Banco Santander - Chile ADS

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Banco Santander Chile 3Q 2023 Results Conference Call on the 3rd of November, 2023. At this time, all participants' lines are on listen-only mode. The format of the call today will be a presentation by the management team, followed by a question and answer session. So without further ado, I would like to pass the line to Mr. Emiliano Muratore, the CFO of the company. Please go ahead, sir.

Good morning, everyone. Welcome to Banco Santander Chile's 3Q 2023 Results Webcast and Conference Call. This is Emiliano Muratore, CFO, and I'm joined today by Cristian Vicuña, Chief of Strategic Planning and Investor Relations, and Carmen Gloria Silva, our economist. First, I want to express my gratitude for your presence at this quarterly meeting. Today, our primary focus is to discuss our performance during the 3Q. We faced challenges such as lower inflation and elevated interest rates. Despite all this, our steadfast commitment to digital strategies and customer-centric products has enabled us to deliver on customer experience and business growth. The Central Bank of Chile has continued a rate reduction strategy, as Carmen Gloria will elaborate on shortly. We anticipate this move will have a positive impact on our funding costs and margins in the quarters to come. We look forward to a more in-depth discussion of this development as we delve into the specifics of our quarterly results.

Thank you, Emiliano. On slide five, I present a summary of the macro overview in the country. The economic activity remains weak. The adjustment cycle initiated last year after a strong overheating in 2021 has continued this year. Private consumption has had a sharp decline due to the withdrawal of liquidity and a weak labor market. While the labor force participation has been increasing since the pandemic, it's still below its historical quarter. And the employment rate remains at high levels, around 9%. Investment, on the other hand, has tended to remain flat. The progress of large projects in mining and energy sectors has compensated for the contraction in real estate investment. In the first half, the economy contracted by 1% annually and expected to end 2023 with an annual variation of minus 0.5%. In 2024, economic activity will grow again, although at a moderate pace, reaching around 2%, driven by less stringent local financial conditions. The decline in consumption has allowed the country's external accounts to improve. The current account deficit was 9% of GDP in 2022, and we project it will be 3% of GDP at the end of this year. The inflation has decreased rapidly. After reaching a maximum of 14% in August 2022, it ended at .1% last September. This reduction has been due to three main factors. First, the fall in international commodity prices. Second, the appreciation of the exchange rate during the first half of the year. And third, the contraction of domestic demand because of restricted financial conditions. Going forward, inflation will continue to decrease, but at a slower pace. Due to more demanding comparison basis, the rebound exhibited by oil prices because of Middle East tensions, and the sharp depreciation of the Pesos since the beginning of July, even beyond its fundamentals. We estimate that the inflation will close in 2023 with a variation close to .7% in US terms. In 2024, the process of convergence to the central bank's 3% target will continue. So the CPI will be around that figure in the last quarter of next year. The central bank began the monetary normalization cycle with a 100 basis point decrease in July, followed by another cut in September and October, bringing the monetary policy rate to 9%. The board has decided to slow the pace of rate cuts, taking into account the deterioration of external financial conditions. It also suspended both the foreign exchange reserve accumulation plan, and the unwinding of its forward short position. After this decision, the exchange rate has appreciated significantly. And in our basis scenario, it will continue to fall to close this year around 875 Pesos. For the next meeting in December, the central bank will continue with the monetary normalization process. Although the pace in the rate cuts will be contingent to the evolution of external risk. If volatility decreases, the monetary policy rate will end at 8.25%. In 2024, cuts are expected to continue. However, if the test scenario of higher from longer prevails, and there is no change in US monetary policy, it will be difficult for the central bank of Chile to lower the interest rate beyond .5% due to a limited interest rate differential. The country's fiscal accounts have deteriorated. This year, we will see an increase in public expenses of around .2% and a contraction in revenues. This will lead to a fiscal deficit close to .5% of GDP, and the public debt will be around 40% of GDP, still well below other economies in the region. In more general terms, boosting medium-term economic growth is crucial. This requires transversal agreements that allow the implementation of a pro-growth agenda and reduce current political and economic uncertainty. The closure of the constitutional process as well as the progress of structural reforms that promote savings and productivity are essential in this regard.

Thank you, Carmen Gloria. Turning our attention to slide nine, let me begin by reiterating our commitment to our four key strategic pillars encapsulated under the umbrella Chile First. First, we're starting a transformative journey towards becoming a digital bank. This evolution is not just about embracing cutting-edge technology, it's about maintaining a physical presence through innovative work effects. These spaces will serve as more than just customer touch points. They will be dynamic hubs fostering connectivity. Equipped with -the-art technology and a dedication to exceptional service, our work effects are designed to redefine the banking experience. Our second pillar is centered on providing specialized value-added services tailored to our corporate, middle market, and private banking clients. Our commitment is to deliver premium transactional trade, foreign exchange, and advisory products and services, ensuring our clients receive a top-notch experience. In our third pillar, we are committed to fostering innovation and propelling growth. We are not content with the status quo, we aim to lead the change in redefining the banking landscape. We actively seek out new business opportunities, pioneering the sustainable transformation of our clients. By challenging conventions, we aim to drive growth and cultivate success. Lastly, we place great importance on the role of our organization. To realize our objectives, we are dedicated to building an agile, collaborative, and high-performance school tool. We recognize that diversity is our strength, and individuals will flourish based on merit. We are constructing a thriving community where talents are nurtured, and innovative ideas are highly valued. On slide 10, we have witnessed remarkable success in our digital products, exemplified by our ability to consistently grow our digital client base. Key initiatives, such as Something Their Life, and more recently, Masloukas, have been instrumental in achieving this. Our Something Their Life account has now attracted over one million clients. It offers a simple current account, while also providing the opportunity to access additional products through our digital platform, including time deposits and mutual funds. As these clients meet our risk criteria, they can access credit lines and loans. Masloukas, introduced in March of this year, has exceeded our expectations. It currently accounts for over 30% of our new account openings per month. Notably, the onboarding process for Masloukas is entirely digital, featuring facial recognition technology and no password requirements. These accounts come with no fixed or variable costs, and accept deposits of up to five million pesos. The success of our digital strategy has also allowed us to enhance our branch innovation. Many of you have experienced our Work Cafe branches, digital branches equipped with co-working spaces. Furthermore, we have fortified our branch network with Work Cafe Espresso branches, a format that focuses on consolidating cash operations into transaction apps, while maintaining a Work Cafe ambience. This includes -the-art technology behind the scenes to ensure our customers enjoy an efficient and secure banking experience. We are pleased to announce that we have already opened four Work Cafe Espresso centers in Vina, Rancagua, Santiago Centro, and Las Condes, with three more Espresso branches planned for the end of the year. On slide 11, our ongoing commitment to digitalization and simplification is evident in the significant reduction of our branch footprint. As of September, our total branch network stands at 245, 254 branches, representing a 17% reduction compared to September 2022. Notably, 31% of our branches no longer have human talent. Instead, they serve as business centers that prioritize advisory services, new business opportunities, and a superior customer experience. Simultaneously, our productivity has seen impressive gains, with loans and deposit volumes per branch increasing by 23% -over-year, and 6% writing the same metric per employee during the same period. Moving to slide 12, our commitment to SMEs remains robust, bolstered by our joint offerings with GetNet. Our digital life accounts for SMEs continues to drive a 17% -over-year increase in total SME clients with more than 370,000 SME clients in our fold. Moreover, there has been 16% -over-year increase in active SME clients. When considering current accounts for businesses, as reported by the CMS, we have seen a remarkable 33% increase capturing almost 35% of the market as of July 2023. GetNet, our acquiring business, has also made significant contribution in attracting more SME clients. GetNet continues to focus on companies of various sizes and has some customer experiences through integrated payment solutions. Currently, it operates more than 148,000 point of sales terminals across the country, with substantial demand from SME clients. More recently, GetNet has expanded into larger clients requiring a host of solutions, thereby offering a more integrated payment system for sophisticated clientele. In the first nine months of the year, GetNet generated fees totaling 32 billion and a net income of almost six billion pesos. Slide 13 illustrates the results of our commitment to productivity through a dedicated and skilled workforce. Our strategy has resulted in a cost structure that is more efficient than our competitors, enabling us to serve our clients at a lower cost. In terms of recurrence, our fees generated by customers now cover over 55% of our expenses, a notable increase compared to the industry average of 41%. Our cost represents only .1% of our assets compared to .6% in the industry. The operating cost to serve our loans is 2.3%. Our cost per branch is at 3,215 million pesos, significantly lower than the industry average of 4,296 million per branch. The cost per current accounts is of 0.4 million per account, less than half the industry average of 800,000 pesos per account. These key performance indicators underscore our organization's transformation towards agility, collaboration, and high performance. On slide 14, we are pleased to report the progress in our LENP promoter score, MPS. In the last quarter, we achieved a score of 58 points, creating a three-point lead over our closest competitors. Our MPS score is based on feedback from more than 60,000 surveys, measuring over 30 MPS metrics across various service channels on a daily basis. This invaluable feedback allows us to proactively manage and improve our client service. Our digital and remote channels continue to receive very high levels of satisfaction from our clients with our APP and website achieving scores of about 70 points. Our contact center is also highly regarded as outperforming our peers. Slide 15 emphasizes our commitment to responsible banking objectives, highlighting progress made in areas such as diversity and infrastructure. We offer a comprehensive range of sustainable products to address climate change through and from their various initiatives. In 2022, we supported numerous customers with sustainable operations in our business and corporate banking divisions. So far in 2023, we have disbursed over $270 million for green finance. We believe this will be one of the fastest growing areas in the coming years. On slide 16, we are delighted to announce the issuance of our first ESG bonds under our ESG framework, with a particular focus on green mortgage. This issuance marks a milestone, as it is the first stimulus issuance with green mortgage stated as the use of proceeds. The private placement amounted to 8,000 Japanese yen, approximately 53 million US dollars for a three-year term. Currently, we have a growing portfolio of approximately 86,000 million pesos in green housing that complies with the highest housing energy certification by the Ministry of Housing and Urban Planning in Chile. We offer preferential interest rates to clients using green housing, and we also contribute to conservation and preservation projects in Chile. This issuance reinforces our commitment to advancing our responsible banking goals and green finance, reflecting the growing demand for such instruments, both locally and internationally. This year, the prestigious magazine, EuroMoney, has made us best bank in Chile for 2023, and we have extended their recognition to best bank SME bank, best bank for corporate and social responsibility and diversity and inclusion in Chile. Furthermore, our advancements in sustainability have been recognized by prominent sustainable indexes with solid ratings from Sustainability and MSCI, where also the Seoul Chilean Bank included in Dow Jones Sustainability Index for Global American Mark. Now, let's talk about the trends in our results and balance sheet. On slide 18, we show our results this year so far. Our operating segments that exclude the corporate centers and ALM continue to perform well with a 33% year over year increase in their net contribution with an important expansion in NII and fees with costs and risk under control, demonstrating the results of our strategy across segments. The accumulated net income as of September, 2023 totaled 319 billion pesos, decreasing 55% year over year. On the other hand, the book value of our equity increased .5% year over year with team ups per share and dividend per share growing 15%. With those two effects of net income and equity, the accumulated return over our equity reached .4% in the first nine months of 2023. The results of corporate and investment banking or CAD have continued to be impressive, increasing .5% year over year. Net contribution from the middle market of corporate increased 27% year over year. Both of these commercial segments experienced an important rise in deposit spreads as well as high growth of fees and treasury income. The focus of these segments continue to be non-lending activities driving profitability. On slide 20, we can see that regional banking results increased .6% year over year driven by the greater client base and more activity by our clients. Our active individual clients increased .9% year over year and people clients increased .5% while our active SME clients have grown .7% compared to September last year. The margin increased .8% year over year due to a better mix of funding and loan growth. Fees in these segments increased strongly by .1% year over year driven by card fees due to greater usage and in the increase in the client base as well as the fees generated by getting it. Provisions increased 60% year over year due to normalization of the liquidity of our clients in recent periods. Operating costs increased in a controlled manner by .7% as the bank continues its digital transformation generating rating of rating efficiencies. In terms of loan growth, in the third quarter we started to observe subtle changes in loans. Retail banking loans grew .4% year over year and .6% on the quarter. Mortgage loans grew 9% year over year and .5% quarter on quarter, higher than the effects of the US variation in the quarter and demonstrating a slight pick-up in origination of new mortgage. Consumer lending grew .8% year over year mainly due to credit card growth after quarters of contraction. Between the end of 19 and 21, these loans decreased 7% of clients reduced large purchases such as travel and hotels which fueled credit card loans. At the same time, many clients pay off credit card debt with the liquidity obtained from government transfers and pension fund withdrawals. At the end of 2022, as household liquidity levels returned to normal and holiday travel resumed, credit card loans began to grow again, increasing total balance compared to pre-pandemic levels. In the recent months, credit card loan growth has started to decrease while installment loans have grown, reflecting a better indebtedness mix of our clients. SME lending showed signs of a recovery, growing 3% quarter on quarter after several quarters of contraction. The COVID-forgotten loans are now finishing and therefore we're seeing a reactivation in demand for loans as well as impact from the expansion of the SME client base through our digital accounts and get net. Our middle market segment decreased .9% year over year and grew almost 3% on the quarter. This quarterly increase is mainly due to the effect of translation gains on the loans in denomination in dollars, mainly for our import and export clients. Around 20% of our commercial loans are in US dollars and Chilean peso depreciated .1% in the quarter. This also explain in part the .6% increase in the CIV in the quarter. Overall, loans have grown .1% year over year and next year we expect the reactivation of the economy to have loan growth reach mid-single digits. Liquidity levels remain strong in the quarter. The bank total deposits increased .4% in the quarter and .9% year over year. The increase was driven by time deposit that increased .1% quarter on quarter and .6% year over year, mainly due to an increase in large corporate deposits as the high interest rates remain attractive to clients. While our demand deposits have decreased 11% on the year, our market share in demand deposits has increased from .9% to 19.7%. Bonds issued increased 11% year over year and .5% on the quarter. During the year, the bank has issued bond in US, Chilean pesos, US dollars and Japanese Yens, taking advantage of attractive opportunities in the various fixed income markets locally and abroad. The bank's liquidity coverage ratio, LCR, which measures the percentage of liquid assets over net cash outflows as of September 30, 2023, was 192% well above the minimum. At the same date, the bank's net stable funding ratio, which measures the percentage of liquid assets financed through stable funding sources, reaches 104.4%, also well above the current regulatory minimum set for this ratio. On slide 23, we have a simplified balance sheet to help explain the different sensitivities on our structural balance. On the asset side, we have around $45 billion in loans of which nearly 60% is linked to inflation. On the liability side, the bank does have some deposits and bonds in US, however, we also use derivatives to control our exposure to inflation. At the beginning of the pandemic, the bank received a fixed rate credit line from the central bank as part of the FCIC program, which we swapped viral rate in 2020. The FCIC is to be paid in two installments during 2024, on April 1st and July 1st, and so the central bank has announced a liquidity deposit program that offers central bank instruments at floating monetary policy rate with maturities on the FCIC payment dates. These instruments, which we have recently started for tracing in October, will be classified as held to collect. This measure will have the Chilean banks to better manage their liquidity in the lead up to the FCIC payments. For us, the payment of the FCIC will not have a significant impact on our NII as we will be replacing a variable rate liability with funding of the current market rates. In terms of our net interest margin ratio, we should see an improvement at the denominator, our interest earning assets decreases as we use our liquid assets for the payment. Lastly, it is important to mention that our time deposits, some $17 billion, have a maturity of 30 to 60 days in general. This means that with the rate decreases, the cost of funding decreases quickly. Now that the rate cuts have started, we expect the pass through of our cost of funding to happen quickly. In terms of margins, the bank's NIM in the quarter reached .6% and 2% year to date. As shown on this slide, this is mainly a phenomenon that affects our non-client NIM or the net interest margin from our ALM activities, including the US gap and our liquidity. The client NIM, which is defined as the NII from our business segments over interest earning assets, has increased at deposits and loans have risen. The bank is well positioned for a fall in real rates. The sensitivities to inflation and interest rates remain stable to the previous quarters with 100 basis points dropping inflation will pressure down our NIMs by 15 basis points and 100 basis drop in the average interest rates will increase our NIM by 30 basis points over a 12 month period. The variation of the US in the third quarter was very low at .3% compared to .4% in the second quarter of 23 or .4% in the same quarter last year. This pass through of the lower variation in the US to our margin is immediate and push our margins downwards. Meanwhile, the central bank of Chile started to reduce the monetary policy rate first at the end of July by a hundred and basis points to .25% and then in September to 9.55%. This led to an immediate improvement on our interest income. However, this was not enough to mitigate the negative impact from the low inflation. The central bank cut the rate a further 50 basis points last week to 9% and as our time deposit base reprices and with higher expected US variation in the fourth quarter, our NIMs will show sign of recovery in the fourth Q and into next year. For 2024, we expect our NIMs to rebound to over three to .5% depending on the evolution of rate gaps in Chile. Moving on to asset quality on slide 25, the MPL ratio rose to .3% slightly above pre-pandemic levels as household liquidity levels returned to normal and the economy feels the squeeze from the high interest rates. The coverage of MPLs as of September, 2023 reached 158% and there has been no reversal of the voluntary provisions. Our impaired loan ratio, which includes the MPLs and restructured loans reached .5% still below pre-pandemic levels, but showing the same upward trends. On slide 26, we showed the asset quality by loan product over the last four years. As displayed, we now have higher coverage for all our products. While the MPL ratio has been rising, the impaired ratio remains under control for consumer and mortgage loans. Our commercial loan book is showing more sign of deterioration with MPLs reaching 3% and the impaired ratio 7.7%. As we can see on the graph on the right, most of this credit is concentrated on the small and medium companies. As a reminder, these SME loans account for around 9% of our total loan. As we can see on slide 27, overall our cost of credit has stayed in line with guidance at .2% year to date. In the graph on the bottom left, we can see how the cost of risk per segment is now similar to where we were before the pandemic back in 2019. On slide 28, we move on to non-interest income revenue sources which continue showing exceptional growth trends. Income from fees and treasury rose .4% compared to a third quarter in 2022 and decreased .2% quarter on quarter after a particularly strong second quarter for fees from financial advisory in the other lines, which was not repeated to the same extent. In general, our fee income is benefiting from higher usage of products in all segments. We expect these trends to continue in 2023. The gradual implementation of the new interchange fee regulations started in October and will reduce fee growth in the fourth quarter. We estimate a negative impact in fees in 2024 of about 25 billion pesos and 47 billion pesos in 2025. Considering this impact for 2024, we expect this line items to grow around 10% with strong growth from clients and products mitigating the interchange fee impact. As shown on slide 29, we also can see a bank effort to continue increasing productivity and to control costs. Operating expenses decreased .7% year over year and increased .1% quarter on quarter. A quarterly decrease in personal expenses is due to the slower rate that we have been closing branches, which has reduced severance costs in the quarter. Meanwhile, our administrative expenses grew 8.4%, mainly due to increased expenses related to technological developments in the quarter. As a reminder, the bank continues ahead with its $260 million technology investment plans for the years 23 to 25, and because of these investments, we are expecting costs to fall in absolute terms in 2023. Moving on to slide 30, we observed a positive evolution of our capital ratios. At the end of the third quarter of 23, the bank reported a core equity ratio of 10.7 and a base ratio of 17.1%. After the distribution of annual dividend that amounted to 60% of the 22 earnings. In May, the regulator announced that from the next year, the Chilean banks will need to include a counter cyclical buffer of 0.5%. This together with the conservation buffer of .5% and the systemic buffer of .5% means that our minimum fully loaded CET1 will be .0% in December 2025. Below on the right, we summarize the requirement levels by our regulator, including the potential buffer requirements and additional trouble. On slide 32, we conclude with some guidance. Our strategy as a digital bandwidth worker will continue to provide us with a greater digital client base with solid fee growth and impressive operating efficiencies. For the fourth quarter of this year, we expect a higher inflation compared to the third few, reaching around .6% compared to 0.3%. And we expect an average monetary policy rate of .1% compared to the .4% in the third quarter. With this, our margins will start to show signs of recovery along with robust client nims. After several quarters of impressive growth, our non-NIIs will finish the year slightly down due to the initial impacts of the lower interchange fees on card businesses. Our cost of risk should remain around .2% with our MPLs continue to trend upward slightly. Cost will remain under control. With all this, we should reach an ROE of high teams in the fourth quarter. For 2024, our macro expectations are more positive with an estimated GDP of 2% with inflation around three and a monetary policy rate ending the year 24 at 5.5%. With this, we expect long growth to reach mid-single digits as the economy reactivates. As rates continue to fall, our margins will continue to recover, reaching a range of three to .5% in 2024, depending on the evolution of rate cuts. Non-NIIs should be growing around 10% with good customer growth trends, but impacted by lower interchange fees. Cost of risk should be stabilizing during the year around .2% with asset quality following the economic cycle. Cost should be growing in line with inflation while maintaining -in-class levels and the effective tax rates will be normalizing. With all of this, our ROE for 2024 will be recovering toward normalized levels, and our guidance for long-term ROE remains between 17 and 19%. With this, I finish my presentation, and now we will grab the answer, any answer, any questions you may have.

Thank you very much for the presentation. We will now be moving to the Q&A part of the call. If you have any questions, please press star 2 on your keypad, star 2 on your keypad for any voice questions. You may also ask a voice or a text question if you are dialed in via the web. We'll now give a moment or so for any questions to come in. Thank you. Our first question comes from Mr. Yuri Fernandez from JPMorgan. Please go ahead, sir, your line is open.

Hello, I have a question regarding fees. You have been doing a

very good job on fees, and we all know that fees can be very good for ROEs

in the long run. You don't allocate a lot of capital for most of those businesses, right? So what is the hope to look for fees here? For sure, not the 30% pace. At least, this is not what we believe. You have the data change. You discussed this in the presentation, but for 2024, 2025, do you think fees should continue to grow well above loans? Any soft guidance you can provide for that line? And then I can ask a second question. Thank you. Hi, Yuri, this is Cristiano. So thank you for the question. So yes, we are convinced that we can continue delivering fee growth higher than our loan growth. And this is mostly because our strategy is structured towards increasing our customer base and focused on transactional products, such as FX transactions and fees. So getting the source of pushing our fees lines toward that goal. So the amount of SMEs that we are growing and increasing the customer base is also explaining why our fees revenues are growing consistently.

And also I would add, hello, Yuri, that our focus on customer satisfaction and MPS, it's a lever that, as you said, in the long run, can sustain the fee growth, because at the end, you need to be able to provide a service or a product that the client is willing to pay. And as you saw in our performance, we have been doing great also too in that front of customer satisfaction.

Perfect. So some like teams growth is reasonable for this line going ahead, like mid-teens, something like that. You

think it's a good guess for

the fee line growth? Mid-teens considering the interchange piece, pressure looks like challenging, but we will try to be in the double digit area and as high as possible. No, super, super clear.

And like on,

still on these

operating efficiency metrics, on the cost side, again, you did a very good job. I know margins, it's harder for you to control, but on expenses, you have been delivering a lot. What is that look here? Can you continue to grow? I think below inflation is officially our speech. If you can provide more color on cost side, what are the big plans for 2024? I would appreciate, thank you.

Yeah, as you said, usually our cost strategy is to have them grow below inflation. This year, they are actually falling significantly below inflation. So in a certain sense, that provides some kind of a headwind going forward. I mean, we still target to be below inflation. We talked in the guidance of cost around inflation, but our intention is to keep growing in the low single digits and hopefully below inflation. Okay,

Cristian, final one,

capital. Are you comfortable with this 10.7, like any change on the dividend payout policy or no, it's a matter of ROE moving up and helping you to recompound capital?

Yeah, no, we don't see any change in the payout of policy. I mean, that 10.7, it's kind of low in the sense that it was pressured by the effects that it was at its peak, close to its peak by the end of September and also some short-term risk-weighted asset inflation in the quarter. So by the end of the year, we expect to be again, above 11%, and so we are comfortable in that area and we think that we can sustain the payout policy we have been having this last few years. Perfect, thank you guys. Thank you.

Okay, thank you very much. Our next question comes from Mr. Daniel Mora-Ardea from Credit Core Capital. Please go ahead, sir.

Hi, good morning and thank you for the presentation. I have just a couple of questions. The first one is, can you mention what will be the steps considering the expiration of the FSC, the liquidity line provided by the central bank and the different effects on the accounts on the balance sheet and the financial results? These should resolve the negative performance of derivatives that is impacting the NAIA in 2023, or can we expect further impacts after the expiration of the FSC? Thank you so much. That will be my first question.

Okay, so, Daniel, thank you for your question. So regarding the effects of the maturity of the FCIC in our balance sheet and results, roughly speaking, we have around six trillion pesos in that facility and also, roughly speaking, half of that is maturing by the end of March and the other half by the end of June. So you can expect that at least three quarters of the total amounts will imply a reduction in the balance sheet. I mean, basically, we already have more than half of that money in liquidity, like waiting to pay the maturity of that liability and we expect to increase that amount of liquidity at least to three quarters of the total amount by the time that it's maturing. So you'll have assets and liability falling in, roughly speaking, around 10% of the current balance sheet. So in terms of ratios, that would imply a reduction in the denominator for NIM, so that in the math will take down our NIM. In terms of NII, considering that most of that is already floated at market rates and that's the same market rates that the liquidity and the assets are yielding. So in terms of NII, for us, it will be non-material, the maturity of the FCIC. So you can't expect a jump in NII because of the maturity. You do can expect an improvement and a jump in NII because of rates going down, because at the end, the lower the rate is the better for us because of that liability and the positioning of the balance sheet. So that is like roughly speaking in our case, the impact of that majority. I mean, a non-relevant impact in NII, neither positive or negative, and a reduction of the balance sheet as a whole and impacting the different ratios where total assets or total liabilities are used.

Perfect, thank you so much. But just to clarify, the current negative position that you have on derivatives that is impacting the net interest margin should decrease with the expiration of the FCIC, right? Because you have the swap to variable rates.

Actually, it will decrease and it's decreasing as interest rates go down. So that's the main factor for that negative to phase out or to disappear. I mean, like interest rates going down rather than the maturity itself.

Perfect, thank you so much. And my second question is regarding the MPLs of the commercial segment. Even though you explained that SMEs that just represent 9% of the total loan portfolio is pushing these indicator up, do you feel comfortable with the current performance? This is the normal levels of the SMEs considering the structural performance of the portfolio, or should we expect an improvement in these figures given the improvement of the economy in the next year? What would be the normal level of the MPLs for the commercial segment?

So, hi Daniel, this is Cristian again. So regarding your question, we are seeing the impact in our commercial portfolio mostly in the upper part of the SME market and the lower part of the middle market. So like the smaller part of the large corporates and the upper part of SMEs. Specifically, we are seeing impacts in roughly three sectors. So agro, especially in the central part of Chile due to the heavy rains associated with the Nino effect between July and September. Some impact in Joreca, hotels, restaurants, and casinos that also suffered for the last four years. And we are also seeing pain points in the construction and real estate developer market. So those are the three segments that are the main point of concerns. The rest of the segments, the rest of the industries are looking quite normal, I would say, considering the current state of the economy and the cycle. So we expect some recovery in the, particularly in the second half of 2024, especially for all those associated with the agro portfolio. But it's all subject to further news and we are monitoring very closely the situation in those specific industries.

Perfect, thank you so much for the answer, very clear.

Okay, thank you very much. We'll now be moving to Ms. Neha Agarwala from HSBC Global Research. Please go ahead, ma'am, your line is open.

Hi, thank you for taking my question. Just a quick one on your loan growth. We expect loan growth will still be missing the rigid first for next year. But where do you think the loan growth is going to come from? If you can give us some color regarding the segmental growth, that'd be very helpful. And my second question is on policy rate. What is the risk in your view regarding rates actually not reaching five and a half for next year being higher than that? Is that a risk and what would be the impact of that on your bottom line in your view? Thank you so much.

Hello, Neha, thank you for your question. Regarding loan growth, I mean, just to try to give some color on the breakdown of that missing and rigid loan growth. We think that mortgages considering that inflation will be going down, I mean, to the 3% area. And also here in Chile, as in the rest of the world, the long term rates have gone up significantly this last few months, weeks. So we expect at this level of rates demand for mortgages to go down a bit. So I would say that mortgages should be, let's say, kind of below the average of loan growth. And then on the consumer side, kind of the opposite. I mean, like, because we still have the liquidity from the pandemic going away. So people have like a higher borrowing needs if you want. And also rates are going down. So in terms of consumer lending, it's much more linked to short term rates rather than long term rates. And we think that also should create a negative, let's say, excuse me, a positive elasticity of people like demanding more loans and so consumer to be on the upper part. And also in SMEs, I mean, after the phase out of the Fogate program, that it's a kind of a negative drag on that portfolio that it's going down after the pandemic. You're gonna have the SME portfolio going above the average. Then when you go into more middle to large corporates, that will depend a lot on how investment is progressing in the economy as a whole. I mean, we don't expect investment to grow too much. And so you might be more on the average of that mid single digits growth for next year. I'm sorry, can you hear me? Yes,

that was super clear. Thank you so much.

Okay, and so what are you going to do? Your second question regarding the risk or the path for monetary policy rates. I mean, so yeah, it's definitely having a terminal but an average rate for our base case scenario give us an average rate of around 6.5 for 2024. So the higher that average, the worse for us and the opposite if it is lower. That's why this guidance of NEMS for 2024 is such a large. I mean, we talked about three to 3.5 and basically with our base case scenario, we should be like in the middle of that range for the NEMS for the year. And then you have that sensitivity, we should have to point it at 100 basis points higher should impact like 30 basis points that NEMS. So just in rough numbers, an average monetary policy rates of seven should take us closer to three for the year and an average closer to six should take us closer to the 3.5 NEMS for the year.

Okay, that's super clear. And the ROE range is 17 to 19 for next year.

Actually, that's the long-term target next year we'll be moving towards that range. To be in that range or not will depend again on the path of the monetary policy rate.

Okay, great. Thank you so much, Emiliano, very helpful.

Thank you very much. Our next question comes from Ernesto Gabilondo from Bank of America. Please go ahead, sir, your line is open.

Thank you, hi, good morning, Emiliano and Christian. Thanks for taking my call. My question is just a follow up on the ROE expectations. Can you hear me? No? Yes, now you can. Now we can, but we lost you. Okay, sorry, yes, I can hear you. I was saying that my question is a follow up on the ROE. You were saying that you're expecting this medium ROE guidance of 17, 19% in the medium term, but would it be reasonable to start getting to the low end of this medium term guidance range in 2024? So for example, even if what you were mentioning in NIEMS, if you go to a level of 7% in the interest rates and NIEMS at 3%, at that level, would it be reasonable to start getting into the 17% ROE or you will need to get more into the interest rate of 6% and a NIEM of .5% to start getting into the ROE of 17% next year?

So, hi Ernesto, this is Christian. So we're expecting somehow lower first half of the year, especially the first quarter should not be as positive after second half of the year. So in order to get to the levels of ROE that you were mentioning, we are probably going to be requiring to be in the .5-ish NIEMS and that probably could happen in some of the final quarters of the year, but not for the complete year.

Perfect. And then just a second question. Can you remind us if you have still an excessive provision charges and where do you see your reserve coverage ratio for the next years?

Yes, Ernesto, regarding the voluntary provisions, we still have like 295 billion pesos of voluntary provisions, that's the total balance. Remember that part of that will be used to cover the new regulation regarding provisioning for consumer loans and then the new standard model that the regulator is proposing. I mean, there were news regarding that. I mean, they published like the second proposal or the second draft for consultation, which is, let's say, softer than the first one. I mean, they were basically receiving the comments from the industry and the market. And so at the first draft, we were expecting an impact between like 100 or 150 billion pesos in provisioning. Now we see that like much lower, I mean, like around like 90 billion will be the impact. So yes, I mean, we still have this almost 300 billion of voluntary provisions. A third of that will be used by 2025 to cover this new provisioning model for the consumer portfolio. And the rest is there basically to cope with, with let's say potential part of the duration of our cost of risk or our MPL.

One point of clarification is that our coverage will not be impacted by this new consumption measure, or I don't know, consumption provisioning measure, because it's a general provision that we allocated to a consumer loan portfolio. So no deterioration in the coverage ratio for this.

Okay, so you expect to keep the same coverage ratio for the next years? Yes, yes, yes, we are, we are. Perfect, thank you very much.

Thank you very much. Our final question today come from Niko Suiva from Bank of America. Please go ahead, sir.

Thanks very much, Emiliano and Christian for taking my question. I have a question regarding your expected bond issue in the international market for 2024. So you have a senior bond maturity in January 2025 for about $750 million. So I wanna confirm if the idea would be to refine and start in the international market. And also, if you were to come to international market in 2024, if it would be specifically in the senior format, given that you have already placed 81 capital with your parent company, and especially also if you expect maybe additional dollar funding needs in 2024, given the expected pickup in economic and long-worth in Chile next year, thanks.

Hello, Nicolas, thank you for your question. I mean, yeah, regarding the format, definitely would be like senior. I mean, we don't plan any hybrid because we have already our 81 outstanding and usually it's like the group's policy to place a hybrid, especially 81 with the parents. So it would be definitely senior format. And regarding the potential of going to the public market in the US, that's something we follow closely on a regular basis. I mean, even though the credit markets and in general the spreads in the US are not bad, the policy are not too high. But then when you do the math considering the basis swap to local currency, which is at the end, our ending currency, you can see that the polling markets abroad have been around the hundred basis points more expensive than domestic market. Domestic market has lost some, let's say, liquidity and depth in the last few years, but it's still available. We have been able to issue good amounts in the last few quarters. So I think it's a possibility. I don't see it as a given because even when you look at the other markets, maybe the Swiss market and some markets in Asia, they are more favored than the US, definitely the US has the size benefit where you can get a higher size without much difficulty. But I think it's something that might happen during the next year, but I wouldn't put it as a given. I mean, it will depend on the market prices and how our liquidity position and long growth progresses.

Thanks very much for that, Emiliano, very clear. One just a follow up. So you said right now you see a differential of about a hundred basis points in favor of issuing locally rather than issuing offshore and then swapping back to Chilean pesos, right?

Yeah, yeah, factoring in all the costs, the expenses, withholding and everything. When you're looking on an olive basis, it looks like every day because the basis swap has been quite volatile, but recently yesterday and in the last few days, we have seen the swaps, the basis swaps going down and that, let's say, creates pressure upwards on the synthetic cost of funding abroad.

Thanks very much, Emiliano.

Okay, thank you.

Okay, thank you very much. We see no further questions at this point. I'll pass the line back to the management team for concluding remarks.

So thank you all very much for taking the time to participate in today's call. We look forward to speaking with you again soon.

Thank you very much. This concludes today's conference call. We'll now be closing on lines. Thank you and goodbye.