Feb 2, 2018
Executives
Emiliano Muratore - CFO Matias Sanchez - Corporate Director of Retail Banking Robert Moreno - Manager of IR Claudio Soto - Chief Economist
Analysts
Thiago Batista - Itau Global Carlos Macedo - Goldman Sachs Ernesto Gabilondo - Bank of America Merrill Lynch Jason Moylan - Deutsche Bank Alonso Garcia - Credit Suisse Nicolas Riva - Citi Tito Libarta - Deutsche Bank Sebastian Gallego - CrediCorp Capital Neha Agarwala - HSBC Yuri Fernandes - JP Morgan Phillip Bench - BBS
Emiliano Muratore
Good afternoon, everyone. Welcome to Banco Santander-Chile's Fourth Quarter 2017 Results Webcast and Conference Call.
This is Emiliano Muratore, CFO; and I am joined today by our special guest Matias Sanchez, Corporate Director of Retail Banking; Robert Moreno, Manager of the Investor Relations; and our Chief Economist, Claudio Soto. Thank you for attending today's conference call.
We are very content with the performance of the bank in 2017, and we have interest and development in retail banking which we would like to share with you today. I will first pass it on now to Claudio for a brief overview on the Chilean economy during the quarter and our expectations for the rest of the year.
Claudio Soto
Hello, last year ended optimistically. Chilean economic scenario is favorable with strong and synchronized growth from our main trade partners and the important search in the copper price.
Domestic confidence has improved substantially reaching positive figures not seen since mid 2013. Job creation remains steady.
The last quarter, employment grew by 2.3% and the employment rate came down to 6.4%. We are going to start growing the southeast, favored by soft consumer prices.
A number of indicators of activity point to a year-over-year GDP expansion of 2.7% in the last quarter of 2017 above the previous quarters. Recent figures on activity in the labor market plus a rather extended condition and improvement in confidence, point to a gradual economic recovery in 2017 pushed by an increasing domestic demand.
On the political front, Sebastian Pinera was elected President in December with a broad public support. His focus on the recovery of economic growth has helped to improve the economic outlook.
For all these reasons, growth is expected to reach nearly 3% this year and slightly above trends in 2019. The unemployment rate will favorably fall amid a positive job creation and are still expanding labor force.
For 2018, we all suspect U.S. inflation to reach to 2.7% while the Chilean Central Bank is expected to maintain flat rate at round 2.5% probably increasing at by 25 basis points in the last quarter of the year.
This combination of highly inflation and rapidly low interest rate is usually a positive factor for bank margins. However, this inflation in peso continues to appreciate, we may have to adjust downward out inflation outlook for this year, although we're optimistic on the evolution of the Chilean economy which should see greater demand for loans.
Robert Moreno
Thank you, Claudio. Now, we'll give further details into our results and implementation of our strategy.
2017 was a record year for Banco Santander-Chile's. Net income attributable to shareholders totaled CLP565 billion increasing 19.6%.
Our return on average equity reached 19.2% in the year in line with guidance. In a year with low inflation and higher taxes, these positive results were driven by client activities reflected in the 17.0% increase in a net contribution from our business segments, which was led by a 28% increase in the net contribution from our Retail Banking segment.
Some additional highlights of the year, our NIM was stable at 4.4% as an improved asset and liability mix, offset lower inflation, provision expenses fell 12.8%, fee is grew almost 10% and cost increased less than 3%. This leaves us on solid footing for 2018 which should be a year with higher growth levels.
Result is important to point out that our positive expansion of ROE was not an industry-wide phenomenon in fact the majority of our main competitors have seen ROE compression in the last few years. In the fourth quarter, net income attributable to shareholders totaled CLP135 billion increasing 24% year-over-year.
The banks return on average equity in the quarter reached 17.8% in 4Q, 2017 up from 15.3% in the same quarter of last year. This rise in net income and return on equity compared to fourth quarter 2016 was notable considering the similar levels in inflation in both quarters.
Compared to the third quarter of 2016, net income decreased 1.9% mainly due to a decrease in treasury income. In terms of strategy, we made an important advance this quarter and all of our strategic objectives.
As seen on the slide, our strategy has our strategy has circled around focusing our growth on those segments with the highest risk adjusted return, increasing client loyalty through an improved client experience and quality of service, deepening our ongoing commercial transformation by expanding the bank’s digital banking capabilities and optimizing our profitability and capital use to increase shareholder value in time. Regarding business growth, the fourth quarter was a little bit sluggish due to the election period and appreciation of the peso in the quarter.
Therefore our focus was more in asset liability management and growth which was clearly reflected in our loan and deposit mix. As loan growth slowed in the quarter, the bank optimized its funding structure by reducing time deposits and increasing non-interest demand deposits.
Total deposits decreased 0.9% quarter-on-quarter with demand deposit growing 6.8%. At the same time, the bank’s equity increased 6.9% year-over-year which also reduced a need for expanding our interest bearing liability.
Simultaneously, the ratio of the bank’s free fund does not interest bearing demand deposits plus equity to interest earning assets increased from 33.2% at the end of last year to 34.9% in 4Q, 2017. The bank also successfully placed a three year bond of $500 million at a spread of 72 basis points above the U.S.
treasury rates in the quarter with a coupon of 2.5%. The lowest rate ever obtained by the bank in a senior offering aboard.
Going forward as a result in 2017, the average cost paid on total deposits tight on demand improved from 2.3% in 2016 to 1.9% in 2017 resulting in a key factor versus defending our profitability in a low inflation environment. Total loans increased 1.9% in the year and decreased 0.1% quarter-on-quarter with growth mainly coming from high yielding retail banking in middle market segment.
In the quarter, following the presidential election, the peso appreciated significantly resulting in a translation loss on loans denominated in dollars which is approximately 10% of loan book. At the same time, our GCB segment had reduction in very low yielding interbank loans.
For these reasons loans in GCB were 21% Q-on-Q. As a reminder, more than 90% of income in this segment is generated by non-lending activities and that segment’s contribution of GCB was up 2.3% in 2017.
On the other hand, loans in higher yielding segments posted positive growth. In the middle market, loans increased 2.4% Q-on-Q, loans to SMEs increased 1.4% and retail banking loans increased 1.8% Q-on-Q.
Most importantly the bank completed its process of downsizing Santander Banefe division for the mass consumer market and launched Santander Life, a new business proposition for middle income clients. This initiative is a new way of relating to the community and customers through a new generation of digital products.
In a momentum our Head of Retail Banking will get into more detail regarding this development. In 2018, we expect loan growth to accelerate to levels between 6% and 8% as the speed of economic growth gains momentum.
As a result of the growth and funding strategy just described and the higher inflation rate in the quarter, net interest income increased 9.1% Q-on-Q and 9.4% year-over-year. The net interest margin to 4.6% compared to 4.2% in 4Q ’16 despite both quarters having a similar inflation rate reflecting stable client margins, a cheaper funding mix and a positive management of the net GAAP and inflation index assets.
In the quarter net interest income from our business clients, business segments increased 3.5% year-over-year and fell 1% quarter-on-quarter. The decline compared to 3Q '17 was mainly due to fall in retail banking.
This in itself was due to a decrease in the spread earned over credit cards. In the quarter, we had record level of purchases with credit cards especially among non-revolving clients.
This generated higher fees, but lowered the spread on cards. Just to give you an example, fees from cards grew 14% Q-on-Q.
At the same time, our net interest margin net of risk was 3.6%, up 30 basis points from the third quarter and 50 basis points from the fourth quarter of last year. The higher NIM in the quarter more than offset the higher cost of credit.
In 2017, the overall evolution of asset quality was positive, despite lower economic growth and slightly higher unemployment levels. For the whole year 2017, total provisions declined 12.8% mainly due to the benefits and risk from the bank's shifting loan mix towards mid and high income clients and the downsizing of Banefe.
Provision expense in 4Q increased 4.6% Q-on-Q and decreased 12.4% year-over-year. The cost of credit in the quarter was 1.1 and for the whole year it was 1.1 as well in line with guidance.
In the fourth quarter there were some deterioration of asset quality as the positive impacts of the changing asset mix was outweighed by the negative impacts of the lower economic growth in the year. We expect these trends to be temporary as economy recovers.
The NPL ratio increased slightly 2.3%, however the bank’s expected loss ratio or risk index measured as loan loss allowances over total loans remains stable at 2.9% and the growth rate of impaired loans also stabilized which is a good proxy for future growth of MPLs. Regarding our second strategic objective, I will now like to turn the call over to our Corporate Director of Retail Banking who will guide us to the changes and accomplishments of the segment and introduction of Santander Life, Matias?
Matias Sanchez
Hello everyone, I’m Matias Sanchez. I’m the Head of Retail Banking in Santander-Chile.
It’s my pleasure to share with you our innovation and transformation plan to face this interesting moment this year in the banking industry. First, let me start out with some history.
2012 was breaking point year for Santander-Chile. In that time, the bank had solid results based on a successful study center on increasing bank penetration in the mass market.
But this strategy had an unexpected outcome the following years. A good analogy can be that Santander-Chile was like American muscle car, high interest rate, high net interest margin, but high number for home loans and high cost of customer attraction as well.
For instance in 2012, 7% of our loan book and 20% of our branches were represented by Santander-Chile, our mass market brand. The bank's return of equity in that year was 90% the NPLs 3.2 and the net interest margin was 5.1%, not bad.
But as you may know the market condition change overnight, some events occur that put our business model under pressure. First, La Polar's scandal triggered some changes in the consumer loan industry, mainly the Dicom law that we erased 60% of the negative credit borrow, creating a huge difficulty to evaluate in new credit and present credit behavior, other regulations that generally restrict CI and the new role that put a cap matching on interest rate lowering 2,000 basis points in only two years.
So, are the market changes so did we, our first goal was to assist the market away from the mass consumer market and to end of start with on the other segment lowering our credit risk back with the challenge of improving market at the same time. I do continue see in the graph, the bank include is it for sure to the high end of the consumer market from 59% in 2013 to near 70% of loans we launched currently.
In the lower end, the ratio decreased from 7 to 3, at the same time we completed a process of downsizing and eliminating Santander Banking closing more than 100 branches and reducing the sales for by more than 2,000 people. Today, we can proudly say that the process of is a study case for how to execute and extend this stock with action with minimum impact on customers, systems and profitability.
In addition to this the bank confirms at the essential level where reaching an all time low in 2012, especially when compared to our main peers in the Chilean market. Our digital innovation plus better incentive plans and the intense training resulted in an extraordinary evaluation of customer satisfaction.
We achieved our goal of closing the customer service gap with our peers according to our remark. Santander also become a most recommended bank in 2017 by its clients, moving from fourth to first place, according to a study conducted by new program.
But in our opinion, our successful plan, transformational plan was also support by important innovation in online and digital banking service. Our first important innovation was NEO CRM in 2012, our industry leading client relationship management system.
The bank recognize all of these client data and there are end of CRM platform that allow us to give each client the same offers and service whatever channel they conducted and ran through. Today, we are the leader in the Internet Banking, our site is very transactional and simple, easy to use.
So we begin the most popular home banking site in Chile, we study 5% market share, twice the market share of our main competitors. Every month 1 million different people used our online banking and they do more than 22 times a month.
The bank also continued to innovate in mobile banking through our APP. For example in October of 2017, we launch our digital important platform were by non-client can become customers by our end-to-end digital process in only a few minutes.
How does it work? Well, the bank’s information system now are linked to several poly data bases and therefore with some very few simple questions the bank can check any customer identify, the credit background and real incomes, simply using Touch ID technology or facial recognition.
This technological, tools help us to reduce the cost of opening a new account and also assure quick and trustworthy risk certification. On the other hand, we decided to adopt our digital strategy, which means the best of both worlds, digital and physical at the same and imbalance.
In 2015, the COO asked me to design a complete new branch experience that should increase our income where this operational cost and most importantly to achieve a real first class experience. Based on this idea, we created the WorkCafe Santander, a complete, high-tech and high-touch experience.
In terms of income, WorkCafe is 20% more productive. That is traditional one and double, the customers' attraction.
In terms of cost, WorkCafe has, for example three salesmen for its administrative people again one to one in the original branches. On this allow us to reduce the direct cost to income of those changes to 15%.
I’m talking about customer experience, WorkCafe customer satisfaction is over 82%, 10 points more than the traditional network. And if we focus only in the customers who usually go through the branch is the satisfaction rises to 96%.
In our humble opinion, WorkCafe is one of the most relevant innovations not only in the local banking market even in Santander Group as well in the last 30 years. In 2017, we launched training workup and respect to rate for it by the end of the year.
And last but not least, on December 17, we announced the launching of Santander Life, our innovative value proposition for the middle and mass market income segments. This unprecedented initiative represents a noble way of relating to the community and customer to a new generation of digital cloud that we were profited greater behavior.
The back into the mass market response to two markets, first of all, the prudent economic outlook in Chile and certainly the technological narration of other that now permit us to acquire new customers to our low cost digital boarding platform, this being launched Santander Life has been a huge success and we are currently selling 200 life accounts to date, which is better than respective. In order to better understanding, we have prepared a short video for audio.
[Audio/Video Presentation]
Robert Moreno
Okay and thank you Matias. I hope that gives a little more insight on our Santander Life which is going to be a very important way of dealing with the middle income market.
And now just to complete the presentation, I’ll briefly go over the fees costs capital and then we’ll get ahead for the questions. In the fourth quarter, the fees decrease slightly, 2.6% quarter-on-quarter, increased 5% year-on-year and during the year we continue to have a very strong growth in client loyalty and satisfaction, and in the quarter the biggest contributor fee income was credit card, as we mentioned before.
In the quarter, higher consumer expenditure triggered a 13.9% Q-on-Q rise in credit card fees. The Q-on-Q decline in overall fees was mainly due to the decrease in ATM card fees, as we have been optimizing the ATM network which was negatively affect fee income but has a positive impact on cost and efficiency.
Just to give you an example, cost related to the transport of cash and security, so a 1.7% in 2017. In the quarter, the bank also continued to transform -- excuse me, operator.
Operator
Yes,
Robert Moreno
Are we still online?
Operator
Yes.
Robert Moreno
Okay, I’ll continue. In the quarter, the bank also continue to transform the distribution network, during fourth quarter 2017 we finished closing all of the Banefe branches and accelerated the pace of opening of our new WorkCafe format.
In total in the last 12 months 11.3% of the branches has been closed, we also eliminated 28% of our ATM and reduced headcount by 2.5% in the year. As a result of all of the above, the banks efficiency ratio reached 40.8% in 2017 compared to 42.7% in 2016.
The low growth of cost is a direct consequence for the various initiatives the bank has been implementing to improve commercial productivity and efficiency. The success of our ongoing digital and branch transformation is also resulting in higher labor productivity.
Finally some insights regarding our capital and dividend plan. The bank concluded the year with strong capital ratio, the core capital ratio reached 11%, 45 basis points higher than four months ago.
A higher more sustainable ROE is permitting to bank to generate better capital ratios and therefore we should be able to sustain a decent dividend payout ratio, which can be at levels of 70% to 75% of 2017 earnings, which would place our growth dividend yield considering yesterday's closing price, between 4% and 4.3%. Final 2017 payout will be proposed by the board at the end of March.
And now we'll Emiliano for some guidance.
Emiliano Muratore
In February 2017, was the good reflection of what we have been seeking to achieve through our strategy, despite low inflation higher taxes. For 2018, here is some guidance.
Loan growth should be in the range of 6% to 8% with focus on retail and middle markets. This couple with a stable interest rates on a slightly higher inflation should be good for NIM and net interest income.
The main potential downside for the download is, if the peso continues to appreciate and inflation expectations are lower. Client loyalty and higher growth of total volumes, we continue to drive fee income.
But remember that ATM fees will continue to fall. This, in turn, will be compensated with lower security and transportation costs.
Finally, the efficiency ratio should improve to levels between 40% to 40.5%, with cost growing the low single-digits range. We expect the cost of credit to remain stable between 1.1% to 1.2%.
We also have one more corporate tax rate increase which should push up our effective tax rate by rise 1.5% to 2% next year. All in, we continue to expect similar ROE to that obtained in 2017.
Finally, Santander-Chile has decided to host an Investor Day given the brighter outlook for Chile, we would like to present a thorough update on our business and digital strategy on behalf of our top management, including our CEO, Claudio Melandri and Matias Sanchez. We will be hosting two events; one in Quebec on May the 24th and one in the New York Stock Exchange on June the 1st.
So please mark your calendars. We will hope you can attend.
At this time, we will gladly to answer any question you may have.
Operator
[Operator Instructions] And the first question will come from the line of Thiago Batista with Itau Global. Your line is now open.
Thiago Batista
I have one question about Santander Life. You’re talking a little about it and probably it’s still in early stage.
But you showed in these slides that the share of low income loans has dropped a lot to about 2% if I am not wrong. In the medium term, how much big from Santander Life can be?
And so in terms of loans, how much we can see these low income segments increasing because of Santander Life? And to be clear for me, what is the size or what is the focus of Santander Life?
Is it more really on the low, low income or more in the middle income, may be just?
Robert Moreno
Okay. Yes.
So basically, in Santander Life, it's more I would say what we call our middle income from people who make over 400,000 the disposable income a month. So when you see the graph at the low end, we’re not going to grow that percentage.
We are going to grow the middle income, okay, from the cut-off of CLP$400,000 and above. So that’s the focus of Santander Life.
So it's basically low middle income to, it's open to anyone to upwards. But the very low end, where Banefe was more focused, we’re probably not going back into that segment.
And this is -- hopefully you could maybe appreciate in the video that this is a completely different of way of banking in that sector. As we said, we resolved a lot of the issues of credit scoring, of costs and so forth.
And -- but we don’t have any like specific focus. So it is a kind of like a very innovative thing.
What we do say for now is that it’s done better than we expected and we are selling around almost 200 products today. And so until now it’s going well but we don’t have a specific forecast.
But I would say that the portion of the loan book to individuals that’s middle income should no longer start, stop, should stop falling because it wasn’t only a fall in the low-end. It was fall in the middle.
So I think there is going to be more balance between middle and high going forward.
Operator
And the next question will come from the line of Carlos Macedo with Goldman Sachs. Your line is now open.
Carlos Macedo
Carlos Macedo from Goldman Sachs. One question on asset quality.
It seems like your NPLs got a little bit worse sequentially, and it was pretty much across the Board. Your guidance for 2018 is for a stable cost of risk.
What should we see expect for the past of NPLs going forward given that the economy is reacting? Is this just a blip in the radar?
Or is it a cycle? How should we think about this?
Thanks. And one more question, just, it’s a follow-up on guidance.
Again 6% to 8% the commercial book did fall a lot in the fourth or the large corporate. How should we break down that 6% to 8% guidance?
Is there going to be something like 10% for individuals and 6% for corporate? How should we think about it?
Robert Moreno
Okay. So regarding NPLs and we believe it’s kind of more of a of a blip than a trend.
In the beginning of last, there was, if you remember, the impaired loans started to grow a bit, but the NPLs did it. So basically as we said in the call, the change in the asset mix was more relevant for NPLs or asset quality than the situation of economy.
As the year progress, I would say the weight, like the slow economic growth started to influence a bit the NPL ratio. But at the same time, if you look at the impaired loans more recently they stabilized.
So basically we have like a blip that started beginning of the year. And now, it’s moving to NPLs and then it should flow through the charge-off and leave the bank.
And since the impaired the velocity of growth impaired loans has stabilize, that’s why we believe it’s a blip. So obviously, there is depends a little bit on the economy affective recovering, which until now it has.
So going forward, I would say, the cost of credit should be in a little bit higher in the beginning of the year. To be give normalizing towards the end of the year, okay, I think that’s going to be the flow.
And regarding loan growth, I would say the 6 to 8 AM is really more everything besides corporate following retail individuals growing more, consumer loans growing a little more than that. And then there is a corporate banking, which if the large project finance or large bridge loan that has a good spread make sense.
This could easily turnaround and we saw 22% a quarter, it could turnaround 15%, 20% in the quarter. So I would say that 6 to 8 is a little more everything besides corporate and corporate to be anywhere from zero to the 20 depending on the size and the profitability.
In the quarter, for example, we reduced interbank, some interbank operations that were really generating very, very low spreads. So take the loan growth is everything besides GCB, closer to 8% maybe more and then the question mark will be corporate, which can be anyone’s guess.
But as I said there, it will be depend on profitability.
Operator
And the next question will comes from the line of Ernesto Gabilondo with Bank of America Merrill Lynch. Your line is now open.
Ernesto Gabilondo
Three questions from my side. The first one is, what are you expecting in terms of total reforms that we have to see a higher GDP growth and where do you see loan growth evolving long term?
My second question is in terms of picks, I know you have provided guidance for the efficiency ratio of 40% to 45% but given the force to reduce branches to promote digital channels which we see expenses growth in this year? And finally, giving unexpected better micro, better operating trends with higher margins, stable cost of credit and OpEx, is it reasonable to expect double digit growth in that earnings in 2018?
Robert Moreno
Claudio Soto, our economist will answer your first question.
Claudio Soto
Okay, so in terms of the structural reform, the new government has announced that is intending to modify the tax reform, lowering corporate taxes to 25% doubly and also reintegrating the corporate tax system. Broadly that will occur slowly your time.
The new government does not have the majority in Congress therefore they need to reach certain agreements in order to pass keys legislation thesis. Despite of this, it is very likely that is true at the interest as we initially start as miss action.
The government can foster and provide an in force on investment in particular in terms of approval of large investment period in mining and energy that would be key to lift eventually during the year, which is the key behind it with the company in growth that is respected by us and better market in general. In terms of long-term growth, we are estimating that trend out should be going up 3% roughly.
The government is facing in terms of listing investments where we could see an increase in long-term growth to 3.5%, but this is something that we’ll have to see. And going to your second question about expenses and then we definitely expect expenses to grow below the revenue rate of growth I mean in the range from 3% to 5% and that’s why we see cost of income falling slightly from 2017 level.
And in terms of bottom line growth I mean I would go back to the guidance of ROE I mean where we expect a similar level of ROE to what we having in 2017.
Operator
Thank you and the next question will come from the line of Jason Moylan with Deutsche Bank. Your line is now open.
Jason Moylan
Thanks for the opportunity to ask a question or two. On your strategy of reducing a physical distribution that work and make it more efficient where are you in that process in terms of 385 branches and 900 approximately at the end and we see those numbers continue to decrease?
And you did talk the second question which is on the mix that you talked about the lower segment remaining kind of where it is or being small. What in the next couple of years, what is the target in terms of the mix between the high end and the middle?
Matias Sanchez
Okay, in terms of branch structure or network and we think we have completed the bulk of our branch and ATM rationalization. Within middle in the digital actually, that I told before, which a perfect combination between the banks digital model with the best physical on.
So, our goal in the next five years is we’ll be open 100 new branches, and finance this opening with better productivity and reduced cost in the same network. During the 2018, we will continue transforming branches into WorkCafe and hope to finish this year with a total of 40 WorkCafe branches.
At the same time we will continue to digitalize back office function, to make the branches more productive. In the fourth quarter and extended the business hours of our branches that close 2:00 p.m.
and now they are up and until 6:00 p.m. so we are gaining more profitability in that.
Emiliano Muratore
So that’s important in a sense that a, so now we should be in the process of opening branches, but idea is in nothing change the kind of cost guidance we have given, basically the cost of opening branches, there will be some transformations of WorkCafe, will be paid through with the efficiency. Okay, so in general and we are launching Santander Life, we are doing things with the WorkCafe, we should be opening the branches over the next five years.
So we are preparing for greater growth, but with a bank that is very different internally. And regarding the mix, it's hard to say difference on economic growth but as we said before, I don’t think we don’t think the middle income will continue to shrink as a percentage of the long portfolio to individual.
And probably the low end will depend on more structural reform, how well the digital banking process evolves so forth. But for now, as I say we are focusing on 400,000 pesos and more and that’s and all the segments above that will be a focus for us, all the way to private banking.
Jason Moylan
And what about market share by segment, if we are looking I believe part of the strategy and this growth in your own mix was also increasing your share of let’s say high income deposits or high segment loans. How has that been evolving and are you where you want to be to back there it should be?
Matias Sanchez
I think that we have done well in gaining market share and in the high income segment, so and respective to give that share I mean, maybe not increasing more than what we had done but staying there and definitely in the middle income individuals that began gaining market share with this new life to precision more than around 70% of the new life accounts we are opening are new clients. I mean the rest of the 30% is formal clients like transforming to the life package, but it's something proven to be good hook to new middle market clients.
So I expect it to gain market share their especially in lending -- in consumer lending and the high income deposit market is very, very competitive here in Chile in terms of pricing. So that’s where we don’t like play like so hard in terms of competing on price.
And that’s why the deposit base, as I said, very sensitive and more volatile in terms of market share where we wouldn’t like to have the cost of funding weakening. So -- but in terms of loans in US are definitely keeping market share in high individuals and gaining on middle income individuals.
Operator
Thank you. And the next question will come from the line of Alonso Garcia with Credit Suisse.
Your line is now open.
Alonso Garcia
Actually I have a couple of follow-ups. The first one on Santander Life, do you think that through this strategy probably, but have you seen at the moment other banks moving back to the mass consumer market as well or do you think you are being sort of first move back to this segment?
And lastly, on cost of risk. I mean, cost of risk has come down from 2% some years back to only 1.1% last year, you are guiding for same cost of risk for this year.
So continuing the recent trend on cost of risk the pickup expected in current activity in Chile but also return to the mass market, at what level should we think for the sustainable basis going forward I mean beyond this year? Thank you.
Matias Sanchez
Yes, we don't -- honestly, we don't know exactly what the other banks will do in the future. We only see that the things they are doing now are the same things that we did two or three years ago.
So our focus now is to take advantage of this two or three years in order to gain profitability and market share in that segment.
Emiliano Muratore
Yes. I mean, we kind of expect them to follow us.
But we think that we are ahead maybe two years, because they are still in the process of restructuring or rethinking the distribution model for the low incomes individuals where we have already finished that and we are in the new phase. It's still to be seen what they will do.
In terms of cost of risk…
Alonso Garcia
Sorry just before moving to cost of risk. Sorry.
So this is from banks, but from the side of retailers, have you observed probably more -- or retailers speeding up the pace of origination once that economic activity seems to be moving upwards or do you think retailers are still seem like changing their behavior?
Emiliano Muratore
I mean, today, the only relevant player coming from the retail -- retailers in terms of lending is Falabella because Wal-Mart is selling their business to BCI. So you have La Polar and some other smaller players that -- just Falabella is the one outside the banking sector.
And yes, I mean, the trends in cost of risk for some of the -- of those players in the recent past was not the best. So I guess that if economic activity definitely picks up we will then see them like grow more aggressively but with the whole system growing also higher at faster pace.
So we don’t expect to gaining share from banks. I mean, like I said they’d be opposite.
I mean, the banks will keep like gaining maybe through inorganic means as the one with Wal-Mart and BCI, but we don’t see retailers gaining share. And I’m going to your question about cost of risk.
As we said, we expect cost of risk in the range from 1.1 to 1.2. So let’s say, from stable to slightly higher than 2017.
Definitely, economic activity should be good for quality and that, that, we don’t expect to go lower than the 1.1 that we did last year. And so this increase in the share of middle income individuals can get us slightly higher to the 1.2%.
But that’s the kind of range we see with the portfolio we have now. Because as you say a few years ago, we were add 2%, but the mix of the portfolio was dramatically different.
So with the portfolio we have now under the digital, we have for the economy in the next three, four years. So we think that the current level of level of cost of risk is sustainable.
Operator
And the next question will come from the line of Nicolas Riva with Citi. Your line is now open.
Nicolas Riva
I guess my only question is a follow-up on a centralize given that you’re going back to the medium and low income consumer segment. How should we think about the expected impact, both in terms of net interest margins and also in terms of freight costs?
Which I guess, you could have some upside risk for margins, but maybe sometimes a risk for credit those?
Matias Sanchez
Yes. So what is that Santander Life has this kind of meritocracy component that it’s very virtuous from the great behavior point of view?
So as the video drive to explain, I mean the people behaving good are getting like benefits and some of those benefits are, I got in the rate that they’re facing. So what we see is that, definitely that’s a portfolio considering that the customers take some time to reach this kind of would become or level where they get the higher benefit at one point there is some level, you have that squeeze in the revenue, because the spread goes down.
But also you know that it sound we’ll have to be paying well for the last 24 months. So at the end of the day from this great behavior point of view, it’s a high-income individual.
And it's someone like who is kind of say. So, in the long-term that the whole business, we expect to have that’s kind of positive virtuous circle that will have higher cost of risk or higher risk than the average of the own portfolio.
But definitely much better than what you would expect for that segment, if you haven’t this kind of incentive to pay on time. So we see that in this segment, it’s important to try to be the first option of segment because sometimes the people are short of cash.
I mean, they have different debts to pay. So the whole incentives of Life may that we, maybe the first, I mean, it’s not the first options for them to pay and that's would be vitreous from risk point of view that definitely as a consumer portfolio that portfolio was the average but not so bad as without the percentage would be.
Operator
Thank you. The next question will come from the line of Tito Libarta with Deutsche Bank.
Your line is now open.
Tito Libarta
Hi, good morning and thank you for the call and for the detailed presentation. Just wanted to follow up I guess on Santander Life of that looking more on the deposit side rebalancing you did see deposits fall last year.
So with Santander Life I mean is the focus more on the lending side there, is there any focus on trying to get some deposits from the middle income customers that will go to deposit base again or if you can give some color on what you think how deposits will evolve as well giving we saw particularly time deposit fall with line percent on the year?
Emiliano Muratore
The Life is definitely more on the lending side of that because basically it was that segment need I mean it’s very demanding on borrowings and numbers in saving. So that line is much more by us to the asset side and the liability side.
And in terms of the evolution of deposits last year I mean as I said before I mean the additional you might be aware that the half of time deposits in Chile and the whole system half of that is coming from institutional investors I mean pension, funds mutual funds. So that’s very hot money, price sensitive where no one to fight on comprise I mean when you look at the repay some deposits and where retail that the profit not twentied on the secondary market that is something that exists here in Chile.
In that market, we are close from 20% to 21% market share I mean the profit coming from by a whole client basically retail or more stable one. So that’s the market share we started to get but in line with the market share we have on the asset side and the rest is when you look at the pension funds or mutual funds and where market share is below 10% and that’s the fight we don’t want to be because same that we get longer money from the market through bonds or through syndicated loans at the same level we are paying for short-term deposits on any traditional HA.
So as a whole thanks to profit market line is lead to be broad battle because of this the external components. But when you look at the retail part, it’s better I mean we get the 20% market share and we are also taking care of that cost of funding and similar to what I mentioned on additional it was happening on private banking or high income view where the market is sometimes to be like too aggressive on pricing and we are more selective on that try to measure that money to mutual funds or some other balance sheet investment that are good for the client and the numbers very increase our cost of funding.
So, and I can say the retail what we should be doing well and especially the one is below private banking and the rest is much price dependent, I mean if the pricing gets, the pricing market – the pricing situation gets not so competitive mainly we will begin growing more.
Matias Sanchez
And we have very strong liquidity ratio, so we have been preparing for Basel III for a long time so our LTR and SFR are quite high. And that leaves us trying to quell that.
Sometimes we can be a little more picky on the funding side because we have strong liquidity ratio.
Operator
Thank you and the next question will come from the line of Sebastian Gallego with CrediCorp Capital. Your line is now open.
Sebastian Gallego
I only have one question actually. We have seen large declines in terms of loans for the global corporate banking and we also have seen some declines in fees for this segment.
Can you comment a little bit on the strategy for this segment since we have talk a lot about the retail portfolio?
Matias Sanchez
Okay, so our corporate banking, the big focus are is obviously profitability, so regarding loans and loans has probably the least profitable product. So for example if you look in the earnings before you see that their net interest income grew by, I believe is like 5% even though loan volumes I don’t know what the average was, but the period end loan volumes saw like 20%.
So that shows you that, you can follow the asset side, and still grow the net interest income there, which with our NIM one quite significantly last year. And not because how great, we just kind of that around 90% of their income is from non-lending activities and what does that mean, there’s positive spread they make on deposits on cash management, okay and then the fee side, and the treasury.
So last year I would say they did a very good job on the net interest income, on the non-lending cash management, and treasury, accept for me did in last quarter. And the fees, the fees started up very strong in the first half, and that’s a little bit deal driven financial advisory, issuing bonds, cash management, specific services.
And then the pipeline kind of dried up a bit in the second half. So that’s why we believe this year and as economy recovers there should be a pickup in the fee based size and on the deposit side as well as the treasury.
And the loan side, it will depend obviously on the profitability. But if the infrastructure project starts to come on line and these type of things tend to be a little more profitable and then we could also see more loan growth going forward.
So, effectively I would say the fall in the loan growth wasn’t very relevant to the business line, but the fact that kind of the deal pipeline did effect a little bit in the second half and we expect, decline in recovers that will recover as well.
Operator
Thank you. And the next question will come from the line of Neha Agarwala with HSBC.
Your line is now open.
Neha Agarwal
Question is on the other operating income line. Even taking out the run-off income from the banks last year, this line came out to be very strong in 2017.
Where should we expect this line to be in the coming years? The average range for other operating income over the last years has been about 20 billion.
So what should we expect for the coming years? My second question is on the net interest margin.
How much expansion have you budgeted for this year, for 2018? How much do you think the minimums could grow versus 2017?
Robert Moreno
Okay, yes. So there's two lines there that sometimes can be difficult to follow other operating income and other operating expenses, okay?
And during 2017 other operating income in the third quarter was positively affected by a one-off from a company we consolidate but we don’t own. So all that gain is eliminated in minority interest, besides that, the other operating income includes for example there’s a big component there which is the gain from repossessed assets.
We had a relatively good year in selling repossessed assets and prices of real estate is quite nice in Chile, so that turned out well. And there was also some reversal what we call non-credit contingency, basically legal issues and for example in other operating expenses we also recognized a big charge in second and third quarter for future severance payments.
And as we started effectively recording those severances in expenses, we also reversed the provision, so that was also in other operating income. So and also the bank did a very good job but this is among one of the many things we worked on in terms of operational risk.
We did a significant job of reducing operational charge-offs mistakes, vandalism, et cetera, et cetera. That's also cut fraud, all of these things helped to improve the other operating income.
So that’s also an area we worked a lot on. Going forward in -- if I remember correctly, you should -- what I would do is look at the 2016 other operating income and operating expenses and that would give you a better idea of more normalized levels, okay?
Emiliano Muratore
Regarding net interest income, I mean, in terms of margin, I mean we are expecting NIM to be between 4.4 to 4.5, I mean maybe slightly higher than 2017 because of inflation was relatively low at 1.7 US the ratio for the year. For 2018 we are expecting that to be 2.7.
So we then see some upwards movement in NIM because inflation that basically stay not higher than 4.5 and then with loan growth in the 6% to 8% range with spread NII to be in that range I mean from 6% to 8% growth.
Neha Agarwala
So if I can follow on that. 2017 was a very good year in terms of declining provisions which basically helped your 20% growth in earnings for the year.
Now for 2018 the challenge to grow earnings would come from both higher taxes and that provisions will likely grow this year. So what in your view would be the main driver for the bottom-line growth in 2018?
Now still having a very good year-end 2017?
Emiliano Muratore
Yes. So basically 2017 was very good year, was more of a bottom up story, right.
Well top-line growth, and from thereon, lower provisions, higher fees and good control of costs, we expanded ROE. This year, we expect still good trends and fees and costs probably a little bit better in the treasury side.
But it is true that this year is more top-line growth, more probably provisions not falling, but maybe a little bit higher NIM and more loan growth. So the big difference between last year and this year.
Is this year, we’re going to be pushing for more growth. And that’s why, part of the reason why in this call, we want to show you something live that we’re going to grow a little bit more in branches.
And we’re doing, so it’s going to be a little bit more consolidating a lot of things we’ve been preparing in the past few years.
Operator
And the next question will come from the line of Yuri Fernandes with JP Morgan. Your line is now open.
Yuri Fernandes
Most of my questions were answered, but I had just a follow-up on the future loan growth, like for 2018, 2020 when the economic gain, outlook improves. How much growth can you see for Chile overall?
Like how fast, like on a nominal loan growth, nominal GDP, can you increase your loan book? Because looking to the first period return, the, I think you used to grow about 2 times the nominal GDP, something close to 12%, 14%.
And given the higher penetration in Chile today, not sure if you can continue growing that quickly, so just your take or look on like, not on 2018, but for future years, how fast can you grow? And with that growth, try to justify the current valuation of the banks?
Thank you.
Emiliano Muratore
I mean within that month although strategically low 1.8 times the real GDP plus inflation. That’s something that we expect to main, I mean, the high penetration in Chile is a little bit tricky because when you breakdown that basically it’s influenced by lending to big corporate and the mortgage market, which is big in amount.
When you look out at the lending to individuals, consumer lending, SME lendings, it’s not particularly so high the penetration. So we don’t see that as the restriction to give the multiple.
And if the economy to grow and close to focusing and in the center bank the job to keep inflation around 3%, okay, there you have the nominal GDP from 6% to 7% and you can see the bank, in fact of growing long, maybe long double-digit range. I mean for that price, you need to have GDP growing close to 4%.
So it’s something that, it might happen. I mean, we don’t see the penetration as a drag on, I mean those see it as a significant drag to reduce the multiplier we have been seen in the past.
I mean so, we think there is an area of economy, nominal GDP around 6% to 7%, yes, you’re going to see long growing in the low-double-digit rate. But that something just to be seeing subject to macro, I mean to GDP and to inflation, because we are facing in this area not only in Chile globally low inflation and so we respect this under bank to be able to take the inflation rate again to the 2% area that still to be seen.
Operator
Thank you. And the next question comes from the line of Phillip Bench with BBS.
Your line is now open.
Phillip Bench
Good afternoon, everyone. Thank you for the presentation.
My question is really related to your digital initiative which clearly making good progress. Can you share with us the percentage of retail transaction that being done through digital channels today compared to those in branches and where do you think this could go to in the next two or three years?
And related to that in one of your slides you showed that cost assets last year was 2% through your digital initiative, do you see this coming down much lower and if so to what level? Thank you.
Emiliano Muratore
Yes. Today, our thankful customer launch for example in online channel is the 22% exactly for all our channels in consumer for example and later a very important question that that launch in online channel are 60% higher in that spread.
So that means obviously is very different for us. And we see that these numbers maintain in the future even improved, but you know you can know exactly where it is the future because the large we are changing everyday and we are innovating a lot of that time.
So we are now happy to the numbers and we are working in improvement. And on the cost asset.
Claudio Soto
On the cost asset I mean our asset base structure grow more and so we think cost will grow below asset at least this year following next year if our forecast come true so the cost asset should improve not only the efficiency and just to kind of reinforce that Muratore said. And so in terms of consumer loan amounts reflect 20% but in terms of operations reflect 40%.
Loans in Carolina are little smaller, but they have 50% higher spread. So just trying to show you the difference at the branch that tend to sell larger loan or it work more with the client, there is more price and negotiation while online they tend to be very quick good spread, but lower amount.
Phillip Bench
Right. Thank you.
That’s helpful. Just a quick followup, you may have mentioned that the branch reduction of 11% last year was very impressive.
Is that go from more broad closure going forward?
Emiliano Muratore
More than branch closure, branch confirmation, we have some branches for example where basically payment centers which we want to reduce; we want to continue growing the workup there. So as we mentioned in the presentation, we want to open next five years 100 new branches maybe this year 20 more branches.
As Robert said, it's more than a transformation model. The branches and we can our business center, our bachelor business center, and that area we are working in that area, two or three years.
Operator
Thank you. Now I am showing no further questions at this time, I’d like to turn the conference back over to Mr.
Robert Moreno with closing remarks.
Robert Moreno
Thank you very much for being with us today and we’ll talk to you in the next call. Thank you.