Banco Santander - Chile ADS

Ladies and gentlemen, thank you for standing by. We would like to welcome you to Banco Santa del Chile third quarter 2021 conference call on the 29th of October 2021. At this time, all participant lines are on listen-only mode. The format of today's recording call will be a presentation by Banco Santa del Chile management team, followed by a question and answer session. So without further ado, I would now like to pass the line to the CFO of the company, Mr. Emiliano Moratore. Emiliano, please go ahead. The floor is yours. Good morning, everyone.

Good morning, everyone. Good morning, everyone. Good morning, everyone.

Good morning, everyone. Good morning, everyone.

Hello?

It's not you?

Sorry for that.

Good morning, everyone. Welcome to Banco Santander Chile's third quarter 2021 results webcast and conference call. This is Emiliano Muratore, CFO, and I'm joined today by Robert Moreno, Managing Director of Investor Relations, and Claudio Soto, Chief Economist from our research team. Thank you for attending today's conference call. We hope you all continue to stay safe and healthy. Yet again, the bank has achieved top results with a strong ROE and solid financial performance thanks to the success of our digital strategy and other initiatives. But before we get into our results, Claudio will start with an update on the economy and macro scenario beginning on slide four.

Thank you, Emiliano. Since our last call, sanitary conditions in Chile have improved substantially. Despite the recent surge in daily COVID cases due to the Delta variant, new infections remain relatively low and the mortality rate has receded. That has occurred in a context where more than 75% of the population have received the full immunization program and 25% have got the booster. As a result, the state of emergency that ended in September has not been renewed and most of the sanitary restrictions have been lifted. The economy has surpassed its pre-pandemic level and has reached its potential, although with some heterogeneity across sectors. Growth has been led by consumption, pushed by government cash transfers and pension fund withdrawals. Investment has also recovered, but has not yet reached its trend. employment continues subdued, with a labor force that is still substantially below its pre-pandemic level. Going forward, we should see further progress in employment, as the sanitary conditions allow people to resume their participation in the labor market. Overall, we have revised upward our growth estimate for the year from 8% to 11%. In 2022, growth will moderate to a range between 1 and 2% as the fiscal impulse fades away and base effects kick in. Inflation has accelerated in response to external cost-push shocks and one-off hikes in prices of certain services. For the next few months, we should see further increases in inflation due to a buoyant demand, a depreciated currency, and higher fuel prices. We forecast CPI inflation will close the year at 6.3% and next year will end up between 4 and 5%, converging to the 3% target in 2023. The central bank has accelerated the reduction of its monetary impulse by increasing the monetary policy rate twice since our last call, one by 75 basis points and the other by 125 basis points. Thus, the monetary policy rate has reached 2.75%, significantly above our initial estimate. For the last monetary policy meeting of the year, in December, we expect the central bank will increase the monetary policy rate by another 75 basis points, so that it reaches its neutral level by the end of the year. During next year, the monetary policy rate may rise further, but the central bank will graduate the size of future monetary tightening according to the evolution of domestic demand. Medium and long-term interest rates have also increased substantially, not only in response to expected tighter monetary policy, but also because of the possibility of a fourth pension fund withdrawal and the uncertainty regarding the political process in Chile. In this context, the peso has depreciated despite favorable copper prices. The government has begun the legislative procedure for the 2022 budget. It considers a significant reduction in expenditures, minus 22.5%, to reach a public deficit of 2.8%. With this, gross public debt will remain below 40% by the end of next year. The political situation in the country is challenging. In a few weeks, there will be presidential and parliamentarian elections. The results of the presidential election are still wide open, and government programs of some candidates have been mutating in recent weeks. In parallel, the Constitutional Convention has approved its internal regulation, ratifying the two-thirds requirement to approve any article. They have begun writing the content of the constitutional text, which should be finished by June 2022.

Thank you, Claudio. We will now move on to explain our strong balance sheet and results. Moving on to slide eight. In the third quarter, our net operating income increased 1.2% Q&Q and 233.7% on a year-on-year basis. Quarterly net income in third Q totaled $176 billion, an increase of 68% compared to the same quarter of last year. Compared to the second quarter, net income decreased 5%, mainly due to higher other operating expenses. Net operating income, on the other hand, increased 1.2% Q&Q, Year-to-date net income increased 63% with our ROE increasing from 12.5% as of September 2020 to 21.1% for September 2021. Strong client growth, higher net interest income, a strong growth of fee income, improvements in asset quality and cost control drove these results. On slide nine, we can see how the bank has significantly outperformed our peers in net interest margin, efficiency, and ultimately ROE, demonstrating that these impressive results are not just related to post-COVID reaction, but also due to the successful execution of our strategy, especially on the digital front. One of the most important drivers of our results was net interest income, as can be visualized on slide 10. Despite asset growth being focused on lower yielding and less risky assets, we still managed to obtain a 13.9% year-on-year increase in NII, with a strong NIM of 4.1% in the quarter. UF inflation in the quarter reached 1.3%. This has triggered the central bank to increase the monetary policy rate, as was mentioned by Claudio previously. Consequently, our cost of funds has started to rise and this lowered our NIMS by 10 basis points, Q and Q. This was compensated in part by the acceleration of loan growth in the quarter. Going forward, we expect the monetary policy rate to continue to increase, which should put downward pressure on our NIMS. On the other hand, and especially in the fourth quarter, UF inflation should continue to accelerate, reaching levels greater than 2% for the next quarter. For this reason, NIMS and 4Q should rebound from current levels, and we forecast a NIMS level of around 4.2% for the full year 2021. As we can observe on slide 11, total deposits grew 16.2% year-on-year and 1.3% Q&Q. In previous quarters, we had seen a strong increase in non-interest-bearing demand deposits, leading to a 24.9% year-on-year increase. Time deposit growth accelerated in the quarter, growing 6.2% compared to June, with the increase in interest rates making this product more attractive. However, as we can see on slide 12, the interest rate we're paying on this product remains well below that of our peers and far below that of the monetary policy rate, demonstrating our successful management of our cost of funds. Also on this slide, we show on the right-hand side that while there has been a slowdown of demand deposits from our larger commercial clients, growth of retail demand deposits remains solid in the quarter. On slide 13, we review loan growth. Total loans increased 3.1% Q&Q and 2.5% year-on-year, as loan growth among large corporates started accelerating in the quarter, as large corporates sought funding in the form of corporate loans, as the bond market remained illiquid. Our middle market segment also saw signs of reactivation, with loans growing 2.7% Q&Q, driven by the acceleration of economic activity in the quarter. Translation gains from the depreciation of the peso and the UF also added to loan growth. Loans to individuals increased 2.6% Q&Q and 7.4% euro a year, driven by mortgage loans that continue to grow solidly at 3% Q&Q, and loans from our auto lending subsidiary increased 17.5% as auto sales in Chile have shot upward. In previous quarters, the SME loan book had seen strong growth due to the FOGAPE and FOGAPE Reactiva programs. In the third quarter, demand for this product continued to decelerate, leading to a contraction of lending to SMEs. As of September 2021, the bank had disbursed $892 billion to the Fogape-Reactiva program, while the total Fogape loan book reached 2.4 trillion pesos. Regarding grace periods, payment holidays, in general, 99.5% of these grace periods are over, and only 0.4% of all loans that previously had a grace period or payment holiday are impaired. Moving on to asset quality in slide 14. In this slide, we can see how the evolution of asset quality remains solid. The MPL and impaired loan ratio continue to show positive trends after the expiration of payment holidays. The coverage ratio of MPLs remained high at 259%. The MPL and impaired loan ratio decreased to 4.7% and 1.2% respectively. These positive trends were seen across the different products as well. As we can see on slide 15, these positive asset quality indicators led to a cost of credit of only 1.1% in the quarter. On slide 16, we take a quick look at non-interest income trends. Free income had an outstanding quarter, increasing 12% Q&Q and almost 20% year-over-year, reflecting the fruits our digital strategy and strong results from corporate banking fee growth was driven by the strong opening of checking accounts thanks to the popularity of our life and super digital product offerings card fees increased 35% year-over-year due to greater card usage while certain insurance brokerage also grew through our digital platforms furthermore getting at our acquiring business that we launched in the first quarter of this year has already contributed more than 3 billion pesos in fees since its launch. Total income from financial transactions decreased 17% Q&Q. Client treasury activities continue to perform solidly, growing 5.8% Q&Q and 17% year-over-year. This was offset by a loss in non-client treasury income due to the execution of various liability management operations to improve NIMS going forward that resulted in initial loss mainly arising from the unwinding of interest rate hedges. The rebound in revenues in the quarter was also accompanied by good cost control as shown on slide 17. Operating expenses decreased 1.4% year-over-year despite higher inflation in the quarter. The year-on-year growth of administrative expenses is due to costs associated to the launch of GetNet and the advance of our digital initiatives in line with our $250 million investment plan for the years 2021-2023. The depreciation of the peso and the rise in inflation has also negatively impacted our expenses. Despite this, the bank's efficiency ratio reached an impressive 37.7% year-to-date. Regarding capital ratios on slide 18, the bank finished the quarter with a core capital ratio of 9.6% and a total BIS ratio of 14.2%. At the same time, in October, the bank became the first Chilean bank to issue an AT1 perpetual bond under the new Basel III regulations. The issuance was for US$700 million, and with this AT1 instrument, In October, our Tier 1 ratio will increase by 1.6 percentage points. With our current profitability, we estimate a payout of 50% to 60% of 2021 earnings to be paid out in 2022. But do not rule out that we could pay this dividend in two tranches next year. With the current share price and the forecast for loan growth and ROE, this would signify a current dividend yield of between 5% and 6% for the bank shares. On slide 19, we can see the requirement of the transition to Basel III year by year. The phase-in of Basel III has commenced and will be fully in place by December 2025. The inclusion of market and operational risk-weighted assets will begin in December of this year. By the end of this year, we expect the minimum core capital ratio required for us will be 8.6%, including an additional buffer set by our board, with a total BIS ratio requirement of 12.8%. In the final portion of this presentation, starting on slide 20, we will give an update on our most significant strategic and business initiatives. Moving on to slide 21, during the quarter, our key digital initiatives continued to advance with great success. This has led to important improvements in profitability, client growth, and satisfaction. On slide 22, we show how Santander Life and SuperDigital are still our heavy-duty products in bringing in new clients to the bank. Total Life clients increased 126% year-on-year, and in 3Q21, Life opened over 90,000 new checking accounts. reaching a total of 822,000 clients. Life Clients also generated, through September 2021, 49 billion pesos in revenue, which shows how this product line not only has a high growth rate, but also a rapid monetization. Superdigital saw record client growth in the quarter, held by alliances with companies such as Corner Shop and Uber, as a way of attracting new clients. At the end of September 2021, we reached 215,000, a 95% year-over-year increase. Further good news came from GetNet, our new acquiring business as shown on slide 23. GetNet was officially launched in February and it has already sold over 40,000 POS and we sold 19,000 just in the third quarter. An important fact to highlight is that 93% of the clients that are in GetNet are SMEs, our target clients. In just eight months, GetNet already has a market share greater than 15% in POSs. Our NPS score for this product is also strong at 74 points, helping to improve the overall NPS score of the SME segment. This product has been quick to monetize, with already three billion pesos in fees generated in fees since its launch. On slide 24, we show how our digital insurance brokerage platforms also had a positive quarter. Clare continued to expand its product offer with 28,000 insurance policies sold in the third quarter. Coming soon, a new cycle cyclist, a new insurance product for cyclists. Autocompata also shines in the quarter. The sale of auto insurance policies to this platform increased 32% year over year. On slide 25, we show how the bank continues its process of transforming its branch network, focusing on the work cafe model and closing less productive branches that have low client flow. The work cafe are beginning to reopen and we recently opened a new work cafe in Puerto Natales, Patagonia. Another eight work cafes are set to open during the rest of 2021. With this change in our branch format coupled with our other digital initiatives, productivity continues to rise with volumes per branch increasing 16.6% year-over-year and volumes per employee rising 16.7% in the same period. On slide 26, we show the tangible results of our initiatives through the record amount of current account openings. Compared to our peers with the latest information available from the CMF, Santander has opened 630,000 net current accounts compared to only 403,000 accounts in the whole system combined without us. With this, we have been able to increase our market share by almost seven percentage points in 12 months from 22 to 29%. We also show how this improves Improvement in our digital offer is pushing upward our net promoter score. The graph on this slide demonstrate how the bank's NPS has improved during the pandemic as our clients have found high value in our digital product offering. We have overtaken our peers, are now solidly established as number one for NPS in Chile with high points as well in product quality, contact center, and our webpage. On slide 27, we show how these efforts are translating into record client growth. With the introduction of digital products coupled with higher MPS scores and a span of a few months, we quickly surpassed the 4 million client mark. On slide 28, we show that the year-on-year growth of clients has been driven across the board, with total clients growing 14% year-on-year, digital clients increasing 39%, and total clients with a current account increasing 45% year-over-year. On slide 29, we get into some recent developments in the ESG world. VGO just finished its annual review of the bank with a rating that puts us in the advanced category with 62 points. evolving from the last time we were overviewed by Vigio, where we were qualified as robust. We have moved from robust to advanced. This is important because today, according to Vigio's analysis and scoring system, we are number three among all EEM retail banks. Regarding the ESG topics as well, on slide 30, We would like to remind you that you are all invited to our next ESG Talk, taking place on Tuesday, November 16th at 8.50 New York Time AM. Where top management, including the CEO and the President of the Bank, together with other members of the Board and Management, will present the fascinating updates we have made in these themes and what is to come ahead. There will also be a live Q&A session. We hope to see you there virtually, and make sure to sign up. To conclude, on the next slide, we update our guidance for 2021. The positive results achieved these last three quarters permits us to be more optimistic than we were previously, and we have again revised our outlook for this year. As inflation and loan growth continue to gain momentum, we expect to finish 2021 with a NIM of 4.2%, up from 4.1% expected previously. Cost of credit should remain in the range of 1 to 1.1%. We are increasing fee growth to greater than 15% for this year based on the strong client trends already mentioned. Cost growth should remain below inflation and efficiency between 37 and 38% is what we are now forecasting. Taking all of this into account, we are revising our guidance for ROE upwards to 21% for 2021. At this time, we gladly will answer any questions you may have. Thank you.

Thank you very much for the presentation. We will now be entering the Q&A part of the call. If you are dialed in via the telephone, please press star 2 on your keypad. That's star 2 on your keypad and wait for your name to be called. If you are dialed in via the web, you may also ask a voice or a text question. We'll now give a moment or so for the questions to come in. Our first question comes from Mr. Marlon Medina from JP Morgan. Please go ahead, sir. The line is open. Once again, the first question comes from Mr. Marlon Medina from JP Morgan. Please go ahead. Okay, we'll go to the next question. Next question is from Mr. Carlos Gomez from HSBC.

Please go ahead. Sorry, your line is open. Carlos Gomez Hi, good morning, and congratulations on the results. A couple of simple questions. The first one is, at this point in time, and given your experience, you had a cost of risk of about 1.1% in the last few quarters. Where do you think that with your current business mix is your normal cost of credit, and when do we get there? Is that a 2022 event, or does it come later? And second, and again, I understand it's difficult to project now, what do you think your long growth is going to be for the next two or three years?

Thank you. Okay. Hi, Carlos. Thank you. Regarding the cost of credit, obviously, as you've seen, our asset quality has done very well. Our coverage is quite high. Now, we do expect more long growth to slowly flow in. So we think that a normalized cost of credit, without considering any type of movements on additional provisions, we would like to keep that stock of voluntary provisions there for any large unexpected event in the future. So a normalized cost of credit would probably be around 1%. And regarding loan growth. Remember last year, we had a rather high loan growth during the pandemic, given the different programs, especially SMEs. This year, there's been a really high level of liquidity in companies and in households. Households have gotten a lot of money from pension funds, from direct subsidies from the government. So that had kept loan growth subdued. As these programs come to an end, we think loan growth should slowly recover, okay? As we said in the last call, and as you saw in the third quarter, loan growth should finish the year around 3 or 4% for the full year. And then going forward, I think slowly as the pandemic ends and we enter kind of like a normal economic cycle, loan growth should return to the normal multiplier levels. So in general, in Chile, loans to GDP grow around 1.5 times in real terms. And then if you add on inflation, you more or less get the nominal rate we're expecting the next two, three years. So if the economy grows, you know, two, 3%, we should be getting roughly around, you know, six, five to 7% nominal loan growth in normal years.

Okay.

Very clear. Thank you so much. very much. We will just try once again to open Marlon Medina's line from JP Morgan. Marlon, your line is once again open. Please go ahead. Please make sure your phone is unmuted. We'll come back to that one shortly again. Next question is from Mr. Ernesto Babilondo from Bank of America. Please go ahead, sir.

Hi, good morning, Emiliano, Claudio, and Robert, and all your team. Thanks for your presentation and the opportunity. My first question is on the political landscape. Do you think that the voting on the fourth pension withdrawal could be delayed after the elections? And can you provide who are the candidates leading the polls on the presidential elections? My second question is on your expectations for the net interest income in NIMS next quarter and next year. Considering your expectations on interest rates for the rest of the year and next year and also the ones for inflation, where do you see the NIMS pressure next year and when do you see them recovering after the repricing of the loan book? Is this something that we can see maybe at the end of 2022, or it should be likely more in 2023. And then my third question is on your mid-term ROE expectations. Considering that 21% this year, well above the pre-pandemic levels, and that you will continue to see high dividend payments Don't you think that the 2022-2023 ROE should be more around the 19-20%? Thank you.

Claudio, can you take the first one, please?

Yes, sure. Can you hear me? Yes? Yes. Okay. Regarding the first question, whether the fourth pension fund withdrawal could be voted after the election is not yet clear. Today, in a while, we will know the schedule of the Senate for next week. At that moment, we will know whether it has been put on schedule to be voted next week. If that doesn't occur, there are high chances that it will be voted after the first round. And given that, the chances that it will not be approved are higher. Candidates leading polls currently are, to the left, Gabriel Boric, and then on the center right, it's Kast. In some polls, Kast appears as the first one, but in other polls, he appears second to Gabriel Boric. And Jasna Proboste, the candidate from the Christian Democratic Party, is currently in third place in most of the polls.

And so regarding your questions about NIEM, as you mentioned, they are the two main factors are inflation and also the short-term interest rates going up. So this last quarter for this year, as Robert mentioned, we are expecting like the quarterly need to be maybe between 4.5 to 4.6. I mean, considering the level of inflation we'll have in the quarter, and that will take the full year around 4.2%. First quarter next year should be, let's say, similar considering the inflation expectations we are expecting for the first quarter. It's also true that the interest rate will keep going up. The central bank, we expect them to hike another 75 basis points in December. And so considering all that, we do expect next year NIM to be lower than this year, I mean, around like 4%. I mean, and if inflation doesn't stay around 4.5 5 but we can get slightly below that um four percent for the full year and uh we do expect by 2023 to have the repricing on the on the asset side uh showing up and also and being able to again build a name from four percent to the upwards uh trajectory uh starting in 2023 And regarding our ROE expectations, it connects a lot with the NIEM issue. I mean, we still expect – we still see our long-term ROE range from 17 to 19 percent. And if next year, because of the inflation scenario, we are able to sustain NIEMs above 4 percent, It's reasonable to have a slightly higher expectation to be in the upper part of that range, as you mentioned, but it's going to be mainly related to what's happening on the NII front.

Super helpful, Claudio and Emiliano. And just a last question on the digital landscape. We have been following all your digital initiatives. and we have recently seen that GetNet in Brazil was listed. So are you exploring something similar to happen in Chile? And on the other hand, we have seen that BCI is exploring to launch a digital bank. So is it in your plans to do something similar, or do you expect to keep the digital transformation within the traditional banks? I'm just saying to this because investors tend to give different valuations to payment companies and to digital banks.

Yeah, I mean, regarding GetNet, as you saw, I mean, the numbers are quite impressive. We are really happy with the speed we have gotten in that business. And there is no discussion yet regarding ownership of listing. We are just focused on growing and growing fast and gaining value. market share, I mean, taking advantage of being the first mover, you can say, in entering that market after Transbank, and our priority there is to keep growing fast and gaining market share. And in the future, if there is any discussion regarding ownership or listing, we will discuss it with you, but they are not present at this moment.

And the digital? Okay. So yeah, so basically you're all familiar with our digital initiatives. Obviously I think they've all been very, very successful. Santander Life is clearly the key here. And Santander Life is slowly transforming itself into our digital bank inside the bank. So basically today Santander Life has been very much focused on the middle income segment It's growing very strongly. And I think a really key thing about Santander Life, unlike a lot of other digital banks that are just beginning, it has rapidly monetized. So as we said before, already through September, Santander Life is generating income of almost 50 billion pesos. Santander Life, unlike a lot of these other digital platforms in Chile, digital debit cards, already has um checking accounts a balances uh probably above 500 million dollars okay which is probably all the other digital debit cards in chile including super digital combined okay and life also has a loan portfolio which hasn't been very aggressive but but it surely should slowly start to become uh to grow more and more life is going to be launching new products okay um And so basically life inside the bank is going to be expanding, and it's slowly transforming into our digital bank. But until now, it's not going to be a separate entity, okay? It's going to be inside the bank, very much integrated with the rest, but clearly taking over different products and segments, okay?

Perfect. Thank you very much, Emiliano and Robert.

Thank you. Thank you very much. Our next question comes from Mr. Juan Recalde from Scotiabank. Please go ahead, sir.

Hi, thank you for taking my question. So my first question is related to GEDNET. I think that the fees generated by this business were around 2 billion pesos in this quarter, and the growth was pretty significant. So my question is, what do you think is the... could be a more normalized level of fees for GANET. Should we expect these 2 billion to continue? It would be much higher. What do you think about that? And then a second question related to the expenses. Expenses look under control, but I saw that the other operating expenses were up around 76% quarter on quarter. You mentioned that the drivers in the release, that the drivers were provisions for non-credit contingencies and also insurance related to cybersecurity, related to Santander Life. I was wondering whether the amount of other operating expenses that we saw in this quarter is going to stay at similar levels. And also, if you can quantify what part of those other operating expenses are related to provisions of non-grade contingencies, and what part are related to cybersecurity insurance?

Thank you for your question. Regarding GetNet, we are in the fast-growth phase of the business. We are growing fast in POS, and also consider that the economy is also in the opening phase, leaving lockdowns behind. I think that we will keep growing fast in that. It's not so easy to imagine what the stable level of fee will be because, as I said, we are targeting fast growth there. So you can expect fees from GetNet to keep growing as we grow in the number of client POSs and also the the amount of sales that merchants are having in this opening phase of the economy. So you can expect growth to stay there for a while, and I think we still have some, I would say, quarters ahead before we can talk about a stabilization level of fees from GetNet.

And just to add on to what Emiliano said, I think in our digital talk last year, we mentioned that we're looking at around $20 million in fee income from GEDNET. I don't know what exchange rate we use, but let's say $60 to $20 billion would be more pesos, a normal level, so we see a lot of growth, and as you see in the figures, we're growing very quickly. Regarding your other question, yeah, the other operating expenses, there's a lot of things there, and I'll explain that line. First of all, Yeah, there are provisions for non-credit contingency. So given that there's still risk regarding the pandemic and other, you know, not all, not the pandemic is not only, you know, credit risk. So we set aside 7 billion pesos there. Okay. On top of that, remember last year there was like a cybersecurity fraud law. So before, you know, we were very active in selling different kind of cybersecurity insurance for clients. A lot of that was prohibited or watered down, and the banks have to cover a larger percentage of that, so we have an insurance policy for that basically. The actual amounts of frauds have gone down per client, but the kind of this insurance policy, the price goes up because the amount of clients are rising. on like a fraud for client basis and the actual number of frauds it's coming down. But since the client base is growing so strongly, it is adding onto that cost. So it's kind of like an indirect cost because of the strong client growth. Okay. Um, and then the other thing there, um, remember that we still own 25% of trans bonds. Okay. And even though we discontinued this in 2019, as a discontinued operations, given the losses Transbank has been recognizing, we decided to kind of like do a catch up and recognize some of the losses Transbank has been accumulating. Okay, so that was around 3 billion pesos. The good news is that Transbank knew a fee schedule was approved, I think by the courts. So the most likely thing is that Transbank's profitability should begin to turn around. Finally, remember that auto lending is growing very strongly in Chile. Santander Consumer Finance, our subsidy for auto loans, has had a very large increase in net income. Inside Santander Consumer's P&L, an important cost is what they pay the dealers. We have a very strong a joint venture with one of Chile's largest car dealers, which is SK Berger. So as their net interest income is rising, as their loan growth is rising, also what we pay to SK Berger for the joint venture is also rising, and that's there as well. But that is also included in consumer finances P&L. So despite the increase in that cost, the earnings of Santander Consumer are growing very strongly. Those are the factors. What do you expect going forward? I would say the trans-bank thing, it shouldn't be repeated. The provisions for other contingencies, around 10 billion, which shouldn't be repeated. But if we continue to grow strongly in auto loans and in client base, the rest should be recurring, okay? But it has other benefits and other lines, obviously.

All right. Thank you. Thank you very much. Our next question comes from Mr. Julio Fernandez from JPMorgan. Please go ahead, sir.

Hi, everybody. Thank you. I hope you are hearing me because we had issues with connections. Hi, hi, everybody. Good morning. I have a first question regarding the OCI, like your available for sale. The results, they were very good. But when we look to the shareholders, like equity decreased in the quarter, and I guess this is related to the sharply increasing in interest rates in Chile, right? Like we looked at the 10 year, it was a massive run. So my question here is what should we expect here going forward? I saw that there were some reclassification from your Available for Sale portfolio to help you material. So if you can explore this topic a little bit, I think that would be important for us, like what should happen in the sequence. And I have a second question regarding payments. Just some follow-ups, like regarding Transbank, if you have any updates regarding the sale. And regarding interchange fee caps, any updates on that topic? Thank you.

Hello, Yuri. Thank you for your question. I mean, regarding OCI, as you mentioned, I mean, the main driver of that has been the sharp increase in interest rate affecting the valuation process. of our ALCO portfolio. We actively manage our interest rate risk and mainly because of that we were able to sustain our NIMS above 4%, I mean significantly higher than our peers during this last 12 to 18 months when the cycle was with rates very low and going down. Now the cycle changed and then changed quite dramatically in the in the timing i mean very very fast change with the central bank increasing the the rates that i think that's part of the the monetary that i would say the typical one of the monetary uh cycle because also inflation is going up and that's a positive for for us but maybe the the different component this time has been the pension funds withdrawals that basically forced pension funds to dispose the all kind of assets, including domestic bonds, and so that put a high pressure on rates and affected the value for Boralco portfolio. Going forward, definitely to project the potential further increase in long-term rates, it's difficult to see increases similar to the ones we have seen so far, because when you compare Chilean rates to other Latin American countries and other EM countries, we are already similar to countries with a much higher level of inflation and much higher level of risk. So I personally think that there's not much room yet to have rates going up. But also, it's true that in the short run, there could be some temporary volatility coming from the pension funds withdrawals. I mean, the fourth withdrawal is still to be decided. The interest rates were, I don't know, 40, 50 basis points higher a few weeks ago. Then they went down because now you can argue that the market is pricing a not so certain probability of the fourth withdrawal to be approved. And if it's not finally approved, I think we can expect interest rates to go down a bit. So summing all that up, going forward, that number will definitely tend to zero because the time will pass at the end. You can see that as a kind of opportunity cost that even though we don't see that as any potential real loss, but it's showing that today we could buy those assets at higher yields and that time value of money will be decreasing when time passes and that negative number will be going to zero, basically having a positive OCI for the for the coming years. Regarding the classification, as you saw in our numbers, there's a part of the portfolio that is roughly 25, 30 percent of the portfolio that is basically being used to fulfill the reserve requirement, the technical reserve requirement, that it's a liquidity requirement that every bank has when your demand deposits exceed 2.5 times your total equity, including Tier 2. So in our case, considering how fast, how high we grew in demand deposits, we are having a strong requirement of that case, so we need to fulfill that by having sovereign bonds. And also, we need collateral for the central bank facilities that were implemented last year to provide liquidity to the system as part of the COVID compensating measures. So that part of the portfolio that it's definitely held to maturity because we don't have an option either to, let's say, take the collateral out of the central bank, neither to not fulfill the technical reserve requirements. We are having them up to maturity and basically what we did was to reflect that new business model into the accounting treatment of that part of the portfolio, basically changing those assets from available for sale to health to maturity, and that's what you saw on our financials. And regarding payments, Bobo?

Yeah, so we have no update on the sale of Transbank. So what we did do is we updated kind of like the valuation in the P&L. So we don't have any backlog and sense of like, you know, we were fully reflecting Transbank's book value in our books. We own 25% of that, but there's no other further update on the sale there. Regarding interchange fees, well, as you know, the law was passed that governs They're going to fix interchange fees. The commission is working. They already started publishing some of what they're looking at, their methodology, but there is nothing yet that they haven't stated anything yet regarding where actually interchange fees will end up. So, I think by March or February, we should have more clarity, but they're working 100% on that, so it's coming for sure by February or March. probably in the next call we might have a more clear update. But clearly that will have an impact on card fees next year, right? We don't know how much yet. And the good news is that people are using their cards more intensively. Client is growing. And in the long term, the fixing of interchange fees will probably, one, permit acquirers, it'll be better numbers for acquirers, like getting it. And two, it'll probably therefore permit the acquiring business and the usage of cards to expand even further okay no no super clear uh you can use the acquirer as a natural hedge right like a higher net for that yeah not that you lose in the beginning okay but in the long term it should let the market expand more no super clear thank you very much guys

Thank you. Our next question comes from Mr. Alonso Garcia from Credit Suisse. Please go ahead, sir.

Thank you. Good morning, everyone. Thank you for taking my question. Most of my questions have been answered, but I just wanted to check with you if there is any regulatory change that you are aware of either at the CMF level or at the Congress or at the Constitutional Assembly that will affect the banking system. And my second question would be regarding the higher interest rates in Chile. I mean, so far we have seen mortgages continue to grow nicely. I just wanted to hear from you about the margin if you're seeing a slower demand on that product given the higher rate scenario going forward. Thank you.

Claudio, can you comment on regulatory agenda?

Yes. Well, the main initiatives in Congress right now, one is the fintech law that is at the very early stages that includes also the regulation of open banking. And then there is a law that was introduced in Congress that puts another cap to the TCM, the cap on the maximum rate you can charge on credit. the law makes some adjustment so that it might be cut even further. Those two initiatives are at the very early stages in Congress and there are many initiatives in Congress that begin its procedure but then after a while they do not continue. There were many initiatives in Congress that were related to the pandemic that were attached to the declaration of state of emergency. Since the state of emergency was not renewed, those initiatives are now not on the table.

Thank you. Sorry, one thing. Claudio, regarding the Constitutional Convention or anything, if there's any other...

Well, regarding the Constitutional Convention, as I mentioned at the beginning, they began writing the text just a few weeks ago. So we are, again, at a very early stage yet. We will have more insights by the first or second quarter of next year. Having said that, the Constitutional Convention will write down the blueprint of the Constitution, which is a very big you know, set of rules. All the details have to be then defined in common law that will take place to occur.

And regarding your question about long-term interest rate on the mortgage market, I mean, definitely the mortgage market has been affected by two main factors. First, the interest rate is significantly higher, I mean, 300, 400 basis points higher than a few months ago, and also that because of this new environment, many banks, including us, reduced the maximum tenor you can ask a mortgage, I mean, from 30 to around 20 years. So basically, those two factors are, say, making the payments or the monthly payments go up by 30, 40, even 50 percent, depending on the segment and the tenors. And that is definitely putting pressure on people in the total amount of money they can borrow in order to keep a reasonable relationship between the monthly payment and their salary or their income. So definitely, if we don't see a normalization, I would say a reduction in long-term interest rate, I think it's going to be very difficult to keep this double-digit growth in mortgages and that growth will slow down and will, let's say, force people to collect a higher amount of money for their down payment in order to get into the house. At the end that, let's say, will normalize and you will see that shock to be diluted in time, but we are in the middle of that adjustment where you can expect for mortgages to slow down in this new rate environment.

Thank you, Emiliano. And just to follow up on the first question, regarding this proposal in Congress to reduce the interest rate cap further, I don't know if you could provide some more color on it. And of course, I understand it's in a very early stage at this point that not everything that gets Congress gets approval. But I mean, if you could comment on the likelihood that you see for it to be approved, who is supporting this law, if it has found further support in Congress or anything that could help us assess its likelihood of being approved or not eventually. Thank you.

I will touch on that. As I mentioned, it's at very early stages in discussion. In the past, we have had Initiatives like that, more than once, and those initiatives just fade away and do not transform into law. This initiative was put to be discussed in Congress in a context of a more broad law in terms of consumption.