Between October and December, Banco Santander earned CLP 113 billion ($237 million, or $0.50 per ADR), more than double the trailing quarter’s net income. This brought full-year earnings to CLP 388 billion ($810 million, or $1.70 per ADR), yielding a healthy 18.8% return on equity.
Compared with the trailing quarter, provisions for loan losses declined despite an increase in nonperforming loans. In the third quarter, Santander Chile booked an extra CLP 25 billion in provisions for loan losses after implementing a more conservative underwriting scheme. Thus, fourth quarter provisions fell to an annualized 1.9% of loans, from 2.6% in September.
Nonperforming loans, on the other hand, increased to 3.2% of the portfolio, up about 15 basis points from the third quarter. As before, we like the bank’s new stricter lending guidelines. Included in the new measures are tighter renegotiation policies, which were partially behind the spike in NPLs. We are not terribly worried about this increase since we think that it will pay off with lower dud loans in the future.
Going forward, we anticipate provisions will be around the fourth-quarter level because of the fall in coverage (allowance for loan losses/ NPL). Although reserves still make a quite acceptable 92% of NPLs, we think the bank will want to avoid further dips in this ratio (it was 98% in September), which will necessarily prevent provisions from falling dramatically until NPLs begin to trend down, in our view.
Despite the pressure from provisions, we anticipate Santander Chile’s returns will not fall significantly below 20%. This is partly due to the bank’s increasing efforts to improve its funding mix by gathering more cheap demand deposits and letting more expensive time deposits run off. Lower funding costs, together with the positive sensitivity the company’s net interest margin has with inflation rates (it has more assets linked to the inflation index than liabilities), should help keep interest revenue from declining meaningfully, especially considering that Chile’s inflation is expected to remain positive in 2013.
We are not concerned about Santander Chile’s capital position. At Dec. 31, the bank’s Tier 1 capital and tangible common equity ratios were stout at 10.7% and 8.3%, respectively (versus 10.6% and 8.0% in the third quarter).
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