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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

  

 

 

 

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: November 17, 2017

 

 

 

 

 

Exhibit 99.1

 

The unaudited financial information has 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.

 

 

 

 

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(santander Logo)

 

Section 1: Key consolidated data

 

(Graphic) Balance Sheet (Ch$mn)  Sept’17   Sept’16   % Change 
Total assets   35,152,715    35,800,252    (1.8%)
Gross customer loans   27,761,585    26,868,375    3.3%
Customer deposits   19,862,372    20,040,250    (0.9%)
Customer funds   25,386,680    25,310,065    0.3%
Total shareholders’ equity   2,971,938    2,794,109    6.4%

 

(Graphic) Income Statement (Ch$mn)   9M17    9M16    % Change 
Net interest income   980,190    964,717    1.6%
Net operating profit before provisions for loan losses   1,372,470    1,272,658    7.8%
Provision for loan losses   (222,400)   (255,573)   (13.0%)
Op expenses excluding impairment and other op. exp.   (522,249)   (508,889)   2.6%
Income before tax   552,460    445,477    24.0%
Net income attributable to equity holders of the Bank   430,137    363,718    18.3%

 

(Graphic) Profitability and efficiency   9M17    9M16    Change bp 

Net interest margin (NIM) 1

   4.3%   4.4%   -10 
Efficiency ratio2   40.2%   42.1%   -195 
Return on avg. equity   20.0%   17.3%   +207 
Return on avg. assets   1.7%   1.4%   +30 
Core Capital ratio   10.7%   10.3%   +37 
BIS ratio   13.6%   13.2%   +39 
Return on RWA   2.1%   1.8%   +300 

 

(Graphic) Asset quality ratios (%)  Sept’17   Sept’16   Change bp 
NPL ratio3   2.1%   2.1%   +5 
Coverage of NPLs  ratio 4   137.2%   145.9%   -870 
Cost of credit5   1.1%   1.4%   -36 

 

(Graphic) Structure (#)  Sept’17   Sept’16   Change (%) 
Branches   405    464    (12.7%)
ATMs   937    1,406    (33.4%)
Employees   11,052    11,557    (4.4%)

 

(Graphic) Market capitalization  sep-17   sep-16   Change (%) 
Net income per share (Ch$)   2.28    1.93    18.3%
Net income per ADR (US$)   1.43    1.17    21.6%
Stock price (Ch$/per share)   47.59    34.04    39.8%
ADR price (US$ per share)   29.71    20.69    43.6%
Market capitalization (US$mn)   13,997    9,747    43.6%
Shares outstanding (millions)   188,446.1    188,446.1    —%
ADRs (1 ADR = 400 shares) (millions)   471.1    471.1    —%

 

1 NIM = Net interest income annualized divided by interest earning assets.

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

4. Loan loss allowance divided by Capital + future interest of all loans with one installment 90 days or more overdue.

5. Provision expense annualized divided by average loans.

 

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(santander Logo) 

 

Section 2: Summary of results1

 

Solid results with ROAE of 20.0% for 9M17 driven by strong net contribution from business segments

 

Net income attributable to shareholders in 9M17 totaled Ch$430,137 million, increasing 18.3%, with a ROAE2 of 20.0% YTD. These positive results were driven by client activities reflected in the 21.2% YoY increase in Net contribution from business segments3. This was led by a 40.0% increase in net contribution from our Retail Banking segment4, which more than offset the negative effects of lower inflation rate on net interest margins and a higher corporate tax rate.

 

(chart) 

 

 

In the third quarter, net income attributable to shareholders totaled Ch$137,326 million (Ch$0.73 per share and US$0.46/ADR), increasing 12.6% YoY and decreasing 8.7% QoQ. The QoQ fall in results was mainly due to the impact of a lower inflation on margins in the quarter. The YoY rise in quarterly results was mainly due to a rise in client margins, a fall in the cost of credit, greater fees and cost control. The Bank’s ROAE in the quarter reached 18.8% in 3Q17 compared to 20.8% in 2Q16 and up from 17.7% in 3Q16.

 

Loans increase 2.2% QoQ with growth in all business segments

 

Total loans increased 2.2% QoQ and 3.3% YoY in 3Q17 with growth in all segments. During the quarter, there was some improvement in various economic indicators, leading to a gradual pick up of loan growth. Retail banking loans increased 0.9% QoQ and 4.5% YoY. The Bank continued to prioritize growth in the mid to high income segments, while maintaining the process of downsizing Santander Banefe, our division for the mass consumer market. Loan growth among middle and high-income earners increased 1.0% QoQ and 5.7% YoY. Meanwhile, in the mass consumer market, loans decreased 10.0% QoQ and 29.5% YoY. Loans to SMEs increased 1.4% QoQ and grew 4.6% YoY.  In this segment, the Bank focused on growing the loan book among larger, less risky SMEs. This segment continued to generate the highest margins net of risk in the Bank. Loans in the Middle-market increased 2.3% QoQ and 3.5% YoY. Following various quarters of subdued growth, this segment’s loan portfolio experienced an acceleration of loan volumes in line with better economic growth figures. In Global corporate Banking (GCB), loans growth also recovered and increased 10.3% QoQ, but is still decreasing 10.9% YoY.

 

 

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

3.Net contribution from business segments is defined as Net interest income + Net fee and commission income + Total financial transactions - provision for loan losses – operating expenses.

4.Retail banking = Individuals + Small and Mid-sized companies (SMEs).

 

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(santander Logo)

 

Rate cut and lower loan growth drives shift of time deposits towards fee generating mutual funds

 

In 2017, the Bank’s funding strategy has been focused on lowering deposits rates in tandem with the lower Central Bank rates, and optimizing liquidity levels. In 3Q17, as loan growth began to accelerate, deposits also began to rise at a higher pace, but with controlled funding costs. Total deposits expanded 3.2% QoQ with time deposits rising 4.4% and demand deposits increasing 1.0%. The cost of time deposits in the quarter decreased an additional 40 basis points QoQ to 2.6%.

 

NIMs, net or risk: Lower inflation offset by lower cost of funds and stable cost of credit

 

Total NIM5 was 4.3% in 3Q17, down 30bp QoQ YoY and 20bp YoY due to lower inflation during the quarter. The Bank has more assets linked to inflation than liabilities; therefore, in periods of lower inflation, our margins are compressed. Client NIMs6 (defined as Client NII divided by average loans, which excludes the impact of inflation and the ALCO’s liquidity portfolio), were stable at 5.0% in 3Q17. The Bank has managed to maintain client NIMs by enforcing a strict pricing policy on loans and a lower cost of funds.

 

The negative impact of a lower inflation rate in the quarter was also offset by the improvements in the cost of credit7. NIM net of risk8 for 3Q17, was 3.3%, down from 3.6% 2Q17, however up from 3.2% in 3Q16. The Client NIM net of risk increased to 3.9%, up slightly by 2bp from 2Q17 and 35bp from 3Q16. In general asset quality indicators remained stable in the quarter. The NPL ratio decreased to 2.1%, with a reduction in the NPL ratio of commercial and mortgage loans. On the other hand, the low growth of the economy during most of the year has resulted in some deterioration of the impaired loan ratio which increased from 6.3% as of June 2017 to 6.4% as of September 2017. Provision for loan losses decreased 5.9% QoQ and 23.5 % YoY in 3Q17, reflecting the change in the loan mix as part of the de-risking strategy enforced by the Bank which has led to a cost of credit of 1.1% in 3Q17, an improvement on the 1.4% in 3Q16.

 

(chart) 

 

 

5.Annualized Net interest income divided by average interest earning assets.

6.Net interest income from our business segments (Client NII) divided by average loans

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

8.Annualized Net interest income minus annualized provisions divided by average interest earning assets.

 

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(SANTANDER LOGO) 

 

Greater customer loyalty & satisfaction fueling solid fee growth

 

In 3Q17, fee income decreased 5.2% QoQ and increased 5.7% YoY. The YoY rise in fees continues to be driven by improvements in client loyalty and satisfaction. Loyal individual customers (clients with >4 products plus minimum usage and profitability levels) in the High-income segment grew 10.4% YoY. Among Mid-income earners, loyal customers increased 3.2% YoY. Loyal Middle-market and SME clients grew 7.4% YoY.

 

The QoQ decline in fees was mainly due to: (i) the decrease in ATM card fees income, as we have been optimizing the ATM network, which negatively affects fee income, but has a positive impact on costs and efficiency (See Operating expenses and Efficiency.) and (ii) a reduction in fees from the GCB segment, following a strong first half in investment and transactional banking activities.

 

Sustained rise in productivity and digitalization. Efficiency ratio at 40.2% in 3Q17

 

The Bank’s efficiency ratio9 reached 40.2% in 3Q17 compared to 41.1% in the same period of last year. Operating expenses grew 2.5% QoQ and 4.8% YoY. The relatively low cost growth is a direct consequence of the various initiatives that the Bank has been implementing to improve productivity and efficiency. Personnel expenses decreased 0.5% QoQ in 3Q17 and increased 1.2% YoY mainly due to the rise in salaries as they are adjusted according to CPI inflation. However, this has been offset by a 4.4% decrease in total headcount in the last twelve months. Administrative expenses increased 7.7% YoY in 3Q17 mainly explained by expenses to re-model branches to a new multi-segment format, opening of more WorkCafé and investments in the development of new digital initiatives. This quarter we also launched another digital milestone, our 100% Digital Onboarding platform. This platform allows non-clients to become a client of the Bank vía our APP using Touch ID or the web page, ensuring automatic credit scoring and data check.

 

Solid core capital10 ratio of 10.7% as of September 2017.

 

The Bank’s Core capital ratio reached 10.7% at the end of 3Q17, 40bp higher than the levels as of September 2016. The total BIS ratio11 was stable at 13.6% as of September 2017 with a YoY growth of RWA of 2.7%.

 

 

9. 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.

10. Core capital ratio = Shareholders’ equity divided by risk-weighted assets according to SBIF BIS I definitions.

11. BIS ratio: Regulatory capital divided by Risk Weighted Assets.

 

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(SANTANDER LOGO)

 

(GRAPHIC) Summary of Quarterly Results

(Ch$ Million)

 

   Quarter   Change% 
   3Q17   2Q17  3Q16   3Q17 / 3Q16   3Q17 / 2Q17 
Net interest income   317,581    344,034    323,407    (1.8%)   (7.7%)
Net fee and commission income   68,102    71,838    64,424    5.7%   (5.2%)
Total financial transactions, net   39,441    35,405    40,689    (3.1%)   11.4%
Provision for loan losses   (72,028)   (76,510)   (94,211)   (23.5%)   (5.9%)
Operating expenses (excluding Impairment and Other operating expenses)   (178,958)   (174,511)   (170,832)   4.8%   2.5%
Impairment, Other operating income and expenses, net   14,903    (19,297)   (12,654)   (217.8%)   (177.2%)
Operating income   189,041    180,959    150,823    25.3%   4.5%
Net income attributable to shareholders of the Bank   137,326    150,436    121,979    12.6%   (8.7%)
Net income/share (Ch$)   0.73    0.80    0.65    12.6%   (8.7%)
Net income/ADR (US$)1   0.46    0.48    0.39    16.1%   (5.2%)
Total loans   27,761,585    27,156,024    26,868,375    3.3%   2.2%
Deposits   19,862,372    19,255,177    20,040,250    (0.9%)   3.2%
Shareholders’ equity   2,971,938    2,895,250    2,794,109    6.4%   2.6%
Net interest margin   4.3%   4.6%   4.5%          
Efficiency ratio2   40.2%   40.4%   41.1%          
Return on equity3   18.8%   20.8%   17.7%          
NPL / Total loans4   2.1%   2.2%   2.1%          
Coverage NPLs   137.2%   136.2%   145.9%          
Cost of credit5   1.1%   1.1%   1.4%          
Core Capital ratio6   10.7%   10.8%   10.3%          
BIS ratio   13.6%   13.6%   13.2%          
Branches   405    406    464           
ATMs   937    1,059    1,406           
Employees   11,052    11,068    11,557           

 

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 average 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 = Shareholders’ equity divided by risk-weighted assets according to SBIF BIS I definitions.

 

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(SANTANDER LOGO)

 

Section 3: YTD Results by reporting segment

 

Net contribution from business segments rises 21.2% YoY in 9M17

 

(GRAPHIC)  Year to date results

(Ch$ Million)

 

   Retail Banking1   Middle market2   Global corporate banking3   Total segments4 
Net interest income   731,791    196,889    74,519    1,003,199 
Change YoY   6.6%   7.8%   5.4%   6.7%
Net fee and commission income   155,186    27,263    22,103    204,552 
Change YoY   2.0%   (4.9%)   10.4%   1.8%
Core revenues   886,977    224,152    96,622    1,207,751 
Change YoY   5.8%   6.0%   6.5%   5.9%
Total financial transactions, net   14,743    10,537    42,664    67,944 
Change YoY   (7.3%)   (27.7%)   (1.9%)   (8.1%)
Provision for loan losses   (212,175)   (13,803)   2,352    (223,626)
Change YoY   (15.2%)   (15.6%)   (16.2%)   (15.2%)
Net operating profit from business segments5   689,545    220,886    141,638    1,052,069 
Change YoY   14.1%   5.4%   3.4%   10.6%
Operating expenses6   (398,444)   (68,642)   (44,671)   (511,757)
Change YoY   0.5%   2.5%   6.7%   1.3%
Net contribution from business segments   291,101    152,244    96,967    540,312 
Change YoY   40.0%   6.8%   1.9%   21.2%

 

1. Retail consists of individuals and SMEs with annual sales below 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 op. profit is defined as Net interest income + Net fee and commission income + Total financial transactions - provision for loan losses.

6. Operating expenses = personnel expenses +administrative expenses + depreciation.

 

Net contribution from our business segments rose 21.2% YoY in 9M17 compared to the same period of 2016. These results exclude our Corporate Activities, which include, among other items, the impact of inflation on results, the impact of movements in the exchange rate in our provision expense and the results from our liquidity portfolio. The net contribution from Retail banking increased 40.0% YoY. Core revenues (net interest income + fees) increased 5.8% YoY driven by a 6.6% YoY increase in Net interest income. This rise in revenues was furthered leveraged on the 15.2% decrease in provision expenses due to the shift in the loan mix towards the middle-high income segments and larger SMEs. Operating expenses in this segment were controlled, increasing only 0.5% as productivity continued to rise. Net contribution from the Middle-market increased 6.8% YoY in 9M17. Core revenues in this segment grew 6.0%, led by a 7.8% increase in net interest revenue, and a 15.6% decrease in provision for loan losses. This was achieved despite an environment of low loan growth, reflecting this segments focus on non-lending revenues. This was offset by lower financial transactions. Net contribution from GCB rose 1.9% in 9M17. Core revenues increased 6.5% YoY driven by an improvement in interest income (5.4% YoY) and a 10.4% rise in fees. The Bank’s strength in cash management services and financial advisory fees has driven income in this segment.

 

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(SANTANDER LOGO)

 

Section 4: Loans, funding and capital

 

Loans

 

Loan growth slowly picking up in the quarter as the Bank remains focused on profitability

 

Total loans increased 2.2% QoQ and 3.3% YoY in 3Q17 with growth in all segments. During the quarter, there was some improvement in various economic indicators, leading to a gradual pick up of loan growth. We expect loan growth to gain momentum for the last quarter and in 2018, as the speed of economic growth should gain momentum.

 

(GRAPHIC)  Loans by segment

(Ch$ Million)

 

   Quarter   Change% 
   Sept-17   Jun-17   Sept-16   Sept-17 / 16   Sept-17 / Jun 17 
Total loans to individuals1   15,116,076    15,005,163    14,463,152    4.5%   0.7%
Consumer loans   4,477,196    4,469,821    4,311,786    3.8%   0.2%
Residential mortgage loans   8,935,539    8,861,371    8,471,975    5.5%   0.8%
SMEs   3,772,564    3,719,986    3,605,955    4.6%   1.4%
Retail banking   18,888,640    18,725,149    18,069,107    4.5%   0.9%
Middle-market   6,616,905    6,470,422    6,390,830    3.5%   2.3%
Global Corporate Banking   2,068,780    1,876,105    2,322,994    (10.9%)   10.3%
Total loans2   27,761,585    27,156,024    26,868,375    3.3%   2.2%

 

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 includes interbank loans. See Note 3 of the Financial Statements.

 

Retail banking loans increased 0.9% QoQ and 4.5% YoY. The Bank continued to prioritize growth in the mid to high income segments and continued with the process of downsizing Santander Banefe, our division for the mass consumer market (persons with disposable income of less than US$800/month approximately). Loans to individuals increased 0.7% QoQ and 4.5% YoY. Consumer loans increased 0.2% QoQ and 3.8% YoY. Mortgage loans increased 0.8% QoQ and 5.5% YoY. Loan growth among middle and high-income earners increased 1.0% QoQ and 5.7% YoY. Meanwhile, in the low end of the consumer market, loans decreased 10.0% QoQ and 29.5% YoY.

 

Loans to SMEs increased 1.4% QoQ and grew 4.6% YoY.  In this segment, the Bank focused on growing the loan book among larger, less riskier SMEs due to risk considerations and also due to the fact that larger SMEs generate higher non-lending revenues. This segment continues to generate the highest margins net of risk in the Bank.

 

In the corporate segments of the Bank loan growth also rebounded in the quarter in line with the more positive economic outlook. Loans in the Middle-market increased 2.3% QoQ and 3.5% YoY. In GCB, loans growth was also positive for the first time this year, increasing 10.3% QoQ, but is still decreasing 10.9% YoY.

 

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(SANTANDER LOGO)

 

Funding and Liquidity

 

Positive deposit growth in the quarter. Cost of funds continues to improve

 

(GRAPHIC)   Funding

(Ch$ Million)

 

   Quarter   Change% 
   Sept-17   Jun-17   Sept-16   Sept-17 / 16   Sept-17 / Jun 17 
Demand deposits   7,270,501    7,195,893    6,913,452    5.2%   1.0%
Time deposits   12,591,871    12,059,284    13,126,798    (4.1%)   4.4%
Total Deposits   19,862,372    19,255,177    20,040,250    (0.9%)   3.2%
Mutual Funds brokered1   5,524,308    5,562,941    5,269,815    4.8%   (0.7%)
Bonds   6,900,261    7,045,748    6,889,770    0.2%   (2.1%)
Adjusted loans to deposit ratio2   101.0%   100.3%   95.6%          
LCR 3   122.5%   123.1%   124.1%          
NSFR 4   106.0%   102.9%   105.6%          

 

1. Banco Santander Chile is the exclusive broker of mutual funds managed by Santander Asset Management S.A. Administradora General de Fondos, a subsidiary of SAM Investment Holdings Limited.

2. Ratio =(Net 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 funded with long term bonds in the numerator of our ratio.

3. Liquidity Coverage Ratio calculated according to ECB rules. Chilean ratios are still under construction.

4. Net Stable Funding Ratio calculated using internal methodology. Chilean ratios are still under construction.

 

In 2017, the Bank’s funding strategy has been focused on lowering deposits rates in tandem with the lower Central Bank rates, and optimizing liquidity levels. In 3Q17, as loan growth began to accelerate, deposits also began to rise at a higher pace, but with controlled funding costs. Total deposits expanded 3.2% QoQ with time deposits rising 4.4% and demand deposits increasing 1.0%. The cost of time deposits in the quarter decreased an additional 40 basis points QoQ to 2.6%.

 

 (LINE GRAPH)

 

The Bank’s liquidity levels remains healthy in the quarter. Our LCR ratio reached 122.5% as of September 2017 and the NSFR ratio reached 106.0% in the same period.

 

 

12. Corresponds to interest expense paid on time deposits divided by the quarterly average balance of time deposits

 

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Shareholders’ equity and regulatory capital

 

ROAE13 of 20.0% in 9M17. Core Capital ratio at 10.7%.

 

Equity
(Ch$ Million)

 

   Quarter   Change% 
   Sept-17   Jun-17   Sept-16   Sept-17 / 16   Sept-17 / Jun 17 
Capital   891,303    891,303    891,303    —%   —%
Reserves   1,781,818    1,781,817    1,640,112    8.6%   —%
Valuation adjustment   (2,279)   17,162    8,091    —%   —%
Retained Earnings:                         
Retained earnings prior periods   —    —    —    —%   —%
Income for the period   430,137    292,811    363,718    18.3%   46.9%
Provision for mandatory dividend   (129,041)   (87,843)   (109,115)   18.3%   46.9%
Equity attributable to equity holders of the Bank   2,971,938    2,895,250    2,794,109    6.4%   2.6%
Non-controlling interest   46,443    30,058    31,720    46.4%   54.5%
Total Equity   3,018,381    2,925,308    2,825,829    6.8%   3.2%
Quarterly ROAE   18.8%   20.8%   17.7%          
YTD ROAE   20.0%   20.3%   17.3%          

 

Shareholders’ equity totaled Ch$2,971,938 million as of September 30, 2017. The Bank’s ROAE in 3Q17 reached 18.8% and 20.0% for the first nine months of the year, in line with guidance and 200 bp higher than in the same period of 2016. The Bank’s Core capital ratio14 reached 10.7% at the end of 3Q17, 40bp higher than the levels as of September 2016. Compared to 2Q17, core capital levels remained stable. The total BIS ratio15 reached 13.6% as of September 2017 with RWA growing 2.7% YoY.

 

Capital Adequacy
(Ch$ Million)

 

   Quarter   Change% 
   Sept-17   Jun-17   Sept-16   Sept-17 / 16   Sept-17 / Jun 17 
Tier I (Core Capital)   2,971,938    2,895,250    2,794,109    6.4%   2.6%
Tier II   814,652    799,032    786,935    3.5%   2.0%
Regulatory capital   3,786,590    3,694,282    3,581,044    5.7%   2.5%
Risk weighted assets   27,863,424    27,132,274    27,130,806    2.7%   2.7%
Tier I (Core Capital) ratio   10.7%   10.7%   10.3%          
BIS ratio   13.6%   13.6%   13.2%          

 

 

13. Return on average equity

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

15. BIS ratio: Regulatory capital divided by RWA.

 

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Section 5: Analysis of quarterly income statement

 

Net interest income

 

Total NIM decreases to 4.3% in 3Q17 with Client NIMs stable at 5.0%.

 

In 3Q17, Net interest income, NII, decreased 7.7% QoQ and 1.8% YoY, mainly due to the lower inflation in the quarter. The Net interest margin, NIM fell to 4.3% compared to 4.6% in 2Q17 and 4.5% in 3Q16. The Bank partially counteracted the impacts of negative inflation by maintaining stable client margins, optimizing liquidity levels and lowering the net gap in inflation indexed assets. 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 income16.

 

Net Interest Income / Margin (Ch$ Million)

 

   Quarter   Change% 
   3Q17   2Q17   3Q16   3Q17 / 3Q16   3Q17 / 2Q17 
Net interest income from business segments   336,132    338,393    327,478    2.6%   (0.7%)
Non-client net interest income   (18,551)   5,641    (4,071)   355.8%   —%
Net interest income   317,581    344,034    323,407    (1.8%)   (7.7%)
Average interest-earning assets   29,572,180    29,917,800    28,979,918    2.0%   (1.2%)
Average loans   27,149,550    27,036,649    26,550,078    2.3%   0.4%
Avg. net gap in inflation indexed (UF) instruments1   3,603,445    4,183,995    4,803,260    (25.0%)   (13.9%)
Interest earning asset yield2   6.2%   7.4%   7.4%          
Cost of funds3   2.0%   2.8%   3.3%          
Client net interest margin4   5.0%   5.0%   4.9%          
Net interest margin (NIM) 5   4.3%   4.6%   4.5%          

Quarterly inflation rate6 

   -0.03%   0.7%   0.6%          
Central Bank reference rate   2.5%   2.5%   3.5%          

 

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

2. Interest income divided by average interest earning assets.

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

4. Annualized Net interest income from business segments divided by average loans.

5. Annualized Net interest income divided by average interest earning assets.

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

 

Client NII. In 3Q17, Net interest income from our business segments (Client NII) increased 2.6% YoY and fell 0.7% QoQ. Average loans were relatively flat QoQ and grew 2.3% YoY. Client NIMs (defined as Client NII divided by average loans), which excludes the impact of inflation and the ALCO’s liquidity portfolio, remained stable at 5.0% in 3Q17. The Bank has managed to maintain client NIMs by strict pricing standards and lower funding costs.

 

 

16. Client Net interest income: NII from the Bank’s reporting segments that includes NII from the Retail, Middle-market and GCB segments. 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 the available for sale portfolio and the interest expense to fund the Bank’s trading investment portfolio. The interest from the Bank’s financial investments classified as trading are recognized as Financial transactions net.

 

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Non-client NII. The variation Unidad de Fomento (an inflation indexed currency unit or UF) in 3Q17 was -0.03% compared to 0.7% in 2Q17 and 0.6% in 3Q16. The Bank has more assets than liabilities linked to inflation and, as a result, margins go up when inflation accelerates and vice-versa. On a QoQ basis, the decrease in non-client net interest income is due to the lower inflation rate in 3Q17 compared to 2Q17 and 3Q16. It is important to note that despite negative UF inflation in 3Q17 compared to 3Q16, the Bank reduced the impact this has on margins by: (i) the Bank lowered its UF gap exposure by 13.9% QoQ and 25.0% YoY, (ii) strong client NIMs, as mentioned above driven by the cut in the Central Bank’s monetary policy rate to 2.5%. The Bank’s liabilities, mainly time deposits, have a shorter duration than assets, so a 100bp average yearly fall in short-term interest rates should result in an approximately 12bp rise in NIMs.

 

Going forward, Client NIMs should remain stable at current levels. At the same time, the UF inflation rate in 4Q17 should be slightly higher than in 3Q17. For 2018, we are expecting a variation of the UF inflation of 2.5-2.7% compared to 1.9% in 2017 with stable short-term interest rates.

 

(LINE GRAPH)

  

Asset quality and provision for loan losses

 

Stable asset quality indicators in the quarter. Cost of credit at 1.1%

 

In general, asset quality indicators remained stable in the quarter. On the one hand the NPL ratio improved slightly to 2.1% in 3Q17 compared to 2.2% in 2Q17, in line with the Bank’s loan growth strategy of steering away from the low end of the consumer market. Similarly, the Bank’s Expected loss ratio or Risk index, measured as Loan Loss Allowances (LLA) over total loans also remained stable at 2.9% as of September 2017. The coverage ratio of NPLs reached 137.2% as of September 2017. At the same time during September 2017, and as part of the normal process of updating the provisioning model for loans analyzed on a group basis, the Bank calibrated these models, incorporating a greater historical depth, including a recession period, thus strengthening the parameters of probability of default and loss given default. This calibration resulted in an increase in provisions associated with commercial and mortgage loans and a decrease in provisions associated with consumer loans, without generating significant differences in the total stock of provisions for credit risk. Finally, As economic growth remained sluggish in 1H17, this fueled some deterioration of the impaired loan ratio from 6.3% as of June 2017 to 6.4% as of September 2017.

 

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Provision for loan losses (Ch$ Million)

 

   Quarter   Change% 
   3Q17   2Q17   3Q16   3Q17 / 3Q16   3Q17 / 2Q17  
Gross provisions   (51,746)   (49,898)   (68,553)   (24.5%)   3.7%
Charge-offs1   (42,816)   (47,379)   (45,783)   (6.5%)   (9.6%)
Gross provisions and charge-offs   (94,562)   (97,277)   (114,336)   (17.3%)   (2.8%)
Loan loss recoveries   22,534    20,767    20,125    12.0%   8.5%
Provision for loan losses   (72,028)   (76,510)   (94,211)   (23.5%)   (5.9%)
Cost of credit2   1.1%   1.1%   1.4%   -25bp   -6bp
Total loans3   27,761,585    27,156,024    26,868,375    3.3%   2.2%
Total Loan loss allowances (LLAs)   (809,021)   (799,442)   (812,707)   (0.5%)   1.2%
Non-performing loans4 (NPLs)   589,581    587,107    556,965    5.9%   0.4%
NPLs consumer loans   89,190    90,524    94,233    (5.4%)   (1.5%)
NPLs commercial loans   344,518    338,728    317,070    8.7%   1.7%
NPLs residential mortgage loans   155,873    157,855    145,662    7.0%   (1.3%)
Impaired loans5   1,788,049    1,705,257    1,594,267    12.2%   4.9%
Impaired consumer loans   327,396    309,040    282,709    15.8%   5.9%
Impaired commercial loans   1,015,198    966,085    918,918    10.5%   5.1%
Impaired residential mortgage loans   445,455    430,132    392,640    13.5%   3.6%
Expected loss ratio6 (LLA / Total loans)   2.9%   2.9%   3.0%          
NPL / Total loans   2.1%   2.2%   2.1%          
NPL / consumer loans   2.0%   2.0%   2.2%          
NPL / commercial loans   2.4%   2.5%   2.3%          
NPL / residential mortgage loans   1.7%   1.8%   1.7%          
Impaired loans / total loans   6.4%   6.3%   5.9%          
Impaired consumer loan ratio   7.3%   6.9%   6.6%          
Impaired commercial loan ratio   7.2%   7.1%   6.7%          
Impaired mortgage loan ratio   5.0%   4.9%   4.6%          
Coverage of NPLs7   137.2%   136.2%   145.9%          
Coverage of NPLs non-mortgage8   170.7%   172.4%   182.4%          
Coverage of consumer NPLs   315.5%   328.8%   318.6%          
Coverage of commercial NPLs   133.3%   130.6%   141.9%          
Coverage of mortgage NPLs   43.9%   37.5%   42.8%          

 

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. Includes 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.

 

Provision for loan losses decreased 5.9% QoQ and 23.5% YoY. The cost of credit in the quarter was 1.1% stable compared to 2Q17 and improving compared to 1.4% in 3Q16. On a QoQ basis, while gross provisions increased, charge-offs were down 9.6% QoQ and loan loss recoveries were up 8.5% QoQ. On a YoY basis, the change in the loan mix continues to be the main force driving down our cost of credit. As a result of the lower cost of credit and stable Client spreads, Client NIMs, net of risk increased 40bp in 3Q17 compared to 3Q16.

  

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(GRAPHIC)  Provision for loan losses

(Ch$ Million)

 

By product provision for loan losses was as follows:

 

   Quarter   Change% 
    3Q17   2Q17   3Q16   3Q17 / 3Q16    3Q17 / 2Q17  
Consumer loans   (19,972)   (47,754)   (68,131)   (70.7%)   (58.2%)
Commercial loans1   (40,124)   (26,313)   (27,503)   45.9%   52.5%
Residential mortgage loans   (11,932)   (2,443)   1,423    —%   388.4%
Provision for loan losses   (72,028)   (76,510)   (94,211)   (23.5%)   (5.9%)
  
1. Includes provision for loan losses for contingent loans.

 

Provisions for loan losses for consumer loans decreased 70.7% QoQ and 58.2% YoY. As mentioned in previous earnings reports, the Bank has been enforcing a strategy of lowering its exposure to the low-end of the consumer loan market and this continues to be one driving force in the reduction in provision for loan losses in the consumer loan book. At the same time the re-calibration mentioned above resulted in a reversal of provisions for consumer loans in the quarter. This also explains the reduction of the coverage ratio of consumer loans to 315.5% as of September 2017. Consumer NPLs reached 2.0% as of September 2017 compared to 2.0% in 2Q17 and 2.2% as of September 2016. The impaired consumer loan ratio, increased from 6.9% as of June 2017 to 7.3% as of September 2017, as the Bank saw a rise in early impaired loans status, following a weaker job market in the first half of the year.

 

Provisions for loan losses for commercial loans increased 45.9% QoQ and decreased 52.5% YoY. This rise was mainly due to the re-calibration of the commercial loan provisioning model for loans analyzed on a group basis. For this same reason, the coverage ratio of commercial NPLs rose to 133.3% as of September 2017. The commercial NPL ratio was 2.4% in 2Q17 compared to 2.5% in 2Q17 and 2.3% in 3Q16.

 

Provisions for loan losses for residential mortgage loans increased to Ch$11,932 million in the quarter. This rise was mainly due to the re-calibration of the mortgage loan provisioning model for loans analyzed on a group basis. However, the NPL ratio of mortgage loan was improved to 1.7% and the coverage ratio of mortgage NPLs reached 43.9% as of September 2017. As economic growth remained sluggish, especially in the first half of the year, there was some deterioration of the impaired loan ratio that reached 5.0% in 3Q17, 10bp higher QoQ and 40bp higher on a YoY comparison. The Bank also continues to improve the LTV of the mortgage book at origination. Below we have also included a graph with the evolution of the loan-to-value (LTV) of our mortgage loans of the incoming loans.

 

(LINE GRAPH) 

 

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Net fee and commission income

 

Greater customer loyalty & satisfaction fueling fee growth

 

In 3Q17, fee income decreased 5.2% QoQ and increased 5.7% YoY. In retail banking, fees decreased 6.0% QoQ and 13.0% YoY. This is mainly explained by the decrease in ATM card fees income as we have been optimizing the ATM network, which negatively affects fees, but has a positive impact on costs and efficiency (See Operating expenses and Efficiency.) Client loyalty continues to rise in retail banking. Loyal individual customers (clients with >4 products plus minimum usage and profitability levels) in the High-income segment grew 10.4% YoY. Among Mid-income earners, loyal customers increased 3.2% YoY. By products, the biggest contributors to fee income growth were collection of mortgage related insurance fees, asset management and checking account fees.

 

(GRAPHIC)  Fee Income by client segment

(Ch$ Million)

 

   Quarter   Change% 
    3Q17   2Q17   3Q16   3Q17 / 3Q16    3Q17 / 2Q17  
Retail banking1   49,924    53,087    57,354    (13.0%)   (6.0%)
Middle-market   9,003    9,117    9,578    (6.0%)   (1.3%)
Global corporate banking   5,560    5,901    6,624    (16.1%)   (5.8%)
Others   3,615    3,733    (9,132)   —%   (3.2%)
Total   68,102    71,838    64,424    5.7%   (5.2%)
  
1. Includes fees to individuals and SMEs.

 

Fees in the Middle-market decreased 6.0% YoY as this segment is the most sensitive to the lower economic growth. This was compensated by the rise in customer loyalty in this segment. Loyal Middle-market and SME clients grew 7.4% YoY.

 

Fee in GCB fell 5.8% QoQ after a good 1H17. Fees in this segment are deal driven and, therefore, tend to vary significantly from quarter to quarter. The strength of the Bank in providing value added non-lending services, such as cash management and financial advisory services should continue to drive fee income in this segment.

 

(BAR CHART) 

 

1. Loyal high income and middle income customers with 4 products plus a minimum profitability level and a minimum usage indicator, all differentiated by segment. SME + Middle-market cross-selling differentiated by client size using a point system that depends on number of products, usage of products and income net of risk.

 

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By products, the evolution of fees was as follows:

 

(GRAPHIC)  Fee Income by product

(Ch$ Million)

   Quarter   Change% 
    3Q17   2Q17   3Q16   3Q17 / 3Q16    3Q17 / 2Q17  
Credit, debit & ATM card fees   10,849    14,084    11,769    (7.8%)   (23.0%)
Asset management   11,310    10,831    9,927    13.9%   4.4%
Insurance brokerage   8,530    9,209    11,009    (22.5%)   (7.4%)
Guarantees, pledges and other contingent op.   8,754    8,722    8,934    (2.0%)   0.4%
Collection fees   12,187    13,455    7,556    61.3%   (9.4%)
Checking accounts   7,973    7,802    7,819    2.0%   2.2%
Brokerage and custody of securities   2,283    2,308    2,256    1.1%   (1.1%)
Other   6,216    5,427    5,154    20.7%   14.5%
Total fees   68,102    71,838    64,424    5.7%   (5.2%)

 

Total financial transactions, net

 

Results from Total financial transactions, net was a gain of Ch$39,441 million in 3Q17, increasing 11.4% QoQ and decreasing 3.1% 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.

 

 

(GRAPHIC)  Total financial transactions, net

(Ch$ Million)

   Quarter   Change% 
    3Q17   2Q17   3Q16   3Q17 / 3Q16    3Q17 / 2Q17  
Net income (expense) from financial operations1   48,034    3,623    (158,191)   (130.4%)   1225.8%
Net foreign exchange gain2   (8,593)   31,782    198,880    (104.3%)   (127.0%)
Total financial transactions, net   39,441    35,405    40,689    (3.1%)   11.4%

 

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.

 

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

 

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(graphic)   Total financial transactions, net by business

(Ch$ Million)

   Quarter   Change% 
    3Q17   2Q17   3Q16   3Q17 / 3Q16    3Q17 / 2Q17  
Client treasury services   20,004    21,803    23,570    (15.1%)   (8.3%)
Non client treasury income1   19,436    13,602    17,119    13.5%   42.9%
Total financ. transactions, net   39,440    35,405    40,689    (3.1%)   11.4%

 

1. 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 revenues fell 8.3% QoQ and 15.1% YoY. This movement of client treasury revenues, which usually makes up the bulk of our treasuring income, reflects the demand on behalf of clients for treasury products mainly for their hedging needs and market making. Overall, the Bank has had a good 2017 in Debt Capital Markets that has also led to cross-selling of products in our market making business, which is reflected as client treasury income. In the third quarter, this activity decelerated compared to the prior quarter, mainly market-making income.

 

Non-client treasury reached Ch$19.4 billion in the quarter. The Bank’s fixed income liquidity portfolio is mainly comprised of Chilean sovereign risk. As inflation expectations fell, local medium and long-term interest rates also declined and the Bank realized gains from its available for sale portfolio, driving non-client treasury income. This was part of our preventive ALM strategy to minimize the impact of lower inflation in the quarter on our profitability.

 

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Operating expenses and efficiency

 

Efficiency ratio improves to 40.2% in 9M17. Sustained rise in productivity

 

The Bank’s efficiency ratio reached 40.2% in 9M17 compared to 42.1% in the same period of last year. Operating expenses, excluding Impairment and Other operating expenses increased 2.5% QoQ and 4.8% YoY in the quarter. The relatively low cost growth is a direct consequence of the various initiatives that the Bank has been implementing to improve commercial productivity and efficiency. The success of our on-going digital and branch transformation is resulting in higher labor productivity.

  

(graphic)  Operating expenses

(Ch$ Million)

 

   Quarter     Change% 
   3Q17  2Q17  3Q16  3Q17 / 3Q16   3Q17 / 2Q17 
Personnel salaries and expenses   (100,855)   (101,350)   (99,643)   1.2%   (0.5%)
Administrative expenses   (59,035)   (54,383)   (54,830)   7.7%   8.6%
Depreciation & amortization   (19,068)   (18,778)   (16,359)   16.6%   1.5%
Operating expenses1   (178,958)   (174,511)   (170,832)   4.8%   2.5%
Impairment of property, plant and equipment    (5,295)   (165)   (10)   54,619%   3,109%
Branches   405    406    464    (12.7%)   (0.2%)
Standard   261    264    278    (6.1%)   (1.1%)
WorkCafé   9    7    —    —%   28,6%
Middle-market centers   8    8    8    —%   —%
Select   53    53    54    (1.9%)   —%
Banefe & other payment centers   74    74    124    (40.3%)   —%
ATMs   937    1,059    1,406    (33.4%)   (11.5%)
Employees   11,052    11,068    11,557    (4.4%)   (0.1%)
Efficiency ratio2   40.2%   40.4%   41.1%   +89bp    +20bp
YTD Efficiency ratio2   40.2%   40.2%   42.1%   +195bp   — 
Volumes per branch (Ch$mn)3   117,590    114,313    101,096    16.3%   2.9%
Volumes per employee (Ch$mn)4   4,309    4,193    4,059    6.2%   2.8%
YTD Cost / Assets5   1.9%   1.9%   1.9%          

 

1. Excluding Impairment and Other operating expenses.

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. Loans + deposits over total branches.

4. Loans + deposits over total employees.

5. Operating expenses as defined in footnote 1 above, annualized / Total assets.

 

Personnel expenses increased 1.2% YoY and fell 0.5% QoQ in 3Q17. On a YoY basis, the slight increase in personnel expenses is mainly due to the rise in salaries as they are adjusted according to CPI inflation. However this has been offset by a 4.4% decrease in total headcount in the last twelve months.

 

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Administrative expenses increased 7.7% YoY and 8.6% QoQ in 3Q17. The increase is explained by expenses related to the optimization of our branch network and other initiatives to help jump-start business growth, such as marketing. We continue to downsize Santander Banefe’s branches and expect to finish closing all of them by year-end. We also accelerated the pace of openings of our new WorkCafé format that is significantly more productive than a traditional branch. As of September we had 9 and by year-end we expect to have a total of 20 WorkCafe branches. In total, in the last twelve months, 12.7% of the Bank’s branch network was closed. The Bank also continued to remove money losing ATMs, eliminating 33.4% of them.

 

This quarter we also launched another digital milestone, our 100% Digital Onboarding platform. This platform allows non-clients to become a client of the Bank vía our APP using Touch ID or the web page, ensuring automatic credit scoring and data check. In less than 5 minutes a non-client can become a client and acquire a product. This system is 100% digital with zero human involvement in the client acquiring process.

 

 (BAR GRAPH)

 

Amortization expenses increased 16.6% 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.

 

In the quarter, the Bank also performed a one-time impairment of Ch$5.3 billion of obsolete software and fixed assets.

 

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Other operating income, net & corporate tax

 

Other operating income, net, totaled a gain of Ch$20,198 million in 3Q17, an net increase of 259.7% compared to 2Q17 which is explained by the extraordinary income in the third quarter of Ch$20.8bn due to the sale of repossessed assets by Bansa S.A., a company that is consolidated by the Bank due to control, but not ownership. For the purposes of consolidation, this one-time income forms part of the net income attributable to minority interest and has no impact on net income attributable to shareholders or shareholders’ equity. The decrease in other operating expenses of 46.9% QoQ is due to a one-time charge of Ch$12 billion related to extraordinary severance expenses recognized in 2Q17 as part of the Bank’s efforts to control costs.

 

(graphic)  Other operating income, net and corporate tax

 (Ch$ Million)

 

   Quarter   Change% 
   3Q17  2Q17  3Q16  3Q17 / 3Q16   3Q17 / 2Q17 
Other operating income   38,871    16,049    3,984    875.7%   142.2%
Other operating expenses   (18,673)   (35,181)   (16,628)   12.3%   (46.9%)
Other operating income, net   20,198    (19,132)   (12,644)   —%   —%

Income from investments in associates and other companies 

   1,349    885    1,076    25.4%   52.4%
Income tax income (expense)   (37,271)   (31,143)   (29,218)   27.6%   19.7%
Effective income tax rate   19.6%   17.1%   19.2%          

 

Income tax expenses in 3Q17 totaled Ch$37,271 million, an increase of 19.7% compared to 2Q17 and an increase of 25.4% compared to 3Q16. The effective tax rate reached 19.1% in 9M17 compared to 18.0% in 9M16. The rise in the effective tax rate was mainly due to: (i) the higher statutory tax rate. The statutory corporate tax rate in 2017 increased to 25.5% compared to 24% in 2016 and; (ii) the lower inflation rate in 9M17 (-0.03%) compared to 9M16 (+2.2%), which results in a lower price level restatement charge to taxable income, since for tax purposes the Bank must readjust its capital for inflation; (iii) income tax includes tax recognized over the one-time gain recognized by Bansa S.A. which as mentioned before is attributable to minority interest and not shareholders.

 

(graphic)   YTD income tax1

(Ch$ Million)

 

           Change% 
   9M17  9M16  9M17 / 9M16 
Net income before tax   552,460    445,477    24.0%
Price level restatement of capital2   (14,708)   (22,934)   (35.9%)
Net income before tax adjusted for price level restatement   537,752    422,543    27.3%
Statutory Tax rate   25.5%   24.0%   6.3%
Income tax expense at Statutory rate   (140,877)   (106,914)   31.8%
Tax benefits3   35,256    26,920    31.0%
Income tax   (105,622)   (79,994)   32.0%
Effective tax rate   19.1%   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.

 

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Section 6: Credit risk ratings

 

International ratings

 

The Bank has credit ratings from three leading international agencies.

 

Moody’s Rating  
Bank Deposit Aa3/P-1  
Baseline Credit Assessment A3  
Adjusted Baseline Credit Assessment A3  
Senior Unsecured Aa3  
Commercial Paper P-1  
Outlook Negative  

 

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  
Outlook Negative  

 

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  
Outlook Stable  

 

Local ratings

 

Our local ratings 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+  

 

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Section 7: Share performance

 

As of September 30, 2017

 

Ownership Structure:

 

 (PIE CHART)

 

Total Shareholder Return 

Santander ADR vs. SP500 (Base 100 = 12/31/2016)

 

(LINE GRAPH)

 

ADR price (US$) 9M17

9/30/17:    29.71 
Maximum (9M17):    30.49 
Minimum (9M17):    21.36 

 

Market Capitalization: US$13,997million

P/E 12month trailing*:   17.1 
P/BV (9/30/16)**:   3.1 
Dividend yield***:   4.5%

 

*Price as of September 30, 2017 / 12mth. earnings
**Price as of September 30, 2017/Book value as of 9/30/17
***Based on closing price on record date of last dividend payment.

 

Average daily traded volumes 9M17

 

US$ million

 

 (BAR CHART)

 

Total Shareholder Return

Santander vs IPSA Index (Base 100 = 12/31/2016)

 

(LINE GRAPH)

 

Local share price (Ch$) 9M17

9/30/17:   47.59 
Maximum (9M17):   48.75 
Minimum (9M17):   41.17 

 

Dividends:

 

Year paid  Ch$/share   % of previous year’s earnings 
2014:   1.41    60%
2015:   1.75    60%
2016:   1.79    75%
2017:   1.75    70%

 

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Annex 1: Balance sheet

 

(graphic)   Unaudited Balance Sheet

 

   Sept-17   Sept-17   Dec-16   Sept-16   Sept-17/Dec16     Sep-17/Sep-16 
   US$ Ths1  

Ch$ Million

       % Chg. 
Cash and deposits in banks   2,110,404    1,348,865    2,279,389    1,448,323    (40.8%)   (6.9%)
Cash items in process of collection   941,383    601,685    495,283    795,584    21.5%   (24.4%)
Trading investments   751,476    480,306    396,987    240,838    21.0%   99.4%
Investments under resale agreements   —    —    6,736    —    —%   —%
Financial derivative contracts   3,318,935    2,121,297    2,500,782    2,844,172    (15.2%)   (25.4%)
Interbank loans, net   435,025    278,046    272,635    276,515    2.0%   0.6%
Loans and account receivables from customers, net   41,734,363    26,674,518    26,113,485    25,779,153    2.15%   3.5%
Available for sale investments   3,329,300    2,127,922    3,388,906    2,840,787    (37.2%)   (25.1%)
Held-to-maturity investments   —    —    —    —    —%   —%

Investments in associates and other companies

   41,679    26,639    23,780    23,402    12.0%   13.8%
Intangible assets   92,485    59,112    58,085    56,840    1.8%   4.0%
Property, plant and equipment   354,996    226,896    257,379    233,785    (11.8%)   (2.9%)
Current taxes   —    —    —    —    —%   —%
Deferred taxes   596,918    381,520    372,699    349,187    2.4%   9.3%
Other assets   1,292,199    825,909    840,499    911,666    (1.7%)   (9.4%)
Total Assets   54,999,163    35,152,715    37,006,645    35,800,252    (5.0%)   (1.8%)
                               
Deposits and other demand liabilities   11,375,266    7,270,501    7,539,315    6,913,452    (3.6%)   5.2%
Cash items in process of being cleared   803,753    513,719    288,473    579,293    78.1%   (11.3%)
Obligations under repurchase agreements   230,799    147,515    212,437    62,412    (30.6%)   136.4%
Time deposits and other time liabilities   19,700,964    12,591,871    13,151,709    13,126,798    (4.3%)   (4.1%)
Financial derivatives contracts   3,045,831    1,946,743    2,292,161    2,649,431    (15.1%)   (26.5%)
Interbank borrowings   2,192,157    1,401,117    1,916,368    1,433,312    (26.9%)   (2.2%)
Issued debt instruments   10,795,996    6,900,261    7,326,372    6,889,770    (5.8%)   0.2%
Other financial liabilities   353,313    225,820    240,016    214,867    (5.9%)   5.1%
Current taxes   16,012    10,234    29,294    9,434    (65.1%)   8.5%
Deferred taxes   10,738    6,863    7,686    12,651    (10.7%)   (45.8%)
Provisions   433,541    277,098    308,982    265,255    (10.3%)   4.5%
Other liabilities   1,318,301    842,592    795,785    817,748    5.9%   3.0%
Total Liabilities   50,276,671    32,134,334    34,108,598    32,974,423    (5.8%)   (2.5%)
                               

Equity

                              
Capital   1,394,513    891,303    891,303    891,303    —%   0.0%
Reserves   2,787,793    1,781,818    1,640,112    1,640,112    —%   8.6%
Valuation adjustments   (3,566)   (2,279)   6,640    8,091    —%   (128.2%)
Retained Earnings:                              
Retained earnings from prior years   —    —    —    —    —%   —%
Income for the period   672,983    430,137    472,351    363,718    (8.9%)   18.3%
Minus: Provision for mandatory dividends   (201,895)   (129,041)   (141,700)   (109,115)   (8.9%)   18.3%
Total Shareholders’ Equity   4,649,829    2,971,938    2,868,706    2,794,109    3.6%   6.4%
Non-controlling interest   72,664    46,443    29,341    31,720    58.3%   46.4%
Total Equity   4,722,492    3,018,381    2,898,047    2,825,829    4.2%   6.8%
Total Liabilities and Equity   54,999,163    35,152,715    37,006,645    35,800,252    (5.0%)   (1.8%)

 

1. The exchange rate used to calculate the figures in dollars was Ch$639.15 / US$1

 

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Annex 2: YTD income statements

 

(graphic)   Unaudited YTD Income Statement

 

   Sept-17   Sept-17   Sept-16   Sept-17/Sept-16 
   US$ Ths1   Ch$ Million   % Chg. 
Interest income   2,400,293    1,534,147    1,610,714    (4.8%)
Interest expense   (866,709)   (553,957)   (645,997)   (14.2%)
Net interest income   1,533,584    980,190    964,717    1.6%
Fee and commission income   537,041    343,250    318,997    7.6%
Fee and commission expense   (204,157)   (130,487)   (127,710)   2.2%
Net fee and commission income   332,884    212,763    191,287    11.2%
Net income (expense) from financial operations   82,818    52,933    (292,184)   (118.1%)
Net foreign exchange gain   91,755    58,645    394,995    (85.2%)
Total financial transactions, net   174,572    111,578    102,811    8.5%
Other operating income   106,296    67,939    13,843    390.8%
Net operating profit before provisions for loan losses   2,147,336    1,372,470    1,272,658    7.8%
Provision for loan losses   (347,962)   (222,400)   (255,573)   (13.0%)
Net operating profit   1,799,374    1,150,070    1,017,085    13.1%
Personnel salaries and expenses   (461,364)   (294,881)   (293,827)   0.4%
Administrative expenses   (268,951)   (171,900)   (168,515)   2.0%
Depreciation and amortization   (86,784)   (55,468)   (46,547)   19.2%
Op. expenses excl. Impairment and Other operating expenses   (817,099)   (522,249)   (508,889)   2.6%
Impairment of property, plant and equipment   (8,830)   (5,644)   (95)   —%
Other operating expenses   (113,699)   (72,671)   (64,872)   12.0%
Total operating expenses   (939,629)   (600,564)   (573,856)   4.7%
Operating income   859,745    549,506    443,229    24.0%
Income from investments in associates and other companies   4,622    2,954    2,248    31.4%
Income before tax   864,367    552,460    445,477    24.0%
Income tax expense   (165,254)   (105,622)   (79,994)   32.0%
Net income from ordinary activities   699,113    446,838    365,483    22.3%
Net income discontinued operations   —    —    —    —%
Net income attributable to:                    
Non-controlling interest   26,130    16,701    1,765    846.2%
Net income attributable to equity holders of the Bank   672,983    430,137    363,718    18.3%

 

1. The exchange rate used to calculate the figures in dollars was Ch$639.15 / US$1

 

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Annex 3: Quarterly income statements

 

(GRAPHIC)  Unaudited Quarterly Income Statement

 

   3Q17   3Q17   2Q17   3Q16   3Q17/3Q16   3Q17/2Q17 
   US$ Ths1   Ch$ Million   % Chg. 
Interest income   718,617    459,304    550,875    535,777    (14.3%)   (16.6%)
Interest expense   (221,737)   (141,723)   (206,841)   (212,370)   (33.3%)   (31.5%)
Net interest income   496,880    317,581    344,034    323,407    (1.8%)   (7.7%)
Fee and commission income   175,840    112,388    115,567    108,842    3.3%   (2.8%)
Fee and commission expense   (69,289)   (44,286)   (43,729)   (44,418)   (0.3%)   1.3%
Net fee and commission income   106,551    68,102    71,838    64,424    5.7%   (5.2%)
Net income (expense) from financial operations   75,153    48,034    3,623    (158,191)   (130.4%)   1225.8%
Net foreign exchange gain   (13,444)   (8,593)   31,782    198,880    (104.3%)   (127.0%)
Total financial transactions, net   61,709    39,441    35,405    40,689    (3.1%)   11.4%
Other operating income   60,817    38,871    16,049    3,984    875.7%   142.2%
Net operating profit before provisions for loan losses   725,956    463,995    467,326    432,504    7.3%   (0.7%)
Provision for loan losses   (112,693)   (72,028)   (76,510)   (94,211)   (23.5%)   (5.9%)
Net operating profit   613,263    391,967    390,816    338,293    15.9%   0.3%
Personnel salaries and expenses   (157,796)   (100,855)   (101,350)   (99,643)   1.2%   (0.5%)
Administrative expenses   (92,365)   (59,035)   (54,383)   (54,830)   7.7%   8.6%
Depreciation and amortization   (29,833)   (19,068)   (18,778)   (16,359)   16.6%   1.5%
Op. expenses excl. Impairment and Other operating expenses   (279,994)   (178,958)   (174,511)   (170,832)   4.8%   2.5%
Impairment of property, plant and equipment   (8,284)   (5,295)   (165)   (10)   54619.1%   3109.1%
Other operating expenses   (29,215)   (18,673)   (35,181)   (16,628)   12.3%   (46.9%)
Total operating expenses   (317,494)   (202,926)   (209,857)   (187,470)   8.2%   (3.3%)
Operating income   295,769    189,041    180,959    150,823    25.3%   4.5%
Income from investments in associates and other companies   2,111    1,349    885    1,076    25.4%   52.4%
Income before tax   297,880    190,390    181,844    151,899    25.3%   4.7%
Income tax expense   (58,313)   (37,271)   (31,143)   (29,218)   27.6%   19.7%
Net income from ordinary activities   239,567    153,119    150,701    122,681    24.8%   1.6%
Net income discontinued operations   —    —    —    —           
Net income attributable to:                              
Non-controlling interest   24,709    15,793    265    702    2149.7%   5859.6%
Net income attributable to equity holders of the Bank   214,857    137,326    150,436    121,979    12.6%   (8.7%)

 

1. The exchange rate used to calculate the figures in dollars was Ch$639.15/ US$1

 

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Annex 4: Quarterly evolution of main ratios and other information

 

(Ch$ millions)            
  Sep-16   Dec-16   Mar-17   Jun-17   Sep-17 
Loans                    
Consumer loans   4,311,786    4,446,803    4,502,447    4,469,821    4,477,196 
Residential mortgage loans   8,471,975    8,619,356    8,747,324    8,861,371    8,935,539 
Commercial loans   13,807,911    13,867,465    13,850,836    13,589,218    14,070,635 
Interbank loans   276,703    272,807    352,044    235,614    278,215 
Total loans (including interbank)   26,868,375    27,206,431    27,452,650    27,156,024    27,761,585 
Allowance for loan losses   (812,707)   (820,311)   (806,005)   (799,442)   (809,021)
Total loans, net of allowances   26,055,668    26,386,120    26,646,646    26,356,582    26,952,564 
                          
Deposits                         
Demand deposits   6,913,452    7,539,315    7,408,618    7,195,893    7,270,501 
Time deposits   13,126,798    13,151,709    12,700,210    12,059,284    12,591,871 
Total deposits   20,040,250    20,691,024    20,108,828    19,255,177    19,862,372 
Mutual funds (Off balance sheet)   5,269,815    5,026,068    5,489,733    5,562,941    5,524,308 
Total customer funds   25,310,065    25,717,092    25,598,561    24,818,118    25,386,680 
Loans / Deposits1   95.6%   92.1%   95.7%   100.3%   101.0%
                          
Average balances                         
Avg. interest earning assets   28,979,918    29,901,912    30,381,349    29,917,800    29,572,180 
Avg. Loans   26,550,078    26,952,880    27,246,674    27,036,649    27,149,550 
Avg. assets   35,869,635    36,163,077    36,629,695    35,860,060    35,124,476 
Avg. demand deposits   7,132,397    7,094,735    7,370,951    7,451,784    7,224,320 
Avg equity   2,755,631    2,833,913    2,914,173    2,887,236    2,926,402 
Avg. free funds   9,888,028    9,928,649    10,285,124    10,339,020    10,150,722 
                          
Capitalization                         
Risk weighted assets   27,130,807    27,237,835    27,492,643    27.133.274    27,863,424 
Tier I (Shareholders’ equity)   2,794,109    2,868,706    2,968,491    2,895,250    2,971,938 
Tier II   786,936    789,001    792,549    799,032    814,651 
Regulatory capital   3,581,046    3,657,707    3,761,040    3,694,282    3,786,590 
Tier I ratio   10.3%   10.5%   10.8%   10.7%   10.7%
BIS ratio   13.2%   13.4%   13.7%   13.6%   13.6%
                          
Profitability & Efficiency                         
Net interest margin (NIM)2   4.5%   4.2%   4.2%   4.6%   4.3%
Client NIM3   4.9%   4.8%   4.8%   5.0%   5.0%
Efficiency ratio4   41.1%   44.3%   40.0%   40.4%   40.2%
Costs / assets5   1.9%   1.9%   1.8%   1.9%   2.0%
Avg. Demand deposits / interest earning assets   24.6%   23.7%   24.3%   24.9%   24.4%
Return on avg. equity   17.7%   15.3%   19.5%   20.8%   18.8%
Return on avg. assets   1.4%   1.2%   1.6%   1.6%   1.6%
Return on RWA   1.8%   1.6%   2.1%   2.2%   2.0%

 

25 

 

 

(SANTANDER LOGO) 

 

(Ch$ millions)

            
   Sep-16   Dec-16   Mar-17   Jun-17   Sep-17 
Asset quality                         
Impaired loans6   1,594,267    1,615,441    1,667,145    1,705,257    1,788,049 
Non-performing loans (NPLs) 7   556,965    564,131    594,855    587,107    589,580 
Past due loans8   336,337    324,312    330,207    260,830    267,873 
Loan loss reserves   812,707    820,311    806,005    799,442    809,021 
Impaired loans / total loans   5.9%   5.9%   6.1%   6.3%   6.4%
NPLs / total loans   2.1%   2.1%   2.2%   2.2%   2.1%
PDL / total loans   1.3%   1.2%   1.2%   0.96%   0.96%
Coverage of NPLs (Loan loss allowance / NPLs)   145.9%   145.4%   135.5%   136.2%   137.2%
Coverage of PDLs (Loan loss allowance / PDLs)   241.6%   252.9%   244.1%   306.5%   302.0%
Risk index (Loan loss allowances /  Loans) 9   3.0%   3.0%   2.9%   2.9%   2.9%
Cost of credit (prov expense annualized / avg. loans)   1.4%   1.3%   1.1%   1.1%   1.1%
                          
Network                         
Branches   464    434    415    406    405 
ATMs   1,406    1,295    1,288    1,059    937 
Employees   11,557    11,354    11,229    11,068    11,052 
                          
Market information (period-end)                         
Net income per share (Ch$)   0.65    0.58    0.76    0.80    0.73 
Net income per ADR (US$)   0.39    0.35    0.46    0.48    0.46 
Stock price   34.04    37.26    41.37    42.24    47.59 
ADR price   20.69    21.87    25.08    25.41    29.71 
Market capitalization (US$mn)   9,747    10,303    11,816    11,971    13,997 
Shares outstanding   188,446.1    188,446.1    188,446.1    188,446    188,446 
ADRs (1 ADR = 400 shares)   471.1    471.1    471.1    471.1    471.1 
                          
Other Data                         
Quarterly inflation rate10   0.6%   0.5%   0.5%   0.7%   -0.03%
Central Bank monetary policy reference rate (nominal)   3.50%   3.50%   3.00%   2.50%   2.50%
Observed Exchange rate (Ch$/US$)  (period-end)   659.08    660.00    662.66    663.80    639.15 

 

1. Ratio =(Net Loans - portion of mortgages funded with long-term bonds) / (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 + administrative 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.