Aug 2, 2013
Executives
Raimundo Monge - Director, Strategic Planning Robert Moreno - Manager, IR
Analysts
Tiego Batista - E2BBA Carlos Macedo - Goldman Sachs Tito Labarta - Deutsche Bank Jose Barriera – Bank of America Christopher DiSalvatore - Credicorp Capital
Operator
Good day ladies and gentlemen and welcome to the Second Quarter 2013 Banco Santander-Chile Earnings Conference Call. My name is Dominique and I will be your operator for today.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.
(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Raimundo Monge, Director of Strategic Planning.
Please proceed, sir.
Raimundo Monge
Thank you very much and good morning ladies gentlemen, once again and welcome to Banco Santander-Chile second quarter 2013 results conference call. My name is Raimundo Monge, Director of Strategic Planning, and I'm joined today by Robert Moreno, Manager of Investor Relations.
Thank you for attending today's conference call in which we will discuss our performance in the second quarter of 2013. Following the webcast presentation, we will be happy to answer your questions.
Before we get into more detail regarding our results, we will briefly give you our latest update on the outlook for the Chilean economy in 2013. We continue to be optimistic on the performance of the economy but we have objected downward our growth expectations for 2013 and 2014, due to lower growth of investment and consumption.
As a consequence, we now expect GDP growth to exceed 4.5% this year, and to be close to 4.2% in 2014. Our outlook for rate has also been modified.
We are now expecting the Central Bank to begin cutting rates in the second half and throughout 2014. Inflation is expected to rise slightly, but remain under control.
News on deposit growth has also been following the recent economic trends with a slight deterioration. In any case, we are still expecting for this year 2013, loan and deposit growth of around 10%.
As of May 2013, the result of Chilean banking industry fell 7% due to higher cost and provision. The second half of the year, despite the slight downward correction in economic growth, we're expecting the banking system process to rebound, as the higher inflation increases asset yields and lower rate reduced funding costs.
We will now review our strategy and performance in the second quarter of this year. Our strategy has been built taking into consideration both the positive outlook we foresee for the Chilean economy in the coming year, but at the same time the different changes in consumer behavior, and the regulation that might be reshaping the consumer lending industry.
We believe, that we are slightly ahead of the rest of the system in making the necessary that will allow us to have increasing profitability in a more challenging and competitive environment. We remain fully committed to deepening our focus on retail banking by transforming our commercial banking unit a process that we began in 2011, strengthening client relationship with a fund growth of our balance sheet, solid levels of capital, and high liquidity.
We will continue to expand our business, while recovering efficiency through liquidity gains and managing risks conservatively. These three strategic points are being attacked through the Bank's transformation plan.
This is the largest overhaul and reorganization of the Bank's retail banking business that will significantly improve the customer experience with the Bank, while improving credit risk indicators. It is important to understand that our recent results reflect in part the short-term cost of implementing this strategy, which affected last year our loan growth, provision expenses, and costs.
The good news is that this year, especially in the second quarter of this year, we are beginning to see improvement in various areas especially in loan and deposit growth, as well as asset quality and consumer lending. We expect these trends to continue in the second half of this year.
As part of this transformation process in 2Q 2013 the bank loans between Santander's Select business model for the middle operating income segment. Previously this segment was serviced through three temporary brand performers, which were united in a single segment.
Santander Select has a unique product mix, 44 specialized branches, as well as a dedicated phone banking and internet service for this specific segment. This platform will be cornerstone of our growth in the mid-to-high income banking segment.
The transformation initiative is also beginning to produce positive results in the improvement we make with the client experience of banking with Santander-Chile. A key aspect of this project is to operate different opportunities we found in reviewing our retail banking model and we adapt the bank to the changing regulatory environment.
Our distribution models will continue to be modernized, which should lead to a factor and seeplay (ph) bank to do business with. Let me give you some examples.
First, the percentage of consumer loans that were sold via the bank's new CRM pre-approval system compared to our direct one-on-one sale has improved from 35% in 2011 to 46% in the 2Q of '13. It means the relationship manager are selling to clients that had been analyzed and approved are more under benefit of this approach is that the provision expense associated with pre-approved consumer loans it's almost half than that of a loan sold to one-on-one process.
Second, the bank's internet and phone banking activity are also growing at a strong rate. The percentage of consumer loans sold to this and other mutual channels has increased to 36% from 20% in 2011, with a lot of room for further improvement.
These loans are partly requiring a lower provision expense of course have to originate then to a branch. All of that is translated into our suites in the mix of the banks with loan portfolio as low-to-mid higher income segments has increased 10.07% year-on-year.
The bank has also been investing and improving client service by improving internal offices and back-office function. The result of these initiatives are also beginning to appear.
According to the latest information made public by Superintendency of Banks, SBIF, we are now among the top large banks in Chile with fewer complaints and tetus its full time. As I mentioned, regarding clients and faction property by the Chilean Consumer Protection Agency for Financial Services, Sernac Financiero, we had also shown continues improvement but we still have upside potential in this area.
Moreover, all of our distribution channels are feeling good rate from our client especially phone and internet banking, which are a priority for us. In the quarter, we redefined our award winning website and launch an officialized phone banking services for the Santander Select segment.
Finally, as a further proof that our strategy is evolving out as planned, consumer loan asset quality has improved. Consumer non-performing loans decreased 14.3% QOQ and the coverage of consumer non-performing loans reached 294%.
At the same time, the amount of impaired consumer loans defined as consumer non-performing loans less well negotiated consumer loans has goal of fabry (ph). These tend to be a leading indication for the evolution of future charge-offs.
The group selection effort had also lead to an important ways in loan loss recoveries especially in consumer at lending. These should be added driver of our profitability going forward.
Our overall business activities and results are also starting to reflect this improvement. In the second quarter of 2013, total loans increased 3.5% QOQ, which was in sense an annualized rate of 14% for the period.
In the quarter, loan growth continued to accelerate in the market the Bank is targeting mid-to-high income individuals, SMEs, and middle-market of companies. Loans in this combined market increased 4.9% QOQ or 20% on an annualized basis.
This is in line with the Bank's strategy of expanding loan volumes with a clear focus on spread net of provision. The evolution of our funding bank was also positive in 2Q 2013.
Total deposits also grew 3.5% QOQ, 14% on a relevant basis. In the quarter, the Bank's funding strategy continued to be focused on increasing core deposits, while lowering the profit for more expansive short-term institutional sourcing.
All deposits defined as demand and time deposit from our retail and corporate clients expanded 2.2% QOQ and 16.4% year-on-year. Our loan core deposits, the bulk growth came from our retail and middle-market segments.
The Bank's margin are also beginning to benefit from the Bank's strategy. The net interest margin in 2Q'13 reached 4.7 compared to 4.7 in the 1Q of this year despite a negative inflation rate that happened in the quarter.
Client net interest margin defined as client net interest income divided by average loans reached 5.8% in the second quarter compared to 5.7% in the first quarter of this year. The higher growth of consumer loans, a stable pricing policy, and an improved funding mix has kept going margins relatively unchanged in the end of last year.
A strategic focus of the Bank is to gradually achieve higher client margins net of provision expenses, even though this could result in slightly lower gross line margins going forward, due to more conservative origination policy. For the remainder of 2013, we are optimistic on the evolution of margins, in addition to the welcome recent strength of client margin, we expect U.S.
inflation to normalize at an annual rate of approximately 2% or roughly 1% the remaining quarter. In addition, market expectation for interest rate also reversed in the quarter, and the Chilean Central Bank is expected to begin losing its monetary policy shortly.
This should also be positive -- it will also be a positive factor for margins given the shorter duration of the Bank's liability to compare the interest earning assets. The Bank's operating revenues as measured by our operating profit before provision for loan losses were at 4.1% QOQ.
Aside from the positive evolution of client margins and income, the Bank also benefited in the quarter from the decrease of long-term rates and the increase in client treasury services. These helped to offset the already mentioned impact of lower inflation to margin and the lackluster evolution of fees are still being affected by regulatory changes.
Net provision for loan losses in the quarter decreased 6.7% QOQ. The Bank's cost of credit provisions over loans reached 1.8% in the quarter in line with our previous guidance.
The QOQ evolution of provisions and asset quality was mainly due to improvement in asset quality in consumer lending as mentioned before in this call. Total coverage with provisions of non-performing loans reached 91% in the second quarter.
Including the collateral effect in many of these operations especially mortgages, the coverage ratio of non-performing loans increased to 143%. As a result of these improvement on asset quality, our operating profit after commissions for loan losses was at 8.2% QOQ.
Those are also holding a trend. Operating expenses in 2Q13 increased 6.8% QOQ mostly due to seasonal factors and 4.9% year-on-year.
Efficiency ratio reached 42.9% in the second quarter. The QOQ rise on costs was mainly due to seasonal factors related to the summer vacation in 1Q13.
Overall headcount remains stable deflating low pressures on personnel expenses. The 4.9% year-on-year increases in operational expenses was mainly due to the 9.2% increase in administrative expenses.
The Bank continued with its transformation project we have despite more administrative expenses in the short-term, but which should begin to produce greater efficiencies going forward. In the quarter, the Bank also launched its Santander Select business model published the higher income statement as already mentioned.
The Bank has closed 21 Santander Banefe branch in the past 12 months, which now totaled 77. Normal branch closes are expected in this segment covering the low-end of the consumer market and some branches will be reformatted as traditional Santander ones.
Moving forward, administrative expenses should grow at a smaller pace as many of these initiatives are finalizing and efficiencies began to kick in. In summary, the Chilean economy is in good health with a moderate slowdown approaching.
On the other hand, our lower rate environment and an uptick in inflation should actually lead to better results in the banking system. When value analyzed, each quarter had many positive aspects, it will normalize the inflation rate I'd say 0.6% a quarter in line with the strict consensus for the next 18 months, our ROE is already reaching 19%, 20% levels.
Our loan growth is beginning to accelerate especially in the segment we are targeting due to their attractive risk adjusted returns. The funding mix compared to improve and our transformation initiatives are beginning to strike healthy green shoots.
Net interest margin should rebound as the year progresses especially net of commissions, attractive quality, and consumer lending improves. Those goals should also continue to decelerate and efficiency should improve.
Finally, as a reminder, the income tax rate in Chile will have risen in 2013 for all companies and therefore focus should be kept on pre-tax earnings. In fact, in the 2Q of this year, our pre-tax net income was up 11.3% QOQ, reflecting the solid earning generation potential of the Bank.
At this time, we will gladly answer any questions you might have.
Operator
(Operator Instructions) And your first question comes from the line of Tiego Batista of E2BBA.
Tiego Batista - E2BBA
Thanks for the opportunity. I have two questions.
The first one is regarding the subser fee income. The performance of this line was weak in the first half of the year, mainly because of regulation, but you comment in the press release that this line is likely to rebound in the second half and especially into 2014.
Could you elaborate a little more about this positive view on fees? This is my first question.
And the second question is regarding asset quality, especially on mortgage. Despite the steady performance of the consumer segment asset quality, you comment that the provision on mortgages could expand in the future.
Could we have additional -- some additional color on this provision expectation for mortgage?
Raimundo Monge
Okay. First of all regarding fee income we have comment in other previous calls we did expect this year to be a driver on that in partly because of a new regulation that are been applied and especially in terms of the insurance are expecting to grow on this line of income.
At the same time we have also been reviewing all the different fees that we are connected in the line of the new regulation and in the line of the new awareness of the client having and at the Bank we don't want to be quarreling with our clients about fees going forward. So, well we're retransforming our fee structure is away from kind of flat fees and moving into usage type of fees, which are people don't complaint about paying usage type of fees and now they do complaint many times because of the kind of flat fees.
So we have been streamlining our fee structure simplifying it, making it more clear, and therefore its part of the natural process of adjusting to this new consumer behavior and the new regulation. And thirdly, last year because of these changes in the macro environment, we've reduced our client base especially in the low end for the more massive market, which tend to be proportionately paying more fees than the upper segment there.
That cost of capital that year, we were increasing our, in terms of checking account client by roughly 1000 client per month. Today in the last three month we've been increasing our checking account clients by 3500 clients.
So that level of activity make us believe that fees will bounce probably by the end of this year and this within the 2014. So we tend to be optimistic however this year it will be, at on a year-over-year view, a major contributor.
Actually, it could be a small target on a year-over-year basis. But next year we expect that fee.
Actually if you take a longtime, two years fees tend to move in line with a number of clients and that’s why the fact that we had been going back to previous the growth of clients, we previously have make us believe that is a good predictor of what we can expect this year. In terms of asset quality, I would say the news are positive.
As you have seen our level of provision has been normalizing going back to previous where our cost of credit was around 1.8, which has been very close to historical average. And we think that given the new models that we implemented, the one year that happened a few years ago.
The news is generated in much better conditions and therefore we could be having pleasant surprises on asset quality line. Of course every once in a while you have surprises especially in the corporate side we saw this quarter one or two positions that we would prefer to strengthen and in the mortgage business you see that the levels were so low that at some moment of time they have to normalize.
But as we stated in our earnings release, we don't have any fundamental concern about mortgages and the level of actual losses are very low. Yeah and that's what we see beyond normalization after an extremely low periods of mortgage and income levels.
Yes, so we don't have the concerns over there. We think that asset quality is probably the concerns are finally behind us and of course is an issue that you have to monitor every single day but we think that now we are in a much better position to address them even though we have better tools for evaluating and follow-up on clients.
I mean and it's expected we see finally a law to integrate the information about customers in a few database in the same good credit deal that will definitely will be addressed. And we think that that information is moving back and hopefully should be in excess if not this year but hopefully 2014.
Operator
Your next question comes from the line of Carlos Macedo of Goldman Sachs.
Carlos Macedo - Goldman Sachs
I have a couple of questions. The first one is, as you mentioned, Raimundo, during the call, if you normalize the net interest income for inflation, say, go back to second quarter last year levels, your ROE would be close to 20% -- 19%, 20%.
So that would be a normalized level now. Of course, with winding down the investments that you are making for the transformation project and all that, I think it's reasonable to believe that ROE could go even higher.
What is the view that you have for ROE in the medium term? Should we expect higher than what the normalized ROE of 19% you have now?
And I think the second question goes in line with that. You mentioned in the release that there is still discussion regarding how the interest rate cap in Chile will be determined.
If you could give us an update in that and the Bank's view on it and if you have any sensitivity on what kind of impact that could have on your net interest income over the next -- well, whatever it is implemented. Thank you.
Raimundo Monge
Okay. Well regarding our medium-term view about ROE as we have mentioned in the previous calls we think that inflation is unfortunately after the Chilean Banks moved to IFRS.
It was that the volatility of our bottom line is built into the volatility of inter quarter inflation levels there. If you take inflation on a year-over-year basis or in a moving average of say six, seven quarters the effect of inflation tends to come from that because sometime you will have higher than average inflation lower than average inflation et cetera.
So at the end we think that the source of value that the bank is able to create is linked to client activity. And that's why the fact that deposit and loans grew at 3.5% or close to 14% on an annualized basis this quarter.
The fact that we are growing much faster than that in those segment and we have targeted on a risk that I believe a much higher risk adjusted or after provision margin. Because again if you take a look at the area where we have been lagging the most compared to our peers is mortgages.
Mortgages today yield absurdly low level of profitability especially in an environment where capital totally will be price and capital term will be constraint for the future. So allocating capital in low yielding mortgages for 20 years we think that these doesn't fulfill our performance criteria and that's why we are lagging mostly on mortgages and in last operations which where, as we don't get enough revenues on the loan lending side we tend not to allocate capital as well.
And that's why that the good news is that in those targets, those segments are delivering good risk adjusted returns that are growing faster than the market. And in the overall picture we are starting to catch up with the market and probably this first half we will gain market here but again we still focus on revenues and on value more than on side track never been and today is not any change.
So with that in mind we think that ROEs of 20% can be achiever as an average moving average of six, seven quarters and sometimes will be higher probably in the second half we will see higher levels because of abnormally high line sorry 1% inflation, which is not very high for historical standards but we see inflation normalizing or being a little higher than what we saw in the first half. You will see our profitability bouncing.
But again what make us comfortable with moving the banking to levels of again as a moving average of 20% we expect that client activity is resuming and the number of clients that the cost setting standards et cetera are moving in line that make us believe that it could be delivered that time of return. Why that return is not expected to go higher than that it's simply a reflection that first inflation is what was expected to be a goal (technical difficulty) and to have something like that.
And secondly because we are operating with much higher capital levels that what we have been historically and that is simply in anticipation of some changes that at this time are not very clear what to expect about Chile moving into a positive 3 or positive two point something standard. Yeah so that's why again we think that ROEs in the 19, 20 range could be achieved not in every single quarter but as the moving average of six, seven quarters because client activity is already growing at a healthy level.
In terms of interest rate caps we don't have any information. The register is positive is but a strong and go back to there are two chambers and there is an integrated chamber to discuss issues including Congressman and Senators and but we think that probably this year would be likely to be approved and the good news is that apparently the intention would be to join the two banking relations the one that consolidate all information in a single schedule and reducing the rate that we have a that we imply that the final effect will be much less than if you simply reduce the caps and you don't have that information about timing.
So to discuss the level of exposure of retailers from the lower end of the consumer market both by banks and non-banks have been barely coming down. It probably is an alert that if you simply reduce prices, what many people would be seek out of the former market which is something that probably nobody want.
And that's why the good news is that probably the $2.6 billion in line or but it's impossible to have a I guess when we process really would be finished that probably in late this year for the benefit of all.
Carlos Macedo - Goldman Sachs
And the election will probably have an impact on that, correct?
Raimundo Monge
That’s right.
Carlos Macedo - Goldman Sachs
Just going back to the first question, then. If we don't look at ROA -- ROE specifically, but look at ROA, and ROA has been fluctuating with inflation.
ROA for this quarter specifically was 1.4%, which isn't particularly bad. It's better than the first quarter, but it is weaker than it was last year.
Do you think that ROA could migrate back to the 2% level where you've seen, and then the leverage can take care of itself? But is that something that you see happening?
Raimundo Monge
Going back to 2% in the short-term is very unlikely, but I'm sure that we will be started to increasing given that we use to have a -- we still a very liquid balance sheet. We have been on purpose for paying high levels of liquidity especially short-term Central Bank notes and short-term mainly Central Bank notes and that again we’ll eventually start.
We have already been reducing that excess liquidity, but still it’s finalizing the ROE. So, the point is that in -- we think that in -- we can leverage a little bit more the balance sheet and in addition, improve the underlying profitability with clients, which is at the end the value was created.
Carlos Macedo - Goldman Sachs
Yeah.
Raimundo Monge
But 2% probably not this year by far.
Operator
Your next question comes from the line of Tito Labarta of Deutsche Bank.
Tito Labarta - Deutsche Bank
Raimundo, thank you for the call. I've a couple of follow-up questions.
Just first in terms of your net interest margin, clearly you should benefit in the second half of the year from higher inflation. You also mentioned you expect rates to begin to get cut in the second half, which should also benefit your margin.
But how much do you think the rates will fall and what type of benefit do you think that would be to, say, your margin? And then, the second question, just going back to asset quality and provisions, given you saw an improvement in the quarter, do you think this improvement will continue for the rest of the year?
And how much mark in NPLs come down, and how would that impact that provisioning levels? As you mentioned, provisioning about 1.8%, on average, like a historical average?
Is that where we should consider going forward or could that come down further as asset quality improves? Thank you.
Raimundo Monge
Okay. Well, in terms of net interest margin this quarter was very low because of a negative inflation something that's very unlikely to happen in many economies, especially an economy that is low in at 4%, 4.5% close to 6% as we see it for this year.
So that's why we think that in the second half this will have a low non inflation we’ve never had the June inflation, which is relevant for July results, has already been published it was 1.6% and very likely that July inflation also is high so 1% would be short of where - what are the end results of the relevant inflation for the quarter. So, but again, even we've much higher inflation and we've seen in the period Bank has been able to have EBITDA's margin of around 5% on a moving average of 6, 7 points.
We think that that is our basic (inaudible). When inflation is lower and we have been growing in the more profitable segment.
We don't think that the levels to be higher simply because we -- after all the creative models that we did we are targeting the middle to high end of the consumer market. The domestic market, the more low end of the consumer market, we are seeing much less activity than before and that's why we don't expect margins to go beyond that 5% again that’s an effort.
And as related with your second question, how we proceed asset quality indicators. We think that again unless we see a brisk cooling of the economy, which now is that you don’t have any indicator I think it’s year-to-date unemployment figures were released and we still see a very robust job market and employment is 6.2 and to a large extent because the growth of the number of people employed has been increasing not that the people are quitting the job market.
So there is still a very robust job market the fact that inflation is negative also increases the real purchasing power of those salaried. And that's why we think that we can cool in this year a stronger growth of the internal expenditures in the second half as though.
So, we think that the basic market will be supported, and in that case, our provision levels should be flattish. We think that for the year it will be flattish or little bit down, especially because last year we had an extraordinary item that it won't be repeated this year.
And therefore, given that we are growing at the levels of higher than 39%. But we believe our cost of credit to something lower, to 1.7 or something like that by the end of the year.
So in terms of asset quality you have to monitor on a single date that we think the news are found with of course and it could be surprises in the positions on the corporate tax but underneath, which is more predictable at least you have more way to predict it, we think that most of the troubles that came after the avalartes (ph) and the elimination of some work many record and the great deals are apparently behind us which is the news.
Tito Labarta - Deutsche Bank
Just following up on the net interest margin. What is the sensitivity to interest rates because you did mention you expect rates to come down?
So how much do you think rates would come down and how would that impact your margin?
Robert Moreno
Hi, Tito this is Robert. As we mentioned in the release, we can burn a lot in core deposits, away which with the (inaudible) of companies.
And it also has another particularity that there tend to be more sensitive to the short-term interest rate. So, they’re much more stable or cheaper, but they’ve also increased the sensitivity to rates.
So, it’s taking us four month period like a 100 basis point decrease in the short-term rates benefits our margins at around $50 million to $60 million, okay. Unlike inflation which is directly to the bottom-line I think this is over a one-year period, okay.
So, I think that the growth of core deposits and their falling rates it likes to fall that is actually good in the next six months for margins. We’ve actually with the courage of increasing core deposits and we’ve also increased to a certain extent the sensitivity to the short-term rates on the funding side.
Tito Labarta - Deutsche Bank
So then, just looking at the second half of the year with inflation picking up, rates coming down, and I know Raimundo, you mentioned about a 5% net interest margin. But could that maybe be even higher just in the second half from the short-term movements in rates, or is it like the 5%, more or less, where you expect that to be, given all of these variables?
Robert Moreno
It should be more than that maybe a little higher the timing on the inflation but when you discount a provision that cost of credit also coming down in the evolution of margins net of our provisions to be higher. In the fourth quarter of last year we had inflations of 1%, we actually reached the net interest margin of 5.5.
So, that’s definitely in the range I mean we could have net interest margins of 5.5 example in the third quarter, okay. Once again that’s -- that I think what Raimundo was trying to say that if you take the average for the year it’s going to closer to 5% and not the 4.7% that we’re seeing today.
So, it’s 4.7% in the first half, between 5.2%, 5.5% in the second half, the average will be 5%.
Operator
Your next question comes from the line of Jose Barriera of Bank of America.
Jose Barriera – Bank of America
Definitely seeing some positive signs. I just want to go back to some of your comments on the macro and your expectations for loan growth this year.
I'm just having a hard time reconciling the fact that we have a decelerating economy, or at least slightly decelerating, even based on how you guys have brought down your expectations for growth this year. But you are looking at loan growth to accelerate from roughly 7.5% to 10%.
So just sort of trying to wrap my hands around that, and if you can just give us some color, that would help us understand how that's happening. The second question is with regards to trading treasury results.
I noticed that they were very high in the quarter. You noted that there was some profits on the repurchase of bonds that were trading at a discount.
If you could tell us exactly how much was coming from that, because I expect that not to be a recurring level of trading, or at least of that particular portion. If you could comment on that as well, that would be great.
Thank you.
Raimundo Monge
Okay. Look, going back to the macro outlook, when we adjust our expectations for the remaining part of this year and next, we were basically thinking in terms of the investment.
Remember that Chile went through a big earthquake in the year 2010, yeah, which has resulted in extremely high investment levels in 2011 and 2012. And of course, many of these projects are finishing, yeah, so that has an impact in investment.
In the case of internal demand consumption basically, which is not related with the financial activity, the news that we’re seeing in the job market make us believe that although consensus is moving down the economy is still being very robust and our concerns are more in terms of the expectations going forward than the realities that we’re seeing today. And expectation pictures change very rapidly.
As you see in the case of the US that things have changed very quickly from a negative view to a very positive view. In the case of the Chilean economy, we’ve seen a drop in the consumer confidence surveys and that’s why many economists are reducing consumption going forward, but it’s something that up to now up it’s not fully difficult.
So, it’s an open issue (inaudible) consolidated purposes we’re adjusting our macro functions. We don’t see a clear change in internal consumption.
And the third component, which is the external outlook, we had good news on that. As you know, Asian-Pac probably weaker than it was expected.
The U.S. is stronger and Europe is kind of flattish, which is good news, yeah, that’s why we think that we were expecting for midyear something close to 5 to 5.1 and it dropped to 4.7 or so, it’s not a big change.
It’s simply a reflection of these kind of minuses and plusses, right, but we don’t have any clear --
Robert Moreno
Crystal ball?
Raimundo Monge
Crystal ball to put it. In terms of trading, there are two components.
Roughly two-thirds or on average it’s like 75%, 80% of our trading gains are client related. Remember that since 2012 Santander Chile has not cut proprietary trading desk.
We had a leading edge of our proprietary trading activities. So, the bulk of the trading gains are with clients, market may and can say that or the concession we have for Central Bank loans for the sake of liquidity.
So, this year, we saw an increasing in that part mostly due to the drop of long-term rates there on the one hand and, secondly, we don't buy bonds but that is not very meaningful. The bulk was mark-to-market of bonds that we keep for liquidity sake, and a very stable or slightly increasing level of client activity, which we (inaudible) reported in two-thirds but historically close to 80%.
That’s why in our case trading gains it shouldn’t be seen as kind of volatile stock trading related revenues. In our case, are client driven and the element of moves the client is have to deal with the volatility of the market staying gray, inflation and things that are precisely the list but clients are looking to close with that.
So, that’s why for us that is our commercial line is linked to clients and that’s why it's similar to (inaudible) market, it tends to be very stable.
Jose Barriera – Bank of America
Raimundo Monge
Yeah, that’s probably to a large extent due to lower long-term rates and mark-to-market of these bonds to keep our liquidity sales.
Robert Moreno
Going forward the line usually fluctuates between $20 billion to $25 billion.
Raimundo Monge
The total.
Robert Moreno
For the total.
Jose Barriera – Bank of America
I see.
Robert Moreno
For the client and the non-client.
Jose Barriera – Bank of America
And do you know -- in this line, do you know the amount of gains that were related to your repurchase of bonds that were --
Raimundo Monge
That was probably around, yeah; in mark-to-market was a $10 million, $5 billion in (inaudible)
Robert Moreno
And in the repurchase must have been like $1 million or $2 million.
Jose Barriera – Bank of America
And then just finally very quickly on your effective tax rate, obviously rates, the tax rate should go up towards the end of the year. What should we expect on a quarterly basis and for the year for 2013 for the effective tax rate?
Raimundo Monge
Yeah, in this call we try to explain how, why this difference between this statutory rate and the effective rate, and again has a lot to do with inflation, yeah. So, this first half we had an effective rate of 17% more or less which is higher because cost inflation was low which is a little bit choppy.
So that’s why in the second half although for surgery purposes we state that effective rate close to 17% and 18% level should be expected probably to inflation is effectively higher the effective rate could be lower than 17%, which is a little bit costly but if it is follow the math, of the chart we put in slides, sorry in page 16 of the press release you will understand why the higher inflation the lower the effective rate but (inaudible) is guaranteed. That’s for practical purpose, our budget is going to be 17%, 18% this year.
Operator
(Operator Instructions) And your next question comes from the line of Christopher DiSalvatore of Credicorp Capital.
Christopher DiSalvatore - Credicorp Capital
Hi guys, thank you for the question. I just wanted to follow-up with loan growth.
It sounds to me that in this quarter it looks like the trend have changed a bit and you guys have become a little bit more, I guess you could say aggressive particularly on the segments that are returning a bit more margin. My question looking forward into 2014 is, if indeed the appetite for the bank has expanded and you see potentially more aggressively in the middle consumer and SME going forward which and how that can relate to potentially even higher potential risk that we’ve seen in the commercial segment, which I’m assuming is coming from the focus more on the SMEs?
And generally that, I mean compensating the uncertainty which seems like a lot of market participants seem to have today. I mean, if you as a bank the appetite you feel that it can be sustained and looking into 2014 potentially a bit more aggressive on those two fronts.
Raimundo Monge
Well, first of all, as a reminder once that the market change because of the consumer behavior, because of the napalalia affair, because of different regulations, we decided a couple of years ago to do two things. Number one is to change our credit risk models to take into consideration these changes on the first-hand, and secondly, we’ve been working through them in this transformation initiative that precisely try to cope with these new rules, and the way to do that is to have more robust tools for evaluating and follow-up of creating efficient and at the same time to have a more efficient and a more intelligent way to tackle the relationship with clients.
What we’re seeing in this second quarter we expect to hopefully to sustain going forward is a new way to manage the bank which is link with on a client by client basis taking into consideration the risk that we are assuming, the profit potential the client has, the level of transactionality that it keeps with us and accordingly you have a relatively a tailor-made soup for every single client. Of course that is still 100% deployed and implemented that theoretically will be more visible in our results.
And that’s why we have stick to segments that are compliant with those new requirements in terms of risk adjusted returns, and then hopefully mortgages eventually will come to that area mainly to large corporations, but in the short term given that we don’t see those level we decide to lose market share because again, we’re in the business of creating value for shareholders more than expanding our size or reducing. And that’s why in the case of mortgages very little activity there is a big drive as we have vis-à-vis the market.
And secondly, in terms of large corporate lending sometimes you grow, sometimes you don’t grow. It’s simply a reflection that we get in the full view of the client enough revenues to compensate for the capital allocation.
So, we think that again our new, if you combine the two tools the different risk models plus the CRM and the different activities of the transformation project it's not going to changing our risk status. It is simply that more and more clients will be profitable if you really understand what’s going on with them.
Up till now, you were simply saying okay, if I want to have a profitable client I need to increase prices. But that process today is increasingly difficult and that’s why you need at a certain kind of market price how can you be more efficient than the rest and more quick in addressing the needs of the client, and at the same time have stronger tool for evaluating and following up on the client behavior.
And that’s why we think that levels of growth as the ones we have been showing and could be sustainable as long as you have a good market with good profitability on the other side. If rates go down again probably it's not sustainable.
Christopher DiSalvatore - Credicorp Capital
Great, okay. And then just looking at the commercial side, I mean, if we sustain, which I would assume that SMEs kind of leading this growth.
If we were to sustain this level, let’s say going into the next 6 or 12 months, how much more or where do you see kind of the NPLs -- I mean, how much more growth do you see in the NPLs or do you see this level more or less is a good photo of kind of the risk-adjusted reward that you are seeing?
Raimundo Monge
Yes. We think that in time you’ll see lower levels but again we’re growing - we’re not growing the very upper part of consumer lending and we’re growing very fast on SMEs, which tend to have higher non-performing levels, which are backed by the state guarantee.
So, at the end, the way you try to grow is by looking which are my expected losses and how I can collect different sources of revenue for the client to compensate for the risk and capital consumption we’re allocating to that specific client. That why the end of the story but we expect spreads to be flattish or slightly down in gross terms but at the same time given that we expect commissions to be lower than before to have spreads adjusted by commissions, which are tighter than historically.
Operator
There are no additional questions at this time. And I would like to hand the call back over to Mr.
Monge for any closing remarks.
Raimundo Monge
Okay. Thank you all very much for taking the time to participate in today’s call.
And we look forward to speaking with you again soon. Have a good day.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect. And have a wonderful day.