20-F: Banco Santander-Chile Reports Annual Results for 2023, Navigates Economic Headwinds

Sentiment:

Annual Report 22 February 2024 6:41 AM

Banco Santander-Chile's 2023 annual report reveals a decrease in net income attributable to shareholders, influenced by a moderate recession and a high interest rate environment.

Worse than expectedThe bank's net income attributable to shareholders decreased by 26.9% in 2023 compared to 2022.The return on average equity decreased from 22.5% to 12.3%.

Summary

Banco Santander-Chile's annual report for the fiscal year ended December 31, 2023, indicates a challenging economic landscape.
Net income attributable to shareholders decreased by 26.9% to Ch$579,427 million.
The return on average equity was 12.3% compared to 22.5% in the previous year.
Net operating income before credit losses decreased by 19.4% to Ch$1,014,170 million.
The bank's performance was affected by a moderate recession in Chile, driven by a high interest rate environment implemented to combat inflation, which finished the year at 3.9%.
The Central Bank expects GDP to increase in a range between 1.25%-2.25% in 2024.
The report highlights increased competition, including from fintech companies, and industry consolidation as factors affecting operations.
The bank's non-performing loan ratio increased to 2.26%, reflecting the challenging economic conditions.
The bank's allowance for expected credit losses was Ch$1,149,991 million, representing 2.82% of total loans at amortized cost.
The bank is subject to regulatory capital and liquidity requirements, including Basel III standards, which could limit operations.
A new bill for pension reform is under discussion in Congress, which could affect the bank's funding mix.
The bank is exposed to risks related to climate change, cybersecurity, and potential legal and regulatory proceedings.

Sentiment

Score: 5

Explanation: The document presents a mixed sentiment. While it highlights the bank's leading position and robust risk management, it also acknowledges the challenging economic conditions and decreased profitability. The outlook is cautiously optimistic, with expectations of GDP growth in 2024.

Positives

The bank maintains a leading position in major business segments in Chile.
The bank has a large distribution network with national coverage and a leading digital onboarding platform.
The bank's relationship with Grupo Santander provides access to a global client base and know-how.
The bank has a robust risk management framework based on ethical principles and corporate values.
The bank is actively managing liquidity and funding risks.
The bank is in compliance with regulatory capital and liquidity requirements.
The bank has signed a new collective bargaining agreement with the main unions, which will become effective in September 2024 and expire in December 2027.

Negatives

Net income attributable to shareholders decreased by 26.9% in 2023.
The return on average equity decreased from 22.5% to 12.3%.
The non-performing loan ratio increased to 2.26%.
The bank expects a Ch$25 billion decrease in revenue from card fees in 2024 and approximately Ch$47 billion in 2025 due to new regulations regarding interchange fees for credit and debit cards.
The bank is exposed to risks related to climate change, cybersecurity, and potential legal and regulatory proceedings.

Risks

A slowdown in the global and Chilean economy could adversely affect the bank's growth, asset quality, and profitability.
Climate change can create transition risks, physical risks, and other risks that could adversely affect the bank.
Pandemics, including the global COVID-19 pandemic, and other public health emergencies could materially impact the bank's financial condition, liquidity, and results of operations.
Increased competition, including from non-traditional providers of banking services such as financial technology providers, and industry consolidation may adversely affect the bank's results of operations.
The growth of the bank's loan portfolio may expose it to increased loan losses.
Failure to successfully implement and continue to improve the bank's risk management policies, procedures, and methods could materially and adversely affect the bank.
The bank relies on models for many of its decisions, and their inaccurate or incorrect use could have a material adverse effect on the bank.
The bank's loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on the bank.
Risks relating to cybersecurity, data collection, processing and storage systems and security are inherent in the bank's business.
Market conditions have resulted, and could result, in material changes to the estimated fair values of the bank's financial assets.
The bank's financial results are constantly exposed to market risk, including fluctuations in interest rates and other market risks.
The bank is subject to counterparty risk in its banking business.
Liquidity and funding risks are inherent in the bank's business and could have a material adverse effect on the bank.
The bank is subject to regulatory capital and liquidity requirements that could limit its operations, and changes to these requirements may further limit and adversely affect the bank.
The bank may not be able to detect or prevent money laundering and other financial crime activities fully or on a timely basis, which could expose it to additional liability.
The bank is exposed to risk of loss from legal and regulatory proceedings.
Political, legal, regulatory and economic uncertainty arising from social unrest and the resulting social reforms, as well as the potential enactment of a new constitution could adversely impact the bank's business.
Currency fluctuations could adversely affect the bank's financial condition and results of operations and the value of its securities.
The bank's controlling shareholder has a great deal of influence over its business and its interests could conflict with those of other shareholders.
The bank's status as a controlled company and a foreign private issuer exempts it from certain of the corporate governance standards of the New York Stock Exchange (NYSE), limiting the protections afforded to investors.
Holders of ADSs may find it difficult to exercise voting rights at the bank's shareholders meetings.

Future Outlook

The Central Bank expects GDP to increase in a range between 1.25%-2.25% in 2024.

Industry Context

The Chilean market for financial services is highly competitive, with competition coming from other domestic and foreign banks, Banco del Estado de Chile, department stores, private lenders, and credit unions and cooperatives.

Comparison to Industry Standards

Banco Santander-Chile's loan portfolio is the largest among Chilean banks, with a 17.6% market share.
The bank ranks second in deposits with a 17.8% market share.
The bank is the third largest in terms of total equity.
The bank is the fourth most efficient bank in its peer group, with an efficiency ratio of 47.3%.
The bank is the fourth largest bank in Chile in terms of net income attributable to shareholders.
The bank is the fourth most profitable bank in its peer group (as measured by return on period-end equity).
The bank had the fourth lowest non-performing loan to loan ratio in its peer group.

Legal Proceedings

The bank is subject to certain claims and is party to certain legal and arbitration proceedings in the normal course of its business, including claims for alleged operational errors.

Related Party Transactions

The bank engages in transactions with related parties, including Santander Group entities, associated companies, and key personnel.
These transactions are required to be on a market basis and are subject to approval by the Board of Directors and the Audit Committee.

Stakeholder Impact

Shareholders: The decrease in net income and return on equity may negatively impact shareholder value.
Employees: The bank has signed a new collective bargaining agreement with the main unions, which will become effective in September 2024 and expire in December 2027.
Customers: The bank is committed to providing a wide range of products and high levels of service to its customers.
Suppliers: The bank is strengthening the supplier risk management model and the internal control framework to ensure that the risks associated with contracting third parties are adequately assessed and managed.
Creditors: The bank is subject to regulatory capital and liquidity requirements, which could limit its operations and affect its ability to repay its obligations.

Next Steps

The bank will continue to monitor and manage risks related to climate change, cybersecurity, and potential legal and regulatory proceedings.
The bank will continue to implement and adjust its operations to comply with Basel III standards.
The bank will continue to monitor the potential impact of the proposed pension reform bill on its financial condition and results of operations.
The bank will continue to monitor the potential impact of the proposed tax reform on its business or clients.

Key Dates

Date	Description
1978	Old Santander-Chile was established as a subsidiary of Santander Spain.
1980s	The current pension fund system dates from the 1980s when pensions went from being state-funded to privately-funded.
1994-05-17	Date of the Foreign Investment Contract among the Depositary, Banco Santander-Chile and the Central Bank.
1995	Private Securities Litigation Reform Act of 1995.
2001-04	The Central Bank eliminated the regulations that affected foreign investors, except that investors are still required to provide the Central Bank with information relating to equity investments and conduct such operations within Chiles Formal Exchange Market.
2002-08-01	Banco Santiago and Old Santander Chile merged, with Santander-Chile being the surviving entity.
2012	Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
2012	Iran Threat Reduction and Syria Human Rights Act of 2012.
2013	Banco Santander Chile sold its asset management business in 2013 and signed a management service agreement for a 10 year-period, automatically renewable for five-year periods, with the acquirer of this business in which we sell asset management funds on their behalf.
2014	Chilean government enacted various tax reforms in 2014.
2015	The FMC and the Central Bank published new liquidity standards and ratios that must be implemented and calculated by all banks.
2017	Law 21,000 created the Comision para el Mercado Financiero or Financial Market Commission (FMC).
2018-01	The Superintendency of Banks and Financial Institutions (SBIF) was eliminated on January 15, 2018 and all functions of this Superintendency were absorbed by the FMC.
2019-01	Law 21,130, which modernized the banking legislation contained in the General Banking Law and amended Law 21,000 (among others), was published in the Official Gazette.
2019-01	Agreement with Latam Airlines was renewed in January 2019 for seven more years.
2019-06-01	Banks are under the supervision of the FMC as of June 1, 2019.
2019-10	Growing public concern over perceived social inequality led to a rise in social unrest during October 2019.
2019-11	The Chilean government announced in November 2019 that it would initiate a process to draft a new Constitution for Chile.
2020	Chile's economy contracted 5.8% in 2020 as a result of the COVID-19 pandemic.
2020-07	A law was passed permitting Chileans to withdraw a minimum of UF35 (U.S.$1,472) and a maximum of UF150 (U.S.$6,311) from their pension funds.
2020-10-09	The FMC published the final regulations on regulatory capital to comply with effective net worth rules in accordance with Basel III and the General Banking Law.
2020-11-02	The FMC published the final guidelines regarding the identification and core capital charge for banks considered Systemically Important Banks (SIBs).
2020-11	After three weeks of nationwide protests, the Chilean government announced in November 2019 that it would initiate a process to draft a new Constitution for Chile.
2020-12	A second pension fund withdrawal was approved, although withdrawals under this approval were not tax-exempt.
2021-01-07	At the Extraordinary Shareholders Meeting of Sociedad Operadora de Tarjetas de Pago Santander Getnet Chile S.A., the members were agreed to pay the subscribed and unpaid capital, for an amount of Ch$3,727 million.
2021-01-27	The Central Bank in its Monetary Policy Meeting held on January 27, 2021 announced the beginning of a third stage of this instrument (FCIC3) commencing on March 1, 2021 for approximately U.S.$10 billion.
2021-03-01	The beginning of a third stage of this instrument (FCIC3) commencing on March 1, 2021 for approximately U.S.$10 billion.
2021-03-05	The Financial Conduct Authority (FCA) announced the cessation or loss of representativeness of the LIBOR benchmarks, published by ICE Benchmark Administration (IBA).
2021-03-22	Getnets shareholders modified the companys bylaws to increase their number of directors from 3 to 5.
2021-04-27	A third withdrawal was approved and added a further U.S.$13.3 billion of liquidity into the system.
2021-08	Law No. 21,365 was enacted, regulating interchange fees in the credit card payment market in Chile.
2021-09	Moodys downgraded the Republic of Chile and, as a direct effect of such downgrade, Santander Chiles credit ratings to A2 with a stable outlook.
2021-12-01	The new regulation became effective on December 1, 2021 and are being gradually implemented and adjusted to be fully effective by December 1, 2025.
2021-12	The Chilean government once again presented a new bill for pension reform to Congress, as previous bills proposed by the government failed to gain congressional support.
2022-01-03	EONIA discontinuation date.
2022-07	A proposed draft of the constitution was rejected by 62% of voters in July 2022, as a consequence of which a new constitutional drafting process was agreed upon by the different political parties.
2022-09	Moodys downgraded the Republic of Chile and, as a direct effect of such downgrade, Santander Chiles credit ratings to A2 with a stable outlook.
2022-11	With the purpose of managing an orderly process of the expiration of the FCIC, in November 2022 the Central Bank established a collateral replacement program with the goal of reducing the pledged credit portfolio by replacing it with eligible Central Bank instruments at a rate of 1/18 per month.
2022-12	A second draft of the constitution was put to the vote and more than 55% of voters elected to reject the constitutional amendment.
2023-04	A new labor reform was approved by Congress in April 2023, which, among other reforms, shortened the work week from 45 hours to 40 hours.
2023-05	The Board of the Central Bank of Chile agreed to activate the Countercyclical Capital Buffer (CCyB) for banks, setting it at 0.5% of risk-weighted assets, which must be implemented by May 2024.
2023-08-31	The Ministry of Health of Chile declared the end of the public health alert for COVID-19.
2023-10-19	Standard and Poors changed its outlook for the Republic of Chile from positive to negative while it maintained its A rating.
2023-12	A new collective bargaining agreement was signed with the main unions, which will become effective in September 2024 and expire in December 2027.
2023-12	The Chilean government once again presented a new bill for pension reform to Congress, as previous bills proposed by the government failed to gain congressional support.
2024-01-29	The government issued a new tax reform proposal which seeks to increase tax revenues by 1.5% of GDP, and there is expectations that the tax reform could be approved by Congress in 2024.
2024-05	The Countercyclical Capital Buffer (CCyB) for banks, setting it at 0.5% of risk-weighted assets, which must be implemented by May 2024.
2024-07-01	The minimum wage will reach Ch$500,000/month (U.S.$572/month) as of July 1, 2024.
2024-09	A new collective bargaining agreement was signed with the main unions, which will become effective in September 2024 and expire in December 2027.
2025	The FMC also stated that it is considering changing its Pilar II requirements to include more banks or to have a permanent Pilar II requirement for all banks beginning in 2025.
2025-12-01	The new regulation became effective on December 1, 2021 and is being gradually implemented and adjusted to be fully in place by December 1, 2025.

Keywords

Banco Santander-Chile, annual report, financial results, risk management, capital adequacy, liquidity, Basel III, Chile, banking, financial services, ADS, shareholders

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