Banco Santander-Chile (BSANTANDER) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Santander-Chile update conference call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like to introduce your host for today's conference, Mr. Robert Moreno. Sir, Please go ahead.

Okay. Hello, everyone. This is Robert Moreno. Thank you for connecting. A lot has been going on, so we've been getting a lot of calls and so forth. So in order to kind of keep everyone updated at the same time, we designed this call for the sell side. And also the way to help you talk to investors as well, who I'm sure are not only calling us or calling you. In this presentation, we're going to give you a little bit of -- first, Claudio Soto, our Chief Economist, will give you a review what's happening locally regarding regulations, effects of the virus, et cetera. And then I'll give you a little bit how the bank is confronting the situation. So let me turn it over to Claudio. Go ahead, Claudio.

Okay. Thank you, everyone. Let me start by giving you a brief overseeing of the situation of the virus in Chile. As you can see, Slide 1, the disease has been progressing in Chile. We have -- today's number is 1,300 people have been infected up to now. Now if you compare the evolution of the contagion in Chile with what we were expecting a week ago, it seems that the country has been managed to somehow flatten the progression. There was a forecast done in March 12 using an exponential projection with a 0.35% increase -- daily increase in the rate of contagion based on the first days of the disease in Chile and experience of other countries. And with that projection, by now the Chile -- the country would have had approximately 4,000 people infected. But the truth is that we have a much less stable infected right now. As I said, the 1,300, which shows that, in a way, the strategy of slowing down the progression of the disease has been working. Now the government has been announcing tougher measures began with just school holidays a week ago and then some other measures. And yesterday, we announced that there would be a lockdown for some neighborhood in Santiago, the ones that have been more affected by the disease that would last for approximately 7 days. So the strategy of the government has been to introduce in a progressive way proper measures, and we see how it evolves. It was -- but up to now the progression has been slower than what we would have forecasted a week ago. Now if you compare the situation in Chile with other countries in terms of the impact of the disease, in terms of the death rate, the truth is that in Chile, the death rate has been substantially low. 2 days ago, we reached 900 cases, and we have only 2 people dead. Today's figures restated in the slope have --, that 4 people have died of the disease out of 1,300 people infected. If you compare that with the situation in other countries, clearly, the impact in Chile has been much more muted. Why the case? Well, one reason could be that is in the gender -- sorry, the age composition of people that have been infected is tilted towards more young people that are less prone to develop complication out of the disease. Another reason could be that we are measuring more people that are affected. In the end, we are -- in Chile, there have been like between 1,300 and 3,000 test, daily test. So that compares favorably with other countries that are testing less people in proportion to the population. That's why we might see that in Chile there are no contagions than in other countries, and that's why the death rate seems to be pretty low. Next slide, Robert, please. Well, if you see the situation of the financial assets -- sorry, before that, let me talk to you briefly about the impact on activity. We have been following the data on electric generation. That is a good proxy of activity. One more slide, Bob, and then we'll go back to this one. We have been following the daily data on electricity duration. That is a good proxy of activity. As you can see in October when we had the social crisis in Chile and we had the disruption of several activities, the electricity generation fell substantially, reflecting the impact on economic activity. Now if you look at the data up to 2 days ago, it's true that there is a slowdown in activity. But up to now the impact on activity has been not as dramatic as it was in October. Probably in April with a more tough lockdown, the impact will be larger. But up to now we don't see such a dramatic impact on activity. Now if we turn back to the previous slide. You saw that in Chile, on copper price, it plays a very important role and the copper price has an important impact on activity. But you have to consider also that the oil price decline favors the country. Chile is a net importer of oil, and oil accounts for about 15% of our imports. So the dramatic fall we have seen in fuel price in the end results in an increase in the term of trade. So despite of the fall in the copper price and the fall in the oil price have been more than compensating this impact on copper and the terms of trade have been improving. Now if you can skip 2 slides, Bob, please. Now the impact on financial -- on Chilean asset has been significant. But if you compare to the situation of all countries in the region, the impact on Chilean asset has been less intense. The stock market turns less than Colombia and Brazil, has been more in Peru and in Mexico. But if you compare, the impact on the exchange rate in Chile has been more muted similar to the situation in Peru, reflecting what I told you about the term of trade impact of this shock, actually that depend more on oil, have suffered a much more strong depreciation of their currencies, such as the case of Mexico and Colombia. But countries that rely more on the mining -- the metal mining sector like Peru and Chile with copper, the impact on the currency has been less intense. Now if you look at financial variables like the interest rate, it's true that the interest rate -- the long-term interest rate has increased. But if you compare it to the recent history, the level of the long-term interest rate is not particularly high. The long-term 10-year nominal bond of the Central Bank is running at 3.8%, more or less, a couple of days ago. Now it's a bit less than that. And that compares favorably with the situation of all countries in the region. And in terms of the CDS spread, it's true that Chile had a 20 basis point difference with Peru up to the financial -- up to the social crisis we had in October. Since then onward, the CDS of Chile's book in tandem with Peru, it has increased since the end of February. But again, much less than in other countries in the region. Pointing out that the macro situation of Chile to confront the epidemic is in much, much better shape than in other countries in the region. Now let me talk briefly about the measures that have been taken by the local authorities. First of all, the Central Bank cut substantially the interest rate in an extraordinary meeting last week. Now the monetary policy rate is at 1%. And probably next week, there is another -- there is a regular meeting next week. And probably, the Central Bank will cut again the interest rate. A week ago, we were expecting that they were going to keep the rate on hold at 1%, but now we're more inclined of an extra cut next week. And on top of that, the Central Bank has provided new facilities. There is a new liquidity facility called FCIC, where the Central Bank compromises to provide liquidity to banks during 4 years at the current monetary policy rate or lower indicated, they cut even further, the policy rate. And in terms of the collateral that are eligible to withdraw from that facility, the Central Bank allowed now using a corporate bond, and they have declared that they are open to new sort of assets, new type of asset as a collateral. So probably, there will be new announcements in the next days or weeks expanding the collaterals eligible to come to this facility. They have also extended the intervention program that was supposed to end now in May, the exchange rate intervention program, and they extended up to January 2021. Now in terms of government announcement, there are several types of announcement made by the government. On the one hand, they increased substantially the resources devoted to health. They use the 2% constitutional increase that allowed the constitution when the government declares an emergency state. Then they also provide sales of liquidity measures to help small businesses and people in general. In particular, they delayed 3 months the corporate tax provision. They also delayed by 3 months the VTA (sic) [ VAT ] and also local taxes. And they cut the stamp tax for credits, they will do that during the 6 months. The tax cut is a law that has to pass congress, but it's almost done. It's probably approved this week. And it will be in place by April 1. Then there is a bill for job protection, where companies will be allowed to keep their labor relations. And the salary of the workers will be paid by the social insurance system that we have. And finally, the government announced the capitalization of Banco Estado for $500 million. And that will help to sustain credit particularly to SMEs and person and people. Now probably the government will announce new stuff in the days to come. We're expecting an expansion in the warranty scheme program that the government has. They haven't announced it yet, but it's very likely that they're going to announce a [ stop ] rate. Now in terms of the bank regulation, the CMF has declared that the implementation of Basel III could be postponed. They acknowledged they have the flexibility to extend the implementation period. They didn't made a strong commitment in terms of extending the period, but they declared their willingness to do so. And also they explicitly said they have the tools. They have also allowed the possibility of deferring up to 3 months installment for payments in the mortgage loans and also for SMEs up to 6 months. And they have made also some announcement in terms of surpluses for bank's operation in the context of helping the operation in the regular situation that we're confronting. That is more or less what we have. I don't know if you have questions now or we...

No, we'll do it at the end, Claudio.

It's going to be at the end?

We'll do it at the end. Okay? Yes.

Okay. Great. Thank you, bye-bye.

So I'll go on. Thank you. So now let's get a little bit into the bank's positioning. Yes? Okay. So first of all, just as a general reminder, here we present in this slide, Slide 14, the bank's breakdown of loans and earnings by segment and sector. We think this is an important reminder because obviously, while in retail banking, which is 70% of the loans, they're obviously more geared to lending. They represent 37% of the bank's total net contribution. That's without the UF GAAP. With the UF GAAP, it's closer to 50%, the earnings. But if we look at middle market and investment banking, we can see that their proportions of our earnings are rather larger than what they contribute in terms of the loan book. And that's basically because of the strength of the non-lending businesses that those 2 areas do. And I mentioned this because in the next few months, that's going to be key. Obviously, lending is going to slow down, but we believe one of the drivers of growth will be the non-lending activities in middle market, SCIB as well as -- and retail banking. And below to the right, we -- in the pie graph, we show you a bit the breakdown of the loans. You see the consumer, the mortgage, and then you see the rest of the commercial loan book by sectors. And just as for general knowledge, the 20 largest exposures represent less than 5% of our total loans, okay? So I think that's -- sorry, that represent less than 7% of our total loans. So I think that's a good diversity. And also, while we are a little more exposed to commerce with the major exposures, there are some of the larger, what we believe to be, best blue chips in that sector. So that also reduces a bit the -- any major pressures we see there. So in general, the diversity of the loan book, we believe, is a factor and the diversity of our income base, which is very diversified between lending and non-lending will help also keep the bank running throughout this period. Obviously, at a lower rate than expected, but we still expect income growth this year until now. The other thing we wanted to mention in this call is -- and these are important matters, and during this crisis, is our balance sheet structure and a very fundamental part of our funding structure that we fund all our commercial and consumer lending with deposits, demand and time deposits. And we have a structural philosophy of funding our long-term mortgages with long-term bonds. These are senior bonds. The fact that now mortgage lending will probably slow down would also mean that we don't have to refinance those -- excuse me, sorry, we have to fund those with deposit. We just have to continue funding them with the bonds or not having to do them any issuance of bonds as the year goes forward. And the other thing is that our deposit base is growing very strongly, and we'll see that in a moment. The other is that we've been taking very good care of our liquidity. As you know, the LCR ratio came into effect roughly 2 years ago, in Chile, 1.5 years. The minimum now is 70%. The government said they might flexibilize that. But in any case, since we're part of Grupo Santander, our minimum is around 115%, and we've been pretty much above that for many years. And even now in the latest figures published, together with Banco Estado, we are among the highest banks in terms of LCR both in local currency and foreign currency. So our liquidity position is very strong. Today, for example, we have, just in our dollar liquidity, between $1.5 billion and $2 billion in cash overnight. So I think that's something that will become more and more important if this situation progresses. The NSFR also, we're also one of the few banks in Chile actually reports it. By Grupo Santander standards, we have to be over 103%, and we're above that and with a very stable and healthy NSFR ratio. And as I said, on the next -- this next slide, we show you this has been the case for a long time. The LCR, here, we show it all the way from 2015, and you can see that when the social unrest started in Chile, we already began a process of increasing liquidity. The social unrest, to a certain extent, was like a trial, a test period for us. And so a lot of the measures we were doing then, we've just extended, including the fact that we had stronger liquidity. You also see the NSFR, where you see the minimum there is the dotted line. The last 2 months, it's come down a bit because we were growing the loan book very well and through February. That's totally going to change now and the NSFR is going to go back by about to where it was probably around the December and November. But in any case, we can see that our liquidity levels are quite solid. In terms of deposit growth, here on the upper left, you can see that through February, our deposits have grown 4%. And you look on the right, you see that the growth was led by checking accounts. Demand deposits, which are noninterest bearing were growing as of February on a year-on-year basis, 24%. It's very good flight to quality, has continued in March. And this is basically a reflection of companies and making sure they have liquidity. A lot of companies are taking down their credit lines, taking out loans. They have the ability to do so. And also depositing a lot to make sure they have liquidity in a safe place. So I think this is very good news for us in terms of funding mix and liquidity. The other thing is the funding cost should also come down because we're growing more in checking accounts and also time deposits, which tend to price off of the Central Bank rate. The Central Bank rate is now at 1%. So our deposit costs should continue coming down as the year goes forward. Today, our deposit in the bank, our retail deposit is around a little less than 2%. So it's already come down 30 basis points from the end of last year. In terms of -- another thing is that this growth in checking accounts has been system-wide, but we've always had, historically, gap with Banco de Chile equivalent to around CLP 1 trillion. But this gap has slowly been closing because we're getting market share in retail and corporate clients. And even though we don't have the figures for our competition, we believe by March, we should be very close to closing this historical gap that we've always had with Banco de Chile in checking accounts. So not only we'll be leaders in the number of checking accounts, but we'll also be very close to being #1 in the amounts in the checking accounts. Regarding loan growth. Loan growth also started the year quite well. It was growing 3% from December and partially inflated by the depreciation of the peso, but we were growing relatively well especially in the middle market and corporate. In March, things have been changing a bit. In March, retail lending really stopped because of supply and demand. I would say consumers have ability to take loans online. SMEs, it's been a little more difficult. We're working around the clock to implement digital banking, better digital banking strategies for SMEs. But today or a lot of SMEs, for example, to get the loan dispersed, they need like the signature of all their partners. And unfortunately, that is something that you have to do with the branch. The branches in Chile are considered an essential service, so they're not going to be closed in the lockdown. But we would like the SMEs be able to operate online, and we're pushing that as fast as we can. And in terms of the supply, well, the focus now will be middle market and corporate, spreads have been increasing. Obviously, we think the risk has been rising, but -- so the focus has been middle market corporate in terms of new origination. And in retail, the focus will be digital banking, and basically, helping clients renegotiate, opening the process to give them some oxygen. And we'll see in a moment that the asset quality in general had, up to this point, been very good. On Slide 20, we see the evolution in the last decade of the NPL ratio, the cost of credit and the coverage. And we show this graph because, first of all, it's -- we don't have any new guidance regarding the cost of credit yet. But here, you can see different events in Chile and where the cost of credit and the NPLs went. In 2009 in the crisis, the cost of risk reached around 3%; the NPL, around 3%. Then with the earthquake, there was another jump in 2010, very similar. Then we had the La Polar when it went broke, when they raised the negative credit bureau. Once again, the cost of credit jumped a little less, in that case, to 2.5%. And then in the recent social unrest, the cost of credit jumped to, in that quarter, around 2%. And so again, that gives you an idea that in the next 2 or 3 months with a very initial kind of, based on historical standards, a cost of risk of around 2%, 2.5% could be possible. Remember that our loan book is very different from what it was in 2009, 2010, '12, basically because of the shift away from the low end, okay? That's also -- you can see that in the overall evolution of NPL. Also, the NPLs went up at the end of last year. But as of February, they recovered much quicker than we thought. And another important thing is that, remember the Chilean banks are not IFRS 9. We are -- the Chilean expected loss models. They do not incorporate a macro -- a factor in the provisioning model. So it's expected loss based on recent payment history. That means that in IFRS 9, you have to make some macro assumptions. Those don't exist in the Chilean models. So basically, if the client continues to pay you, has good history, you don't have to do the additional provisions, okay? But the coverage has been much higher, and that is also very different from the case in past crisis. And if we look at the next slide, here we show it by product. It's been a very similar trend. But I would like to point out consumer lending. In consumer lending in 2009, 2012, the cost of risk reached 11%, in a more recent crisis reached closer to 6%. So in every moment of stress, the deterioration of asset quality has been lower because of the change in the mix. Also, our mortgage has been stable throughout the cycle, okay? Mortgage has gone through many periods of higher unemployment and lower growth and so forth and has done relatively well. Still a big question mark what will happen. But at least we feel quite safe compared to previous periods. On Slide 22, just as a reminder, this is the percentage of loans that are in high end, middle income and mass income. And basically, all the growth in the last few years has become high-income people. Middle income has grown but at a lower rate than high income and low income. Mass income just -- has continuously fallen. There's very, very little left, and already has a high coverage ratio. And also, when we compare it to our main competitors, this is also apparent. And the top graph, if we take December 2015 of base 100, the absolute level of our consumer NPLs have fallen close to 40%. And also during the last part of 2019, we didn't see a big deterioration, while our main competitors did see a deterioration towards the end of last year given the change in our asset mix versus them, the same in impaired loans. Remember, the impaired are the consumer NPLs plus renegotiated. So overall, we think another relative positive of us versus our competitors is the mix of our consumer loan book. So then regarding the balance sheet, the last part. We saw deposits, liquidity, loan growth is capital. So capital, here, we also show a little longer period of our core capital ratio in Chile and our BIS ratio. We finished last year with a good ratio of 10.1%. And we stated recently, we were going to pay out 60%. And then we decided to backtrack. I think that was kind of a surprise, but let me explain a bit the reasoning for that. First of all, in general, there's a view that if we want to be better cooperation between the banks and the regulators and the Central Bank, we do have -- as the largest bank in Chile, we kind of have to lead this process of lowering payout in order to show that we really want a stronger banking system during this crisis, okay? So the regulators stated publicly, they wanted banks to lower their payouts because also, at the same time, they're giving certain extensions on provisioning, liquidity facilities, and it didn't make much sense to be paying high payouts when this is happening at the same time. So we -- the Board met, the Asset and Liability Committee, we met, and we decided to backtrack to pay -- go down to 30%. And an important thing here is that we're going to pay out 30% now. We always provision on our capital base a 30% dividend. So this dividend will be neutral to our capital ratios. 40% of 2019 earnings will go to the bank's reserves and capital, and the other 30% will be retained earnings. And that's important because, let's say, this situation improves quickly, and the second half is really good and our capital ratios jump back up, we can pay out another dividend if we want without any additional, let's say, governance. So I don't think we're going to do that, but we left at 30% in retained earnings in case, okay, if everything gets better. And the other thing is that in Chile, with the depreciation of the peso, we don't run an FX GAAP. But when the peso depreciates, our asset base kind of inflates, and our capital base doesn't. So therefore, the depreciation of the peso had been eating into our capital ratio. We calculate that in the last 12 months, the depreciation of the peso has signified 100 basis points less of core capital. So if we would have more or less the same exchange rate, our core capital ratio would be 11.1%. So therefore, we thought it was more prudent to pay 30% now and then we'll evaluate the situation moving forward. But that will leave us, I think, comfortable. Remember, we still have Basel III coming in. There are some questions now when that will come in or not. It will come in this year or next year. But the idea is to always keep our capital ratio by the year-end above 10%. Then regarding the results and what's going to happen with our strategy. On this slide, I'm showing here, these are the strategic initiatives. We're all working on them. I think some will be, moving forward, a little slower than others. Superdigital, we're about -- once again, we were about to launch it officially, and then all these disaster broke loose. So Superdigital, once again, the official launching was postponed once again. But remember, Superdigital is online. It's live. And we've had record amount of downloads in March. Basically, people knowing that they're going to be working at homes. They're employers aren't going to be able to pay them at the branches, so the Superdigital has become a favorite download for -- especially for people who don't have any access to banking. Superdigital is having record growth. Getnet, our acquirer is ready, probably a little bit slower to roll out. We're probably going to push back things 2 or 3 months, but all the developments are made. Santander Consumer. Well, there, obviously, car sales are lower. But the good news is that we're already funding that at a much cheaper way. We're getting 40, 50, 60 basis points lower cost of funds. So the asset base isn't growing. Santander Consumer cost of funds is declining significantly. And Santander Life is also having another record month for the same reason as Superdigital, okay? So one of the good news in all of these is that our digital banking strategy is paying off very nicely at the moment. Klare is -- it might be also postponed for a little bit, just waiting for a good moment. And the wealth management as well, the new private banking branches, obviously, all that, it might be pushed back. And the Work Cafes are closed, okay? So basically, the focus now is Life, Superdigital and getting that SME banking fully digital so people can operate and take down loans and refinance online, okay? And the other thing we just launched in the last few days is a credit card on your -- like a bracelet. So you don't have to touch the POS, and it's very quick. It's Mastercard only for the time being, but I think this is a nice innovation where people can buy without having to touch things, okay? The other focus has been this whole program of measures for clients. For mortgage, we're following the CMF guidelines. You can delay your installments between 3 to 6 months. Basically, you take a new loan. It's like a refinancing with 3 to 6 months grace period. And obviously, you recapitalize those 3 or 6 months grace periods, and you add them on towards the end, not in one big quota, but in more months towards the end. And in consumer financing, it's similar, but we have 2 programs. One is for people who have no difficulties, but maybe they want to -- they view that maybe in the next few months, they might have a problem. So they can go online and refinance all of their loans, get a 3-month grace period. If they view that their financial situation is good and the system approves them, then they can take on additional loans. And then there's a program for people who have up to 89 days nonperforming [indiscernible] belong. It's not for NPLs. It's for people 89 days or less, and they can refinance also 3 to 6 months. And if it's their first renegotiation, meaning they've had problems because of the social unrest or the coronavirus, obviously, the impacts on provisions are lower. If it's a client that had multiple renegotiations or is more than 90 days overdue, meaning their problems come from way before, they enter another type of recovery process, okay? So these are for people who are fine today or clearly have had problems because of the coronavirus or the social unrest. And then SME is very similar, but it's more one-on-one because it depends on what type of business. And this is what we're working on very quickly now to roll out the digital platform. The other thing is, I don't know if this is good or bad, but here are the figures as of February. And the good news is that we were doing really well. This is -- the start of the year was fantastic. Our net interest income was growing 18%. Our margins were up. Fees were growing double digit. Treasury was growing 30%. Obviously, there was more provisions, right, because we still had some overlap or effect from the end of last year, but the cost of credit was running way below where we had guided. Costs were under control. The efficiency ratio was down, a bit down to 38%. And the ROE was almost 19%, okay? So we are well on our way to meet our goals for the first quarter. March should still be a good month because the inflation was relatively high. And this is good in form. This is good because this will help us through the rest of the year. The high profitability of the first 3 months should help us weather a second half -- second quarter that will obviously be weaker. And then going forward, hopefully, the third and fourth quarter will start to recover. But the year started good. Some of these trends will continue, some will not. One trend, which we think has been key has been the growth of clients, okay? As I said before, the third quarter is going to be just as good as the third quarter. Record amount of client openings. Last year, we opened 27% of all the checking accounts in Chile. So that part of the business is doing fantastic, and most of this is not lending. It's deposit accounts and checking accounts. The other good news is margins. As we see on this graph on this slide, the left, the monetary policy rate has been falling. Inflation has been rising, and that usually signifies good news on net interest margins. I think this is going to go through most of the second quarter. The big question mark going forward will be that, if the peso depreciates, will that be the most important factor for inflation or will be the general global contraction be more important and prices will come down? So there is some question marks about the evolution of inflation in the second half. But at least in the first half, we should have relatively good news for margins. And even if loan growth slow down, net interest income growth should be better than what it was last year. Well, part of this has to do with what you see here, apart from inflation rising, which is the dotted line. The kind of yellowish line is the Central Bank rate, which is coming down, and the red line is a 10-year yield. So upward sloping yield curve, higher inflation. This is, in general, good news for net interest margins. So even though loan growth should come down, margins should be relatively stable throughout the first half. And regarding the cost of risk. So the last quarter was 1.9%. Through February, it was 1.1%. We were guiding 1.3% to 1.4%. This is, by far, the hardest -- it's hard to say what's going to happen. Obviously, it's going to deteriorate. And as we saw in the previous slides, similar situation. We had cost of risk at 2%, 2.5%. But in the fourth quarter of last year, which was a similar stoppage, we had negative GDP growth. It only went up to 2%. Remember, we increased coverage. We took additional provisions for consumer loans. So we do have some maneuverability, but obviously, this number is going to rise, and that's still the big unknown. But I guess, for your model, you can kind of use some historical standards even though the loan mix is very, very different. Regarding noninterest income. Fees were growing 13%, led by credit cards. The credit card is something I think will continue for the rest of the year. People might buy less, but people are buying more online and more with their credit card. And also the changes in the 4-part model going to the interchange model is definitely having a benefit for our card business. So we think that's going to be a positive. It's hard to say how much fees will grow, but we think we'll be able to eke out some good growth in fees because of the credit card business, the opening of accounts, so forth. And in treasury, the client treasury continues to do well. A lot of clients seeking, hedging, buying products. The nonclient will definitely not do as well as last year. Higher long-term rates signify better margins. Higher long-term rates signify lower income from the realized gains from the available for sale portfolio. So treasury will probably fall 10 to 20 percentage points this year because of the nonclient, while the client will do well and fee should also do okay, given the good part of credit card. On the next slide, the other thing we control is cost. Costs are growing 4.7%. Remember, that includes the incorporation of Santander consumer. The natural rate is below 4%. Probably variable incentives are going to fall this year. And there's going to be obviously, tight cost control. That's what usually happens in these situations. We're not going to do -- we don't need to do any major, let's say, reductions of headcount. But obviously, we're going to slow down some projects and focus more on others. So we think cost growth should be below 4%. So now before we go to questions, just as a summary. We think the Central Bank and the CMF have been proactive to keep the system moving, to keep liquidity. More measures are coming. There will be some impact on asset quality. But we think that the last decade, we worked really hard on our loan mix and our coverage, so we hope that will help to minimize that. We have very strong liquidity. We're making sure our capital, even though we had to cut our dividend, we hope this will be a short-term thing, but we think we feel comfortable with our capital levels going forward for the rest of the year. Client growth has been very strong. Loan growth will come down, but we're going to be focusing on less riskier loans and obviously helping our individual and SME clients. And finally, results through February and probably March remains strong. The rest of the year, it will be weaker. But we think at least margins and income have some momentum, our cost as well, and we have to really see what happens with the cost of credit. So now if you have questions, we'll open it up, if you have questions for me here or Claudio. Thank you.

[Operator Instructions] And our first question comes from the line of Sebastián Gallego.

I have actually 2 questions. The first one is if you can comment on the potential extraordinary provisions or just provisions that you currently have on your balance sheet. Is there any that you have right now that you could potentially unleash or just release? The second question comes from -- also from asset quality regarding your models. Are you reporting or just provisioning if in case a client goes overdue even at the first day? Or you wait until the 30th day? How -- what is the best way to think about the way you're provisioning right now? And finally, just a confirmation on the 100 basis points on capital that you mentioned due to the depreciation on the FX. What was the initial figure on the FX? Just to compare, what is the best way to think about those 100 basis points on capital?

Okay. So at the end of last year, we took CLP 16 billion additional provisions in consumer lending. Okay, that's -- and in the commercial side, more than doing like additional or voluntary, we beefed up the coverage for a number of clients. So you can kind of saying like, we did it for different reasons, but -- so more than a lot of clients that we thought might have difficulty during possible future social unrest. We increased the provisioning in the end of last year. There's no social unrest, there's a different problem. But -- so more than reversing them, we'll probably -- we might use them. So that could help us keep the provision, the cost of credit, not too high, okay? So we do have some space to maneuver given everything that we did at the end of last year, which was basically like CLP 16 billion in consumer lending. And in commercial lending, this wasn't like an addition, I was kind of like changing the rating of the clients. It was roughly around CLP 20 billion. So CLP 16 billion additional, around CLP 20 billion, CLP 25 billion of downgrades that probably might happen, but we've already done them. So that could help us for a couple of quarters. And on the provisioning. So we use expected loss models of the regulator. And there, it depends -- not only does it depend on the number of days. So if they're like 1 or 5 days overdue, the provision expenses, they're not large. It goes -- moves very quickly to how many days, more days, 10, 20, 30 and above 90, okay? And the provisioning kind of goes up exponentially. But there's other factors as well you have to take into account. And this is for -- this excludes the large corporates. You have to take into account their indebtedness level. You have to take into account their -- what you call their -- how -- how indebted or how much their financial burden is, sorry. And also how -- what their past performance has been in the system, if they have other bad behavior in other banks that have been reported, and also how many times they've been renegotiated. So let's say someone, they have a clean history. And now they have their first 30-day not -- they haven't been paying for 30 days, and they have an impeccable behavior. The most likely thing that you renegotiate them, they're marked, okay? They have a small provision, not very significant. And then you see how they perform. And if they don't have a successive -- but we never do more than 2 renegotiations. After that, we stop and then you start falling down, cascading down the nonperformance and increasing the provision. So it's based on profile of clients depending on their recent behavior in the bank and the system, indebtedness level and financial burden. And for large corporates, it's a matter of the rating you give, your internal rating system, okay? Regarding the capital base. So the peso at the end of 2018 was around CLP 700, I believe. So it went from like CLP 700 to CLP 800. That's the -- it's kind of like the rise. It's kind of like CLP 100 went up 8 -- 100 basis points, okay? Obviously, the percentage rise goes -- is less the higher the exchange rate goes. The peso has been a little more stable now basically because, as Claudio showed, the terms of trade of Chile have been improving. So in relative terms, Chile isn't so off. We're a bat off during the social unrest, but now everyone is getting hit. So in relative terms, we're a little bit better. So basically, it's that kind of a simple rule of thumb, CLP 100 is 100 basis points of capital, okay, roughly.

And our next question comes from the line of Jason Mollin.

My question -- a general question of where Santander-Chile is seeing stresses in the economy in the last few weeks. And in your client base, maybe give us some color on sectors. I mean obviously, there have been certain sectors affected by the shutdown. We've seen some very abnormal moves in some of the bond market. We were looking at the ENAP 2021, which is just 1 year maturity trading at 700 basis points versus the USD. I mean treasuries, it's just -- it looks like there's a lot of stress. It's hard to understand what's going on in those markets, if you can provide some color. And perhaps, are you seeing system-wide and for Santander deposit withdrawals in the last weeks or demand for foreign currency?

Okay. Yes. So as Claudio showed, the sovereign spreads in Chile went up, a little less than other countries, but the reality in the corporate bond market is all over the place. So you have some companies going up a lot, some not going up. Banks in general, the spreads have gone up, but we used to pay -- I remember in the middle of last year, the spreads reached like 40 basis points over the Central Bank. Today, I believe it's like 140, okay? So the absolute rates aren't that high, and it's gone up. But as you're giving an example of ENAP, and there -- I think there's 2 factors, okay? I think the banks have been seen as really safe. So we've seen a little bit, I mentioned in the presentation, huge inflows of deposits. Time deposits, a little less, but checking accounts, okay? So in that sense, really good liquidity. We're managing liquidity. We've taken care of our dollar liquidity, okay? Obviously, dollar liquidity around the world is tighter, but we were kind of preparing for this before for other reasons. But the fact that Chile had the social unrest and that we were expecting a big period of unrest this month. We really prepared. In fact, we were, as a side note, able to start working at home because you really had like a dress rehearsal in November and December. So the banks are really preparing for this situation, but for other reasons, okay? But other companies, some of them have high indebtedness levels, okay? Some of them have a high and little leverage. I think that's affected their spreads. In other companies, it's just because they're in a sector that is viewed as a little bit weak, okay? So some sectors are obviously going to see -- be weaker. And that's your other question. So I would say the fact that everyone has to stay at home, some small shops, not like supermarkets, okay? I think supermarkets are doing really well today. But some shops, obviously, might be weaker. Tourism around the globe, transportation industry, these are the things that you're going to have to be looking up. And a lot of people and in terms of individuals, a lot of people who work off of commission or, let's say, have a big source of their income being variable are probably going to have to abide by the bank's renegotiation policies, okay? So I would say they're going to have 3 months of rest, of oxygen, okay? And then -- so the shorter the period of inactivity lasts, the better. I mean that's obvious for everyone. In terms of individuals and mortgage and for the sectors, tourism, shops, commerce, transportation, these type of things, I think, are the most vulnerable, okay? So all of it, how bad will it get? Once again, it's how long this will last, and that's why as Grupo Santander worldwide has been asking everyone to stay home to respect these quarantine periods because the quicker we get this over, the faster we get back to work, okay?

How have, in the past, I remember, I believe, Santander-Chile has offered these kinds of grace periods in other moments of crisis. How well did that go? What kind of usage clients signed up? And what was the eventual cost for -- in other periods for the bank?

Okay. So in the 2009 crisis, we had a big program called, Alíviate, and it had mixed results. I think for Banefe, it wasn't so positive because the way -- it wasn't well designed. So the areas we made in that, we are not repeating. There was a lot of condoning that. And the problem with that is there was kind of a reverse incentive, okay? But that's not the case today. I think today, we've learned a lot from what happened in October, November. You give a grace period. You give people oxygen. You focus it on people who are 89 days or less, okay? People who are more overdue are going to have their own programs. But the big programs are -- what does that mean? It's people who are clearly having a problem today, and that's probably because of the situation. So you try to avoid people who are -- have had a problem from before, okay? So focusing on clients that clearly have a problem today, which means that if you give them oxygen now and the situation gets better, they'll probably get back on track, okay? And so that's really the key. So I think -- also, the other thing is that we're working a little bit closer with the CMF. So they're giving us a little bit of more flexibility on some of the provisioning models, which wasn't so much the case before. So I think everyone is working closer together than in past periods. So I think today, they're done. And also, we have more information on clients than we did before, okay? We don't have a consolidated database yet. That's about to be approved at some point this year. But since most of the -- before, a lot of loans were outside the banking system. Today, most of the consumer lending is in the banking system. That's a huge help to be able to identify real problems versus temporary problems, okay?

And our next question comes from the line of Ernesto Gabilondo.

First, and maybe as a follow up to that previous question. So have you ever weighed the impact in your net interest income by not recognizing the interest of mortgages and SMEs during 3 months and 6 months, especially in mortgages that represent 34% of the loan book?

Okay. Yes, that's really important question. And remember, we're giving grace periods. So we're accruing the interest, okay? So what you do is you -- those installments, you add on towards the end to make it simple. So they get like a new loan. It's like any time you get a loan and you ask the bank for a great period, you basically add it on towards the end. So the loan -- the average rate, okay, because the payments will be made over a longer period of time, so the opportunity cost of money, the average rate will come down, right? But it's not like we're not going to be recognizing interest in those periods, okay? I think that's really important, okay? We have to keep high liquidity because you're not receiving the payment, but you're accruing the interest, okay?

Okay. Perfectly understood. And then my second question is to understand the trend in the asset quality. So given that you are postponing some of the credit payments, should we consider a relatively stable asset quality in the second quarter? But considering that after passing the second quarter, should we think we will annualize -- we will evaluate if these measures were enough to protect the asset quality? And do you think that the third quarter will be the one in which we will see the potential deterioration? And how do you see this third quarter with potential demonstrations coming back?

Okay. So I guess, these measures do kind of like push some of the -- could push some of the problems towards the third or fourth quarter. Once again, it depends how strong the rebound is and how long this last, okay? If things are really slow to get back on track, eventually, you have to start recognizing the problems. So that's maybe for individuals and some SMEs. Even -- I do think some companies, they might have been in trouble before, they are impaired or on the brink. Some of those aren't going to make it through, and there you have some impact. You see what I'm saying? So there will be an impact in the second quarter, probably more focused on companies, on commercial, if there's anything. And then in the third and fourth quarter, depending on the rebound and how things get better, it will be probably more focused on individuals, okay?

Perfect. Perfectly explained. And then my last question is -- yes, sure.

Sorry. What was the other question? Sorry.

Yes. So no, I want to do another question regarding your common equity Tier 1 ratio. As you mentioned before, Basel III regulation is likely to be postponed, and you have already reduced the dividend payout ratio. However, if considering Basel III, what would be the Common Equity Tier 1 ratio considering the buffers and the systemic risk? I believe the minimums in Mexico and in Brazil are close to 10% and 10.5%.

Yes. We believe in Chile, there will be -- and obviously, there's a phase in, but it'll be around 9.5%, okay?

9.5%. Perfect.

And our next question comes from the line of Thiago Batista.

It's Thiago Batista. I have one question. I know that it's still in a kind of early stage, but do you have any idea how much loan growth can be in 2020? I remember that the guidance that Chile gave a couple of weeks or months ago of 5% seems to be tough scenario. So do you have any indication on how much loan growth can be? And also, if you have already new GDP assumptions?

Okay. I don't know, Claudio, if you want to address that? Or should we -- I don't know if you have...

Yes. So in terms of growth on -- we are working with several scenarios. We have a wider range of possible outcomes this year. We expect it might fall between 0.5% or 1%, up to 3%, 3.5% this year. So that is more in the range of estimate we are working for the scenarios where we [ see internally ].

And for loan growth. Well, with that overall contraction, loan growth should be in the low single digits, okay, probably focus more on the middle market, large corporates. Spreads have been rising. So -- but loan growth, obviously, will slow down a bit from what we initially guided.

And our next question comes from the line of Alonso Garcia.

I think you mentioned earlier in the call that you were expecting still an income growth in 2020. So my question is, if given the positive performance of margins at least expected for the first half, do you think income growth can outpace OpEx growth of 4% this year? And I have a second question afterwards.

Okay. I believe in terms of -- and so now in terms of net interest income in CDS, treasury, when including treasury, probably. We have to see how that evolves, but we think that we can be at or slightly above OpEx growth. And if necessary, we'll control more costs than that if needed, okay?

Understood. And just regarding your Life product, I understand, of course, it is a more detail platform or more detail-oriented, but -- so probably the disruption in your digital infrastructure might not be that significant, but considering that it is focused on lower income segment compared to the rest of your consumer portfolio, do you expect deterioration coming from here? Have you observed anything so far? What are your thoughts there?

Yes. No, not really because so far most of the clients, they have -- we have a loan book there in Life, but it's around CLP 60 billion. It's rather small. And the majority of the clients -- in fact, 50%, 60% of the clients entering Life and Superdigital have had some bad credit behavior in the past, so they don't have an option for a loan yet, but they have all the option for the transactionality. So basically, this is a matter of getting clients. We charge them a low fee per month, fixed fee of around CLP 2,000. So the fact that we're getting a lot of clients, meaning this year alone, Superdigital and Life will be generating $8 million to $9 million in fees with very little risk, okay? So the more clients, the marginal cost of incorporating them is very low, and they generate fees rather quickly. So Life and Superdigital, especially Life, actually make money today, okay?

Okay. And just very quickly, you mentioned that your 20 largest exposures represent 11% -- 10% of your portfolio, that's correct?

Yes. One second, let me make sure I get that figure correct. So the 20 largest exposures by groups in Chile represents, one moment, hold on, okay? So we have, in our loan book, one second. So our loan book is around in pesos, CLP 32 billion -- CLP 32 trillion. So it's 8% of the loans, okay?

Okay. And your largest exposure is 8% of your loans, okay.

Yes. Okay.

And our next question comes from the line of Yuri Fernandes.

I have a follow up regarding the NII question. I got that you are going to continue to accrue interest in the grace period and also that margin should benefit from inflation and all like all the moving parts. My question here is when Santander-Chile stopped accruing interest, like at what level of past due loans you stop accruing those interests? And my second question is regarding the SMEs. I think Chile may be a bit different than other countries in this sector. Given you have all the issues with the social unrest, so we are getting to a new layer here for SMEs, like another one month of stop. Do you agree with the view that maybe SMEs may be the focus, like the focus of pressure for asset quality going ahead? Or do -- are you more concerned in any other sectors, such as airlines, tourism? Like, what is the factor that concerns you more like SMEs or the big or the bigger guys?

Okay. Okay. So we stop accruing when it's over 90 days, okay? So that's for sure. And when they have -- when a client has a series of renegotiations, we usually don't do that anymore. But when clearly it declined already, even if they've been renegotiated 2 or 3 times, we stop accruing interest. And more than 90 days, we also stop accruing interest, okay?

Super clear.

And yes, the SMEs is definitely the area of focus, okay? The last few years -- we still think it's a matter of size and collateral. So I think some sector is obviously more affected than others. But I think the last few years, we've been getting out of the more microlending, unguaranteed with no collateral. So that -- there has been a change in mix in the SME book in terms of size. But obviously, our focus will be on, I think, some of the larger increases in asset quality. So the deterioration and NPL will be in the SMEs. And then always, in these processes, I think the large corporates in Chile have always shown to be very healthy, but there's always 1 or 2 cases that kind of pop up, right? But if you look at the corporate bond market in Chile, I don't think there's been a large default in many years. So I wouldn't be surprised if not a large corporate blue-chip, no, but the next Tier 2 or Tier 3 companies, something might happen. There's always sectors where there's winners and losers. And when the economy goes through the shock, the weaker ones tend to lose the race, okay? So that has happened in all the crisis I've seen from the Asian crisis at 2009. More than sector, it's been -- in a couple of sectors, there's been winners and losers, okay? But I think the big increase in provisioning, as like you said, will come from probably the SME market, okay? Once again, depending on how long this lasts. And there might always be some case popping up in the mid-sized companies, okay?

Okay. I have a quick follow up. How much of your portfolio has collaterals? Do you have the figure like how much of your book is protected here?

Yes. I don't have it off the top of my mind, but it's obviously high. I think all the mortgage, I would say, let's say, all of the mortgage, which is 1/3, probably 50% to 60% of the commercial loan book and like 10% of consumer lending. So in our financial statement, when you look at the loan book, there's also -- we can send this. But in the loan book, the notes regarding the loan book, you see what percentage of are impaired NPLs are covered in collateral. So when you add -- our NPLs have 146% coverage with provisions. You add on collateral, I believe that figure goes up closer to 200% or so, okay. I'll send everyone the exact figures and when you could see them in the financials.

And I'm showing no further questions at this time. And I'd like to turn the conference back over to Mr. Robert Moreno for any further remarks.

Okay. Thank you very much. Obviously, these are difficult times, but I think the bank is in a good -- relative position to confront this scenario. And so we hope that the next few quarters we'll be reflecting this, this relative strength we hope we have. Thank you very much. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.