FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

Commission File Number: 001-14554

Banco Santander Chile
Santander Chile Bank
(Translation of Registrant’s Name into English)

Bandera 140
Santiago, Chile
(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
 
Form 20-F         x                 Form 40-F      o
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes           o                        No             x

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes            o                       No             x

Indicate by check mark whether by furnishing the information contained in this Form, the Registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

Yes            o                      No             x

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A
 

 
 
 

 

Table of Contents

Item
 
1.
2Q2010 Earnings Release
2.
1H 2010 Financial Statements (Spanish)
3.
Translated Material Event

 
2

 
 

SECOND QUARTER 2010
EARNINGS REPORT
 
Investor Relations Department
0
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
email: rmorenoh@santander.cl
 
 

 
 

INDEX

SECTION
 
PAGE
     
SECTION 1: SUMMARY OF RESULTS
 
2
     
SECTION 2: BALANCE SHEET ANALYSIS
 
7
     
SECTION 3: ANALYSIS OF QUARTERLY INCOME STATEMENT
 
10
     
SECTION 4: CREDIT RISK RATINGS
 
17
     
SECTION 5: SHARE PERFORMANCE
 
18
     
SECTION 6: INSTITUTIONAL BACKGROUND
 
19
     
ANNEX 1: BALANCE SHEET
 
20
     
ANNEX 2: YEAR TO DATE INCOME STATEMENT
 
21
     
ANNEX 3: QUARTERLY INCOME STATEMENTS
 
22
     
ANNEX 4: QUARTERLY EVOLUTION OF MAIN RATIOS AND OTHER INFORMATION
 
23
     
 
CONTACT INFORMATION
Robert Moreno
Manager, Investor Relations Department
Banco Santander Chile
Bandera 140 Piso 19
Santiago, Chile
Tel: (562) 320-8284
Fax: (562) 671-6554
Email: rmorenoh@santander.cl
Website: www.santander.cl
 
Investor Relations Department
1
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 

 

 
 
SECTION 1: SUMMARY OF RESULTS

Net income increases 29.3% YoY in 2Q10
Quarterly results, Ch$ billion and change, %

* Core revenues = Net interest income and fee income. ** Includes Other operating income, Other operating expenses, income attributable to investments in other companies, income tax and net of minority interest.

In 2Q10, net income attributable to shareholders1 totaled Ch$138,823 million (Ch$0.74 per share and US$1.41/ADR2). These results represent an increase of 29.3% compared to 2Q09 (from now on YoY) and 16.6% compared to 1Q10 (from now on QoQ).

ROAE reaches 33.8% in 2Q10

With these results, the Bank’s ROAE in the quarter reached 33.8%. The Bank currently has one of the highest ROEs and capitalization levels in the Chilean financial system. As of June 30, 2010, the Bank’s BIS ratio reached 14.1% and its Tier I ratio stood at 10.3%. In April 2010, the Bank paid its annual dividend of Ch$1.37/share, 21.2% more than in 2009 and equivalent to 60% of 2009 earnings attributable to shareholders.

 

1 The results in this report are unaudited. 
2 Earnings per ADR is calculated using an exchange rate of Ch$543.09 per US$.
 
Investor Relations Department
2
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 
 

 
 
Total loans grow 3.8% QoQ in 2Q10 with loan growth seen in all products and segments

In 2Q10, total loans increased 3.8% QoQ and 8.8% YoY with loan growth in all products and segments. High yielding retail loans increased 3.9% QoQ and 11.4% YoY. The recent economic data for Chile show that economic growth is gaining momentum with a strong rise in investment and consumption levels. Unemployment figures have also been better than expected as well as wage growth. The negative impacts of the earthquake have also been lower than expected. The Bank’s market share increased in various products, especially in consumer banking, which has increased 100 basis points since the beginning of the year.
 

The funding mix improves and total deposits rise 6.1% QoQ. The Bank’s deposit ratings are upgraded in the quarter

In the quarter, the Bank also improved its funding mix. Total deposits increased 6.1% QoQ. This was led by a 7.2% QoQ and 35.2% YoY increase in demand deposits. Clients also began to increase their savings in time deposits as interest rates and inflation began to rise. In 2Q10, the Bank’s foreign currency time deposit were upgraded by Moody’s from A1 to Aa3 in line with the rise in the sovereign ratings of Chile. The ratio of loans to deposits3 also improved to 99.8% as of June 2010 compared to 104.3% as of March 2010.

 

3 Loans to deposits = (Loans - marketable securities that fund mortgage portfolio) / (Time deposits + demand deposits).
 
Investor Relations Department
3
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 

 
Net interest margin reaches 6.1% in 2Q10

In 2Q10, net interest income was up 5.8% QoQ and 7.1% YoY. The Bank’s net interest margin reached 6.1% in the quarter. The YoY rise in net interest income was mainly due to (a) the higher inflation rate as the Bank maintains long-term assets (mainly medium and long-term financial investments) that are indexed to the inflation rate, which are partially funded with nominal deposits, (b) loan growth and, (c) an improved funding mix.
 

Net provision expense decreases 41.7% YoY in 2Q10

In 2Q10, the Bank’s net provision expense decreased 20.3% QoQ and 41.7% YoY. This was mainly due to an improvement in asset quality, especially among individuals. Net provision expense for consumer loans decreased 12.2% QoQ and 53.8% YoY. The NPL ratio of consumer loans decreased from 3.08% as of March 2010 to 2.99% as of June 2010. The coverage ratio of consumer NPLs in the same period increased from 247.2% to 256.6%.

Fees income grows 3.2% YoY in 2Q10

Net fee income increased 4.5% QoQ and 3.2% YoY, led by brokerage related fees. Fees from insurance brokerage increased 89.9% YoY. The Bank’s success in selling insurance online, coupled with an increase in premiums on behalf of insurance underwriters has driven insurance brokerage fees. Fees from the securities brokerage grew 10.1% QoQ and 18.8% YoY. These fees were driven by the Bank’s new internet platform for stock trading and a greater demand for investing in the local stock market. These positive trends were partially offset by lower fees from checking accounts due to regulatory changes introduced in mid-2009 and short-term negative impact on fees in zones more affected by the February earthquake.

The adjusted efficiency ratio reaches 34.4% in 2Q10

Operating expenses in 2Q10 increased 13.5% QoQ and 13.3% YoY. This rise was due, in part, to a Ch$3,517 million one-time charge directly related to impairment charges on fixed assets as a result of the earthquake. This is partially offset by insurance compensation recognized in other operating income. Adjusting for earthquake related effects, the efficiency ratio reached 34.4% in 2Q10. The rise in costs was also due to a rise in personnel expenses, which is directly related to the increase in commercial activity, especially in retail banking.
 
Investor Relations Department
4
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 

 
Gross income, net of provisions & costs increases 33.3% YoY in 2Q10

The positive evolution of our business volumes, in line with our strategic objectives, the better economic environment and the normalization of inflation levels has resulted in strong recurring earnings in the quarter. Gross income, net of provisions & costs, a proxy for recurring earnings, jumped 8.1% QoQ and 33.3% YoY.

(Ch$ million)
 
2Q10
   
YoY Chg.
   
QoQ Chg.
 
Net interest income
    242,782       7.1 %     5.8 %
Fee income
    65,158       3.2 %     4.5 %
Financial transactions
    25,041       -15.6 %     -15.3 %
Provision expense
    (55,952 )     -41.7 %     -20.3 %
Operating expenses
    (117,987 )     13.3 %     13.5 %
Gross income, net of provisions & costs
    159,042       33.3 %     8.1 %
Other operating and non-operating income, net*
    (20,219 )     70.1 %     -27.9 %
Net income attributable to shareholders
    138,823       29.3 %     16.6 %
*
Includes Other operating income, Other operating expenses, income attributable to investments in other companies, income tax and net of minority interest.

Net income attributable to shareholders up 40.1% YoY in the first half of 2010

In the first half of 2010 (1H10), net income attributable to shareholders totaled Ch$257,927 million (Ch$1.37/share and US$2.60/ADR). The ROAE reached 31.2% and the efficiency ratio reached 34.1% in the period. Gross income, net of provisions and costs increased 23.6% led by a 14.1% rise in net interest revenue and a 32.5% decrease in provision expense.

(Ch$ million)
 
1H10
   
YoY Chg.
 
Net interest income
    472,180       14.1 %
Fee income
    127,509       2.2 %
Financial transactions
    54,614       -44.5 %
Provision expense
    -126,139       -32.5 %
Operating expenses
    -221,986       9.7 %
Gross income, net of provisions & costs
    306,178       23.6 %
Other operating and non-operating income, net*
    -48,251       -24.3 %
Net income attributable to shareholders
    257,927       40.1 %
*
Includes Other operating income, Other operating expenses, income attributable to investments in other companies, income tax and net of minority interest.
 
Investor Relations Department
5
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 
 

 
 
Banco Santander Chile: Summary of Quarterly Results

   
Quarter
   
Change %
 
(Ch$ million)
 
2Q10
   
1Q10
   
2Q09
   
2Q10 / 2Q09
   
2Q / 1Q 10
 
Net interest income
    242,782       229,398       226,611       7.1 %     5.8 %
Fee income
    65,158       62,351       63,145       3.2 %     4.5 %
Core revenues
    307,940       291,749       289,756       6.3 %     5.5 %
Financial transactions, net
    25,041       29,573       29,656       (15.6 )%     (15.3 )%
Other operating income, net
    19,951       6,065       2,928       581.4 %     229.0 %
Provision expense
    (55,952 )     (70,187 )     (96,037 )     (41.7 )%     (20.3 )%
Operating expenses
    (117,987 )     (103,999 )     (104,099 )     13.3 %     13.5 %
Gross income, net of provisions & costs
    159,042       147,136       119,276       33.3 %     8.1 %
Other operating & Non-op. Income 1
    (20,219 )     (28,032 )     (11,885 )     70.1 %     (27.9 )%
Net income attributable to shareholders
    138,823       119,104       107,391       29.3 %     16.6 %
Net income/share (Ch$)
    0.74       0.63       0.57       29.3 %     16.6 %
Net income/ADR (US$) 2
    1.41       1.25       1.12       25.9 %     13.0 %
Total loans
    14,582,467       14,043,570       13,401,486       8.8 %     3.8 %
Customer funds
    14,874,748       14,344,713       14,769,070       0.7 %     3.7 %
Shareholders’ equity
    1,665,326       1,683,104       1,497,019       11.2 %     (1.1 )%
Net interest margin
    6.1 %     5.8 %     6.0 %                
Efficiency ratio
    35.2 %     33.0 %     31.5 %                
Return on average equity 3
    33.8 %     28.6 %     28.7 %                
NPL / Total loans 4
    2.8 %     2.7 %     3.1 %                
Coverage NPLs
    93.3 %     97.1 %     75.7 %                
PDL / Total loans 5
    1.4 %     1.4 %     1.4 %                
Coverage ratio of PDLs
    193.3 %     189.8 %     173.0 %                
Risk Index 6
    2.7 %     2.7 %     2.3 %                
BIS ratio
    14.1 %     14.7 %     15.0 %                
Branches
    499       498       501                  
ATMs
    1,871       1,856       1,929                  
Employees
    11,133       11,155       11,391                  
1.
Includes Other operating income, Other operating expenses, income attributable to investments in other companies, income tax and net of minority interest.
2.
The change in earnings per ADR may differ from the change in earnings per share due to the exchange rate. Earnings per ADR was calculated using an exchange rate of Ch$543.09 per US$.
3.
Annualized quarterly Net income attributable to shareholders / Average equity attributable to shareholders.
4.
NPL: Non-performing loans, full balance of loans with one installment 90 days or more overdue.
5.
PDL: Past due loans, all installments and lines of credit more than 90 days overdue.
6.
Risk Index: Loan loss allowances over total loans, measures how much the Bank expects to loose on its loan book, according to its internal models and the Superintendency of Banks guidelines. Banks must have 100% coverage of the Risk Index.
 
Investor Relations Department
6
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 
 

 
 
SECTION 2: BALANCE SHEET ANALYSIS

LOANS

Loans grow 3.8% QoQ in 2Q10 with loan growth in all products and segments

Loans
 
Quarter ended,
   
% Change
 
(Ch$ million)
 
Jun-10
   
Mar-10
   
Jun-09
   
June 10/ 09
   
June 10 /
Mar. 10
 
Total loans to individuals1
    7,715,031       7,411,686       6,815,737       13.2 %     4.1 %
Consumer loans
    2,404,128       2,303,983       2,121,045       13.3 %     4.3 %
Residential mortgage loans
    4,360,496       4,219,733       3,970,896       9.8 %     3.3 %
SMEs
    2,210,170       2,143,885       2,097,592       5.4 %     3.1 %
Institutional lending
    330,980       313,079       291,867       13.4 %     5.7 %
Total retail lending
    10,256,181       9,868,650       9,205,196       11.4 %     3.9 %
Middle-Market & Real estate
    2,983,741       2,907,944       2,779,165       7.4 %     2.6 %
Corporate
    1,347,855       1,279,965       1,266,310       6.4 %     5.3 %
Total loans 2,3
    14,582,467       14,043,570       13,401,486       8.8 %     3.8 %
1.
Includes consumer loans, residential mortgage loans and other loans to individuals
2.
Total loans gross of loan loss allowances. Total loans include other non-segmented loans and exclude interbank loans.

In 2Q10, total loans increased 3.8% QoQ with loan growth seen in all products and segments. The recent economic data for Chile show that economic growth is gaining momentum with a strong rise in investment and consumption levels. Unemployment figures have also been better than expected as well as wage growth. The negative impacts of the earthquake on loan growth was also lower than expected. The Bank’s market share also increased in the quarter. The most important rise in market share has been in consumer and credit card loans, which increased 100 basis points since the beginning of the year to 26.8%.
 
Source: Superintendency of Banks of Chile

High yielding retail loans increased 3.9% QoQ. Loans to individuals increased 4.1% QoQ, led by a 4.3% increase in consumer loans. Notable was the 4.9% QoQ and 25.9% YoY increase in credit card consumer loans as the Bank continues to gain market share in credit card purchases. Residential mortgage loans increased 3.3% QoQ as long-term rates remained attractive and lower than expected negative impacts of the earthquake on this market.

Lending to small and middle-sized companies (SMEs)  and the middle market increased 3.1% and 2.6% QoQ, respectively. These segments were positively impacted by the rebound in economic growth with some areas still lagging in growth due to the earthquake, but this should begin to turnaround in the second half of the year. Factoring loans and lines of credit, the two highest yielding loans in these segments, increased 54.5% and 15.1% QoQ, respectively.
 
Investor Relations Department
7
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 

 
Corporate lending also showed positive growth in 2Q10, reflecting the stronger evolution of investment levels in the economy and the on-going reconstruction effort.

FUNDING

Strong growth of demand deposits. The Bank’s FX deposit rating are upgraded in the quarter

(Ch$ million)
 
Jun-10
   
Mar-10
   
Jun-09
   
June 10/ 09
   
June 10 /
Mar. 10
 
Demand deposits
    4,168,884       3,890,230       3,083,814       35.2 %     7.2 %
Time deposits
    7,193,376       6,818,939       8,342,396       (13.8 )%     5.5 %
Total customer deposits
    11,362,260       10,709,169       11,426,210       (0.6 )%     6.1 %
Mutual funds
    3,512,488       3,635,544       3,342,860       5.1 %     (3.4 )%
Total customer funds
    14,874,748       14,344,713       14,769,070       0.7 %     3.7 %
Loans to deposits*
    99.8 %     104.3 %     94.3 %                
Bonds
    3,245,162       2,872,100       2,622,275       23.8 %     13.0 %
*
(Loans - marketable securities that fund mortgage portfolio) / (Time deposits + demand deposits).

Customer funds increased 3.7% QoQ. The 7.2% QoQ increase in demand deposits in the quarter was mainly due our strategic focus on non-lending activities and the low interest rate environment. Clients also began to increase their savings in time deposits as interest rates and inflation began to rise. The ratio of loans to deposits also improved to 99.8% as of June 2010 compared to 104.3% as of March 2010. December 2009. Going forward, and as the Central Bank continues to rise rates, the growth rate of customer deposits should continue to increase with time deposits growth accelerating while the growth of non-interest bearing deposits should decelerate.

Mutual funds under management decreased 3.4% QoQ as clients moved away from short-term nominal rate fixed income funds as inflation rose and shifted towards time deposits as the Bank proactively funneled money to deposits in order to fund the Bank’s strong loan growth.

In 2Q10, the Bank’s foreign currency time deposit were upgraded by Moody’s from A1 to Aa3 in line with the rise in the sovereign ratings of Chile.

The Bank also continued to access the international bond market in order to maintain strong liquidity levels and to minimize interest rate risk by adequately funding the longer duration portion of the loan book with funding of similar characteristics. For this reason, bonds have increased 13.0% QoQ and 23.8% YoY. In April 2010, the Bank issued a US$500 million 3-year Floating Rate Senior Notes due 2012 in accordance with Rule 144A. This bond received an Aa3 rating and the all-in cost was equivalent to Chilean sovereign risk plus 0 basis points. At the time of issuance, this bond received a rating higher than the sovereign rating of the Republic of Chile4. This was the first short-dated FRN issued by a Latin American bank in recent history. This market is usually only accessible by high grade issuers such as Santander Chile.


4 At the moment of the bond issue Chile’s sovereign rating was A1. In June it was upgraded to Aa3.
 
Investor Relations Department
8
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 
 

 
 
SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL

ROAE of 33.8% reached in 2Q10. Record dividend paid in April 2010

 
Quarter
   
Change %
 
(Ch$ million)
 
Jun-10
   
Mar-10
   
Jun-09
   
June 10/ 09
   
June 10 /
Mar. 10
 
Capital
    891,303       891,303       891,303       0.0 %     0.0 %
Reserves
    51,538       51,539       (16,960 )     (403.9 )%     (0.0 )%
Unrealized gain (loss) Available-for-sale financial assets
    (18,193 )     (32,620 )     (14,199 )     28.1 %     (44.2 )%
Retained Earnings:
    740,678       772,882       636,875       16.3 %     (4.2 )%
Retained earnings previous periods
    560,129       818,885       508,045       10.3 %     (31.6 )%
Net income
    257,927       119,104       184,043       40.1 %     116.6 %
Provision for mandatory dividend
    (77,378 )     (165,107 )     (55,213 )     40.1 %     (53.1 )%
Minority Interest
    28,460       29,942       30,920       (8.0 )%     (4.9 )%
Total Equity
    1,693,786       1,713,046       1,527,939       10.9 %     (1.1 )%
Equity attributable to shareholders
    1,665,326       1,683,104       1,497,019       11.2 %     (1.1 )%
ROAE
    33.8 %     28.1 %     28.7 %                

Shareholders’ equity totaled Ch$1,665,326 million (US$3.0 billion) as of June 30, 2010. ROAE in 2Q10 reached 33.8%. This strong profitability was achieved while having one of the highest levels of capitalization in the banking system. Voting common shareholders’ equity is the sole component of our Tier I capital and represented 10.3% of risk weighted assets as of June 30, 2010. The BIS ratio reached 14.1% at the same date. In April 2010, the Bank paid its annual dividend of Ch$1.37/share, 21.2% more than in 2009 and equivalent to 60% of 2009 earnings attributable to shareholders.

Capital Adequacy
 
Quarter ended
   
Change %
 
(Ch$ million)
 
Jun-10
   
Mar-10
   
Jun-09
   
June 10/ 09
   
June 10 /
Mar. 10
 
Tier I
    1,665,326       1,683,103       1,497,019       11.2 %     (1.1 )%
Tier II
    627,608       599,353       535,978       17.1 %     4.7 %
Regulatory capital
    2,292,934       2,282,455       2,032,997       12.8 %     0.5 %
Risk weighted assets
    16,210,259       15,513,732       13,544,319       19.7 %     4.5 %
Tier I ratio
    10.3 %     10.8 %     11.1 %                
BIS ratio
    14.1 %     14.7 %     15.0 %                
 
Investor Relations Department
9
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 
 

 
 
SECTION 3: ANALYSIS OF QUARTERLY INCOME STATEMENT

NET INTEREST INCOME

Net interest margin increases to 6.1% in 2Q10
 
 
Quarter
   
Change %
 
(Ch$ million)
 
2Q10
   
1Q10
   
2Q09
   
2Q10 / 2Q09
   
2Q / 1Q 10
 
Net interest income
    242,782       229,398       226,611       7.1 %     5.8 %
Average interest-earning assets
    15,816,902       15,776,237       15,147,554       4.4 %     0.3 %
Average loans
    14,291,144       13,879,173       13,733,919       4.1 %     3.0 %
Net interest margin (NIM) 1
    6.1 %     5.8 %     6.0 %                
Avg. equity + non-interest bearing  demand deposits / Avg. interest earning assets
    36.4 %     33.9 %     30.3 %                
Quarterly inflation rate 2
    0.97 %     0.27 %     (0.13 )%                
Avg. overnight interbank rate (nominal)
    0.51 %     0.40 %     1.40 %                
Avg. 10 year Central Bank yield (real)
    3.04 %     3.14 %     2.86 %                
1.
Annualized.
2.
Inflation measured as the variation of the Unidad de Fomento in the quarter.

The Bank’s net interest margin reached 6.1% in the quarter, improving 30 basis points compared to 1Q10 and 10 basis points compared to 2Q09. Net interest income was up 5.8% QoQ and 7.1% YoY. The YoY rise in net interest income was mainly due to: (a) The higher inflation rate as the Bank maintains long-term assets (mainly medium and long-term financial investments) that are denominated in Unidades de Fomento (UFs), an inflation indexed unit, which are partially funded with nominal or non-interest bearing peso short-term deposits. The UF inflation reached 0.97% in 2Q10 compared to -0.13% in 2Q09;  (b) loan growth and; (c) an improved funding mix as the ratio of average equity and non-interest bearing demand deposits to average interest earning assets reached 36.4% in 2Q10 compared to 30.3% in 2Q09.

Compared to 1Q10, the 5.8% increase in net interest income was mainly due to the increase in the loan book, the higher inflation rates and the improved funding mix. This was partially offset by the higher short-term interest rates which increased funding costs. During the quarter the Central Bank began to increase short-term rates which increased 100 basis points in the quarter to 1.5%. Going forward, we expect the Central Bank to continue to rising rates.
 
Investor Relations Department
10
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 
 

 
 
PROVISION FOR LOAN LOSSES

Provision expense down 41.7% YoY as asset quality improves among individuals

 
Quarter
   
Change %
 
(Ch$ million)
 
2Q10
   
1Q10
   
2Q09
   
2Q10 /
2Q09
   
2Q / 1Q 10
 
    (14,012 )     (26,002 )     (19,402 )     (27.8 )%     (46.1 )%
Charge-offs
    (49,506 )     (52,158 )     (87,392 )     (43.4 )%     (5.1 )%
Gross provisions and charge-offs
    (63,518 )     (78,160 )     (106,794 )     (40.5 )%     (18.7 )%
Loan loss recoveries
    7,566       7,973       10,757       (29.7 )%     (5.1 )%
Net provisions for loan losses
    (55,952 )     (70,187 )     (96,037 )     (41.7 )%     (20.3 )%
Total loans 1
    14,582,467       14,043,570       13,401,486       8.8 %     3.8 %
Total reserves (RLL)
    (387,624 )     (374,064 )     (314,191 )     23.4 %     3.6 %
Past due loans 2 (PDL)
    200,524       197,060       181,645       10.4 %     1.8 %
Non-performing loans 3 (NPLs)
    415,556       385,211       415,311       0.1 %     7.9 %
Gross provision expense / Loans
    1.74 %     2.23 %     3.19 %                
Cost of credit 4
    1.53 %     2.00 %     2.87 %                
PDL / Total loans
    1.38 %     1.40 %     1.36 %                
Coverage of past due loans 5
    193.3 %     189.8 %     173.0 %                
Risk Index (RLL / Total loans)
    2.66 %     2.66 %     2.34 %                
NPL / Total loans
    2.85 %     2.74 %     3.10 %                
Coverage of NPLs 6
    93.3 %     97.1 %     75.7 %                
1.
Excludes interbank loans.
2.
PDLs: All installments and lines of credit more than 90 days overdue.
3.
NPL: Non-performing loans: Full balance of loans with one installment 90 days or more overdue.
4.
Cost of credit: Net provision expense, annualized / Loans.
5.
Coverage PDLs:: RLL / PDLs.
6.
Coverage NPL:  RLL / NPLs.

In 2Q10, the Bank’s net provision expense decreased 20.3% QoQ and 41.7% YoY. This was mainly due to an improvement in asset quality, especially among individuals. Net provision expense for consumer loans decreased 12.2% QoQ and 53.8% YoY. This was mainly due to the improvement of the economy and the risk measures adopted by the Bank in 2009 to improve credit risk procedures among individuals.

By loan product, provision expense was as follows:

Net provisions for loan losses by
segment
 
Quarter
   
Change %
 
(Ch$ million)
 
2Q10
   
1Q10
   
2Q09
   
2Q10 / 2Q09
   
2Q / 1Q 10
 
Commercial loans*
    (15,264 )     (23,231 )     (13,612 )     12.1 %     (34.3 )%
Residential mortgage loans
    (4,021 )     (5,197 )     (3,096 )     29.9 %     (22.6 )%
Consumer loans
    (36,667 )     (41,759 )     (79,329 )     (53.8 )%     (12.2 )%
Net provisions for loan losses
    (55,952 )     (70,187 )     (96,037 )     (41.7 )%     (20.3 )%
*
Includes net provision expenses for interbank loans and off-balance sheet contingent loans.
 
Investor Relations Department
11
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 

 
The Bank’s Risk Index remained stable QoQ at 2.66%. This ratio, defined as loan loss allowances over total loans, measures how much the Bank expects to loose on its loan book, according to its internal models and the Superintendency of Banks guidelines. The Bank is required to have 100% coverage of its Risk index. Non-performing loans increased 7.9% QoQ. This was mainly due to the expiration in May 2010 of temporary regulations (applicable during March and April 2010) that allowed banks to report non-performing loans as performing to the extent such loans were performing as of February 27, 2010, the date of the earthquake that stroke Chile’s Central-South zone, and that the bank determined that the borrower missed payments due to this event.  The coverage ratio of total NPLs reached 93.3% as of June 2010.

The NPL ratio of consumer loans decreased from 3.08% as of March 2010 to 2.99% as of June 2010. The coverage ratio of consumer NPLs in the same period increased from 247.2% to 256.6%. Since peaking in 2Q09, consumer NPLs have consistently declined as the economy has improved and also as a result of the Bank’s efforts in improving recovery procedures. The earthquake also had a lower effect than expected on the asset quality of consumer loans.
 
 
Investor Relations Department
12
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 
 

 
 
NET FEE INCOME

Solid YoY growth of usage-linked fees

Fee Income
 
Quarter
   
Change %
 
(Ch$ million)
 
2Q10
   
1Q10
   
2Q09
   
2Q10 / 2Q09
   
2Q / 1Q 10
 
Collection fees
    14,236       13,812       16,552       (14.0 )%     3.1 %
Credit, debit & ATM card fees
    13,353       14,351       11,950       11.7 %     (7.0 )%
Checking accounts & lines of credit
    10,470       11,265       13,116       (20.2 )%     (7.1 )%
Asset management
    9,657       9,391       7,495       28.8 %     2.8 %
Insurance brokerage
    8,962       5,106       4,719       89.9 %     75.5 %
Guarantees, pledges and other contingent operations
    5,954       5,829       5,923       0.5 %     2.1 %
Fees from brokerage of securities
    2,098       1,906       1,766       18.8 %     10.1 %
Other Fees
    428       691       1,624       (73.6 )%     (38.1 )%
Total fees
    65,158       62,351       63,145       3.2 %     4.5 %

Net fee income increased 4.5% QoQ and 3.2% YoY. The evolution of the main products was the following:

Fees from asset management increased 2.8% QoQ and 28.8% YoY. Total assets under management reached Ch$3,512,488 million (US$6.5 billion) decreasing 3.4% QoQ and increasing 5.1% YoY. The QoQ decrease in volumes under management was mainly due to a reduction in short-term money market funds as the Bank’s commercial teams have also proactively funneled low yielding money market funds to time deposits as the growth rate of the loan book continues to accelerate.

A similar trend was observable in brokerage related fees. Fees from insurance brokerage increased 75.5% QoQ and 89.9% YoY. The Bank’s success in selling insurance online, coupled with an increase in premiums on behalf of insurance underwriters has driven insurance brokerage fees. The Bank’s success in selling insurance online, coupled with a greater demand for insurance in general has driven insurance brokerage fees. Fees from the brokerage grew 10.1% QoQ and 18.8% YoY. These fees were driven by the Bank’s new internet platform for stock trading and a greater demand for investing in the local stock market.

Collection fees in 2Q10 increased 3.1% QoQ. This was mainly due to higher collection of loan insurance policies on behalf of third parties, higher collection fees of consumer loans and higher fees from the payment of services, mainly on-line. The 14.0% YoY decline was mainly due to the temporary interruption of collection activities in the zones more affected by the earthquake.

Fees from credit, debit and ATM cards decreased 7.0% QoQ mainly as a result of an increase in credit card expenses. Merchant discount fees also spiked in 1Q10 after the earthquake due to one-time home improvement purchases in that quarter. YoY credit card fees increased 11.7% as the usage of cards continues to grow and penetration of bank credit cards continues to rise. As of June 2010, the Bank, with 30.9% of all bank credit card accounts, generated 36.6% of all monetary purchases year-to-date. YoY billing was up 34.6% in real terms YoY compared to 29.2% for the rest of the market, excluding Santander.
 
Investor Relations Department
13
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 

 
Fees from checking accounts and lines of credit decreased 7.1% QoQ and 20.2% YoY. The YoY decline was mainly due to regulatory changes that prohibited fees charged for unauthorized overdrafts as of April 2009. The QoQ decrease was mainly due to the temporary waiving of fees in some of the more affected areas by the earthquake.

OPERATING EXPENSES AND EFFICIENCY

Greater commercial activity and inflation driving expenses

Operating Expenses
 
Quarter
   
Change %
 
(Ch$ million)
 
2Q10
   
1Q10
   
2Q09
   
2Q10 / 2Q09
   
2Q / 1Q 10
 
Personnel expenses
    (66,002 )     (55,589 )     (57,701 )     14.4 %     18.7 %
Administrative expenses
    (35,707 )     (36,053 )     (34,258 )     4.2 %     (1.0 )%
Depreciation and amortization
    (12,592 )     (12,341 )     (12,140 )     3.7 %     2.0 %
Impairment
    (3,686 )     (16 )     0       %     22937.5 %
Operating expenses
    (117,987 )     (103,999 )     (104,099 )     13.3 %     13.5 %
Efficiency ratio*
    35.2 %     33.0 %     31.5 %                
*
Operating expenses / Operating income.  Operating income = Net interest income + Net fee income+ Financial transactions net + other operating income and expenses.

Operating expenses in 2Q10 increased 13.5% QoQ and 13.3% YoY. This was mainly due to Ch$3,686 million in impairment charges on fixed assets of which Ch$3,517 million were a one-time charge directly related to the earthquake. This is partially offset by insurance compensation recognized in other operating income. The net impact on results of earthquake related damage, deducting insurance, was Ch$-1,138 million in 2Q10.

The efficiency ratio reached 35.2% in 2Q10. Adjusting for earthquake related charges and income the efficiency ratio reached 34.4% in 2Q10. Excluding impairments charges, the Banks costs increased 9.9% QoQ and 9.8% YoY. The YoY rise in costs was mainly due to a rise in personnel expenses that is directly related to an increase in commercial activity. The selling of products has been growing at an accelerated pace and as a result variable incentives to commercial teams have increased. This should be compensated in future quarters with stronger core revenue growth. Headcount did not vary significantly in the quarter. The QoQ rise in personnel expenses is also due to seasonal factors related to personnel vacation expenses.

The increase in administrative expenses QoQ and YoY is mainly due to the higher inflation as 2/3 of administrative expenses are linked to inflation.
 
Investor Relations Department
14
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 
 

 
 
NET RESULTS FROM FINANCIAL TRANSACTIONS

Positive results from client treasury activities in the quarter

Net Results from Financial Transactions*
 
Quarter
   
Change %
 
(Ch$ million)
 
2Q10
   
1Q10
   
2Q09
   
2Q10 / 2Q09
   
2Q / 1Q 10
 
Net gains from mark-to-market and trading
    44,922       52,092       (18,863 )     (338.1 )%     (13.8 )%
Exchange differences, net
    (19,881 )     (22,519 )     48,519       (141.0 )%     (11.7 )%
Net results from financial transactions
    25,041       29,573       29,656       (15.6 )%     (15.3 )%
*
These results mainly include the mark-to-market of the available for sale investment portfolio, realized and unrealized gains of financial investments held for trading, the interest revenue generated by the held for trading portfolio, gains or losses from the sale of charged-off loans and the mark-to-market of derivatives. The results recorded as Exchange differences, net mainly includes the translation gains or losses of assets and a liability denominated in foreign currency.

Net results from financial transactions, which include the sum of the net gains from mark-to-market and trading and exchange differences, net totaled a gain of Ch$25,041 million in 2Q10. In order to better understand this line item, we present them by business area in the table below.

Net Results from Financial Transactions
 
Quarter
   
Change %
 
(Ch$ million)
 
2Q10
   
1Q10
   
2Q09
   
2Q10 / 2Q09
   
2Q / 1Q 10
 
Santander Global Connect 1 & Market making 2
    26,169       19,290       18,374       42.4 %     35.7 %
Financial Management (ALCO) & Prop. trading
    (1,128 )     10,283       11,282       %     %
Net results from financial transactions
    25,041       29,573       29,656       (15.6 )%     (15.3 )%
1.
Santander Global Connect is the Bank’s commercial platform for selling treasury products to our clients.
2.
This line item also includes the gain or loss from the sale of charged-off loans.

The 15.3% QoQ and 15.6% YoY decrease in this line item was mainly due lower results from Financial Management, which was negatively affected by rising rates. This also impacted gains from proprietary trading. Proprietary trading represented only 1% of the Bank’s total income in 1H10 and usually represent less than 5% of total income.  This was partially offset by gains from the sale of treasury services to companies through the Santander Global Connect platform that increased 35.7% QoQ and 42.4% YoY.
 
Investor Relations Department
15
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 

 
OTHER INCOME AND EXPENSES

 
Quarter
   
Change %
 
(Ch$ million)
 
2Q10
   
1Q10
   
2Q09
   
2Q10 / 2Q09
   
2Q / 1Q 10
 
Other operating income
    19,951       6,065       2,928       581.4 %     229.0 %
Other operating expenses
    (17,648 )     (12,556 )     7,821       %     40.6 %
Other operating income, net
    2,303       (6,491 )     10,749       (78.6 )%     %
Income attributable to investments in other companies
    223       120       440       (49.3 )%     85.8 %
Income tax
    (24,163 )     (21,760 )     (21,816 )     10.8 %     11.0 %
Income tax rate
    15.0 %     15.5 %     16.7 %                

Other operating income, net totaled a gain of Ch$2,303 million in the quarter. This result was driven by stronger gains from the sale and recovery of repossessed assets, Ch$2,379 million income from insurance claims for earthquake damage and Ch$12,975 million one-time gain from the sale of 16 branches in the quarter. These branches are now rented by the Bank. This was partially offset by higher costs related to repossessed assets and other provisions for future non-credit contingencies.

Income tax increased 11.0% QoQ and 10.8% YoY mainly as a result of the higher income before taxes. The effective tax rate paid in the quarter was 15.0% compared to 16.7% in 2Q09. This lower effective tax rate was mainly due to the higher inflation in 2Q10 compared to 2Q09. For tax purposes the Bank’s still calculates the price level restatement of equity and this computes as a deduction from our taxable income. The statutory tax rate in Chile has not changed and is 17% over net income before taxes. It is expected that the statutory corporate tax rate in Chile will rise to 20% in 2011 and gradually return to 17% in 2013 as a part of the government’s plan to finance the reconstruction efforts.
 
Investor Relations Department
16
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 
 

 
 
SECTION 4: CREDIT RISK RATINGS

International ratings

The Bank has credit ratings from three leading international agencies. All of our ratings are assigned a stable outlook. Moody’s upgraded the Bank’s foreign currency deposit rating in 2Q10, following a similar rise for Chile’s sovereign rating.

Moody’s
 
Rating
Foreign currency bank deposits
 
Aa3
Senior bonds
 
Aa3
Subordinated debt
 
A1
Bank Deposits in Local Currency
 
Aa3
Bank financial strength
 
B-
Short-term deposits
 
P-1

Standard and Poor’s
 
Rating
Long-term Foreign Issuer Credit
 
A+
Long-term Local Issuer Credit
 
A+
Short-term Foreign Issuer Credit
 
A-1
Short-term Local Issuer Credit
 
A-1

Fitch
 
Rating
Foreign Currency Long-term Debt
 
A+
Local Currency Long-term Debt
 
A+
Foreign Currency Short-term Debt
 
F1
Local Currency Short-term Debt
 
F1
Individual rating
 
B
 
Local ratings:
 
Our local ratings, the highest in Chile, are the following:

Local ratings
 
Fitch
Ratings
 
Feller
Rate
Shares
 
Level 2
 
1CN1
Short-term deposits
 
N1+
 
Level 1+
Long-term deposits
 
AAA
 
AAA
Mortgage finance bonds
 
AAA
 
AAA
Senior bonds
 
AAA
 
AAA
Subordinated bonds
 
AA
 
AA+
Outlook
 
Stable
 
Stable
 
Investor Relations Department
17
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 
 

 
 
SECTION 5: SHARE PERFORMANCE
As of June 2010

Ownership Structure:
 

ADR Price Evolution
Santander ADR vs. Global 1200 Financial Index
(Base 100 = 06/30/2008)
 

 
ADR price (US$) 2010
06/30/10:
    67.09  
Maximum (2010):
    71.88  
Minimum (2010):
    59.40  
         
Market Capitalization: US$12,170 million

P/E 12 month trailing*:
    12.5  
P/BV (06/30/10)**:
    4.04  
Dividend yield***:
    3.9 %

Price as of June 30 / 12mth Earnings
** 
Price as of June 30 / Book value as of 06/30/10
***
Based on closing price on record date of last dividend payment.
 
Average daily traded volumes YTD 2010
US$ million
 

Local Share Price Evolution
Santander vs IPSA Index
(Base 100 = 06/30/2008)
 


Local share price (Ch$) 2010
06/30/10:
    35.67  
Maximum (2010):
    36.36  
Minimum (2010):
    30.74  

Dividends:
Year paid
 
          Ch$/share          
   
% of previous year
earnings
 
2006:
    0.83       65 %
2007:
    0.99       65 %
2008:
    1.06       65 %
2009:
    1.13       65 %
2010:
    1.37       60 %
 
Investor Relations Department
18
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 
 

 
 
SECTION 6: INSTITUTIONAL BACKGROUND

Institutional Background

As per the latest public records published by the Superintendency of Banks of Chile for June 2010, Banco Santander Chile was the largest bank in terms of loans and equity. The Bank has the highest credit ratings among all Latin American companies, with an A+ rating from Standard and Poor’s and Aa3 by Moody’s, which are the same ratings assigned to the Republic of Chile, and A+ by Fitch which pierces the sovereign ceiling. The stock is traded on the New York Stock Exchange (NYSE: SAN) and the Santiago Stock Exchange (SSE: Bsantander). The Bank’s main shareholder is Santander, which controls 76.91% of Banco Santander Chile.

For more information see www.santander.cl

Banco Santander (SAN.MC, STD.N) is a retail and commercial bank, based in Spain. Santander has more than 90 million customers, 13,660 branches – more than any other international bank – and 169,460 employees around the world. It is the largest financial group in Spain and Latin America, with leading positions in the United Kingdom and Portugal and a broad presence in Europe through its Santander Consumer Finance arm. In 2009, Santander registered EUR 8,943 million in net attributable profit. Banco Santander’s eligible capital at the close of the third quarter came to EUR 79,704 million, with a surplus of EUR 34,769 million above the required regulatory minimum. With this capital base, the BIS ratio, using Basel II criteria, comes to 14.2%, Tier I to 10.1% and core capital 8.6%. These ratios place Santander among the most solvent banks in the world.

For more information see www.santander.com
 
Investor Relations Department
19
Bandera 140 19th Floor, Santiago, Chile, Tel: 562-320-8284, fax: 562-671-6554,
 
email: rmorenoh@santander.cl
 
 

 
 
ANNEX 1: BALANCE SHEET

Unaudited Balance Sheet
 
Jun-10
   
Jun-10
   
Mar-10
   
Jun-09
   
June 10/ 09
   
June / Mar. 10
 
   
US$ths
   
Ch$mn
   
% Chg.
 
                                     
Assets
                                   
Cash and balances from Central Bank
    2,561,819       1,398,881       1,526,810       942,065       48.5 %     (8.4 )%
Funds to be cleared
    891,702       486,914       345,521       426,647       14.1 %     40.9 %
Financial assets held for trading
    1,487,875       812,454       877,884       1,003,448       (19.0 )%     (7.5 )%
Investment collateral under agreements to repurchase
    9,157       5,000       3,679       13,212       (62.2 )%     35.9 %
Derivatives
    2,804,183       1,531,224       1,465,832       1,502,295       1.9 %     4.5 %
Interbank loans
    75,885       41,437       47,738       57,800       (28.3 )%     (13.2 )%
Loans, net of reserves for loan losses
    25,995,499       14,194,842       13,669,507       13,087,295       8.5 %     3.8 %
Available-for-sale financial assets
    2,456,361       1,341,296       1,572,839       1,444,802       (7.2 )%     (14.7 )%
Held-to-maturity investments
    -       -       -       -       %     %
Investments in other companies
    11,907       6,502       7,095       7,145       (9.0 )%     (8.4 )%
Intangible assets
    130,160       71,074       72,290       69,356       2.5 %     (1.7 )%
Fixed assets
    298,844       163,184       179,981       190,997       (14.6 )%     (9.3 )%
Current tax assets
    10,006       5,464       4,649       4,826       13.2 %     17.5 %
Deferred tax assets
    204,996       111,938       103,186       94,369       18.6 %     8.5 %
Other assets
    1,090,094       595,246       572,698       561,407       6.0 %     3.9 %
Total Assets
    38,028,488       20,765,456       20,449,709       19,405,664       7.0 %     1.5 %
                                                 
Liabilities and Equity
                                               
Demand deposits
    7,634,620       4,168,884       3,890,230       3,083,814       35.2 %     7.2 %
Funds to be cleared
    555,273       303,207       197,908       195,249       55.3 %     53.2 %
Investments sold under agreements to repurchase
    267,554       146,098       762,703       512,279       (71.5 )%     (80.8 )%
Time deposits and savings accounts
    13,173,475       7,193,376       6,818,939       8,342,396       (13.8 )%     5.5 %
Derivatives
    2,290,169       1,250,547       1,358,323       1,462,558       (14.5 )%     (7.9 )%
Deposits from credit institutions
    3,846,230       2,100,234       2,005,763       1,140,901       84.1 %     4.7 %
Marketable debt securities
    5,942,976       3,245,162       2,872,100       2,622,275       23.8 %     13.0 %
Other obligations
    289,514       158,089       174,497       149,046       6.1 %     (9.4 )%
Current tax liabilities
    39,659       21,656       74,440       34,786       (37.7 )%     (70.9 )%
Deferred tax liability
    4,893       2,672       1,650       9,567       (72.1 )%     61.9 %
Provisions
    349,787       191,001       266,699       122,990       55.3 %     (28.4 )%
Other liabilities
    532,449       290,744       313,411       201,864       44.0 %     (7.2 )%
Total Liabilities
    34,926,600       19,071,670       18,736,663       17,877,725       6.7 %     1.8 %
                                                 
Equity