Business context and reporting period
Banco Santander-Chile’s annual Form 20-F covers the fiscal year ended December 31, 2017, with comparisons to 2016 and 2015. It is not a standalone fourth-quarter report. The Bank is a Chile-focused commercial and retail bank and reported under IFRS as issued by the IASB; certain regulatory and market-share figures are presented under Chilean Bank GAAP. Amounts below are in Chilean pesos (Ch$) millions unless stated otherwise.
The Bank reported total assets of Ch$35,823,605, net customer loans of Ch$26,772,544, and equity of Ch$3,147,920 at year-end. It held a 19.0% share of Chilean system loans and ranked first by total loans, according to the filing.
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net interest income | Ch$1,326,691 | Ch$1,281,366 | +3.5% |
| Net fee and commission income | Ch$279,063 | Ch$254,424 | +9.7% |
| Net operating profit before loan-loss provisions | Ch$1,797,522 | Ch$1,682,575 | +6.8% |
| Net provision for loan losses | Ch$(302,255) | Ch$(342,083) | Expense down 11.6% |
| Operating expenses | Ch$(778,950) | Ch$(756,041) | Expense up 3.0% |
| Operating income | Ch$716,317 | Ch$584,451 | +22.6% |
| Net income | Ch$575,249 | Ch$478,432 | +20.2% |
| Net income attributable to Bank equity holders | Ch$562,801 | Ch$476,067 | +18.2% |
Net interest margin was 4.34%, broadly stable from 4.32%; return on average assets improved to 1.6% from 1.4%, and return on average equity to 19.2% from 16.8%. The efficiency ratio improved to 44.3% from 44.9% (lower is better). Income-tax expense rose 33.0% to Ch$145,031, and the effective tax rate increased to 20.1% from 18.6%, mainly reflecting the higher Chilean statutory rate.
At year-end, gross loans were Ch$27,725,914, up 1.9%; net customer loans rose to Ch$26,772,544 from Ch$26,147,154. Total deposits fell to Ch$19,682,111 from Ch$20,691,024, as time deposits declined while demand deposits increased. Issued debt instruments were Ch$7,093,653, compared with Ch$7,326,372. Total liabilities were Ch$32,675,685 and total equity Ch$3,147,920.
Operating activities used Ch$416,357 of cash, compared with Ch$736,154 generated in 2016. Investing activities used Ch$73,458 and financing activities used Ch$330,645, principally for dividends. Cash and cash equivalents ended the year at Ch$1,634,341, down from Ch$2,486,199. The year-end liquidity portfolio was Ch$3,522,919, versus Ch$4,931,466 in 2016.
Regulatory capital to risk-weighted assets was 13.91%, above the Bank’s stated 11% minimum requirement. The filing also reports a basic/core capital measure of 7.92% of total assets in its capital table; elsewhere it cites 11.0% for a core capital ratio using a different presentation. Verify the definitions and regulatory basis before comparing these figures.
Material changes versus the prior comparable period
- Profitability strengthened: attributable net income rose 18.2%, while net interest income and net fees increased 3.5% and 9.7%, respectively.
- Lower loan-loss provisions supported earnings, but credit quality weakened: non-performing loans increased to Ch$633,461 from Ch$564,131, and the NPL ratio rose to 2.28% from 2.07%. Allowance coverage of NPLs fell to 124.9% from 140.2%.
- Total operating income included a sharp rise in other operating income, to Ch$62,016 from Ch$6,427. This included a one-time Ch$20,663 gain related to a Bansa Santander asset transfer and a Ch$29,903 release of contingency provisions. The Bansa gain was attributed to non-controlling interests and, according to the filing, did not affect income attributable to Bank shareholders.
- Net foreign-exchange gains declined to Ch$126,956 from Ch$507,392, while net financial-operations results improved from a loss of Ch$367,034 to income of Ch$2,796. Combined net financial transactions were down 7.6%.
- Operating expenses increased, including a 19.1% rise in depreciation and amortization, as the Bank invested in technology and digital capabilities. The branch network contracted 11.3% to 385 branches; the ATM network declined from 1,295 to 926.
- Total assets declined from Ch$37,030,025 to Ch$35,823,605, while the year-end liquidity portfolio also decreased materially.
Outlook, management commentary, risks and unusual items
Management cited a more favorable Chilean economic outlook, expecting economic growth of approximately 3.5% in 2018, compared with about 1.5% in 2017. This is an economic forecast, not quantified earnings guidance. Management said loan growth would remain selective and emphasized higher-return client relationships, digital investment, and cost and branch-network efficiencies.
Key risks include Chilean economic and political conditions; rising unemployment and loan defaults; interest-rate, inflation/UF and foreign-exchange movements; short-term and concentrated deposit funding; competition, including fintech providers; and cyber, operational, regulatory and legal risks. The Bank reported that 99.1% of customer deposits were payable on demand or had remaining maturities of one year or less; its top 20 time deposits represented 29.7% of total time deposits. Fitch downgraded the Bank’s main ratings from A+ to A in August 2017 following a sovereign downgrade; S&P maintained a negative outlook, and Moody’s also reported a negative outlook.
Regulatory changes were in prospect: a proposed Chilean banking-law reform would move toward Basel III capital requirements, with additional buffers and possible systemically important bank requirements. The Bank estimated that adoption of IFRS 9 on January 1, 2018 would reduce opening equity by Ch$82,454 million, net of tax. The filing also identifies IFRS 16 lease accounting changes effective in 2019; the impact was still under assessment.
The Bank stated that it believed its loan-loss allowances were adequate for known and estimated incurred losses. However, the filing notes that actual losses may exceed estimates and that legal claims can be difficult to predict. It reported provisions of Ch$1,214.2 million for legal actions at year-end and no individual legal proceedings exceeding its stated significance threshold. The independent auditor, PwC, issued an unqualified opinion on the 2017 and 2016 IFRS financial statements and concluded internal control over financial reporting was effective.
Most important facts for an investor to verify
- Reconcile the reported year-end cash-flow decline and the sharp fall in the liquidity portfolio with the Bank’s funding plans and subsequent-period liquidity disclosures.
- Review the rise in NPLs and impaired loans, the lower NPL coverage ratio, and the effects of slower growth, unemployment and 2017 model recalibration on future credit costs.
- Separate recurring operating performance from the Ch$20,663 million Bansa-related gain and the Ch$29,903 million contingency-provision release.
- Confirm the precise regulatory definitions and accounting basis for the reported 13.91% capital ratio and differing basic/core capital figures; assess the expected effects of Basel III reforms.
- Assess the concentration and short maturity of deposits, including institutional depositor concentration, and the Bank’s ability to refinance debt at acceptable cost.
- Verify the IFRS 9 opening-equity adjustment of Ch$82,454 million and monitor its realized impact on provisions, earnings and capital after adoption.
- Distinguish the annual dividend paid in 2017, relating to 2016 earnings, from the 2017 earnings distribution, which was still subject to shareholder approval in 2018.