BANCO SANTANDER CHILE annual report, Q4 FY2019

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Banco Santander-Chile — FY2019 Form 20-F

Reporting period: Fiscal year ended December 31, 2019, compared primarily with FY2018. This is an annual report, not a standalone Q4 filing. Financial statements use IFRS as issued by the IASB; amounts below are Chilean pesos (Ch$) in millions unless noted. U.S.-dollar translations are for convenience.

Business context and financial performance

  • Santander-Chile is a leading Chilean retail and commercial bank. It reported Ch$50,574,714 in total assets, Ch$31,775,420 in net loans at amortized cost, Ch$23,490,249 in deposits, and Ch$3,398,870 in equity attributable to the Bank’s shareholders at year-end.
  • Net interest income was Ch$1,416,964, up 0.2%. Net fee and commission income was Ch$287,086, down 1.3%. Net financial transactions income was Ch$201,692, up 91.9%.
  • Net operating profit before loan-loss provisions was Ch$1,918,743, up 4.7%; net operating income after provisions was Ch$1,595,432, up 5.2%. Operating income was Ch$793,542, up 4.2%, and income before tax was Ch$794,688, up 4.1%.
  • Net income was Ch$621,313, up 3.6%; income attributable to Bank shareholders was Ch$619,091, up 4.3%. Return on average equity was 18.0% (18.4% in the selected-data table for 2018); return on average assets was 1.4% (1.6% in 2018).
  • Net interest margin declined to 3.95% from 4.32%. The IFRS efficiency ratio increased to 41.8% from 41.1%. The filing also reports a Chilean Bank GAAP peer-comparison efficiency ratio of 41.3%; the accounting basis differs.
  • Loan-loss provisions were Ch$323,311, up 1.9%. Non-performing loans were Ch$671,336, or 2.1% of loans, broadly unchanged from 2.1% in 2018. The allowance was Ch$896,095, equal to 2.7% of loans versus 2.9% in 2018.
  • Operating expenses rose 6.3% to Ch$801,890, including personnel expense of Ch$410,157 (+3.2%), depreciation and amortization of Ch$106,092 (+33.8%), and other operating expenses of Ch$49,303 (+52.4%). IFRS 16 shifted certain rent costs into depreciation and amortization.

Balance sheet, funding, liquidity and cash flow

  • Total assets rose 29.3% from Ch$39,132,512. Net loans at amortized cost increased 8.3% from Ch$29,331,001; deposits increased 7.7% from Ch$21,809,236. Derivative assets and liabilities also increased substantially; their year-end reported balances were Ch$8,148,608 and Ch$7,390,654, respectively.
  • Issued debt instruments totaled Ch$9,500,723, versus Ch$8,115,233 in 2018; interbank borrowings were Ch$2,519,818, versus Ch$1,788,626. The filing describes deposits as the principal funding source and notes that 97.7% of customer deposits were payable on demand or had remaining maturities of one year or less.
  • The Bank’s liquidity portfolio was Ch$6,013,124 at year-end, up from Ch$3,538,937. The regulatory liquidity coverage ratio was 143%; the net stable funding ratio was 108% under the Bank’s internal model, while local implementation requirements remained under development.
  • Net cash provided by operating activities was Ch$1,849,165, compared with Ch$1,022,492 in 2018. Investing activities used Ch$135,369, mainly reflecting the Santander Consumer acquisition; financing activities used Ch$385,286, including dividend payments. Year-end cash and cash equivalents were Ch$3,711,334, versus Ch$2,256,155.
  • Regulatory capital was reported at 12.86% of risk-weighted assets in the financial-statement table, against the Bank’s 11% minimum; basic capital was 6.96% of total assets. Other passages give 13.4% for regulatory capital and 10.1% for the basic capital ratio, so the filing’s differing figures and bases should be reconciled.

Material changes and unusual items

  • Shareholder-attributable net income rose 4.3%, but margin pressure offset loan growth: average interest-earning assets increased 9.4%, while net interest income was nearly flat. Management cited lower UF inflation, mortgage refinancing at lower real rates, and a flatter yield curve.
  • Net financial transactions benefited from a sharp rise in foreign-exchange gains and realized gains on derecognition of amortized-cost financial assets. These gains were partly offset by a Ch$162,183 loss on trading derivatives; management linked the loss to peso volatility and the Bank’s defensive U.S.-dollar liquidity position during social unrest.
  • The Bank acquired 51% of Santander Consumer Chile in November 2019 for Ch$62,136. The transaction was accounted for as a common-control transaction and reduced equity by Ch$37,041. The acquisition added consumer auto lending and is included for only part of 2019.
  • Social unrest in Chile in the fourth quarter damaged 70 branches, with 15 reported destroyed. The Bank recorded Ch$2,726 in property impairment and Ch$1,823 in related operating expenses; management said most damage was insured. The unrest also contributed to early loan delinquency and increased economic uncertainty.
  • The Bank began selling its interests in Redbanc and Transbank and classified those holdings, together with the remaining Nexus interest, as held for sale and discontinued operations. It reported Ch$1,699 of discontinued-operations income in 2019; the remaining Nexus stake was sold in January 2020.
  • IFRS 16 adoption added right-of-use assets and lease liabilities of Ch$154,284 on January 1, 2019. FY2019 lease expense presentation therefore differs from 2018.

Outlook, risks and contingencies

  • The filing does not provide a specific bank earnings or revenue forecast. Management described Chile’s weaker 2019 economy and, in the report’s discussion, projected Chilean GDP growth of about 1.0% for 2020. These estimates predate the full effects of the coronavirus outbreak.
  • Management estimated that a new automatic repayment rule for current-account credit lines could reduce 2020 net interest income by about Ch$20,000. Proposed restrictions on loan prepayment fees and changes to responsibility for card and online fraud were under discussion, with impacts not quantified.
  • Key risks include Chilean social and political uncertainty, weaker growth and rising unemployment, credit deterioration, inflation and interest-rate movements, currency volatility, short-term deposit funding concentration, competition and technology disruption, cybercrime, regulatory changes and the prospective Basel III capital framework. Santander-Chile considered it likely it would be designated a systemically important bank, potentially requiring additional capital.
  • The Bank reported Ch$1,274 in provisions for legal contingencies at December 31, 2019. It stated that ordinary-course claims were not expected, in aggregate, to materially affect consolidated results, but noted the ultimate outcome of proceedings is uncertain.
  • The 2019 dividend had not yet been proposed or approved when the report was filed. Chilean law generally requires annual cash dividends of at least 30% of net income, subject to capital requirements. The Ch$355,141 paid in 2019 related to prior-year earnings.
  • PwC issued an unqualified opinion on the IFRS financial statements and concluded internal control over financial reporting was effective. Santander Consumer Chile, acquired in November 2019, was excluded from the internal-control assessment; it represented 1.0% of consolidated assets and 0.5% of revenues, according to the auditor’s report.

Most important facts for investors to verify

  • Reconcile the reported capital ratios: 12.86% versus 13.4% regulatory capital, and 6.96% versus 10.1% basic capital, including the applicable accounting and regulatory bases.
  • Assess whether fourth-quarter Chilean unrest caused a lasting deterioration in delinquencies, SME and mortgage credit quality, provisions, and collateral values.
  • Separate recurring earnings from the 2019 FX and realized securities gains, and evaluate the trading-derivative loss and lower net interest margin.
  • Review deposit maturity and concentration, liquidity under stress, and funding needs as Basel III capital and liquidity rules are implemented.
  • Track the Santander Consumer acquisition’s contribution to earnings and credit losses, the final disposal of Redbanc and Transbank, and the proposed dividend.
  • Confirm subsequent developments, especially the coronavirus impact, 2020 operating performance, and the estimated Ch$20,000 net-interest-income effect of the credit-line repayment rule.