Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Banco Santander-Chile Results Conference Call on the July 29th, 2022. At this time, all participant lines are in listen only mode. The format of today's call will be a presentation by the management team, followed by a question and answer session. Without further ado, I would now like to pass the line to Mr. Emiliano Muratore, the CFO of the company. Please go ahead, sir.
Good morning, everyone. Welcome to Banco Santander-Chile's Second Quarter 2022 Results Webcast and Conference Call. This is Emiliano Muratore, CFO, and I'm joined today by Robert Moreno, Managing Director and Head of Investor Relations, and Claudio Soto, Chief Economist. Thank you for attending today's conference call. The bank has continued with strong results in the second quarter of this year, with all-time high ROE and solid financial performance. Our successful digital strategy and consumer-oriented product offerings continues to attract new clients, indicating great growth opportunity going forward. Before we start the presentation, let me start with some important news. Banco Santander-Chile's results in recent years have consolidated its leading position in the Chilean market, not only in terms of loans, profitability, and efficiency, but in client growth and digital innovations.
This performance has been achieved with the contribution of all the teams under the leadership of Claudio Melandri and Miguel Mata. Leadership in the corporate world has always been dynamic and changes are the norm. After more than 30 years working for the bank, our current CEO, Miguel Mata, will be leaving this position to take new challenges, and he will continue to contribute to the group. Claudio Melandri will remain as chairman of the board in Chile. On August 1st, Román Blanco will take over as country head and CEO of the bank. Román has 18 years of experience in the group, which he joined in 2004 as vice president of Santander Banespa in São Paulo, Brazil, where he was assigned the task of strengthening the group's presence in this market.
In 2007, he was appointed as president and CEO of Santander in Colombia, whose strategy led to significant value creation for Santander in that country. In 2012, he assumed the same responsibilities in Puerto Rico, and later was appointed as CEO of Santander Bank, N.A. and Santander Holdings in Boston, United States. He was currently responsible for Santander Group's operations in the Andean region and Uruguay. He's also a member of the board of directors of Banco Santander Uruguay, Banco Santander Perú S.A., and Banco Santander de Negocios Colombia S.A. We would like to extend a warm welcome to Román Blanco, whose leadership will continue strengthening Santander's strong market position in Chile. Now, I invite Claudio Soto to give us an update on the macro scenario beginning on slide five.
Thank you, Emiliano. During the second quarter, the economy has continued slowing down, gradually returning back to trend. Consumption has remained resilient when investment is contracting. High interest rates have helped to normalize liquidity levels. Business confidence has decreased, and the growing concern of a global recession has led to a significant fall in the copper price. The labor market continues subdued, with employment still running below pre-pandemic levels. The economy will keep decelerating throughout the year. We estimate GDP will contract Q on Q in the third and fourth quarter. As a result, annual growth will be negative in the second semester. We keep our GDP growth forecast for this year at 1.5%, as seen on slide six. Inflation has continued increasing.
The consumer price index, CPI, rose 12.5% year on year in June, and it will reach more than 13% in August and September. Behind that, there are the still high commodity prices, a weak currency, and second-round effects from past price increases. In the last quarter of the year, it should begin slowing down as global prices soften and local activity moderates. All in all, CPI inflation should close the year at around 12%. The central bank has tightened its monetary policy even further by raising the monetary policy rate by 225 basis points since March, reaching 9.75%. We expect the monetary authority will increase its policy rate in the next two meetings, finishing the hiking cycle with an MPR at around 10.5%.
After that, they should keep the rate on hold and begin cutting at the beginning of next year as inflation and activity slow down. There are few weeks ahead before the constitutional referendum, which will take place on September fourth. The result is highly uncertain, and most likely it will be tight. In any case, there is broad consensus that in the case the approved option wins, amendments to the new text will be necessary. In case the reject option wins, a deep reform to the current constitution will take place. Because of that, there will be still a considerable period of uncertainty ahead.
Thank you, Claudio. We will now move on to slide eight to focus on the evolution of our various client and digital initiatives this year. A key theme of the quarter is the ongoing strong client growth driven by these platforms. On slide nine, we begin with our most successful initiative, Santander Life.
This platform reached in the second quarter the important milestone of surpassing 1 million clients. As can be seen from the graph, we started a Life program in 2018, and this platform really gained traction once we launched the Cuenta Life in June 2020, a full-blown digital checking account that clearly differentiated us from our competitors who focused on offering a digital prepaid debit card. In 2022, Santander Life also began offering clients the ability to open a US dollar checking account online for an additional fee. Life clients are growing 42% year-over-year, and 86% of our Life clients are new to the bank.
Life's active clients, defined as those in which Santander is their main bank, increased 30% year-over-year, and loyal clients, which are those that are active and profitable and properly use a majority of Life products, rose 46%. Furthermore, our Life clients have a net promoter score of 68, highlighting their satisfaction with this platform. Santander Life's clients are also rapidly being monetized with gross income of $63 million in the first half of 2022, a 68% increase compared to the same period of last year. Demand deposits remain high at CLP 950 million, surpassing by many, many times the amounts clients have deposited in similar competing platforms.
On the loan side, Life clients had a total of CLP 316 million in consumer loans, increasing by 56% in consumer credit and 118% year-over-year in credit cards alone. These clients are also beginning to purchase other products such as mutual funds and time deposits, which have grown 44% year-over-year and 203% respectively. On slide 10, we showcase our two most recent digital initiatives that are piggybacking on the Life's platform to expand our presence among micro entrepreneurs, Prospera and Cuenta Pyme Life. These are two projects in the incubation stage. Prospera is for the owner-operated micro businesses which need a current account. With a small monthly fee and a one-time payment for the mobile POS, these clients can access a current account with free and unlimited transfers and no limits to their monthly balance.
Cuenta Pyme Life has a slightly different focus, targeting companies with tax records that need a current account. The government has a program called Tu Empresa en un Día, in which approximately 365 companies are created each day online. Through this same platform, companies have the option, through Cuenta Pyme Life, to open a checking account online without previous history nor minimum sales. Cuenta Pyme Life builds on the same successful platform we had created for individuals, focusing mainly on transactionality as well as responsible lending opportunities in the future. The success of Getnet continues, as shown on slide 11. Getnet has sold over 111,000 POSs. Also in the second quarter, Getnet began rolling out its e-commerce solution. 94% of Getnet's clients are SMEs, our target clients, and 99% of the POSs are sold through the bank's distribution channels.
Getnet already has a market share greater than 14% in POSs, with around 1,318 billion in monthly sales flowing through these POSs. This product has been quick to monetize, generating CLP 9 billion in fees in the first half, increasing 800% year-over-year. In the second quarter, Getnet has also started to break even after just over one year of operations. On slide 12, we show how Superdigital continues to expand. Superdigital is a prepaid digital product aimed at the unbanked who seek a low-cost bank account. Superdigital clients have grown 84% year-over-year, reaching over 334,000 clients. This growth has been helped by alliances with companies such as Cornershop and Uber as a way of attracting new clients. As can be seen on slide 13, we continue to lead our main competitors in NPS.
In 2022, our NPS has dipped slightly as the bank has accelerated the monetization and digitalization of customer channels and incorporated tighter cybersecurity protection, which has led to some client disruptions in the short term, but that will allow us to give a better service and heightened cybersecurity in the medium term. On slide 14, we show how all these efforts are translating into record client growth led by our most important product, checking accounts. Clients with checking accounts increased 29.6% year-over-year compared to June of last year. With this success in attracting new current account clients, we have gained over seven percentage points since April 2019, reaching a market share of 29.1%.
With the new US dollar checking account offer through Life, we have seen a sustained increase in our market share in this product, which reached an impressive 34.5% in April of 2022. As shown on slide 15, the bank accelerated the branch transformation process, focusing on the Work Café model and closing less productive branches. In the last twelve months, we have closed 10% of our branch network, and in the same period, we have opened nine more Work Cafés. As a result of these initiatives, coupled with our digital strategy, productivity is rising significantly, with volumes per point of sale increasing 13.9% year-over-year, and volumes per employee increasing 10.2% year-over-year. Moving forward to slide 16, we want to highlight the most relevant progress in our responsible banking commitment.
Since 2019, we have financially empowered over 2 million people, mainly through our Life, Getnet, and Superdigital platform. This puts us well on track to reach our goal of financially empowering 4 million people by 2025. Another milestone was reached in our environmental goal in the quarter. As many of you may remember from our ESG talk last year, the bank announced that it will start to generate its own energy through six solar plants. We are pleased to comment that our first solar plant will begin operations in September, and a further three plants will be operational by the end of the year. Each plant generates 300 kilowatts of energy. With these solar plants, we should reach our goal to be carbon neutral in our own operations by 2025.
Beginning on slide 18, we will now take a look at our financial results. Our net income to shareholders in the second quarter reached a new quarterly record of CLP 285 billion, increasing 41% year-over-year and 21% quarter-over-quarter. With this, our quarterly return on equity also reached a new high of 31.7%. With this strong quarterly result, our net income in the first half totaled CLP 521 billion, increasing 40.9%, and our ROE reached an impressive 28.7% in the first half of this year. As we will analyze in upcoming slides, the high inflation rate was clearly a key factor behind these solid results. As we can observe on slide 19, the contribution from our client segments, which excludes the impact of inflation, continued to grow steadily.
As of June, the net contribution of our business segments increased 17.6% year-over-year. Results from retail banking, which includes individuals and SMEs, increased 10% year-over-year, mainly driven by higher margins and higher fees due to client growth and greater product usage. Our middle market segment grew 20% year-over-year, driven by a higher loan spread. Additionally, commissions increased 36% in line with the greater activity of clients in cash management and foreign trade businesses. The results of Santander Corporate and Investment Banking, or SCIB, grew an impressive 39% year-over-year due to the increase in loans, higher loan spreads, and an increase in fees driven by our investment banking unit and greater client treasury income. On slide 20, we review our loan book, which grew 3.8% Q-over-Q and 10% year-over-year.
Loans to individuals increased 11.8% year-over-year and 3.3% Q-over-Q, with loan growth in this segment being driven by high-yielding auto loans, which grew 5.2% Q-over-Q and 51% year-over-year. Our credit card loan book also started to accelerate, growing 7.4% as household consumer behavior patterns have begun to normalize. Mortgage loans increased 13.5% year-over-year and 4% quarter-over-quarter. Growth in this product was mainly driven by the higher UF inflation rate that resulted in a positive translation impact on mortgage loans. During the quarter, loans in our SCIB segment grew 12.8% Q-over-Q, while loans to our middle market increased 4.7% in the same period as the economy continued to grow and large corporates sought funding in the form of corporate loans as the bond market remained illiquid.
This growth was also affected by translation gains from the depreciation of the peso and the high UF variation in the quarter. On slide 21, we show the evolution of our funding mix. Total deposits decreased 6.3% year-over-year and increased 2.1 Q-over-Q. After a strong increase in non-interest-bearing deposits in the last two years, we have started to see clients shifting their money to time deposits as rates rise. As a result, time deposits increased 17.1% Q-over-Q. With this shift, we expect average funding costs to continue to rise as the monetary policy rate continues to go up. These higher rates will be eventually transferred to our loan book, but given that our interest-bearing liabilities have a shorter duration than our assets, funding costs will go up first.
Moving on to slide 22, we can see how the movement of volumes, rates, and inflation have been affecting our margins in the quarter. The variation of the UF in the second quarter reached 4.3% compared to 2.4% in the first quarter of this year and 1.1% in the second quarter of last year.
This led to a strong increase in our net interest income from readjustments, which grew 11.7% year-over-year and 24% Q-over-Q and led to an increase in the quarterly NIM to 4.5% compared to 3.7% in the first quarter of this year. However, this has been partially offset by the rise in funding costs due to the increase in the monetary policy rate by the central bank and the subsequent shift of funds from non-interest-bearing demand deposits to time deposits. Going forward, we expect rates to continue to rise and for inflation to gradually start to slow down. This will put a downward pressure on our NIMS in the second half. Therefore, we maintain our guidance for NIMS for 2022 at a level between 3.5% and 3.7%.
On slide 23, we can see the evolution of asset quality over a long period, where it is clear that the asset quality of the bank remains at historically low levels, as measured both by the NPL and impaired loan ratio, while coverage also remains at all-time highs. As household liquidity levels normalize, we expect asset quality levels to gradually return to pre-pandemic levels. As shown on slide 24, this process was visible in the quarter, with NPLs increasing to 1.5% of loans. However, it is important to note that the impaired loan ratio, that is the ratio of NPLs plus restructured loans, did not show the same trend, reflecting that new impaired loan creation did not accelerate in the quarter.
The coverage of NPLs as of June 2022 reached 228%, and there has been no reversal of the voluntary provisions we recognized in 2020 and 2021. As we can see on slide 25, these positive asset quality indicators led to a cost of credit of 1% for the second quarter of 2022, and 0.9% during the first half of the year, in line with our guidance for this year, which remains unchanged. On slide 26, we move to non-net interest income revenue sources, which expanded 15.3% year-over-year in the second quarter. Fee income increased 17% year-over-year, driven by higher client activity and the growth of our client base, as previously described.
Compared to the first quarter, fees decreased 2.5%, mainly due to the effect of the new interchange fee caps that started in April this year that reduced the income the bank makes on our card transactions. As shown on slide 27, operating expenses in the second quarter increased 8.5% year-over-year and 15.8% Q-over-Q. The Q-over-Q rise in cost is mainly due to seasonality effects and inflation. Compared to the second quarter 2021, the rise in costs was mainly fueled by the impacts of inflation on personnel expenses and some administrative costs, the depreciation of the peso, which increased some administrative expenses denominated in US dollars, mainly IT-related, and finally, higher other operating expenses due to the recognition of greater provisions for non-credit related contingencies, mainly related to future severance payments.
Furthermore, as Santander Consumer, our auto lending subsidiary, sales and results have increased significantly. We also incur greater expenses related to the joint venture with our main dealership partner, which is recognized in this slide. Finally, the bank continues ahead with its $260 million technology investment plan for the years 2022-2024. Despite this rise in costs, the bank's efficiency ratio in the first half reached 37.9% compared to 40% in the same period of 2021. Moving on to slide 28, we now analyze our capital ratios. At the end of second quarter 2022, the bank reported a core equity ratio of 9.6% and a total BIS ratio of 16.2.
During the second quarter, the bank paid its annual dividend, representing 60% of 2021 net income, with an attractive dividend yield of 5.5%. This led to a decrease of 60 basis points on our core capital. Our fully loaded ratio was 10.1% core capital, and we recorded a total BIS ratio of 16.7% at the same date. We are on track to finish the year with a core capital ratio above ten percent, and we are maintaining our guidance of a dividend payment of 50%-60% of 2022 earnings. Finally, on slide 29, we present our outlook for the rest of 2022. We expect our business segments to continue performing well thanks to our digital platforms and growing client base.
This will be the basis for long-term growth and profitability in the coming years. The macroeconomic situation is also a key factor on our results, and as Claudio mentioned, we now expect a GDP of around 0.5% this year, with inflation reaching around 12% and the monetary policy rate with further increases and probably finishing the year at around 10.5%. With this, we expect loan growth of 8%-10% and a net interest margin for the full year of 3.5%-3.7%. Non-NII should grow this year by at least 15%, driven by client growth and greater product usage. Our guidance for the cost of credit remains unchanged at 0.91%. Given our efforts with our digital strategy, we expect costs to grow below inflation at around 7% for the year and at a much slower pace than observed in the second quarter. All in, we expect an ROE of 21%-22% for 2022.
With this, I finish my presentation, and now we will gladly answer any questions you may have.
Thank you very much for the presentation. We'll now be moving to the Q&A part of the call. If you have any questions, please press star two on your keypad. That's star two on your keypad. You may also ask a voice question if you are dialed in via the web. The text questions are disabled for this call. Our first question comes from Mr. Jason Mollin from Scotiabank. Please go ahead, sir. Your line is open.
Thank you very much. Thanks for the presentation, gentlemen. My first question, I guess, is on the path for inflation in the third and fourth quarter, given the higher policy rates. If you can talk about that path to get to the inflation rates for the full year. I'm imagining that sensitivity for NIM to inflation is why you're maintaining the NIM guidance at 3.5%-3.7%, and why the ROE for the full years is so much lower than the first half. If you can provide some color, that would be great. My second question is really on the outlook for the regulatory environment in Chile. We've seen some news on a potential fintech law, if you can talk about that and if you expect competition to heat up? Thank you.
Okay. Hello. Thank you for your question, Jason. I mean, I'll take the first one, and I'll leave Claudio for the. The first one, I mean, regarding the path for, let's say inflation, rates and NIM, as basically our expectation for inflation for the year implies basically having in the second half the same inflation or almost the same inflation we had in the first half. That's, let's say, it would be flat semester versus semester. The policy rates for the second half is going to be significantly lower. That's why, even though in the first half we were able to sustain the NIM above 4% for the second half, that number will trail downwards according to our expectation for inflation and rates.
That will, let's say, average at 3.5%-3.7% for the year. It's true that the reaction function for the central bank in the sense of how sticky high inflation will be and how they will react to that and when they will start the easing cycle is going to be a crucial element going forward for our NIM. For the second half, basically that's the equation. I mean, a similar level of inflation with a higher short-term rates, and that's implying lower NIM for the second half, averaging 3.5%-3.7% for the year.
Well, in terms of the regulatory environment, one of the main regulation that is in Congress right now is the fintech regulation that also includes open banking in Chile. In terms of fintech, basically our view is that it regulate activities that are currently being developed by certain companies. So it basically put them under the umbrella of the CMF, which is a good thing to do. In terms of open banking, the key point there is basically data protection. There is also a law in Congress right now that is pursuing to protect personal data. The important thing here is that both laws talk to each other, that they are coherent.
The important thing in the case of open banking is to have a good regulation in terms of personal data. Also, it is advancing in Congress an old bill that consolidates debt information that has been very important in order to have a better data and information to evaluate risk. Because of this regulation on fintech and on open banking, that has opened the door to rediscuss this bill on consolidated debt, and we have a positive view on that regulation.
Is there any comment on timing? When do you think open banking rules or the fintech law could be implemented?
We think that at least during this year it will be under discussion in Congress, and then there is a transition for implementation that may take place during next year. Probably the political agenda in the second semester this year will be very much focused on the constitutional process, and that will take a lot of political energy in Congress. It might be the case that this discussion will stall a little bit. It might be finished by the end of this year and then next year, starting its implementation. That would be the shortest period of implementation.
Thank you. Appreciate it.
Thank you very much. The next question comes from Mr. Tito Labarta from Goldman Sachs. Please go ahead, sir. Your line is open.
Hi, good morning, Emiliano and Robert. Thank you for the call, taking my question. Again, a bit of a follow-up to Jason's first question on the guidance for the year. I guess, I mean, do you think that the guidance is sort of conservative at this point? Can there be some upside risk? 'Cause if to get to 21%-22% ROE for the year, that means you probably have to be below 20% in the second half of the year. Just to get how much conservativeness may be baked into that guidance. Kind of similarly, could you remind us the sensitivity of your margin to the higher rates or if inflation will be the same in the second half as the first half? How much will your margin fall because of the higher rates or just, if you can remind us the sensitivity of that? Thank you.
Hello, Tito. Thank you for your question. I mean, I would call it like neutral, I mean, or balanced, the different risk to the guidance. I mean, basically it will depend on the combination of inflation and monetary policy rates. With our expectation of inflation around 12% and the rates peaking at 10.5%, that's the number basically we have seen. From that, basically the risk or the movement from that base case scenario would be the higher the inflation, the better and the opposite, right? I mean, the.
Considering that, we are already in July, the effect of the rate for this year tends to be lower, I mean, for the calendar year, and will be affecting more next year. With our macro expectations, I would call it like balanced. Let's say I wouldn't call it conservative according to that assumptions of inflation at 12% and rates peaking at 10.5% by the end of the year. In terms of sensitivity, probably.
Yeah. Basically we have around, like 30 basis points sensitivity to inflation. Okay? Probably 100 basis points. It's around 30 basis points in NIM. Here it's really important what Emiliano said, it's over like the sequential. Even inflation is gonna remain high, you know, we had like more or less 6% inflation UF in the first half. We more or less have six in the second. Sequentially, we're not gaining any more NIM because of inflation, okay? That's why, you know, it's a little tricky because inflation is still high, but, you know, we're not gaining any more from that. On the other hand, we have the sensitivity of the short-term interest rates.
As you know, we have this kind of natural hedge where we're long inflation, and we're obviously reprice our liabilities, okay? Faster than the more sensitive to monetary policy rates. Today the sensitivity of more or less a 100% rise in rates, short-term rates, is around 25-30 basis points. You know, in the first quarter, I think the average monetary policy rate must have been around 4%. The second quarter, 7%. In the third and fourth quarter, the average monetary policy rate is gonna be roughly around 10%, okay? You're not gaining any more NIM unless inflation continues to surprise on the upside. Now you're gonna see the bulk of the effect of the rise of rates, okay?
With those sensitivities, you more or less get that net interest margin for the year of 3.7%. Where this could change is if inflation goes higher and rates don't change. If inflation ends up at 13%, let's say, and rates still say 10%, we get another, you know, 30 basis points more of NIM, okay? That is kind of the equation we're looking for the second half of this year.
Remember that also inflation has an impact on the effective tax rate.
Yeah.
That amplifies the effect. I mean, let's say the higher the inflation from our base case will imply a lower effective tax rate and the opposite. As we see it now, when you look at market prices and surveys and the different scenario, inflation around 12% looks like a balanced view.
Great. Thanks, Robert. Thanks, Emiliano. That's helpful. Just, sorry to follow up on this, but, I think your economist mentioned inflation reaching 13% in August and September, right? Already for 3Q, you're probably running ahead of that expectation to some extent. You would expect some kind of decline in inflation probably for the fourth quarter.
Yeah, yeah. On a year-over-year basis, remember that inflation started to pick up late last year. That's why the sequential year-over-year tends to go down from where we are now because last quarter of last year was already high.
With that.
Yeah, go ahead.
From July until October, we see prints that are on average one percentage point increase month on a monthly basis. November and December, we see much softer monthly CPIs, about 0.4% on average.
Okay, perfect. Thank you.
Thank you very much. The next question comes from Yuri Fernandes from JP Morgan. Please go ahead, sir. Your line is open.
Thank you, everybody. I have a question regarding asset quality. We saw an increase on NPLs this quarter, likely higher new NPL formations than you're losing a little bit your coverage ratio. My question is, what should we see going forward? Like, should the NPLs keep deteriorating now that economy is slowing down, we have much higher inflation? If NPLs are supposed to keep deteriorating, where should they land? Is this a normalization to pre-COVID levels? Are you concerned that this may go higher? Like what is the message overall for asset quality going forward? Thank you very much.
Okay. Yeah, you're correct. The NPLs went up in the quarter, not so much impaired loans. What does that mean? Basically, it's that people who are already impaired, meaning that they were restructured or they're more than one day overdue, they floated down to NPL status. That's a good thing in the sense that more people are not really entering impaired and people who are impaired are entering NPLs. It basically means that it's good for the cost of credit because we already have a high coverage, meaning that people who are impaired or going to NPL already have, you know, a deteriorated expected loss and therefore the provision taken. Okay. That's why we should continue seeing some NPL deterioration going forward.
That should eventually, you know, by the end of next year, I would say, or sometime next year, reach pre-pandemic levels, which I believe was an NPL ratio of around 1.8%. Okay. Remember, we're coming off of all-time lows. I think that's gonna be a normal process. Also, you know, we are expecting. I said the economy was going to grow like 0.5%. This year, the economy is gonna grow like 1.5%, what Claudio said. Next year it could actually have a recession. It could actually be negative. Okay. All in, we expect the cost of credit, we're not changing that.
We still think it's there, because of the high coverage, it should remain at 0.91%, the cost of credit. NPL should slowly, gradually return to pre-pandemic levels of around 1.8%. A coverage level should go down further. Okay? This is without taking into account any reversal yet of the voluntary additional provisions we have taken. Okay? There are also some accounting. For example, in the first quarter, you saw mortgages fall very a lot in NPL, but we did a lot of coverage. We knew there was gonna be a shift in the NPLs in mortgage, okay, because we saw that in early non-performance.
That's good because in the first quarter, we already took the necessary provisions to cover the mortgage. I don't see mortgage NPLs rising very much going forward. The coverage ratio basically went back to where it was at the beginning of this year. I think we did a very good move in the first quarter of anticipating that increase in NPLs. That's basically the summary. I don't know if that was clear.
No, that was super clear, Robert. Thank you very much. If I may, just a second question regarding deposits, right? I guess this is totally expected. We are seeing demand deposits decreasing. There is a cost of opportunity given higher rates. My question is. How do you see these movements, right? Is this in the same pace as you're expecting? Is this faster than you're expecting? Basically, what is the view for demand deposits versus total deposits going forward? You know, like should this normalize in 2023? Do you believe you can keep a buffer helping your margins? Because I guess we discussed in the previous questions a lot about inflation and rates. I guess on the liability side, you also have the pressure, right? Like your funding costs should go up, because of the mix, right?
Yeah. I mean, I think we think that the fall in demand deposits will start to slow down. I mean, basically because what we have seen is that the fall is mainly concentrated on individuals. I mean, basically people spending the money they got from the pension fund withdrawals and from the fiscal stimulus through COVID. Spending or let's say taking advantage of the higher level of rates, I mean, or let's say reacting to the higher opportunity cost of the rates. That process is finished. I mean, it's let's say not unlimited, the amount of money. That will be slowing down.
We think that maybe by the end of the year, that process should like normalize, and we can start to have like a normal pace of growth because the effect of the opportunity cost of rates basically will be already there. I mean, that will be. The shifting should kind of finish and starting forward from there, we should have like a more normal pace of growth of deposits, time and demand deposits and the shifting basically waning by the end of the year, beginning of the next year. I don't know, Bobby.
We talked about the sensitivity to rates and that also includes the shift. Another reason, you know, the NIMs are a little tighter in the second half is because of this shift. Okay. I guess that's a really good point you're making, where it's not only the sensitivity is what it is, but also you have, you know, a lot of people flowing to time deposits. We haven't seen this rate of you know markets here in Chile is you know stock and everything. There's kind of still a lot of risk aversion and, you know, you can take a 10%-12% time deposit. That's, you know, an assured profitability for the client. Yeah, that's included basically in our NIM outlook. It includes the shift.
There is also an effect in the same direction related to the asset side, in the sense that people still have liquidity, so basically they are not borrowing much, and that's why you see origination and volumes in the consumer side flat to falling. When they basically spend the money or they don't have more money, they will also. I mean, demand deposit will stop falling and also there will be a more, let's say, tailwind to consumer credit. We will start to originate assets at higher rates. At the end, that process happening by the end of the year, beginning of next year, will have like that double positive effect that the negative effects will stop.
Yeah. Just the last thing, it's kind of hard to see is because there's a lot of translation gain and loan growth, okay? Let's say if you eliminate that, apart from auto loans, finally credit card loans started to grow in the quarter, okay? Yeah. I remember credit card and auto loans are nominal peso. In terms of real origination, we saw honestly, in two products, you know, auto loans and credit card, which is basically people returning to more normal. Basically in line with Emiliano that you should see. Those are coming out at good spreads, but you'll see the impact of that on NIMs in next year, okay?
No, no. Perfect. Thank you, Emiliano. Thank you, Robert.
Very much. Our next question comes from Mr. Ernesto Gabilondo from Bank of America. Please go ahead, sir. Your line is open.
Hi. Good morning, Emiliano, Claudio, Robert, and good morning, everyone. My first question is on your loan growth. Just want to hear your expectations, considering the higher rates and the potential economic recession in Chile. Wondering more about the loan growth for next year. Would like to hear, like, your first impressions for next year. Which do you think will be the segments that could suffer the most, and which would be the ones that could be more resilient? My second question is on asset quality.
Also considering the economic recession, the challenges of a new tax reform, a new pension reform, the economic risks that you pointed out on the ongoing constitutional process, even if it's approved or not, the lower copper prices that you mentioned, and that you are no longer having the excess liquidity from pension withdrawals. How should we think about the asset quality for next year? Thank you.
Okay. You know, loan growth obviously this year it's growing. A lot of it influenced now by the depreciation of the peso and inflation. Originations are. If originations you know lead to a lower actual loan growth, okay? Next year with economy flat or negative growth, okay, we should see you know loan growth probably in the mid to low single digits, okay? The good news there and linking this to your question about resilience, I would say that a lot of loans that were very subdued in growth because the excess liquidity in households should drive growth next year. Mainly consumer growth, okay? I think there's.
Even though there might be a slight recession, unemployment should then continue to improve. Our average client in terms of debt servicing ratio, in terms of household debt overall, is still much better than it was actually even before 2018, okay? The average health of our client, you know, without being very aggressive in loan growth, there should be room to grow the retail loan book. SMEs have been basically they grew a lot 2020, 2021 because of the FOGAPE. This year there's been more of a actually the SMEs normalizing their balance sheet situation, paying off some of these loans. I think there should be some, you know, moderate SME growth next year.
Mortgages, if rates start to come down and inflation starts to come down, there could be real origination growth. This year, originations are down. It's basically inflation. Basically I think there will be growth in the retail loan growth, but basically overall with low single-digit loan growth. In terms of asset quality, yeah, as you said, on the one hand there's gonna be lower growth, but on the other hand, as I said, we still have you know, our average client still has very good asset quality indicators, okay, in terms of paying. Remember, some people spent their excess liquidity. A lot of our clients paid off their debt or saved their money, okay?
I think that in this recessionary cycle, there will be, as I mentioned before, an uptick in NPLs. You know, NPLs going back to pre-pandemic levels. But we still currently, even with our GDP guideline, we're still seeing the cost of credit, you know, 0.91%, okay? On top of that, you know, we still have our additional voluntary provisions, which, you know, are there. We're not thinking of using them, but they're still available.
Perfect. Thank you very much, Robert. I just want to double-check if you continue to see a medium-term ROE between 17% and 19%.
Yeah. Yeah. Basically, we maintain that view on long-term ROE.
Perfect. Thank you very much.
Okay, thank you very much. Our next question comes from Mr. Alonso Garcia from Credit Suisse. Your line is open, sir. Please go ahead.
Hi. Good morning. Thank you for taking my question. It's just a follow-up on asset quality. I wonder if you could comment on your exposure to certain industry where you see particular risks amid the current macro environment. I mean, I have in mind the real estate industry, given higher interest rates and the health insurance industry, given all the noise that we have been seeing with ISAPRE. So those are the ones I have in mind, but I don't know if you could comment on this or any other sector where you could see particularly high risks in this environment for your commercial portfolio. Thank you.
Okay. Regarding our exposure, first of all, in the health industry, it's really low. We have a 10% market share in ISAPRE. It's not significant. I mean, it probably may require more provisions, but I would say nothing that jeopardizes our outlook. In real estate and in construction, I would say it's around, you know, 5%-6% of our loan book. There, the good news is that those, the companies we deal with. First of all, the NPLs are still ridiculously low. Second of all, the companies we deal with in those sectors still have very strong balance sheets.
We tend to deal with you know well-established real estate and construction firms and that have good balance sheets. I would say construction in Chile has been slowing down. I would say that's a little bit more of the tricky sector. There'll probably be an increase in provisions, maybe mainly among you know small construction businesses. Overall, those aren't a big part of our loan book, okay? The large construction companies, I think, have a very solid balance sheets. We probably won't be growing, but we don't see a major threat there. The real estate developers, our client mix there is actually very good, and they've managed very well the cycle, like you know selling, you know, getting rid of inventory, having good cash.
Overall, there will be an increase in risk in those sectors, but I would say nothing that jeopardizes our cost of credit outlook. Also, remember, during the pandemic in 2021, we set a lot of provisions in the corporate area. Any weakness we saw in the loan book, and more than a sector on a client basis, we kind of cleaned up during the pandemic. Any weaker client that we saw that either wasn't gonna make it through the pandemic or was gonna have difficulty in a recession, we increased the provision. That's why I think even during this downturn, we're entering it with, I think, a very healthy corporate loan book, which is in the end where you always try to avoid big surprises.
On the retail side, you can manage it in terms of, you know, the scoring models. The problems come when a larger company has problems. There, I think we're very confident that we're entering this cycle with very good coverage of that loan book.
Thank you. Very clear. If I may a follow-up. I mean, what is needed for you to decide using some, at least, operational provisions that you have created since 2020? I mean, what kind of NPL ratio or contraction in GDP you would need to see to make use of those additional provisions? That I think that so far you are guiding that you won't be using, correct?
Yeah. I mean, I would say that the base scenario is not using them. Basically, that's a board's decision. There hasn't been set a specific target of NPL of cluster risk as you were asking. I would say that the idea of those provisions basically was to prepare for really high levels of risk coming out of the pandemic and from the macro situation. So I wouldn't expect the usage of those provisions unless we are significantly high in terms of cost of risk. Meaning significantly high is definitely above pre-pandemic levels and let's say using that voluntary provision as a way to smooth or to absorb that extraordinarily high level of risk. That's why it was created.
As I said, I mean, so far the best case is that we are not planning to reverse any of that. Basically it will be a decision from the board when to use it. The spirit is basically that, I mean, to use it as a way to absorb extraordinarily high levels of cluster risk.
Very clear. Thank you very much.
Okay, thank you very much. Our final question comes from Neha Agarwala from HSBC. Please go ahead.
Hi. Congratulations on the results, and thank you for taking my question. Just very quickly, about the outlook for 2023. This year, the earnings have benefited a lot from higher inflation. Next year, as inflation eases off, is there anything that the bank can do to offset the impact on margins from more moderate levels of inflation? Maybe a high fee income growth. Loan growth, you said, will be around in low single digits. Is there anything that you can do? How do you see the earnings evolution for 2023? Thank you so much.
Hello, Neha. Thank you for your question. I mean, talking about 2023, we think that it's still a bit early to talk much about the guidance for next year, basically, because as you were saying, inflation and rates are going to be key drivers for the revenue, for margin, and for basically bottom line evolution. When you say what the bank can do, I can add that what the central bank can do, I mean, in the sense that in that scenario of inflation basically going down from, let's say, low double digits or low teens, if you want to mid-single digits or something like that, we would expect the central bank to start cutting rates, and that's going to be the counterbalancing effect on our margins.
I mean, the big question is, say, the pace and the rhythm and how aggressive the fall in inflation is and how aggressive the central bank is reacting to that. Basically, I would like to wait some more months, I mean, maybe next call to discuss more 2023 in that sense, because at the end it will be the combination of that. How fast and how low the inflation goes down and how the central bank reacts to that. That, from, let's say, the pure financial sensitivity point of view. As you said, all the non-NII revenues are doing really well.
I mean, we expect also to be growing healthy on the different lines in fees as we are doing now, and also from our markets transaction. You saw the numbers in checking accounts, peso checking accounts, dollar checking accounts, that's doing really well. From the non-NII point of view, we are, let's say, confident and positive on the outlook for next year because our commercial activity with clients is doing really well. All the initiatives we are doing in the digital front are helping to sustain that. From the more NII financial point of view, I would like to wait a bit more visibility on that, let's say, easing cycle or the dovish cycle that it's anytime in the future, depending on local and international conditions. Okay.
Now just real quickly, also costs. I mean, obviously there's the inflation, but as you saw in the second quarter, we sped up. You know, we've already closed 10% of our branches. There's a lot of efficiencies that we're working on as well. So productivity should rise. As Emiliano said, our client business is doing really well. You know, we're adding, I believe, you know, like 60,000 clients a month or so, and a new client. So there's a lot of room there in terms of cross-selling. And another thing that's important is that in the second quarter, obviously inflation was a big deal, but when you exclude that, the growth of non-credit related income has been very strong. Okay. So I think that's really gonna sustain our results next year.
Very helpful. Thank you so much.
Okay. Thank you very much. It looks like we have no further questions at this point. I'll pass the line back to the management team for the concluding remarks.
Thank you, Michael. Thank you all very much for taking the time to participate in today's call. We look forward to speaking with you again soon.
Thank you very much. This concludes today's call. We'll now be closing all the lines. Thank you and have a good day. Goodbye.
Bye-bye.