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

  

 

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: August 3, 2016

 

 

 

Exhibit 99.1

 

 

  

INDEX

 

SECTION		PAGE
SECTION 1: SUMMARY OF RESULTS		2
SECTION 2: YTD RESULTS BY REPORTING SEGMENT		6
SECTION 3: LOANS, DEPOSITS AND CAPITAL		7
SECTION 4: ANALYSIS OF QUARTERLY INCOME STATEMENT		11
SECTION 5: CREDIT RISK RATINGS		21
SECTION 6: SHARE PERFORMANCE		22
ANNEX 1: BALANCE SHEET		23
ANNEX 2: YTD INCOME STATEMENT		24
ANNEX 3: QUARTERLY INCOME STATEMENTS		25
ANNEX 4: QUARTERLY EVOLUTION OF MAIN RATIOS AND OTHER INFORMATION		26

 

CONTACT INFORMATION
Robert Moreno	Tel: (562) 2320-8284
Manager, Investor Relations Department	Email: robert.moreno@santander.cl
Banco Santander Chile	Website: www.santander.cl
Bombero Ossa 1068, Piso 8 Santiago, Chile

 

 

 

 

SECTION 1: SUMMARY OF RESULTS¹

 

Adjusted net income increased 6.0% YoY in 1H16, resulting in a ROE of 18.2%

 

In the first half of 2016 (1H16), net income attributable to equity holders, excluding a pre-tax one-time severance expense of Ch$10,789 million, totaled Ch$249,939 million (Ch$1.33 per share and US$0.80/ADR) and increased 6.0% compared to the first half of 2015 (1H15). The Bank’s adjusted ROE² reached 18.2% in 1H16, the same level achieved in 1H15. Including the extraordinary charge, net income totaled Ch$241,739 million (Ch$1.28/share and US$0.77/ADR) and the ROE was 17.7% in 1H16.

 

Healthy loan and deposit growth, greater customer loyalty and sound asset quality indicators were the driving forces that propelled our results in the first half. The net contribution from our business segments³ rose 11.1% YoY.

 

 

Adjusted ROE reached 18.3% in 2Q16

 

In the second quarter of 2016 (2Q16), Net income attributable to shareholders in 2Q16, excluding the extraordinary one-time severance expense already mentioned, totaled Ch$124,500 million (Ch$0.66/share and US$0.40/ADR). The Bank’s adjusted ROE reached 18.3% in the quarter. Reported net income was Ch$116,300 million (Ch$0.62 per share and US$0.37/ADR), decreasing 7.3% QoQ and 17.1% YoY. The reported ROE was 17.1% in the quarter.

 

1. The information contained in this report is unaudited and is presented in accordance with Chilean Bank GAAP as defined by the Superintendency of Banks of Chile (SBIF).

2. Return on Equity, ROE = Net income distributable to shareholders divided by average shareholders’ equity.

3. Net business segment contribution: Net interest income + Net fee and commission income + Financial transactions, net - Provision expense – Operating expenses from our reporting segments. These results exclude our Corporate Center and the results from Financial Management, which includes, among other items, the impact of the inflation on results.

 

 

 

 

Loans up 8.0% YoY. Growth focused in segments with the highest profitability, net of risk

 

Total loans increased 1.8% QoQ and 8.0% YoY in 2Q16. The Bank continued to focus loan growth on segments with the highest profitability, net of risk. Retail banking loans (loans to individuals and small and middle-sized enterprises, SMEs) increased 2.6% QoQ and 12.7% YoY. The Bank is still focusing on expanding its loan portfolio in middle and high-income individuals, but with a more balanced growth between consumer and mortgage loans to boost overall spreads. As a result, consumer loan growth accelerated to 2.4% QoQ, while Residential mortgage loans expanded 2.7% QoQ. Loans in the Middle-market expended 1.1% and 2.0% YoY as lower economic growth has slowed demand for loans in this segment. In our GCB unit, large corporate loans increased 6.8% QoQ but decreased 1.1% YoY. Loan growth in this segment is volatile due, in part, to large transactions that are not necessarily recurrent between one quarter and the next.

 

Total deposits increased 10.3% YoY in 2Q16

 

Total deposits increased 2.2% QoQ and 10.3% YoY. Non-interest bearing demand deposits increased 2.2% QoQ and 8.7% YoY. Notable was the rise in demand deposits in the GCB segment, which expanded 23.0% QoQ and 28.9% YoY. This high growth is a reflection of our strength in cash management services. Time deposits increased 2.2% QoQ and 11.3% YoY. This growth came from our retail customers, as well as wholesale deposits from institutional sources. The high liquidity in the local market is resulting in an ample supply of deposits, which has been beneficial for margins.

 

Core Capital ratio⁴ at 10.1% and BIS ratio of 13% in 2Q16 after payout of 75% of 2015 earnings

 

The Bank’s Core Capital ratio reached 10.1% and its BIS ratio was 13.0% as of June 30, 2016. The Bank paid its annual dividend in April, equivalent to 75% of 2015 earnings. This payout was temporarily increased from the 60% paid out in the previous year. Despite this increase in payout, the Bank’s core capital ratio increased 10bp YoY due to the Bank’s solid profitability levels and the control of Risk-weighted Asset (RWAs) growth.

 

Client net interest income up 6.3% in 2Q16. Client NIMs stable at 4.8%

 

In 2Q16, Net interest income, NII, increased 5.0% QoQ and decreased 1.0% YoY. The Net interest margin (NIM⁵) reached 4.6% compared to 4.5% in 1Q16 and 5.1% in 2Q15. The YoY decrease in NIM in the quarter was mainly due to the lower inflation rate in 2Q16 compared to 2Q15. In 2Q16, the variation of the Unidad de Fomento (an inflation indexed currency unit), was 0.9% compared to 0.7% in 1Q16 and 1.5% in 2Q15. The Bank has more assets than liabilities linked to inflation. Therefore, margins go up when inflation accelerates and vice-versa.

 

4. Core Capital ratio = Shareholders’ equity divided by Risk-weighted Assets according to SBIF BIS I definitions.

5. Net interest income, annualized, divided by average interest earning assets.

 

 

 

 

Client net interest income⁶, which is NII from our business segments and excludes the impact of inflation, increased 1.5% QoQ and 6.3% YoY, driven mainly by loan growth and a higher yielding loan mix. Client NIMs⁷ reached 4.8% in 2Q16 compared to 4.8% in 1Q16 and 4.9% in 2Q15. On a QoQ basis, the Bank’s client NIMs remained steady since loan spreads have been rising in the segments we are targeting. On a YoY basis, the 10bp decline in client margins was mainly due to the shift in the asset mix to less riskier segments, which is gradually improving asset quality.

 

Steady improvement of asset quality: NPLs down to 2.2%, Cost of credit at 1.3% in 2Q16

 

The Bank’s strategy of de-risking the asset mix continues to have a positive impact on asset quality. In 2Q16, the Non-performing loans (NPLs) ratio improved to 2.2% from 2.5% in 1Q16 and 2.7% in 2Q15. Total Impaired loans, a broader measure of asset quality that includes NPLs and renegotiated loans, improved 10 bp. QoQ to 6.3% and 40 bp. since the end of 2Q15. Total Coverage of NPLs in 2Q16 reached 140.5% compared to 122.5% in 1Q16 and 106.4% in 2Q15.

 

Provision for loan losses increased 7.1% QoQ and 2.3% YoY in 2Q16. The cost of credit in the quarter was 1.3% compared to 1.2% in 1Q16 and 1.4% in 2Q15. The QoQ rise in provision for loan losses was mainly due to higher provision expenses in consumer loans. As mentioned in previous earning reports, the Bank continues to push forward its strategy of lowering exposure to the low-end of the consumer loan market. This entails an active policy of charging-offs loans in this sub-segment and bolstering the coverage ratio. The Consumer loan NPL ratio improved to 20bp QoQ to 2.1%. The coverage ratio of non-performing consumer loans reached 306.7% as of June 30, 2016.

 

Fee income increases 9.6% YoY in 2Q16. Client loyalty continues to expand

 

Net fee and commission income increased 1.4% QoQ and 9.6% YoY in 2Q16. This rise in fees was in part due to greater product usage and customer loyalty and a recovery of fees in GCB. Loyal individual customers (clients with >4 products plus minimum usage and profitability levels) in the high-income segment grew 8.7% YoY. Among Middle-market and SME clients, total loyal customers grew 12.7% YoY. By products, the drivers of fee growth were mainly credit cards, debit cards, and checking accounts.

 

Cost control measures beginning to pay-off: operating expenses up 4% YoY in 2Q16

 

Operating expenses increased 4.0% YoY in 2Q16. This was the lowest quarterly YoY growth rate in the last seven quarters. The Bank has been implementing several measures to lower cost growth to mid-single digits by year-end 2016. Personnel salaries and expenses increased 5.1% YoY in 2Q16, also the lowest growth level in seven quarters. This has been achieved by reducing high-level management positions. Administrative expenses decreased 2.7% YoY. The Bank in the last 12 months has closed 10 branches and eliminated 120 ATMs. This has been replaced by an increase in transaction through more efficient channels, such as internet, mobile and phone banking. The effectiveness of the Bank’s CRM has also increased productivity.

 

6. Client net interest income: NII from the Bank’s reporting segments that includes NII from the Retail, Middle-market and GCB segments, excluding GCB’s Treasury division. Non-client NII: NII from Bank’s inflation gap, the financial cost of hedging, the financial cost of the Bank’s structural liquidity position, NII from treasury positions and the interest expense of the Bank’s financial investments classified as trading, since NII from this portfolio is recognized as Financial transactions net.

7. Client NII divided by average loans.

 

 

 

 

Banco Santander Chile: Summary of Quarterly Results

 

		Quarter												Change %
(Ch$ million)		2Q16				1Q16				2Q15				2Q16 / 2Q15				2Q16 / 1Q16
Net interest income			328,437				312,873				331,733				(1.0	)%			5.0	%
Net fee and commission income			63,872				62,991				58,274				9.6	%			1.4	%
Total financial transactions, net			27,860				34,262				30,331				(8.1	)%			(18.7	)%
Provision for loan losses			(83,436	)			(77,926	)			(81,592	)			2.3	%			7.1	%
Operating expenses (excluding Impairment and Other operating expenses)			(172,051	)			(166,006	)			(165,408	)			4.0	%			3.6	%
Impairment, Other operating income and expenses, net			(27,447	)			(11,023	)			(10,113	)			171.4	%			149.0	%
Operating income			137,235				155,171				163,225				(15.9	)%			(11.6	)%
Net income attributable to shareholders of the Bank			116,300				125,439				140,364				(17.1	)%			(7.3	)%
Net income/share (Ch$)			0.62				0.67				0.74				(17.1	)%			(7.3	)%
Net income/ADR (US$)1			0.37				0.39				0.47				(20.5	)%			(5.4	)%
Total loans			26,164,035				25,694,035				24,217,740				8.0	%			1.8	%
Deposits			20,236,094				19,802,170				18,342,082				10.3	%			2.2	%
Shareholders’ equity			2,704,685				2,821,692				2,577,776				4.9	%			(4.1	)%
Net interest margin			4.6	%			4.5	%			5.1	%
Efficiency ratio2			43.8	%			41.6	%			40.3	%
Return on equity3			17.1	%			18.1	%			21.8	%
NPL / Total loans4			2.2	%			2.5	%			2.7	%
Coverage NPLs			140.5	%			122.5	%			106.4	%
Cost of credit5			1.3	%			1.2	%			1.4	%
Core Capital ratio6			10.1	%			10.6	%			10.0	%
BIS ratio			13.0	%			13.5	%			12.9	%
Branches			468				470				478
ATMs			1,484				1,529				1,604
Employees			11,653				11,793				11,614

1.

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 (Exchange rate for the last trading day of the quarter taken from the Central Bank of Chile) for each period.

2.

Efficiency ratio: Operating expenses excluding impairment and other operating expenses divided by Operating income. Operating income = Net interest income + Net fee and commission income + Total financial transactions, net + Other operating income minus other operating expenses.

3.

Return on equity: annualized quarterly net income attributable to shareholders divided by Average equity attributable to shareholders in the quarter. Averages calculated using monthly figures.

4.

NPLs: Non-performing loans: total outstanding gross amount of loans with at least one installment 90 days or more overdue.

5.

Cost of credit: annualized provision for loan losses divided by quarterly average total loans. Averages calculated using monthly figures.

6.

Core Capital ratio = equity attributable to shareholders divided by risk weighted assets (in accordance with SBIF BIS I definitions).

 

 

 

SECTION 2: YTD RESULTS BY REPORTING SEGMENTS

 

Net contribution from business segments rises 11.1% YoY in 1H16

 

Year to date results		As of June 30, 2016, 2016
(Ch$ million)		Retail banking1				Middle- market2				Global corporate banking3				Total segments4
Net interest income			457,751				118,940				45,594				622,285
Change YoY			5.8	%			8.4	%			7.9	%			6.5	%
Fee income			99,305				15,522				12,553				127,380
Change YoY			9.4	%			14.1	%			71.7	%			14.0	%
Core revenues			557,056				134,462				58,147				749,665
Change YoY			6.4	%			9.1	%			17.3	%			7.7	%
Financial transactions, net			10,252				10,438				24,931				45,621
Change YoY			40.5	%			16.8	%			(14.1	)%			0.8	%
Provision expense			(159,545	)			(11,520	)			2,253				(168,812	)
Change YoY			11.2	%			(11.1	)%			—	%			7.4	%
Net operating profit5			407,763				133,380				85,331				626,474
Change YoY			5.3	%			11.8	%			9.5	%			7.2	%
Operating expenses6			(260,521	)			(40,804	)			(25,435	)			(326,760	)
Change YoY			2.2	%			12.4	%			9.4	%			3.9	%
Net contribution from business segment			147,242				92,576				59,896				299,714
Change YoY			11.4	%			11.6	%			9.6	%			11.1	%

1.

Retail consists of individuals and small entities (SMEs) with annual income less than Ch$2,000 million.

2.

Middle-market is made up of companies with annual sales exceeding Ch$2,000 million. It also serves institutions such as universities, government entities, local and regional governments and companies engaged in the real estate industry with annual sales exceeding Ch$800 million.

3.

Global Corporate Banking, GCB: consists of foreign and domestic multinational companies with sales over Ch$10,000 million.

4.

Excludes the results from Corporate Activities.

5.

Net operating profit is defined as Net interest income + Net fee and commission income + Total financial transactions - provision for loan losses.

6.

Operating expenses = personnel expenses +adm. expenses + depreciation

 

Net contribution from our business segments rose 11.1% YoY in 1H16 compared to the same period of 2015. These results exclude our Corporate Activities, which includes, among other items, the impact of inflation on results and the impact of movements in the exchange rate in our provision expense.

 

The net contribution from Retail banking increased 11.4% YoY. Core revenues (net interest income plus fees) in retail banking increased 6.4% with solid growth of fee income as customer loyalty continues to improve. Provision expense in retail banking increased 11.2% YoY, but decreased 7.3% QoQ in 2Q16 as asset quality in mortgage lending improved (See Provision expense). Costs in this segment also decelerated and only grew 2.2% YoY in 1H16.

 

Net contribution from the Middle-market increased 11.6% YoY in 1H16. Core revenues in this segment increased 9.1%. Net interest income increased 8.4% compared to a 2.0% YoY increase in loan volumes in this segment. Fee growth remained strong, rising 14.1% as cross-selling continued to improve (See Fee income). Costs in this segment increased 12.4% YoY in 1H16.The Middle-market has been an important area of growth for the Bank, since it provides the Bank with balanced growth of lending and non-lending businesses, with controlled risks.

 

 

 

 

Net contribution from GCB rose 9.6% in 1H16. Core revenues increased 17.3% YoY driven by cash management services and financial advisory fees. On the other hand, these results were partially offset by the 14.1% fall in client treasury activities that experienced a lower demand for treasury products as volatility in the local rate and exchange markets subsided, especially in 1Q16. These results rebounded in 2Q16 (See Financial transactions, net).

 

SECTION 3: LOANS, DEPOSITS AND CAPITAL

 

LOANS

 

Loans up 8.0% YoY. Growth focused in segments with the highest profitability, net of risk

 

Loans by segment		Quarter ended,												Change, %
(Ch$ million)		Jun-16				Mar-16				Jun-15				Jun. 16 / 15				Jun. / Mar. 16
Total loans to individuals1			14,257,390				13,893,738				12,605,550				13.1	%			2.6	%
SMEs			3,687,640				3,589,801				3,323,388				11.0	%			2.7	%
Retail banking			17,945,030				17,483,539				15,928,938				12.7	%			2.6	%
Middle-market			6,134,698				6,065,108				6,013,970				2.0	%			1.1	%
Global corporate banking			2,237,493				2,095,871				2,263,481				(1.1	)%			6.8	%
Total loans2			26,164,035				25,694,035				24,217,740				8.0	%			1.8	%

1.

Includes consumer loans, residential mortgage loans and other commercial loans to individuals.

2.

Total loans gross of loan loss allowances. Total loans include other non-segmented loans and exclude interbank loans. See Note 3 and Note 9a of the Financial Statements.

 

Total loans increased 1.8% QoQ and 8.0% YoY in 2Q16. The Bank continued to focus loan growth on segments with the highest profitability, net of risk. Therefore, Retail banking loans (loans to individuals and SMEs) increased 2.6% QoQ and 12.7% YoY. Among Retail banking clients, the Bank focused on expanding its activity with middle and high-income individuals and larger-sized SMEs. Loans to individuals increased 2.6% QoQ and 13.1% YoY. Loan growth among Middle and high-income earners grew 3.1% QoQ and 14.8% YoY, while loans to lower-income individuals decreased 3.7% QoQ and 11.1% YoY.

 

Loans by product		Quarter ended,												% Change
(Ch$ million)		Jun-16				Mar-16				Jun-15				Jun. 16 / 15				Jun. / Mar. 16
Consumer loans			4,239,461				4,141,786				3,996,665				6.1	%			2.4	%
Residential mortgage loans			8,321,626				8,099,477				7,145,186				16.5	%			2.7	%

 

 

 

 

In the quarter, the Bank pushed a more balanced growth between consumer and mortgage loans to boost overall spreads. As a result, consumer loan growth accelerated to 2.4% QoQ and 6.1% YoY. Consumer loan growth among middle and high-income earners grew 3.5% QoQ and 11.1% YoY, while in the low end of the market, consumer loans decreased 5.2% QoQ and 15.3% YoY. Residential mortgage loans expanded 2.7% QoQ and 16.5% YoY. As expected, the growth rate of residential mortgage loans has begun to decelerate. As a reminder, this year residential projects, which obtain their building permits in 2016, are subject to the full VAT tax, which should slow the demand for mortgage loans. The Bank also continues to focus growth on mortgages with loan-to-values below 80%.

 

Loans to SMEs also accelerated in the quarter, growing 2.7% QoQ (11.0% YoY). A sound management of risk and a relevant rise in non-lending revenues are accompanying the growth of loans to SMEs and, therefore, this segment continues to contribute to the Bank’s ROEs despite slower economic growth.

 

In 2Q16, loans in the Middle-market increased 1.1% QoQ and 2.0% YoY. This segment continues to be a growth area for the Bank, but given the slower economic growth, demand for loans has weakened. The Bank has also become more selective in this segment. Spreads, on the other hand, continued to rise and this segment’s net interest income continued to out-strip loan growth. In 1H16, this segment had the highest rise in net operating profit as other non-lending revenues continued to grow at double digits as well (See Section 2: YTD Results by Reporting Segments).

 

In GCB, loans increased 6.1% QoQ, but decreased 1.7% YoY. This segment generally has a volatile evolution of loan growth, due in part, to large transactions that are not necessarily recurring between one quarter and the next, which also tend to be short-term bridge loans or takedowns of credit lines. Specifically in the quarter, the Bank increased its business with Asian banks to strengthen our leading position in financing trade with this region and offering other non-lending services to local and foreign companies doing business between Asia and Chile. It is important to point out that more than 80% of net revenues in this segment come from non-lending activities, mainly cash management, fees and treasury services.

 

 

 

 

DEPOSITS

 

Total deposits increased 10.3% YoY in 2Q16

 

Deposits		Quarter ended,												% Change
(Ch$ million)		Jun-16				Mar-16				Jun-15				Jun. 16 / 15				Jun. / Mar. 16
Demand deposits			7,238,303				7,079,271				6,659,174				8.7	%			2.2	%
Time deposits			12,997,791				12,722,899				11,682,908				11.3	%			2.2	%
Total deposits			20,236,094				19,802,170				18,342,082				10.3	%			2.2	%
Adjusted loans to deposit ratio1			97.8	%			98.2	%			101.8	%
Avg. non-interest bearing  demand deposits / Avg. interest earning assets			25.4	%			25.8	%			25.8	%

1. (Loans – portion of mortgages funded with long-term bonds) / (Time deposits + demand deposits). The Bank’s mortgage loans are mainly fixed-rate long-term loans that we mainly finance with matching long-term funding and not with short-term deposits. For this reason, to calculate this ratio, we subtract residential mortgage loans in the numerator of our ratio.

 

Total deposits increased 2.2% QoQ and 10.3% YoY. Time deposits increased 2.2% QoQ and 11.3% YoY. This growth came from our customer segments as well as wholesale deposits from institutional sources. The high levels of liquidity in the local market led to an improvement in spreads earned over deposits from wholesale investors. Despite this, Santander Chile continued to be one of the banks with the lowest exposure to short-term wholesale deposits as a percentage of total funding.

 

Non-interest bearing demand deposits increased 2.2% QoQ and 8.7% YoY. Demand deposits growth in the quarter was mainly driven by the GCB segment, which expanded 23.0% QoQ and 28.9% YoY. This high growth is a reflection of our strength in cash management services with these customers.

 

In 2Q16, the Bank continued to be active in the local debt markets. In this period, the Bank issued the equivalent of US$1.0 billion in long-term bonds in the local market at attractive spreads. These funds are used to finance the growth of our fixed-rate mortgage loan book, which has an average duration of 6 years. This way we increased the spread of our mortgage loans, while maintaining solid levels of structural liquidity. This also highlights that when the cost of issuing bonds abroad rises, we have access to ample liquidity in the local market.

 

 

 

 

SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL

 

Adjusted ROE in the quarter reached 18.3%. BIS Ratio at 13.0% and Core Capital at 10.1%

 

Equity		Quarter ended,												Change, %
(Ch$ million)		Jun-16				Mar-16				Jun-15				Jun.         16 / 15				Jun. /     Mar. 16
Capital			891,303				891,303				891,303				0.0	%			0.0	%
Reserves			1,640,112				1,527,893				1,527,893				7.3	%			7.3	%
Valuation adjustment			4,053				474				(6,509	)			(162.3	)%			755.1	%
Retained Earnings:			169,217				402,022				165,089				2.5	%			(57.9	)%
Retained earnings prior periods			-				448,878				-				—	%			—	%
Income for the period			241,739				125,439				235,841				2.5	%			92.7	%
Provision for mandatory dividend			(72,522	)			(172,295	)			(70,752	)			2.5	%			(57.9	)%
Equity attributable to equity holders of the Bank			2,704,685				2,821,692				2,577,776				4.9	%			(4.1	)%
Non-controlling interest			31,021				30,556				32,593				(4.8	)%			1.5	%
Total Equity			2,735,706				2,852,248				2,610,369				4.8	%			(4.1	)%
Quarterly ROE			17.1	%			18.1	%			21.8	%
Adjusted quarterly ROE1			18.3	%			18.1	%			21.8	%
YTD ROE			17.7	%			18.1	%			18.2	%
Adjusted YTD ROE1			18.2	%			18.1	%			18.2	%

1. Adjusted for one-time severance expense recognized in 2Q16 of Ch$10,789 million (pre-tax).

 

Shareholders’ equity totaled Ch$2,704,685 million as of June 30, 2016. In 2Q16, ROE reached 17.1%. Excluding the one-time charge recognized in the quarter, the adjusted ROE in the quarter was 18.3%. The Bank’s Core capital ratio reached 10.1% and its BIS ratio was 13.0% as of June 30, 2016. The Bank paid its annual dividend in April, equivalent to 75% of 2015 earnings. This payout was temporarily increased from the 60% paid out in the same month last year. Despite this increase in payout, the Bank’s core capital ratio increased 10bp YoY due to the Bank’s solid profitability levels and its control of RWA’s growth. (See table below).

 

Capital Adequacy		Quarter ended,												Change %
(Ch$ million)		Jun-16				Mar-16				Jun-15				Jun. 16 / 15				Jun. / Mar. 16
Tier I (Core Capital)			2,704,685				2,821,692				2,577,776				4.9	%			(4.1	)%
Tier II			781,772				773,581				753,492				3.8	%			1.1	%
Regulatory capital			3,486,457				3,595,273				3,331,268				4.7	%			(3.0	)%
Risk weighted assets			26,876,728				26,608,992				25,734,108				4.4	%			1.0	%
Tier I (Core Capital) ratio			10.1	%			10.6	%			10.0	%
BIS ratio1			13.0	%			13.5	%			12.9	%

1.

BIS ratio: Regulatory capital divided by risk-weighted assets according to SBIF BIS I definitions.

 

 

 

 

SECTION 4: ANALYSIS OF QUARTERLY INCOME STATEMENT

 

NET INTEREST INCOME

 

Client net interest income up 6.3% in 2Q16. Client NIMs stable at 4.8%

 

Net Interest Income / Margin		Quarter												Change %
(Ch$ million)		2Q16				1Q16				2Q15				2Q16 / 2Q15				2Q16 / 1Q16
Client net interest income			313,527				308,758				294,962				6.3	%			1.5	%
Non-client net interest income			14,910				4,115				36,771				(59.5	)%			262.3	%
Net interest income			328,437				312,873				331,733				(1.0	)%			5.0	%
Average interest-earning assets			28,627,966				27,801,452				25,859,714				10.7	%			3.0	%
Average loans1			25,994,155				25,542,836				23,975,617				8.4	%			1.8	%
Avg. net gap in inflation indexed (UF) instruments2			4,761,448				4,086,190				3,891,355				22.4	%			16.5	%
Interest earning asset yield3			7.8	%			7.5	%			8.7	%
Cost of funds4			3.6	%			3.3	%			3.8	%
Client net interest margin5			4.8	%			4.8	%			4.9	%
Net interest margin (NIM)6			4.6	%			4.5	%			5.1	%
Quarterly inflation rate7			0.9	%			0.7	%			1.5	%
Central Bank reference rate			3.50	%			3.50	%			3.00	%

1.

Excludes interbank loans

2.

The average quarterly difference between assets and liabilities indexed to the Unidad de Fomento (UF), an inflation indexed unit.

3.

Interest income divided by average interest earning assets.

4.

Interest expense divided by sum of average interest bearing liabilities and demand deposits.

5.

Annualized Client Net interest income divided by average loans.

6.

Annualized Net interest income divided by average interest earning assets.

7.

Inflation measured as the variation of the Unidad de Fomento in the quarter.

 

In 2Q16, Net interest income, NII, increased 5.0% QoQ and decreased 1.0% YoY. The Net interest margin (NIM) reached 4.6% compared to 4.5% in 1Q16 and 5.1% in 2Q15. In order to improve the explanation of margins, we have divided the analysis of Net interest income between Client net interest income and Non-client net interest income⁸.

 

Client NII. In 2Q16, Client NII increased 1.5% QoQ and 6.3% YoY, driven mainly by loan growth. Average interest earning assets increased 3.0% QoQ and 10.7% YoY. Client NIMs (defined as Client NII divided by average loans), which excludes the impact of inflation, reached 4.8% in 2Q16 compared to 4.8% in 1Q16 and 4.9% in 2Q15. On a QoQ basis, the Bank’s client NIMs remained steady since loan spreads have been rising in the segments we are targeting. On a YoY basis, the slight decline in client margins was mainly due to the shift in the asset mix to less riskier segments, which is gradually producing an improvement in the Bank’s cost of credit (See Provision Expense).

 

8. Client Net interest income: NII from the Bank’s reporting segments that includes NII from the Retail, Middle-market and GCB segments, excluding GCB’s Treasury division. Non-client NII: NII from Bank’s inflation gap, the financial cost of hedging, the financial cost of the Bank’s structural liquidity position, NII from treasury positions and the interest expense of the Bank’s financial investments classified as trading, since NII from this portfolio is recognized as Financial transactions net.

 

 

 

 

Non-client NII. In 2Q16, the variation of the Unidad de Fomento (an inflation indexed currency unit), was 0.9% compared to 0.7% in 1Q16 and 1.5% in 2Q15. The Bank has more assets than liabilities linked to inflation and, as a result, margins go up when inflation accelerates and vice-versa. The QoQ rise in Non-client NII was mainly due to the 20 bp. rise in the quarterly inflation rate. The fall in Non-client NII in 2Q16 compared to 2Q15 was mainly due to the lower inflation rate. During the quarter, the Bank’s average UF gap increased 16.5% and should remain relatively stable going forward. We expect quarterly UF inflation rates of 0.7%-0.9% for the remainder of the year.

 

 

 

 

 

ASSET QUALITY AND PROVISION FOR LOAN LOSSES

 

Steady improvement of asset quality: NPLs down to 2.2%, Cost of credit at 1.3% in 2Q16

 

Provision for loan losses		Quarter												Change %
(Ch$ million)		2Q16				1Q16				2Q15				2Q16 / 2Q15				2Q16 / 1Q16
Gross provisions			(54,187	)			(47,612	)			(52,731	)			2.8	%			13.8	%
Charge-offs1			(50,535	)			(48,169	)			(45,890	)			10.1	%			4.9	%
Gross provisions and charge-offs			(104,722	)			(95,781	)			(98,621	)			6.2	%			9.3	%
Loan loss recoveries			21,286				17,855				17,029				25.0	%			19.2	%
Provision for loan losses			(83,436	)			(77,926	)			(81,592	)			2.3	%			7.1	%
Cost of credit2			1.3	%			1.2	%			1.4	%
Total loans3			26,164,035				25,694,035				24,217,740				8.0	%			1.8	%
Total Loan loss allowances (LLAs)			795,218				784,073				703,289				13.1	%			1.4	%
Non-performing loans4 (NPLs)			566,177				639,981				661,052				(14.6	)%			(11.8	)%
NPLs consumer loans			88,991				93,712				100,712				(11.6	)%			(5.0	)%
NPLs commercial loans			318,324				365,245				377,296				(16.1	)%			(13.3	)%
NPLs residential mortgage loans			158,862				181,024				183,044				(13.2	)%			(12.2	)%
Impaired loans5			1,645,082				1,642,087				1,633,035				0.7	%			0.2	%
Impaired consumer loans			278,756				288,037				365,204				(23.7	)%			(3.2	)%
Impaired commercial loans			953,733				935,144				878,629				8.5	%			2.0	%
Impaired residential mortgage loans			412,593				418,906				389,202				6.0	%			(1.5	)%
Risk Index6 (LLA / Total loans)			3.0	%			3.1	%			2.9	%
NPL / Total loans			2.2	%			2.5	%			2.7	%
NPL / consumer loans			2.1	%			2.3	%			2.5	%
NPL / commercial loans			2.3	%			2.7	%			2.9	%
NPL / residential mortgage loans			1.9	%			2.2	%			2.6	%
Impaired loans / total loans			6.3	%			6.4	%			6.7	%
Impaired consumer loan ratio			6.6	%			7.0	%			9.1	%
Impaired commercial loan ratio			7.0	%			7.0	%			6.7	%
Impaired mortgage loan ratio			5.0	%			5.2	%			5.4	%
Coverage of NPLs7			140.5	%			122.5	%			106.4	%
Coverage of NPLs non-mortgage8			179.2	%			155.8	%			136.6	%
Coverage of consumer NPLs			306.7	%			285.3	%			252.3	%
Coverage of commercial NPLs			143.6	%			122.6	%			105.7	%
Coverage of mortgage NPLs			41.0	%			38.0	%			27.4	%

1.

Charge-offs corresponds to the direct charge-offs and are net of the reversal of provisions already established on charged-off loans.

2.

Annualized provision for loan losses / quarterly average total loans. Averages are calculated using monthly figures.

3.

Excludes interbank loans.

4.

Total outstanding gross amount of loans with at least one installment 90 days or more overdue.

5.

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 all loans to an individual client with at least one NPL (which is not a residential mortgage loan past due less than 90 days), regardless of category; and (b) for loans collectively evaluated for impairment, the carrying amount of all loans to a client, when at least one loan to that client is not performing or has been renegotiated.

6.

LLA / Total loans. Measures the percentage of loans that banks must provision for given their internal models and the SBIF’s guidelines.

7.

LLA / NPLs.

8.

LLA of commercial and consumer loans / NPLs of commercial and consumer loans.

 

The Bank’s strategy of de-risking the asset mix continues to have a positive impact on asset quality. In 2Q16, the Non-performing loans (NPLs) ratio improved to 2.2% from 2.5% in 1Q16 and 2.7% in 2Q15. Total Impaired loans, a broader measure of asset quality that includes NPLs and renegotiated loans, improved 10 bp. QoQ to 6.3% and 40 bp. since the end of 2Q15. Total Coverage of NPLs in 2Q16 reached 140.5% compared to 122.5% in 1Q16 and 106.4% in 2Q15.

 

 

 

 

By product, the evolution of Provision for loan losses in 2Q16 was as follows:

 

Provision for loan losses		Quarter												Change %
(Ch$ million)		2Q16				1Q16				2Q15				2Q16 / 2Q15				2Q16 / 1Q16
Consumer loans			(51,819	)			(46,918	)			(41,320	)			25.4	%			10.4	%
Commercial loans1			(35,889	)			(26,644	)			(37,955	)			(5.4	)%			34.7	%
Residential mortgage loans			4,272				(4,364	)			(2,317	)			—	%			—	%
Provision for loan losses			(83,436	)			(77,926	)			(81,592	)			2.3	%			7.1	%

1. Includes provision for loan losses for contingent loans

 

Provision for loan losses increased 7.1% QoQ and 2.3% YoY in 2Q16. The cost of credit in the quarter was 1.3% compared to 1.2% in 1Q16 and 1.4% in 2Q15. The QoQ rise in provision for loan losses was mainly due to higher provision expenses in consumer loans. 

 

Provisions for loan losses for consumer loans increased 10.4% QoQ and 25.4% YoY in 2Q16. The Bank continues to push forward its strategy of lowering exposure to the low-end of the consumer loan market. This entails an active policy of charge-off and bolstering coverage ratio in the lower income segment. Consumer loan growth in the low-end of the market decreased 5.2% QoQ and 15.3% YoY. The Consumer loan NPL ratio improved 20 bp. QoQ to 2.1%. The Impaired consumer loan ratio also improved 40 bp. QoQ and 250 bp. YoY to 6.6%. The coverage ratio of non-performing consumer loans reached 306.7% as of June 30, 2016. Going forward, and as mentioned in previous earnings reports, the Bank will continue limiting consumer loan refinancing policies due to the expected rise in unemployment in 2016. This implies that a greater amount of consumer loans could be charged-off even though asset quality trends are improving.

 

 

Provisions for loan losses for commercial loans increased 34.7% QoQ and decreased 5.4% YoY. The QoQ rise was due to a rise in charge-offs mainly in the Middle-market segment. Overall asset quality trends in commercial lending kept improving in the quarter, reflecting the proactive stance to risk despite slower economic growth. The commercial NPL ratio reached 2.3% compared to 2.7% in 1Q16 and 2.9% in 2Q15. At the same time, the commercial impaired loan ratio was stable at 7% in the quarter. The Coverage ratio of commercial NPLs reached 143.6% as of June 2016.

 

 

 

 

Provisions for loan losses for residential mortgage loans recorded a reversal of Ch$4,272 million. This was mainly due to a positive evolution of recovery efforts. Recovery of mortgage NPLs increased 57.3% to Ch$2,814 million in the quarter. The Impaired mortgage loans ratio improved 20 bp. to 5.0% QoQ and 40 bp. YoY. The NPL ratio of mortgage loans decreased to 1.9% in 2Q16 from 2.2% in 1Q16 and 2.6% in 2Q15. The coverage of mortgage NPLs also increased to 41.0% as of June 2016.

 

NET FEE AND COMMISSION INCOME

 

Fee income increases 9.6% YoY in 2Q16. Client loyalty continues to expand

 

Fee Income		Quarter												Change %
(Ch$ million)		2Q16				1Q16				2Q15				2Q16 / 2Q15				2Q16 / 1Q16
Retail banking1			50,251				49,054				47,597				5.6	%			2.4	%
Middle-market			7,787				7,735				6,644				17.2	%			0.7	%
Global corporate banking			5,973				6,580				2,968				101.2	%			-9.2	%
Others			(139	)			(378	)			1,065				-	%			-63.2	%
Total			63,872				62,991				58,274				9.6	%			1.4	%

1.

Includes fees to individuals and SMEs.

 

Net fee and commission income increased 1.4% QoQ and 9.6% YoY in 2Q16. This rise in fees was in part due to greater product usage and customer loyalty and a recovery of fees in GCB.

 

Loyal individual customers (clients with >4 products plus minimum usage and profitability levels) in the high-income segment grew 8.7% YoY. Among Mid-income earners, loyal customers increased 3.3% YoY. Loyal Middle-market and SME clients grew 12.7% YoY. This drove fees in retail banking that increased 2.4% QoQ and 5.6% YoY. Fees in the Middle-market also rose 0.7% QoQ and 17.2% YoY. The driver of fees in those segments was mainly credit and debit card fees, as well as checking account fees.

 

 

 

 

 

In the GCB, fees increased 101.2% YoY due to a recovery in investment banking activities, following a weak performance in 2015. Fees in this segment will continue to be deal-dependent and therefore, may be volatile going forward.

 

By products, the evolution of fees was as follows:

 

Net fee and commission income		Quarter												Change %
(Ch$ million)		2Q16				1Q16				2Q15				2Q16 / 2Q15				2Q16 / 1Q16
Credit, debit & ATM card fees			14,428				14,184				11,450				26.0	%			1.7	%
Insurance brokerage			9,847				9,659				10,602				(7.1	)%			1.9	%
Asset management			9,240				8,928				9,035				2.3	%			3.5	%
Guarantees, pledges and other contingent operations			8,696				9,284				8,151				6.7	%			(6.3	)%
Checking accounts			7,953				7,848				7,429				7.1	%			1.3	%
Collection fees			7,836				7,961				5,030				55.8	%			(1.6	)%
Brokerage and custody of securities			1,990				2,040				2,112				(5.8	)%			(2.5	)%
Lines of credit			1,403				1,345				1,660				(15.5	)%			4.3	%
Other Fees			2,480				1,744				2,805				(11.6	)%			42.3	%
Total fees			63,872				62,991				58,274				9.6	%			1.4	%

 

TOTAL FINANCIAL TRANSACTIONS, NET

 

Total financial transactions, net		Quarter												Change %
(Ch$ million)		2Q16				1Q16				2Q15				2Q16 / 2Q15				2Q16 / 1Q16
Net income (expense) from financial operations1			45,706				(179,699	)			(50,524	)			—	%			—	%
Net foreign exchange gain2			(17,846	)			213,961				80,855				—	%			—	%
Total financial transactions, net			27,860				34,262				30,331				(8.1	)%			(18.7	)%

1.

These results include the realized gains of the Available for sale investment portfolio, realized and unrealized gains and interest revenue generated by Trading investments, gains or losses from the sale of charged-off loans and the realized gains (loss) or mark-to-market of derivatives.

2.

The results recorded as Foreign exchange gain mainly include the translation gains or losses of assets and liabilities denominated in foreign currency as well as from our hedge accounting derivatives.

 

Results from Total financial transactions, net was a gain of Ch$27,860 million in 2Q16, decreasing 18.7% QoQ and 8.1% YoY. It is important to point out that the Bank does not run a significant foreign currency gap. The Bank’s spot position in foreign currency is hedged with derivatives that are either considered trading derivatives or hedge accounting derivatives. Derivatives that are considered trading are marked-to-market in net income from financial operations. Hedge accounting derivatives are mark-to-market together with the hedged item in net foreign exchange results. This distorts these line items, especially in periods of a strong appreciation or depreciation of the exchange rate.

 

 

 

 

In order to understand more clearly these line items, we present them by business area in the following table:

 

Total financial transactions, net		Quarter												Change %
(Ch$ million)		2Q16				1Q16				2Q15				2Q16 / 2Q15				2Q16 / 1Q16
Santander Global Connect1			18,634				12,500				15,881				17.3	%			49.1	%
Market-making			7,487				7,501				6,701				11.7	%			(0.2	)%
Client treasury services			26,121				20,001				22,582				15.7	%			30.6	%
Non client treasury income2			1,739				14,261				7,749				(77.6	)%			(87.8	)%
Total financ. transactions, net			27,860				34,262				30,331				(8.1	)%			(18.7	)%

1.

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

2.

Non client treasury income. These results include the income from sale of loans, including charged-off loans, interest income and the mark-to-market of the Bank’s trading portfolio, realized gains from the Bank’s available for sale portfolio and other results from our Financial Management Division.

 

Client treasury services were up 30.6% QoQ and 15.7% YoY. This rise of client treasury revenues reflects the greater demand on behalf of clients for treasury products mainly for their hedging needs, as volatility increased in the quarter. This boosted results in Santander Global Connect, the Bank’s commercial platform for selling treasury products to our clients.

 

On the other hand, the results from Non-client treasury income decreased 87.8% QoQ and 77.6% YoY. As a reminder in 1Q16, the Bank recorded a one-time gain of Ch$6 billion after tendering one of our outstanding international bonds. In addition, the higher market volatility resulted in a greater charge recognized for the credit value adjustment (CVA) of the derivatives portfolio. CVA is an estimation of the market value of counterparty credit risk embedded in derivatives.

 

 

 

 

OPERATING EXPENSES AND EFFICIENCY

 

Cost control measures beginning to pay-off: operating expenses up 4% YoY in 2Q16

 

Operating expenses		Quarter												Change %
(Ch$ million)		2Q16				1Q16				2Q15				2Q16 / 2Q15				2Q16 / 1Q16
Personnel salaries and expenses			(101,217	)			(92,967	)			(96,274	)			5.1	%			8.9	%
Administrative expenses			(54,991	)			(58,694	)			(56,488	)			(2.7	)%			(6.3	)%
Depreciation & amortization			(15,843	)			(14,345	)			(12,646	)			25.3	%			10.4	%
Operating expenses1			(172,051	)			(166,006	)			(165,408	)			4.0	%			3.6	%
Impairment of property, plant and equipment			(48	)			(37	)			(20	)			140.0	%			29.7	%
Branches			468				470				478				(2.1	)%			(0.4	)%
Standard			278				278				275				1.1	%			0.0	%
Middle-market centers			8				8				5				60.0	%			0.0	%
Select			54				54				53				1.9	%			0.0	%
Banefe & other payment centers			128				130				145				(11.7	)%			(1.5	)%
ATMs			1,484				1,529				1,604				(7.5	)%			(2.9	)%
Employees			11,653				11,793				11,614				0.3	%			(1.2	)%
Efficiency ratio2			43.8	%			41.6	%			40.3	%
YTD Efficiency ratio2			42.7	%			41.6	%			41.1	%
YTD Cost / Assets3			1.9	%			1.9	%			1.8	%

1.

Excluding Impairment and Other operating expenses.

2.

Efficiency ratio: Operating expenses as defined in Note 1 / Operating income. Operating income = Net interest income + Net fee and commission income + Total financial transactions, net + Other operating income - Other operating expenses.

3.

Operating expenses as defined in Note 1, annualized / Total assets.

 

Operating expenses, excluding Impairment and Other operating expenses, grew 3.6% QoQ and 4.0% YoY, the lowest quarterly YoY growth rate in the last seven quarter. As mentioned in the previous earning report, the Bank has been implementing several measures to lower cost growth to mid-single digits by year-end 2016. The QoQ increase in costs is mainly seasonal, especially personnel expenses, which grew 8.9%⁹. The YTD Efficiency ratio reached 42.7% in 1H16 compared to 41.1% in 1H15. The YTD Cost / Asset ratio was 1.9% as of June 2016.

 

Personnel salaries and expenses increased 5.1% YoY in 2Q16, also the lowest growth rate in the last seven quarters. This was mainly due to the indexation of wages to CPI inflation, which in the last twelve months was 4.2%. The Bank has been reducing high-level management positions in order to mitigate personnel cost growth. This process has entailed greater severance payments (See Other operating income, net), and was concluded in April. Going forward, the growth rate of personnel expenses should continue to decelerate as the results of these cost-cutting measures becomes more visible.

 

9 In the first quarter of each year an important portion of the Bank’s employees take their annual vacation. This results in lower personnel costs in 1Q due to the manner in which vacation days are accounted for under Chilean GAAP.

 

 

 

 

Administrative expenses decreased 6.3% QoQ and 2.7% YoY. This fall is due to three main reasons: (i) the appreciation of the peso in the quarter, since various outsourced IT costs are denominated in foreign currency, (ii) general cost cutting efforts, and (ii) greater efficiency of the distribution network. The bank has been reducing its brick-and-mortar branch network and increasing digital banking capabilities. The Bank in the last 12 months has closed 10 branches and eliminated 120 ATMs. This has been replaced by an increase in transaction through channels such as internet, mobile and phone banking. The effectiveness of the Bank’s CRM has also increased productivity.

 

Amortization expenses increased 10.4% QoQ and 25.3% YoY. This rise was mainly due to the investment in software and digital banking the Bank is carrying out as part of our plan to improve productivity and efficiency.

 

 

 

 

 

OTHER OPERATING INCOME, NET & INCOME TAX

 

Other operating income, net  and Corporate tax		Quarter												Change %
(Ch$ million)		2Q16				1Q16				2Q15				2Q16 / 2Q15				2Q16 / 1Q16
Other operating income			4,611				5,248				5,677				(18.8	)%			(12.1	)%
Other operating expenses			(32,010	)			(16,234	)			(15,770	)			103.0	%			97.2	%
Other operating income, net			(27,399	)			(10,986	)			(10,093	)			171.5	%			149.4	%
Income from investments in associates and other companies			641				531				788				(18.7	)%			20.7	%
Income tax income (expense)			(21,114	)			(29,662	)			(21,531	)			(1.9	)%			(28.8	)%
Effective income tax rate			15.3	%			19.1	%			13.1	%

 

Other operating income, net, totaled a loss of Ch$27,399 million in 2Q16. Other operating expenses included a one-time charge of Ch$10,789 million in the quarter related to severance expenses as part of the Bank’s efforts to control costs going forward (See Operating Expenses).

 

Income tax expenses in 2Q16 totaled Ch$21,114 million. The statutory corporate tax rate in 2016 increased to 24.0% compared to 22.5% in 2015. The effective tax rate was 15.3% in 2Q16 compared to 19.1% in 1Q16 and 13.1% in 2Q15. This was mainly due to the difference in inflation rates in both periods. The higher inflation results in a greater charge to taxable income for price level restatement, since for tax purposes the Bank must readjust its capital for inflation.

 

In 1H16, the Bank paid an effective tax rate of 17.3% compared to 18.0% in 1H15. The higher statutory tax rate has been offset by the higher loss by the price level restatement of capital and a rise in other tax deductions, mainly resulting from property taxes paid over leased assets. These can be deducted from our income tax base.

 

YTD income tax1 (Ch$ million)		Jun-16				Jun-15				Var. (%)
Net income before tax			293,578				294,401				(0.3	)%
Price level restatement of capital2			(14,717	)			(10,346	)			42.2	%
Net income before tax adjusted for price level restatement			278,861				284,055				(1.8	)%
Statutory Tax rate			24.0	%			22.5	%			6.7	%
Income tax expense at Statutory rate			(66,927	)			(63,912	)			4.7	%
Tax benefits3			16,151				11,063				46.0	%
Income tax			(50,776	)			(52,849	)			(3.9	)%
Effective tax rate			17.3	%			18.0	%

1.

This table is for informational purposes only. Please refer to note 12 in our interim financials for more details.

2.

For tax purposes, capital is indexed to CPI inflation. The statutory tax rate is applied over net income before tax adjusted for price level restatement.

3.

Mainly includes income tax credits from property taxes paid on leased assets as well as the impact from fluctuations in deferred tax assets and liabilities.

 

 

 

 

SECTION 5: CREDIT RISK RATINGS

 

International ratings

 

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

 

Moody’s		Rating
Bank Deposit		Aa3/P-1
Baseline Credit Assessment		a2
Adjusted Baseline Credit Assessment		a2
Senior Unsecured		Aa3
Commercial Paper		P-1
Bank Deposit		Aa3/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+

 

 

 

  

SECTION 6: SHARE PERFORMANCE

As of June 30, 2016

 

Ownership Structure:

 

 

ADR Price Evolution

Santander ADR vs. SP500

(Base 100 = 12/31/2015)

 

 

ADR price (US$) 6M16

 

6/30/16:			19.37
Maximum (6M16):			20.24
Minimum (6M16):			15.98

 

Market Capitalization: US$9,121 million

 

P/E 12month trailing*:			13.2
P/BV (6/30/16)**:			2.2
Dividend yield***:			5.3	%

 

*

Price as of Jun. 30, 2016 / 12mth. earnings

**

Price as of Jun. 30, 2016 / Book value as of 06/30/16

***

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

 

Average daily traded volumes 6M16

 

US$ million

 

 

Local Share Price Evolution

Santander vs IPSA Index

(Base 100 = 12/31/2015)

 

Local share price (Ch$) 6M16

 

6/30/16:			31.92
Maximum (6M16):			33.89
Minimum (6M16):			29.10

 

Dividends:

 

Year paid		Ch$/share				% of previous year’s earnings
2013:			1.24				60	%
2014:			1.41				60	%
2015:			1.75				60	%
2016:			1.79				75	%

 

 

 

 

ANNEX 1: BALANCE SHEET

 

Unaudited Balance Sheet		Jun-16				Jun-16				Dec-15				June 16 / Dec. 15
Assets		US$ths				Ch$ million								% Chg.
Cash and deposits in banks			3,263,040				2,164,211				2,064,806				4.8	%
Cash items in process of collection			1,166,640				773,774				724,521				6.8	%
Trading investments			584,326				387,554				324,271				19.5	%
Investments under resale agreements			12,315				8,168				2,463				231.6	%
Financial derivative contracts			4,525,906				3,001,807				3,205,926				(6.4	)%
Interbank loans, net			356,344				236,345				10,861				2076.1	%
Loans and account receivables from customers, net			38,249,253				25,368,817				24,535,201				3.4	%
Available for sale investments			3,605,677				2,391,465				2,044,411				17.0	%
Held-to-maturity investments			-				-				-				—	%
Investments in associates and other companies			33,553				22,254				20,309				9.6	%
Intangible assets			83,775				55,564				51,137				8.7	%
Property, plant and equipment			351,400				233,066				240,659				(3.2	)%
Current taxes			-				-				-				—	%
Deferred taxes			509,484				337,915				331,714				1.9	%
Other assets			1,723,071				1,142,827				1,097,826				4.1	%
Total Assets			54,464,783				36,123,767				34,654,105				4.2	%
			Jun-16				Jun-16				Dec-15				June 16 / Dec. 15
Liabilities			US$ths				Ch$ million								% Chg.
Deposits and other demand liabilities			10,913,386				7,238,303				7,356,121				(1.6	)%
Cash items in process of being cleared			798,770				529,784				462,157				14.6	%
Obligations under repurchase agreements			46,747				31,005				143,689				(78.4	)%
Time deposits and other time liabilities			19,597,122				12,997,791				12,182,767				6.7	%
Financial derivatives contracts			4,294,637				2,848,418				2,862,606				(0.5	)%
Interbank borrowings			2,944,231				1,952,761				1,307,574				49.3	%
Issued debt instruments			9,604,155				6,369,956				5,957,095				6.9	%
Other financial liabilities			326,786				216,741				220,527				(1.7	)%
Current taxes			7,231				4,796				17,796				(73.1	)%
Deferred taxes			16,790				11,136				3,906				185.1	%
Provisions			337,428				223,799				329,118				(32.0	)%
Other liabilities			1,452,802				963,571				1,045,869				(7.9	)%
Total Liabilities			50,340,084				33,388,061				31,889,225				4.7	%
			Jun-16				Jun-16				Dec-15				June 16 / Dec. 15
Equity			US$ths				Ch$ million								% Chg.
Capital			1,343,842				891,303				891,303				0.0	%
Reserves			2,472,841				1,640,112				1,527,893				7.3	%
Valuation adjustments			6,111				4,053				1,288				214.7	%
Retained Earnings:			255,133				169,217				314,215				(46.1	)%
Retained earnings from prior years			-				-				-				—	%
Income for the period			364,476				241,739				448,878				(46.1	)%
Minus: Provision for mandatory dividends			(109,343	)			(72,522	)			(134,663	)			(46.1	)%
Total Shareholders' Equity			4,077,927				2,704,685				2,734,699				(1.1	)%
Non-controlling interest			46,771				31,021				30,181				2.8	%
Total Equity			4,124,698				2,735,706				2,764,880				(1.1	)%
Total Liabilities and Equity			54,464,783				36,123,767				34,654,105				4.2	%

 

The exchange rate used to calculate the figures in dollars was Ch$663.25 / US$1

 

 

 

 

ANNEX 2: YTD INCOME STATEMENTS

 

YTD Income Statement Unaudited		Jun-16				Jun-16				Jun-15				June  16 / 15
		US$ths.				Ch$ million								% Chg.
Interest income			1,620,712				1,074,937				963,083				11.6	%
Interest expense			(653,791	)			(433,627	)			(357,931	)			21.1	%
Net interest income			966,920				641,310				605,152				6.0	%
Fee and commission income			316,856				210,155				188,733				11.4	%
Fee and commission expense			(125,582	)			(83,292	)			(74,998	)			11.1	%
Net fee and commission income			191,275				126,863				113,735				11.5	%
Net income (expense) from financial operations			(202,025	)			(133,993	)			(191,083	)			(29.9	)%
Net foreign exchange gain			295,688				196,115				262,405				(25.3	)%
Total financial transactions, net			93,663				62,122				71,322				(12.9	)%
Other operating income			14,865				9,859				10,785				(8.6	)%
Net operating profit before provisions for loan losses			1,266,723				840,154				800,994				4.9	%
Provision for loan losses			(243,290	)			(161,362	)			(160,818	)			0.3	%
Net operating profit			1,023,433				678,792				640,176				6.0	%
Personnel salaries and expenses			(292,776	)			(194,184	)			(180,491	)			7.6	%
Administrative expenses			(171,406	)			(113,685	)			(111,341	)			2.1	%
Depreciation and amortization			(45,515	)			(30,188	)			(24,780	)			21.8	%
Op. expenses excl. Impairment and Other operating expenses			(509,698	)			(338,057	)			(316,612	)			6.8	%
Impairment of property, plant and equipment			(128	)			(85	)			(20	)			—	%
Other operating expenses			(72,739	)			(48,244	)			(30,416	)			58.6	%
Total operating expenses			(582,565	)			(386,386	)			(347,048	)			11.3	%
Operating income			440,868				292,406				293,128				(0.2	)%
Income from investments in associates and other companies			1,767				1,172				1,273				(7.9	)%
Income before tax			442,636				293,578				294,401				(0.3	)%
Income tax expense			(76,556	)			(50,776	)			(52,849	)			(3.9	)%
Net income from ordinary activities			366,079				242,802				241,552				0.5	%
Net income discontinued operations			-				0				-				—	%
Net income attributable to:
Non-controlling interest			1,603				1,063				5,711				(81.4	)%
Net income attributable to equity holders of the Bank			364,476				241,739				235,841				2.5	%

 

The exchange rate used to calculate the figures in dollars was Ch$663.25 / US$1

 

 

 

 

ANNEX 3: QUARTERLY INCOME STATEMENTS

 

 

Unaudited Quarterly Income Statement		2Q16				2Q16				1Q16				2Q15				2Q16 / 2Q15				2Q16 / 1Q16
		US$ths.				Ch$mn												% Chg.
Interest income			838,610				556,208				518,729				562,368				(1.1	)%			7.2	%
Interest expense			(343,417	)			(227,771	)			(205,856	)			(230,635	)			(1.2	)%			10.6	%
Net interest income			495,193				328,437				312,873				331,733				(1.0	)%			5.0	%
Fee and commission income			159,287				105,647				104,508				94,181				12.2	%			1.1	%
Fee and commission expense			(62,985	)			(41,775	)			(41,517	)			(35,907	)			16.3	%			0.6	%
Net fee and commission income			96,302				63,872				62,991				58,274				9.6	%			1.4	%
Net income (expense) from financial operations			68,912				45,706				(179,699	)			(50,524	)			-	%			-	%
Net foreign exchange gain			(26,907	)			(17,846	)			213,961				80,855				-	%			-	%
Total financial transactions, net			42,005				27,860				34,262				30,331				(8.1	)%			(18.7	)%
Other operating income			6,952				4,611				5,248				5,677				(18.8	)%			(12.1	)%
Net operating profit before provisions for loan losses			640,452				424,780				415,374				426,015				(0.3	)%			2.3	%
Provision for loan losses			(125,799	)			(83,436	)			(77,926	)			(81,592	)			2.3	%			7.1	%
Net operating profit			514,654				341,344				337,448				344,423				(0.9	)%			1.2	%
Personnel salaries and expenses			(152,608	)			(101,217	)			(92,967	)			(96,274	)			5.1	%			8.9	%
Administrative expenses			(82,911	)			(54,991	)			(58,694	)			(56,488	)			(2.7	)%			(6.3	)%
Depreciation and amortization			(23,887	)			(15,843	)			(14,345	)			(12,646	)			25.3	%			10.4	%
Op. expenses excl. Impairment and Other operating expenses			(259,406	)			(172,051	)			(166,006	)			(165,408	)			4.0	%			3.6	%
Impairment of property, plant and equipment			(72	)			(48	)			(37	)			(20	)			140.0	%			29.7	%
Other operating expenses			(48,262	)			(32,010	)			(16,234	)			(15,770	)			103.0	%			97.2	%
Total operating expenses			(307,741	)			(204,109	)			(182,277	)			(181,198	)			12.6	%			12.0	%
Operating income			206,913				137,235				155,171				163,225				(15.9	)%			(11.6	)%
Income from investments in associates and other companies			966				641				531				788				(18.7	)%			20.7	%
Income before tax			207,879				137,876				155,702				164,013				(15.9	)%			(11.4	)%
Income tax expense			(31,834	)			(21,114	)			(29,662	)			(21,531	)			(1.9	)%			(28.8	)%
Net income from ordinary activities			176,045				116,762				126,040				142,482				(18.1	)%			(7.4	)%
Net income discontinued operations			-				-				-				-
Net income attributable to:
Non-controlling interest			697				462				601				2,118				(78.2	)%			(23.1	)%
Net income attributable to equity holders of the Bank			175,349				116,300				125,439				140,364				(17.1	)%			(7.3	)%

 

The exchange rate used to calculate the figures in dollars was Ch$663.25 / US$1

 

 

 

 

ANNEX 4: QUARTERLY EVOLUTION OF MAIN RATIOS AND OTHER INFORMATION

 

		Jun-15				Sep-15				Dec-15				Mar-16				Jun-16
(Ch$ millions)
Loans
Consumer loans			3,996,665				4,044,266				4,150,671				4,141,786				4,239,461
Residential mortgage loans			7,145,186				7,449,707				7,812,850				8,099,477				8,321,626
Commercial loans			13,075,889				13,717,101				13,326,359				13,452,772				13,602,948
Total loans			24,217,740				25,211,074				25,289,880				25,694,035				26,164,035
Allowance for loan losses			(703,289	)			(727,831	)			(754,679	)			(784,073	)			(795,218	)
Total loans, net of allowances			23,514,451				24,483,243				24,535,201				24,909,962				25,368,817
Loans by segment
Individuals			12,605,550				13,019,293				13,520,649				13,893,738				14,257,390
SMEs			3,323,388				3,431,073				3,514,058				3,589,801				3,687,640
Retail			15,928,938				16,450,366				17,034,707				17,483,539				17,945,030
Middle-market			6,013,970				6,221,928				6,006,282				6,065,108				6,134,698
Corporate			2,263,481				2,484,401				2,178,643				2,095,871				2,237,493
Deposits
Demand deposits			6,659,174				6,644,367				7,356,121				7,079,271				7,238,303
Time deposits			11,682,908				12,101,216				12,182,767				12,722,899				12,997,791
Total deposits			18,342,082				18,745,583				19,538,888				19,802,170				20,236,094
Loans / Deposits1			101.8	%			103.9	%			98.5	%			98.2	%			97.8	%
Average balances
Avg. interest earning assets			25,859,714				26,960,678				27,198,456				27,801,452				28,627,966
Avg. loans			23,975,617				24,765,949				25,220,702				25,542,836				25,994,155
Avg. assets			32,037,326				34,139,533				34,507,339				34,754,591				35,195,160
Avg. demand deposits			6,663,795				6,620,448				6,830,026				7,181,633				7,280,495
Avg equity			2,570,721				2,615,864				2,703,134				2,772,379				2,714,063
Avg. free funds			9,234,515				9,236,312				9,533,160				9,954,012				9,994,558
Capitalization
Risk weighted assets			25,734,108				26,762,555				26,457,597				26,608,992				26,876,727
Tier I (Shareholders' equity)			2,577,776				2,649,228				2,734,699				2,821,692				2,704,685
Tier II			753,492				765,342				803,517				773,581				781,772
Regulatory capital			3,331,268				3,414,570				3,538,216				3,595,272				3,486,457
Tier I ratio			10.0	%			9.9	%			10.3	%			10.6	%			10.1	%
BIS ratio			12.9	%			12.8	%			13.4	%			13.5	%			13.0	%
Profitability & Efficiency
Net interest margin (NIM)2			5.1	%			4.9	%			4.7	%			4.5	%			4.6	%
Client NIM3			4.9	%			4.9	%			4.8	%			4.9	%			4.8	%
Efficiency ratio4			40.3	%			39.6	%			43.5	%			41.6	%			43.8	%
Costs / assets5			2.0	%			1.9	%			2.1	%			1.9	%			1.9	%
Avg. Demand deposits / interest earning assets			25.8	%			24.6	%			25.1	%			25.8	%			25.4	%
Return on avg. equity			21.8	%			19.8	%			12.4	%			18.1	%			17.1	%
Return on avg. assets			1.8	%			1.5	%			1.0	%			1.4	%			1.3	%
Return on RWA			2.2	%			1.9	%			1.3	%			1.9	%			1.7	%

 

 

 

 

		Jun-15				Sep-15				Dec-15				Mar-16				Jun-16
Asset quality
Impaired loans6			1,633,035				1,678,153				1,669,341				1,642,087				1,645,082
Non-performing loans (NPLs)7			661,052				638,392				641,831				639,981				566,177
Past due loans8			390,059				374,349				364,771				353,610				340,761
Loan loss reserves			703,289				727,831				754,679				784,073				795,218
Impaired loans / total loans			6.7	%			6.7	%			6.6	%			6.4	%			6.3	%
NPLs / total loans			2.73	%			2.53	%			2.54	%			2.49	%			2.16	%
PDL / total loans			1.61	%			1.48	%			1.44	%			1.38	%			1.30	%
Coverage of NPLs (Loan loss allowance / NPLs)			106.4	%			114.0	%			117.6	%			122.5	%			140.5	%
Coverage of PDLs (Loan loss allowance / PDLs)			180.3	%			194.4	%			206.9	%			221.7	%			233.4	%
Risk index (Loan loss allowances /  Loans)9			2.90	%			2.89	%			2.98	%			3.05	%			3.04	%
Cost of credit (prov expense annualized / avg. loans)			1.36	%			1.66	%			2.38	%			1.22	%			1.28	%
Network
Branches			478				475				471				470				468
ATMs			1,604				1,556				1,536				1,529				1,484
Employees			11,614				11,604				11,723				11,793				11,653
Market information (period-end)
Net income per share (Ch$)			0.74				0.69				0.44				0.67				0.62
Net income per ADR (US$)			0.47				0.40				0.25				0.39				0.37
Stock price			32.31				31.54				31.79				32.57				31.92
ADR price			20.25				18.22				17.64				19.35				19.37
Market capitalization (US$mn)			9,540				8,584				8,310				9,116				9,126
Shares outstanding			188,446.1				188,446.1				188,446.1				188,446.1				188,446.1
ADRs (1 ADR = 400 shares)			471.1				471.1				471.1				471.1				471.1
Other Data
Quarterly inflation rate10			1.5	%			1.5	%			1.1	%			0.7	%			0.9	%
Central Bank monetary policy reference rate (nominal)			3.00	%			3.00	%			3.25	%			3.50	%			3.50	%
Observed Exchange rate (Ch$/US$)  (period-end)			634.58				691.73				707.34				675.10				661.49

 

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

2 NIM = Net interest income annualized divided by interest earning assets

3 Client NIM = Net interest income from reporting segments annualized over average loans

4 Efficiency ratio =(Net interest income+ net fee and commission income +financial transactions net + Other operating income +other operating expenses) divided by (Personnel expenses + admiinistrative expenses + depreciation). Excludes impairment charges

5 Costs / assets = (Personnel expenses + adm. Expenses + depreciation) / Total assets

6 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.

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

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

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

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