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Banco Santander-Chile (NYSE:BSAC)
Q4 2019 Earnings Call
Jan 29, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2019 Banco Santander Chile Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to CFO, Emiliano Muratore. Please go ahead, sir.

Emiliano Muratore -- Chief Financial Officer

Good morning, everyone. Welcome to Banco Santander Chile's fourth quarter 2019 results webcast and conference call. This is Emiliano Muratore, CFO, and I'm joined today by Robert Moreno, Managing Director of Investor Relations; and our Chief Economist, Claudio Soto. Thank you for attending today's conference call.

Despite a challenging quarter, we have made advances in our strategy and look forward to sharing with you our progress. Before we get into our results, Claudio will give us some insight into the macro environment and our expectations for the rest of the year.

Claudio Soto -- Chief Economist

Thank you, Emiliano. Activity contracted abruptly in the fourth quarter due to the social unrest that affected Chile. October's metrics [Phonetic] fell more than 5% against September. In November, there was partially recover [Phonetic] with a 1% gain. We estimate activity continued improving in December as the social unrest receded. All in all, we estimate the economy fell by more than 2% year-on-year in the last quarter, and the year as a whole, expanded 1.1%.

Going forward, activity will depend to a large extent on the domestic political scenario. Confidence has declined and risk premiums have increased. On top of that, uncertainty regarding the constitutional process will affect new investment projects. Against that backdrop, a substantial fiscal stimulus will help to support domestic demand. On the other hand, the real depreciation of the peso of about 10% will boost export. All in all, we see a 4% decline in gross capital formation for the year as a whole. Private consumption will expand at around 1% and export will speed up to 3.3%. GDP in total will grow 1% this year.

Until now, official figures do not show a significant deterioration in the labor market. However, layoffs during the last days of December increased relevantly [Phonetic]. Although we estimate that there won't be significant layoffs in the coming months, job creation will slow down. Therefore, unemployment will increase up to 8% to 8.5% during the year.

CPI inflation increased in the last month and closed 2019 just at the 3% target of the Central Bank, which led to a UF inflation variation of 2.7%. During the first quarter, CPI inflation will increase about 3.5%, driven by the currency depreciation. However, in the second part of the year, it will slow down as the low growth of the economy creates slackness. After an important cut in monetary policy rate in mid-2019, we do not expect further cuts this year. The Central Bank made clear that while they are intervening in the FX market, a rate cut will be incoherent. Moreover, given the volatility seen in financial asset prices, we estimate the Board will be particularly careful in deciding its next move.

Regarding fiscal policy, we estimate that public deficit will reach between 4.5% and 5% of GDP. Thus, public debt will rise fast. While the government has room to expand its expenditure, a credible commitment toward a fiscal consolidation in the future will be important to ensure that debt converges toward a reasonable.

The social conflict with [Indecipherable] during the weeks was spurred by several factors, including a slower economic growth after the commodity boom, a persistent although declining inequality, lack of safety nets for the growing middle class, and corruption scandals at different levels. In response to these events, almost all political parties agreed to launch a process for an eventual change in the constitution. The process begins with a referendum that will take place on April 26. Citizens will decide if they want a new constitution or not, and if so, which body will write it down.

In writing the new constitution, each article in it will have to be approved by two-third of the constituent body. Once written, the new constitution will be put back to Chileans in a second referendum that we estimate will take place in March 2022. In parallel, the government is looking to speed up some of the reforms that were already in discussion. The bill that modernizes the tax system should be approved this week. In its new design, there will be no full integration of the income tax as it is -- it was originally proposed. And there will be a focus on helping the smaller enterprises and increased taxes to the wealthy. With this reform, the government seeks to collect an additional CLP2.2 billion.

Regarding pensions, one of the most demanded reform by the population, the amendment bill proposes increasing the mandatory contributions from 10% up to 16% [Phonetic] with increased [Indecipherable] per year. Of the extra contribution, 3% will finance a new solidarity fund. This reform will be implemented over a 12-year transition period.

Robert Moreno -- Manager of Investor Relations

Okay. Thank you, Claudio. So if you move now on to Slide 7, I wanted to also briefly discuss some of the reforms and regulations that may affect the Bank both positively and maybe negatively. Just to note, not all of these reforms are finalized and many are in the initial discussions.

Firstly, beginning in January 1 of this year, there is already in place a new regulation whereby banks have to automatically use available checking account funds to pay off our clients associated credit line. This will have an impact on NIMs of around 8 basis points this year. Another potential risk going forward is more consumer protection through fraud compensation. There is ongoing discussion about limiting the responsibility of clients in case of loss, threat or fraud of debit and credit cards. In light of these developments, we are trying to limit the exposure of our clients to credit card fraud through education, marketing campaigns, daily transfer amount limits, better chip technology, improved ATM software and other technological improvements. But we cannot assure this level will not increase the financial costs related to cyber crime, credit card fraud and insurance coverage.

As many of you know, our regulator has been publishing the regulations for the implementation of Basel III in Chile. Just this week, the regulator published the model for risk weighting of credit risk. From our preliminary evaluation, this is broadly in line with our expectations, and we continue to believe that the effect on our bank should be neutral to positive in terms of our capital ratios. According to the bank regulator, credit risk-weighted assets will decrease 20% for the system under this new method. We are still estimating the impact for us. By December of this year, banks must publish the risk-weighted assets under Basel III.

Other possible developments which we view as positive are the creation of a consolidated positive credit bureau and what is called financial portability. These two measures should improve bank penetration levels, especially through the development of new digital banking services.

Moving on to Slide 8, we wanted to give a strategy update of the Bank. 2019 was a landmark year in innovations, as we see on Slide 9. Superdigital was piloted and launched, and now has over 18,000 clients. During the first half of 2020, we will have the official launch of Superdigital, which was postponed in the fourth quarter.

We also made advances in our acquiring business, which we will go into detail shortly. In November, we also received the final approval from a regulator to acquire 51% of Santander Consumer and began consolidating this company in that month. This portfolio represents around 1% of our total loan book, 8% of our consumer loans and has an ROE greater than 18%. During the quarter, our Life program continued to grow strongly despite the social turmoil, reaching over 136,000 clients. A new private banking model will also be launched during the first half of this year.

On Slide 10, we show the most relevant advances we made in the fourth quarter. At the end of December, the President of the Bank, Claudio Melandri, made the first transaction through our acquiring system, which is currently being piloted in the Work Cafe. We expect to roll this out in the first semester of 2020. The acquiring business will be branded as Getnet, as we help Grupo Santander build a global brand name in this business.

Klare, our digital insurance platform, will also be launched during the first half of this year. The subsidiary was officially created, but we are still waiting for final regulatory approvals to start operations. Remember that this is a 100% digital platform where clients will be able to customize and compare different insurance products. These two initiatives will help bolster our fee income in the coming years.

On Slide 21, we can see that we had a strong client -- we also had a strong client growth in the last -- during the year. During the fourth quarter, despite the social unrest, on average, we opened more than 23 new accounts each month. That means we managed to open 66% more accounts compared to the same quarter of 2018. We also had the highest market share in terms of net increase in current accounts. In 2019, we opened 26% of all new checking accounts in the market. This also has given way to an increase in client loyalty, as well as digital clients, as seen on Slide 12. We measure loyalty as clients with at least four products who must also surpass a minimum usage and profitability standards. Throughout the year, we had an increase in loyal high-income individuals, as well as SMEs. Digital clients also kept expanding, increasing 13% and reaching over 1.2 million clients.

Our work in digitalization as well as other initiatives has also helped us improve our client satisfaction, as seen on Slide 13. We have consistently improved both our net promoter score and net global satisfaction, closing the gap with our top contender.

Another important topic that Santander pushed during the year was ESG, as can be seen on Slide 14. During last year, our mission put an emphasis on not only to be the best bank, but to do so responsibly. We have always been a market leader, but this year -- but in 2009 [Phonetic], we put more focus on communicating our ESG initiatives. And this in turn, helped us to improve in many ranking and indices. This year, for example, we were able to improve our ESG score as measured by Vigeo Eiris from a limited score of 38 out of 100 to a robust score of 58. This put us well above our Chilean and Latin American peers and ranked us Number 8 in the world and Number 4 in emerging markets for best ESG standards for retail banks.

One such initiative in line with the responsible banking is that now our clients can compensate their carbon footprint, as can be seen on Slide 15. We are the first bank in the country to give our clients the opportunity to become carbon-neutral. Clients can compensate their footprint through either directly buying certified carbon credits or contributing to an environmental project here in Chile. Clients only have to go into their account online and they can see how many kilos of carbon dioxide they have emitted, how much it translates into monetary terms and the breakdown of where the CO2 emissions are coming from. This initiative was launched during the end of November. And during the month of December, 312 tons of CO2 were compensated through carbon credits. Clients also contributed to the foundation for a project in a National Park close to Coquimbo. And in one month, already 20% of the total financing of this project was achieved.

On Slide 16, we show how our strategy and continued pursuit has also gained us in recognition. For the second year in a row, we were recognized within the Top 3 in the country for Best in Corporate Governance by a survey carried out by Ernst & Young, EY. We are also very proud of climbing the ranks in Great Place to Work on fifth place overall last year to Number 3 in companies with over 1,000 employees. Once again, we were awarded Bank of the Year for 2019 by the renowned magazine, The Banker.

Moving on to Slide 17, we will now go into the results for the fourth quarter and the full year. On Slide 19, we show that net income attributable to our shareholders for 2019 was CLP552 billion, translating to an ROE of 16.7%. Remember that during the year, we had an increase in provisions of CLP31 billion in July, as the new model for SMEs set out by our regulator came into effect. As the social unrest continued from October onwards, we also decided to take on an additional provision of CLP16 billion for our consumer model. When adjusted for these extraordinary provisions, ROE reached 17.7% for the year.

Please turn to Slide 19. The Bank's total deposits increased 7.7% year-over-year and 2.7% quarter-on-quarter. During the quarter, the Central Bank lowered the monetary policy rate again by 25% to 1.75 [Phonetic]. This led to a decrease in the cost of funds to lower time deposit costs. On the other hand, demand deposits had a record year in terms of growth in 2019, increasing 18 -- 8.8% quarter-on-quarter and 17.8% year-over-year. As a reminder, demand deposits are non-interest-bearing. Our liquidity ratios also remained healthy with the LCR ratio finishing the year at 143% and the NSFR at 108%.

On Slide 20, we review loan growth. Total loans increased 8.1% in 2019, in line with guidance, and 2.6% quarter-on-quarter. Loans to individuals was the fastest growing segment in 2019, led by an increase in lending to high-income earners. This was also driven in part by the incorporation of Santander Consumer in November, following the final approval from our regulator. This contributed CLP451 billion of consumer loans as of December 2019, representing 8% of the consumer loan book. Going forward, we expect loan growth of 5% for this year, with more or less the same growth across all segments.

On Slide 21, we show the evolution of NIMs. The quarter-on-quarter increase in the net interest margin was mainly due to the higher UF inflation rate, a decrease of 25 basis points in the short-term interest rate, and the improved funding mix. These positive effects were partially offset by the negative impact of lower long-term interest rates that drove a record level of refinancing of mortgages in the year.

With this in mind, on Slide 22, we wanted to show you the evolution of certain market factors that should help to sustain margins in 2020. As you can see on this slide, the yield on the Central Bank's two-year note fell steadily during 2019 but began recovering during the fourth quarter. This should help loan spreads. At the same time, the Central Bank cut the monetary policy rate. This should lower funding costs during 2020. In addition, we have seen an increase in inflation, which is positive for margins. We also expect a positive push from Santander Consumer, which should boost margins by 10 basis points as well. On the other hand, we do have headwinds coming from the regulatory changes, as well as slower economic growth. Therefore, we are leaving our guidance for NIMs with a stable outlook for the year at around 4.1%.

On Slide 23, we can see that the asset quality had a slight deterioration during the quarter due to the social unrest in Chile, with NPLs and the impaired loan ratio increasing 10 basis points to 2.1% and 5.9% respectively. By segment, SMEs were the most affected within our loan book. We have been proactive in trying to help our SME clients by either refinancing or giving grace periods for them to recover, explaining the uptick in impaired commercial loans as well.

Our coverage ratio increased in the consumer loan portfolio during the quarter, as we set aside additional provisions for CLP16 billion to cover possible higher risk levels and any greater provisions required by the bank regulator for this portfolio in 2020. In mortgages, we have maintained a focus on originating mortgage loans among high-income earners and with an average loan to value below 80%. This has been a key factor in maintaining healthy asset quality in this product.

Moving on to Slide 24, we can see that the cost of credit ended the fourth quarter at 1.9%, and 1.3% for the whole year. When adjusted by the onetime charge previously mentioned, the cost of credit was 1.7% in the quarter. Incorporation of Santander Consumer had an effect on the cost of credit of 10 basis points in the quarter. Going forward, our cost of credit should remain stable at 1.3% to 1.4% in 2020 due to the expected increase in unemployment, lower economic growth of 1% for the year and the incorporation of Santander Consumer. This will be partially contained by the Bank's minimal exposure to low-income retail lending. Only less than 1% of the loan book today is to low income earners.

On Slide 25, we show how non-interest income was a positive contributor to our revenues. This reflects that despite lower growth, we successfully continued to generate greater business income with our new and existing clients. Financial transactions had an overall strong year, especially in client treasury, as demand for treasury products remained strong throughout 2019. Fee income rebounded nicely in the second half of the year, led by a rebound in card fees due to the migration of our cards to an interchange fee model and greater usage, an increase in collections fees from Santander Consumer which we started to consolidate in the quarter, and an increase in financial advisory among our corporate clients. In total, non-interest income increased 25% in 2019. In 2020, fee income should continue to recover, as many of our initiatives such as Klare should begin contributing and new client and client loyalty growth remains high. All in, we expect non-net interest income to rise above loan growth in 2020.

On Slide 26, we show our distribution network. As of the end of the year, we had 377 branches, of which 53 were Work Cafes. During the social unrest, we had 70 branches which suffered damages with 15 inoperable. Most of the damage was covered by insurance, which is reflected in other operating income in the quarter. At the same time, we recognized an impairment of CLP2.8 billion due to destroyed assets and branches. We do not expect any material additional charges due to social unrest in 2020. However, our digital channels have been able to serve our clients efficiently during these times, driving upward our productivity levels in 2020.

Employee headcount decreased compared to last year. However, when compared to the previous quarter, there was uptick as we began consolidating Santander Consumer. The incorporation of Santander Consumer added about 200 employees to the Bank headcount. Going forward, we do not believe headcount should increase further.

Please turn to Slide 27. Operating expenses remained flat in the quarter with a year-on-year growth of 3.9%. The Bank consistently delivers world-class levels of efficiency, with a ratio of 38.3% in the quarter and 40% for the year. The Bank continues to spend on marketing, communication, cyber security and technology developments, as well as improvements to our distribution network. But the efficiency ratio should remain around 40% for 2020 as well.

Please turn to Slide 28. As of December 2019, we reached a core capital ratio of 10.1% and our BIS ratio reached 12.9%. The solid capital ratios at the end of the quarter gives the Bank room to grow and to continue implementing our investment plan.

As we stated before, the CMF has been publishing a series of regulations that map out the transition of banks to Basel III. Firstly, the CMF published for discussion the definition of systemic banks. The regulator then published for discussion the determination of the operational risk coefficient, which are all very much in line with the recommendations made by the Basel Committee in Basel IV. We estimate that operational risk should add on around 7% to our risk-weighted assets, very much in line with our original estimates.

More recently, this week, the regulator published for discussion the credit risk weightings. According to the regulator, using information for December 2018, the regulations proposed should reduce credit risk assets by 23% compared to current regulations, which will lead to a total savings for the industry of $4.5 billion. However, this will be compensated by the incorporation of operational and market risks. We continue to believe that the transition to Basel III or IV will be neutral to positive for this bank.

In 2019, we distributed an annual dividend of 60% of the previous year's profits, which led to a dividend yield of 3.7%. For 2020, we expect a similar level of payout, which places our current dividend yield at above 4%. The final dividend proposal will be decided by the Board in March.

To finalize, we will now move on to our outlook for 2020 on Slide 30. The social unrest in Chile continues to create uncertainty in the local economy. We expect investment to contract in 2020. It should be compensated by the export sector and higher fiscal spending from the reforms initiatives proposed to address the social issues. However, our ambitious investment plan, which is focused on digitalization and technological improvements and new businesses such as acquiring, will continue to progress in 2020.

We expect loan growth in 2020 to reach 5%, with higher growth coming from retail loans. Margin should benefit from higher inflation, particularly in the first semester, and the impact of Santander Consumer. However, this will be compensated -- may be compensated by regulatory changes such as the automatic payment of credit lines. Therefore, NIM should remain stable at around 4.1%.

Our improving client service in digital channels has enhanced our ability to capture new clients and cross sell existing ones, and this should continue driving non-interest income slightly above loan growth. Considering the expectation that unemployment will increase this year and the onetime provisions already taken in 2019, we now expect cost of credit to remain stable at 1.3% to 1.4% of loans -- average loans. The efficiency ratio should also remain around 40%, even including our ambitious investment plan. And the effective tax rate will remain on average around 21% to 22%. With this outlook, we believe a return on average equity of around 17% is attainable.

At this time, we will gladly answer any questions you may have.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from the line of Ernesto Gabilondo with Bank of America.

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Hi, good morning, Emiliano, Robert and Claudio, and thanks for the opportunity to my [Phonetic] questions. My first question is in the economic outlook. As you mentioned, the economic growth is expected to decelerate in 2020. So considering the potential increase in Chile's debt from 27% to 40% in the next years, the implementation of our progressive tax reform, the implementation of the pension reform and the challenges of reaching a constitutional agreement, do you see the possibility of a negative outlook for Chile from credit rating agencies later this year? I will -- this will be my last -- my first question and then I will ask a couple of questions.

Robert Moreno -- Manager of Investor Relations

Okay. First of all, up to now, rating agencies have been positive regarding Chile's outlook. They have been supportive of the strategy the government is pursuing. The information regarding the evolution [Phonetic] of the deficit has been made public already since a couple of weeks. So the agencies already incorporated that information into their evaluation. And up to now, in general, their evaluation is relatively positive.

Now, there are risks -- there is a risk on the activity on the one hand. In general, we see more downside risk than upside risk for activity. And also of course, the impact of the pension reform may not be completely incorporated in the forecast for the evolution of the public deficit into the future. Therefore, we see some risk of a revision of the outlook for the economy in the future.

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Great, thank you so much. And then a couple of questions. The first one is in terms of your expectations for loan growth. So we know this loan growth of 8% in 2019, I think it was partially explained by the acquisition of the consumer portfolio. But how do you see the organic and total loan growth in 2020 under this scenario? You mentioned 5%, but just want to know if this is considering an organic growth or it's excluding the consumer portfolio. And especially, I will appreciate your expectations in the SME segment. We have seen several merchants that have not been able to reopen their businesses, and we think that social unrest is expected to come back in March after being in holidays. And then my last question is, if it would be reasonable to expect low-to-mid single-digit earnings growth in 2020, and with that, we will reach your 17% ROE for this year? Thank you.

Robert Moreno -- Manager of Investor Relations

Okay. So the 5% is the year-end versus year-end. So it includes -- it's organic. Obviously, in the first half of the year we're comparing, it will be higher because we'll be including Santander Consumer compared to last year when we were not -- or when we reach the end of the year, it should be around 5%. So take that as organic.

And SMEs, SMEs is a large segment for the Bank. It's around 15% of the loan book. And there, we have companies that sell up to around $3 million. But there's more than 200,000 companies. And the focus will be obviously in the larger SMEs, the SMEs that also are more involved in the export business. Chile many sectors. So there are sectors that are going to perform well this year. As Claudio said, the export sectors should be -- have a strong year. The prices of Chile's exports have been relatively robust. Copper has been a little volatile, but the other ones have been very, very strong. And we're obviously probably going to avoid some of them, maybe the smaller SMEs until we have better economic figures. And obviously in SMEs, there's a lot of stores and commerce, which suffered in October, November. We did see improvements in December. And in January, things have been really calm. As you said, we don't -- March is a big question mark. Everyone is kind of on vacation now. But given that the government has taken a lot of steps to reform -- to do reforms -- they announced the constitutional reforms, I'm not saying that social unrest will disappear, but we don't believe it will at the levels we saw in October, November, because a lot has been done and the democratic institutions are slowly churning out the reforms that everyone has been asking for. So I would say, SMEs are kind of the weak link in the loan book, but we think things should slowly get better and not worse. Okay?

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Perfect. Thank you. And then for my last question?

Emiliano Muratore -- Chief Financial Officer

About the net income growth.

Robert Moreno -- Manager of Investor Relations

Net income growth, yeah. So exactly. So basically, we've always said, it comes true. We should have a mid-to-high single-digit EPS growth, right? So basically, I think the important thing here is that despite the lower loan growth, our revenue growth -- last year, revenues grew like 5%, 6%. We're not expecting revenue growth to slow down because margins should be relatively stable, non-interest income should be high or good or strong or similar to loan growth. And the big question mark, and we did give some guidance, is the cost of credit. Okay?

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Perfect. Very helpful. Thank you very much.

Operator

Thank you. And our next question comes from the line of Jason Mollin with Scotiabank.

Jason Mollin -- Scotiabank -- Analyst

Hello, everyone. My first question is a follow-up on loan growth. Do you consider this outlook conservative? And you talk about the upside and downside risk to this 5% for total loans. And my second question is about the new client data that you showed with Santander Chile achieving a 26% share of the net increase in clients. Can you talk about these clients? Do they come from other banks? Are these clients new to the system? What kind of clients are they? Thank you very much.

Emiliano Muratore -- Chief Financial Officer

Hello, Jason. Regarding the -- let's say, the bias or the loan growth guidance, I think that it's a bit biased to the downside. As Claudio was mentioning, that -- our 5% is consistent with the 1% GDP growth -- that as of today, we see maybe more downside risk than upside risk to that GDP, and that would imply also the loan growth expectation to be a little bit more biased to the downside, if we consider like risk scenarios, although today, our base case and maybe best estimate is that, 1% for GDP, 5% for loan growth. But in terms of risk scenarios, I would say that the downside is a bit higher than the upside.

Robert Moreno -- Manager of Investor Relations

And regarding the -- so we had, as we said in the presentation, growth of 26% and a net increase in checking accounts through October. So this is mainly the middle-high income portion of the clients. And this is a mix of everything, getting -- since these are checking accounts, this is mainly people who are already in the system. So I would say, it's clients coming from other banks. I think this has a lot to do with the fact that our client service has been steadily improving, our digital services have always been very good, the fact that the Work Cafe has really helped their image and so forth. So checking accounts is really a reflection of all the efforts we've done on many fronts. And mainly is there [Phonetic] a little bit of cross-selling. We've been very successful in opening checking accounts, not only in Chilean pesos but in dollars. And we're also obviously capturing market from other clients.

The new entrants are basically coming through Santander Life and Superdigital, especially Santander Life. Santander Life, they're opening debit card accounts. So it's not included in the checking account. And that has also been very strong. Santander Life has been very well perceived by clients. Remember that there was social unrest, but Santander Life's Merit Program is very much in line with what people are looking for. They will be recognized for their efforts. And the digital onboarding in Santander Life kept things going even when branches were closed. Okay?

Jason Mollin -- Scotiabank -- Analyst

Thank you very much.

Operator

Thank you. And our next question comes from the line of Thiago Batista with UBS.

Thiago Batista -- UBS -- Analyst

Hi, guys. I have two questions. The first one is a follow-up on the macro overview or the macro outlook. About the unemployment ratio, how much you guys are expecting for unemployment ratio in Chile in 2020? And also, if this explains the potential increase in cost of risk, when it's increased -- the 1.3% to 1.4% guidance for cost of risk, if this should be caused by this increase in the unemployment ratio in Chile?

My second question is about the medium-term ROE. So I know that there's a lot of moving parts nowadays in Chile. But do you believe it's possible to work with the ROE of 19% and 20% as used to be a couple of years ago, or the 17% tend to be the new level?

Robert Moreno -- Manager of Investor Relations

On unemployment, we expect unemployment to go up, up to 8% to 8.5% [Phonetic] this year. We are starting at around 7% in November. That 7% already accounts for part of the event of the social unrest. And up to now, the labor market [Indecipherable] a significant deterioration. However, because of the slow growth we're expecting for this year, unemployment should go up. Now, having said that, our risks are more to the downside than there is a risk to the upside in terms of unemployment. But in no case, we are seeing unemployment reaching two-digit levels.

Emiliano Muratore -- Chief Financial Officer

Yes. And relating that to cost of risk, the increase in cost of risk during the last quarter had to do in part with, let's say, the employment situation worsening a bit. Not so far yet but -- not too much yet, but yes, the expectations are unemployment going up.

And regarding long-term ROE, we -- honestly, I think that it is still like too early to assess or let's say recalibrate long-term ROE expectations at this moment because although the situation in Chile has been relatively, let's say, abrupt and big [Phonetic] during these last few months, I think it's too early to change or to, let's say, guide the long-term ROE after this situation. And we will need to have to see the time passing, and maybe during this year, we got to have a clearer picture of, let's say, the new long-term expectation for the economy and for the Bank.

Thiago Batista -- UBS -- Analyst

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Tito Labarta with Goldman Sachs.

Tito Labarta -- Goldman Sachs -- Analyst

Hi, good morning. Thanks Emiliano and Robert for the call. My question in terms of asset quality, I guess, and the cost of risk, you saw a little bit of deterioration in the quarter. Do you think this will continue throughout the year? I know you mentioned higher unemployment, so it probably will. But just wanted to get a sense, how much do you think it could deteriorate from here? And also with the cost of risk, right, it's a bit more elevated than in the past, given the uncertainty, which makes sense. But do you think that you can -- if things go well, you eventually get back to that 1.1% cost of risk that we saw in the past? Or do you think, just given the uncertainty beyond this year, it could likely remain more elevated at that 1.3%, 1.4% level or even higher? Just to get a sense on -- maybe some sensitivity on asset quality and cost of risk that you expect. Thank you.

Emiliano Muratore -- Chief Financial Officer

Yeah, I think it's important what you mentioned that before -- up to September, before all this situation in Chile, we were with that underlying cost of risk of around 1%. That is consistent with all the changes we have made in the composition of the loan book. So when you look at the cost of risk of the last quarter and also the total for the year, around 1.35%, we think that -- assuming the underlying risk of the portfolio that it was consistent with that 1%. The new environment in terms of employment and consumption and economic activity, we think that it's going to be unlikely to go as low as we were before all this. So that 1%, 1.1% looks too challenging. But also we think that the situation from where we are in the last quarter, especially after seeing the behavior of the portfolio in October, November and December, that it has been sequentially better month after month. October was the one with the biggest noise and disruption. But then, November and December, we saw a kind of good behavior of the delinquency in the portfolio. So I would say that [Indecipherable] as low as we were before October, it's unlikely that -- but we don't see the full year cost of risk going higher than we had last year.

Tito Labarta -- Goldman Sachs -- Analyst

Okay thanks, Emiliano. It's helpful.

Operator

Thank you. And our next question comes from the line of Neha Agarwala with HSBC.

Neha Agarwala -- HSBC -- Analyst

Hi, thank you for taking my question. First, on the regulatory side, do you foresee any other regulatory changes that are not incorporated in your guidance, maybe higher tax rate? And the second question is on the asset quality. I understand that you're being more cautious on the retail and construction sector. Any other sector or segment that you are trying to hold on and not grow as much this year? Thank you so much.

Emiliano Muratore -- Chief Financial Officer

Helo, Neha. Regarding the regulation, we don't see and actually there is not any other piece of regulation on the table under discussion, apart from the ones we mentioned. So we are not factoring in any other piece in our outlook for the year.

And in terms of asset quality and sectors, actually, I think that it's going to depend, the growth, on the demand of credit, that it will also be different among other sectors. We are still seeing, I would say, kind of normal decent demand coming from middle market corporates, all the external sector, exporters and all that. So -- and we haven't seen any significant slowdown in loan growth in those segments. Then when you go to SMEs, the demand is also nice; now, a bit lower because of the general situation. But no, there is no any specific sector that we think that we need to slow down or stop. We do want to be, let's say, prudent in exploring like new clients. And we want to work more with our client base, clients that we know, that we have been working with them in the past. So maybe in terms of calibrating the growth strategy, maybe the biggest tweak would be like not being extremely aggressive in capturing new clients, especially in lending, I mean, going into lending to new client. That is maybe the biggest change if you compare the current stance to what we had before.

Neha Agarwala -- HSBC -- Analyst

Okay. And if I can ask another question, could you update us on the IFRS implementation?

Emiliano Muratore -- Chief Financial Officer

Probably [Phonetic] it's by January next year, when all the disclosing regulation is implemented in Chile. I would say that by January 2021, we will be fully IFRS, except for credit losses provisioning. That is the part where we are not IFRS and we are not going to be in the near future. And so in the long term, our expectation is to convert fully to IFRS because remember that now, all the issuers, not just banks, are under the same regulator, the CMF, and all the other issuers are under full IFRS. So I think that in the long term, I expect to see conversions [Phonetic] to full IFRS. But in the near future, we expect to be as we are, in full IFRS, except for provisions that will stay with this more standardized expected loss model created by the regulator.

Robert Moreno -- Manager of Investor Relations

Just as a clarification, we are IFRS, except for the credit provisions. And the change that's coming now is the format, how we publish all our financials. That will change to more or less what you see in other parts of the world, and that should be finished by the end of this year, beginning of next year. Okay?

Neha Agarwala -- HSBC -- Analyst

Okay, great. Thank you so much.

Operator

Thank you. And our next question comes from the line of Sebastian Gallego with Credicorp.

Sebastian Gallego -- Credicorp -- Analyst

Hi, good morning. Thanks for the presentation. I have several questions. The first one on asset quality, as well, more follow-up on asset quality. I just want to get a sense if you can break down per segment on commercial, consumer and mortgage, where do you see the most deterioration in terms of asset quality delinquencies or NPLs? Second question is related to margins. I just want to get a sense of under which scenario are you considering -- or what's your base case scenario for inflation or UF inflation on a quarterly basis just to reach stableness [Phonetic] in your guidance? And final question is regarding Basel III standards. When you read the article that was published by the regulator, they mentioned that even though the risk-weighted assets or the credit risk-weighted assets will decline, this will be compensated by the other risk-weighted assets, market and operational. The question is, do you expect that to actually compensate? Or do you actually believe that the net effect will be a decline in risk-weighted assets? Thank you.

Robert Moreno -- Manager of Investor Relations

Okay. So regarding your first question, which is the asset quality break-down, basically, obviously, there's potential for consumer lending to deteriorate. But we really have a really high coverage. So remember, we took CLP16 billion in additional provisions. We have very little loan growth in the low end of the market. So I think that is a good, you could say, insurance policy. So maybe NPLs could rise. But I don't expect a huge deterioration of the cost of risk in consumer lending. Okay?

And mortgage is similar as well. And remember, all of this is using the current 1% percent GDP forecast and unemployment forecast we discussed. And mortgage as well, in mortgage, we have decent loan-to-value ratios, and we've also focused growth more on the higher end. So obviously, there could be some deterioration, but we feel like we've -- it could be contained.

And the big question mark really comes from the SME sector, where I think you saw it in the fourth quarter and you -- and we're probably there where we could see potential further deterioration and the need to increase the cost of risk. So I would say that's the basic breakdown. And that's why we are forecasting a cost of risk of 1.3% to 1.4%. Okay?

Emiliano Muratore -- Chief Financial Officer

Regarding the inflation expectations, for the full year, today, we are expecting a 2.7% UF5 variation. On the quarterly profile, I would say, it's relatively stable, I mean, 0.7%, 0.8% [Phonetic] for the different quarters, starting in this quarter. So that's why with that inflation assumption, we are foreseeing still stable NIMs.

And regarding the impact of Basel III on the numbers, one of the -- I would say, one of the things we found is that the regulator is incorporating some kind of complexity in the standard method when -- to calculate the weighting. So it's -- we don't have our fine print -- our numbers today. But if you -- the regulator mentioned that there will be a 23% reduction in risk-weighted assets coming from risk. So if we do that -- if we take that 23% for us and we assume that credit risk will fall 23% and we take into account the operational regulation that is already under consultation, so we know how it will be. And if you -- then you have market risk of the X there in that equation and -- but if you take the scenario of keeping the same model that today we have under Basel I, which is a very, let's say, harsh and prudent model, if you take those numbers, we see our CET1 around 11%. That is roughly like 100 basis point higher than what we have today. But there are -- I would say, in that calculation, the two big questions are, that 23% of reduction coming from credit risk, how close we are to that average, above or below. We will know that in the weeks when we are able to do the -- all the simulations and calculations. And then market risk, how close it is the Basel III model the Basel IV model compared to the Basel I we have today. But that's the kind of number we are seeing so far.

Sebastian Gallego -- Credicorp -- Analyst

Perfect, very clear. Thank you.

Operator

Thank you. And our next question comes from the line of Jorg Friedemann with Citibank.

Jorg Friedemann -- Citibank -- Analyst

Thank you very much for taking my question. I have also a couple of follow-ups, if possible. Just for me to understand, you explained several times already regarding your cost of risk guidance and asset quality expectations. But in this quarter, you actually took a proactive stance and buildup coverage in advance before a more severe deterioration came in. So is this the same rationale that you are going to follow going forward to come up with this 1.3% to 1.4%? Or are you going to be more reactive to NPL deterioration from now on? So the question is, if we're going to continue building up coverage in the expectation of things to deteriorate, or you are going to be only more reactive going forward? So this is the first question. And the second question, if you could give us an update on the payout, taking into consideration these regulations of Basel III that are coming in. Thank you.

Robert Moreno -- Manager of Investor Relations

Okay. So regarding your first question, I think maybe one way to explain it is, during 2019, we had a cost of risk of 1.3%. But we had like one timer's, right? So we had CLP16 billion in the fourth quarter and the CLP31 billion in the third. If you take that out, our cost of risk was 1.1%. So you can say, with all the events last year, we would have been at like 1%, 1.1%, and with an increase, at 1.3%, is what I'm saying. So the actual impact of all of this is a 20 -- on a comparable basis, is like a 20% basis increase. So I would say there was, in the fourth quarter, some kind of proactive [Technical Issues]. This year, it's going to be more -- I would say, a little more like reactive because of the proactiveness we already did, OK? So on a comparable basis, we're going from like 1% cost of risk to 1.3%, 1.4%. And that's how we view it. And we feel comfortable with that, considering that we've already done last year. Okay?

And the second on the payout, so as we said in the -- just a little while ago, given the information we have now regarding our current capital ratios and what we've seen and what we can infer from the new regulations, we expect to pay out of 2019 earnings, which would be paid in April, to be around 60%. Similar payout, which gives you a current dividend yield of around like 4% or so. Now, the Board still hasn't decided on its final resolution and what it will propose to the shareholders' meeting, and that will be informed at the end of March. Okay?

Emiliano Muratore -- Chief Financial Officer

And so, maybe, let's say -- well, definitely, we said, loan growth expectations are not so high and are a bit biased to the downside. So that -- the pressure on the capital shouldn't come from, let's say, faster loan growth. There are a few pieces of the regulation for Basel III to be put under presentations, market risk being one of them and some others. So those are the -- maybe the risk on the payout. Having -- without having any relevant negative surprise coming from the Basel III regulation, you should expect the payout to be stable compared to last year.

Jorg Friedemann -- Citibank -- Analyst

That's very clear. I appreciate it. Thank you very much.

Operator

Thank you. And our next question comes from the line of Piedad Alessandri with Credicorp.

Piedad Alessandri -- Credicorp -- Analyst

Hi, thank you for allowing some questions. I know there are no new regulations under discussions, but are you considering the possibility of an increase on bank taxes, considering the increase in debt for the government? Or do you see the possibility of a specific tax for the banks?

Emiliano Muratore -- Chief Financial Officer

No, actually, we are not at this moment considering any of those taxes in the future. There is nothing being discussed. And so under the current tax reform, nothing like that is under discussion. So going to your question, no, we are not considering that.

Piedad Alessandri -- Credicorp -- Analyst

Thank you very much.

Operator

Thank you. And our next question comes from the line of Yuri Fernandes with J.P. Morgan.

Yuri Fernandes -- J.P. Morgan -- Analyst

Hi, Emiliano. Hi, Robert. I have a question regarding margins. Are you being conservative here? Looking to your inflation outlook, you had like flattish inflation, too, like the CPI at 2.7%. And Santander Chile, you have like a benefit that maybe your peers and [Indecipherable] should not have. You just consolidated a consumer finance company that helped margins. And you also had a very good performance on demand deposits. So if you are really right on the flattish margins for 2020, I think the outlook here is negative for the system, right, because it's maybe down for your peers and for the system. So that's the first one regarding margins, are you conservative here or not?

And I have a follow-up on asset quality. You had many, many questions here. But just checking about the renegotiated portfolio, if you can provide some color on how big was the increase this quarter? When are you renegotiating those loans? You can provide any metric, any color, so we can track these and keep an eye on how the renegotiated book is behaving. Thank you.

Emiliano Muratore -- Chief Financial Officer

Okay. So first on NIM, I would say that it's not so conservative because -- you're right in the sense that we have many tailwinds for NIMs, like the Central Bank cut rates recently, the slope of the curve recovered, and now, we have, let's say, a decent slope between the shorter end and the longer end. Then, inflation is going to be stable or maybe with some upside risk if the FX keeps high or -- and depreciating. So I would say that in general, the new origination, all these factors are positive factors for NIMs. Maybe the thing that you are not factoring in is that all the big flow of mortgages refinancing that we had last year, it was mainly during the second half of last year. So we are still seeing that, let's say, snowball effect in the full year margin for this year. So -- and maybe that's why, without factoring in that more refinancing mortgage effect, you can see it as conservative. But this effect is going to hit harder during the full year in 2020 than it was in 2019, which was only part of the year.

Robert Moreno -- Manager of Investor Relations

Asset quality, yeah, so the best way to go monitoring that is the impaired loan ratio. That's why we include that because in very simple terms, the impaired loan ratio, on Slide 23, if you can look at there, that includes the NPLs plus mainly the renegotiated loans. So if you look at the commercial loans, the impaired loan ratio went from 6.7% to 7%. That's the biggest impact we had there in asset quality, and that's the renegotiation of these SME loans in tourism, restaurants, hotels, small shops. So the best way to go monitoring how that behaves is impaired loan ratio. And obviously, our provisioning models, which aren't IFRS 9, but they are forward looking, they have to take -- so when you renegotiate, you just don't sweep problems under the table. You have to take provisions anyway. So that's why provisions were high apart from the -- because if you take out the CLP16 billion, you still get a relatively large amount of provisions because we were increasing provisions for these impaired loans. So as the year progresses, not only do you look at NPLs but keep a track of how the impaired loan ratio evolves because that's a good indicator of the overall. In fact, the impaired loan ratio is very similar to the Stage 3 of IFRS 9. Okay?

Yuri Fernandes -- J.P. Morgan -- Analyst

No, super clear, Robert. Thanks for the answers. If I just may ask one thing on the cost of risk, it's fair to assume that it should be much higher in the first half of the year, especially in the first Q, and then gradually decrease, right? And the average should be the 1.3%, 1.4% you mentioned in the guidance, right?

Robert Moreno -- Manager of Investor Relations

Yeah, I think that should be correct, yes.

Yuri Fernandes -- J.P. Morgan -- Analyst

Thank you.

Operator

Thank you. And I'm showing no further questions at this time. So with that, I'll turn the call back over to CFO, Emiliano Muratore, for closing remarks.

Emiliano Muratore -- Chief Financial Officer

Thank you all very much for taking the time to participate in today's call. We look forward to speaking with you again soon.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Emiliano Muratore -- Chief Financial Officer

Claudio Soto -- Chief Economist

Robert Moreno -- Manager of Investor Relations

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Jason Mollin -- Scotiabank -- Analyst

Thiago Batista -- UBS -- Analyst

Tito Labarta -- Goldman Sachs -- Analyst

Neha Agarwala -- HSBC -- Analyst

Sebastian Gallego -- Credicorp -- Analyst

Jorg Friedemann -- Citibank -- Analyst

Piedad Alessandri -- Credicorp -- Analyst

Yuri Fernandes -- J.P. Morgan -- Analyst

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