in its strategic objectives and the main commercial results achieved in the quarter. Within the quarter, the bank saw relevant advances in several of its strategic objectives fueled by its transformation project. The evolution of our quarterly results demonstrate that our retail bank is well ahead in adopting the new strategy with the strongest function of loans especially on those segments with higher risk adjusted contribution and solid growth of retail deposits.
This has been achieved with an increased use of our new Customer Relationship Management Platform or CRM, improved quality of service and by reaping the full benefits of our revamped credit models.
The evolution of our asset quality indicators also shows that we are slightly ahead the rest of the system in making necessary changes to confront on better footing a slowdown in economic growth. Our capital levels remain robust. All of the above will allow us to continue to achieve an optimal balance between our return on equity and our cost of capital. By maximizing these relations, we should be able to expand shareholder value.
In the first Q of 2014, total loans increased to 2.5 Q-on-Q and a solid 12.3% year-on-year. In the quarter, the bank continued its strategy of expanding the loan book with a focus of increasing spreads net operation in an economic environment that remain healthy but where growth has been decelerating.
Loan growth lead by lending to individuals which increased 3.7% Q-on-Q and 11.4% year-on-year in the first quarter. Those in the high end income segments which are mainly distributed through Santander Select Network increased 4.3% Q-on-Q and 17.4% year-on-year. The lower income segment the bank's loan portfolio decreased 3.1% Q-on-Q and 14.5% year-on-year, continuing the loan mix shift started several quarters ago.
The funding mix continued to improve. Retail deposits expanded 2.3% Q-on-Q and 13.5% year-on-year. The banks continued to focus on deposits for individuals which increased 0.8% Q-on-Q and 14.9% year-on-year. Deposits from small middle class companies, SMEs, increased 1.5% Q-on-Q and 13.5% year-on-year. In the middle market, deposits rose 4.7% Q-on-Q and 11.8% year-on-year.
The Central Bank continues to cut interest rates. Our focus on retail deposits should help support net interest margin. Retail deposits not only tend to be cheaper or more stable than institutional deposits, but they generally have shorter contractual maturity. Therefore as rates decline, our interest bearing liabilities will reprice faster than our interest earning assets.
The client base continued to expand at a favorable pace. It is to note Santander Select, a new retention model aimed at the high end of the consumer market and with the more intensive use of our new CRM, the impact on our client base has been quite positive. The client entering the bank are also of a better risk return profile given the effectiveness of CRM at pre-approving client sand cross selling them more rapidly.
As of March 2014 the bank had 3.5 million clients which increased 6% compared to March 2013. Our Select Client segment has grown more than 8% in the same period.
As the year progresses we expect this to gradually improve the results from [free] income. The transformation project is also resulting in a favorable evolution of consumer loan asset quality which is a key cornerstone of our strategy to obtain higher margins net of provisions. This is due to various initiatives that the bank has been carrying out since 2011. Number one, the portfolio mix change focusing on the loan growth in the middle to higher end of the consumer market; two, improvements on our risk models; three, the focus on growing via pre-approved loans; and lastly, the revamping of the collection process of the bank.
The success of these efforts are reflective in the evolution of the impaired consumer loans, meaning consumer non-performing loans plus renegotiated consumer loans. The ratio of impaired consumer loans to total consumer loans reached 9.5% as of March 2014 compared to 11.9% as of March 2013. Consumer non-performing loan ratio decreased to 2.3% in the first Q of 2014 compared to 3.6% 12 months ago.
The bank also concluded the first quarter with strong capital ratios. Our core capital ratio reached 10.7%, one of the highest levels among our main peers with a Basel ratio of 13.9% in the same period.
The bank paid recently its annual dividend of CLP1.41 per share equivalent to a dividend yield of 4.1% and represented an increase of 13.8% compared to the dividend paid in 2013. The ultimate goal of our strategy is to maximize the difference between our ROE and the cost of equity.
Today, we have one of the best relations between core capital and pre-tax ROE among our main peers, and we are the highest credit rating in the banking world.
Now we will explain the evolution of our results which also show favorable trends in the quarter. In the first quarter of 2014, net interest income increased 6.6% Q-on-Q and 27.2% year-on-year. The net interest margin, NIM, in the first Q of 2014 reached 54% -- sorry, reached 5.4% compared to 5.2% in 4Q of 2013 of 4.7% in first Q 2013.
In order to expand the explanation of margins, we have divided the analysis of net interest income between client net interest income and non-client net interest income. The evolution of non-client interest income was positively affected by the higher inflation rate. The bank has more assets than liabilities linked to inflation and as a result, margins have a positive sensitivity to variations in inflation. In the first Q of 2014, the variations of unidades de fomento, UF, an inflation occurrence in the index of currency unit was 1.28% compared to 0.95% in fourth Q 2013 and 0.13% in the first Q of 2013.
In the quarter, the bank increased its average U.S. GAAP through loan growth in the U.S. Finance with non-interest bearing checking accounts and time deposits denominated in nominal terms. This GAAP is mainly produced by the bank's lending on funded activities.
In the first Q of '14, client net interest income was flat Q-on-Q and increased 5.3% year-on-year driven mainly by growth. The lower client margin was a consequence of the shift of the bank's loan mix towards a better risk adjusted loan portfolio. This has resulted in higher loan growth in other income individuals compared to a decrease in loans in the consumer segment as we saw which means riskier has the highest spread. At the same time the new maximum rate regulations are pressing our margins in the lower end of the consumer market despite this impact being lower than what we were expecting.
As we will see in the next slides, this has been more than offset by an improvement in asset quality. Most asset quality metrics improved during the first quarter of '14. Net provisions from loan losses decreased 7.7% Q-on-Q and 12.5% year-on-year. The cost of credit provisions over average loans improved to 1.5% in the first Q compared to 1.7% in fourth Q '13 and 1.9% in the first Q of '13.
Consumer non-performing loans ratio decreased to 2.3% in the first Q compared to 3.6% in the first Q of 2013. We expect consumer non-performing loans ratio to begin to bottom out going forward due to the increase in consumer loan growth but to remain below the levels reached into 2011 and 2012 due to the improvement in admission policies and the changes in the segments we focused on.
At the same time, mortgage non-portfolio in non-performing loans ratio improved to 2.4% in first Q '14 compared to 2.9% in the first Q of '13. While the commercial non-performing loans ratio also fell to 3% in the first Q of '14 compared to 3.2% the first Q of '13.
The coverage of non-performing loans with provisions in the first quarter reached 107% compared to 91% in the first Q of that year. The central objective of our current strategy is to achieve higher net interest margin net of provision expenses while still gain market sharing, those segments with higher risk adjusted contribution.
In the first quarter the bank's NIM, net of provision expense reached 4% compared to 3.7% in the last quarter of that year and 2.9% in the first quarter of 2013. This in line with the bank's focus towards a less risky loan mix which has also minimized the negative impact of the new regulations that lower maximum lending rates.
Operations expenses in first Q increased 3.4% year-on-year well below the growth of income. The efficiency ratio reached 35.6% in the first Q compared to 41.4% 12 months ago. This improvement in efficiency was mainly due to the rise in productivity brought forth by the transformation project and the increase in loans, pre-approvals from our new CRM platform.
The percentage of loans are pre-approved which is a significant, [clearly] more efficient and less riskier way of increasing consumer loans continue to expand. Productivity also continued to rise as usage of complementary channels such as Internet, phone banking, point of sale transactions and automatic bill payments continue to increase. This way the bank's business activity continues to increase with minimal variations in personnel and branch distribution network.
All the above has resulted in a record high operating income at 76.5% year-on-year fueled in part by higher inflation but also reflecting the strong operating income from our business unit which has no relation with inflation.
The total operating contribution from our business segment increased 18.6% year-on-year in the first Q of '14. As a consequence, net income reached our record quarterly level of CLP142 billion. And the ROE was 23.9%, one of the highest in the last three years.
To conclude, we think the bank is starting to benefit of the different changes done in the last three years to adapt to more a challenging business environment. The transformation project is boosting our commercial activity, loan growth has been solid, and the funding mix continued to improve. It means net of provision expense continue to rise as asset quality continues to improve across the board. Fees are beginning to rebound led by promising trends in client growth. The bank's productivity and efficiency is improving, and costs are expected to continue growing below income levels.
At this time, we would 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) Your first question comes from the line of Thiago Batista with Itau BBA. Please proceed.
It seems like he disconnected. Your next question comes from the line of Chris Delgado with JP Morgan. Please proceed.
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Saul Martinez, JP Morgan - Analyst [2]
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Hi, guys. This is actually Saul, Saul Martinez. I just want to explore the risk adjusted NIM. Obviously, it shows a very substantial trend upward. It is a little misleading the way it's presented though because of higher inflation. If I look at just the client NII, it's growing about 5% year-on-year, 0% quarter-on-quarter. So, it is growing less than your loan book. Adjusting for loan loss provision, that client NII is growing at or slightly above your loan portfolio which is a good outcome. But how do you see that evolving going forward? Are you close to the bottom end, for example, of your cost of risk, 1.5%, where it can't further improve, in which case, your NII from client activity does have to start to improve more going forward for that positive trend to continue? So, I kind of want to get a sense for the exhibit on risk adjusted NIM but adjusting for inflation whether you think client NII net of loan loss provision to continue to grow at or above your loan portfolio.
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Raimundo Monge Zegers, Banco Santander - Chile - Director of Corporate Strategy [3]
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Okay. No, it is a very relevant question. First of all, although we divide our net interest margin between client and non-client, as we stated in the script in -- to a larger extent the sensitivity of inflation is not kind of a bet that we take against the market, it is simply that the commercial activity of the bank generates a gap and therefore that gap is, to a large extent, explained by client activity. It simply that we prefer not to count on those resources of revenues as something that we are managing but is simply a way, a fact of the market. But it's linked to client activity, and that's why margin trending up overall due to inflation also has a lot to do with commercial activity that the bank is pursuing.
But even if we deduct that part and we stick to what we call a [decline against] the margin, we think that still there's a room to improve. Probably, on the gross margins, we're very close to bottoming in terms of the mix being already to a larger extent middle to high end of the consumer market and very little exposure to the low end of the consumer market. And that means that on the provision side also with a lag, we are expecting to see further improvement of asset quality because usually there is a lag between growth and how the evolution of provision expense and asset quality in general. So, we think the net interest margin net of provision probably has further room to improve.
Today, [the happening] that you would see in a consolidated basis is a mixture of different many operations that you're doing. Today, our current risk model and our pricing is very, is much more subtle than before, and therefore we think that with the new programs and the new operating model, we can price more thinly risk which we think is the way to compensate for a more challenging environment. And that's why -- although we're probably -- on the gross side, we are close to bottoming; in the net side, we still see room for improving because the pricing we are doing is much -- once you define thinner classes of clients within the whole client base, you can price more (inaudible) your products.
So, the evolution should be we think for the rest of the year similar or hopefully a little bit more favorable. And the only concern is whether the micro conditions deteriorate in such a way that it can be reversed. That's why at the end, the good news is that today we can price risk much more thinly than say two or three years ago and the more -- the negative news is that the economy is slowing down not on the consumer side but to a large extent on the investment side which is more linked to large companies than to the general retail clients.
So, that's why we think that net-net, that evolution can be sustained. Today, we still have levels of cost of credits that given the new shape of the loan portfolio, it's a little bit higher than some peers that are more focused on that segment. So, we think there's still room to perform and to get the benefit of this long mix.
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Saul Martinez, JP Morgan - Analyst [4]
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So your -- so, that's helpful. Thank you, Raimundo. So you think that there is more -- so the 1.5% cost of risk this quarter, you feel like there's still some room there for that to decline going forward in the coming quarters?
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Raimundo Monge Zegers, Banco Santander - Chile - Director of Corporate Strategy [5]
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Yes. Because the -- in the consumer, especially with the consumer where most of the provisions are set, the advantages that we've seen in the last two years, every single quarter had been improving, a reflection of better quality clients, better -- thinner selection process, and that's why we think that going forward that should keep on contributing.
How low it can get? Probably, we'd be bottoming at some moment in time but still we have cost of credit given the relative shape of the loan portfolio which is higher than the risk because we still have an exposure to the low end of consumer market that what some other competitors don't have. And that's why we think that still there's room, how low it can get this is difficult to predict at this moment but we think that there's further room for reducing that level.
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Saul Martinez, JP Morgan - Analyst [6]
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Okay, great. That's very helpful. Thank you.
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Operator [7]
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Your next question comes from the line of Fred de Mariz with UBS. Please proceed.
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Frederic de Mariz, UBS - Analyst [8]
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Thank you. Good morning, everyone. Thank you for the conference call. A couple of questions on my side. The first one has to do with margins as well. You tell in your press release what comes from inflation and what comes from the actual client exposure. On the inflation side, we thought it was 1.2% in the quarter, in the first quarter, so quite high and definitely much higher than last year. What are you expecting per quarter for the coming quarters? And when do you think that [welfare] would peak in the country? So, that's the first question.
And on the second question, more of a general top down view, I would be interested in hearing your thoughts on the new government especially on the fiscal side. And do you expect anything new that could impact the bank? Obviously we know about the pressure on fees, the pressure on corporate tax rate, but just wondering if there's anything new that you would like to mention. Thank you.
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Raimundo Monge Zegers, Banco Santander - Chile - Director of Corporate Strategy [9]
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Okay. Well, regarding inflation, it's very likely that the second Q will still be -- the variation of the U.S. will be higher than the kind of secular trends, yes? And then, so for the second Q, the U.S. should be moving at around one or something like that, 1% or something like that. And then for the remaining of the year, inflations of 0.7%, 0.8% more or less is our expectation to create a final variation for the year of around 3.5% as we stated in the call, yes?
So we still have a support from higher than normal inflation in the second Q. And it's linked with the second part of your question because part of the changes in the taxes, some of them general corporate taxes, some part is specific taxes, also could be fueling in higher inflation going forward. So, it could be that we see for the rest of the year a relatively higher inflation that in the recent quarter that is supported by depreciation of the Chilean peso and at the same time some specific taxes that are increasing the prices of the good start are part of CDI.
In terms of a fiscal reform, it's something that's still a little bit of a soon to get a full picture. It's been moving very fast but at the same time, there is a growing discussion about the medium term impact that it can have in terms of jobs, et cetera, et cetera. So, that's why today, I would say that the business community is trying to ask for more time to discuss because it's a very comprehensive tax reform and therefore it makes little sense to rush things such a critical issue.
But what is already mentioned will have an impact in the corporate taxes, no doubt, because you have to pay a high statutory rate, and at the same time, it can have an impact in the price of assets because of the same -- which is there -- it's not very clear whether it's fully priced on the Chilean Index. Share index has been lagging for most of last year and part of this year, other index, and therefore, some analysts believe that it is fully priced but it's difficult to know.
Things are good about the reform is, number one, that it will be gradual. It will take four years to see the full impact of the reform. Secondly, contrary to other markets, this is not a tax reform that is established to fill in the blanks that you have in the public accounts. Here, it's simply a specific kind of project that has been set by the government to improve indication. And therefore, in order to generate the deficits, it is expected to increase taxes. So it's a little bit different from the typical tax reform where you're simply raising more cash to fill in the gaps you have in your -- already in your budget.
So, it speaks well of a country that is trying to find a long-term investments with long term sources, such as a reform. The [rent], of course, and nitty-gritty there are things that we don't like things that we like more, et cetera. But I would say that nobody's complaining about the rationality of the rising taxes to support big improvement in education, simply that the discussion sometimes, the nitty-gritty gets confused and that's why hopefully we can see, we'll have more time to discuss that nitty-gritty.
So, the ending part of the bank will be, first, because of high corporate tax which is a credit for shareholders, anyway, so it's not that damaging. And also, there is an increase in special tax that is charged whenever you sign a contract which affects the form -- the bank [value are] relatively small tax anyway.
So, it's a little bit too early to see how much of an impact we'll have, and generally speaking, of course, you tend not to favor higher taxes, but in this case, there are good reasons to be positive about the tax increase. And now the discussion is how to do it in a hopefully less, in a way that impacts as little as possible job creations, investments, et cetera.
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Frederic de Mariz, UBS - Analyst [10]
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That's great. Thank you very much for sharing your thoughts.
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Operator [11]
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Your next question comes from Jose Barria with Bank of America. Please proceed.
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Jose Barria, Bank of America/Merrill Lynch - Analyst [12]
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Hi, Raimundo. Thanks for taking my question. Going back to the evolution of provisions, obviously, very good to see the trend here and show that your efforts over the last year are paying off. But I wanted to focus on perhaps something that wasn't as great which was the 28% quarter-on-quarter increase in provision on the consumer side, and I'm talking about the net provision. Can you tell us what happened there? Is it an issue of growth provisions being high? Or is there something specific to a certain segment or maybe recoveries weren't as good in the quarter? I wanted just to see how you're thinking about that.
And secondly, with regards to the performance this quarter, ROE was very strong at, you know, close to 24%. I wanted to know if you think that we are seeing a peak here for the year given how strong U.S. was in the quarter or if you think that we can continue to see ROE at this level on a sequential basis here in the next couple of quarters? Thank you.
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Raimundo Monge Zegers, Banco Santander - Chile - Director of Corporate Strategy [13]
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Okay. Well, in terms of the net provisioning increase in consumer lending, we're not concerned to a large extent that it has to do with a lower recovery in the quarter. Remember that first Q in Chile is mostly a holiday season so sometimes it's difficult to reach clients because they are not close to collect the money, et cetera. So, it's something that happened last year. And, of course, it's a trend that you have to follow but we still believe that it was something due to seasonality more than something structural. And that's why although we are always monitoring that kind of a pattern, up to now, we don't have a big source of concern.
In terms of ROE, probably it's higher than normal ROE because inflation was higher than normal. And because many of the things that explained it also are difficult to repeat. It's very difficult to see drops in provisions permanently. It's very difficult to see drops in cost permanently, et cetera. So, we think in a seven, eight quarters, moving average quarters, we still believe that the ROE should be closer to 20%, 19.5%, 20%. So that means that probably this has been higher than normal ROE. And going forward, we should see lower than the levels we've seen in this quarter. And for an average, obviously, seven, eight moving -- eight quarters moving average quarters, we still believe that close to 20% with the only caveat that it will depend at the end of also the taxes. On a gross or on a pre-tax basis, we're more confident that that level of profitability can be sustained. On an after tax is something out of our control.
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Jose Barria, Bank of America/Merrill Lynch - Analyst [14]
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I see. Great. And given that the bottom up story here seems very, very good given the trends that you have spoken, I guess the main concern for investors that I speak to is a top down. And I wanted to get your thoughts in terms of what really worries you the most that could affect the story from the top down; maybe just, you know, a quick comment on that.
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Raimundo Monge Zegers, Banco Santander - Chile - Director of Corporate Strategy [15]
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No. I would say that today, our biggest concerns are internal because generally speaking the external, the relevant external picture for the country has improved, meaning that the expected growth of our main commercial partners is better than in the last two years. So, today, the focus of our concern is mostly internal because the new government has been moving things very quickly and changing a number of things in order to fulfill the promises that they did in the campaign. And as usual, when you see relevant things or structural things moving quickly, you get a little bit concern of how that will have a medium term impact in your business.
The good thing is that although those external concerns are relevant and the fact that investment is going down or growing less rapidly than before, et cetera, we think that's something, that Chile is in a position, on relative terms, to get advantage of the risk because although the absolute evolution of the market will be lower than, say, before or the year before, on a relative terms, we think that with new credit models, with the new CRM, with a new payout of all the transformation we have been doing, we can get on a relative terms a better stake of the market especially in terms of profitability.
So they are compensated forces. We think we are in a good position to take advantage of what the rest are probably starting to face, which is a more challenging operational environment, and we have a certain advantage compared to them. So, although the absolute picture is a little bit weaker than say two years ago, on relative terms we think we are in a good position to capitalize on investments and the changes we've been doing in last two or three years.
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Jose Barria, Bank of America/Merrill Lynch - Analyst [16]
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Got it, very clear. Thank you very much.
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Operator [17]
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Your next question comes from the line of Tito Labarta with Deutsche Bank. Please proceed.
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Tito Labarta, Deutsche Bank - Analyst [18]
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Hi, good morning, Raimundo. Thanks for the call. My question is a bit of a follow up to in terms of profitability. I mean the quarter is definitely you know very strong particularly in the face of the economy slowing a bit. But if we look at the adjustments you made to the last couple of years, I mean I don't think you don't need expenses to continue to decline. But even you know just kind of keeping expenses under control, you mentioned risk adjusted margins have room to improve further excluding inflation which is difficult to control.
I mean I think 20% ROE appears to be conservative given the steps you've kind of taken over the last few years. I just want to get a sense in terms of -- do you think it is conservative or where would you be most concerned? Is it like loan growth which you have been growing faster than the system, could that slow down significantly? Or are you worried about expenses ticking up? I just want to get a sense of you know where the risk could come from that would you know potentially maybe hurt ROE in the future excluding inflation?
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Raimundo Monge Zegers, Banco Santander - Chile - Director of Corporate Strategy [19]
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Okay. We think that moving to something close to 20% as a moving average of seven, eight quarters is something that we can achieve because of investment we have doing in the last two years. In terms of whether that level could be higher or low will depend to a large extent in the external conditions today specifically the different reforms that the new government is starting to address.
And not because there is reforms themselves are either negative or positive but because the expectation is something that are difficult to control and when you go from an economy that has been doing very well and you include some sources of concerns, you'll never know how the market will react.
Today, we're seeing very clearly that the investment side people are in a wait and see attitude. However, contrary to that on the consumer side, things are moving quite normally. And employment although has been picking up a little bit. It's still very close to employment. Inflation although has been increasing to some extent, generally speaking, it's relatively low. And so the general environment except for investment is relatively supportive.
The situation is that depending on how the new administration moves in terms of reforms, et cetera, that picture can change in terms of expectations, yes? For good or for bad because it's not clear that the tax reforms will be [contractive], it can be expansive in the short term but the concern is whether in the medium term it will be pushing growth or controlling the growth of the economy.
So, today 20% as a moving average, 19.5%, 20% as a moving average is sound and the concerns are how the business community react to the different changes that we've been seeing and that will be more in the political side which is completely out of our control or knowledge than in the economy. On the economic side except for higher taxes, the rest of the changes are not very meaningful.
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Tito Labarta, Deutsche Bank - Analyst [20]
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Okay, great. So just to understand your concerns will be more on the macro side but the steps you've taken last couple of years, you feel pretty comfortable that you can kind of continue to deliver on better risk adjusted margins, keeping efficiency under control. So really the concern is more on the macro side particularly with the new government? Is that correct?
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Raimundo Monge Zegers, Banco Santander - Chile - Director of Corporate Strategy [21]
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Yes. That's right. Yes. We've seen that today is -- although the absolute growth of the industry or the absolute profitability of the industry is a little bit more difficult to calculate, on relative terms, we think we are in a good position to benefit because most of the changes are quite enduring. The capability to understand more thoroughly how your clients are behaving through our CRM or our ability to slice and dice a little bit more thinly the client based are things that will endure for many years and that's why we think we are in the early stages of reaping the benefits of those transformations, yes.
That's why although the absolute level of growth of the system is a little more difficult to evaluate, we think that on relative terms, that Chile is in a good position to outpace the rest because even in a market that is growing slowly or slower than before, there are big opportunities. And given that our transformations have helped us to be a little bit quicker than the rest to move we think that, of course, we will be able to capitalize those opportunities a little faster than the rest, yes?
Today, our competitive stance is not a -- simply in state of coverage having more branches, more ATMs, et cetera, but in terms of speed, how quick we are to react on how the clients are changing. And that is something we're starting to get a grip on and that's why we think it could be supportive going forward even though the general macro picture could be less supportive than say two years ago.
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Tito Labarta, Deutsche Bank - Analyst [22]
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Great, thanks. That's very helpful, Raimundo. Thank you.
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Operator [23]
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Your next question comes from the line of Thiago Batista with Itau. Please proceed.
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Thiago Batista, ITAU BBA Securities - Analyst [24]
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Yes, hi guys. Thanks, Raimundo, and (Inaudible). Sorry for the last -- (inaudible) of the call when [Melanie] was disconnected. But I have basically one follow up and one question. The follow up is regarding the asset quality. You already indicated that the cost of credit will probably decline a little bit going forward but could you give me some quote about daily payout ratio. Are you expecting any payout ratio increase in any specific sector?
And my question is regarding, my other question is regarding (inaudible), you already showed that the number of clients resulted to an extension especially in the selected clients, I do believe that this will indicate some resume in the subsidy expansion. Now how much if you can expand, I'm not sure if you expand this year, but how much this line could expand this year?
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Raimundo Monge Zegers, Banco Santander - Chile - Director of Corporate Strategy [25]
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Okay. In terms of asset quality, I would say that today we don't have the kind of a cross section concerns about the sectors, yes? Except to some sectors that can have specific progress.
In the last two years, I would say the sectors we have more concern was about the non-commodity exporters which were basically exporters that given the appreciation of the Chilean currency were suffering because their local costs were rising and the local or the peso equivalent sales were pressured, yes?
Today that sector is benefitting from the depreciation of the peso, because it depreciated like 15% in the last 12 months so that has given relief to the sectors so now we don't have sectors of concerns and we have specific companies, et cetera, which is something that what banks typically are following.
Therefore the delinquency levels, I would say across the board are stable or slightly increasing or improving -- sorry. We see that in consumers, we see that in mortgages and we see that in commercial.
I would say the only point where we are a little bit more concerned are SMEs where we have seen some deterioration there. Most of our business has partial or full guarantee of the state. There's a comprehensive state guarantee program but we have seen some deterioration, still nothing to be fully concerned, but of course, it's an ongoing thing that you always monitor, yes? So in terms of asset quality, the acceptance if the economy really stops affect the more massive markets, today no big source of concern.
In terms of fee income, I would say that we are probably bottoming in terms of -- has been a drag to our performance in the last two years. Today, basically is not growing or growing very, very moderately. But as we state in the call, the fact that we are increasing our client base by 6% et cetera, tends to be a very good medium term indicator of growth, yes?
If you take a long time (inaudible), the biggest correlation is between number of clients and fee growth after a lag. And the other thing is that the CRM is precisely targeting to increase cross-selling standards and to increase the usage of our products to be quicker in addressing the needs of clients should it expand.
So we think that fees or [lien] in this year won't be a contributor to a bottom line performance. But eventually by the end of the year, we should be growth of fees more in the line of 5%, 6%% which is linked to the growth of the client base that we have since March of last year.
So that's why -- the other thing is that again when you're doing very well on the net interest income side especially on adjusted by provision given the new cross file of the client, you tend to waive fees and that's why we tend to measure the full contribution of clients and not necessarily we try to maximize every single line. We talked about what we call net line contributions that includes the different sources of revenues as a proportional lending volumes or deposits, et cetera. That's why you don't necessarily maximize each line. You tend to maximize the contribution of the clients.
That's why sometimes you prefer to especially fees that today are quite visible and there are a lot of scrutiny not to push them too much and to concentrate on other sources of revenues which are more consumer-friendly in today's environment, yes? And that's why we think that the net contribution of clients have been steadily improving and that makes us the optimist about the future.
But in any case, we think that [usage] type of fees should be growing by the end of the year and being definitely the driver of growth in 2015 but not for 2014.
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Thiago Batista, ITAU BBA Securities - Analyst [26]
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Okay. Thanks for that.
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Operator [27]
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Your next question comes from the line of Claudia Benavente with Scotiabank. Please proceed.
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Claudia Benavente, Scotiabank - Analyst [28]
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Hi, this is Claudia. I just wanted to ask you if you can give us a color or forecast of expected impact after the expected approval of the [space] new methodology for provisioning under unexpected loss bases which could potentially propose a modeling that ends up being more conservative relative to internal models and consequently implying an increase in reserves. I just wanted to know something more about that?
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Raimundo Monge Zegers, Banco Santander - Chile - Director of Corporate Strategy [29]
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Yes. With a -- as you know, the superintendent has put for opinions, new procedures to provision mortgages and the provision is set depending on the loan to value and depending on other metrics. In our case, although the final impact is not known because at the end, it will depend on the final draft that is published. The impact shouldn't be that big because we have been moving in that direction for some years, yes? And we were, last year, the first to issue the new [covered] bonds were authorized by the Central Bank and part of the requirement is to fulfill those loans are that the loan to value should be below 80%. The effort that the customer does below 25%.
And that's why if you see the evolution of the mortgage book, we have been lagging the market for a couple of years because the rest of the markets were still growing with loan to value much higher than 80%, that's why we did the adjustment today. We have started to grow in line with the rest of the market but with asset quality picture, it's completely different. Therefore we think that the impact of the new measures depended on the final drag, but according to what we know today, it shouldn't be that meaningful because it has been part [of the] or the adjustment process that the bank has been doing.
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Claudia Benavente, Scotiabank - Analyst [30]
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Perfect. Thanks.
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Operator [31]
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And at this time, we have no further questions. I will now like to turn the call back to Mr. Raimundo Monge for any closing remark.
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Raimundo Monge Zegers, Banco Santander - Chile - Director of Corporate Strategy [32]
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OK. Thank you all very much for taking the time to participate in today's call. We look forward for speaking with you again soon. Have a good day.
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Operator [33]
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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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