Nov 4, 2014
Executives
Raimundo Monge – Director, Strategic Planning Robert Moreno – Manager, IR
Analysts
José Barria – Bank of America / Merrill Lynch Thiago Batista – ITAU BBA Securities Saul Martínez – JP Morgan Tito Labarta – Deutsche Bank
Raimundo Monge
Good morning, ladies and gentlemen, once again, welcome to Banco Santander-Chile Third Quarter 2014 Results Conference call. This is Raimundo Monge, Director of Strategic Planning.
I am 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 third quarter of ‘14.
Following the webcast presentation, we will be happy to answer any questions you might have. Before we go in to more detail regarding our results, we will briefly give our latest update on the economic outlook for the Chilean economy in 2014 and 2015.
As forecasted, the economy continues to decelerate in the third quarter, mainly due to the lower-than-expected investment and consumption levels. 2014, we are anticipating GDP to grow around 1.9% with internal demand that is consumption plus investment expanding 1.2%.
We expect the economy to rebound in 2015 with a GDP growth of around 3.2% and internal demand expanding 3.4%. The inflation rate measured by the variation of the U.S.
and inflation linked unit and the most relevant indicator for banks should rise to 4.6% this year due to depreciation of the peso and the effects on prices of some goods [ph] as a result of the new tax law. We expect inflation to return into a more normal level of around 3% in 2015.
Given this outlook, the Central Bank continue to cut interest rate in the quarter to 3%. We expect the central bank to pause its interest rate cuts as further reduction could depreciate the peso a fuel greater inflation.
The quick [ph] rebound of the economy should be driven by various factors. First of all, the outlook of growth of Chile’s main trading partners especially the U.S.
continues to strengthen. In fact, the weighted average GDP growth of Chile main trade partners continues to be revised upward [ph].
This should be positive for the contribution of Chile’s export growth to GDP. Export growth as mentioned in GDP figures should expand at around 6% this year and the next.
Regarding investments, in 2014 we are expecting a contracting of 4% and a recovery to levels closer to 2% in 2015. This should be driven by two main factors, first of all, the investment are expected in the infrastructure and the energy sectors.
Second of all, we believe that the various reforms [ph] being discussed in Congress will be resolved via broad-based compromises resulting in a rebound in investor and consumer confidence. Finally, total consumption including government expenditure should continue to grow at around 4% both in 2014 and 2015.
All in, this represents a relatively supportive macro environment for banks. For this reason, loan growth should continue to grow close to 9% in 2014 and around 8% in 2015.
Deposit growth have slowed as the high inflation and low interest rate environment has led to a greater flow of money to money market funds. But liquidity levels remain quite packed [ph].
The profitability of the Chilean banking system is also stabilized into [ph] a more normalized inflation and interest rate environment in the third Q of the year. Asset quality in the financial system has also remained relatively stable.
Now we will review how the bank continues to move forward in its strategic objectives and the main commercial results achieved in the quarter. The evolution of our quarter results reflects as expected the lower inflation rate.
But more importantly, the bank experienced robust business trends despite the lower growth of the economy. We attribute this to our commercial strategy of focusing growth first of all in those segments with the highest risk adjusted contribution.
This has been achieved with an increased use of our new customer relationship managing platform CRM, improved quality of service, strong growth of corporate transactional services such as cash management and in reaping the full benefit of a revamped upgrade [ph] model. The evolution of our asset quality indicators also shows that we are slightly ahead of the risk of the system in making the necessary changes to confront on better footing the current economic environment.
Our capital levels remain robust. All of these will allow us to continue to achieve an ultimate balance between our return on equity and our cost of capital.
By maximizing these relations, we believe we will be able to expand shareholder value going forward. In the third Q of ‘14, total loans increased 2.2% q-on-q and 9.6% year-on-year.
In the quarter, the bank continued to focus on strategy of expanding the loan book to less riskier clients and segments. Lending to individuals increase 2.7% year-on-year and 12% year-on-year.
Those in the high-income segment which are mainly distributed through the Santander select network increased 3.9% q-on-q and 17.1% year-on-year. While in the Santander Benefit Unit which I think [ph] low range of segment, the loan portfolio increased 0.3% q-on-q and 3.6% year-on-year, continuing the low mid-shift [ph] started several quarters ago.
Lending to small-and-medium sized enterprises, SMES, expanded 0.7% q-on-q and 4.5% year-on-year. In the quarter, the bank continued proactively decelerating loan growth in this segment.
Growth has been focused in those SMEs clients that are also intensive in non-lending activities such as cash management which tend to be the most profitable SMEs. In the third quarter, the middle market segment loans increased 4.1% q-on-q and 9.85 year-on-year.
Loan growth accelerate in this segment due to the increased activity among mid-sized exporters which are benefiting from the weaker peso. This segment also generated increasingly higher levels of business volumes in other areas such as cash management which has helped to drive the rise in client deposit.
Total deposit increase 8.6% q-on-q and 8.8% year-on-year. The bank continue to focus on increasing its core deposit base as reflected in the 1.1 q-on-q and 8.9 year-on-year rise on non-interest bearing demand deposit.
Simultaneously in the quarter, various institutional investors and large corporate clients increased their deposit with the bank given the high liquidity of the economy. This was reflected in the 13.1% q-on-q and 8.7% year-on-year increase in bank deposit in the third quarter.
With the important change in the bank founding [ph] mix in the last few years, the bank is moving ahead in compliance with the Chilean regulators proposed new liquidity requirements. As of September 2014, the bank has 3.5 million clients.
The bank achieved positive net client growth for the sixth consecutive quarter. The client base has grown 6.7% in this stretch which started at the end of the first Q of 2013 when the bank completed the development of the CRM and launched the Santander Select brand for high-income segment.
Clients in the high-income segment increased 17% in the same period. The consolidation of our strategy is sustained growth in various products in which we have gained market share this year.
Despite focusing growth among the middle-high and the high-income segments of the population, we have gained market share in consumer lending, credit loans and transactions and deposit since the beginning of the year. We have also increased our market share in processing [ph] mortgage loans in the same period.
The transformation project is also resulting in a safer evolution of consumer loan asset quality which is a key cornerstone of our strategy to obtain higher margins net of provision. This is due to various initiatives the bank has been carrying out since 2011.
Among them, the portfolio mix change focusing on loan growth in the middle to higher end of the consumer market, the improvement in risk models, the focus on growing via pre-approved loans and lastly, the revamping of the recollection process. These efforts are reflected in the sound evolution of impaired consumer loans, that is consumer non-performing loans plus renegotiated consumer loans, especially when compared to our competitors.
Since June 2012, impaired consumer loans in the Chilean banking system excluding Santander Chile have increased 52% compared to a decrease of 14% in [indiscernible]. As a result of this improvement in impaired consumer loans, the expected loss of our consumer loan portfolio has been reduced considerably.
Accordingly, in the third quarter, the bank recalibrated its consumer loan risk model which resulted in a reduction in provision as required for the performing [ph] portion of this loan book. The bank also concluded the third quarter with a strong capital ratio.
Our core capital ratio reached 10.6%, one of the highest levels on our main peers with a Basel I ratio of 13.7. The ultimate goal of strategy is to maximize the difference between our ROE and cost of equity.
Today we have one of the best relations between core capital and ROE, cost-of-capital and ROE among our main local peers. And we have the highest credit ratings in the banking world.
Now we will explain the evolution of our results which as mentioned were lower on a q-on-q basis mainly as a result of the lower quarterly inflation rate. However, the bank solid commercial and client profitability trend observed in that year were sustained in the quarter.
In the third Q of ‘14, net interest income decreased 14.1% q-on-q and increased 4% year-on-year mainly as mentioned because of the lower quarter inflation rate. The net interest margin, NIM, in 3Q ‘14 reached 5% compared to 6% in the second quarter and 5.3% in the third quarter of 2013.
In order to improve the exponential margin, we have divided the analysis of net interest income between non-client interest income which include someone addressing [ph] the impact of inflation in our results and client interest income which gives a clear picture of the bank’s recurring net interest income and margin. As mentioned, the reduction of non-client net interest income was due to the lower quarterly inflation rate.
The bank has more assets than they really is linked to inflation. And as a result, margins have a positive extensibility to variations to inflation.
In the third quarter, the variation of Unidad de Fomento, UF, an inflation index currency unit was 0.6% compared to 1.8% in the second quarter of ‘14 and 1% in the third quarter of ‘13. The gap between assets and liabilities index to the U.S.
average approximately CLP4.1 trillion, that is around US$6.8 billion. This implied that for every 100 basis points change in inflation, our net interest income increases or decreases by CLP41 billion, all other factors equal.
The existence of risk guard is mainly due to the bank’s lending and funding activity. We expect U.S.
inflation in the fourth quarter to be approximately 1% to 1.1% favoring our non-client interest income. Concerning client, net interest income, it increased 1.7% q-on-q and 6.9% year-on-year in the third quarter, driven mainly by loan growth.
Client net interest margins reached 5% in the third quarter compared to 5.5% in the previous quarter and 5.6% in the third quarter of ‘13. Client yields has remained relatively stable since the third quarter of last year, despite the change in loan mix to less risky segments and the negative impact of reductions in the maximum rate.
This has been made mainly due to the better funding mix and writing long [ph] spreads in 2014. For the remainder of 2014 and 2015, client net interest income should increase in line with loan growth as client margins are expected to remain relatively stable.
Income is relatively beginning to rebound in line with expansion of banks’ clients and product base. Net fee and commission income increased 0.4% q-on-q and 2.1% year-on-year.
The income from our business segment was up 4.4% q-on-q and 12% year-on-year. Notable was the 4.4% q-on-q and 11% year-on-year increasing [indiscernible] from individuals and the 4.7 q-on-q on the 31% year-on-year increase in SMEs.
These positive figures were partially offset by the decreasing collection fees that are negatively affected this year by the refund of insurance premiums for mortgage loans that are prepaid. In the third quarter of ‘14, the times total core revenue, that is net interest incomes, plus fee income was down 12.1 % q-on-q and increased 3.7% year-on-year.
As mentioned, this reduction was mainly due to the lower inflation rate in the quarter. On the other hand, the bank’s core revenue from our business segment, a clear metric of the bank’s recurring revenue generation was up 2.2% q-on-q and 7.5% year-on-year.
The bank’s core revenue from business segment has increased for five consecutive quarters boosted by our transformation project. Acid quality [ph] was stable in the quarter.
The banks total non-performing loans ratio remained stable at 2.9% q-on-q and decreased from 3% in the third quarter of ‘13. Total coverage of non-performing loans in 3Q reached 104.1% compared to a 102.3% in the second quarter of ‘14 and 94.8% in 3Q ‘13.
Provisions for loan losses increased 18.2% q-on-q and 3% year-on-year in the third quarter. In this period, the bank recognized a one-time provision expense of CLP8,578 million from the record inflation and improvement of his provisioning models for loans analyze in a group base.
This recalibration was performed in order to proactively increase average of non-performing loans in the SME segment. This explains a big part of the 28.1% q-on-q and the 11.8% year-on-year in gross provisions.
At the same time chart jobs [ph] remain stable in the quarter increasing 0.2% q-on-q and decreasing 8.7% year-on-year. As a result, the cost of trading, that is, provisional expenses analyzed divided by total loans reached 1.8% in the third Q of ‘14.
The bank total net provisional expense has decreased 4.1% in the first nine months of this year compared to the similar period of 2013. And the cost of credited 1.53% in the first nine of this year compared to 1.89 in the same year, in the same period in 2013.
Operating expenses excluding impairment charges decreased 6.4% q-on-q and increased 0.5% year-on-year in the second quarter. This period, the bank recognized a one-time impairment of intangibles of CLP36,577 million.
This impairment was mainly of software. In the past few years, the bank has invested significantly in new systems and software.
Software was usually amortized in two years but some older ones that were not contributing to the bank profit and loss statement were fully chart off – in the third quarter. This will imply lower depreciation and amortization expenses of around CLP13 billion in 2015 and CLP5 billion in 2016 as well as a lower depreciation charge in the 4Q of this year.
Excluding the chart for impairment, the efficiency ratio reached 36.7% in the first nine months of 2014. Personal salaries and expenses decreased 0.4% q-on-q and increased 10.1% year-on-year.
The year-on-year increase in personal expenses was mainly due to the impact of a higher inflation rate over salary which are index inflation and variable incentives due to the solid client activity. Headcount increased 1% q-on-q and decreased 1.1% year-on-year to 11,493 persons in total.
Administrative expenses increased 1.7% q-on-q and 7.9% year-on-year. This was mainly due to greater business activity that has resulted in high system and data processing cost; and second, the effects of a high inflation rate over cost because of index inflation like rent expense.
In the quarter, the bank opened three Santander Select branches and closed six financial branches as far as ongoing process of seeking greater efficiencies in the brick-and-mortar distribution network. The bank remains focused on growing through complimentary channels such as the Internet, [indiscernible] banking and mobile banking.
Apart from the one-time impairment charge and provision expense I just mentioned, the bank also recognized an additional one-time unaudited [ph] non-cash income of CLP35,411 million in the line item income tax expense during September 2014. Chile’s new tax bill became effective in the third quarter and the bank had to recalculate if it’s deferred asset and liabilities using the new higher statutory rates including that bill.
All of the above has resulted [ph] in a fairly solid 2014. Our year-to-date earnings was up 53.6% to CLP412 billion with an ROE of 22.8% and an efficiency ratio of 36.7%.
In the quarter, net income was up 8.9% year-on-year and drove [ph] 31% q-on-q. I’ll be happy to explain through this presentation core business trends remain robust and for these reasons we have no significant change to our outlook for the 4Q for [ph] the year 2015.
As we have mentioned in previous earnings calls, the bank has been targeting and is currently reaching an ROE between 19% and 20% with a normalized inflation of 3%. The bank average ROE in the past eight quarters assuming at 3% annual inflation rate is 19.3%.
In 3Q ‘14, the bank’s ROE excluding one-time and under a normal inflation scenario would have been also within the 19%, 20% range. To conclude, 2014 has been a solid year in many aspects.
The most important has been the growing client and commercial trend that reflect the success of the transformation initiative starting a few years ago. Loan growth has been solid in the segments we’re targeting and client margins have remained stable despite the essential [ph] low mix.
The fund being mixed continues to improve and we have among the lowest cost of fund in the Chilean financial industry given our strong core deposit market share. The bank has also robust core capital ratios and liquidity levels.
The larger client base is helping us to assume growth of our fee base and we are also gaining market share in many products and services such as credit cards, loans and transactions, consumer installment loans, mortgage loans, deposit and checking accounts. Asset quality is stable and the banks proactively tighten coverage ratio of SME’s non-performing loans in order to avoid surprises if your economy does not rebound as quickly as expected in 2015.
The banks will [indiscernible] and efficiency levels are also improving. We are increasing our loan book by 8%, 9% a year with no increase in branches or headcount.
We accelerate the amortization of obsolete software [ph] in the quarter and these will produce cost savings in future quarters. In summary, high-quality recurrent result in the year and quarter in which we are showing solid core business trends while preparing the bank for another sound year in 2015.
At this time, we will gladly answer any questions you might have.
Operator
Ladies and gentlemen, the lines are open. (Operator instructions) Our first question here comes through from José Barria with Bank of America.
José Barria – Bank of America / Merrill Lynch
Good morning Raimundo and team. I have two questions.
The first one is with regards to provision in the quarter. I understand what you explained with the chart you took for the recalibration of the SME portfolio, but when I look at the provision per segment, it looks like on commercial loans you had a huge increase from about CLP39 billion in the prior quarter to CLP86 billion; and that’s not really explained by this CLP8.5 billion recalibration that you did or charge that you took for the recalibration.
And then, on consumer loans there is a big decrease. So, I’m sorry, I just don’t understand exactly what’s happening here and I want to get an idea of sort of what the right numbers I should be looking at in terms of a recurring number of provisions should be.
If you can start there and then I’ll ask the second question.
Raimundo Monge
Yes, what happened is that we previously recalibrated the consumer models and the SMEs models. In one case, as we pointed, we reduced the coverage and the provisions for that specific segment.
And in the case of SME we also did. The net, the combined effect of the two was the CLP8.5 billion result [ph].
It was a combination of our release on the consumer side and increase in the coverage and the SME side. And that’s why the net of the two was the CLP8.5 billion that we highlighted the –
José Barria – Bank of America / Merrill Lynch
Okay.
Raimundo Monge
With the two simultaneously.
José Barria – Bank of America / Merrill Lynch
I see. Okay, that’s clear now.
And then, going forward, what I’m thinking about what we should be expecting for provision to average [ph] loans, it sounds like you’re getting more conservative on the SME segment or on the commercial segment, but on the consumer segment, things have shaped up well given some of the changes, adjustments that you’ve made in prior quarters. What should we be thinking about in terms of provisions to average [ph] loan as we look ahead?
Raimundo Monge
Yes, well, if you take the historical trends [ph], we have been improving overall cost of credit or provisions over loans. We think that that trend – although the headwinds that we’re seeing specifically in the SMEs and the rest of the segment we haven’t seen up so far, no relevant indicators of asset quality [indiscernible].
And that make us believe that this year we have a 1.6 cost of credit ratio for the three first quarters as a whole, we think that – we come and think that for the last quarter and the year 2015, because, in the consumer side where most of the provisions and chart notes [ph] are happening, the vintages [ph] there, you measure that segment through vintages [ph]. The vintages are [indiscernible] that we have room to improve even though the macro outlook would be – or has been this year a little bit weaker than what we were expecting.
So 1.6, around 1.6 as an average for the next year and the remaining of this year is a good advice.
José Barria – Bank of America / Merrill Lynch
Perfect. Okay, thank you.
And then, the second question is if you could give us an update on the plans to implement Basel III in Chile and I understand that the regulators are proposing a change to the banking law which is necessary to enact or sort of to have you guys report under Basel III. What’s the latest and when do you think this happens and what is the potential impact on your capital ratio?
Raimundo Monge
Yes. The superintendents of banks [ph] as we mentioned recently that the hearing or the superintendency [ph] and the Ministry of Finance are in the final stages of drafting a proposal.
Here, the biggest pending issue is the capital ratios, yeah, because the liquidity elements of Basel III have already been proposed to the different market participant by the central bank at the beginning of the year and we haven’t seen nothing that is surprising there. So that, the pending part is capital ratios in the early commentaries that we have heard is that the system is well-prepared to move to Basel III because in Chile the capital allocation for credit risk purposes is higher than the average in other geographies.
And therefore, you could release part of that capital to redeploy it for operational risk and market risk which are the new categories coming in the Basel III implementation. So, the other commentary is that apparently no single entity will be in need of or in a desperate need of further capital, yes.
And given the fact that it will be phased in three or four years, we think that most of the system will pass the first relatively – in a relatively straight forward way. So in terms of liquidity for example, depending on how – which elements or which securities are qualified at high graded [indiscernible] you should see some changes in prices or – but you will [ph] speak in especially the larger banks have a strong presence in core deposit.
In our case, we calculate a core deposit market tier of around 21%. And by opposition, a market tier institutional money below 10%, yes.
We did the same as we said for the larger banks. So it’s a process that will take many years and we don’t see any need to rush things because the Chilean market has been essentially very well in the different ups and downs of the different cycles [ph].
So it’s good news because it’s an international standard. We at Santander believe we are a little bit ahead of the rest and we have some shadow [ph] calculations that make us very comfortable about the process.
José Barria – Bank of America / Merrill Lynch
Okay. And when you say comfortable, basically alluding that you don’t think that there would be a need for capital at least in your operations?
Raimundo Monge
No, in our case, very likely and given that we have the highest core capital ratio under Basel I is very likely that if it’s pressing for us it would be very much pressing for the rest, but we don’t foresee that scenario [ph].
José Barria – Bank of America / Merrill Lynch
I see. Okay.
Thank you very much, Raimundo.
Operator
Next question is from Thiago Batista with ITAU.
Thiago Batista – ITAU BBA Securities
Yes. Hi – actually two – hello – on [indiscernible] this quarter – do believe –
Raimundo Monge
I’m not hearing you very clearly.
Thiago Batista – ITAU BBA Securities
Hello? Now is better?
Raimundo Monge
Yes, it’s better.
Thiago Batista – ITAU BBA Securities
Yes. Thanks and sorry for that.
How much do you believe –
Operator
Should we take the next question?
Raimundo Monge
Yes, I guess. I don’t hear him very well.
Operator
Yes, I can’t hear him either. So our next question is from Chris Doug Otto [ph] with JP Morgan.
Saul Martínez – JP Morgan
Hi, this is Saul actually from JP Morgan, Saul Martinez. Can you guys hear me?
Raimundo Monge
Yes, Saul, very clearly.
Saul Martínez – JP Morgan
Okay. Okay, great.
Just sort of following up on the earlier question, you guys gave some metrics by business segment. The results obviously in the SME segment looked pretty dreadful this quarter and regardless of the – perhaps because of the recalibration, but clearly there are some deterioration there.
Can you give us a sense, especially since this has been a business you guys have been focused on, it has been a core segment, it does seem like you guys are more conservative, whether there is additional risk that you will see more deterioration in this business line and that you’re exposed to this business line really dampening your results overall? So I’m curious what the outlook is especially given the economic backdrop for what you’re seeing in SMEs.
And secondly, just, I think the earlier question I was going to ask you about fees. I’ll go ahead and ask you as well.
You’ve seen some stability in fees. What are you – after a very difficult few years because of regulatory issues and whatnot – have we – I suppose you think we’ve seen the bottom as client growth has materialized.
But where do you see fee growth sort of tracking at over the next year or two? Do you see high-single digit?
How do you see fee growth evolving over the next couple of years?
Raimundo Monge
Okay, in terms of SME, as you correctly [ph] point, this quarter looks essentially low, the contribution because of the one-time recalibration of the model and therefore the amount provision has jumped very materially, yes. But that is, we perceive as a sense of precautionary measure to be fully protected even if the economy doesn’t rebound as most of the market is expecting.
Contrary to that, if you see the gross revenues are growing close to 7% which is relatively sound and at the same time the absolute profitability, the ROE here we’re getting done on [ph] – excluding this one-timer has consistently been ahead of 20%. So it’s a segment that we want to be and it’s very profitable.
Simply that because of the weaker operation and environment we have taken actions to be hopefully fully protected even in the event of the economy driving more than what the market is expecting. So it’s a segment – the point there is that they are different realities.
The SME universe is very broad and what we have been preaching is similar to what we have been doing in the individuals universe, moving away from the relatively low end of the market and much more into the upper end of the market. Here what we’re doing is moving away from those companies that just borrow money and moving to those companies that apart from borrowing money give us other sort of compensations, either fee income, fee-based income, Treasury type of activity and especially cash management.
And that’s why as you see, the fee income, there is a big increase although from a relatively long base [ph] on a year-on-year base and on a quarter-on-quarter base. So just to wrap it, it’s a segment we want to be present.
It’s simply that you have to be careful to be more selective and – but once you’re selective and that’s why we have been tight in this cruise [ph] of our operating model, we feel we can get a good profitability in the segment as a whole. In terms of fees, probably, we talked this last year that we were seeing this year in fee growth in the low teens, in the low single digits, yeah, which at the end of the year is very likely we’ve seen.
And why is that? Because we’ve started increasing clients, there is a lag of close to one year between you – a new client comes into the bank and is fully accredited in terms of fee contribution, and that’s why today, we’re starting to read the clients that came into the bank last year.
And that’s why you have a sort of a momentum that is embedded in our current client base that should be given fees going forward. And that’s why taking next year, we think that we could achieve growth of five, six, and in fact, same with higher growth fees on a year-on-year basis because most of our fees now are linked to use, yes, which is of course different when fees were reliant on having the product which [indiscernible] had been under more – a review by regulations, et cetera.
So going forward, to make a long story short, probably in the middle to high single digit range, especially in the consumer side, in the select clients [indiscernible] are the middle to high-end of the consumer market.
Saul Martínez – JP Morgan
Okay. Thank you.
Can you – just a follow up. Would you be willing – you said that in an earlier question that the one-off in provisions which related to the combined effect of recalibrating consumer and SME models, would you mind sharing how much you took up for additional reserves and SMEs and how much you released for consumer loan-loss provisions because of that recalibration?
Raimundo Monge
Which one? The gross?
Robert Moreno
The gross in SMEs was CLP44 billion.
Raimundo Monge
The gross in SMEs was CLP44 billion.
Robert Moreno
And the gross in consumer –
Raimundo Monge
Yes?
Robert Moreno
CLP36 billion
Raimundo Monge
Yes, roughly, the gross constitution in SMEs was CLP44 billion and the release in the consumer side was grossly CLP36 billion [indiscernible].
Saul Martínez – JP Morgan
Okay, that sounds great. Thank you very much.
That’s very helpful.
Operator
Next question is from Tito Labarta with Deutsche Bank.
Tito Labarta – Deutsche Bank
Hi, good morning, Raimundo and Robert. Thanks for the call.
My question just in terms of your profitability kind of longer term, you mentioned you have excluded inflation or more normalized levels of inflation around 3%, you expect ROEs of around 19% to 20%. Is that kind of what we should expect going forward given the kind of the slowdown we’ve seen in Chile?
Do you think there could be even some more downside to that? I just want to get a sense of what you’re thinking long term in terms of your ability to sustain your ROE at around 20% or so.
Thank you.
Raimundo Monge
Yes, thanks, Tito. No, I would say that our medium-term goal is to maintain our stated ROE between 19% and 20% as we have done in the last eight quarters or so.
The effect of inflation actually, if you calculate it, by using a normalized inflation or headline inflation test to counsel in a seven, eight quarters moving average. Because a piece of research is that actually product – our results excluding the effect of inflation and, I mean, we’ve basically proven that, yes.
And therefore, inflation is really relevant for the very short term results, yeah. But for the medium-term results for, say, one year or two or one year and a half results, explain very little [ph], yes.
And that’s why depending on your planning horizon, inflation is very relevant element or completely relevant if you are looking for a medium to long-term. So that’s why in our case, we are hopefully managing the bank for the medium to long-term, inflation is not a value creation.
We create value with clients, by field operations. And that’s why we think that in the medium-terms perspective, ROE is 19% to 20% can be achieved.
That means that we really did to some extent absorbing the higher tax rates that we will have to pay going forward by means of increasing probability and by means of fully getting the push of our new tool; the ones that are linked to the transformation project. And that’s why, if not for that, our pretax income and/or pretax ROEs, could have been rising in time simply that because taxes are going to be rising in the next three, four years.
We expect ROE to be 19%, 20%. These are a challenge but we think that we have the tools to deliver that.
Tito Labarta – Deutsche Bank
Okay, great. So the 19% to 20% also includes the impact of the tax reform exercise, you think you can fill the same net level?
Raimundo Monge
That is the challenge we have said.
Tito Labarta – Deutsche Bank
Okay, great. Thank you very much.
Operator
Okay. And we have no other questions.
Raimundo Monge
Okay, well, thank you all very for taking the time to participate in today’s call. We look forward to speaking with you again soon.
Have a good day.