Banco Santander-Chile - Q1 2023

Transcript

Operator (participant)

Good afternoon, welcome to Banco Santander-Chile's first quarter 2023 results conference call. We are joined by Emiliano Muratore, Claudio Soto, Cristian Vicuña, and Robert Moreno. I will hand over to Emiliano to begin the presentation.

Emiliano Muratore (CFO)

Good morning, everyone. Welcome to Banco Santander Chile's first quarter 2023 results webcast and conference call. This is Emiliano Muratore, CFO, and I'm joined today by Robert Moreno, Head of Investor Relations, Cristian Vicuña, Head of Strategic Planning, and Claudio Soto, Chief Economist. Thank you for attending today's conference call. Today, we will be discussing the trends and results seen in the first quarter. While tight monetary policy continues to squeeze margins, our successful digital strategy and customer-oriented product offering continues to drive strong results from our business segments. To begin, I invite Claudio Soto to give us an update on the macro scenario beginning on slide 3.

Claudio Soto (Chief Economist)

Thank you, Emiliano. The government continues its government adjustment process after the overheating of 2021. GDP grew 2.5% in 2022 and contracted 0.5% in the 1st quarter of this year in response to tight financial conditions and a contracted fiscal policy. High interest rates have drained away excess liquidity from past pension fund withdrawals. The labor market remains relatively weak, with low employment growth and an increasing unemployment. Real wages have contracted due to high inflation. Political uncertainty fell after the referendum that rejected the constitutional proposal of the Constitutional Convention last year. However, it remains relatively high as compared with the solid levels. In this context, we expect that GDP will have a mild contraction this year of around -0.25% before returning to trend next year.

Domestic demand will remain subdued, while the external sector will benefit from the reopening of China. Overall, the outlook for activity is better than what we had previously estimated. Domestic demand and better terms of trade will help recovering the external accounts. During the first quarter, the trade balance reached 7.5 billion surplus, an historical record. For the year, we expect a current account deficit of 4% of GDP, down from the 9% of GDP deficit of last year. High copper prices, lower political uncertainty, and the global depreciation of the dollar have strengthened the Chilean currency. Inflation, although remains elevated, are going to fall in line with our past forecasts. March CPI increased 11.1% year-over-year, and during the second quarter, CPI annual changes should reach a single digit.

The slackness of the economy, the appreciation of the currency, and the fall of fuel prices will keep pushing down inflation, which we expect will be running at 5.1 year variation by the year end. The central bank has kept its monetary policy rate at 11.25%. Although the last inflation report had a relatively hawkish tone, we expect that the conditions for an easing cycle will be met at the beginning of the third quarter as the fall in core inflation becomes entrenched. Given the high level of the monetary policy rate, once the board begins cutting, they will proceed at a fast pace. As a result, we expect the monetary policy rate to finish the year between 7.5% and 8%, above our previous estimates.

Our baseline scenario assumes that the proposal for a new pension fund withdrawal that is currently being discussed in Congress is not approved. On page 5, we have some of the reforms that are in the agenda of the government. One of the most important ones, the tax reform, was rejected in Congress last March. Currently, the government is trying to build an agreement for a new tax proposal. In the meantime, the discussion for increasing the mining royalty has advanced. The pension reform is still pending and should be announced during the second semester. The reduction in the number of weekly hours from 45 to 40 was approved during March. The new regulation introduces some more flexibility in the labor market and contemplates a five-year transition for the hours reduction. This week, the new interchange fee for credit and debit cards were officially published.

The transition from the current fees to the new ones will be gradual and will start in six months' time. Also, this year, the government has relaunched the FOGAPE scheme for SMEs and a FOGAPE scheme offering state guarantees for the first-time mortgage buyers. Last week, the government announced a new national strategy for lithium involving the participation of both public and private companies, the use of greener technologies, and looking to add more value-added in the production process. Finally, the constitutional process has continued as scheduled. The expert commission is preparing a preliminary draft for a new constitution that should be sent to the Constitutional Council in June.

The members of this council will be elected on May 7th. The final text will be subject to a referendum with mandatory participation on December 17th, 2023.

Cristian Vicuña (Chief Strategy Officer and Head of Investor Relations)

Thank you, Claudio. In my presentation in page five, six, I would like to start first by reviewing an update on the bank's strategy. Our purpose, like the rest of Grupo Santander's, is to help people and business prosper with the mission of being the best financial services company, acting responsibly and gaining the loyalty of our clients, shareholders, collaborators, and communities. Our style of doing business is simple, personal, and fair. Our day-to-day behavior with all the stakeholders is summarized by the TEAMS acronym. Where do we envision ourselves by 2026? We see ourselves as the leading financial services company in Chile for our clients, collaborators, communities, and shareholders.

We will focus on being obsessed for our clients, their progress, and their experiences. For our collaborators, we seek to maintain a committed and high-performance team. For the community, we expect to be leaders in social and sustainable finance. Finally, for shareholders, we seek attractive and predictable returns and to be the leading bank in terms of profitability, efficiency, and recurring risk-free revenues in Chile. We want to achieve this plan through four pillars of our strategy under the Chile first. First, to be a digital bank with branches, a digital bank with WorkCafés, to reach customers with state-of-the-art technology and the best level of service. Second, with specialized and value-added services for our corporate and wealth management businesses that focuses on value-added transactional trade and advisory products and services. Third, always searching for unexplored growth opportunities.

We want to break paradigms in the banking sector, finding new business opportunities and leading the sustainable transformation of our clients. Finally, a key enabler, an organization that is agile, collaborative, and with a high performance and diverse cultures, where exceptional people can advance based on merit. As we can see on page 9, we are also fully committed to diversity. For example, as of April, we are the Chilean company with the highest percentage of women among the board, among all firms included in the IPSA index. Moreover, 56% of the bank's total employees are women, and the percentage of women in the top managerial positions has increased from 18% in 2019 to currently 32%. Another key innovation launched in the first quarter of 2023 was the WorkCafé Expreso.

In these newly fully transactional branches, it takes on average less than 5 minutes to perform a transaction with the highest level of security for our customers and the state-of-the-art technology with facial recognition and digital totems. All of this combined with the great service experience of our WorkCafé style. We have opened 4 WorkCafé Expreso centers in Viña, Rancagua, Santiago Centro, and Las Condes, where we serve over 50,000 people weekly. The NPS of these branches is an eye-opening 96. The WorkCafé Expreso will allow us to keep updating our branch network while improving waiting times on NPS. At the same time, other traditional branches surrounding the WorkCafé Expreso will be 100% dedicated to value-added services. Currently, 28% of Banco Santander-Chile's branches do not perform transactional services and are completely paperless, improving efficiency and productivity.

Loan and deposit volumes increased 22% year-over-year, in the same indicator per employee rose 9.3% in the same period. On page 12, we show how Life continues to shine, with clients growing 17% year-over-year, total revenues generated by Life increasing by 40%. Moving on to page 13, we show how Life's success has permitted the bank in a short period to achieve a market share of approximately 25% of checking account balances in Chile. Our aim is set on the large pocket of sight on saving account deposits. This market in Chile totals $24 billion in deposits, in which we only have a 1.8% share of savings accounts and a 7.7% share of the sight account market.

In order to capture a greater share of these markets, in the first quarter of 2023, we launched Más Lucas. This is a 100% digital product that includes an interest-bearing sight account plus a saving account. The onboarding process is a 100% digital, there are no passwords, only facial recognitions. The account number is very easy to remember, Chile's country code 66, plus your national ID number. This account has no fixed or variable costs and accepts deposits for up to CLP 5 million. Moving on to page 15, we show how the success of Getnet continues.

Our acquirer has sold more than 177,000 POS, with a 17% market share in points of sales and a 7% in total purchases, according to our estimates. Fee totaled more than CLP 10 billion in the quarter and are growing more than 200%. In the first quarter, we also introduced a new specialized attention model in our middle market segment for the agriculture, automotive, and multilatina sector, which encompasses Chilean middle market corporations seeking to internationalize. This new specialized attention model seeks to enhance our growth and market share in these highly attractive sectors of the Chilean economy, which are intense not only in lending, but also non-lending products as well. Another point to highlight was the progress made in our commitment to the objectives of sustainable finance and the environment.

We have a market-leading range of sustainable products that help care for climate change with Santander Verde. In 2022, we managed to support numerous customers with sustainable operations in our business and corporate banking businesses. In total, in 2022, we dispersed sustainable trades, both social and environmental, for an amount of $230 million, 390% more than in 2021, making us the leader in these products in Chile. We believe that this will be one of the fastest-growing areas in the coming years. The success in sustainable finance has also been achieved in all our responsible banking objectives, as shown on the next slide. We achieved our goals in gender, environmental, social, and educational targets. This has resulted on being ranked the number one in the main sustainability indexes, such as Sustainalytics and MSCI.

We are also the only Chilean bank included in the Dow Jones Sustainability Index for global emerging markets. In terms of NPS, we continue to have an indicator above the average of our main peers. In the first quarter of 2023, we did see a slight dip in our results. This was due to the ongoing changes in our app to improve cyber security. We are fully committed to return to the number one spot. The WorkCafé Expreso should be key, as the improvements of these models in terms of NPS at the branch level are substantial. Now, I will turn it to Robert, who will discuss our results.

Robert Moreno (Manager of Investor Relations)

Thank you, Cristian. Moving on to page 22. Net income in the first quarter totaled CLP 136 billion, decreasing 42% year-over-year and increasing 33% quarter-on-quarter. In the quarter, the bank's margins continued to be negatively affected by the high interest rate environment. The bank's ROE in the quarter reached 13%. On the other hand, our business segments continued to show solid growth with an important expansion in net interest income and fees, with costs and risks under control. The net contribution from our business segments that excludes the corporate center and ALM increased 30% year-over-year. The results of Santander Corporate and Investment Banking, or CIB, have remained impressive, increasing 76.7% year-over-year. Net contribution from the middle market of corporates increased 31% year-over-year.

Both of these commercial segments experienced an important rise in deposit spreads, as well as high growth of fees and treasury income. The results from retail banking rose a 10.5% year-over-year, also driven by rising deposit spread and greater fee income, coupled with higher productivity levels. In terms of loan growth, in the first quarter, loan growth decelerated as the economy feels the effects of tight monetary policy, slowing inflation rates, and depreciation of the peso. During the quarter, the CIB segment decreased 1.2% Q and Q, influenced by translation gains or translation losses caused by the 6.5% appreciation of the peso in the quarter. This also explains the 1.0% Q and Q decrease in loans in our middle market segment.

As mentioned during the quarter, we launched specialized attention models for the agriculture, automotive, and multilatina sectors to enhance loan and income growth in the sector. Retail banking loans grew 1.1% in Q and Q, led by consumer loans, which in turn were driven by good demand for credit card and auto loans. Origination of new mortgage loans has decelerated with the slowdown of inflation and high interest rates. As for SMEs, the demand for new loans remains subdued as clients continue to pay back the FOGAPE loans disbursed in 2020 and 2021. A new FOGAPE, FOGAES program was launched by the government in April to support mortgage growth to households and lending to SMEs. We maintain our guidance of year-over-year loan growth of 5% to 6%. Liquidity levels remained strong in the quarter.

The bank's total deposits increased 3.7% Q and Q. The increase was driven by time deposits that increased 9.9% Q over Q. Bonds issued increased 17% year-over-year and 2.3% for the quarter. During the first quarter, the bank has issued various bonds in the local bond market in order to take advantage of the inverted yield curve to control funding costs. The bank's liquidity coverage ratio, which measures the percentage of liquid assets over net cash outflows at the end of the quarter was 182%, well above the minimum.

At the same date, the bank's net stable funding ratio, which measures the percentage of illiquid assets financed through stable funding sources, reached 113%, also well above the current legal minimum set for this ratio. In terms of margins, the bank's NIM in the quarter remained stable Q over Q at 2.2%. The variation of the UF continued to decelerate while short-term interest rates remained high. Both of these factors continued to weigh on the bank's NIM. As shown on this slide, this is mainly a phenomenon that affects our non-client NIM or the net interest margin from our ALM activities, including the UF GAAP and our liquidity. The client NIM, which is defined as NII from our business segments over interest-earning assets, has increased as deposit and loan spreads have risen.

On slide 27, we give further insights into our margins for the rest of 2023. For every 100 basis points decline in inflation, our NIM falls on average by 15-20 basis points, and for every 100 basis points rise in the average monetary policy rate, our NIM falls by around 30 basis points. We have updated our base case scenario for 2023 with our latest internal forecast by increasing the expected average monetary policy rate from 9.2% to 10.4% this year, and the UF inflation of 5.1%. Under this base case scenario, the bank's NIM in 2023 should reach 2.4%. Moving on to asset quality on slide 28.

The rise in the NPL ratios to 1.9% is gradually returning to pre-pandemic levels as household liquidity gradually returns to normal and the economy feels the squeeze from high interest rates. There has been no reversal of the voluntary provisions. The coverage of NPL as of March 2023 reached 186%. As you can see on slide 29, these overall positive asset quality indicators led to a cost of credit of 1.2% in 2023, in line with our guidance for this year. On slide 30, we move on to non-net interest income revenue sources, which continue showing exceptional growth trends. Income from fees and treasury rose 33.8% year-over-year and 20% Q and Q, driven by higher usage of products in all segments.

We expect these trends to continue for the rest of the year. As shown on slide 31, we can see the Bank's efforts to continue increasing productivity and to control costs. Operating expenses decreased 1.2% year-over-year and 8% Q-over-Q. The Bank continues ahead with its $260 million technology investment plan for the years 2023 to 2025. Because of these investments, we're expecting costs to fall in absolute terms in 2023. Moving on to slide 32. We also observed a positive evolution of our capital ratios. At the end of the first quarter, the Bank recorded a core equity ratio of 10.5%. It is important to point out that in March 2023, the Bank changed its policy for provisioning of dividends.

In March, the bank provisioned the full dividend, which was paid out in April 2023, equivalent to 60% of 2022 earnings, following the board's approval of said dividend. Last year, the full impact of the dividend was recognized in April, therefore, the two equity bases are not entirely comparable. As a result, value added for our shareholders, measured as the growth in book value plus dividends dispersed, increased 23.7% year-over-year. On slide 33, we conclude with some guidance. Despite 2023 being a somewhat more challenging year on the macro front, we believe our strong client activities will continue to expand. Coupled with this, we will continue with our investment program, which focuses on digitalization and automation. We also expect client growth to remain robust, led by Santander Life, Getnet, and now Más Lucas.

In terms of loan growth, we expect mid-single-digit growth with a focus on all segments. NIMs should contract to 2.4% with solid client NIMs. As the monetary policy rate comes down, we expect NIMs to rebound. Non-NII growth should surpass 20% this year on the back of strong client acquisition and usage figures. Cost control will be a major focus, and we expect a decrease of low single digits in our total cost base. Asset quality should deteriorate somewhat, but the cost of risk will remain at a manageable level of 1.1%-1.2%. In summary, we start the year with ROEs in the low teens. As the year progresses, ROE should improve for the full year. For the full year, we are guiding an ROE of 15%-17% lower than the initial guidance.

This is mainly due to higher average short-term interest rates, partially offset by strong client profitability numbers. Our long-term ROE ex-expectations remain unaltered at 17%-19%. With this, I finish my presentation, and now we will gladly answer any questions you may have.

Operator (participant)

Thank you. We will now move to the question and answer section. If you would like to ask a question, please press star two on your phone and wait to be prompted. Our first question comes from Juan Recalde at Scotiabank. Your line is open. Please go ahead.

Juan Recalde (VP)

Hi. Thank you for taking my question. My question is related to the NIM. The NIM expectation has declined and now you are guiding for around 2.4% NIM for 2023.

I was wondering what kind of NIM can we expect for 2024. I'm just trying to get a sense of what a more normalized level of NIM can be. Thank you.

Emiliano Muratore (CFO)

Yes. Hello, Juan, thank you for your question. I mean, a more normalized NIM would be like around 4%. That's when monetary policy, it's like on a normal level. We don't see that happening before 2025, maybe. In 2024 would be like in the middle from where we are this year at around 2.4-2.5%. Next year being around 3.3-3.5%, all depending on the pace and the path of the monetary policy rate. That would be like the trend going forward.

Juan Recalde (VP)

That's helpful. Thank you for the comment.

Operator (participant)

Thank you. Our next question comes from Neha Agarwala from HSBC. Please go ahead.

Neha Agarwala (SVP)

Hi, thank you for taking my question. Could you please explain once again what led you to reduce your guidance for ROE for this year? Is it just the interest rates which are higher than expected previously or is it something else? Regarding the NIM from the market, when do you think that will normalize, be close to zero, if nothing else, by early 2024, it seems right now. Could you please confirm? Thank you.

Emiliano Muratore (CFO)

Yes. Hello, Neha. Thank you for your question. The adjustment in NIM guidance basically is like the, if you look at the heat map, the way we call that chart on the previous call, basically what we did is we moved to the new average monetary policy rate and the new inflation. Let's say that it's just related to the delay in the interest rates cuts that we were expecting before, and now we're expecting a bit later. There is not more than updating to the new macro scenario we are expecting now.

In terms of the non-clients NIM going to neutral, again, will depend on the level of interest rates and according to the pace we are expecting for the central bank to cut rates. That should be more around the second half of next year.

Neha Agarwala (SVP)

Perfect. Any regulatory changes that we should expect this year or next year that could impact the bank? Thank you so much.

Emiliano Muratore (CFO)

There is nothing in agenda. I mean, now we have the interchange fees already known and the transitioning period announced. There are no regulatory issues being discussed at this moment that we envision that could affect us in the coming months.

Neha Agarwala (SVP)

Thank you so much.

Operator (participant)

Thank you. We have a question from Tito Labarta from Goldman Sachs. Please go ahead.

Tito Labarta (VP)

Hi. Good morning. Thank you for the call and taking my questions. A couple questions. Just to understand a little bit, the ROE evolution and the timing of when you expect the rates to come down, because, you know, as long as rates remain high, the ROE should be relatively low, you know, just given the guidance. Should we expect sort of first half of the year you will be below that ROE guidance of 15%-17%, and then maybe 3Q and 4Q, you start to go above that? Could you clarify when do you expect rates to start to come down in Chile? My second question is on your fee income, which, you know, very strong. How... Is that growth that we're seeing sustainable?

How long can you continue to grow the fee income at that pace? Thank you.

Emiliano Muratore (CFO)

Hello, Tito. Thank you for your question. I mean, regarding the timing for interest rate cuts, our base case scenario is assuming a cut in July. I mean, a small cut, but the cutting cycle starting in the third quarter and then continuing during the year. With that path, the trajectory of ROE will be the one you mentioned. I mean, basically first half below the average for the year and third quarter starting to rebound together with the NIM when the central bank starts the relaxing cycle and keep going up during the first fourth quarter as the additional cuts are made.

Cristian Vicuña (Chief Strategy Officer and Head of Investor Relations)

Tito, this is Cristian. Regarding the fee question, of course, this year is spectacular for us with more than 20% growth or over 15%-20% growth. It is looking pretty good. This is very linked to our customer growth base and the performance of our Getnet initiatives and Life initiatives. For the upcoming years, we of course expect to grow strongly, hopefully better than the market, but I'll say that 20% figures for the long run are not what we expect normally. We'll say larger than 10%, but not 20.

Tito Labarta (VP)

Okay. That's helpful. Thank you so much.

Operator (participant)

Thank you. Our next question comes from Carlos Gomez-Lopez from HSBC. Please go ahead.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

No question. Thanks for the answer. Thank you.

Operator (participant)

Okay. Thank you. Our next question comes from Daniel Mora at Credicorp. Please go ahead.

Daniel Mora (Senior Equity Research Analyst)

Hi. Good morning, thank you for the presentation. I have a couple of questions. The first one is regarding the NIM. You already explained the decrease in the guidance, but I would like to understand what will be the strategy of the derivatives that are currently impacting the net interest income, I mean, the hedge of interest rates. Are you waiting for them to decrease, the decrease of rates will improve the position of the derivatives, or are you gonna wait for the expiration date of these assets? What is the strategy there? The second one is regarding fees and very strong performance in the first quarter.

Without considering the effect of the new regulation of interchange fees, do you expect this to continue in the coming years, the current pace of growth? I would like to understand what is in the other fees in the first quarter, because we observe a strong increase in other fees. Thank you so much.

Emiliano Muratore (CFO)

Thank you, Daniel, for your question. I mean, regarding the derivatives strategy, I mean, definitely that portfolio will have the margin improving when interest rates start to fall. Today, as you saw, our expectation for monetary policy average for the year is, like, 10.4%. When you look at what the market is pricing, it's slightly higher than that, I mean, like, 10.6% or so. That's why we are not, like, logging in that or fixing that level because we do expect that the trajectory will be slightly lower and faster than what the market is implying, and that's why the strategy basically is, like, to wait to rates to fall and to follow our path, which is now slightly lower than what the market was expecting.

I mean, late last November, the market was on the opposite side, I mean, was implying a more dovish trajectory to our view, in that moment, we closed part of that sensitivity, securing a more dovish path. Today, we don't see that opportunity because we, our scenario is on the lower part compared to what the market is expecting. On the fees, I leave it to Cristian to comment.

Cristian Vicuña (Chief Strategy Officer and Head of Investor Relations)

Hi. Regarding the fees, similar to the previous question, we expect a very strong 2023, to grow a little slower but better than the market. Probably something a little higher than 10, but not the same 20 that we're expecting for the year. Regarding your question on the other fees, it's mostly related to corporate investment bank advisory fees on M&A and debt structuring.

Daniel Mora (Senior Equity Research Analyst)

Perfect. Thank you so much.

Operator (participant)

Thank you. Our next question comes from Olavo Artuso at UBS. Please go ahead.

Olavo Arthuzo (Equity Research Analyst)

Yes. Thank you guys for taking my question. Actually, I just have one related to the operating expenses, because the bank revised downwards the guidance for this year with the expectations for a negative growth in costs. Could you please just clarify a little bit more on the drivers behind this performance? If you could add to it, if we could expect like a drop of 1% to 2% or maybe 5% of the operating expenses, that would be helpful. Thank you.

Emiliano Muratore (CFO)

Hello, Olavo. Thank you for your question. I mean, no, I mean, it's not like -5%. I mean, it's like more on the low single digits fall that we are expecting. The drivers are the combination of things. I mean, first, all the fraud control that we are doing, I mean, all the fraud expenses that we have on the bank are in the other operating expenses, and that's something that we have been making good progress and that number has improved and is going to help the loan growth or the loan cost fall for this for this year.

All the work we are doing in the branch networks, optimization and also the transformation. I mean, you saw the work of the WorkCafé Expreso initiative, which is also, apart from driving NPS up because clients are also happy, it's a very efficient way to deal with the transactionality coming for clients. In general terms, all the digitalization of the bank, all the Más Lucas and all the Life initiatives we are doing are taking productivity up by having new client growth, new client acquisition and client revenues and having costs under control. I don't know, Cristian, if you want to add on that.

Cristian Vicuña (Chief Strategy Officer and Head of Investor Relations)

I would say that we expect these new initiatives to keep us from allowing us to update the branch network as a whole, and we see further improvements in how we deploy our strategy.

Olavo Arthuzo (Equity Research Analyst)

Okay. Thank you very much, guys.

Robert Moreno (Manager of Investor Relations)

Thank you. Our next question comes from Yuri Fernandes at JPMorgan. Please go ahead.

Yuri Fernandes (Executive Director)

Thank you, guys. I have a first one regarding expenses. It has been very good and have been delivering on these closing branches, reduce a little bit the headcount. We are seeing a super strong growth on fees, right? I think part of that fees, like some administrative expense, they should be somewhat related, right? Like technology, software, like, I don't know. My question is how sustainable is for you to keep such a good level of G&A growth? I understand the guidance is negative for this year. My question is, should we see more investments in 2024?

Like, how comfortable are you that, you know, this year is not a one-off because you kind of built some provisions on costs last year, and we should see, you know, like a pickup in the coming years? That's the first one. I have a follow-up regarding the margins. Just a curiosity on the FCIC instruments. I think the FCIC they explain part of your margins, right? Like a part of your strategy on asset liability management. When your FCIC instruments, they should mature, I don't know. I think there are different mature dates depending on the program. So not sure if March, not sure if this is July, 2024. So just trying to understand when should we start to see, you know, like your FCIC instruments getting paid. Thank you.

Emiliano Muratore (CFO)

Okay. Thank you, Yuri, for your question. I mean, regarding expenses, I mean, definitely you should not expect costs falling in the following years. I mean, this is. In that sense, this year is going to be a one-off. Our usual target and what we have done basically in every year, I would say in the latest period, is to have costs growing below inflation. I mean, that is like the starting point for our strategy. Inflation will be in the mid to low single digits going forward. That's where we want cost to be. The composition of that cost will be shifting to what you mentioned.

I mean, more on amortization of technology investment and digital initiatives. I mean, and taking advantage of the improvements in the footprint of the branch network, because we'll be having like less square feet. This strategy of WorkCafé Expreso will help us to reduce the square feet of branches, and that will help in that cost. Also all the digitalization will increase the productivity per employee. Yes, I mean, in that sense, it's a one-off the performance in cost for this year. It's part of the discipline we think we need to have with the revenue pressure we are having coming from margins. This is going to be a tight year on that, and we are delivering on that.

Going forward, we should expect to go back to a more normalized pace of cost growth, slightly below inflation. Regarding the FCIC, I mean, the FCIC basically matures half of it in April and half of it in July next year. As you said, I mean, considering our strategy that basically has that liability floated, the maturity itself won't have a significant impact for us because basically we are already paying the floating cost of that. That we will be benefiting from interest rate going down, starting the same day that the interest rates start to fall.

When the maturity happens, considering that we are already floated at the level of rates that will be at that moment, I mean, I don't know, let's say 6%, 7% or whatever % we have in mid next year. For us, it won't have an impact because we are already with the liability at that level. I don't know if I'm if I explained the situation.

Yuri Fernandes (Executive Director)

If I understood, like the liability is floating, but your assets, they are not floating for that, right? You bought, I don't know, fixed rate instruments on that. Like the materials... Correct me if I'm wrong, but maybe the maturity of the FCIC should be a tailwind for your margins. No?

Emiliano Muratore (CFO)

No. It's not, this is not going to be a significant tailwind because we already have... As you said, I mean, we are talking on the liability side. We have the assets repricing in this context. We are already seeing a repricing on the asset side that will help us that.

Robert Moreno (Manager of Investor Relations)

Yeah. Yuri is right. It's a tailwind in a sense that rates come down, it's a tailwind. Okay? And when it expires, it should be a tailwind if depending where rates are. Okay? In itself, today, it's not. You see? It'll be a tailwind when rates start to go down. Okay?

Yuri Fernandes (Executive Director)

Okay. No, perfect, guys. Thank you. If I may, a third one, just touching on asset quality, if you can provide some color for us, like the trends we are seeing, like some worsening on consumers. Just like your overall view on asset quality. Thank you.

Emiliano Muratore (CFO)

Yeah. The asset quality, as you saw on the slide, basically we are normalizing in terms of NPLs and impaired loans. Impaired loans is still below pre-pandemic levels. That's what we see for the year. I mean, there's 1.2%, 1.1%, 1.2% cost of risk for the year. It's consistent with having a similar to pre-pandemic levels of asset quality. We are confident that we can be there. We still have the voluntary provisions as a way to cope with a more deteriorated scenario in case that happens.

That, as you saw, first quarter cost of risk was at 1.2%, and we think that we can keep at that level for the rest of the year, which is definitely a higher level of cost of risks to the one we had this last couple of years. Consistent with a more normalized scenario that in a certain sense is a bit of the flip side of the slower pace of rate cuts that we are seeing, consistent with a not so weak economic scenario. That is also, let's say, reflected in the asset quality, which is normalizing to pre-pandemic, but not in an extreme or harder way.

One thing that has been clarified to us regarding asset quality this year is that the adjustment in the consumer portfolio of the new re-regulation that was being discussed, it's been delayed. We don't expect this happening in 2023. At least not before late this year, I mean, maybe next year.

Yuri Fernandes (Executive Director)

No, no, that's good news, guys. Thank you, and congrats on the cost control.

Emiliano Muratore (CFO)

Okay, thank you.

Operator (participant)

Thank you. Our next question comes from Ewald Stark from BICE Inversiones. Please go ahead.

Ewald Stark (Analyst)

Can you hear me? Thanks for the presentation. I have two questions. The first one is related to NIMs. Given the monetary policy is expected to stay higher than previously expected, how do you expect NIM to behave in 2024, a year from now, in a scenario of higher monetary vehicle? I mean, with an upward slope and some level of repricing of the portfolio. NIM visibility seems affected in the previous months and going forward, one would expect that the NIM should recover as the portfolio reprices, adjusts to the monetary policy rate.

Robert Moreno (Manager of Investor Relations)

Okay. Yeah. What you said is correct. We have some tightness in the NIM because of the high rates. Effectively. You can see some of this already in the client NIM. The client NIM is hard to forecast, but you can see that our client NIM, which is basically the net interest margin of our business segments, okay, is rising because they're repricing their assets, okay. You know, we're getting hurt more by the increasing cost of deposits, but assets are slowly beginning to reprice. Spreads are rising. Even though loan growth isn't helping too much. For that repricing, you need quicker loan growth. There has been definitely an increase in loan spreads and also deposit spreads. Okay.

This is important that, you know, every money we get in checking accounts, the spread rises with rates. Those are both tailwinds to our margin. Effectively, next year, a little bit what Emiliano said before, you know, as rates go down, you know, probably Our funding base will get cheaper, the assets will be still repricing. Then obviously, you still have the headwind of lower inflation. All in, effectively, NIMs should bottom out if everything goes as we expect in the second or third quarter, and then slowly begin to recover next year, as Emiliano said, 3.5, around there. Then in 2025, probably reach equilibrium rates and inflation, right? Should be back to our historical levels of around four.

Ewald Stark (Analyst)

Okay, perfect. The second question, it's about operating expense. You know, you said previously that you expect a stronger full operating expense or operating expense, maybe growing at 0% or even negative. In the first quarter, operating expense grew by 13%. How do you arrive to the consolidated figure if the remaining quarters are here?

Emiliano Muratore (CFO)

Yeah. As you saw, I think that when we talk about total expenses, we are including other operating expenses. When you factor that in, that total number fell like 1.2% in the first quarter. I think that that is like the line that you have to factor in. That's what we talk about total expenses, including other operating expenses.

Robert Moreno (Manager of Investor Relations)

it's personnel-

Ewald Stark (Analyst)

Okay, perfect.

Robert Moreno (Manager of Investor Relations)

... depreciation and others, okay?

Emiliano Muratore (CFO)

In the first quarter, that number fell 1.2%.

Ewald Stark (Analyst)

Sorry, what line of operating expense?

Robert Moreno (Manager of Investor Relations)

When we talk about our operating expenses, we're tying it just as they show up in the financials now, which is personnel, administrative, depreciation and amortization, and other operating expenses. The big item that's falling is other operating expenses, which has a lot to do with the improvements we have made in cybersecurity and the lower cost of our cyber fraud insurance. It's also an interesting-

Ewald Stark (Analyst)

Mm-hmm.

Robert Moreno (Manager of Investor Relations)

-reduction in personnel. Okay? Really perfect. Yeah. I'm okay. Thanks.

Emiliano Muratore (CFO)

Thank you.

Operator (participant)

Thank you. We have a question from Ernesto Gabilondo from Bank of America. Please go ahead.

Ernesto Gabilondo (Director of LatAm Financials)

Thank you. Hi, good morning, Emiliano and Robert. Most of my questions have been answered, so just have a couple of questions. The first one is a follow-up in your net income guidance or your ROE guidance. When we incorporate the ROE of 15%, 17%, this implies earnings contraction between 15%-25% this year. I just wanted to double-check if that sounds reasonable. I believe, last time you were expecting a modest earnings contraction. As you have explained it, the delay in lower interest rates has mainly be the key reason for lowering the guidance. My second question is on your effective tax rate. We have seen the banks have benefiting from high inflation before having lower effective tax rates.

Now that we're thinking of a more normalized inflation level, how should we be thinking about the effective tax rate in the next years?

Emiliano Muratore (CFO)

Thank you for your question, Ernesto. I mean, your assumption, I don't call it, like, reasonable, but it's consistent with ROE, the guidance to be around, like, 15%, fall in net income. Yes, I mean, basically the biggest driver to our adjustment in guidance of NIMs and ROE has to do with the monetary cycle normalizing later than what we were expecting. We see this as a process of normalization of NIMs and ROE taking longer than we were expecting, and that's in term for 2023. We'll have a, let's say, an impact for one or two quarters of that delay.

In the third quarter, starting the normalizing process, and going forward and also being closer to normal in 2024 and definitely in 2025. The second, was?

Robert Moreno (Manager of Investor Relations)

Tax.

Emiliano Muratore (CFO)

tax. Okay. Yeah. Bob?

Robert Moreno (Manager of Investor Relations)

Yeah. Effectively as rates and inflation go back to normal, the tax rate should rise, okay. The ROE should also rise. Today we're paying, like, 12%-13% effective tax rate. There's different effects. You know, inflation is still high. The lower net income also lowers the tax. Effectively, by next year, if inflation is back to more lower single-digit levels, we should be going by I would say 2024, we should be roughly, you know, close to the 18% effective tax rate. 2025, probably around 21%-22%, and it should stay around there. Sorry, one quick thing. Regarding your first question, it's true that the net income falls, but we do see a slight rise in book value.

I think that's a key point to make that, we try to explain it a bit in one of the slides. Book value in, given the way rates and inflation are moving, which might have a negative impact on NIM, but in capital it's been positive. Our book value is growing, and I think that's means we're still creating value.

Ernesto Gabilondo (Director of LatAm Financials)

Perfect. Thank you very much, Emiliano and Robert.

Operator (participant)

Thank you. I'm not seeing any more questions. Perhaps I can hand back to Emiliano for closing remarks.

Emiliano Muratore (CFO)

Yeah. Robert, the floor is yours.

Robert Moreno (Manager of Investor Relations)

Okay. Thank you, everyone. This is a final note. After 30 great years, today is my last day at Santander Chile. I've decided to move on to other projects. I would like to thank investor and analyst community for your support. Cristian Vicuña, along with Raimundo and Claudia, will keep you guys covered. For me, it has been an honor to be your IR guide. Please feel free to keep in touch, and I'll be sending an email soon with my details. Thank you. Thank you, everyone. Bye.

Emiliano Muratore (CFO)

I want to publicly thank Bob for his commitment and his terrific job during these 30 years. Without any doubt, he made a huge positive impact on Santander Chile and the Chilean banking sector as a whole. He will be deeply missed. I wish him the best of luck in his new stage. On this emotional note, I thank you everyone for joining us today, and we look forward to speaking with you soon again.

Robert Moreno (Manager of Investor Relations)

Bye.

Operator (participant)

Thank you. That concludes the call for today. Thank you, and have a nice day.