Banco Santander-Chile (BSANTANDER) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Banco Santander-Chile's Third Quarter 2026 Earnings Conference Call on the 4th of November 2026. [Operator Instructions] So with this, I would now like to pass the line to Patricia Perez, the Chief Financial Officer. Please go ahead.

Good morning, everyone, and thank you for joining us today. I'm Patricia Perez, CFO of Banco Santander-Chile; and I'm joined by Cristian Vicuna, Head of Strategy and Investor Relations; and Andres Sansone, Chief Economist. The same quarter confirms the resilience of our franchise. We delivered strong year-to-date profitability despite low inflation in the quarter, while maintaining disciplined cost management, stable capital and positive commercial momentum. Andres will begin with an overview of the economic and regulatory environment. Cristian will then discuss our strategy, third quarter results and initial guidance for 2027. We will conclude with a Q&A session. With that, let me turn it over to Andres.

Thank you, Patricia. Let me start with the macro environment. The third quarter took place against a demanding external backdrop. The conflict in the Middle East kept energy prices high, particularly diesel where refining capacity remains tight, while higher food and freight costs pushed up the price of imported goods. Major central banks maintain a restricted bias and lower long-term rates rose. The 10-year U.S. treasury yield is up around 90 basis points this year, and local long-term rates moved in line. Even so, Chile's showing spreads remain contained and copper continue to provide important support to the external accounts. Domestically, activity has been weak through 2026 for 2 main reasons. First, mining fell to its lowest level since 1996 in August due to lower ore grades, maintenance and weather. We now expect mining output to contract by 6%, 8% this year against a 2% increase we expected at the start of the year, which explains 1.4 to 1.7 percentage points of the growth downgrade, including spillovers. Second, the oil shock passed through quickly to domestic fuel prices reducing disposable income and weighing on expectations. Nonmining activity has remained broadly stagnant since the end of 2025 and the labor market has deteriorated. As a result, we expect flat GDP growth in 2026. For 2027, we expect a recovery to 3.5% with investment as the main driver. Chile has not lost its productive capacity, the normalization of mining and low base alone should take growth above 2%. On top of that, the pipeline of large investment projects have been revised up for 2027 and 2028 and the reconstruction law to reinforce this through a lower corporate tax rate and faster permitting. We expect gross fixed capital formation to grow by more than 5%. Consumption should recover more gradually as employment and real wages lag the recovery in activity. On inflation, annual CPI stood at 4.1% in September, while core inflation, excluding volatile items, is to 3.2%, consistent with weaker domestic demand. Higher fuel and food prices together with a weaker peso should lift headline inflation to around 5.5% by the end of 2026 before it returns to target during 2027. We expect the monetary policy rate to remain at 4.5% through 2027 with inflation still elevated. There is little room for cuts and risks are fitted towards a tighter path with the energy shock purchase or inflation expectations away from 3%. Turning to the regulatory environment. The national reconstruction and economic and social development law was published on October 17 this year. This measure we faced in gradually between November 2026 and 2029. At its core is a tax agenda aimed at boosting investments, improving competitiveness and supporting the economic recovery. The corporate tax rate will reduce gradually from 27% to 23% in '29, and the tax system will be fully integrated from 2027, simplifying the tax structure and lowering the cost of capital. The law also streamlines permitting procedures, investment benefits and property tax assumption for senior citizen and a special fund to rebuild areas affected by wildfires. Over time, these initiatives should contribute to higher private investment improved business confidence and stronger economic activity and a recovery in commercial loan demand. For calls, the first sales of new homes with final municipal approval will be accepted from VAT for 12 months from December 1. This should help absorb the existing housing stock of more than 100,000 new homes, support real estate and construction activity and improve access to housing, creating a more supportive environment for mortgage origination. The mortgage interest rate subsidy program also continues to support housing demand. It offers a great subsidy of up to 60 basis points. And together with the FOGAES guarantee, the total reduction in the mortgage rate can reach up to 100 basis points. In 2026, the program was expanded from 50,000 to 80,000 subsidies and the maximum eligible homes value was raised from USD 4,000 to USD 6,000. According to the Aviv as of 25 September 2026, more than 100,000 eligible applications received commercial approval and more than 33,000 mortgages have been granted. The second important development is the capital markets and home financing reform, or MK reform, which was sent to Congress on 9th September 2026. It includes more than 30 measures across 4 pillars, access to housing and saving financing for companies of all sizes, model '19 financial regulation and strengthening Chile as a regional finance sector. Key measures include state backed housing fund administered by Banco Estado, it will issue expected guarantee bonds to buy mortgages of up to USD 6,000 originated by banks through a competitive tender with bank retaining servicing and first loss tranches. intended to foster the market. But so far, we see relevant uncertainty regarding final impact with current first laws and material risk transfer treatments. The bill also includes a voluntary housing saving scheme in which the state at 3% of the home's value for the households that save 7% and a junior segment on the stock exchange for emerging and mining exploration companies. In addition, it eliminates the 4% withholding tax on interest paid to non-resident investors in qualifying fixed income instrument, also extends the stamp tax exception to funding from foreign banks and allows insurance coverage to be incorporated into the framework for payment drop. With that, let me hand over to Cristian.

Thank you, Andres. So now let me walk you through our strategy, how we performed in the third quarter of 2026, and had a first glance of what we expect for 2027. So our strategic ambition remains unchanged. We want to become a digital bank with a physical presence, combining scalable digital capabilities with the proximity and advice of our Work Cafe network. Our strategy is organized around 3 pillars. Same customer means offering the best value proposition across segments, attracting more customers, improving Net Promoter scores and increasing our share of wallet. Our ambition is to serve over 3.5 million active customers, including 400,000 small and medium-sized companies. Think Global is about accelerating our digital transformation through global platforms and an AI-powered operating model. This enables a better digital experience faster deployment of capabilities and a greater productivity and efficiency. Think value focuses on converting our customer franchise and efficient operating model into strong sustainable returns. We continue to prioritize high-quality revenues, recurring income streams, trading capabilities, long-term ROE above 20% and a dividend payout of 60% to 70%. Furthermore, in September, we announced our investment plan for the next 3 years of $450 million for technology and branch renewal. This will allow for a deeper use of technology and data, to improve the customer experience and simplified processes as well as the continued evolution of our branch network and Work Cafes. This strategy is supported by 5 complementary global business lines. Retail and Commercial, Corporate and investment banking, Wealth Management and Insurance, Consumer Banking and Payments through Getnet. Retail and commercial remains the core of our franchise. Our focus is on simplifying products and processes while continuing to scale our Work Cafe model. Corporate and investment banking at strengthening advisory, FX and transactional banking capabilities with a clear focus on sustainable solutions and capital optimization. Wealth Management and insurance strengthened, our advisory-led model renews our private banking proposition and reinforces our position in insurance and middle funds. Consumer Banking supports our leadership in auto financing, including new and electric vehicles while also expanding our presence in used car financing. And through Getnet, our payment business is helping us reach new client segments with value-added services and simple bundled solutions. Retail, which includes the bulk of our individual clients remains the backbone of the balance sheet, representing 66% of loans, 48% of deposits and 69% of margins. At the same time, we have meaningful contributions from CIB payments wealth into the feed business. The diversified mix, combined with AI-enabled global platforms reinforces the scale, efficiency and revenue diversification. Our progress continues to receive external recognition. Euromoney named us Best Bank in Chile, Best Banks for ESG and Best Bank for SMEs in 2026. We were also recognized as Bank of the Year by Latin Finance and Best Bank in Chile by Banca last year, while Global Finance named Best Bank for SMEs in 2025. Our annual report was recognized among the best in the MSCI Noam index companies in Chile, Peru and Colombia. In sustainability, our MSCI ESG rating improved to AAA. We remain the first Chilean bank included in the Dow Jones Best in Class World Index and Sustainalytics continue to classify us as low risk. The Santander Arena has been another milestone this year. Since September 2026, our brand has held the naming rights to Chile's 15,000-seat arena at. This strengthens brand visibility and creates additional opportunities to connect customers with our payment and digital ecosystem. Let me now turn to profitability and returns. For the first 9 months, attributable net income reached CLP 892.8 billion, increasing 12% year-on-year. Return over average equity was 29 -- 19.1 in the quarter and 24.5% year-to-date. Net income attributable to shareholders reached CLP 237.1 billion in the third quarter. This was 38% lower quarter-on-quarter, reflecting the normalization of inflation after the exceptionally high U.S. valuation in the second quarter and 4% lower year-on-year. So even with quarterly U.S. valuation of only 0.58%, the bank maintained solid profitability while year-to-date returns remain above our target. On the balance sheet, this was a very encouraging quarter. After several periods of subdued loan growth, lending pick up led by commercial and auto loans, while customer funds grew even faster. Total loans, which include our loan book at amortized cost and at fair value through OCI reached CLP 4.8 trillion, up 2.3% Q-on-Q and 3.9% year-to-date. The highlight was commercial lending, which grew 4% in the quarter and 5.2% year-to-date, a clear sign that business demand is picking up. Mortgage grew 1.8% in the quarter and 4.5% year-to-date while auto loans also kept after good momentum, rising 1.3% on the quarter and 6.3% year-to-date. In consumer lending, installment loans grew 1%, while total consumer loans raised 0.5% Q-on-Q, mainly reflecting a 3.5% reduction in credit card balances. On the funding side, deposits grew faster than loans, reflecting healthy customer dynamics. Total deposits reached CLP 33.3 trillion, up 2.8% Q-on-Q and 9% year-to-date driven by 5.6% growth in time deposits, while demand deposits declined slightly 0.8%. Mutual funds also performed strongly, reaching CLP 16.8 trillion, up 5.5% Q-on-Q and 15.5% year-to-date. As a result, total customer funds reached CLP 50.1 trillion, increasing 3.7% in the quarter and 11.1% over the last year. Liquidity remains strong, with our liquidity coverage ratio of 172% and a net stable funding ratio of 117%, both well above the regulatory minimum of 100%. Turning on to interest income and margins. Year-to-date, NIM remained strong at 4.1%, 10 basis points higher year-on-year. During the first 9 months, net interest income from interest and readjustments reached CLP 1.62 trillion, increasing 7% year-on-year. Net interest income grew 4.5%, while net readjustment income increased 21.8%. We can see here on the graph on the left, how our NIM follows the path of inflation, Q-on-Q, net interest income from interest and readjustment declined 18.1%, mainly reflecting the normalization of the U.S. variation from 2.46% in the second quarter to 0.58% in the third quarter. The quarterly NIM consequently declined from 4.7% to 3.8%. Overall, the bank preserved a solid 4.1% year-to-date NIM despite substantial quarterly volatility in inflation. Looking at the second graph, we can see how the mix of funding has been improving with 5.5% year-on-year increase in our demand deposits that do not pay any interest at 19.9% in our time deposits that pay the monetary policy rate minus a spread. Meanwhile, we have been reducing our bond portfolio where the majority is in U.S. with a longer duration. This is in response to our inflation expectations and also part of our loan book where we see -- where we expect to see stronger growth in the near future. On Slide 14, customer acquisition remained positive although lower transactionality at this point in the cycle temporarily affected fee growth. We reached 4.9 million total clients and 2.7 million active clients. Total customers increased 7% year-on-year and active customers increased 2% with 55% of total clients now active. Checking accounts increased 5% year-on-year. Credit card transactions rose 7% and mutual fund assets under management increased 10.1%. We also had 378,000 business current accounts. Year-to-date fees totaled CLP 422 billion, decreasing 3% year-on-year. Asset management and insurance fees grew 13%, partially offsetting weaker payments on card fees. Results from financial transactions reached CLP 216.8 billion, up 0.6% year-on-year. In the quarters, fees declined 7% and results from financial transactions decreased 13%, reflecting a softer transactionality with more competition in the payment markets and a more moderate market environment. Efficiency continues to be a clear competitive strength. Our efficiency ratio was 33% year-to-date, 290 basis points better than a year ago, and the bank remained the most efficient in Chile based on industry figures available as of August 2026. Operating expenses decreased 4.2% year-on-year, while core expenses declined 1.3%. Personnel expenses increased 3.4%, but this was more than offset by a 5.5% reduction in administrative expenses and lower other operating expenses. As a reminder, in 2025, we migrated our legacy core servers to cloud servers, and so our administrative expenses were inflated in the first semester of 2025 with both servers running in parallel. Our recurrence ratio was 60.8%, meaning that fees generated from clients represented more than 60% of our core expenses. The branch network now totals 219 locations, including 94 Work Cafes, 115 traditional branches and 10 other locations. This reflects the continued transformation of our distribution model. On the asset quality, on Slide 16, cost of risk remained stable with year-to-date cost of risk at 1.4% compared with 1.39% in the same period last year. During 2026, risk levels have shown a trend towards normalization, although with some isolated cases in the commercial loan portfolio. Following the increase in nonperforming loans and impaired portfolios observed in previous years in a context of lower economic activity and weakening labor market, asset quality indicators have begun to stabilize with the NPL ratio at 3.5% and the impaired ratio of 7.4%. Capital remains stable, and the regulatory environment is evolving positively. Our capital adequacy stood at 16.3% and CET1 at 10.9% as of September 2026. This includes a provision for distributing 70% of 2026 earnings as dividends. CET1 remained above the 2026 minimum requirement of 9.08%. Risk-weighted assets were concentrated 70% in credit risk, 18% in market risk and 12% in operational risk with a risk-weighted asset density of 58%. The new regulatory model for market risk-weighted asset was published in the third quarter. Banks may opt to use the duration model for interest rate risk, and we estimate a positive impact from the new framework. Looking ahead, we are also monitoring the regulation for internal credit risk models and potential changes to the charges under the market capital for reform. To conclude, let me present our expectations for the coming periods. Firstly, we reaffirm our guidance of a return on average equity of more than 24% for 2026. This incorporates the one-off expense related to the reevaluation of our deferred tax assets due to the upcoming changes in the corporate tax rate, where we expect to incur an expense of around CLP 40 billion. With our return over average equity year-to-date of 24.5%, we are confident on reaching our target. For 2027, we assume a GDP growth of 3.5% and a U.S. valuation of 3.1%, which the monetary policy rate should remain at 4.5%. Against that backdrop, we expect loan growth of 6% to 7%, driven by commercial lending, where we have already begun to see early signs of reactivation of demand. With the normalized inflation environment, we should see net interest margins of around 4%. Noninterest income should grow in the mid- to high single digits, and we expect efficiency to remain in the low 30s with a stable cost of risk. This should lead to an ROE of an initial guidance between 22% and 24% for 2027. The main drivers are a more supportive growth environment, improving commercial demand, a diversified revenue base and continued operating discipline. At the same time, we will maintain a prudent approach to risk and capital allocation. With that, I will conclude the presentation. Thank you very much for your attention, and we will now be happy to take your questions.

[Operator Instructions] Our first question comes from Daniel Ardila from CrediCorp Capital.

I have a couple of questions. The first one is regarding loan growth. You have lost market share on a year-to-date basis. What has driven this performance? And how should we think about loan growth going forward? Do you expect to regain market share? Or will competitive pressures keep grow broadly in line with the window industry level? That would be my first question. And the second one is regarding fees and Getnet. So fees have declined sequentially again mainly due to payments and Getnet. Can you please elaborate a little bit more on the competitive environment of this industry? If you think that competition has stabilized or should we expect further pressures in the coming quarters for payment fees?

Daniel, thank you for your questions. I will pass the word to Patricia for the loan growth expectations, and I'll take the fee question.

Thanks, Daniel, for your question. Regarding loan growth, we are as Cristian already mentioned in the presentation, we are already starting to see early signs of the lending recovery. We have been discussing throughout the year. As we mentioned, loan growth grew during the quarter, 2.3%, with the commercial loans leading that improvement, increasing 4% during the quarter and 5.2% year-to-date. Mortgages have been growing as well above inflation. And on the commercial side, commercial lending, consumer -- sorry, remains the weaker part of the portfolio. And in that sense, auto loans is the outlier, right, with a strong performance during the year with an improvement of 6.3% year-to-date. This is consistent with our view of our gradual and sequential recovery of the loan growth. Going forward, we are expecting the same trend with commercial lending leading that improvement, right? So as we already shown, we are expecting mid- to high single digits in terms of loan growth for next year, in line with the recovery of the economy for next year.

Yes. To complement a bit, we saw a milder first half of this year, which was expected, and we're seeing a final part of the year with stronger dynamics, it was also the path that we were seeing for the year. So all in all, we have increased the distance with our most closer peer. So I think the first position in the Chilean industry is still safely on our side. So regarding the fees, what we are seeing is a weakness that is concentrated in specific transactional categories related to the payment business. So the 2 main things that are not performing as expected this year are the card business, where we saw quite an impact of the high prices in consumer demand and domestic demand in Chile linked also to a weaker labor market. right? And the second part is a very intense competition in the acquiring business, mostly from the large incumbent and the newcomers that we are seeing. So there is a price competition happening and at the same time that there is also a customer competition happening, right? So we are optimistic on the positioning of Getnet in this environment. We have nearly 300,000 POSs and above 240,000 merchants. And we think that most of the impact we are seeing is going to not be present next year. So with all that, we are still seeing good dynamics in the wealth management and insurance and the cash management and advisory businesses that provide us with a good backbone for the expectations for next year, right? To give you an example, asset management and insurance have increased 7% in the third quarter and 4% Q-on-Q. And for an account and collection fees are growing 3.4% year-over-year in the third quarter. So we are guiding mid- to high single-digit growth for next year in fees plus financial transaction. I hope this gives you a little bit of flavor here.

Perfect. Very clear. If I may, just one follow-up question regarding loan growth. Beyond the guidance that you already provide, I would like to understand the competitive landscape. You're mentioning that especially commercial loan growth has started to pick up, but I would like to understand if we are going to see an industry in which there is growth for every bank in the industry? Or should we see a lot of competitive pressures in the best tickets and resulting in that we could see pressures in margins or spreads in that loan growth?

So we -- that's the scenario that we have been seeing for the last 2 years, right? So little demand and very tight spreads, especially in the best names, right? So the competition is already there. What we are seeing for next year is that the picking up of the economy dynamics and the implementation of all the stockpile of projects that Andres commented in the macro view will create relevant demand for -- from the commercial portfolio. And I think that there's going to be enough for the full industry to grow. So we expect a slightly reduced competition to what we have been seeing in the last 2 years.

Our next question comes from Neha Agarwala from HSBC.

I just wanted to check on -- it's good to get a very strong guidance for '27. What are the key areas of risk -- downside risk that you -- in your view, you see for 2027? And what could be the catalyst for providing upside to the numbers that you already have stated. So just wanted to understand both the upside and downside risks that you have in mind as you give the 2027 guidance.

Neha, thank you for your question and comments. So in general terms, the main sources of risks that we are seeing in the last year and that we are expecting also to be the case for next year are coming from the external scenario, right? So the uncertainty that was created in the market dynamics because of high oil prices are things to monitor. Also, the long-term levels of rates from the international environment is also something that it's a risk scenario. The other things that we are seeing increasing sources of uncertainty are the effects of the El Nino in the Chilean economy. So we have seen a very abnormal distribution of the rains in the geography and in the different seasons. And the other things that I think are potential upside risks are coming from the pickup of the economy. So we are guiding 3.5% GDP expansion and a 6% to 7% loan growth environment, but if the mortgage and real estate markets start gaining early traction and the effects of the reforms that the government has already approved and is discussing in Congress start picking up some momentum. There could be a case for stronger growth and a better loan expansion for the industry. So I believe that those are the alternative or the best scenarios that we are not incorporating in our initial guidance.

Very, very helpful. Any update on the reg -- any regulatory changes that we should note for 2027 that could impact the numbers?

So far, there's already in the numbers, the reduction in the corporate rate. We also commented on the changes that have already been made into the risk-weighted assets market risk. That's going to be positive for our capital, and we expect the changes to be implemented potentially in the first months of next year. There is the discussion on the capital markets reform that Andres discussed. There are some interesting things that are aimed towards the financial markets. I believe that the reduction of the stamp tax and duties on overseas issuances from financial corporations could provide a boost for the industry. And well, there's also this discussion on the reform package to foster the mortgage market and the first home ownership that the government is pushing for -- but that is yet to be finished in Congress. So we are not quite certain yet on the final details on how that is going to impact us.