Q4 2014 Banco Santander-Chile Earnings Call

BSANTANDER.SN - Banco Santander-Chile
Q4 2014 Banco Santander-Chile Earnings Call
Feb 05, 2015 / 02:00PM GMT 

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Corporate Participants
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   *  Raimundo Monge
      Banco Santander-Chile - Corporate Director of Strategic Planning

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Conference Call Participants
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   *  Thiago Batista
      Itau - Analyst
   *  Philip Finch
      UBS - Analyst
   *  Tito Labarta
      Deutsche Bank - Analyst
   *  Jose Barria
      Bank of America - Analyst
   *  Saul Martinez
      JP Morgan - 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 quarter four 2014 Banco Santander-Chile earnings conference call. My name is Catherine and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

 I would like to turn the call over to Mr. Raimundo Monge, Corporate Director of Strategic Planning. Please proceed sir.

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 Raimundo Monge,  Banco Santander-Chile - Corporate Director of Strategic Planning   [2]
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 Thank you very much. Good morning, ladies and gentlemen. Once again, welcome to Banco Santander-Chile's fourth quarter 2014 results conference call. My name is Raimundo Monge, Corporate Director of Strategic Planning. I am joined today by Robert Moreno, Manager of Investor Relations.

 Thank you for attending today's conference call, in which we will discuss our performance in 4Q 2014 and for the year 2014 as a whole. Following the webcast presentation, we will answer your questions.

 Before we get into more detail regarding our results, we will briefly give our latest update on the outlook for the Chilean economy in 2015 and 2016.

 We expect the economy to rebound in 2015 and 2016 with the GDP growth of around 2.5% up to 2.7% in 2015 and around 3.5% in 2016. Internal demand at the same time should expand 2.3% in 2015 and close to 3.8% in 2016. The inflation rate measured by the variation of the UF, an inflation-linked unit and the most relevant indicator for the Bank, should increase between 2% and 2.5% in 2015, as international fuel prices have dropped considerably in recent months. We expect inflation to return to more normal levels of around 3% in 2016. Given this inflation outlook, we expect the Central Bank to cut interest rates further 50 basis points in 2015.

 The expected rebound of economy should be driven by various factors. First of all, the outlook of growth of Chile's main trade partners, especially the US, continues to strengthen. Export growth as measured in GDP figures should expand at around 4% in both 2015 and 2016. At the same time, the fall in international oil prices is another positive event for the Chilean economy as Chile imports most of its oil.

 Regarding investment, in 2015 and 2016, we are expecting a recovery following the contraction seen in 2014. This should be driven by the greater investment expected in its structure and the energy sectors.

 Finally, total consumption including government expenditure should continue to grow at around 4% in both 2015 and 2016. All in, this should represent a relatively supportive market environment for Bank. For these reasons, loan growth should continue to grow close to 8%, 9% in 2015 and 2016. We expect ROE in the system to fall in 2015, due to lower inflation and higher corporate taxes, but core operating and asset quality trends should remain healthy.

 Now, we will review how the Bank continues to move forward in its strategic objectives, and the main commercial results achieved in the year. The evolution of our results in 2014 reflects the high inflation rates, but more importantly, the Bank continues to experience robust core business trends despite the lower growth of the economy. We attribute this to our business strategy of focusing growth in those segments with the highest net contribution. This has been achieved with an increased use of our new customer relationship management platform, CRM; improved quality of service and strong growth of transactions in alternative channels.

 At the same time, the evolution of our asset quality indicators also show that the different changes in our credit approach are starting to be positive contributors to the Bank's profitability. Our capital levels also remain robust. All the above should allow us to continue to achieve an optimal balance between our return on equity and our cost of capital. By maximizing this gap, we should be able to expand shareholder value on a consistent way.

 In terms of our first strategic goal, focused growth, in fourth Q 2014, total loans increased 2.8% Q-on-Q and 9.3% year-on-year. The Bank focused on expanding its loan portfolio in higher income segments, while remaining more selective in lower income segments and SMEs. Lending to individuals increased 4.4% Q-on-Q and 13% year-on-year.

 The other area of relevant growth in the loan book was in the middle market segment. In the fourth quarter of 2014, loans in this segment increased 1.1% Q-on-Q and 8.1% year-on-year. Loan growth in this segment was focused on mid-sized exporters which are benefiting from stronger external conditions and the weaker peso.

 For the past two years, the Bank has proactively executed its strategy of shifting the loan mix towards less riskier segments and with an aim of improving profitability on a risk adjusted basis. Today, 62% of Bank's loans to individuals are in the mid, high income segment compared to 54% in 2012. Otherwise, the percentage of loans to individuals in Santander Banefe, our unit aimed to the low end of the consumer market, has fallen from 8% to 6%. As we will see in the rest of the presentation, this shift is resulting in a better margin net of risk and a higher and more stable long term profitability outlook.

 As a side comment, a good example of this positive outcome -- or the positive outcome of this strategy are the results from Santander Banefe. In 2014, net interest income fell close to 7%, but provisions expense fell close to 18% year-on-year. As a result, Santander Banefe results increased 5% in the year. These results are relevant considering that in recent years, Banefe faced regulation that hit its margins and fees while confronting a worsening economic outlook.

 The Bank's core deposit base, that is checking accounts and non-wholesale time deposits, continue to strengthen in the fourth quarter of 2014. Total deposits increased 3.9% Q-on-Q and 10.4% year-on-year. Core deposit increased 16.3% in 2014, and now represent 77.9% of total deposits compared to close to 74% by the end of 2013. This was led by the 13.2% Q-on-Q and 15.3% year-on-year rise in non-interest bearing demand deposits.

 As was [indicated] in our loan book, the Bank also performed an important shift in its funding mix toward a cheaper and more stable funding base. In the last two years, our market share in checking accounts have increased from 20% to 21%, our market share in non-institutional time deposit have risen from 20.7% to 22%. As a result, our total market share of core deposit has increased 110 basis points to 21.5%.

 Apart from improving our funding costs, this funding strategy also place us in a good position to comply with the Central Bank's new liquidity requirements, which were recently published. The effectiveness in the execution of our loan and funding strategy has been based on the growth of our client base and the improvement of our commercial approach, our second strategic goal.

 In the fourth Q of 2014, the Bank achieved positive net client growth for the seventh consecutive quarter. The client base has grown 7.2% in this stretch, which started at the end of the first Q of 2013 when the Bank completed the deployment of the CRM and launched the Santander Select brand for higher income clients. Clients in the higher income segment have increased 17% in the same period.

 As of December 2014, the Bank had a total of around 3.6 million clients. This growth in clients has been achieved improving our service and with important rise in productivity. Since 2012, the Bank has reduced by almost 5% its branch network, 18% the ATM network and 2% its headcount. We have closed unprofitable branches in Santander Banefe and opened a new network for Santander Select. At the same time, we closed various payment centers.

 As shown in the three previous slides, this has not affected our distribution capability, in fact they have improved. This was possible given the important rise in the usage of remote channels. The percentage of transactions now performed outside the branches reached 87% in 2014 and the amount of bill payment and transfer performed electronically is -- at the branches reached 73%. Finally, more than half of deposits are now taken electronically instead of at the branch.

 In terms of our third strategic goal; managing risks, the transformation project is also resulting in a favorable evolution of asset quality, which is a key element in our strategy to obtain higher margins net operations. These efforts are reflected in the sound evolution of impaired consumer loans, that is consumer non-performing loans plus renegotiated consumer loans, especially when compared to our competitors.

 Since June 2012, impaired consumer loans in the Chilean banking system excluding Santander-Chile have increased 60% compared to a drop of 15% in the case of Santander-Chile. As a result of this improvement in impaired consumer loans, the effective loss of our consumer loan portfolio has been reduced considerably.

 The improvement in asset quality has also been apparent in other products. Since 2012, net non-performing loans in commercial loans have fallen slightly, and coverage has increased from 78% to 108%, reflecting our efforts to bolster coverage in SMEs.

 In mortgage lending, the NPL ratio has decreased from 3% to 2.7% with coverage rising to 27%, reflecting our efforts of reducing loan to values in that business.

 For the home loan book, NPLs have fallen from 3.2% to 2.8% in the same period with coverage rising from 92% to 109%.

 The Bank also concluded 2014 with strong capital ratios. Our core capital ratio reached 10.9% by the end of the year, the highest among our main peers, with a Basel I ratio of 14%. We have not issued shares in more than 12 years, while maintaining an attractive dividend yield and being well prepared for the gradual transition to [these three] standards. We have among the highest credit rating in the banking world.

 The ultimate goal of our strategy is to maximize the difference between our ROE and the cost of equity. Despite lower ROEs expected for 2015, the higher capital base, lower interest rate environment and the improved risk profile have also reduced our cost of equity from historical levels.

 With our lower cost of capital, today we have what we -- one of the largest positive gaps between ROE and cost of equity in the banking world. This is our approach for maximizing shareholder value on a consistent basis.

 Now we will explain the evolution of our quarterly results. In the first Q -- in the fourth Q of 2014, net interest income increased 19.2% Q-on-Q and 21.2%, mainly due to the higher quarterly inflation rate, solid loan growth and the better funding mix. The net interest margin in fourth Q 2014 reached 5.8% compared to 5% in 3Q 2014 and 5.2% in the fourth quarter of 2013.

 The rise in non-client net interest income was due to higher quarterly inflation rate. The positive gap between assets and liabilities indexed to the US averaged CLP4,251 billion, around $7 billion in the fourth quarter of 2014. This implies that for every 100 basis point change in inflation, our net interest income increases or decreases by CLP43 billion, all other factors being equal.

 We speculate US inflation in 2013 to be between 2% and 2.5% as mentioned. This reduction compared to 2014 is mainly due to the fall in crude prices, which is good news for the economy and our clients. The decline in US inflation will be a -- should be concentrating in the first Q of 2015 where we expect US inflation to be around 0.5 or 0.7 negative, and rising to around 1% in the second quarter.

 We are reducing our US GAAP and we expect interest rate to fall further, which will have a positive effect on the margins and the Bank's fixed income portfolio.

 Client NIMs on the other hand remained relatively stable Q-on-Q and reached 5.4% in the last quarter. In this period, client NIMs in the middle market and corporate segment increased as loan spread has remained stable and the funding mix improved. This was offset by the reduction in client NIMs in individuals, as a consequence of the shift in the -- of the loan mix to higher income segments, which has resulted in a relevant reduction in the risk of this segment that is more than offsetting the lower margins.

 Fee income continues to rebound. Net fee income increased 6.4% Q-on-Q and 6.2% year-on-year. Because of the rise of clients, checking account, insurance broker and card related fees showed positive growth trends. Fees from our business segments, which exclude the effect of regulation and other non-segmented fees, increased 5.7% Q-on-Q and 22% year-on-year. This evolution of fees reflect the Bank's effort of expanding the client base and to increase cross-selling in the retail segment.

 Fees from corporate banking also evolved positively in the quarter, due to strong performance in financial advisory and transactional service in the quarter.

 In fourth Q 2014, the Bank's total core revenue; that is net interest income plus fee income, was up 17.1% Q-on-Q and 18.8% year-on-year. The Bank's core revenues from its business segments, which exclude among other things the impact of inflation, was up 1.4% Q-on-Q and 8.8% year-on-year. The Bank's core revenue from business segment has increased for five consecutive quarters despite improved risk profile of the client base.

 Asset quality was stable in the quarter. The bank's total non-performing loan ratio decreased 10 basis points to 2.8% in the fourth quarter compared to the same period of 2014 and the previous quarter. Total coverage of non-performing loans with provisions in fourth Q 2014 reached close to 109% compared to 104% in 3Q and 99% in fourth Q 2013.

 Provision for loan losses increased 10.5% Q-on-Q and 24.7% year-on-year in the quarter. During this period, three elements affected provisions for loan losses. First, loan growth resulting in higher provisions as the Bank's expected loss model required the recognition of provisions the moment loans are granted. Two, the Bank recognized approximately CLP20 billion in above normal provisions for further improvements made to the provision modeling in consumer lending and the downgrading of specific loan positions mainly in the SME and middle market segment. And thirdly, the depreciation of exchange rate and the higher inflation rate in the quarter, which resulted in greater provisions of the loans denominated in foreign currency and in US.

 As we mentioned in the beginning of this presentation, we feel comfortable about the evolution of asset quality in our loan book going forward. For the whole year in 2014, the Bank's total net provision expense rose 2.9% in the year, the cost of credit reached 1.7% in 2014 compared to 1.84% in 2013. This figure reflect that despite the slowdown in economic activity, the Bank's asset quality remained healthy throughout the year.

 As of December 2014, the net provision expense in the Chilean banking system excluding Santander-Chile increased 21.8% year-on-year. That is almost 10 times. The end result was that in 2014, our margins net of provision improved or were stable in most segments.

 As explained previously, the Bank has been shifting the loan mix to over less riskier segment with an aim to improve profitability net of risk. This was partially offset by the weaker result in the SME segment, which was affected by the recalibration of the provision model done in the second half of the year. We expect this segment to see an improvement in provisioning levels and accordingly margins net of risks throughout 2015.

 Efficiency ratio reached 36.9% in 4Q 2014. For the full year 2014, the efficiency ratio reached 36.8% compared to 40.4% in 2013. Operating expenses including impairment and other operating expenses increased 7% Q-on-Q and 9.8% year-on-year in the fourth quarter of 2014.

 Personnel salaries and expenses grew 5% Q-on-Q and 15.9% year-on-year with total increase in variable incentives after the solid year the Bank will -- had in more segments and the impact of a higher inflation rate over salaries. Headcount levels have remained stable.

 Administrative expenses decreased 0.9% Q-on-Q and increased 10.3% year-on-year. This rise was mainly due to, number one, greater business activity that has resulted in higher system and data processing costs. Number two, the effects of a high inflation rate over cost indexed to inflation. And number three, the ongoing investment to continue optimizing the branch network as previously mentioned.

 All of the above result in a solid 2014 year and a final solid fourth quarter of 2014. Our year-to-date earnings were considerably up, allowing the Bank to obtain world class indicators, ROE for the year of 22.5% and efficiency ratio below 37%.

 In the quarter, we benefited from higher inflation, but also from robust core business trends. The Bank has been able to achieve normalized ROEs between 18.5% and 19.5% in the last two years, assuming a 3% constant yearly inflation for both periods. With this normalized ROE level, we can conclude that 2014 was a very solid year for the Bank with quality results both in the year and in the last quarter.

 The most important for us has been the steadily stronger business trends are gradually reflecting the success of our transformation project, started three years ago. In 2015, we expect these sound core commercial trends to be [reined] albeit with a lower UF inflation and higher corporate tax rate, which should reduce stated ROEs especially in the first quarter of 2015, but without changing our solid medium term outlook. 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). Thiago Batista, Itau.

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 Thiago Batista,  Itau - Analyst   [2]
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 Hi, Raimundo and Robert, thanks for the opportunity. I had two questions. The first one is regarding the downgrades you did in the SME and middle market segment. Could you give to us some additional color about those downgrades and if those two segments could present some deterioration in the NPR ratio during coming quarters.

 And the second question is about the US GAAP. Is it possible to try to reduce at least slightly the GAAP you have especially in the first Q as the inflation will be really very low?

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 Raimundo Monge,  Banco Santander-Chile - Corporate Director of Strategic Planning   [3]
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 Okay. Well, in terms of positions both in the SMEs and the middle market, as you know, these are the bank credit criterias for especially larger clients has to be conservative at all time, but especially now that we have seen softer growth trends. And accordingly given that we have had a very strong quarter and year and the expectations are that the economy will have a softer growth also in 2015, we prefer to downgrade proactively positions that are fine today, but you never know what to expect in the future.

 So it's simply a reflection of our prudent approach as we have seen. Actually non-performing loans have been improving in the last, say, 12 months, but given that we have a strong year, we prefer to be more prudent than not going forward. So they are simply positions that in the margin make us believe that standard deviation could be expected and therefore we prefer to have a completely clean balance sheet to start the year 2014 without any pending review or some things like that.

 In terms of the US GAAP, as we mentioned in the call, we have been in the process of reducing it. But again, remember that our approach is medium term. And although we know that inflation will be negative in the first Q as we have already stated, we think the inflation is positive and if you take a two year perspective, we will end -- be ending making money with the GAAP. So remember that we tend not to manage the Bank having only a quarter-on-quarter view, but a more medium term view and this GAAP is beneficial to some extent for our results, but of course it produces volatility.

 But this is a position that is opened by the commercial activity of the Bank, which is what we are trying to handle. So, it's a fact of the market that sometimes you would have a higher than normal inflation, lower than normal inflation in the following quarter. But we try to manage the Bank from a medium term perspective and try not to open or close a gap simply because of the expectation of the following month or following quarter inflation.

 So -- and given the relative large size of the Bank compared to the size of the market, the process cannot be done quickly enough because we would be to some extent (inaudible) or changing the prices of the papers or contract you can use to hedge that. So that's why we tend to be medium term oriented and as we mentioned, in the medium term, we can -- we make money with this mismatch, which again is not a gap that we opened on purpose but it's simply the way the market is structured.

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 Thiago Batista,  Itau - Analyst   [4]
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 Okay, very clear. Thank you, Raimundo.

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Operator   [5]
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 Philip Finch, UBS.

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 Philip Finch,  UBS - Analyst   [6]
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 Good morning gentlemen. Thank you very much for your presentation. I've got a couple of questions please. First of all, in terms of your tax rate, in the fourth quarter, obviously it came down. Can you explain what drove it down? What were the key drivers for that? But also going forward, what we should assume for tax rate for 2015?

 And secondly, just to go back to what you were saying in the presentation about the sensitivity to inflation, you were saying that for every 100 basis points full or change in inflation your NII change in Chilean peso would be CLP43 billion. Just given that, what is your expectation for inflation in the first quarter? You gave us guidance for your forecast for the full year of 2015, but 4Q on specifically what was you looking for that?

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 Raimundo Monge,  Banco Santander-Chile - Corporate Director of Strategic Planning   [7]
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 Yes. Well, in terms of the tax rate in the fourth quarter, what we saw was a combination of two elements that dragged the effective tax rate. As we put in our press release, inflation, it tends to reduce the effective rate because for tax purposes the capital of the Bank is adjusted by inflation. So the higher the rate, the lower the effective rate you tend to pay simply because of inflation. It's a little bit technical, but we have a chart in the press release that hopefully will help you to understand what we are talking about.

 The second element is linked to the new tax bill that by increasing the expected -- the rates that will prevail in the future make more valuable the tax loss carried forward that banks tend to have, yes. And in the second -- in this quarter, we have been receiving more color of what to expect. Because this is a calculation that depends on the criteria set for the integrity of the implementation of the new tax bill. So that's why we saw some non-cash positive impact in this quarter. So it's simply something that is not repeated. And as we put, that help -- but of course it was compensated by other provisions that we have been taking throughout the quarter to try to have a (inaudible) quarter.

 Going forward, unfortunately, we still don't have full clarity of what to expect because there are some probabilities that the effective rate will be -- traditionally in the recent years, we were able to reduce the rate from the statutory rate about 300 basis points on average. But today, we don't have clarity, enough clarity, because the internal revenue services they're providing based on a daily basis hints of what to expect. So it's difficult to know. But definitely will be a little bit lower than the statutory rate. How low, whether it's consistent with that 300 basis point reduction or not it's difficult to say now. So for practical -- it's unfortunate that calculation that we are in this very moment trying to understand.

 In terms of the sensitivity to inflation, as we stated in the call, our expectation for this first Q is a negative inflation of something close to 0.5%, up to 0.7% of US variation, which is what is relevant for the Bank.

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 Philip Finch,  UBS - Analyst   [8]
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 Thank you very much, that was very clear.

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Operator   [9]
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 Tito Labarta, Deutsche Bank.

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 Tito Labarta,  Deutsche Bank - Analyst   [10]
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 A couple of questions also, just following up on the provisions in addition to the downgraded SME in the middle market, you also mentioned a -- recalibrating a little bit the consumer loan models which slipped also to CLP10 billion in additional provisions. Just can you tell us a little bit more about what you were changing there? Do you expect any more changes in [the SPIF] and also as you -- some changes, I think, more to the mortgage provisioning models, do you expect any changes from that. I just want to understand a little bit what drove that, and if you expect any more provisions or adjustments in your models going forward?

 And then the second question is in terms of fee income. We saw a decent increase in fees, which had been pretty flat most of the year. Could you tell us a little bit more what you expect for fees going forward now. I think a lot of the regulatory pressure is a little bit behind you. How much do you think you can sustainably grow in fee income going forward? Thank you.

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 Raimundo Monge,  Banco Santander-Chile - Corporate Director of Strategic Planning   [11]
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 Okay. In terms of the provision, as we stated in the previous quarter, we were recalibrating the model, which is a process that we do every other year more or less but of course depending on the specific conditions. So this process, we advance in the third Q and was not fully finished. Today, it has been fully finished, and that's why we shouldn't expect a relevant impact going forward at least well into 2015 due to this regular inflation given that it's almost but concluded.

 In terms of -- and it's simply, these are fairly complex models that have a number of parameters that if you do have changes on them, you have positive and negative. And the net for this quarter was a negative of close to CLP10,000 billion. But at the same time, what is relevant at the end of the day is how your provision expenses, sorry, which is how your non-performing loans levels are performing. And that is because, as we mentioned in the call, to be relatively optimistic or we have a positive view about asset quality going forward.

 In terms of fees, fees are starting to bounce basically because of what we have hinted in the previous quarters, that at the end, the best correlation is between number of clients and fees after a lag of nine, 12 months. Once you start increasing your client base, as we started last year, it tend to mimic that in terms of fee growth, but with a lag. And that's why we think that in 2015, we should maintain a growth in the high single-digit, middle single-digit level, given that our client base has been growing at around 6% on a yearly basis. So that unless you have other rounds of regulation as you correctly point, we haven't seen that for almost two years. It could be possible to achieve that kind of middle to high single-digit growth in 2015.

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 Tito Labarta,  Deutsche Bank - Analyst   [12]
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 Thanks, that's very helpful.

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Operator   [13]
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 Jose Barria, Bank of America.

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 Jose Barria,  Bank of America - Analyst   [14]
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 Hello Raimundo and Robert, thanks for the opportunity. I have a few questions. The first one going back to asset quality and what happened in the quarter. You mentioned downgrading certain clients or certain loan positions in SME and middle market segment. Can you tell us if that was in a sector -- concentrating in one specific sector, or if it was across the board? Any clarity on that would be great. And I'll stop here and then I'll ask the second and third questions I have afterwards.

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 Raimundo Monge,  Banco Santander-Chile - Corporate Director of Strategic Planning   [15]
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 No, it was not a specific sector. It's simply you review the positions, you are continuously monitoring specific clients in different sectors, and in the margin you prefer to be more conservative given that you have a very solid quarter anyway. So that's why it's not a reflection of any system-wide or sector-wide iteration, simply specific positions in different sectors of the economy.

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 Jose Barria,  Bank of America - Analyst   [16]
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 Okay, perfect. What drove the -- and going back to fee income, we saw very good evolution in two lines; one was insurance brokerage fees, and the other one was other fees which we have a lot less visibility in. But could you tell us what drove the significant increase in both of those lines in 4Q?

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 Raimundo Monge,  Banco Santander-Chile - Corporate Director of Strategic Planning   [17]
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 In insurance, it's -- well, we have been launching a campaign, a large campaign of specially open market insurance, which are not related with credit of operation. But also credit related insurance especially in the mortgage side, which has been growing very fast, has also been fueling that line. In terms of the others, a number of things are moving there. But there mostly are things related to -- in the corporate side, mid-sized firms and large-sized clients. But they are -- it's difficult to predict how that line will evolve. So we're not still growing -- well actually if you see the growth of the business sector, it has been growing faster than what I mentioned, but we think that that can stabilize going forward. So still it's difficult to know, there are many things in that line, and it's therefore difficult to predict.

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 Jose Barria,  Bank of America - Analyst   [18]
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 Okay, got it. Going back to your macro slides, I see that you guys are forecasting a 50% reduction in Central Bank rates. What should we expect the impact of that to be on your margins, that specifically, just the change in Central Bank rates?

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 Raimundo Monge,  Banco Santander-Chile - Corporate Director of Strategic Planning   [19]
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 Yes, if you achieve that on an annualized basis that will represent CLP12 billion to CLP15 billion. That is part of the hedge that this situation has an inflation on time. And that's why, as we have mentioned before, the fact that inflation goes up not necessarily is good because usually it's followed by a higher rate. And now that inflation is coming down, not necessarily is bad because it's also followed by lower rates. And that's why these kind of financial components of our profit and loss statement is less relevant on a medium terms perspective than what you would imply simply by seeing short-term quarter figures. And that has to be taken into account when looking at [Chilean] banks.

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 Jose Barria,  Bank of America - Analyst   [20]
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 Right. Then in terms of the timing of when you expect this cut; first half, second half?

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 Raimundo Monge,  Banco Santander-Chile - Corporate Director of Strategic Planning   [21]
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 It's difficult to know because right now inflation is going very low, and therefore that gives the Central Bank further breathing space. And that has been running low basically because of oil prices, which are starting to bounce back again. So they don't have any -- the Central Bank has no rush to do it. But we're certainly that if core inflation keeps going down, with broad measures of inflation, they will be in a position to rule over rate. So not very sure if that time is probably second quarter on, not in the first Q.

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 Jose Barria,  Bank of America - Analyst   [22]
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 Got it. Okay. And just finally very quickly, I see you guys are forecasting acceleration in growth next year, GDP growth relative to 2014. What does that imply for loans? Do you expect loan growth to be higher than what you saw in 2014?

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 Raimundo Monge,  Banco Santander-Chile - Corporate Director of Strategic Planning   [23]
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 No, what we have seen lately is a pickup in loan growth, but probably it's a better bet to expect some slowing down. We finished the year with growth of 10%, 11%, but because of the one-time increases in mortgages, which is linked to the tax bill. If you deduct that and you deduct the high inflation level that also fueled that growth in UF loans, next year as we stated in the conference, growth of 8%, 9% can be more reasonable.

 The economy today, there was a reading of the monthly GDP indicator that also is starting to bounce. And that's what -- to jump and that's why we think that 8% to 9% can be achieved. Traditionally, in Chile, loans have been able to grow two times GDP growth. So if you add inflation, that is growing 2.6%, 2.7% times two plus inflation is very close to 8% to 9%.

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 Jose Barria,  Bank of America - Analyst   [24]
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 Perfect, very clear. Thank you very much, Raimundo.

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Operator   [25]
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 Saul Martinez, JP Morgan.

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 Saul Martinez,  JP Morgan - Analyst   [26]
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 A couple of questions, I apologize if you already addressed some of these questions, I got on the call a little bit late. But first on, on the expenses which seem to have had a pretty big uptick just sequentially and quarter-on-quarter. Can you comment on that and what your expectations are for costs going forward because I think part of the earnings pieces has been that cost control would remain in place and that that would help drive decent profitability.

 And then secondly, just on a more normalized, how you think about a more normalized ROE. Obviously, the deflation inflation will cause variations in reported ROE on a sequential or on a quarterly basis. But in the more normalized ROE scenario, whether that be 2.5%, 3%, are you still comfortable that a 19%, 20% ROE is feasible?

 When I look at this quarter, it seems like there are a lot of moving parts not just on inflation, on provisions, on your other Op expense line where you had some contingencies cost, but it's hard to kind of decipher how much is you being conservative and how much is really core, so -- or reflects core results. Can you -- how comfortable are you that through the cycle inflation normalizing, higher tax rates and all the moving parts that 19%, 20% ROE is sort of the feasible base case to look at over the next couple of years?

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 Raimundo Monge,  Banco Santander-Chile - Corporate Director of Strategic Planning   [27]
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 Yes, well, in terms of expenditures, specifically in the last quarter, we provisioned for bonuses and special prices given that the bank in the last three or four years has been close to 20% of our annual remuneration. Our link to -- direct link to bonuses is tied to performance and as a consequence of the strong year, we have booked more prices for it because people are doing we think an outstanding job and it's fair for -- to share part with the team.

 So, it shouldn't be repeat and I would say that looking towards 2015 growth on an annualized basis of 5% to 6% are more reasonable, not the level we saw in -- especially the end of 2014. So, this Group has a culture of cost control and given that we have this kind of productivity enhancing tools, we think we can increase our efficiency and increase our performance simply by getting more revenue out of clients more than by slashing cost; probably on the cost side is already most have been done, but on the revenue side by using the CRM, by using this new and enhanced credit models, we think we can get high profitability out of our clients simply by knowing them a little bit better.

 In terms of ROE, it's a difficult question because up to now we have been hinting ROEs of 19%, 20% adjusted by our -- under normalized 3% inflation. We got that level both in 2012, sorry in 2013 and 2014. Going forward, we have some doubts about the extent of taxes diluting that stated ROE from a medium terms perspective. It's a technicality but from an analyst or from an investor standpoint, especially a foreign investor which is the bulk of our shareholders, is not that meaningful because although the Bank will be paying more taxes, you will receive as a foreign investor more credit, and therefore your total tax payment, which is what the end [result] should really deduct from whatever you get, it has not changed for foreign investors and it's only changing for local investors.

 That's why although the stated ROE could be lower, from evaluation standpoint that shouldn't be important for foreign shareholders. So, end of the story, we think that again to take the new tax structure, probably 20% is a little bit too high, it could be a little bit lower depending on what is the effective rate you use all in to value the bank. So, it's a calculation that we still haven't done, we feel comfortable but the recent stories that the Bank is doing well in the commercial side, which at the end is what's create value on a permanent way.

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 Saul Martinez,  JP Morgan - Analyst   [28]
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 That's helpful. Thanks, thanks so much.

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Operator   [29]
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 Thank you. I would now like to turn the call over to Mr. Raimundo Monge for closing remarks.

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 Raimundo Monge,  Banco Santander-Chile - Corporate Director of Strategic Planning   [30]
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 Okay. 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   [31]
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 Thank you for joining today's conference. This concludes the presentation. You can now disconnect and have a very good day.




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