May 2, 2016
Executives
Raimundo Monge - Corporate Director, Strategic Planning Robert Moreno - IR Manager Emiliano Muratore - Chief Financial Officer
Analysts
Tito Labarta - Deutsche Bank Thiago Batista - ITAU BBA Nicolas Riva - Citi Jason Mollin - Scotiabank
Operator
Good day, ladies and gentlemen, and welcome to the Banco Santander-Chile First Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder this conference call may be recorded.
I would now like to turn the conference over to Raimundo Monge. You may begin.
Raimundo Monge
Thank you very much and good morning ladies and gentlemen. Once again welcome to Banco Santander-Chile's first quarter 2016 results webcast and conference call.
Thank you for attending today's conference call in which we will discuss our performance in the quarter. This is Raimundo Monge, Director of Strategic Planning.
I'm joined today by Emiliano Muratore, our new Chief Financial Officer; and Robert Moreno, Manager of Investor Relations. Emiliano has been recently appointed as the CFO for Santander-Chile.
He joined the Bank 10-years ago and for the last 8-year has been leading the financial management division in charge of assets over liability management for the Bank. Prior to this, she has held other senior positions in Grupo Santander in Spain.
He will be joined in the Bank's communication effort with markets bringing his deep knowledge about more value things, market trends, regulations, capital and liquidity. He will be available at the Q&A session at the end of this conference for any question you might have.
Let us turn our call with a brief update on the outlook for the Chilean economy. According to the most recent survey of Chile's main economies compiled by the Central Bank, the broad consensus is that this year the economy should manage to grow close to 1.7% and to recover to 2.5% in 2017.
Economic growth has been slower than expected in the first quarter that should be close to bottom in-out as a slightly better external conditions and the weaker currency should help the export oriented activity. In addition, the government has completed the bulk of its reform and is expected to have a greater focus on economic policy and especially products and growth issues.
Unemployment which until now has been resilient has shown lately some weaknesses but investment on the other hand has finally begun to entire positive growth territory. We believe there should not be any further height this year in local interest rates as inflation should stabilize below 4%, a level that Central Bank feels comfortable with.
Clearly the minus sector has been the economies a cureless heals in the last few years but there are other sectors that are showing positive growth trends such as the non mining export sector, the communication sector, utilities and infrastructure. Rate loss remains in positive territory and this is driving retail long growth especially in the middle and upper income segment.
As a result, asset quality had been fairly stable and loan and deposit growth remains quite steady expending close to 10% as of March. For the entire 2016, we'll take loan and deposit growth to be between 7% and 9%.
Now we will give further detail into the implementation of our strategy and how it is benefitting our client activity and results this quarter. In the 1Q of 2016, the Bank made important advances in all of its strategic goals.
The salary implementation for our strategy continues to be the basis for our sustained profitability and performance despite slower economic growth. As we will see in the rest of the presentation, the Bank showed positive balance sheet growth and results in those segments it has been targeting mostly retail banking and the middle market of company.
This has been achieved by the improvements in customer loyalty and service which has helped to boost long term, check-in accounts, and fee income in those segments. At the same time, our strategies resulted in better asset quality metrics which brightens the outlook for our cost of credit in 2016 and 2017.
Finally, we also finished the quarter with the strongest capital ratios among our main peers which should allow us to continue grow it an attractive pace and to pay good dividends to our shareholders. We expect this relentless focus on our strategic goals to continue producing some profitability throughout this lower economic growth period.
Regarding our first strategic objective, focus growth in the 1Q of 2016, loan growth continue to be focus on the middle and higher income individual, larger SMEs and the middle market of corporate. Segments that are our current market environment tend to deliver higher risk adjusted profitability.
Total loans increased 1.6% QoQ and 9% year-on-year in the first quarter. However retail banking loans which includes loans to individuals and SMEs increased 2.6% QoQ and 17% year-on-year.
Loans to SMEs were focused on larger SMEs that also generate non-lending income. The SME segment was the most profitable business unit in the quarter and notable feet given the lower economic growth.
The second most profitable unit is our middle market segment. Although in the 1Q 2016 loans in the middle market increased 1% QoQ at 8.1% year-on-year, as demand as weakened this was more than offset by non-lending activities especially cash management and fee based income which has held to drive the positive quarterly result in this unit.
In corporate banking, loans decreased 3.8% QoQ and 14.7% year-on-year. During the quarter, spreads in this segment tightened resulting in a temporary cost of our loan growth with those clients.
It is important to point out that, more than 80% of net revenues in this segment come from non-lending activities mainly cash management, fees and treasury services which once again drove our results of the unit in the first year of 2016. Loans to individual increased 2.8% in QoQ and 13.6% year-on-year but we have very different trends by sub-segment.
Loans to high income earners attended by our Santander Select network increased 21.4%, loans to middle income earners attended to our traditional branch network increased 8.9% and loans to the low income segment decreased by 9.4% year-on-year. These reflect the event focus on writing growth in those areas with the high risk adjusted return and in line with Chile's lower economic growth.
The time strategy of focusing equally on both lending and non-lending businesses has also let to solid deposit growth. Total deposit increased 1.3% QoQ and 12.1% year-on-year.
In the quarter, deposit growth was led by time deposit that increased 4.4% QoQ and 13.3% year-on-year. Demand deposit decreased 3.8% QoQ due to this seasonality of the quarter but increased 9.9% year-on-year.
Bank continues to lead the market in cash management services for company and to generate high customer loyalty in retail banking. The middle market segment which expanded 10.8% year-on-year led demand deposits growth.
Demand deposit in retail banking and global corporate banking GCB increased 8.4% and 6.8% year-on-year respectively. Regarding our second strategic objective, the Bank continued to improve customer's loyalty and quality of service.
Knowing to do so, we are making significant progress in readapting our distribution capabilities with segmented performance and a strong focus on digital banking. Therefore loyal individual customers client with four product plus minimum usage and profitability levels.
In the high income segment increased 9.7% year-on-year. Among middle income earners, loyal customer rose 6.6%, the same indicator for SMEs and middle market rose 10.5.
However let it be said that still only 15% of our customer base needs are redefined loyalty standards reflecting the large potential we have for further growth. Here our new CRM is helping to boost client activity and commercial productivity for our sales people.
This favorable evolution of our loyal customer base has been achieved by a steady improvement in our customer satisfaction indicators. 2012 we set a goal to close the customer satisfaction gap between us and our main peers by the end of 2016 measured as a percentage of clients who consider the Banks customer service function as good or very good minus don't rate the Bank poorly in an independent survey done twice a year for Bank.
We are very close to reaching these targets. Another key leverage point for improved client loyalty has been expanding our digital capability.
In Internet and digital banking services, we continue to let our main competitors by a wide margin. According to the latest information published by the Superintendency of Banks, our market share in Internet banking among private banks measured as the client that entered a bank website using a password settles that of the second player.
It favors consistent with our strong market share in the transaction analysis with our clients. The improvement in customer loyalty is also being achieved by improving and better segmenting our distribution network, the strongest in Chile.
In the last 12 months, the bank has first increased by 17.4% their amount of Santander Select branches, aimed at their higher end of the consumer market. Secondly closed 23% of benefit and other payments aimed at the lower end of the market.
Thirdly, the number of Santander standard branches has remained unchanged but with relevant modifications to the layouts. The bank has remodeled 28 branches under the new full service model which are multi segment branches with dedicated space to different set client segments we attend and greater score footage dedicated to our automatic banking services.
And with this format, all segments share back office and [indiscernible] generating important efficiencies. In simple terms, to improve digitalization for our services we're extracting more income from each square foot.
In 16 of these branches, we have open incentive to select corners for space exclusively dedicated to these segments. Likewise, in 15 branches we opened by net corners which are areas in traditional - in a traditional branch with only three employees dedicated to consumer lending for demand market.
Finally, we have opened 8 middle markets centers outside of San Diego that are specialized centers for those A clients. Another achievement in the first quarter was the improvement in asset quality and capital ratios which are key elements of our third strategic objective.
The improvement of our asset quality metric is mainly due the change in the loan mix that has more - which has more than offset the negative impact of slower economic growth. The banks totaled non-performing loans ratio remains stable at 2.5% in the 1Q of 2016 compared to 4Q 2015 and improved from 2.7% observed in the 1Q of 2015.
Total coverage of non-performing loans in the first quarter reached 122.5% compared to a 117.3% in 4Q and 111% in the 1Q of 2015. The impact of better consumer loan mix in asset quality can be observed - can be clearly observed in the consumer lending business.
The consumer loans, non-performing loan ratio improved to 2.3% in the first quarter of 2016 compared to 2.5% in the 1Q of 2015. The impaired consumer loan ratio also improved to 7% in the first quarter of this year coming from 9.1% in the 1Q of 2015.
The coverage ratio of non-performing consumer loans reached 285% in the first quarter compared to 256% in the 1Q. The Bank also concluded the first quarter with strong capital ratios.
The core capital ratio reached 10.6% and the Bank's total BIS 1 ratio reached 13.5% at the same date. It can be observed in the Slide 16 – in the slide of our webcast, we have the strong capital ratios compared to our main peers.
Because of this solid capital position, the Bank's board agrees to propose shareholders a onetime increase to the Bank dividend policy to 75% equivalent to 1.79 a dividend per share, which was approved in our recent shareholder meeting. Therefore, the dividend yield was 5.3% considering the share price at the close of the record day in Chile.
With this dividend plus the share price depreciation, since the end of 2014, the ADR price of Santander Chile has outperformed several of our main LatAm peers reflecting the positive results of our strategy which I bring in to our shareholders despite being a relatively challenging period for Bank. With this we conclude our section and strategy and commercial activity.
Now we will briefly review the Bank's profit and loss statement. In the 1Q of 2016, net interest income increased 1.8% QoQ – sorry, decreased 1.8% QoQ and increased 14.4% year-on-year.
Net interest margin reached 4.5% in the 1Q of 2016 compared to 4.7% in the last quarter of 2015 and 4.4% in the 1Q of 2015. In this first half the variation of the Unidades de Fomento and inflation in index currency unit was 0.7% compared to 1.1% in the fourth quarter of last year and negative 0.02% in the 1Q of 2016.
As you might know, the Bank has more assets than liabilities linked to inflation and as a result, margins go up when inflation accelerates and vice versa. This explains the QoQ fluctuations in total net interest margin.
Going forward, we expect quarter inflation rates to be between 0.7 and 0.9 per quarter and therefore to have relatively stables interest margins. On the other hand, client net interest income, that is, their net interest income from our business segments and excluding the impacts of inflation, grows 1.5% QoQ and 6.6% year-on-year driven mainly by long growth and improved funding needs.
Client NIMs reached 4.8% in QoQ similar to what we saw in the 4Q of 2015 and lower than the 5% we observed in the 1Q of 2015. On a year-on-year basis, the decline in client margins was mainly due to the shift in the asset mix to lesser riskier segments which is gradually producing an improvement in the Bank cost of sales.
As seen in the chart, the cost of credit improved to 1.2% in 1Q 2016, compared to 1.8% in 4Q 2015 and 1.4% in 1Q 2015. Provision for loan losses decreased 48.1% QoQ and 1.6 year-on-year in the first quarter.
As a reminder, in January 2016, Chilean Bank in accordance with rules adopted by the superintendency of Bank, adopted a new standard credit provision model to calculate loan loss allowances for impaired consumer and commercial loans and for residential mortgage loans with the loan to value ratios greater than 80%. These provision was recognized as an additional provision in the 1Q of 2015 for Ch35,000 million.
Excluding this charge, provision expense would have decreased 32.4% QoQ. Going forward, the cost of credit stood - stayed at levels between 1.3% and 1.4% of loans.
This rise is not due to any major deterioration of asset quality but due to a fact that in the 1Q of '16, provision expense was positively affected by the appreciation of the total peso which lowered provisions over loans denominated in foreign currency. There is a counter balancing in result in financial transactions net, therefore, the slight rise in the cost of credit in coming quarters will not necessarily affect the bottom line.
Net, fee and commission income increased 6.5% QoQ and 13.6% year-on-year in the first quarter of '16. Retail banking fees grew 2% QoQ and 13.6% year-on-year.
Fees in the middle market also rose 8.7% QoQ and 11.2% year-on-year. At the same time, fees recovering in GCB, Global Corporate Banking, and increased 51% year-on-year.
These writing fees was impart due to our CRM platform which has been fueling greater private usage in customer loyalty as previously mentioned. Fees in Global Corporate Banking also recovered due to greater investment banking activities.
The Bank’s efficiency ratio improved to 41.6% in the 1Q, operating expenses decreased to 7.8% QoQ due to seasonality. Personal salaries and expenses increased 10.4% year-on-year.
This was mainly due to the indexation of wages to inflation. The Bank has been deepening the use of technology to increase its digital capabilities, improve the branch network and restructuring the top tiers of management to control cost growth.
This signified higher severance expenses throughout 2015 and 2016. In April, this year, another wave of management changes was executed and as a result, the Bank will recognize a one-time charge between Ch$10 billion to Ch$11 billion this month.
With this and other measures, the Bank expects to lower cost growth to mid-single digits by the end of this year. In summary, the 1Q was a solid quarter.
Our ROE reached 18.1%, net income increased 31.4% year - on-year due to the higher inflation but more importantly the steady growth of client revenues and volumes coupled with better services and loyal indicators. This shows our strategy generating positive return and is noted to give the current economic environment.
The streamline of the branched network and headcount, together we have reached the banking strategy, should also generate lower cost growth as the year progresses. At this time, we are glad to answer any questions you might have.
Operator
[Operator Instructions] Our first question comes from the line of Tito Labarta from Deutsche Bank. Your line is now open.
Tito Labarta
Hi, good morning, and thanks for the call. Couple of questions, looking more at fees and expenses.
We saw good growth in your fee income given the benefits of your CRM system. Do you expect that growth to continue?
Can we expect to continue to see the double digit growth that we saw this quarter on a year-over-year basis or do you think that will slow down a bit? And then similarly in expenses, I know it declined on the quarter but still running around 10% for the year.
Just want to get a little bit more color on - how you see expenses growing this year as well. Thank you.
Raimundo Monge
Okay. As we mentioned in the conference and in our press release, the fees has been steadily recovering which to a large extent is due to increase used because, as you know, Bank's in Chile are for many reasons are very limited choices of writing a transaction fees what you try to stimulate to use.
And there our new CRM is helping us to do the trick because we have been able to fuel growth and fuel transaction early to be plan. How high it can grow?
There are two forces there, a little bit of heading, one is our ability to help clients, to increase their level of transactionality and to increase their level of fees that they generate in the process and the counter effect is, of course, the economy has been slowing down. So two affect tempt to go into different direction.
Net, net we think that fees on a year-on-year basis was a full year - could be growing as we had mentioned in previous call between 7%, 8% or something around that and depend on the backlog, it could be higher but we prefer to be a little more conservative in this issue. Contrary to that, expenses also has been running ahead of our medium term trends basically because we have been investing in creating all the systems that now are finally starting to pay, but at the same time the 1Q probably is a little bit cleaning because as we mentioned in the press release, our collective bargaining implied that we have to - we adjust our salaries by accumulate inflation.
Usually the process is done on May but this time because the accumulate inflation was higher, we anticipate the indexation or the adjustment by inflation to a margin. That’s why the 1Q result include two adjustment of impact by inflation the one we had last year in April, May last this one.
That's why in time or for the rest of the year given that we don't foresee new adjustments, you will have a comparison base that will be larger and that will reduce the year-on-year growth rate of a wait. At the same time, we have been moving into a more – having a more stronger digital capabilities moving transactions out of the branches and streamlining our branch network which we think will help us to contain a cost growth and at the same time we have done in April, a one-time adjustment - especially of senior and second and third layer of management which will be booked in April but will also help to achieve these mid-single digit growth that we foresee for the end of the year.
Tito Labarta
That's very clear. Thank you.
Operator
Our next question comes from the line of Thiago Batista of ITAU BBA. Your line is now open.
Thiago Batista
Yes, thanks. Have two questions.
The first one about the consumer loan portfolio. With following the 1Q, some contractions in the consumer portfolio QoQ when we looked QoQ but with - from improvement in the income ratio, material in the client provisions of the consumer portfolio.
So my question is what could be expected for the consumer loan portfolio going forward. And the second one about the margins, I know that this year we will have the negative impact of inflation but considering the inflation impact, do you believe that your NIM should expand in line with your loan portfolio in 2016?
Raimundo Monge
Yes, regarding consumer loan portfolio there are two things. One is that January and February tend to be seasonally low because this is mostly holiday season and people tend to borrow more by the end of year to prepare for holidays and Christmas and things say that.
So, typically we have slowdown in this first month. But if you go into our monthly fevers which are published by the superintendency, you see an increase in March net the quarter was kind of flat but the dynamic of a launch has resumed in March.
We don't foresee a big increase of consumer lending because we are still contracting our exposure to the low end and expanding our exposure to the middle to high end. So net-net to my lending which now is growing at around 8% to 12% could be accelerating to something closer to 7%, 8% at most but we don’t foresee this year because of the - of our more prudent approach and because we're reducing our absolute exposure to the lower end to grow further there in that.
In terms of margin as we stated in the previous call and before we comment on the results of 4Q, we expect total net interest margin to be below 10 to 15 basis points because inflation this year is expected to be lower than deflation we saw last year in the first quarter is a little bit of outline because inflation has been much higher than previous - in equivalent quarter in 2015. So if you take a year-on-year view, our total net interest margin could be around 10, 15 basis lower simply because we’ll see lower heading inflation.
However on the client net interest margin that is the bulk, we see some room for expansion because the profile of our growth will be more accretive and will be less relying on mortgages that tend to be the lowest yielding asset by far. So that's why if we sustain our growth in SMEs and we start growing a little bit more rapidly in consumer, which is what we're basically hinting, and we sustain our growth in mid size corporate, we can see simply by a mix effect to higher - a higher client NIM but total NIM suffering because of the lower inflation for the year.
Thiago Batista
Okay, thanks perfect.
Operator
Thank you. And our next question comes from the line of Nicolas Riva of Citi.
Your line is now open.
Nicolas Riva
Yes, thanks Raimundo for taking my questions. The first one is on loan loss provisions.
They reached 1.2% of average loans this quarter that's below the guidance that you offered the last conference call which was 1.4% to 1.5%. So my first question what explain the lower loan with provision this quarter.
I notice if you can give again your guidance for loan loss provisions this year because I thought in this conference call a lower number which was 1.3% to 1.4% of average loans. And the second one more general, I know that your strategy has been over the last few years to increase your exposure to segments of prepared risk that just for example by [indiscernible] and to increase exposure to mid-to-high income consumer loans and also a large SMEs and the middle market companies.
However the economy continues to slowdown and implement is peaking up, so kind of wanted your thoughts on what could be the impact of the higher unemployment and the slower economy in asset quality? Thanks.
Raimundo Monge
Yes, thank you very much. Well, in terms of loan provision as you registered to say, our guidance for this year was closer to 1.4, 1.5.
We had a very sound first quarter which was to some extent a benefit because we didn't have any major surprise in the mid-size and large-size corporate. The loan loss reserve requirements for the more massive market are produced by statistical model target fairly reliable but of course once a volume have surprises in the non-standardized clients., they’re large corporate mid-sized corporate thing.
So when we’re talking about 1.4%, 1.5%, we were assuming that some surprises issued appear higher in the quarter or full year of course the level of 1.2 is low - much lower than what we were expecting and is basically because we had more or less the same level of a provisions in the standard categories superlatively once we do it model and no surprise in the corporate side, plus the positive effect of the appreciation of the peso because those loans are granted in dollars which are around 13% of our loan book. The provisions are also set in dollars and as consequence when you see an appreciation of the currency, you also have a translation effect on the provisions needs to set aside for those position.
As we mentioned in the webcast that doesn't have an impact in the bottom line because that positions are covered at the bank level and as a consequence when you’re having appreciation for the currency, you tend to have lower provisions on one side but it’s hedged, and we also see, when the currency depreciates that you have, your provisions are some extent inflated by translation exposure but at the same time you make money on the derivative that is covering the position. So this is not something the affect our net income versus hedged but of course sometimes it grows up our provision expense or in the case of the 1Q lowers than stated.
So that’s why in the 1Q our provision level were closer to 1.3% and if we expect some surprises in the remaining quarters of the year 1.4%, 1.3% can be sustained. In terms of the growth, we have been monitoring the macro favors since the beginning of the lower growth cycle that we entered a couple of years ago, we think that there are still mixed effect are not fully leasable in the sense that’s one thing to start changing the mix and the other is that you see in that quarter, the benefit of that lower risk growth and that's why we think that again assuming essential scenario where the economy managed to grow at around 1.7% at the consensus to forecast build by the Central Bank state.
We think the mix effect still leasable will be compensated for the lower but of course if we see specially employment figures entering the negative territory because as you - sometimes unemployment is a mix of supply and demand conditions, many people rush to the market, you can see an increase in the unemployment rate but Bank's is not that bad because you never lend money to people that are out of the job. Yes what is concerning is when you see job distraction, people that used to have a job, they’re out of job because those are the clients that eventually won't be able to pay you.
So today we’re of course monitoring the activity permanently as usual but we think that still in the central scenario that we have to try to state it in the call, the mix effect will be dominant but of course if the situation turns around very rapidly, this has been a complete answer and we will have to take actions to defend our profitability but feeling our central scenario we don't see that.
Nicolas Riva
Thanks.
Operator
Thank you. And our next question comes from the line of Jason Mollin of Scotiabank.
Your line is now open.
Jason Mollin
Hello, thank you for taking my question. More of a general question here, you showed some updated information on Internet usage looking for improving customer loyalty and quality of the service.
And in fact in the total number of branches of course have declined in the last several years, can you talk about how you’re viewing the value of traditional branches and if you think technology is reducing that value and if you think that the branch network should continue to shrink going forward. Thank you.
Raimundo Monge
It’s a very good question and we think we don’t have an equivalent good answer but I would say that today what we have been doing is basically think about the value of branches and properly the ongoing model for the next 2 or 3 years because it is changing very rapidly, is that you will still need branches because many more complex part of transactions will feel be done at the branch level but probably the simple tasks, I’d say cash in a check or paying a water bill or things like will be moved increasingly to non-physical branch, non-physical distribution schemes because clients at the end are getting increasingly used to technology and clearly there was a drawback that Internet access and especially Smartphone access was relevant expensive. But today the bulk of the population especially in the middle class and they are even in the lower segment - income segment are increasingly having access to mobile a technology and as a consequence clients are driving - the driving force in the process and for us is a bonus because it allow us to do what we have been doing, that is to reduce the number of branches that are more importantly reduced the size of the branches and the headcount you have within the branches.
And so, I would said that in the foreseeable future the next two, three, five years probably will be a combination of higher technology in linear branches but we don’t foresee a model of branch lets say banking because he has not been successfully in any place and still people need to shake hands for steadily in the more year to and companies for devising heading strategy I think say that. So it’s a probably smaller investment in branches and smaller bricks and mortar in terms third place but we won't foresee operating results branches because at the end people need to see and banker especially on the deposit side when you see our branch, you say where there is money, I feel comfortably, if you're having, I don’t know in the cloud sometimes you get a little bit nervous.
So probably there are two co-existing and the way we are moving to have clever branches left on sectional intensive branches more, value added services in the branches and the rest mortgage to alternative a challenge. Just to give an idea in the shareholder meeting we announced the CapEx service for this year and the bulk would be IT related.
Simply reflecting that the bulk of our focus is in technology more than brick-to-mortar.
Jason Mollin
That’s helpful Raimundo. And that budget - is that increasing for this year versus last year for instance.
A – Raimundo Monge
No, it’s coming - is slightly down. Basically the cost in the last mid years, we have invested a lot in the new tools that now are starting to pay basically new credit models and also the CRM that are finished and from now on, you don’t have to keep pace with that level of investment because you already have them, you simply try to strike more or more juice of the investment you have already done.
So going forward the level is a little bit lower than the previous three years but still we will maintain relatively hefty level especially in IT related activities.
Jason Mollin
Thank you very much. Have a good day.
Operator
Thank you. Our next question comes from the line of [Carlos Gomez] [ph] of HSBC.
Your line is now open.
Q – Unidentified Analyst
Hi, good morning, two questions. First one refers to your tax rate expected for the end of the year and the second I would like to know where the maximum conversional, maximum tax, and the maximum interest rate is today, where do you expect it to go and whether at this point it has an effect on your business or not?
Thank you.
Raimundo Monge
Okay, well regarding the tax rate although this year the statutory tax rate rises to 24%, the bank is - generally all banks it have some way to they reduce it basically because for tax purposes the adjustments that you have to do on your capital has been remained - has been maintained and as a consequence the adjustment of your capital to gross it, to keep it constant on real terms by grossing on nominal terms is counted as an expense for the tax purposes and as a consequence we try to explain that at the end of our press release typically the rate can be lowered by 350, 400 basis point. So we expect this year the tax rate - the effective tax rate to be closer to 20% more than closer to 24% or so yes.
In terms of the impact of the capital that we have in rates, today there are most buy in rate because there are several rate caps for several types of rates but the most tighten is in the consumer lending for smaller operations is around 35% has been raising lately, basically a reflection of the high risk that you are assuming. But today is very little binding because as coming before we have been basically reducing our exposure in that segment more than increasing and those operations are - this is binding only when you renew or when you do a new lending therefore the older lending just still have the rates you close the deal, whenever you closed there.
So, it’s not binding today a set forth for very few operation and of course the side effect which is negative as well is that many clients have been simply showing move out of the formal market and into formal market but there is some more of a policy issue than a commercial issue for us. In our case the rate is not very binding of course it would be better to have flexible prices to reflect the increase incremental cost and incremental risks that you assume in going down market but today they focus for many reasons is precisely the opposite.
Q –Unidentified Analyst
Thank you. And if can follow up on the tax side, I mean we understand that, we understand the reduction, of course inflation is relatively high today, so for planning purposes when you are looking two, three years from now when the tax rate normalizes at the level we will eventually reach and with an inflation rate which is more normal 2%, 2.5% where would you expect your normalized tax rate to be?
Raimundo Monge
Well the final stage is to have an statutory rate in 2018 of 27% and consequently if you - as you correctly point - you foresee inflation going down, the gap between the effective rate and the statutory rate will narrow probably to 100 points or so. So we would expect that by the year 2015 if inflation comes down to have an effective rate closer to 25% or 24.5% or things like that because as you correctly point, it depends on the absolute rate of inflation.
The other thing and other technicality is that remember that for four investors, the higher corporate tax can be used separately when you receive dividends and that's why from a valuation standpoint, the fact that you have the total tax burden is 35 and has not changed, it means that from a valuation standpoint the issue is not very relevant because although the bank might or any company might be paying more, you receive a higher credit out of a total payment of 35% which from a valuation standpoint used kind of discounted growth model, it should be neutral because the bankers pay more, you as a financial shareholder are paying less and as a consequence in valuation standpoint, they change that no matter. The tax increase is basically affecting the local shareholders when they are local citizens which in our case is less relevant because the bulk of our trading is done outside in the form of ADRs et cetera that’s why we think that from a valuation standpoint although the effective rate and the statutory rate are right, it should have a less of an impact in our case given the bulk of our shareholder base are -
Unidentified Analyst
Very good. Thank you very much.
Operator
[Operator Instructions] Our next question comes from the line of [indiscernible] BCI Asset Management. Your line is now open.
Q – Unidentified Analyst
Thank you for taking my questions. Regarding the mortgage loans, what have you seen in the dynamics in term of asking the 20% of loan payment on the customer having 10% to 15% in savings.
And what do you expect in the future in term of growth in this segment? Thanks.
Raimundo Monge
In terms of the dynamics, the growth rate is foreseen to be slowing down. There are at least two elements, one is that last year we had a record level of sales of house with an apartment and as an consequence the mortgage market was abnormally growing abnormally high basically because people were trying to get advantage of the lower value added taxes on new properties.
That issue will be on time coming down, there are still like 16 to 18 months to go because many of the sales that were done last year were properties of not even constructed some of them and that is when we see that element will reduce the growth rate but not meaning that we will see zero growth on market. The second element is more permanent that the superintendency applied, this is modest for mortgages that make very expensive to go in the mortgage beyond low to value higher than 80% because otherwise you have to set high provisions and given that the margins of mortgage are very low, it’s completely positive.
So at the end of the day, we think that the two elements will reduce the growth of mortgages are very high level of 18%, this year our expectation is something between 12%, 13% and probably next year more closer to 10% or so basically because of the two - the combination of the two elements. In terms of profitability, it doesn’t produce a big impact because as you know the stress on mortgages are very low but of course is at the centre of the competition of Banks because clients with mortgages tend to be more profitable than clients without mortgages.
So at the end what count is more than the size of the mortgage or whether you have a mortgage or not, it is the type of clients you are pursuing. And of course the client with the mortgage at least in our case tend to be two times more profitable than the client which have the mortgage not because the mortgage itself is profitable but simply because you have more time to cross-sell it and more time to have bonding relationship with the clients.
So we foresee slowdown in the market to something close to 12%, 15% this year but we don’t foresee that as a big drag in our profitability because at the end you are basically breaking even in many of the mortgages you are originating. That is why the mortgage – the side products are very profitable.
Q – Unidentified Analyst
Okay, thanks.
Operator
[Operator Instructions] I'm showing no further questions at this time.
Raimundo Monge
Okay. Well, thank you all very much for taking time to participate in today's call.
We look forward to speaking with you again soon. Have a good day.
Operator
Ladies and gentlemen, thank you for participating in today's conference. It does conclude today's program.
You may all disconnect. Have a great day everyone.