Banco Santander-Chile — 2018 Annual Report (Form 20-F)
Reporting period: Fiscal year ended December 31, 2018; this is an annual filing, not a standalone fourth-quarter report. Financial statements are audited and prepared under IFRS as issued by the IASB. Amounts below are in Chilean pesos (Ch$) unless otherwise stated.
Business context
Santander-Chile is a leading Chilean commercial and retail bank, with 18.6% market share in loans and 17.9% in deposits at year-end. It reported 380 branches, 910 ATMs and 11,305 employees. Its principal businesses are retail banking, middle-market banking and corporate investment banking. Parent Banco Santander, S.A. controls 67.18% of its shares.
Financial and operating performance
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Net interest income | Ch$1,414,368 million | Ch$1,326,691 million | +6.6% |
| Net fee and commission income | Ch$290,885 million | Ch$279,063 million | +4.2% |
| Net operating profit before loan-loss provisions | Ch$1,833,464 million | Ch$1,797,522 million | +2.0% |
| Loan-loss provision expense | Ch$317,408 million | Ch$302,255 million | +5.0%; IFRS 9 adoption makes the periods not fully comparable |
| Operating expenses | Ch$754,314 million | Ch$778,950 million | −3.2% |
| Net income | Ch$599,693 million | Ch$575,249 million | +4.2% |
| Net income attributable to Bank shareholders | Ch$595,333 million | Ch$562,801 million | +5.8% |
| Net interest margin | 4.32% | 4.34% | Broadly stable |
| Return on average assets / equity | 1.6% / 18.4% | 1.6% / 19.2% | ROE declined |
| Efficiency ratio | 41.1% | 43.3% | Improved; lower is more efficient |
Management attributed higher net interest income to loan growth, higher UF-linked inflation and lower peso deposit costs, partly offset by a lower-yielding loan mix and higher costs on UF liabilities. Loan balances at amortized cost grew 9.0%. Net fee income benefited from retail customer activity and corporate investment banking fees. Net financial transaction income declined 19.0%, principally reflecting weaker non-client treasury results and foreign-exchange income. Other operating income fell 62.7%, partly because a one-time gain from the sale of repossessed assets was lower than in 2017.
Balance sheet, funding and capital
| Metric at December 31, 2018 | Value | Prior-period comparison |
|---|---|---|
| Total assets | Ch$39,132,512 million (approximately US$56.1 billion) | Ch$35,823,605 million; +9.2% |
| Loans at amortized cost, net | Ch$29,331,001 million | 2017 was reported under the prior classification; direct comparison is affected by IFRS 9 |
| Customer deposits | Ch$21,809,236 million | Ch$19,682,111 million under Chilean Bank GAAP |
| Total liabilities / equity | Ch$35,887,053 million / Ch$3,245,459 million | 2017: Ch$32,675,685 million / Ch$3,147,920 million |
| Issued debt instruments | Ch$8,115,233 million | 2017: Ch$7,093,653 million |
| Regulatory capital ratio | 13.4% | 13.91% in 2017; minimum applicable to the Bank was 11% |
| Liquidity coverage ratio | 151.6% | Above the 100% minimum stated in the filing |
| Net stable funding ratio | 109.5% (internal model) | Regulatory methodology and initial limits were not finalized |
Funding remains deposit-led: 98.8% of customer deposits were payable on demand or had remaining maturities of one year or less. The Bank reported a liquidity portfolio of about Ch$3.54 trillion at year-end. Operating activities generated Ch$1,022,522 million of cash in 2018; investing activities used Ch$91,565 million and financing activities used Ch$423,611 million, primarily for dividends. Cash and cash equivalents ended at Ch$2,256,155 million.
The filing presents differing capital figures on different bases: the regulatory capital ratio was 13.4%, while the regulatory table reports core capital at 7.72% of total assets; another risk discussion cites a core capital ratio of 10.6% without a clearly reconciled basis. Investors should verify the applicable definitions and local regulatory calculation.
Credit quality and material changes
- Non-performing loans were Ch$631,649 million, or 2.1% of loans, versus 2.3% in 2017; allowance coverage of non-performing loans was 139.7%, compared with 124.9%. The filing cautions that 2018 uses IFRS 9 and prior periods IAS 39, limiting comparability.
- Retail customers accounted for 68.8% of loans at amortized cost; residential mortgages were Ch$10,150,981 million, or 33.6% of total loans. The 2018 consumer-loan ECL charge was Ch$189,251 million, while mortgage provisions were released by Ch$14,119 million.
- IFRS 9 was adopted on January 1, 2018, replacing an incurred-loss model with expected credit losses and changing financial-asset classification and measurement. The opening equity impact was reported as approximately Ch$82 billion net of tax; comparative figures were not restated.
- The Chilean peso depreciated 13.1% against the U.S. dollar in 2018. CPI inflation was 2.6%, while UF inflation was 2.9%, supporting income from the Bank’s net UF asset exposure.
Outlook, risks and unusual items
- The filing cites expected Chilean economic growth of approximately 3.5% in 2019; it does not provide specific Bank earnings, loan-growth or margin guidance.
- Chile’s January 2019 banking-law reform introduces Basel III-aligned capital requirements, buffers and supervisory changes, with the SBIF’s functions expected to transfer to the FMC. The Bank considered it probable it could be designated systemically important, which could bring additional capital requirements. The impact was not yet certain.
- Key risks include credit deterioration, short-term and concentrated deposit funding, interest-rate, inflation and currency movements, Chilean economic and regulatory developments, competition and technology execution, cybersecurity, operational risk, and potential ratings or funding-cost pressure.
- Legal proceedings arise in the ordinary course of business. Provisions for legal contingencies were Ch$923 million at year-end; the filing says ultimate losses could exceed reserves but does not provide a clear estimate of total potential exposure.
- The Board proposed a Ch$357,757 million dividend relating to 2018 earnings, subject to shareholder approval. The Ch$423,611 million paid during 2018 related to the prior year’s earnings.
- The Bank announced its decision to sell its 25% investment in Transbank; completion timing was undetermined. Its co-brand credit-card agreement with Chile’s largest airline was renewed in January 2019 for seven years.
- IFRS 16 took effect for the Bank on January 1, 2019, adding right-of-use assets and lease liabilities of approximately Ch$154 billion. The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Reconcile capital ratios and confirm the Bank’s capital headroom under the new Basel III rules, including any systemically important bank surcharge.
- Assess whether credit quality and ECL coverage remain adequate, particularly for consumer, SME and mortgage exposures, while accounting for IFRS 9 comparability limits.
- Evaluate deposit maturity and concentration, liquidity metrics, and the Bank’s ability to refinance issued debt and other borrowings on acceptable terms.
- Confirm shareholder approval and payment details for the proposed 2018-earnings dividend, and distinguish it from the dividend paid in 2018.
- Track Transbank-sale progress, the impact of IFRS 16, and implementation costs or capital effects from regulatory changes.