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FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Report of Foreign Issuer

 

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

 

Commission File Number: 001-14554

Banco Santander Chile
Santander Chile Bank
(Translation of Registrant’s Name into English)
 
Bandera 140
Santiago, Chile
(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

    Form 20-F x     Form 40-F ¨  

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

  Yes ¨   No x  

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

  Yes ¨   No x  

 

Indicate by check mark whether by furnishing the information contained in this Form, the Registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

  Yes ¨   No x  

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A

 

 
 

 

IMPORTANT NOTICE

  

The unaudited financial statements included in this 6K have been prepared in accordance with the Compendium of Accounting Standards issued by the Superintendency of Banks and Financial Institutions (SBIF) of Chile. The accounting principles issued by the SBIF are substantially similar to IFRS, but there are some exceptions.  The SBIF is the banking industry regulator that according to article 15 of the General Banking Law, establishes the accounting principles to be used by the banking industry. For those principles not covered by the Compendium of Accounting Standards, banks can use generally accepted accounting principles issued by the Chilean Accountant’s Association AG and which coincides with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). In the event that discrepancies exist between the accounting principles issued by the SBIF (Compendium of Accounting Standards) and IFRS, the Compendium of Accounting Standards will take precedence. The Notes to the unaudited consolidated financial statements contain additional information to that submitted in the Unaudited Consolidated Statement of Financial Position, Unaudited Consolidated Statement of Income, Unaudited Consolidated Statement of Comprehensive Income, Unaudited Consolidated Statement of Changes in Equity and Unaudited Consolidated Statement of Cash Flows. These notes provide a narrative description of such statements in a clear, reliable and comparable manner.

 

 
 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  BANCO SANTANDER-CHILE
   
  By: /s/ Cristian Florence
  Name: Cristian Florence
  Title: General Counsel

Date: September 9, 2014

 

 

 

Exhibit 99.1

 

 

 
 

 

INDEX

 

SECTION   PAGE
     
SECTION 1: SUMMARY OF RESULTS   2
     
SECTION 2: RESULTS BY BUSINESS SEGMENT   7
     
SECTION 2: BALANCE SHEET ANALYSIS   8
     
SECTION 3: ANALYSIS OF QUARTERLY INCOME STATEMENT   12
     
SECTION 4: CREDIT RISK RATINGS   22
     
SECTION 5: SHARE PERFORMANCE   23
     
ANNEX 1: BALANCE SHEET   24
     
ANNEX 3: YTD INCOME STATEMENT   25
     
ANNEX 2: QUARTERLY INCOME STATEMENTS   26
     
ANNEX 3: QUARTERLY EVOLUTION OF MAIN RATIOS AND OTHER INFORMATION   27

 

CONTACT INFORMATION Santiago, Chile
Robert Moreno Tel: (562) 2320-8284
Manager, Investor Relations Department Fax: (562) 2671-6554
Banco Santander Chile Email: rmorenoh@santander.cl
Bandera 140, 19th floor Website: www.santander.cl

 

 
 

 

 

SECTION 1: SUMMARY OF RESULTS

 

Net income up 12.5% QoQ and 85.8% YoY in 2Q14. ROAE* reaches 26.7%

 

In 2Q14, Banco Santander Chile’s Net income attributable to shareholders reached a record level for a quarter and totaled Ch$159,616 million (Ch$0.85 per share and US$0.62/ADR), increasing 12.5% compared to 1Q14 (from now on QoQ) and 85.8% compared to 2Q13 (YoY from now on). The Bank’s ROAE reached 26.7% in 2Q14 compared to 16.0% in 2Q13.

 

In the first half of 2014 (1H14), Net income attributable to shareholders reached Ch$301,459 million (Ch$1.60 per share and US$1.16/ADR), increasing 80.8% compared to 1H13. The Bank’s ROAE in the first half of 2014 was 25.3% compared to 15.6% in 1HQ13. The efficiency ratio in 1H 2014 reached 36.0% compared to 42.0% in 1H13.

 

*ROAE: Net income annualized divided by average equity (average equity defined as the average of the monthly balance of shareholders’ equity). In the table above, the ROAE for the 4Q13 does not include the one-time gain recognized as a result of the sale of the Bank’s subsidiary Santander Asset Management in 4Q13. Including the gain from the sale the ROAE was 30.7%.

 

Strong operating trends in 2Q14: Operating income up 9.4% QoQ and 73.8% YoY

 

The Bank’s total operating income1, reached Ch$183,833 million in 2Q14, increasing 9.4% QoQ and 73.8% YoY. This result was due to positive evolution of our business segments, plus the additional impact of the higher inflation rate in the quarter.

 

 

1.Operating income: Net interest income + fee income + Financial transactions, net + Other operating income, net – provision expense – operating expense.
2.Net operating profit: Net interest income + fee income + Financial transactions, net – provision expense. Excludes the results from the Financial Management and the Corporate Center.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

2
 

 

 

Net operating profit from the Bank’s business segments1 totaled Ch$300,108 million in 2Q14, increasing 4.0% QoQ and 9.4% YoY. These results exclude our Corporate Center and the results from Financial Management, which includes, among other items, the impact of the inflation. The Bank has more assets than liabilities linked to inflation and, as a result, margins have a positive sensitivity to variations in inflation (such relationship between assets and liabilities linked to inflation, with positive or negative sensitivity, is referred to as “inflation gap”). In 2Q14, the variation of the Unidad de Fomento (an inflation indexed currency unit), was 1.76% compared to 1.28% in 1Q14 and (0.07%) in 2Q13. The gap between assets and liabilities indexed to the UF averaged approximately Ch$4.2 trillion (US$7.6 billion) in 2Q14. This signifies that for every 100 basis point change in UF inflation, our Net interest income increases or decrease by Ch$42 billion, all other factors being equal. This gap is produced by the Bank’s lending activities in UFs and funding activities in nominal pesos.

 

Operating profit in the Individuals segment increased 11.7%, +19.5% in the Middle-market and +32.7% in the Corporate segment YoY in 2Q14. The QoQ improvement in profitability of our business segment was led by the 10.5% QoQ rise in operating profits in Individuals and the 6.8% QoQ increase in profits from the Middle-market segment.

 

Loan growth up 10.2% YoY, especially in segments with higher risk-adjusted contribution

 

In 2Q14, Total loans increased 1.5% QoQ and 10.2% YoY. In the quarter, the Bank continued to expand the loan book among those clients and segments with the highest risk adjusted returns in an economic environment that remains healthy, but with growth decelerating. Lending to Individuals increased 2.0% QoQ and 11.7% YoY in the quarter. Loans in the High-income segment increased 2.4% QoQ and 15.9% YoY. In the Lower income segments, the Bank’s loan portfolio decreased 3.2% QoQ and 11.8% YoY. Lending in the Middle-market segment (companies with sales between Ch$1,200 million and Ch$10,000 million per year), loans increased 1.1% QoQ and 7.1% YoY.

 

Funding mix improving. 9.2% YoY growth of non-interest bearing demand deposits2

 

Total deposits fell 1.8% QoQ and increased 2.5% YoY. In the quarter, the Bank continued to focus on increasing core deposits2 and lowering deposits from wholesale sources. This is reflected in the 1.0% QoQ and 9.2% YoY increase in non-interest bearing demand deposits compared to a decrease of 3.4% QoQ and 1.2% YoY of time deposits. Wholesale time deposits decreased 14.8% QoQ and 16.8% since the beginning of the year.

 

 

1.     Net interest income + fee income + Financial transactions, net – provision expense.

Individuals: Persons with monthly income greater than Ch$150,000. SMEs: defined as companies that sell less than Ch$1,200 million per year. Middle-market: defined as companies with sales between Ch$1,200 million and Ch$10,000 million per year. Corporate: defined as companies with sales over Ch$10,000 million per year or that are part of a large foreign or local economic group. Excludes the results from Financial Management and the Corporate Center.

 

2.   In 2014, we changed the definition of core and wholesale deposits as part of our gradual shift towards BIS III liquidity models. Core deposits are now defined as all checking accounts plus time deposits from the Individual, SME and Middle market segments. Long-term wholesale deposits are time deposits from institutional sources and Corporate segments with an average maturity greater than 120 days. Short-term wholesale deposits are time deposits from institutional sources and the corporate segment with an average maturity of less than 120 days.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

3
 

 

 

NIM at 6.0% in 2Q14. Continuous growth of NIMs, net of provisions

 

In 2Q14, Net interest income increased 11.0% QoQ and 40.0% YoY. The Net interest margin (NIM) in 2Q14 reached 6.0% compared to 5.4% in 1Q14 and 4.7% in 2Q13. A central point of our current strategy is to achieve a higher NIM, net of provision expenses. In 2Q14, the Bank’s NIM, net of provisions reached 4.5% compared to 4.0% in 1Q14 and 3.1% in 2Q13. This in line with the Bank’s focus towards a less risky loan mix and the improvements in funding costs, which has also minimized the negative impact of the new regulation that lowered maximum lending rates.

 

* Quarterly net interest income, net of provision expense, divided by average interest earning assets.

 

Provision expense decreases 3.0% YoY in 2Q14

 

Net provision for loan losses increased 3.4% QoQ and decreased 3.0% YoY in 2Q14. The Cost of credit (Provision expenses annualized divided by total loans) reached 1.55% in 2Q14 compared to 1.53% in 1Q14 and 1.79% in 2Q13. Net provisions in consumer loans, which represented half of total provision expense, decreased 3.7% QoQ and 11.2% YoY. Direct charge-offs of consumer loans decreased 32.0% YoY. The Bank’s total NPLs ratio3 reached 2.9% in 2Q14 compared to 2.7% in 1Q14 and 3.1% in 2Q13. Total Coverage of NPLs4 in 2Q14 reached 102.3%.

 

 

3 NPL ratio defined as: Gross non-performing loans (overdue 90 days or more ”NPL”) divided by gross (loans and accounts receivable customers)

4 Total coverage of NPLs define as: Allowance for loan losses divided by gross NPL.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

4
 

 

 

Efficiency ratio improves to 36.4% in 2Q14

 

Operating expenses in 2Q14 totaled Ch$153,465 million. The efficiency ratio reached 36.4% in 2Q14 compared to 42.5% in 2Q13 as income continues to rise faster than expenses. On a YoY basis, operating expenses increased 8.1%. Personnel expenses increased 8.8% YoY. This rise was mainly due to the higher CPI adjustment in salaries. Administrative expenses increased 10.1% and this was mainly due to: (i) greater business activity that has resulted in higher system and data processing costs and (ii) the effects of a higher inflation rate over costs indexed to inflation, like rent expenses.

 

* Efficiency ratio: Operating expenses / Operating income. Operating income = Net interest income + Net fee income+ Net results from Financial transactions + Other operating income and expenses.

 

Core capital ratio reaches 10.7% in 2Q14.

 

The Core Capital ratio5 reached 10.7% as of June 2014. Chilean regulations only permit the inclusion of voting common shareholders’ equity as Tier I capital. The Bank’s BIS ratio6 reached 13.9% at the same date.

 

 

5. Core Capital ratio defined as: Shareholders’’ equity divided by risk-weighted assets

6. BIS Ratio defined as: Regulatory capital divided by risk-weighted assets

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

5
 

 

 

Banco Santander Chile: Summary of Quarterly Results

 

   Quarter   Change % 
(Ch$ million)  2Q14   1Q14   2Q13   2Q14 /
2Q13		   2Q14 /
1Q14		 
Net interest income   348,039    313,493    248,667    40.0%   11.0%
Net Fee and Commission income   55,815    55,764    58,144    (4.0)%   0.1%
Core revenues   403,854    369,257    306,811    31.6%   9.4%
Total Financial transactions, net   30,062    32,972    33,253    (9.6)%   (8.8)%
Provision for loan losses   (84,036)   (81,234)   (86,655)   (3.0)%   3.4%
Net operating profit1   353,365    326,505    260,597    35.6%   8.2%
Operating expenses   (153,465)   (137,574)   (141,963)   8.1%   11.6%
Operating income2   183,833    168,052    105,763    73.8%   9.4%
Net income attributable to shareholders   159,616    141,843    85,892    85.8%   12.5%
Net income/share (Ch$)   0.85    0.75    0.46    85.8%   12.5%
Net income/ADR (US$)3   0.62    0.55    0.36    70.1%   12.5%
Total loans   21,784,284    21,455,870    19,772,361    10.2%   1.5%
Deposits   14,975,221    15,250,974    14,615,036    2.5%   (1.8)%
Shareholders’ equity   2,416,870    2,424,863    2,136,835    13.1%   (0.3)%
Net interest margin   6.0%   5.4%   4.7%          
Efficiency ratio   36.4%   35.6%   42.5%          
Return on average equity4   26.7%   23.9%   16.0%          
NPL / Total loans5   2.9%   2.7%   3.1%          
Coverage NPLs   102.3%   107.0%   91.3%          
Risk index6   2.9%   2.9%   2.9%          
Cost of credit7   1.6%   1.5%   1.8%          
Core Capital ratio   10.7%   10.7%   10.2%          
BIS ratio   13.9%   13.9%   12.9%          
Branches   479    484    485           
ATMs   1,753    1,860    1,972           
Employees   11,381    11,455    11,558           
1.Includes Net interest income + fee income + Financial transactions, net + other operating income - provision expense.
2.Includes Net operating profits – operating expenses – other operating expenses.
3.The change in earnings per ADR may differ from the change in earnings per share due to exchange rate movements. Earnings per ADR was calculated using the Observed Exchange Rate Ch$550.60 per US$ as of June 30, 2014.
4.Annualized quarterly net income attributable to shareholders / Average equity attributable to shareholders in the quarter.
5.NPLs: Non-performing loans: full balance of loans with one installment 90 days or more overdue.
6.Risk Index: Loan loss allowances / Total loans: measures the percentage of loans the banks must provision for given their internal models and the Superintendency of Banks guidelines.
7.Cost of credit: provision expenses annualized divided by average loans.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

6
 

 

 

SECTION 2: RESULTS BY BUSINESS SEGMENT

 

Positive and recurring income trends in most business segments

 

   2Q14 
(Ch$ million)  Individuals1   SMEs2   Middle-market3   Corporate4   Total
segments5		 
Net interest income   153,515    67,057    54,328    21,800    296,700 
Change YoY   -0.2%   1.5%   12.1%   29.0%   4.0%
Change QoQ   4.5%   2.6%   1.9%   5.6%   3.7%
Fee income   37,185    11,515    7,101    4,371    60,172 
Change YoY   0.9%   7.2%   -3.5%   13.4%   2.3%
Change QoQ   6.4%   5.9%   -5.8%   -24.6%   1.7%
Financial transactions, net   6,154    2,248    3,881    14,908    27,191 
Change YoY   339.3%   66.0%   4.6%   48.6%   64.8%
Change QoQ   332.2%   76.2%   -4.9%   -16.6%   10.3%
Provision expense   (44,053)   (34,047)   (4,618)   (1,237)   (83,955)
Change YoY   -20.3%   58.7%   -47.2%   61.1%   -2.7%
Change QoQ   -2.1%   22.7%   -43.1%   110.7%   3.1%
Net operating profit6   152,801    46,773    60,692    39,842    300,108 
Change YoY   11.7%   -17.5%   19.5%   32.7%   9.4%
Change QoQ   10.5%   -6.0%   6.8%   -8.9%   4.0%
1.Individuals: Persons with monthly income greater than Ch$150,000
2.SMEs: defined as companies that sell less than Ch$1,200 million per year.
3.Middle-market: defined as companies with sales between Ch$1,200 million and Ch$10,000 million per year.
4.Corporate: defined as companies with sales over Ch$10,000 million per year or that are part of a large foreign or local economic group.
5.Excludes the results from Financial Management and the Corporate Center.
6.Net interest income + fee income + Financial transactions, net – provision expense.

 

Net operating profit from the Bank’s business segments, which reflects the earnings trends of the Bank’s client segments, totaled Ch$300,108 million in 2Q14, increasing 4.0% QoQ and 9.4% YoY. These results exclude our Corporate Center and the results from Financial Management, which includes, among other items, the impact of the inflation gap (such relationship between assets and liabilities linked to inflation with positive or negative sensitivity, is referred to as “inflation gap”)

 

On a YoY basis, the lower growth macro environment has mainly affected the SME segment. The rest of the Bank’s business segments experienced double-digit growth of profitability. Operating profit in Individuals increased 11.7%, +19.5% in the Middle-market and +32.7% in the Corporate segment YoY in 2Q14.

 

The QoQ improvement in profitability of our business segments was led by the 10.5% QoQ rise in operating profits in individuals and the 6.8% QoQ increase in profits from the middle-market segment. In individuals, which represents 50% of operating profits in the Bank, spreads increased, fees rebounded and provision expense fell on a QoQ basis. The changes in asset mix in consumer lending and the focus on pre-approved loans has been an important driver in the decrease of provisions expenses. The middle-market continued to show positive results as spreads and volumes expanded along with a 43.1% QoQ and a 47.2% YoY decrease in provisions expense.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

7
 

 

 

SECTION 3: BALANCE SHEET ANALYSIS

 

LOANS

 

Loans up 10.2% YoY. Growth focused in segments with a higher risk-adjusted profitability

 

Loans  Quarter ended,   % Change 
(Ch$ million)  Jun-14   Mar-14   Jun-13   Jun. 14 / 13   Jun. /
Mar. 14		 
Total loans to individuals1   11,049,148    10,827,707    9,887,878    11.7%   2.0%
Consumer loans   3,736,553    3,696,198    3,266,648    14.4%   1.1%
Residential mortgage loans   6,095,929    5,841,152    5,355,978    13.8%   4.4%
SMEs   3,293,787    3,289,191    3,066,396    7.4%   0.1%
Middle-Market2   5,171,768    5,116,787    4,830,455    7.1%   1.1%
Corporate   2,315,308    2,168,967    1,992,933    16.2%   6.7%

Total loans 3

   21,784,284     21,455,870     19,772,361     10.2%   1.5% 
1.Includes consumer loans, residential mortgage loans and other commercial loans to individuals.
2.Includes Middle market of corporates, real estate and lending to institutions.
3.Total loans gross of loan loss allowances. Total loans include other non-segmented loans and exclude interbank loans.

 

In 2Q14, Total loans increased 1.5% QoQ and 10.2% YoY. In the quarter, the Bank continued to focus on its strategy of expanding the loan book with a focus on increasing spreads, net of provisions in an economic environment that remains healthy, but with growth decelerating.

 

Lending to Individuals increased 2.0% QoQ and 11.7% YoY. The Bank focused on expanding its loan portfolio in higher income segments, while remaining more selective in lower income segments. Loans in the high-income segment, which are mainly distributed through the Santander Select network, increased 2.4% QoQ and 15.9% YoY. In the lower income segments, the Bank’s loan portfolio decreased 3.2% QoQ and 11.8% YoY, continuing the loan mix shift started several quarters ago. By products, total consumer loans increased 1.1% QoQ and 14.4% YoY. Residential mortgage loans expanded 4.4% QoQ and 13.8% YoY. Growth in mortgage loans was affected by the higher UF inflation rate in the quarter. The recurring QoQ growth rate of mortgage loans, that is excluding the indexation effects produced by the higher inflation, was 2.6%. The Bank continues to focus on residential mortgage loans with loan-to-values below 80%, at origination.

 

Lending to SMEs expanded 0.1% QoQ and 7.4% YoY. In the quarter, the Bank proactively decelerated loan growth in this segment in light of the expected economic slowdown. The Bank is stressing growth among SME clients backed by strong levels of collateral (including state guarantees) and / or clients with a high level of cash management and transactional business, which generates higher levels of revenue for the Bank with a lower risk profile. This allows us to generate ROEs in the mid-20s range in this segment.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

8
 

 

 

In 2Q14, the Middle-market segment loans increased 1.1% QoQ and 7.1% YoY. In this segment, growth rates remained positive, but the Bank did experience a slight reduction in loan demand in line with the lower growth of investment in the economy. This segment is still generating increasingly higher levels of business volumes in other areas such as cash management, which has helped to drive the rise in client deposits.

 

In the Large corporate segment, loans increased 6.7% QoQ and 16.2% YoY. This segment generally has a volatile evolution of loan growth, due in part, to large transactions that are not recurring between one quarter and the next. Spreads in this segment have also been rising as can be observed in the 29% YoY increase in net interest income in the quarter (See Results By Business Segments).

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

9
 

 

 

DEPOSITS

 

Improving funding mix with a focus on non-interest bearing checking accounts

 

Deposits  Quarter ended,   % Change 
(Ch$ million)  Jun-14   Mar-14   Jun-13   Jun. 14 / 13   Jun. / Mar.
14		 
Demand deposits   5,664,560    5,610,373    5,188,708    9.2%   1.0%
Time deposits   9,310,661    9,640,601    9,426,328    (1.2)%   (3.4)%
Total deposits   14,975,221    15,250,974    14,615,036    2.5%   (1.8)%
Loans to deposits1   104.8%   102.4%   98.6%          
Avg. demand deposits / Avg. interest earning assets   24.6%   24.0%   24.8%          
1.(Loans – residential mortgage loans) / (Time deposits + demand deposits).

 

Total deposits fell 1.8% QoQ and increased 2.5% YoY. In the quarter, the Bank continued to focus on increasing cheaper core deposits7 and lowering deposits from wholesale sources. This was reflected in the 1.0% QoQ and 9.2% YoY increase in non-interest bearing demand deposits compared to a decrease of 3.4% QoQ and 1.2% YoY of time deposits. Wholesale time deposits decreased 14.8% QoQ and 16.8% since the beginning of the year. Core deposits7 have increased 4.4% year-to-date. At the same time, the low interest rate environment reduced the demand for time deposits on behalf of companies.

 

The adjacent graph shows the evolution of the different type of deposits during the year.

 

1. See footnote 7 at the end of this page.

 

 

7.In 2014, we changed the definition of core and wholesale deposits as part of our gradual shift towards BIS III liquidity models. Core deposits are now defined as all checking accounts plus time deposits from the Individual, SMEs and Middle market segments. Long-term wholesale deposits are time deposits from institutional sources and Corporate segments with an average maturity greater than 120 days. Short-term wholesale deposits are time deposits from institutional sources and the corporate segment with an average maturity of less than 120 days.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

10
 

 

 

SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL

 

ROAE in 2Q14 reached 26.7% with a core capital ratio of 10.7%

 

Shareholders' Equity  Quarter ended,   Change % 
(Ch$ million)  Jun-14   Mar-14   Jun-13   Jun. 14 / 13   Jun. / Mar.
14		 
Capital   891,303    891,303    891,303    0.0%   0.0%
Reserves   1,307,761    1,130,991    1,130,962    15.6%   15.6%
Valuation adjustment   6,785    (6,069)   (2,170)   (412.7)%   (211.8)%
Retained Earnings:   211,021    408,638    116,740    80.8%   (48.4)%
Retained earnings prior periods   -    441,926    -    —%   —%
Income for the period   301,459    141,843    166,771    80.8%   112.5%
Provision for mandatory dividend   (90,438)   (175,131)   (50,031)   80.8%   (48.4)%
Equity attributable to shareholders   2,416,870    2,424,863    2,136,835    13.1%   (0.3)%
Non-controlling interest   28,536    28,847    27,469    3.9%   (1.1)%
Total Equity   2,445,406    2,453,710    2,164,304    13.0%   (0.3)%
Quarterly ROAE   26.7%   23.9%   16.0%          

 

Shareholders’ equity totaled Ch$2,445,406 million (US$4.4 billion) as of June 30, 2014. The ROAE in 2Q14 was 26.7%. The Core Capital ratio reached 10.7% as of June 2014. Chilean regulations only permit the inclusion of voting common shareholders’ equity as Tier I capital. The Bank’s BIS ratio reached 13.9% at the same date.

 

Capital Adequacy  Quarter ended,   Change % 
(Ch$ million)  Jun-14   Mar-14   Jun-13   Jun. 14 / 13   Jun. / Mar.
14		 
Tier I (Core Capital)   2,416,870    2,424,863    2,136,835    13.1%   (0.3)%
Tier II   726,457    715,010    561,047    29.5%   1.6%
Regulatory capital   3,143,327    3,139,873    2,697,882    16.5%   0.1%
Risk weighted assets   22,634,232    22,649,033    20,959,977    8.0%   (0.1)%
Tier I (Core capital) ratio   10.7%   10.7%   10.2%          
BIS ratio   13.9%   13.9%   12.9%          

 

The Bank’s shareholders approved on April 22, 2014 the Bank’s annual dividend equivalent to 60% of 2013 net income (Ch$1.407/share). This was equivalent to a dividend yield of 4.1% on the dividend record date in Chile (April 15, 2014). The dividend increased 13.8% compared to the dividend paid in 2013. The prudent management of the Bank’s capital ratios and high profitability has permitted the Bank to continue paying attractive dividends.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

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SECTION 3: ANALYSIS OF QUARTERLY INCOME STATEMENT

 

NET INTEREST INCOME

 

Continuous growth of NIMs, net of provisions

 

Net Interest Income / Margin  Quarter   Change % 
(Ch$ million)  2Q14   1Q14   2Q13   2Q14 /
2Q13		   2Q14 /
1Q14		 
Client net interest income1   297,070    286,320    280,722    5.8%   3.8%
Non-client net interest income2   50,969    27,173    (32,055)   (259.0)%   87.6%
Net interest income   348,039    313,493    248,667    40.0%   11.0%
Average interest-earning assets   23,226,246    23,121,712    21,215,426    9.5%   0.5%
Average loans   21,661,513    21,241,689    19,384,881    11.7%   2.0%
Interest earning asset yield3   10.2%   9.4%   7.8%          
Cost of funds4   4.7%   4.4%   3.4%          
Client net interest margin5   5.5%   5.4%   5.8%          
Net interest margin (NIM)6   6.0%   5.4%   4.7%          
Quarterly inflation rate7   1.76%   1.28%   (0.07)%          
Central Bank reference rate   4.00%   4.00%   5.00%          
Avg. 10 year Central Bank yield (real)   1.86%   2.04%   2.38%          
1.Client net interest income is mainly net interest income from the from all client activities such as loans and deposits minus the internal transfer rate. See footnote 1 at the end of this page.
2.Non-client interest income is net interest income mainly from the Bank’s ALCO positions and treasury. See footnote 1.
3.Interest income divided by interest earning assets.
4.Interest expense divided by interest bearing liabilities + demand deposits.
5.Client net interest income annualized divided by average loans.
6.Net interest income divided by average interest earning assets annualized.
7.Inflation measured as the variation of the Unidad de Fomento in the quarter.

 

In 2Q14, Net interest income increased 11.0% QoQ and 40.0% YoY. The Net interest margin (NIM) in 2Q14 reached 6.0% compared to 5.4% in 1Q14 and 4.7% in 2Q13. In order to improve the explanation of margins, we have divided the analysis of Net interest income between Client interest income1 and Non-client net interest income.

 

Client net interest income8. In 2Q14, Client net interest income increased 3.8% QoQ and 5.8% YoY, driven mainly by loan growth, higher loan spreads and the better funding mix. Average loans increased 2.0% QoQ and 11.7% YoY. Client NIM (defined as client net interest income divided by average loans) reached 5.5% in 2Q14 compared to 5.4% in 1Q14 and 5.8% in 2Q13. On a QoQ basis, client margins increased 10 basis points. This was mainly due to a proactive rise in spreads in various segments, the improvements in the Bank’s funding structure (See Deposits) and the fall in short-term interest rates that has also lowered funding costs, since deposits have a shorter duration than loans.

 

 

8 Client net interest income is net interest income from all client activities such as loans and deposits minus the internal transfer rate. Non-client interest income is net interest income from Bank’s inflation gap, the financial cost of hedging, the financial cost of the Bank’s structural liquidity position, net interest income from treasury positions and the interest expense of the Bank’s financial investments classified as trading, since interest income from this portfolio is recognized as financial transactions net.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

12
 

 

 

The lower client margins compared to 2Q13 was mainly due to: (i) higher loan growth in upper income individuals compared to a decrease in loans in the low-income consumer segment, which being riskier, has a higher spread and (ii) the new maximum rate regulations, which lowered client margins in the low end of consumer lending. This has been partially offset by the reduction in provision expense.

 

A central point of our current strategy is to achieve a higher NIM, net of provision expenses. In 2Q14, the Bank’s NIM, net of provisions reached 4.5% compared to 4.0% in 1Q14 and 3.1% in 2Q13.

 

NIM, net of provisions: net interest income net of provision expense divided by average interest earning assets

Client NIM: Client net interest income divided by average loans

 

Non-client net interest income. The Bank has more assets than liabilities linked to inflation and, as a result, margins have a positive sensitivity to variations in inflation. In 2Q14, the variation of the Unidad de Fomento (an inflation indexed currency unit), was 1.76% compared to 1.28% in 1Q14 and (0.07%) in 2Q13. The gap between assets and liabilities indexed to the UF averaged approximately Ch$4.2 trillion (US$7.6 billion) in 2Q14. This signifies that for every 100 basis point change in UF inflation, our Net interest income increases or decrease by Ch$42 billion, all other factors being equal. This gap is produced by the Bank’s lending activities in UFs and funding activities in nominal pesos.

 

In the remainder of 2014, the evolution of margins should reflect various factors. The Bank will continue to change the mix and focus on margins, net of provisions. In addition, we expect UF inflation to remain at levels of 0.5-0.7% per quarter on average in the second half. In addition, the Central Bank should continue reducing interest rates, which should help support NIMs as our interest bearing liabilities tend to re-price quicker than our interest earning assets. The maximum rate regulation may also continue affecting margins. It should take between 20-26 months for the maximum rate to reach the 35%-38% level. The Bank estimates that in 2014 the new rates could lower our net interest margin by 10-15 basis points, all else being equal.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

13
 

 

 

PROVISION FOR LOAN LOSSES AND ASSET QUALITY

 

Provision for loan losses  Quarter   Change % 
(Ch$ million)  2Q14   1Q14   2Q13   2Q14 / 2Q13   2Q14 / 1Q14 
Gross provisions   (54,069)   (53,731)   (51,159)   5.7%   0.6%
Charge-offs1   (44,377)   (41,924)   (49,853)   (11.0)%   5.8%
Gross provisions and charge-offs   (98,446)   (95,655)   (101,012)   (2.5)%   2.9%
Loan loss recoveries   14,410    14,421    14,357    0.4%   (0.1)%
Net provisions for loan losses   (84,036)   (81,234)   (86,655)   (3.0)%   3.4%
Total loans2   21,784,284    21,455,870    19,772,361    10.2%   1.5%
Total reserves (RLL)   642,633    626,452    564,994    13.7%   2.6%
Non-performing loans3(NPLs)   628,124    585,477    618,917    1.5%   7.3%
NPLs commercial loans   376,714    362,043    369,280    2.0%   4.1%
NPLs residential mortgage loans   163,908    139,997    162,589    0.8%   17.1%
NPLs consumer loans   87,502    83,437    87,048    0.5%   4.9%
Impaired loans4   1,537,089    1,487,982    1,384,462    11.0%   3.3%
Impaired consumer loans   358,661    349,350    343,412    4.4%   2.7%
Impaired residential mortgage loans   339,087    334,814    289,929    17.0%   1.3%
Impaired commercial loans   839,341    803,818    751,121    11.7%   4.4%
Cost of credit5   1.55%   1.53%   1.79%          
Risk index (RLL / total loans)6   2.9%   2.9%   2.9%          
NPL / Total loans   2.9%   2.7%   3.1%          
NPL / Commercial loans   3.2%   3.0%   3.3%          
NPL / Residential mortgage loans   2.7%   2.4%   3.0%          
NPL / Consumer loans   2.3%   2.3%   2.7%          
Impaired loans / total loans   7.1%   6.9%   7.0%          
Impaired consumer loan ratio   9.6%   9.5%   10.5%          
Impaired mortgage loan ratio   5.6%   5.7%   5.4%          
Impaired commercial loan ratio   7.0%   6.7%   6.7%          
Coverage of NPLs7   102.3%   107.0%   91.3%          
Coverage of NPLs ex-mortgage8   128.6%   130.6%   114.7%          
Coverage of commercial NPLs   85.5%   86.0%   72.4%          
Coverage of mortgage NPLs   28.0%   31.9%   25.5%          
Coverage of consumer NPLs   314.0%   324.2%   294.2%          
1.Charge-offs correspond to the direct charge-offs and are net of the reversal of provisions already established on charged-off loan
2.Excludes interbank loans.
3.NPLs: Non-performing loans: full balance of loans with one installment 90 days or more overdue.
4.Impaired loans include: (A) for loans individually evaluated for impairment, (i) the carrying amount of all loans to clients that are rated C1 through C6 and (ii) the carrying amount of loans to an individual client with a loan that is non-performing, regardless of category, excluding residential mortgage loans, if the past-due amount on the mortgage loan is less than 90 days; and (B) for loans collectively evaluated for impairment, (i) the carrying amount of total loans to a client, when a loan to that client is non-performing or has been renegotiated, excluding performing residential mortgage loans, and (ii) if the loan that is non-performing or renegotiated is a residential mortgage loan, all loans to that client.
5.Cost of credit: Quarterly provision expense annualized divided by average loans.
6.Risk Index: Loan loss allowances / Total loans; measures the percentage of loans the banks must provision for given their internal models and the Superintendence of Banks guidelines.
7.Loan loss allowances / NPLs.
8.Loan loss allowance of commercial + consumer loans divided by NPLs of commercial and consumer loans.

 

Net provision for loan losses increased 3.4% QoQ and decreased 3.0% YoY in 2Q14. The Cost of credit (Provision expenses annualized divided by total loans) reached 1.55% in 2Q14 compared to 1.53% in 1Q14 and 1.79% in 2Q13. The QoQ rise in provision expense was mainly due to higher charge-offs of commercial loans in the SME segment. Compared to 2Q13, the fall in provision expense is mainly due to the improvements in asset quality in consumer lending.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

14
 

 

 

By product, the evolution of Net provision expense was as following:

 

Provision for loan losses  Quarter   Change % 
(Ch$ million)  2Q14   1Q14   2Q13   2Q14 /
2Q13		   2Q14 /
1Q14		 
Commercial loans   (39,144)   (35,104)   (30,530)   28.2%   11.5%
Residential mortgage loans   (3,082)   (2,728)   (9,026)   (65.9)%   13.0%
Consumer loans   (41,810)   (43,402)   (47,099)   (11.2)%   (3.7)%
Net provisions for loan losses   (84,036)   (81,234)   (86,655)   (3.0)%   3.4%

 

Net provisions in consumer loans, which represented half of total provision expense, decreased 3.7% QoQ and 11.2% YoY. Direct charge-offs of consumer loans decreased 32.0% YoY and totaled Ch$21,875 million. As mentioned in previous earnings reports, the decline in net provision expenses in consumer loans was mainly due to: (i) focusing loan growth in the higher-end of the consumer market, (ii) tightening admissions policies, (iii) revamping of the collections process, and (iv) growing via pre-approved loans, which have a better credit risk profile.

 

The results of these efforts can be observed in the evolution of impaired consumer loans (consumer NPLs + renegotiated consumer loans). The ratio of impaired consumer loans to total consumer loans reached 9.6% as of June 2014 compared to 9.5% as of March 2014 and 10.5% as of June 2013. The Consumer Non-performing loan (NPLs) ratio remained stable at 2.3% in 2Q14 compared to 1Q14 and improved from 2.7% in 2Q13. We expect the consumer NPL ratio to begin to bottom out going forward due to the increase in consumer loan growth, but to remain below the levels reached in 2011 and 2012 given the improvements in admission policies and the changes in the segments we focus on.

 

Net provisions in residential mortgage loans increased 13.0% QoQ and decreased 65.9% YoY in the quarter. The Mortgage NPL ratio reached 2.7% in 2Q14 compared to 2.4% in 1Q14 and 3.0% in 2Q13. The NPL ratio in mortgage lending has remained relatively stable for an extended period, as can be observed in the adjacent graph. Growth in this product has been centered on mortgages with loan-to-value ratios below 80%. The QoQ rise in mortgage NPLs is mainly due to the Bank’s stricter stance on renegotiating overdue mortgage loans and not a deterioration of asset quality in this product. As a result, the evolution of the impaired mortgage loans ratio improved from 5.7% 1Q14 to 5.6% in 2Q14. The impaired mortgage loan ratio is a broader measure of asset quality and mainly includes non-performing or renegotiated residential mortgage loans.

 

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

15
 

 

 

Provision expense in commercial loans increased 11.5% QoQ and 28.2% YoY. The increase in net provision expense in commercial loans was mainly due to: (i) stronger loan growth that led to higher loan loss provisions as the Bank’s internal provisioning models recognize provisions when a loan is granted, and (ii) higher provision expense in the SME segment due to a slight deterioration in asset quality, as economic growth decelerated in the quarter. The Bank has proactively lowered growth in the SME segment and is focusing loan growth in the Corporate and Middle-market segment in which risks are lower, margins are rising and funding is improving. The Bank is also stressing growth among SME clients backed by strong levels of collateral (including state guarantees) and clients with a high level of cash management and transactional business opportunities, which generate higher levels of revenue for the Bank with lower risk. The Commercial NPL ratio rose to 3.2% in 2Q14 compared to 3.0% in 1Q14, but was stable YoY.

 

The Bank’s total NPLs ratio reached 2.9% in 2Q14 compared to 2.7% in 1Q14 and 3.1% in 2Q13. Total Coverage of NPLs in 2Q14 reached 102.3%.

 

NET FEE INCOME

 

The growth of the client base continues to improve and fees begin to bottom out

 

Fee Income  Quarter   Change % 
(Ch$ million)  2Q14   1Q14   2Q13   2Q14 /
2Q13		   2Q14 /
1Q14		 
Credit, debit & ATM card fees   11,335    10,060    9,777    15.9%   12.7%
Collection fees   8,568    10,305    11,471    (25.3)%   (16.9)%
Insurance brokerage   8,530    8,117    8,081    5.6%   5.1%
Asset management   7,618    6,506    8,540    (10.8)%   17.1%
Guarantees, pledges and other contingent operations   7,596    7,941    7,624    (0.4)%   (4.3)%
Checking accounts   7,219    7,106    6,948    3.9%   1.6%
Fees from brokerage and custody of securities   1,809    2,016    1,647    9.8%   (10.3)%
Lines of credit   1,748    1,722    1,728    1.2%   1.5%
Other Fees   1,392    1,991    2,328    (40.2)%   (30.1)%
Total fees   55,815    55,764    58,144    (4.0)%   0.1%

 

Net fee income increased 0.1% QoQ and decreased 4.0% YoY. The YoY decline was mainly due to various changes in regulations that affected the Bank in 2013 and the sale of our asset management business, which implied recognizing approximately 75% of earned management fees compared to 100% before.

 

Compared to 1Q14, fee income in credit, debit and ATM card fees showed an important recovery, as product usage continued to rise. Asset management fees increased 17.1% QoQ as the Bank significantly increased the distribution and brokerage of mutual funds. Insurance brokerage fees also increased with the sale of more insurance products. This was offset by the 16.9% QoQ decrease in collection fees and the 10.3% fall in brokerage fees. In the quarter, this fee item was negatively affected by new regulations that set new terms for the reimbursements of insurance premiums for pre-paid mortgage loans. The weaker equity markets in 2Q14 also lowered equity brokerage fees.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

16
 

 

 

The client base continues to expand. The client’s entering the Bank are also of a better risk-return profile given the effectiveness of the CRM at pre-approving clients and cross-selling them more rapidly. In 2Q14, the Bank also renewed its co-branding agreement with Chile’s main airline, LAN, until August 2020, which benefits more than 600,000 credit card holders. Once again, our partnership with LAN reflects the strength of our distribution capabilities. Each day Santander Chile fills up the equivalent of 3 Boeing 767s by redeeming miles obtained through credit card purchases.

 

As of June 2014, the Bank had 3.5 million clients which increased 5.0% compared to June 2013, despite the on-going reduction of the client base in the lower end of the consumer market. As the year progresses, we expect this to gradually improve the results from fee income. Our Select client segment has grown more than 9% in the same period.

 

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

17
 

 

 

NET RESULTS FROM FINANCIAL TRANSACTIONS

 

Lower demand for client treasury services in the quarter

 

Financial Transactions*  Quarter   Change % 
(Ch$ million)  2Q14   1Q14   2Q13   2Q14 /
2Q13		   2Q14 /
1Q14		 
Net profit (loss) from financial operations   (103,583)   29,542    15,039    (788.8)%   (450.6)%
Net foreign exchange gain   133,645    3,430    18,214    633.7%   3796.4%
Net results from financial transactions   30,062    32,972    33,253    (9.6)%   (8.8)%

* These results mainly include the realized gains of the Available for sale investment portfolio, realized and unrealized gains of Financial investments held for trading, the interest revenue generated by the Held for trading portfolio, gains or losses from the sale of charged-off loans and the mark-to-market of derivatives. The results recorded as Foreign exchange profits (loss), net mainly includes the translation gains or losses of assets and a liability denominated in foreign currency.

 

Net results from financial transactions totaled a gain of Ch$30,062 million in 2Q14, decreasing compared to 2Q13 and 1Q14. In order to understand more clearly these line items, we present them by business area in the table below.

 

Financial Transactions  Quarter   Change % 
(Ch$ million)  2Q14   1Q14   2Q13   2Q14 /
2Q13		   2Q14 /
1Q14		 
Santander Global Connect9   12,192    11,852    10,965    11.2%   2.9%
Market-making   9,690    12,843    10,107    (4.1)%   (24.6)%
Client treasury services   21,882    24,695    21,071    3.8%   (11.4)%
Non-client treasury income   8,180    8,277    12,182    (32.8)%   (1.2)%
Net results from financial transactions   30,062    32,972    33,253    (9.6)%   (8.8)%

 

In the quarter, the exchange rate was less volatile than in 1Q14, lowering demand for hedging on behalf of our corporate and middle-market clients. This explains the 11.4% QoQ decrease in income from Client treasury services, which represented 73% of total financial transaction income. Non-client treasury income totaled Ch$8,180 million in 2Q14, a similar level compared to 1Q14. In the current quarter, the Bank recognized Ch$5 billion from the sale of charged-off loans. In 1Q14, the Bank recorded a gain of approximately Ch$5 billion from tendering some of our outstanding bonds.

 

 

9. Santander Global Connect is the Bank’s commercial platform for selling treasury products to our clients.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

18
 

 

 

OPERATING EXPENSES AND EFFICIENCY

 

Efficiency ratio reaches 36.4% in 2Q14

 

Operating Expenses  Quarter   Change % 
(Ch$ million)  2Q14   1Q14   2Q13   2Q14 /
2Q13		   2Q14 /
1Q14		 
Personnel expenses   (86,849)   (74,667)   (79,794)   8.8%   16.3%
Administrative expenses   (51,482)   (49,427)   (46,762)   10.1%   4.2%
Depreciation, amortization and impairment   (15,134)   (13,480)   (15,407)   (1.8)%   12.3%
Operating expenses   (153,465)   (137,574)   (141,963)   8.1%   11.6%
Branches   479    484    485    (1.2)%   (1.0)%
Traditional   273    273    269    1.5%   0.0%
Middle-market centers   3    3    -    —%   0.0%
Select   44    44    44    0.0%   0.0%
Banefe   74    74    77    -3.9%   0.0%
Payment centers  & others   85    90    95    -10.5%   -5.6%
ATMS   1,753    1,860    1,972    (11.1)%   (5.8)%
Employees   11,381    11,455    11,558    (1.5)%   (0.6)%
Efficiency ratio1   36.4%   35.6%   42.5%          
1.Operating expenses / Operating income. Operating income = Net interest income + Net fee income+ Net results from Financial transactions + Other operating income and expenses.

 

Operating expenses in 2Q14 totaled Ch$153,465 million. The efficiency ratio reached 36.4% in 2Q14 compared to 42.5% in 2Q13. Productivity continues to rise as usage of complementary channels such Internet, phone banking, POS and Automatic bill payments continues to increase with minimal variations in personnel and the branch network.

 

The 11.6% QoQ rise in expenses was mainly due to: (i) seasonal factors and (ii) the effects of a higher inflation rate over personnel expenses. Personnel expenses are at a seasonal low in the first quarter each year as an important percentage of employees take their paid vacations. The vacation accrual, which had been provisioned over the rest of the year, is utilized in the first quarter and, therefore, when an employee takes their vacation, rather than debiting personnel expenses for ongoing remuneration, the provision is utilized. As a result, personnel expenses are generally lower in the first quarter. Additionally, in April of each year, the Bank’s readjusts salaries for yearly CPI inflation, which was 4.3%.

 

On a YoY basis, operating expenses increased 8.1%. Personnel expenses increased 8.8% YoY. This rise was mainly due to the higher CPI adjustment in salaries mentioned above and an increase in variable incentives due to the positive operating results recorded by the Bank’s business segments. Headcount fell 0.6% QoQ and 1.5% YoY to 11,381 people.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

19
 

 

 

The 10.1% YoY increase in Administrative expenses was mainly due to: (i) greater business activity that has resulted in higher system and data processing costs and (ii) the effects of a higher inflation rate over costs indexed to inflation like rent expenses. At the same time, the Bank closed 5 payment centers (SuperCaja) as part of the on-going process of seeking greater efficiencies in the brick & mortar distribution network. The Bank also continued to optimize the ATM network in order to adjust to new security procedures and to remove unprofitable machines. The Bank remains focused on growing through complementary channels such as internet, phone and mobile banking.

 

The 1.8% YoY decrease in depreciation and amortization was mainly due to lower amortization of intangibles compared to 2013, as we completed various technological upgrades as part of the Transformation Project last year and accelerated their amortization. Going forward, depreciation and amortization expenses should rise as the Bank commences a second wave of accelerated amortization of software. The Bank has an internal policy of to amortize software developments in 3 years.

 

OTHER INCOME AND EXPENSES

 

Other Income and Expenses  Quarter   Change % 
(Ch$ million)  2Q14   1Q14   2Q13   2Q14 /
 2Q13		   2Q14 / 
1Q14		 
Other operating income   3,485    5,510    7,188    (51.5)%   (36.8)%
Other operating expenses   (16,067)   (20,879)   (12,871)   24.8%   (23.0)%
Other operating income, net   (12,582)   (15,369)   (5,683)   121.4%   (18.1)%
Income from investments in associates and other companies   552    287    667    (17.2)%   92.3%
Income tax expense   (25,079)   (26,152)   (20,293)   23.6%   (4.1)%
Income tax rate   13.6%   15.5%   19.1%          

 

Other operating income, net, totaled a loss of Ch$12,582 million in 2Q14 compared to Ch$5,683 million in 2Q13. This higher net loss was mainly due to higher provisions for non-credit contingencies.

 

Income tax expense

 

The effective Income tax rate in 2Q14 was 13.6% compared to the statutory tax rate of 20%. For tax purposes, companies in Chile must still record the impacts of price level restatement, which usually generates a tax loss as the Bank has a large capital base, especially in periods of higher inflation.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

20
 

 

 

Below is a summary of our year-to-date income tax expense and rate.

 

YTD tax expenses
summarized3
(Ch$ million)

   6M14   6M13   Var. (%) 
Net income before taxes   352,724    202,112    74.5%
Price level restatement of capital1   (96,157)   (17,280)   456.5%
Net income before taxes adjusted for price level restatement   256,567    184,832    38.8%
Statutory Tax rate   20.0%   20.0%   0.0%
Income tax expense at statutory rate   (51,313)   (36,966)   38.8%
Tax benefits2   82    2,436    (96.6)%
Income tax   (51,231)   (34,530)   48.4%
Adjusted Effective tax rate   14.5%   17.1%     
1.For tax purposes, Capital is re-adjusted by CPI inflation.
2.Includes mainly tax credits from property taxes paid on leased assets.
3.This table is for information purposes only, please refer to note 13c in our financials for more detail regarding our income tax expense.

 

In the second half of 2014, the Bank should be paying an effective tax rate of approximately 14-18%, subject to further changes in the statutory corporate tax rate.

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

21
 

 

 

SECTION 4: CREDIT RISK RATINGS

 

International ratings

 

The Bank has credit ratings from three leading international agencies. All ratings have outlook stable.

 

Moody’s    Rating
Foreign currency bank deposits   Aa3
Senior bonds   Aa3
Subordinated debt   A3
Bank Deposits in Local Currency   Aa3
Bank financial strength   C+
Short-term deposits   P-1

 

Standard and Poor’s   Rating
Long-term Foreign Issuer Credit   A
Long-term Local Issuer Credit   A
Short-term Foreign Issuer Credit   A-1
Short-term Local Issuer Credit   A-1

 

Fitch   Rating
Foreign Currency Long-term Debt   A+
Local Currency Long-term Debt   A+
Foreign Currency Short-term Debt   F1
Local Currency Short-term Debt   F1
Viability rating   a+

 

Local ratings:

Our local ratings, the highest in Chile, are the following:

 

Local ratings   Fitch
Ratings		   Feller
Rate
Shares   1CN1   1CN1
Short-term deposits   N1+   N1+
Long-term deposits   AAA   AAA
Mortgage finance bonds   AAA   AAA
Senior bonds   AAA   AAA
Subordinated bonds   AA   AA+

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

22
 

 

 

SECTION 5: SHARE PERFORMANCE

As of June 30, 2014

 

Ownership Structure:

 

 

ADR Price Evolution

Santander ADR vs. SP500

 (Base 100 = 12/31/2013)

 

 

ADR price (US$) 6M14

06/30/14:   26.45 
Maximum (6M14):   26.85 
Minimum (6M14):   19.34 

 

Market Capitalization: US$12,461 million

 

P/E 12 month trailing*:   13.8 
P/BV (06/30/14)**:   2.9 
Dividend yield***:   4.1%

 

*   Price as of June 30, 2014 / 12mth. earnings

**  Price as of June 30, 2014 / Book value as of 06/30/14

***Based on closing price on record date of last dividend payment.

 

Average daily traded volumes 6M14

US$ million

 

 

Local Share Price Evolution

Santander vs IPSA Index

(Base 100 = 12/31/2013)

 

 

Local share price (Ch$) 6M14

06/30/14:   36.49 
Maximum (6M14):   37.21 
Minimum (6M14):   26.81 

 

Dividends:

Year paid  Ch$/share   % of previous year’s
earnings		 
2011:   1.52    60%
2012:   1.39    60%
2013:   1.24    60%
2014:   1.41    60%

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

23
 

 

 

ANNEX 1: BALANCE SHEET

Unaudited Balance Sheet  Jun-14   Jun-14     Dec. 13   June 14 / Dec. 13 
Assets  US$ths   Ch$ million   % Chg. 
                     
Cash and deposits in banks   1,943,554    1,074,727    1,571,810    (31.6)%
Cash items in process of collection   1,219,015    674,079    604,077    11.6%
Trading investments   1,161,157    642,085    287,567    123.3%
Investments under resale agreements   -    -    17,469    —%
Financial derivative contracts   3,427,951    1,895,554    1,494,018    26.9%
Interbank loans, net   176,798    97,764    125,395    (22.0)%
Loans, and accounts receivables from customer, net   38,232,908    21,141,651    20,327,021    4.0%
Available for sale investments   2,400,134    1,327,202    1,700,993    (22.0)%
Held to maturity investments   -    -    -    — %
Investments in associates and other companies   30,076    16,631    9,681    71.8%
Intangible assets   107,525    59,458    66,703    (10.9)%
Property, plant and equipment   324,821    179,616    180,215    (0.3)%
Current taxes   41,490    22,943    1,643    1296.4%
Deferred taxes   353,990    195,746    230,215    (15.0)%
Other assets   566,861    313,457    400,025    (21.6)%
Total Assets   49,986,280    27,640,913    27,016,832    2.3%

 

   Jun-14   Jun-14   Dec. 13   June 14 / Dec. 13 
Liabilities  US$ths   Ch$ million   % Chg. 
Deposits and other demand liabilities   10,243,883    5,664,560    5,620,763    0.8%
Cash items in process of being cleared   739,959    409,175    276,379    48.0%
Obligations under repurchase agreements   246,952    136,557    208,972    (34.7)%
Time deposits and other time liabilities   16,837,552    9,310,661    9,675,272    (3.8)%
Financial derivatives contracts   3,195,741    1,767,149    1,300,109    35.9%
Interbank borrowing   3,119,912    1,725,218    1,682,377    2.5%
Issued debit instruments   9,930,192    5,491,098    5,198,658    5.6%
Other financial liabilities   343,476    189,932    189,781    0.1%
Current taxes   -    -    50,242    (100.0)%
Deferred taxes   36,248    20,044    25,088    (20.1)%
Provisions   352,301    194,812    236,232    (17.5)%
Other liabilities   517,751    286,301    198,777    44.0%
Total Liabilities   45,563,967    25,195,507    24,662,650    2.2%
                     
Equity                    
Capital   1,611,847    891,303    891,303    0.0%
Reserves   2,364,976    1,307,761    1,130,991    15.6%
Valuations adjustments   12,270    6,785    (5,964)   (213.8)%
Retained Earnings:   381,614    211,021    309,348    (31.8)%
Retained earnings from prior years   -    -    -    —%
Income for the period   545,165    301,459    441,926    (31.8)%
Minus: Provision for mandatory dividends   (163,550)   (90,438)   (132,578)   (31.8)%
Total Shareholders' Equity   4,370,707    2,416,870    2,325,678    3.9%
Non-controlling interest   51,605    28,536    28,504    0.1%
Total Equity   4,422,312    2,445,406    2,354,182    3.9%
Total Liabilities and Equity   49,986,280    27,640,913    27,016,832    2.3%

 

The exchange rate used to calculate the figures in dollars was Ch$552.97 / US$1

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

24
 

 

 

ANNEX 2: YTD INCOME STATEMENT

  

YTD Income Statement Unaudited  Jun-14   Jun-14   Jun-13   June 14 / Dec. 13 
   US$ths.   Ch$ million   % Chg. 
Interest income   2,047,303    1,132,097    839,468    34.9%
Interest expense   (850,977)   (470,565)   (344,320)   36.7%
Net interest income   1,196,326    661,532    495,148    33.6%
Fee and commission income   324,497    179,437    173,536    3.4%
Fee and commission expense   (122,716)   (67,858)   (54,771)   23.9%
Net fee and commission income   201,781    111,579    118,765    (6.1)%
Net profit (loss) from financial operations   (133,897)   (74,041)   (1,834)   3937.1%
Net Foreign exchange gain   247,889    137,075    57,349    139.0%
Total financial transactions, net   113,992    63,034    55,515    13.5%
Other operating income   16,267    8,995    11,757    (23.5)%
Net operating profit before provisions for loan losses   1,528,366    845,140    681,185    24.1%
Provision for loan losses   (298,877)   (165,270)   (179,513)   (7.9)%
Net operating profit   1,229,489    679,870    501,672    35.5%
Personnel salaries and expenses   (292,088)   (161,516)   (151,327)   6.7%
Administrative expenses   (182,485)   (100,909)   (92,622)   8.9%
Depreciation and amortization   (51,694)   (28,585)   (30,914)   (7.5)%
Impairment   (52)   (29)   (173)   (83.2)%
Operating expenses   (526,319)   (291,039)   (275,036)   5.8%
Other operating expenses   (66,814)   (36,946)   (25,673)   43.9%
Total operating expenses   (593,133)   (327,985)   (300,709)   9.1%
Operating income   636,356    351,885    200,963    75.1%
Income from investments in associates and other companies   1,517    839    1,149    (27.0)%
Income before taxes   637,873    352,724    202,112    74.5%
Income tax expense   (92,647)   (51,231)   (34,530)   48.4%
Net income   545,226    301,493    167,582    79.9%
Net income discontinued operations   -    -    -    —%
Net income attributable to:                    
Non-controlling interest   61    34    811    (95.8)%
Net income attributable to shareholders   545,165    301,459    166,771    80.8%

  

The exchange rate used to calculate the figures in dollars was Ch$552.97 / US$1

  

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

 

25
 

 

 

ANNEX 3: QUARTERLY INCOME STATEMENTS

 

Unaudited Quarterly Income Statement  2Q14   2Q14   1Q14   2Q13   2Q14 / 2Q13   2Q14 / 1Q14 
   US$ths   Ch$mn   % Chg. 
             
Interest income   1,069,118    591,190    540,907    413,671    42.9%   9.3%
Interest expense   (439,718)   (243,151)   (227,414)   (165,004)   47.4%   6.9%
Net interest income   629,400    348,039    313,493    248,667    40.0%   11.0%
Fee and commission income   160,508    88,756    90,681    85,996    3.2%   (2.1)%
Fee and commission expense   (59,571)   (32,941)   (34,917)   (27,852)   18.3%   (5.7)%
Net fee and commission income   100,937    55,815    55,764    58,144    (4.0)%   0.1%
Net profit (loss) from financial operations   (187,321)   (103,583)   29,542    15,039    -%   -%
Net Foreign exchange gain   241,686    133,645    3,430    18,214    633.7%   3796.4%
Total financial transactions, net   54,365    30,062    32,972    33,253    (9.6)%   (8.8)%
Other operating income   6,302    3,485    5,510    7,188    (51.5)%   (36.8)%
Net operating profit before provisions for loan losses   791,004    437,401    407,739    347,252    26.0%   7.3%
Provision for loan losses   (151,972)   (84,036)   (81,234)   (86,655)   (3.0)%   3.4%
Net operating profit   639,032    353,365    326,505    260,597    35.6%   8.2%
Personnel salaries and expenses   (157,059)   (86,849)   (74,667)   (79,794)   8.8%   16.3%
Administrative expenses   (93,101)   (51,482)   (49,427)   (46,762)   10.1%   4.2%
Depreciation and amortization   (27,340)   (15,118)   (13,467)   (15,261)   (0.9)%   12.3%
Impairment   (29)   (16)   (13)   (146)   (89.0)%   23.1%
Operating expenses   (277,529)   (153,465)   (137,574)   (141,963)   8.1%   11.6%
Other operating expenses   (29,056)   (16,067)   (20,879)   (12,871)   24.8%   (23.0)%
Total operating expenses   (306,585)   (169,532)   (158,453)   (154,834)   9.5%   7.0%
Operating income   332,447    183,833    168,052    105,763    73.8%   9.4%
Income from investments in associates and other companies   998    552    287    667    (17.2)%   92.3%
Income before taxes   333,445    184,385    168,339    106,430    73.2%   9.5%
Income tax expense   (45,353)   (25,079)   (26,152)   (20,293)   23.6%   (4.1)%
Net income   288,092    159,306    142,187    86,137    84.9%   12.0%
Net income discontinued operations   -    -    -    -           
Net income attributable to:                              
Non-controlling interest   (561)   (310)   344    245    (226.5)%   (190.1)%
Net income attributable to shareholders   288,653    159,616    141,843    85,892    85.8%   12.5%

 

The exchange rate used to calculate the figures in dollars was Ch$552.97 / US$1

  

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

26
 

 

 

 ANNEX 4: QUARTERLY EVOLUTION OF MAIN RATIOS AND OTHER INFORMATION

  

   Jun-13   Sep-13   Dec-13   Mar-14   Jun-14 
(Ch$ millions)                    
Loans                         
Consumer loans   3,266,648    3,423,558    3,607,248    3,696,198    3,736,553 
Residential mortgage loans   5,355,978    5,465,600    5,625,810    5,841,152    6,095,929 
Commercial loans   11,149,735    11,434,106    11,702,254    11,918,520    11,951,802 
Total loans   19,772,361    20,323,264    20,935,312    21,455,870    21,784,284 
Allowance for loan losses   (564,994)   (586,416)   (608,291)   (626,452)   (642,633)
Total loans, net of allowances   19,207,367    19,736,848    20,327,021    20,829,418    21,141,651 
                          
Deposits                         
Demand deposits   5,188,708    5,257,128    5,620,763    5,610,373    5,664,560 
Time deposits   9,426,328    9,690,368    9,675,272    9,640,601    9,310,661 
Total deposits   14,615,036    14,947,496    15,296,035    15,250,974    14,975,221 
Loans / Deposits1   98.6%   99.4%   100.1%   102.4%   104.8%
                          
Average balances                         
Avg. interest earning assets   21,215,426    21,799,669    22,470,077    23,121,712    23,226,246 
Avg. loans   19,384,881    20,047,191    20,599,268    21,241,689    21,661,513 
Avg. assets   25,564,757    26,112,158    26,643,136    27,884,085    27,989,256 
Avg. demand deposits   5,224,278    5,173,559    5,300,996    5,542,214    5,767,539 
Avg equity   2,141,449    2,175,459    2,263,385    2,376,656    2,391,833 
Avg. free funds   7,365,726    7,349,018    7,564,381    7,918,870    8,159,372 
                          
Capitalization                         
Risk weighted assets   20,959,977    21,334,180    21,948,982    22,649,033    22,634,232 
Tier I (Shareholders' equity)   2,136,835    2,213,114    2,325,678    2,424,863    2,416,870 
Tier II   561,047    564,191    708,063    715,010    726,457 
Regulatory capital   2,697,882    2,777,305    3,033,741    3,139,873    3,143,327 
Tier I ratio   10.2%   10.4%   10.6%   10.7%   10.7%
BIS ratio   12.9%   13.0%   13.8%   13.9%   13.9%
                          
Profitability & Efficiency                         
Net interest margin   4.7%   5.3%   5.2%   5.4%   6.0%
Efficiency ratio2   42.5%   39.8%   38.2%   35.6%   36.4%
Avg. Free funds / interest earning assets   34.7%   33.7%   33.7%   34.2%   35.1%
Return on avg. equity   16.0%   18.6%   30.7%   23.9%   26.7%
Return on avg. assets   1.3%   1.5%   2.6%   2.0%   2.3%

  

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

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   Jun-13   Sep-13   Dec-13   Mar-14   Jun-14 
Asset quality                         
Impaired loans                         
Non-performing loans (NPLs)3   618,917    618,419    613,301    585,477    628,124 
Past due loans4   371,136    369,208    356,203    354,195    384,998 
Loan loss reserves5   564,994    586,416    608,291    626,452    642,633 
NPLs / total loans   3.13%   3.04%   2.93%   2.73%   2.88%
PDL / total loans   1.88%   1.82%   1.70%   1.65%   1.77%
Coverage of NPLs (Loan loss allowance / NPLs)   91.3%   94.8%   99.2%   107.0%   102.3%
Coverage of PDLs (Loan loss allowance / PDLs)   152.2%   158.8%   170.8%   176.9%   166.9%
Risk index (Loan loss allowances / Loans)5   2.86%   2.89%   2.91%   2.92%   2.95%
Cost of credit (prov expense annualized / avg. loans)   1.79%   1.93%   1.71%   1.53%   1.55%
                          
Network                         
Branches   485    488    493    484    479 
ATMs   1,972    1,915    1,860    1,860    1,753 
Employees   11,558    11,626    11,516    11,455    11,381 
                          
Market information (period-end)                         
Net income per share (Ch$)   0.46    0.54    0.92    0.75    0.85 
Net income per ADR (US$)   0.36    0.43    0.71    0.55    0.62 
Stock price   31.25    32.94    30.46    32.1    36.49 
ADR price   24.45    26.29    23.57    23.44    26.45 
Market capitalization (US$mn)   11,519    12,386    11,104    11,043    12,461 
Shares outstanding   188,446.1    188,446.1    188,446.1    188,446.1    188,446.1 
ADRs (1 ADR = 400 shares)6   471.1    471.1    471.1    471.1    471.1 
                          
Other Data                         
Quarterly inflation rate7   (0.07)%   1.04%   0.95%   1.28%   1.76%
Central Bank monetary policy reference rate (nominal)   5.00%   5.00%   4.50%   4.00%   4.00%
Avg. 10 year Central Bank yield (real)   2.38%   2.25%   2.17%   2.04%   1.86%
Avg. 10 year Central Bank yield (nominal)   5.21%   5.27%   5.04%   4.91%   4.84%
Observed Exchange rate (Ch$/US$) (period-end)   503.86    502.97    523.76    550.53    550.60 

 

1 Ratio = Loans - mortgage loans / Time deposits + demand deposits

2 Efficiency ratio =(Net interest revenue+ fee income +financial transactions net + Other operating income +other operating expenses)

Divided by (Personnel expenses + admiinistrative expenses + depreciation)

3 Capital + future interest of all loans with one installment 90 days or more overdue.

4 Total installments plus lines of credit more than 90 days overdue

5 Based on internal credit models and SBIF guidelines. Banks must have a 100% coverage of risk index

6 The rato of ADRs per local shares was modified in Oct. 2012

7 Calculated using the variation of the Unidad de Fomento (UF) in the period

 

Investor Relations Department

Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,

email: rmorenoh@santander.cl

 

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