Jan 31, 2017
Executives
Raimundo Monge - Corporate Director of Strategic Planning Emiliano Muratore - Chief Financial Officer
Analysts
Philip Finch - UBS Guilherme Domingues Costa - Itaú BBA Ernesto Gabilondo - Bank of America Merrill Lynch Carlos Macedo - Goldman Sachs Nicolas Riva - Citigroup José Miguel Burmester - Itaú Asset Management Alonso Garcia - Credit Suisse Sebastian Gallego - Credicorp Capital Diego Ciconi - Scotiabank GBM
Operator
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Banco Santander-Chile Fourth Quarter 2016 Earnings Conference Call.
At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions] We will have a question-and-answer session later, and the instructions will be given at that time.
Now, we’d like to welcome and turn the call to Mr. Raimundo Monge, Director of Financial and Strategic Planning.
Please go ahead.
Raimundo Monge
Thank you very much and good morning, ladies and gentlemen. Once again, welcome to Banco Santander-Chile’s fourth quarter 2016 results, webcast and conference call.
As told, my name is Raimundo Monge, Director of Strategic Planning, and I’m joined today by Emiliano Muratore, our CFO; and Robert Moreno, Manager of Investor Relations. Thank you for attending today’s conference call in which we will discuss our performance in the fourth quarter.
Let us start our call with a brief update on the outlook for the Chilean economy. In the quarter, we have begun to see some positive news in the economic front.
According to market consensus, the economy should grow between 2% to 2.2% in 2017. We have also included our forecast for GDP growth in 2018 at 2.7%.
Unemployment continues to be resilient. Inflation has fallen below the Central Bank’s inflation target at 3%, which has opened the door to the Central Bank’s first interest rate cut.
We expect at least one more cut in rates in the first-half of this year. Finally, consumer expectations are improving, which is also another positive sign that the economy should begin to perform a little bit better in 2017.
The recent strength in corporate prices may result in upside potential to our GDP growth forecast. Loan growth in the banking systems remains stable.
As of November, loans were growing at 5.6% year-on-year, quite in line with our expectations for the year. The growth rate of mortgages loans has been decelerating as anticipated, but the positive growth of most non-mining sectors and the stability of employment have kept loans to individuals expanding at a healthy rate.
Asset quality has been improving, a reflection of loan growth in riskier segments and a healthy corporate loan book. For 2017, we continue to expect loan growth for the system between 6% and 7%.
Now, we’ll give further detail into the implementation of our strategy and how it’s benefiting our client activity and results this year. Net income in 2016 totaled Ch$472 million and increasing 5.2% year-on-year.
Pre-tax profit was up 10.3% in the same period. The Bank’s ROE reached 17.1% in the year, which was in line with initial guidance despite an annual inflation rate that was below the market expectations of around - the initial market expectations of around 3%, 3.3% for the year.
The Bank achieved its ROE target due to the strong growth of our client activities. Core business profits showed solid trends throughout 2016 with healthy loan growth, stable client margins, expanding fees, sound asset quality indicators and controlled cost growth.
These propelled a 25.6% year-on-year increase in the net contribution from our business segments. These was partially offset by two elements; number one, the lower inflation rate in 2016 compared to 2015 and the impact that this has on our net interest margins, NIMs; and secondly, the higher effective tax rate due to the hike in statutory tax rate.
In the fourth quarter of 2016, net income attributable to shareholders totaled Ch$109 million. Compared to 4Q 2015 net income increased 29.7% due to 63.8% year-on-year increase from the net contribution from our business segments and the recognition of an additional provision of [Ch$35,000 million] [ph] in 4Q 2015 due to the new provisioning requirements.
Compared to 3Q 2016, net income fell 10.9% Q-on-Q, due to the lower inflation rate in 4Q 2016 compared to 3Q 2016, and the lower income from our wholesale banking unit. In terms of strategy, the bank made important advances this quarter in all of our four strategic objectives.
As seen in the slide, our strategy has circled around, number one, focusing our growth on those segments with a higher risk adjusted return; number two, increasing client loyalty through an improved client experience and quality of service; number three, deepening our ongoing commercial transformation by expanding the bank’s digital banking capabilities; and four, optimizing our profitability and use of capital to increase shareholder value in time. Regarding our first strategic objective, during the fourth quarter of 2016, loans increased 1.3% Q-on-Q and 7.5% year-on-year.
The bank continued to focus loan growth on segments with the highest profitability net of risk. This signified positive growth among larger SMEs and the mid-to-high income individuals, while still avoiding growth in the low-end of the consumer business and the low spread wholesale lending segment.
Retail loans increased 2.1% Q-on-Q and 9.2% year-on-year. Consumer loans were the fastest growing product in the quarter and grew accelerated to 3.1% Q-on-Q and, 7.1% year-on-year.
Despite loan growth in the middle market and our wholesale unit GCB, both of these segments had record years in terms of contribution to the bank’s bottom line. This was due to a strong increase in loan lending revenue such as cash management, investment banking and treasury service for clients, as well as positive asset quality numbers.
The bank was selective in its growth in 2016 that still managed to gain market share in loans. Loan market share including interbank loans increased 40 basis points with a rise in market sharing in both consumer mortgage and commercial loans.
The Bank’s strategy of focusing equally on both lending and non-lending businesses has also led to positive growth on the deposit in the year. Total customer funds, which include deposits and mutual funds managed by the Bank increased 1.6% Q-on-Q and 6.9% year-on-year.
Total deposit increased 3.2% Q-on-Q and 5.9% year-on-year. In the quarter, non-interest bearing demand deposits led growth and increased 9.1%.
Also in the quarter, local pension fund experienced strong flows to their fixed income funds. These lowered long-term interest rates and improved issuance spreads.
The Bank took advantage of this momentum and issued the equivalent of US$700 million grossly in long-term bonds, mainly in the local market. This also demonstrates that when the cost of issuing bonds abroad rises we have access to ample liquidity in the local market at attractive rates.
The Bank also focused in 2016 on improving its funding cost. The Bank’s main source of funding are nominal time deposit in Chilean pesos.
The average cost of these deposits descended throughout 2016. These should help to support client margins in 2017, not only did our funding cost also improved in 2016, but we were able to expand our market share in the process.
Total deposit market share was up 30 basis points in 2016 with a 14 basis point rise in our market share in non-interest bearing demand deposits. In the 4Q of 2016, net interest income decreased 2.1% Q-on-Q and 0.6% year-on-year.
The net interest margin reached 4.2% in the quarter. The main reason for this lower margin was the lower inflation rate in 4Q as already mentioned while client margins remained stable.
At the same time, the large inflow of liquidity in the bank via deposits in the quarter and bonds in the quarter, led to an increase in lower yielding financial investments, which should normalize in the early quarters of this year. Client net interest income, which is net interest income from our business segments and excludes the effect of inflation increased 6.8% year-on-year in 4Q 2016.
Client NIMs reached 4.8% in 4Q 2016 compared to 4.9% in 3Q 2016 and 4.8% in 4Q 2015. The 10 basis point Q-on-Q fall in client NIMs compared to 3Q 2016 was mainly due to the shift in the loan mix away from the low end of the consumer market.
This is leading to a gradual improvement in the Bank’s cost of credit, which should continue in 2017. In the 4Q of 2016, the net interest margin net of provision in retail banking rose 40 basis points compared to both the third quarter and the year-end of 2015.
We expect in 2017 the net interest margin net of provision in retail banking to expand a further 10 to 20 basis points. The Bank’s strategy of de-risking the asset mix had a positive impact in asset quality and coverage ratios across the board in 2016.
In the fourth quarter, the non-performing loan ratio reached 2.1% flat compared to the previous quarter and 40 basis point lower than by year-end 2015. Total coverage of non-performing loans finished the year at 145.4%, up from 117% in December 2015.
Provision for loan losses decreased 6.9% Q-on-Q and 41.6% year-on-year in the fourth quarter 2016. As a reminder, provision expense in the last quarter of 2015 included a non-recurring pre-tax provisions of Ch$35,000 million directly related to regulatory changes regarding provisioning models for mortgage loans, and substandard consumer and commercial loans analyzed on a collective basis.
Excluding this impact, provision expenses still decreased 23.9% Q-on-Q in the fourth quarter. The cost of credit in the quarter was 1.3% compared to 1.4% in 3Q 2016 and 1.8% in 4Q 2015.
This lower credit - this lower cost of credit was mainly due to a decrease of 34.8% Q-on-Q, and 14.5% year-on-year in provisions for consumer loans. As mentioned in previous earning reports, the bank has been enforcing a strategy of lowering the exposure to the low-end of the consumer loan market.
This entailed an active policy of charging off and bolstering coverage ratio in the lower income segment. In the whole of 2016, this signified approximately Ch$36,000 million in higher provisions for consumer loans.
We expect lower provisions for consumer lending in 2017 given the aforementioned rise in coverage plus the change in the consumer loan mix, improvements in admission policy and more efficient recovery efforts. This improvement in asset quality was visible, not only in consumer loans, but in all products.
As we can see in the graphs on this slide, the non-performing loan ratio fell in all of our products and the coverage ratios rose significantly as well, this notable considering that 2016 was a relatively low growth year. Moving forward, we expect that the non-performing loan ratio should remain relatively stable.
Regarding our second strategic objective, the Bank continued to increase customer loyalty and improved customer satisfaction, which are key strategic goals as they create sustainable and long-term value for our shareholders. In the quarter, Santander-Chile reached another milestone in our efforts to create a bank that is simple, personal and fair for our clients, as it closed the client-satisfaction gap we maintain with our main peers.
As of October, 77% of our clients rate us with top marks in client service. According to an independent survey conducted every April and October of each year, positive teamwork together with our technological innovations such as the CRM has made this achievement possible.
This sustained improvement in customer service should be a key driver for commercial growth of cross selling and fee growth going forward. Loyal individual customers, that is clients with more than four products plus minimum usage and profitability levels in the high-income segment grew 11.1% year-on-year.
Among mid-income earners, loyalty customers increased 8% year-on-year. Loyal middle market and SME clients grew 12.9% year-on-year.
These initiatives are driving fee growth. On a 12-month basis, fee income was up 7.1% in 2016, in line with our guidance.
In the fourth quarter, fee growth slowed down mainly due to lower fees in retail banking. This was to a large extent due to the lower origination of mortgages loans that affected insurance related fees.
The bank has also been eliminating money-losing ATMs, which lower fees but it improves overall profitability. In the quarter, the bank also developed various initiatives in digital and branch network transformation, in line with our third strategic objective.
Since 2013, we have been in engrossed in an ambitious project of redesign and testing new distribution models. The bank is transforming its branch network by adapting a market segment approach with its smaller branches that are multi-segment with dedicated spaces for the different business segment.
These new branches are more productive and client-friendly. And therefore, we do not expect this to impact our business volumes.
In 2016, we remodeled 57 branches to our new multi-segment format. In 2017, we expect this trend to continue while closing and consolidating less efficient branches.
In 2016, we also innovated by opening two Work/Café branches. These branches are high-tech, high-touch branches, with no human tellers or back office.
These innovated branches, which also have a café, meeting rooms and free Wi-Fi, were one of the most relevant innovation in the local banking. In 2017, we expect to open approximately 18 Work/Cafés.
The Bank’s digital transformation and new branch format has been quite successful and as a result the Bank accelerated its branch closure plan in the quarter. This fourth quarter, the bank closed 21 Santander Banefe branches that attends the mass consumer market.
This transformation is boosting productivity. In the last two years we have closed 8% of our branches and eliminated 21% of our ATMs.
In this same period total volumes per branch has grown 32%. An increase in transactions through channels such as Internet, mobile and phone banking has allowed the bank to reduce its brick and mortar network without hurting business growth or client service.
In Internet banking for example, our market share excluding the state-owned bank is close to 40%. This signifies that more and more customers are performing to a transactionous [ph] operation through our web and this reduces the need not only for branches but for ATMs as well.
The effectiveness of the Bank’s CRM has also increased commercial productivity, as well as the implementation of other digital initiatives. We believe that this trend should continue in time contributing to increase our operational excellence and contain cost growth.
In 2017 their priority will be to further develop our mobile banking capabilities and the usage by our clients. These efforts are beginning to pay off.
2016 operating expenses increased by 3.9%, a little below our initial guidance. Moving forward, we expect the growth rate of course to remain at this level as the result of this productivity enhancing and cost cutting measures should become more visible.
Finally, our client-driven strategy is optimizing profitability and capital, and increasing shareholder value. The Bank concluded the quarter with strong capital ratios.
The core capital ratio reached 10.5%, 20 basis points higher than the same period last year despite the higher payout ratio. The growth of risk-weighted assets was merely 2.9% year-on-year compared to 7.5% for loans.
The Bank has been implementing a number of initiatives to control the growth of nonproductive risk weighted assets. Given the good dividend the bank has been paying plus the share appreciation, since the end of 2014 the ADR of Santander-Chile has outperformed several of our main LatAm peers, reflecting the positive results of our strategy are bringing to our shareholders especially in the long-term and despite being operating in a relatively challenging economic environment.
In summary, during the quarter then in 2016 the Bank continued executing its strategy and maintained a solid client business momentum. The Bank has been steadily improving its competitive position in the market, gaining market share across the board, increasing its customer loyal base and transforming its business model and distribution capability to face both a more demand in business environment and digital challenges most companies are now facing.
In 2017, revenues should expand in line with loan growth driven by higher GDP growth and the better level of customer businesses driven by gains in loyalty and market share gains. This should be further leveraged by two factors.
Number one, a lower cost of credit, which should go down to levels between 1.1% and 1.2% for the year and, cost [ph] growth that should be in the range of 4% to 5%. This will be partially offset by a higher effective tax rate that rises 1.5 percentage points and some lower inflation as we have already mentioned.
All in, this double-leverage effect should lead to our ROE expansion in 2017 in the range of 17% to 18% as long as U.S. inflation remains above 2.5%.
At this time, we will gladly answer any questions you might have.
Operator
Thank you. [Operator Instructions] And our first question comes from the line of Philip Finch with UBS.
Please go ahead, Philip.
Philip Finch
Thank you. Thank you, Raimundo, for the presentation.
A couple of questions for me, please. In terms of cost of risk, we saw steady improvement last year with the fourth quarter level of 1.3%.
Looking ahead into 2017, and where can we see cost of risk come down to? And linked to that, also in terms of coverage ratio, we’ve seen decent improvement there with latest figure at 145%.
What is the optimal level for coverage ratio that you’re looking for? And my second question is regarding your digital transformation strategy, and linked to that, the branch optimization plans.
What improvements can we expect to see in terms of efficiency? And linked to that, do you have a target for cost income ratio this year?
Thank you.
Raimundo Monge
Okay. In terms of cost of risk, as we stated in the call, we take that level to be between 1.1% and 1.2% for the whole year 2017.
And why is that? Basically because as we mentioned in previous calls, once the bank’s started shifting the asset mix at the beginning you see the negative effect of lower gross margins, given that you are substituting relatively high yielding loans for relatively lower yielding loans.
But then after a lag, which we are starting to see that today, you also see the same phenomenon happening in the cost of credit, yeah. And in terms of gross margin, as you see this year, the client gross margin has been very stable at around 4.8%, 4.9%.
And then we should foresee in the next year-and-a-half, at least 2017 and early part of 2018, that the trend in asset quality or cost of credit improvement to sustain. It’s basically because the new mix is lower risk and lower yielding.
Today, we have seen the lower yielding part. We should foresee the lower risk.
And therefore, we have a mix effect that is already is trying to be visible, and the counterforce will be the macro-conditions. But today, the basic consensus is that the economy in 2017 will be similar, if not, slightly better than 2016.
Yes, so we don’t - we expect cost of risk again to be improving 10 [ph] basis points to something between 1.1%, 1.2%. In terms of coverage, remember that in Chile what you do - you do provision is the expected loss, yes.
And why coverage have raised so fast in the last year-and-a-half, is a combination that that we have changed our models to expected loss model, where you take the provision ahead of the eventual bad news. Secondly, because there has been some changes in regulations that they have forced banks to take provisions regardless of their internal models, yes, especially that happened last year but has happened in other bases with large corporate borrowers, et cetera.
And thirdly, because we have - as we mentioned in the press release, we have been going through a process of getting out of the low-end of the consumer market, the very low-end of the consumer market. And the way to do that is to increase coverage by provisioning 100% of those positions that you won’t be making business with them for long.
That’s why this year we took an extraordinary provision, to call it someway, of Ch$36,000 million, which is very similar to what we took the year before, because of the regulatory change. So in terms of bottom-line performance the two elements cancel out, yes.
But leave us with a high coverage and completely out of that low-yield segment that we won’t be doing business going forward. So the coverage today is around 145%, we think that the level that should be very close to its peak.
And from now on being at that level was slightly lower whenever you start normalizing other deliberation effort that we have already been doing. In terms of digital transformation, we have been moving in that direction.
We have a lot of new capabilities. And of course, they’re not only done as a way to save money.
But, of course, they allows us to be more productive and more efficient. But also to a lure client and retain clients more thoroughly, yes, which should spill in the different lines of the profit and loss, and more money in your checking accounts, more bonding with the company [ph] base income and the like.
In terms of branches, we don’t have a specific plan of our branch closure but, of course, what you are doing is calibrating the transactionality that is done at the branch level vis-à-vis the surface that you have. And the moment that the - you have some threshold to start closing branches, whenever clients or the number of those transactions are carried out at the branch level that not justify a physical point.
So what we have been doing is basically concentrating two or three branches in one single space. And the way to do that is, of course, moving ordinary [ph] transactions to other channels.
And secondly, as we have been toying with the new Work/Café format, getting rid of the back office that is there. And that means that you have smaller branches that are mostly commercial contact points and not necessarily transactionality point for where you are processing transactions.
With banks for many years have had, we call it some way, the ovens to produce the bread on site and then they sell what they produce over there. That is very inefficient because prime retail space that is used for branches is very expensive to do back office operation.
And today, technology allows to move that process out of the branch, yes. So we don’t have - but, of course, in time this will be improving efficiency.
Today - but remember that at the end, what you’re trying is to - the bank doesn’t have an absolute problem for efficiency. We have cost income ratios of 41%, 42%.
What we need to do and that why we’ve been doing this transformation, is to increase the profitability by client, yes, by to some extent working harder with their clients for their own interest to get more activity with the bank, and as a consequence, more profitability. So this is not necessarily a cost cutting effort.
It’s more productivity enhancing and a revenue enhancing effort, yes, which of course at the end will have an impact in efficiency ratios, but not necessarily around the cost side, but also in the revenue side, yes. So it comes with two-way improvement.
Philip Finch
All right. Thank you, Raimundo.
Operator
And our next question comes from the line of Guilherme Costa with Itaú BBA. Please go ahead.
Guilherme Domingues Costa
Good morning, guys. This is Guilherme Costa from Itaú BBA.
Thank you for the opportunity. My first question is about the loan expansion in 2017.
We saw that during 2016 you showed an increase in the market share of total loans and you indicated that loan growth for the Chilean financial system will probably be around 6% to 7% in 2017. So I would like to know how much do you believe your portfolio could extend in 2017 and what segments should drive the expansion in the year.
And my second question is about your NPL ratio. You indicated that the NPL ratio will probably remain flat during 2017.
But I would like to know the breakdown of the NPL ratio, if you expect to see some potential increase in the delinquency rate of customer loans or if this is already under control. Thank you.
Raimundo Monge
Okay. Thank you very much.
In terms of loan growth, as rightly pointed, remember that in our case we don’t have a target for loan growth. Loan growth in our case is a result of the implementation of our profitability driven strategy.
So we tend to grow lower than the market when we think that spreads are out of line, and a little bit faster than the market when we think that spreads are right, yes. This year that happened, and we were able to - and that’s why our client activity has been fueling a relatively solid performance.
That was subdued because of lower inflation, which has nothing to do with clients and higher corporate ratios - or corporate taxes that also have nothing to do with client activity. So for next year, we foresee that the system should be growing between 6% and 7%.
In our case, starting the year probably in line of that, we don’t see any reason to be growing faster than the market or lower than the market. But of course at the end, it will depend on the pricing decision of our peers.
If we see kind of spreads that don’t compensate for the use of capital, we stop slow growing for some this year, we saw that very clearly in the wholesale area, where we decreased our exposure, simply because the spreads that we’re seeing in the market were not fulfilling our risk-adjusted return on capital. As a consequence, we think to put the brakes in that area.
Contrary to that, in other segments, for example consumer lending we have been accelerating, yes. So at the end of the day, we don’t have a target for loan growth.
It’s very likely that we should be moving, falling in line with the market. But at the end it will depend on getting the right spread for the right risk profile, and the right capital consumption that we are seeing in the market.
[So for record, pesos] [ph] is in line with the market, but we don’t have a firm target in that line. In terms of non-performing loans, we say that we foresee non-performing loan to be relatively flattish in around 2.1%.
It could be a little bit lower, but not very much. Why is that, because the mix effect that has been improving is starting to be concluded, and from now on probably the macro effect will be the one to follow.
And given that we foresee that the economy will be very similar in 2017 to what it was in 2016 or could be slightly more positive, we don’t foresee any headwinds coming from the macro situation in our asset quality. In terms of segments, again, in retail the fact that the unemployment figures have been very stable, wage growth have been very stable, we don’t foresee surprises and especially because today we are operating with the upper 30%, 35% of the working population.
So we are basically in the segment that is more system to any problems at the macro-side [ph]. And the same happens with SMEs, [that position regarding ones] [ph] that create more and more noise in a weaker operational requirement.
Today, we are operating mostly in the larger SMEs, and especially SMEs that not only borrow money, but also have other side - revenues they - as we have talked before, the intention is to be the main bank of the majority of our clients, and that is applicable not only in retail, but also especially in the SMEs where we need. We are kind of forcing that is we are not the main bank of the customer.
It’s is better to reduce our exposure there, because of the risk/return relationship doesn’t square, yes. So flat in non-performing loans is simply because the mix effect won’t be pushing [in down that favor] [ph] and we don’t foresee the macro to be deteriorating the figure as well.
Guilherme Domingues Costa
Okay, perfect. Thank you very much.
Operator
And our next question comes from the line of Ernesto Gabilondo with Bank of America Merrill Lynch. Please go head, Ernesto.
Ernesto Gabilondo
Hi, good morning, Raimundo, and thanks for taking my call. If there is a reduction in interest rates, how do you perceive NIM in 2017?
For my second question, a follow-up regarding the transformation to multi-segment branches and Work/Café branches, what can we expect in terms of fees and OpEx growth? And finally, how do you perceive Chile’s sovereign risk?
And I will also appreciate your outlook on the new presidential elections taking place this year. Thank you.
Raimundo Monge
Okay. In terms of NIMs, there are two forces that we’ll be struggling, probably a stable or slightly higher client NIM, which is beneficial; lower interest rates that are also beneficial in - we put in the press release that every 100 basis point drop on rates has that positive impact of like the $10 million.
Unidentified Company Representative
Ten basis points.
Raimundo Monge
10 basis points, sorry. And then, that will be partially or fully compensated by lower inflation.
We foresee a U.S. inflation, which is what it matters to us to be around 20 basis point lower in 2017 compared to 2016.
So those are the moving parts. So net-net, we think that our total spreads will be stable at around 4.8, something like that.
We don’t see them dropping unless again, U.S. inflation is below the 2.5 target that we have in mind, yes.
In terms of the transformation, fees have been lagging to be clear. And that’s why this year we are putting special emphasis on increasing our fee base, especially usage cycle fees.
We have been doing a lot of things in client, in loyalty, a lot of things in terms of simplifying the way we operate it, et cetera. We think that this is the year to start - well, extracting the benefit of that.
In 2016, we were held by a very active position in the wholesale market. Today, we think that we should be doing something in the same line on the retail side.
And therefore, fees should be growing similar to what we did for this year, between 7% to 8%, but more fueled by retail growth than by wholesale, which tend to be less stable, yes. In terms of OpEx, as we stated in the call, we finished the year with a year-on-year growth of close to 4%, next year probably something similar to that, between 4% and 5% or so, yes.
In terms of sovereign risk, probably somewhat tricky question, because if you see countries with one notch below Chile macro ratios, we tend to have better macro ratios than many of the countries that have similar level of rating assuming a cut in the sovereign rating. However, what concerns the rating agencies is the speed of the, especially the indebtedness of the public sector.
So there we think that is where most of the concern is today concentrated. It’s difficult to know what the end, because the timing is very tricky.
But we think that the Ministry of Finance is doing a very good job in tackling issues that are concerned by the rating agencies. And we hope that Chile will maintain its sovereign ranking.
In terms of the presidential election, it’s a very open question. We don’t have a strong view, but the most likely candidates should be more market friendly.
And that should be perceived us good news. We have seen some improvement in consumer confidence and business confidence, which I think is a combination of the various external outlooks, especially copper commodity prices and the idea that going forward the political process will be more based on consensus and not necessarily in kind of one-sided approaches as we have seen in some cases in the last year.
Ernesto Gabilondo
Great. Thank you very much, Raimundo.
Operator
And our next question comes from the line of Carlos Macedo with Goldman Sachs. Please go ahead Carlos.
Carlos Macedo
Hey, thanks. Good morning, Raimundo.
A couple of questions, first, you touched upon this many times throughout your speech in answering questions. How far long do you think you are in the process of converting to or migrating to the higher level or the higher income strata in your strategy?
I mean, are you 90% along, are you 50% along? In other words, when will this cease and we’ll start seeing more stable trends in terms of asset quality that we can forecast, so that we can see the steady state?
This transformation has helped - it hurt NIM as you talked about and hurt a little bit the fee revenues, but it has helped asset quality a lot. I’m just trying to understand when we will see that stabilized and be the new norm.
Second question, give us an update on the regulatory front. We know that Basel III was being discussed in Congress.
Can you just give us a little bit of an update there and what we can expect from that side? Thanks.
Raimundo Monge
Okay. In terms of how far, although this is very tricky to know, when you’re done, yes.
But I would say that generally speaking, on the earning mix we are basically where we should be, yes, in the sense that we are already - we have leveled our market share in the upper segment. Historically, we had - we were lower than our total market share in the upper segment.
Today, we are - it’s difficult to reach an estimation, but we think we are approaching our natural market share in that segment as well. And we think that going forward it will be more of going behind the trend, so at the macro level.
In asset quality, as I mentioned before probably this is where we should be. We should have some improvement in non-performing levels, and especially on provisions in the next 18 months that we support our performance 2016 - 2017, sorry, and to a large extent 2018.
But in terms of asset quality indicators, should be around what we have seen today or a little bit lower. And then the more difficult part is that, what the lessons that we have learnt by doing this process.
We plan to move than down market, to say that in the way that - the CRM which is basically a platform to manage all the client relationship was at the beginning developed mostly for the high-end of the consumer market, people that have many different needs, in savings, in investments, in financing activity. Now that capabilities can be replicated for the more massive market with fewer digital models, yes, actually three - or where the interactions are mostly done through the Internet or mobile.
And that’s why the process I would say will never stop, yes. It’s simply that you are changing the speed.
So it’s a little bit difficult to answer, because we don’t have a period where we have 100% accomplishment, yeah. We have been moving, and we are starting to see that.
But the tricks that we have learnt for the upper 30% of the population can be replicated, and that is something that we are waiting until we have more solid macro conditions to start deploying new models for the more massive market. Again we cannot give up for a piece of the market that is relatively large and growing faster than the upper end, yes.
It’s simply that today the timing is not right, and today the models that banks are using are not suitable given the new reality. But if you develop a model that is leaner and more technology based, et cetera.
And given the fact that demand is more aware of the IT and mobile activities et cetera, we think we can have going forward an IC [ph]. But that of course will be depending on the macro conditions.
In the regulatory front, we haven’t seen any advancements in Basel III ordinance. The problem is that there is a big backlog of projects under discussion in Congress, and the government to some extent is running out of time to get the - So we don’t have any update on that side.
But in our case at least we are basically Basel III compliant. We are reporting to our - to the regulator of our controlling shareholder figures are very comfortable in terms of capital liquidity, et cetera.
And we think that the process for us at least it will be level, the playing field, that would be beneficial, yes, because we have done an effort in anticipation to having Basel III implemented in terms of liquidity, in terms of capital, that some of our - or the rest of the players are not necessarily following. And that means that we are on a relative disadvantage position compared to them.
Once we have full implementation process, it would be good news for us. But the timing is very uncertain.
Although the commitment has been to do it this year, but the chances are relatively low because there are so many things that are pressing before that, yes. However, the regulation of the financial system in Chile - given that they - Basel III is very useful when you have large number of banks.
And therefore you don’t know them very well. In Chile, there are seven or eight banks that they defined 90% of most of the categories.
In this, we tend to see as a very work - a very through working knowledge about them. And as a consequence is a system that has been very sound to it for many years.
And that’s why it’s a good to have an international standard, but probably won’t mean big change in the day-to-day activities of most of the banks [that is going low] [ph].
Carlos Macedo
Okay, perfect. Just a follow-up, just to confirm, are you going to go back to 60% payout this year from the high level in last year?
Raimundo Monge
It’s something that, of course, you propose the shareholder meetings in - but we think that the fact that growth won’t be too high and that the - remember that, at the end what you do is, you say, okay, in order to keep strong capital ratios and in order to fuel your growth, which is how much you have to retain. We think that retaining 40% can be enough, yes, but would be moving between 60% or between 55% and 65%.
Carlos Macedo
Okay. Great.
Thanks, Raimundo.
Operator
And our next question comes from the line of Nicolas Riva with Citi. Please go ahead.
Nicolas Riva
Yeah, thanks. Raimundo, just a follow-up on Basel III and capital, remember, in the past you said that the move to Basel III could be positive for your capital ratios.
And you mentioned potentially a positive impact of around 200 basis points, and of course your capital position right now is very, very comfortable. So in the case that Basel III, the move to Basel III were to be positive for capital ratios, where would be the plans to deploy the excess capital?
Thanks.
Raimundo Monge
Of course, this is a risky industry. And you never have excess capital, yeah.
But if the circumstances are sound, of course, you can maintain a relatively higher payout. And in that way you are to some extent reducing your - the capital ratios to the level of your main competitors, yes, which is probably the path we should be following.
Nicolas Riva
Thanks.
Operator
And our next question is from the line of José Burmester with Itaú Asset Management. Please go ahead.
José Miguel Burmester
Good morning, Raimundo, and thank you for the conference. My question is regarding the growth in the Santander Banefe branch.
If you can give us some follow-up of what you mentioned. The company mentioned previous quarter that you were going to grow in that segment.
So if you can give us a follow-up on that. Thanks.
Raimundo Monge
There, there are two things that the - what we have been changing is the approach from a branch-based approach, where you have account officers and it’s that relatively heavy model, to a leaner model that is mostly IT and especially Internet and mobile phone based, yes, which is what we have been doing. And then to have their sale activity, with because of course you have enquiries and you have doubt, et cetera, we are putting, instead of having full blown branch, we are putting corners in the risk of Santander branch for Banefe clients.
But eventually, and we are very close to that point, we will have a completely IT-based model for that client profile. And we will push it very, very great hard.
But we are waiting for proper market condition. So we still - our kind of - this year we reduced our exposure, especially in the very low end, where we are at 100% provision now.
And then on the remaining part, one that we want to keep doing business, we are in a not full blown approach, because of course the macro conditions could have an effect in jobs, et cetera. So we have been prudent in that.
But we are doing a lot in terms of how to change the model that we attend those clients, and which will be the approach - the commercial approach that we follow. And we are very ready to deploy that, but of course, we prefer to wait until we have more clarity in terms of what are the economic outlook is for that segment in the next two, three years.
José Miguel Burmester
Okay. And my second question is regarding, is there any sector that you see with some risk that you are concerned with?
Raimundo Monge
No. Today I would say, we continuously monitor different sectors, yes.
They are - but I would say that generally speaking, there are players in specific sectors that are concerned. And at the same time concerns are more in terms of the size of the business than in fact of activity they’re doing, yes.
Of course, there today the exporters are doing well compared to two, three years ago. But I would say that most of the concerns come from the specific companies in goods sectors.
And secondly, the smaller companies that tend to be less, how to call it in a positive way, less fluent in managerial techniques and things like that. But sometimes because of the swords [ph] or because of the way they handle it, it can produce a surprise.
But it’s more related to - with the management capabilities that then the sector where they are operating. So that’s why we foresee that our - we think there is - sorry, our non-performing loans should be relatively flattish as going forward.
José Miguel Burmester
Thank you.
Operator
And our next question comes from the line of Alonso Garcia with Credit Suisse. Please go ahead.
Alonso Garcia
Thanks for taking my question. Good morning, everyone.
I would just like to get some color in regards to the provision related to the bandwidths of the commercial portfolio. I mean, should we think of them as one-off, given the stable asset quality ratios in the segment during the quarter?
Thank you.
Raimundo Monge
Yes. What happened is that in the fourth quarter of 2015, we downgraded a number of positions in that segment that were company-specific issue, et cetera.
Then we have in 3Q a very low level. And what we are seeing today is more of a normalization of that segment.
There was one specific client that we had to put a - but it was a very company-specific issue. So I would say that the number is more the kind of normal number going forward than what we saw either in the third Q or in the fourth Q of 2015, yes.
So with the only exception of that, the company that was close to Ch$6,000 million, the rest is relatively the typical SMEs and smaller companies that require continuously to have provisions and charge-offs, et cetera. So it’s not a fully normal number, but it’s not too deviated as compared to the three quarter figures and the fourth quarter that you see with our head - or way of the secular trend.
Alonso Garcia
Perfect. Thank you very much.
Operator
[Operator Instructions] And our last question is from the line of Sebastian Gallego with Credicorp Capital. Please go ahead.
Sebastian Gallego
Hi, good morning, everyone. Thanks for the presentation.
I have two questions. First one, can you talk about competition and how do you perceive the environment given the current macro conditions for this year?
And, the second question I would like to ask is, can you talk about your competitive advantages on the cash management and financial advisory fees? You were particularly strong in that segment within the wholesale banking.
Thank you.
Raimundo Monge
Okay. In terms of the competitive environment, I would say that banks have been - after rounds of regulation that affected banks in terms of setting maximum rate, limiting the ability to charge fees, more provisions, et cetera, in the last two, three years banks have been very much on steady waters, yes.
And that has allowed at least but larger banks to do a lot of retooling in terms of how to operate, because this was like a one-time change in the model that resulted in banks adding more technology and thinking more about their predominant business model, et cetera. So I would say that the price competition has been less intense than historically, because banks are realizing that you have to take care of your capital and your liquidity, and you have to be more doing your effort in order to sustain your market position, not in terms of slashing prices but in terms of bringing hopefully clever ideas for your customers to benefit, yes.
So I would say that we have today relatively normal competitive - competition of course. The fact that Itaú has been in a rigid process, to some extent leaves them a little bit of aside of the competition.
But the rest of the larger banks have been doing sensible things and coping very well with the weaker operational environment, yes. In terms of our competitive advantage of the cash management, there are basically two things that are necessary doing the cash management business.
Number one is to have physical branches, because at the end of the day the money that you are handling on behalf of the customer needs to be going to a branch, yes, and of course, the more branches you have the more, what, you’re in a better position to handle that physical cash. And the second is the systems, and there we benefit from group wise systems are very good tools, et cetera.
And I would said this is something that takes a lot of time to develop. But once you have it, it tends to be a relatively sticky business, because for companies it’s very difficult to change their provider of cash management, given that you have to integrate them to their systems, et cetera.
So it’s something that takes time to develop, but once you develop, and unless you don’t do crazy things or have big service problems, is a business that is very system or very sticky, yes. In terms of financial advisory, well, that is more a reflection that we have seen a number of foreign goods players quitting the market to some extent and that results in more space to compete.
And the fact that we are controlled by Grupo Santander also allow to do a number of cross-border deals that facilitate the life of our clients, and things like that. So it’s more short-term to call it someway.
And of course, every deal is a completely new reality. And as a consequence, it’s difficult to say, we have developed a sustainable capability.
We have been to-date, but of course, it’s something that you start every year from ground-zero up. And as a consequence, it’s difficult to predict, whether you can repeat it or not.
So with anything done last year, it’s a little bit different from cash management, well, your starting position is very relevant to forecast what you will be doing. Here you start from zero every year.
Sebastian Gallego
Okay. Thank you, Raimundo.
And one follow-up if I may, I’m not sure if you answered this question. But when do you expect the commercial loan book to pick up?
Is it during this year or do you see another transition year given business sentiment in Chile?
Raimundo Monge
At the end I would said that it will be very much linked to expectations, yes. And expectations probably today are very much linked to the political cycle and to some extent the things you are seeing aboard, yes.
And both are a little bit unpredictable at this time. You don’t know for sure.
But as long as you see more clarity, and probably in the political side, you will see more clarity throughout the second quarter or end of the first quarter we will have no clarity, which will be the [context in the presidential race] [ph]. That will eliminate that.
Secondly, the Ministry of Finance has very convinced, I would say, the rest of the government that growth should be a priority, because otherwise it’s very difficult to move your political changes, et cetera. And as a consequence, it’s difficult to know, but probably will be more entering the second half than in the first-half, yes.
We think that this year banks will start relatively week in the first quarter, basically because inflation will be very low and growth in the summer season is relatively low. But from then on we should be gathering momentum and finish a year in the line of what we have talked on the call.
Sebastian Gallego
Thank you very much.
Operator
And we do have an additional question from the line of Diego Ciconi with Scotiabank. Please go ahead, Diego.
Diego Ciconi
Hi. Thanks for taking my question.
I just wanted to get a sense of how you’re managing your balance sheet in 2017. I mean, loan growth has been decelerating from previous levels.
But your total funding is still growing at low double-digits. So we see that you’re increasing your exposure to other investment securities, but the trading results in 2016 has not been so strong.
What can we expect of the securities book and the trading this year?
Emiliano Muratore
Hello, hi, this is Emiliano. Regarding your question, I would say that, by the end of last year 2016 the investment portfolio grew.
And it was part of a liquidity management strategy, where we took advantage of the robust domestic markets in terms of funding. And so we placed a significant amount of bonds in the domestic market, mainly refunding part of the loan growth for this year that although is not going to be like so high like, not double-digits, but you can expect the investment portfolio to fall comparing to the end of the year, because we were like holding cash, because we did the bonds placements in the domestic market.
And in terms of upgrading [ph] results, we don’t expect any much difference from the other revenue lines for 2016. But in terms of balance sheet, you will see a fall in the investment portfolio, because of using the liquidity for loan growth and also paying off liabilities.
Diego Ciconi
Great. Perfect.
Thank you.
Operator
And I’m not showing any further questions in the queue. I would like to turn the call back to the management team for any final remarks.
Raimundo Monge
Okay. Thank you all very much for taking the 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. This concludes the program and you may all disconnect.
Have a wonderful day.