Banco Santander Chile Announces Third Quarter and Nine-Month 2011 Earnings

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Oct 27, 2011, 05:38 ET

SANTIAGO, Chile, Oct. 27, 2011 /PRNewswire/ -- Banco Santander Chile (NYSE: SAN; SSE: Bsantander) announced today its unaudited results for the third quarter and nine-month period ended September 30, 2011. These results are reported on a consolidated basis in accordance with Chilean GAAP in nominal Chilean pesos.

3Q11: preparing for a more challenging environment

In the nine-month period ended September 30, 2011 (9M11), net income attributable to shareholders(1) totaled Ch$332,963 million (Ch$1.77 per share and US$3.56/ADR(2)) and decreased 13.1% compared to net income in the same period of 2010. Return on average equity reached 23.8% in 9M11, among the highest returns in the Chilean financial system. The efficiency ratio in 9M11 reached 38.4%.

In 3Q11, net income attributable to shareholders totaled Ch$75,153 million (Ch$0.40 per share and US$0.80/ADR). Compared to 2Q11 (from now on QoQ) net income decreased 46.9%. Compared to 3Q10 (from now on YoY) net income decreased 40.0%. Several non-recurring items and a cautious stance regarding risks affected these results.

Our outlook for Chile in 2012 continues to be positive, with GDP expected to expand 4.5% and inflation to be close to 3.0%. Nonetheless, the Bank focused its actions on 4 main points in the quarter in order to maintain sustainable levels of high profitability in 2012: (i) Liquidity, (ii) Capital, (iii) Selective loan growth and spreads, and (iv) Prudent risk policies. This process is very similar to the approach we carried out in the 2008-2009 period.

I. Focus on liquidity

Core deposits grow 6.9% QoQ and 30.9% YoY

Total deposits increased 4.4% QoQ. In the quarter, the Bank continued to focus on increasing its core deposit base (non-institutional deposits). These cheaper deposits led growth and expanded 6.9% QoQ and 30.9% YoY, representing more than 70% of the Bank's deposit base. The Bank's loan to deposit ratio (measured as loans minus marketable securities that fund mortgage portfolio over total deposits(3)) improved to 94.8% as of September 2011 compared to 96.8% as of June 2011 and 100.9% in September 2010.

The Bank's market share in total deposits has increased 36 basis points in the last 12 months to 18.7%. Throughout 2011, funding costs in the banking system have risen due to higher short-term interest rates, but the Bank's funding costs have increased at a slower pace given the focus on core deposit growth. We currently have opened a gap of 20 basis points in average cost of funds compared to the rest of the Chilean banking system.

Surplus liquidity tops US$3 billion

In the quarter, the Bank's deposit base increased at a faster pace than its loans. This additional liquidity was temporarily invested in low yielding short-term Central Bank's instruments until market conditions become more favorable. The Bank's surplus liquidity, defined as financial investments minus non-structural liabilities, averaged US$3.0 billion in the quarter.

II. Focus on core capital

Core capital at 10.2%. ROAE in 9M11 at 23.8%

The Bank currently has one of the highest capitalization levels in the Chilean financial system. Voting common shareholders' equity is the sole component of our Tier I capital. The Bank core capital ratio reached 10.2%, increasing 40 bp QoQ. The Bank implemented a series of measures to boost core capital ratios by optimizing risk-weighted assets. As a result, the BIS ratio reached 13.9% as of September 30, 2011 compared to 13.4% as of June 2011. ROAE in the nine-month period ended September 30, 2011 reached 23.8%.

III. Focus on selective loan growth and spreads

In 3Q11, total loans increased 1.5% QoQ and 16.1% YoY. The Bank has been following a more selective approach to loan growth given the market uncertainty, while continuing to focus on retail lending activities. Higher yielding loans to individuals increased 2.1% QoQ in 3Q11. This loan growth was led by lending to middle and upper income individuals, which expanded 2.2% QoQ. Lending to Santander Banefe slowed in the quarter and grew 1.3% QoQ. Lending to SMEs led growth in retail lending and expanded 2.8% QoQ. In the middle market, loans grew 2.9% QoQ (18.1% YoY). This year the Bank is obtaining attractive returns in this segment given the positive evolution of credit risk and spreads.

Rising spreads

The Banks net interest margin in the quarter reached 4.6% compared to 5.2% in 2Q11. The Bank's margins in the quarter were negatively affected by lower QoQ inflation rates, as the Bank has more assets than liabilities linked to inflation. Inflation in the quarter descended from 1.44% in 2Q11 to 0.56% in 3Q11. For every 100 bp decline in inflation, net interest income falls by approximately Ch$25 billion. The increase in the Bank's surplus liquidity has also temporarily reduced the Bank's net interest margin.

These negative effects on margins were partially offset by rising loan spreads (excluding the impacts of mismatches in inflation indexed assets and liabilities). Loan spreads in the quarter began to rise as the Bank implemented a stricter pricing policy in light of a potential deterioration of economic conditions and a potentially higher cost of capital. This should also help to sustain or improve margins in coming quarters.

IV. Prudent credit risk policies

Risk index stable despite higher provisions

On a year-to date basis net provision expense has increased 7.6% compared to a 16.1% rise in loan growth. Provision for loan losses in the quarter increased 58.9% QoQ and 75.4% YoY. This rise was mainly due to one-time provisions expenses, the expansion of our lending volumes, especially consumer lending and more prudent credit risk policies implemented in light of a possible deterioration of the macro environment. This included restricting renegotiations and, therefore, increasing charge-offs. This also resulted in a temporary rise in NPLs, but did not affect the Bank's risk index. The Risk Index, which includes non-performing loans and additional risk parameters, remained stable QoQ at 2.94%. The Bank is required to have 100% coverage at all times of its Risk Index. The NPL ratio, which includes all loans that are more than 90 days overdue, as of September 2011 reached 2.81%. The coverage ratio of total NPLs (loan loss allowances over non-performing loans) reached 104.8% as of September 2011.

Institutional Background

As per the latest public records published by the Superintendency of Banks of Chile for June 2011, Banco Santander Chile was the largest bank in terms of loans, equity and second in terms of total deposits. The Bank has among the highest credit ratings among all Latin American companies, with an A+ rating from Standard and Poor's and Fitch and Aa3 by Moody's, which are the same ratings assigned to the Republic of Chile. The stock is traded on the New York Stock Exchange (NYSE: SAN) and the Santiago Stock Exchange (SSE: Bsantander). The Bank's main shareholder is Santander, which controls 75.0% of Banco Santander Chile.

For more information see www.santander.cl

Banco Santander (SAN.MC, STD.N, BNC.LN) is a retail and commercial bank, based in Spain, with a presence in 10 main markets. Santander is the largest bank in the euro zone and tenth in the world by market capitalization. Founded in 1857, Santander had EUR 1,374 billion in managed funds, more than 100 million customers, 14,679 branches – more than any other international bank – and 190,000 employees at the close of June 2011. It is the largest financial group in Spain and Latin America. Furthermore, it has significant positions in the United Kingdom, Portugal, Germany, Poland and the U.S. northeast. Santander Consumer Finance operates in the Group's core markets as well as in the Nordic region. In the first half of 2011, Grupo Santander registered €3,501 million in net attributable profit.

(1) The results in this report are unaudited.

(2) Earnings per ADR was calculated using the Observed Exchange Rate of Ch$515.14 per US$ as of September 30, 2011.

(3) Mortgage loans in Chile are long-term fixed rate loans. Therefore, we consider it to be more conservative form a market risk and liquidity stand point to fund these loans with long-term fixed rate bonds and not short-term variable rate deposits.

Website: www.santander.cl

SOURCE Banco Santander Chile