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Banco Santander Chile (NYSE:BSAC)
Q1 2020 Earnings Call
Apr 29, 2020, 11:00 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 Q1 2020 Banco Santander Chile Earnings Call. [Operator Instructions]. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Emiliano Muratore.

Sir, please go ahead.

Emiliano Muratore -- Chief Financial Officer

Good morning, everyone. Welcome to Banco Santander Chile's first quarter 2020 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. We hope you are all safe and healthy during these times. As we are working remotely, please bear with us if we experience any technical difficulties during the call.

Given the uncertainty of this ongoing crisis, we have removed our guidance for 2020. We will not be sharing forward-looking statements, and we would appreciate to keep this reminded for our Q&A session. We look forward to sharing with you our progress during this quarter. Before we get into the results, Claudio will explain the measures our government and local regulators have taken during this month to minimize the impact of COVID-19 on the economy.

Go ahead, Claudio.

Claudio Melandri -- Chairman of the Board

Thank you. Please turn to Slide 4. The Government, the Central Bank and the CMF, our regulator, has taken a series of actions to support the economy and help companies to access funding during the crisis. The Central Bank cut its policy rate to 0.5%, its technical minimum, according to the Board, and has signaled that it will keep it at this level for several months.

On Page 5, we show all the Central Bank initiatives to increase liquidity in the system. It has launched two liquidity facilities for banks with a funding cost set up [Phonetic] the Monetary Policy Rate. The total amount banks can borrow under these facilities correspond to a 3% of the loan book and up to 15% if loans are directed toward SMEs.

That would entail [Phonetic] a total amount of about $24 billion. One of this line is the new loan growth in the conditional facility, FCIC where banks can borrow upto four years using corporate bonds and high rated commercial loans as collaterals. The other is the liquidity credit line, LCL, where borrowing is unsecured and for up to two years, subject to each bank's reserves at the Central Bank.

Ultimately, this credit line should provide liquidity to banks to enable them to continue financing companies and individuals. Today, Santander has requested about $1.4 billion from the LCL and we expect to withdraw from the FDIC soon.

The Central Bank has also launched a bank bond purchase program for up to $8 billion and announced temporary adjustments to the liquidity requirements to bank suspending the 30 and 90 days mismatch requirement, and offering flexibility on the regulation and compliance with the LCR, whose limit will remain at 70% for 2020.

Turning to the government, on page 6, we show the three different areas, when it has focused to help [Phonetic] during the crisis. First, liquidity relief to firms and households, by deferring tax payments and transitory cut in the stamp tax. Second, household income support to cash transfers and our job protection scheme whereby firms would have [Indecipherable] workers while its salary is paid by the unemployment system.

And third credit support through the capitalization of both Banco Estado with $500 million and the guaranteed fund for small companies, FOGAPE with $3 billion. It also expanded the coverage of this fund. These measures will be financed through adjusting in the fixed [Phonetic] budget government financial assets and new debt.

As we can see on page 7, the capitalization of FOGAPE and the extension of its coverage to companies with annual sales of up to 1 million UF could benefit up to 99.8% of the firms in Chile. Under its new regulation, guarantees provided by FOGAPE was covered between 60% and 85% of the loans, which will be restricted to finance working capital lines. They would have a maximum amount equivalent to three month of sales as the preferential interest rate equivalent to the monetary policy rate plus 3% and a tenant period of up to 48 months.

And we also have a six-month grace period before companies have to start paying back. During this period, capital amortization of existing loans will be postponed. The [Indecipherable] used to raise capital, pay dividend, or make investments. Santander has published preliminary set for SMEs and has improved our office banking capabilities, so that SMEs can easily access this funds when they become fully available.

The government expects this funded product would allow guarantees for about $24 billion. On page 8, we also see how the CMF has its regulations regarding the treatment of payment holidays period and warranties. Regarding grace period, and only until July 31st 2020, the CMF will allow freezing of provision of repo brand loans for debtors for upto 30 days overdue. For mortgages and commercial loans, the maximum grace period is six months. For consumer loans, the maximum grace period is three months.

So far, the banking industry has received more than 800,000 requests since March. The CMF also announced the temporary extension in the write-off -- in asset received payments and the possibility of used excess mortgage warranties to warranty SME loans. In terms of capital ratios, the CMF announced its ability for the implementation of Basel III in Chile postponing the phase in until December 2021. Finally, a fraction of the FOGAPE warranty can be considered as part of Tier 2 capital.

Emiliano Muratore -- Chief Financial Officer

Thank you, Claudio. On Slide 10, moving forward, we wanted to highlight, first of all, our strong balance sheet, starting with our funding mix. The bank's total deposits increased 17.7% year-on-year and 7.5% quarter-on-quarter in 1Q20. Time deposits increased 7.7% in the quarter despite lower rates.

Demand deposits [Technical Issues] bearing had a record year in terms of growth, increasing 7.3% quarter-on-quarter and 29.6% year-on-year. All of our client segments saw a strong growth of checking account balances. As we can see on Slide 11, our liquidity has increased with the LCR ratio at 205% and the NSFR at a healthy 105%.

Our liquidity levels are well above the average in the system and are well above the regulatory minimum. This also shows good liquidity levels in general in Chile. During this year, this regulatory minimum was going to increase to 80%. But the CMF has decided to freeze it at 70%. We will try to maintain it always at a very high rate.

On Slide 12, we now will review loan growth. Total loans increased 12.3% in the 12 months, and 5% quarter-on-quarter. Loans to corporate was the fastest growing segment in the quarter, led by an increase in demand for access to credit lines, leading up to the COVID-19 shutdowns. After the social unrest in the previous quarter, consumer lending was already starting to contract in line with consumer confidence and continues to the first quarter.

The strong year-on-year growth is still being influenced by the incorporation [Phonetic] of our auto lending business, Santander Consumer in November of last year, which represented about 8% of the total consumer loan book. In the quarter, mortgages loan had a 3.6% quarter-on-quarter growth, mainly attributable to outstanding pipeline from the increased demand for refinancing from the low interest rates in 2019.

On Slide 13, we show the evolution of asset quality over the last ten years. The black dotted line is the cost of risk of the banking system. As you can see, in recent times, our cost of risk has lowered, and is more in line with the system. On Slide 14, we explain that the main reason for this has been the shift in our consumer loan mix.

Currently, 75% of our loans to individuals are high-income clients. Moving on to Slide 15, we can see how this shift in our consumer portfolio has resulted in an important outperformance in terms of asset quality compared to our main competitors, mainly in consumer lending. Since 2015, in absolute terms, NPLs in our consumer portfolio have fallen by 42% and in our impaired portfolio by 37%. On Slide 16, we show our capital ratios. We finished the quarter with a capital ratio -- our core capital ratio of 9.7%, and a BIS ratio of 12.7%.

During the quarter, our capital ratios which remained healthy continued to be affected by the depreciation of the Chilean peso. Without this effect, our core capital would have reached 10.4%. We also had an increase in Tier 2 capital since we issued a subordinated bond in the quarter. In addition, in April, the BIS ratio will be further strengthened by two sub-bond issued in the local market for a total of $6 million.

Tomorrow, we will be having our Annual Shareholders Meeting remotely where we will propose a 30% payout lower than our usual 60%. We decided to be conservative in light of the COVID-19 crisis, and to have robust capital levels to facilitate volume growth in line with the measures of the government and our local regulator. It is important to note that we already have this payout level provisions and equity and therefore this payout will not affect our capital ratios.

Moving into business results. On Slide 18, we show how despite the COVID-19 crisis, we continue to move forward in our business strategy. We would like to highlight that in April, we officially launched Superdigital and Klare. Just to remind you, Superdigital is our prepaid card that we offer digitally in order to increase digital transactionality in the mass segment. Klare is the first-ever digital insured tech broker in Chile allowing people to quickly compare insurance products from different companies in order to make a more informed choice.

On Slide 19, we would also like to emphasize that with the COVID-19 crisis, our digital strategy has been more important than ever. We will be investing more rapidly in digitalization of loan approvals, especially for SMEs given the strong demand we expect in coming months. Our contact center is functioning at 80% of capacity with our executives working from home.

In terms of central offices, over 95% are working from home as well. The lockdown has also shifted -- has shown a shift in consumer behavior. People are using our online services more frequently while visiting physical branches less. This has led to an increase in digital clients, which reached 1.3 million as of March, and purchases online have also increased 8.7%. As banks are part of the essential services defined by authorities, over 80% of our branches are still open in areas that are not under quarantine.

On Slide 20, we show that our strong digital platforms has sustained strong client acquisition in the quarter where we have opened 115% more accounts than in the first quarter of 2019. Cuenta Life and Superdigital have played a large role in this increase. We also continue to lead the market in checking account opening. And our market share in checking account opening surpassed 27%.

On Slide 21, we are proud to show that we reached joint top number one in Net Promoter Score, NPS. This shows the improvement in the relative perception of our client service -- of our clients who are serviced and products. Even in these stressful times, when customers had to rely more on digital services and the contact centers. The results obtained constitute valuable feedback to continue improving the Santander service experience.

On Slide 22, we show the evolution of our net interest margin. Our net interest margin reached a healthy 4.2% in the quarter due to strong inflation supported by an improved funding mix. On Slide 23, we can see that asset quality had an improvement compared to the last quarter after the social unrest. The economy recovered in January and February, leading to an improvement in asset quality in our portfolio and a lower cost of risk compared to the fourth quarter. We have not had any material impact of the COVID-19 crisis on provisions yet.

On Slide 24, we show the evolution of non-interest income. Fees started the year very strong especially in credit card fees, checking accounts, insurance brokerage, and asset management. The improvements in client satisfaction, cross-selling, and acquisition of new clients has helped to bolster retail and middle-market fees.

In March, the COVID-19 crisis began to reverse some of these trends as people stayed at home and corporate investment activity slowed. Our client treasury business had a good quarter. This was offset by the results of our non-client treasury business. The effects of increasing long-term interest rates lowered the gains realized on our available for sale portfolio and higher volatility had a negative impact on the CVA of derivatives.

On Slide 25, we show the evolution of efficiency and expenses. Operational expenses increased mainly due to administrative expenses, as a lot of our service contracts are priced in US and an increase in inflation affects these costs. Furthermore, some of our technology services are in foreign currency and the depreciation of the peso also affected them negatively. As we have more employees working from home, we also had to increase some investments in order to finance this transition. Overall, our efficiency remained very strong at 40.6% in the quarter.

To finalize, we will now move on to our summary on Slide 26. The Central Bank and the CMF have launched a series of initiatives that will help maintain liquidity and capital levels, while Chile flattens the COVID-19 curve. The government has also announced initiatives that will help both individuals and companies during these times. We currently have high liquidity levels and healthy capital ratios. We proactively lowered our dividend distribution to 30% to support loan growth and our balance sheet.

This loan growth will come mainly from commercial lending while SMEs and individuals will also have the opportunity to reprogram loans subject to bank approvals. Our digital channels have proven a great asset with client growth continuing in the first quarter and more clients using these channels, efficiency also remained solid.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions]. And our first question is going to come from Ernesto Gabilondo from Bank of America. Your line is now open.

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

Hi, good morning, Emiliano and Robert, and thanks for the opportunity. I believe that all the loan book could be subject to the grace period as you mentioned in the press release. So can you provide us what is the percentage of clients requesting the program in each of the segments to total loans? And then we have seen US banks, banks in Spain with other liquidity facilities, while they created a lot of provisions in the first quarter of this year. However, we have seen other banks in the region and their case [Phonetic] considering that the grace programs will not allow you to create or anticipate additional provisions. So when do you see provisions starting to show up? And do you think this could happen between the last quarter of the year and the first quarter of 2021? Thank you.

Emiliano Muratore -- Chief Financial Officer

Okay. Thank you, Ernesto, for your question. Regarding the percentage of the loan book, I mean so far in individuals, we have seen from 20% to 25% of the portfolio like asking for this grace periods. In the commercial part, we haven't seen so far much, because all this COVID-19 problem is starting like next week, we expect to have a high interest from companies. But it is not in place yet. So we haven't seen any number there yet.

And regarding the cost of risk and when should that like show up, I mean already in March, we had a -- if you compare the monthly figures there was already a spike in cost of risk. So I think that we have already seen a part of that. But it's -- I think it's fair to say as you mentioned, that considering that the grace periods we are granting to clients are from three months to six months, a significant part of the flows and liquidity pressures on clients will be postponed to the end of the year.

So let's say that even though cost of risk might still be higher during the rest of the year, we will have this -- let's say, a big chunk of capital being due starting by the end of the year. And in terms of extraordinary provisions, we haven't decided on that yet. And I think that during the year, depending on how the asset quality and the behavior of the portfolio evolves, we can make it all. I mean, it's still early in our view because we haven't seen how this all grace period will finally affect the health of the portfolio. And also, definitely how fast the recovery of the economy is in terms of the intensity and the speed of the recovery. I mean, I think that's going to be a crucial input to how finally the asset quality situation ends up.

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

Perfect. Thank you. And if I can make a second question, that will be in terms of loan growth. We are seeing that in most of the Latin American region with some exceptions, but we have seen commercial loans picking up. We're seeing companies taking, withdrawing the approved credit lines. However, we are also seeing that the banks would prefer to concentrate in their own client base providing them with liquidity. But they are not granting new loans for new projects for the moment. I think they want to preserve the asset quality. So I want to know if this will be the same case for you and how do you see the loan growth for the year?

Emiliano Muratore -- Chief Financial Officer

I mean, yes, that's as you mentioned, we are seeing a very kind of [Indecipherable] in the sense that all the consumer part is growing less or even falling, I mean, consumption is falling across the board. So I think it's expected to see the consumer part not growing much or even falling a bit. I mean, I would say that's the same situation for mortgages going forward.

When you talk about consumer loans, as you said, that it's a completely different situation because we are seeing strong demand from corporates, I mean not just SMEs, but I would say especially big multinational companies, let's say, increasing their demand for credit in part because their inflows, their cash inflows definitely are weaker.

So I think as you see now we're -- you can already see that in the composition of the loan growth for the first quarter where in our corporate and investment banking segment, which is mainly very big multinational companies, the growth was like 30% for the quarter and I think that that's kind of a good opportunity for us and for the clients. We are supporting them, and so that's going to be at least for the coming weeks and months, I think a good source of loan growth.

Then when you move into smaller companies like SMEs, all this guarantees program from the government should be like the main driver for growth. It's let's say a significant size of the program up to $24 billion in guarantees. The guarantees are in average, I would say, like 70% of the loans [Phonetic]. So we are talking about total lending capacity as a system of around $35 billion or so.

And so I think that's going to be a source of loan growth going forward with this currencies program being also important for us in terms of capital consumption and also risk appetite as a whole. And so, I think that's the main things going forward. I mean the guarantee has been the source for loan growth in SMEs and in corporates, big corporations still demanding credit for at least for a few months.

And in terms of new projects, more long term, that demand has fallen, I think it's mainly, all the long-term projects are in kind of wait and see mode and we don't expect much demand coming from there in the coming months.

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

Perfect. Thank you very much. Thank you.

Operator

And thank you. And our next question comes from Jason Mollin from Scotiabank. Your line is now open.

Jason Mollin -- Scotiabank -- Analyst

Thank you. I have two questions. My first is on the bank's capital ratio. You mentioned in your presentation and of course in your release about the decline in capitalization due to FX movements. Can you talk about the sensitivity of the bank's balance sheet and operations to movements in the FX, including the capital?

And my second question is based on the measures that you talked about specifically for the lending, state guarantee program for working capital lines, if you can talk about the implementation of that, when you might expect companies to actually get money in hand under this program? Thank you.

Emiliano Muratore -- Chief Financial Officer

Okay. Thank you, Jason for the questions. In terms of the capital ratio and the sensitivity to FX, the ballpark or the rule of thumb is like we have a decrease of six basis points in our CET1 ratio for every CLP10 depreciation in the FX, I mean, those are the kind of sensitivity. I would say that like one-third or 40% of those six basis points is coming from the loan book in dollars, I mean we have 10% to 12% of our loan book in dollar-denominated. So that's where that inflation is coming. And the other is coming from the derivative portfolio that the credit exposure of that portfolio also fluctuates with the FX.

And so that's the other big source of risk weighted assets, inflation coming from the FX. And that was what has made us like lose more than 100 basis points of CET1 in the last 12 months. And definitely, that was one of the, let's say, main reasons of let's say reviewing the dividend policy for this year.

And in terms of the program for SMEs, like, your question is like next Monday, I mean, we will be beginning with the application process for these SME clients. I mean we are expecting to have today at -- by the close of business have the final pieces of regulation we need from the regulator in order to operate.

So tomorrow is like the end of the month, I mean Friday is a holiday and so next week we are starting granting those loans.

Robert Moreno -- Investor Relations

Yeah. And just one follow-up, Jason. Our balance sheet doesn't have like big FX risk. So it's hedged. So what does that mean is that when there is a depreciation of peso and the dollar loans go up, there is no like counterbalance on results. So the capital doesn't. Okay, so that's important. And when these dollar positions are like translated to peso, right, they have provisions, the provisions also rise, but that part is hedged. The only part that's not really hedged is the cost, like these tech costs, that -- the contracts that we pay abroad for technology.

I would say that's the only part that is in terms of P&L is more affected by the exchange rate. And the other thing obviously is when the peso depreciates, there's more inflation and that eventually leads to higher NIMs, OK.

Jason Mollin -- Scotiabank -- Analyst

Thank you, both.

Operator

Thank you. And our next question comes from Tito Labarta from Goldman Sachs. Your line is now open.

Tito Labarta -- Goldman Sachs -- Analyst

Hi, good morning and thank you for the call. A couple of questions, maybe first, following up on this provisions. I don't know if you've run some stress tests. Just trying to think about the cost of risk. You de-risked your loan portfolio quite a bit in the last several years. Your cost of risk historically used to be closer to 2%, in the last year, it was getting closer to 1%. I think you were guiding around 1.3%, 1.4% this year, before the COVID-19. And then if you look at back in 2008-2009, the cost of risk was above 2%, like 2.4%, I think was the peak.

I know it's hard to say right now, but if you can help us atleast put this into perspective, right. How much did the cost of risk increase from here? What kind of a worst case scenario, I don't know, just anything probably you can give on that would be very helpful. And then my second question in terms of the outlook for margins, just thinking about the different moving parts here, right. If you're growing more incorporates on a lower spread that could negatively impact margins, FX depreciation, [Indecipherable] benefit margins for maybe inflation peaks for the year and demand -- weaker demands may make peso come down a bit. So if you could help us think about sort of all the moving points that could impact your margin and how that's going to evolve for the year. Thank you.

Emiliano Muratore -- Chief Financial Officer

Okay. Thank you, Tito. I mean, in terms of cost of risk, I mean, I'm sorry to disappoint you, that I mean we cannot give you like much guidance, I mean I think that in the slides, in the webcast, the idea is to show the past was mainly to support your rationale, I mean in the sense that, today the portfolio is significantly different to what it was in the past. I mean like, say much more safe [Phonetic] in that sense. But also it is true, such that comparing for these peaks is also kind of unfair in the sense that the portfolio now is quite different, but also it is true that this crisis is quite different to all the others we have see in the past.

So that's what we tried to show, and that's why I would say that we still see the composition of our loan book in relative terms to the system. And you can also like see that trend in the slides, if and when we compare with some other peers, in relative terms we still feel comfortable of our future cost of risk, but in absolute terms, it's something very difficult to guide. Now, in the coming months, we will be having more visibility on that.

And in terms of NIMs, as you said, there are very different moving parts. There are some very really good tailwinds coming from cost of funds. I mean first, as you can see, we are growing demand deposits at a very, very faster pace and we are still seeing that in April and we expect to see that also in the future. And that's for the non-interest bearing part of the deposits. But also in the interest-bearing part, as what you also saw in the webcast, we are doing pretty well because we are outperforming our peers. But also the Central Bank cut rates and that is also useful for the cost of funds. So that's the part of the tailwind.

The inflation, as you know, it's a significant part of the volatility of our NIM. That has been high in the first quarter, but when you look to the -- what the market is expecting, they are expecting like a decreased inflation that would put some downward pressure on NIMs. But also, it's fair to say that uncertainty and volatility will also affect the place. And I think that today, the base case scenario, especially because of the oil price situation is to have inflation for the rest of the year slowing down.

That's also like a long shot for many people because as the volatility of the market is very high and we don't see how this all -- all these cost constraints in the supply chain may affect also prices. So I think that that's, let's say a downward pressure, but with some question marks.

And then in terms of the composition of the loan growth, yes, I mean, we are seeing more growth in corporates and we are going to see this growth in the SMEs guaranteed by the government, and it's going to have like a 3% NIM because the rate is like already fixed. And so that in terms of the composition of the loan growth will put also some pressure on NIMs. But also it's important to mention that in the whole market, not just the corporate, you see across the board, cost of risk, I mean, more than the cost of risk, I would say that the price of risk has risen.

I mean we have seen that in our bonds in the secondary market. So we are seeing like a newer [Phonetic] models in terms of pricing that even though it's higher than before, the composition is more geared to incorporate and to guarantee the SMEs lending, should imply like some downward pressure on NIMs. But the volume of the loan growth kind of compensated I think in terms of the NII. I don't know Bob if you want to complement.

Robert Moreno -- Investor Relations

Yeah, I think it's hard, there's a lot of part of the P&L, there's a lot of moving parts now. And but I think independent of the movement of NIMs, we think that NII could see positive growth this year. How much, it's hard to say, last year was basically flat. So NII didn't grow at all, but this year there will be volume. There is different moving parts. So it's hard to say how much, but NII should be both [Technical Issues] by volume and cheap funding.

Tito Labarta -- Goldman Sachs -- Analyst

Great, thanks, Emiliano and Robert, it's very helpful. Just a couple of follow-ups, if I may. I think you had guided originally for the year and the cost of risk like 1.3%, 1.4%, this quarter it was around 1.2%. I mean, I think it's fair to say it should be above that initial guidance. But just to understand the rationale and maybe not being more conservative and boosting provisions this quarter, I know you had a big provision in the fourth quarter or maybe you got influenced that decision. So just to understand why maybe waiving to book maybe additional provisions?

Robert Moreno -- Investor Relations

So yeah, it's really simple in the sense that there are so many programs coming out that we're still trying to see the impacts. Okay? So that's the reason. We're implementing all these programs now and we're waiting for some guidelines. So there's still a lot of work behind the scene. So that's why in the first quarter there's really no clarity and everything will be more visible in the second. Okay. So as Emiliano said, the SME program is launched now, next week, which will be ready in May. And so there are a lot of moving parts and that's why I think the second quarter when we have a better feel of how well this will come and we'll see what exactly what we can and can't do. Okay.

Emiliano Muratore -- Chief Financial Officer

And also, I think it's worth mentioning that as you said, I mean last quarter of last year would look like a big provision because of the social unrest in Chile. And I would say that until mid-March the situation was really kind of good and better than expected, I mean across the board. I mean, in the business front, but also in the asset quality front.

So we have those huge provisions coming from last year. Behavior until mid-March was really good, but now we are in the middle of this crisis and now we have to figure out how to look forward. But maybe we felt like we didn't need to move so fast in terms of making extra provision of that because we did much more information as Robert said. But also we are coming from a quarter where we took high provisions and then the behavior got better until the COVID crisis started.

Robert Moreno -- Investor Relations

Yeah. So basically in Chile the COVID crisis is an April effect, OK. In other countries, it might have come before, but we really started to feel more of the pinch, so we'll definitely have more clarity in the second quarter. Okay?

Tito Labarta -- Goldman Sachs -- Analyst

Perfect. That's very helpful. And sorry if I can ask one more follow-up. Just going back to the NII you could see positive growth, just -- you had originally given a mid-single-digit loan growth, I mean I think it's fair to say it's probably above that, given the growth you're seeing on the corporate side.

Robert Moreno -- Investor Relations

I mean it depends on how much demand and supply go forward. But I mean there shouldn't be a decrease in loans this year. Okay. I don't think --

Emiliano Muratore -- Chief Financial Officer

Yeah. Because all these grace periods also kind of reduce the amortizations of the -- for the year, so that's kind of backstop to loan growth. So yes, I think it's fair to say that initial guidance is still like on the table.

Tito Labarta -- Goldman Sachs -- Analyst

All right, perfect. Thank you very much.

Operator

And thank you, and our next question comes from Alonso Garcia from Credit Suisse. Your line is now open.

Alonso Garcia -- Credit Suisse -- Analyst

Good morning, everyone. Thank you for taking my question. My question is a follow-up on asset quality. I mean, you mentioned that clearly, you have derisked the portfolio over the past several years, and now you're in a much better -- with a much healthier quality with higher exposure to higher-income individuals.

However I just wanted to ask if in general, you perceive Chile to be in a better or worse shape in terms of household and SME leverage indebtedness compared to the previous crisis such as the [Indecipherable], the earthquakes just to get a sense on what's the starting point for Chilean SMEs and households as a whole?

And my second question is, on capital, you've mentioned in your previous outlook call that you were targeting core Tier 1 ratio of above 10% by end of this year. But I know if that target remains in place given the weakening of Chilean peso depreciation or if we should expect CET1 to remain above that level by the end of this year? Thank you.

Emiliano Muratore -- Chief Financial Officer

I mean in terms of capital, yes, that's the -- I would say maybe the target that -- it's I think staying with our clients and supporting our clients. It goes like even let's say higher in the let's say, rule of preferences. So yes, I mean we would like to go to 10%. Definitely, the FX will set a big part of that target, if we are able to reach it or not. And I would say that we still target to be as close as -- to 10% as possible maybe from 9.5% to 10%. But we don't want to say to be there a restriction in the sense of supporting our clients.

It's also true that regulation is helping that, I mean, all this guarantee is are coming from the States. Although in Basel I they will be counted as Tier 2 and not as the deduction of risk-weighted assets. That will change in Basel III, and now Basel III has been postponed. So, our capital position as an all-in ratio will be very strong by the end of the year. I mean it is now and it is going to be because of Tier 2 that we have been issuing and also because the guarantee is coming from the state and SME portfolio is also helping the total ratio.

That is not going to be seen on CET1 yet because of the Basel I framework, but that will also put a tailwind looking into Basel III number. So we feel comfortable and it's not like whatever it takes to target, but we still keep it as where we would like to be. And the other was?

Robert Moreno -- Investor Relations

The other question was regarding that we are effectively derisked, but how the households and some SMEs are in terms of leverage. Well, the low income after the maximum rates obviously, they deleveraged, so -- and also we are less exposed there. Another thing, remember that rates are much lower today. There has been an increase in household leverage because of mortgage, OK. But there has been really signified deterioration in the debt servicing ratios. In fact probably this year for someone who keeps their employment given that a lot of mortgages have been refinanced at much lower rates, I would say the deleverage of the household might have gone up, but their debt servicing ratio are probably coming down.

And also wage growth has been relatively decent in the last ten years. So I would say in household, I don't see a bigger risk today from overleverage than the last ten years, OK. In fact, if you take base 100 like an index of household income versus house prices, household income has grown more, OK. It's been different periods where they haven't grown at the same pace, but in the last ten years, the household income has grown more than household prices.

So on that we still find SMEs, they've been growing with the economy, we have an interesting portfolio there, they are very profitable. Obviously, with the social unrest, there was some impacts. But they rebounded very nicely in January and February, OK. And there the key here is the government programs. Now remember the government programs are mainly geared toward clients that have less than 30 days overdue as of March and very smaller SMEs, all the way back to October.

So it's really focused on those clients that clearly are showing difficulties or might have difficulties because of the recent events. If someone has been in an NPL for a while now, it's a different story, OK.

Emiliano Muratore -- Chief Financial Officer

And also there, we don't have to lose from side that like almost 35% of our loan book are mortgages, right. And with the loan to value in the back book from 60% to 70%, so that's also when I think when we compare in relative terms within the Chilean system, especially if you look at the comparison to other geographies, the weight of the mortgage book being, under Chilean law being like a full recourse mortgage, I think it's also a thing to consider when assessing how much the deterioration of the loan book could be.

Robert Moreno -- Investor Relations

And also coverage has doubled in the last decade, OK. We used our coverage of -- the way we measure NPLs, now 70% today, we are around 140%. So I mean that's why we feel this and in relative terms, we feel good compared to the system, OK. But obviously, this all, in the end, comes down to how long this slowdown will last, and that's why it's really important to flatten the curve and get things back online safely, OK.

Alonso Garcia -- Credit Suisse -- Analyst

Understood. Thank you very much for the answers.

Operator

Thank you. And our next question comes from Sebastian Gallego from Credicorp Capital. Your line is now open.

Sebastian Gallego -- Credicorp Capital -- Analyst

Hi, good morning. Thank you for the presentation. I have some questions. The first one regarding on the business strategy, and all the initiatives you pointed out in Slide 18. Can you talk about, for example, the wealth management, the acquiring business. I know, all the initiatives that may get some delays, how do you think about all these initiatives under the current scenario?

Also, for example, the Work Cafe initiatives, that will be helpful to understand what's your plan going forward. The second question probably just a follow-up on recent question and that you were discussing kind of the real estate sector and the LTVs. Do you see any risk on the actual real estate sector, considering that some players in the industry have loan to values closer to 80%. And probably the third question will be on the deposit side. I know you mentioned that it's been performing well, that probably for banks have been acting as a safe haven. But how do you see deposits evolving and what could be probably a key risk for the deposit market at this point? Thank you.

Emiliano Muratore -- Chief Financial Officer

Thank you, Sebastian, going to your first question about business strategy. We mainly keep everything like in place. As you can see even during this last few weeks, we've made the official launch of Superdigital and also Klare. The acquired business, we are waiting for the final approval from the regulator because we need to create a subsidiary of the bank to operate other bank's cards. So we are waiting for that, and when we get that, we will start immediately deploying the different businesses, especially because under this context, all the e-commerce, and all the digital proposition is key and we are very confident to the digital offering we have in our acquiring business. So that's just a matter of waiting for the regulatory approval.

And even in the wealth management, yes, I mean, there is a slight postponement if you want, but more related to working remotely and that it's like now that it's like tougher to get some things moving forward, more than kind of a market volume. I mean because I think that the need is already there. That's an area where we have room to improve and to gain market share. And I would say that we will also be moving there quickly as far as we get more kind of normality in the operations. And the key parts of our strategic plan are staying there and we are keeping them and we don't plan to change them. I know, probably the real estate.

Robert Moreno -- Investor Relations

Okay. Yeah. So in our loan book, I would say around 6% of our loans, 6% to 7% are to the real estate sector. These are real estate developers, OK. Construction is higher, because construction as a sector is a little higher because it includes the real estate developers, infrastructure, and concessions, OK. So I think the infrastructure, which is mainly in the private and public investment and infrastructure should remain healthy and growing, concessions as well. And then there is the real estate sector which we focus on a select group of real estate developers, OK, who have very good projects, but also have a really good balance sheet.

So until now, the past-due loan ratio of our real estate developers as of March was less than 0.1%, OK. So we feel comfortable, obviously, I don't know the position of other players and so forth. But our real estate development portfolio isn't such a big part of the loan book and as of March, the clients that will be -- we work with like 20, 30 very select and so now they've behaved well.

Obviously sales of new apartments and houses are going to come down for a while, so that's why it's really important to have good companies behind those projects.

Emiliano Muratore -- Chief Financial Officer

And about deposits, I don't know if there is still a strong statement to say, but I mean, I don't see like, big risk. I mean on the other side, I see, like good PRs to support the deposits that we are seeing so far. And because first, we are -- we see some degree, if you want to apply [Phonetic] to be the preference for liquidity to the people basically make them have their money in their checking accounts. I mean, we are -- we have the highest number of checking accounts in Chile. So that's like preference to liquidity for asset kind of flight to quality is a good lever for us.

And also, the low rates environment in the past also has proven to be a good support for deposits because the opportunity caused for people is much lower. And also something that is good for the deposits that we're seeing already and slightly negative for our asset management business is that in Chile there is a I would say a significant amount of money from people, individuals and corporates in money market funds.

That finally comes back to banks through deposits, but it's like institutional deposit where the asset manager is taking like retail clients deposits. And now that situation is changing as you might imagine with the monetary policy rate at 0.5%, even with low levels of fees in those funds, the net yield investor is really, really low. So that's creating like two forces, one that it doesn't make let's say much problem to have the money in the checking account yielding nothing. And also, it's good for the clients and also for banks to have a time deposits with a yield slightly above the fund, but also positive for the bank.

And so I don't see, I would say a significant risk on the deposit side. Definitely keeping this pace of growth is difficult to happen, I mean I don't see, I mean, I hope we've gotten that, but it's very strong, what we are seeing so far. But I don't know probably in the deposits if we see any greater threats or risk.

Robert Moreno -- Investor Relations

No threats. Now, remember eventually down the line companies are going to start investing again. So to start building things, their checking accounts might come down. Now obviously they expanded into some other business and so forth. So this level is going to continue. But in the future, we will go back to maybe some normal levels as companies obviously are trying to keep cash on their balance sheet, OK.

But remember April is a tax payment month. So that's also big seasonally high. And another thing what Emiliano and we've said in the call is, there's also growth in retail and part of that has to do with the growth in account opening. We've had a very good run even in March because the digital platforms are working, the retail side, I think still has some room to grow as we capture market share.

Sebastian Gallego -- Credicorp Capital -- Analyst

All right, thank you. Just a confirmation, and a follow-up, maybe if I may, on the initial question, you mentioned that 20% to 25% of people or loans asked for grace period. Is that as a total loan or just for the consumer segment, I'm not sure?

Claudio Melandri -- Chairman of the Board

[Speech Overlap] Total individuals, consumer plus mortgages.

Sebastian Gallego -- Credicorp Capital -- Analyst

Perfect. Thank you very much, very clear.

Operator

And thank you, and our next question comes from Yuri Fernandes from JP Morgan. Your line is now open.

Yuri Fernandes -- JPMorgan -- Analyst

Thank you, Emiliano. Thank you, Robert. I have a question regarding the guarantee of the working capital line. If you can comment a little bit about the economics of this line like how should we think about the spread there. I read that the rates would be around 3.5%, but I'm not that sure about the cost of funding of this line. And also if you need to charge the same rate for all the companies in the standard of the size of them. And also if you can give any color regarding this spread of this line versus an average SME spread for a normal loan, like how much cheaper is this kind of line?

And finally, should we expect Santander Chile to engage in these $24 billion expected program in line with our market share of the system? The point is if you do like 20%, 25% of this program. It's a sizable increase on your loan book, and I really don't know if the margins of this product, they are economic in [Indecipherable] giving like that's the bank. They still will be responsible for about 30% of the risk of this line.

So my question is, how are the economics here, right, like I know this maybe is not super important now given the size of the crisis, but how this program can hurt your margins and your overall profitability? Thank you.

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

Okay, thank you, Yuri. I mean, I think this quarter is easier, you have to see it as a 3% NIM products, I mean the funding is coming from the Central Bank. The Central Bank is also providing $24 billion of funding to banks up to four years at 0.5%. And so, though the collaterals there are different, but I think it's fair to make the numbers with that cost of funds, so that leaves a 3% margin before costs, before fees, before risks, before everything I mean like gross margin. So that's the first part.

I mean the price is like not fixed. I mean it's like, not more than a 3.5% rate. So you could expect some segment maybe being slightly below that, but I think it will be around that 3.5%. And comparing with other means or other programs I think the spread is significantly lower. And so the way to see this is that as a stand-alone product, it's going to be like not a profitable product. I mean when you factor in cost risk fees because also in this economics the one paying the fee is the bank. So let's say of that need have, to the fact [Phonetic] of the fee is going to be like 20 basis points yearly or something like that.

So as a stand-alone product, you don't have to see this as a very profitable product, you have to factor in a couple of important things. I mean the first is like -- is that in capital terms is going to be like light, because the guarantee from the state is going to be in the second period as remediation. That hasn't happened so far. Until now the state guarantees weren't mediating the capital consumption. Now they will, so that's a very good part in terms of risk-adjusted by capital.

And the other that I think is the main idea behind this product -- behind this program from the government is that how many clients will survive or will make it through the crisis, because of this [Indecipherable], I mean that's -- I think that that's a big upside that it's going to be impossible to make the comparison of the scenario with or without because we have it now. But we see it as a good hub for many of our clients to get through this crisis. The terms are already set, I mean the government has been deciding programs and you have to see it as a way of profitability, as a stand-alone basis, but looking at the broader picture is like a good way to help people navigate the crisis.

Robert Moreno -- Investor Relations

And another thing real quickly is that the definition of SME is a little bit larger than the SME -- our definition. So, it's true for [Indecipherable] that the traditional SME we have defined in our earnings report. The spread is lower, but when you go a little bit higher into the more middle market and it -- the spread isn't that -- not much more.

Emiliano Muratore -- Chief Financial Officer

Because here we had something about companies that have a total revenue of CLP35 million a year, I mean $1 million. That's the big corporate, I mean, and that they are also considering this program. And going to the beginning of your questions. Yeah, I think it's fair to expect that to keep like our market share of that blind, the thing is as of now is a fair assumption to make.

Yuri Fernandes -- JPMorgan -- Analyst

Great, thank you. Very clear. Thank you, guys.

Operator

Thank you. And the next question comes from Tibad Alessandri from CrediCorp. Your line is now open.

Tibad Alessandri -- CrediCorp -- Analyst

Hi, thank you for allowing my question. I wanted to ask more specifically first about the macroeconomic assumptions you're making. If you could give us a bit of your view on the macroeconomic environment for 2020. And second, the amount of impact, FX has on opex. Thank you very much.

Emiliano Muratore -- Chief Financial Officer

Yeah. And the first -- I'm sorry again to say that we are not sharing any guidance at this moment from any source. So we skip that part, I mean if you want to comment on the effects on opex.

Robert Moreno -- Investor Relations

Yeah. So this quarter our costs went up around, one second please -- quickly, I'll give you an indication, so there is an impact in administrative expenses. Our costs grew in 12 months, 6%, OK. Now, Santander Consumer added around CLP3 billion of which wasn't there. So if you take that out its around 5% or so. And so the FX was around in 12 months, I would say it impacted growth of like two percentage points, so roughly CLP100 in 12 months added around two percentage points to costs basically in administrative expenses, OK.

Now personnel expenses, we have a very good January and February. So we provision good variable incentives for those two months obviously that might reverse depending on how things go. So I think the pressure on costs and personnel expenses, we're not going to do any headcount reductions as the sort of President said. And so the big impact will come in the future on administrative expenses and obviously if the peso doesn't continue depreciating significantly that cost growth should die down, OK.

So I would say about one-third of the costs and administrative expenses have some relation to FX.

Tibad Alessandri -- CrediCorp -- Analyst

Okay. So you could say one-third of your administrative expenses is in US dollars, probably?

Robert Moreno -- Investor Relations

In Euros, OK.

Tibad Alessandri -- CrediCorp -- Analyst

Euros.

Robert Moreno -- Investor Relations

Some of the tech costs are in euros as well, OK, dollars and euros.

Tibad Alessandri -- CrediCorp -- Analyst

Thank you very much.

Robert Moreno -- Investor Relations

Okay.

Operator

Thank you. And our next question comes from Jorg Friedemann from Citibank. Your line is now open.

Jorg Friedemann -- Citibank -- Analyst

Thank you very much for taking my question. I'd like to get a bit more color, if possible on the grace period program. I understand that you mentioned already that 20% to 25% of the total loans apply to the program. Just wondering if you could give us a bit more granularity about how much more you expect going forward. And how you will give us visibility to check on the potential evolution of those contracts. I mean, probably we are going to be a bit blank together with you during these months of the grace period. But if you expect to add additional provisions, even though they are not required to or how we are going to understand the impacts when the grace period is over.

This is the first question. And the second question, I was looking into page 10 of your MD&A and you mentioned in terms of fee income that you already got initial impact from the COVID crisis. But when I look into this table, they split among the different segments of your business. I just see a significant contraction in that year-over-year basis in the SCIB segment, which I think is related to these low dollar of investment banking.

Is it fair to assume that additional pressure should be concentrated especially in retail going forward or how do you see that evolving in the coming quarters? Thank you very much.

Emiliano Muratore -- Chief Financial Officer

Okay. Thank you, Jorg. I mean regarding your first question what I'm telling you is that the speed of people asking for this grace period because you have to consider that for individuals, I mean the consumer loans are more like the product or the solution that was like already available. And so this 20% to 25% is what we have seen so far and the speed we have seen in this last few days, weeks is very, very low. I mean, what we had was like a huge amount of people like lining up if you want to get the grace period, I mean we get them in the first mainly two weeks, three weeks. And now the base is like much lower. So we can expect some growth in the number. I mean basically, it can only grow, but I will say that it's going to be so relevant the growth from what we have seen so far.

Assuming what we've seen on Chile that it's now at a stage where the government is moving into kind of new normal and trying to push the economic activity to recover and to start again. And so in terms of -- and then you have the SMEs or commercial lending where the -- if you want the solution is going to be only available next week. I mean, yesterday was the first auction, so they are, as I said before, we are going to really starting Monday. I would assume that Iike a heightened level of demand. But also it's true that from the client point of view, and from the corporate point of view, this is not like a free option, if you want or a free launch, because if you get this money you have to restrict your dividend policy and you have like some use of proceeds restriction that it's let's say, I think that could make some clients think twice before borrowing.

And so definitely now during the second quarter and the rest of the year, seeing how the evolution of the portfolio, the evolution of the crisis goes, I think that those will be like the inputs to decide if -- if we should move to let's say higher provisions even though that regulation would give us some room. But so far we haven't moved there yet. About this, you want to?

Robert Moreno -- Investor Relations

Yeah. And regarding the fees, in the first quarter, you're correct CIB is the corporate investment banking, and they -- I would say they are more affected in the first quarter by the slowdown and the social unrest, OK. The trend probably won't really improve for a while. And in retail, we had -- one thing, we had a really good January and February and then March things started to slow down. So, yeah especially like in credit card spending, the good news is that we're getting clients, people are using more of the online purchases. But if you look at the actual monetary purchases of credit cards and debit cards they are coming down in April.

So that's going to have some impact. Well, remember we changed from the three part model to the four part model on the credit card. That is also helping us a little bit. We're not charging more to commerce, but the economics of our credit cards are a little bit better. So that could help to absorb some of the shock. But you're correct in saying that the trend we saw especially in January and February in credit and card usage are going to come down in the second quarter.

Sorry, did you mention the additional provision, did you answer that part?

Emiliano Muratore -- Chief Financial Officer

Yes.

Robert Moreno -- Investor Relations

Okay.

Jorg Friedemann -- Citibank -- Analyst

That's perfect. I really appreciate. Thank you.

Operator

Thank you. And I'm showing no further questions. I would now like to turn the call back over to management 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: 73 minutes

Call participants:

Emiliano Muratore -- Chief Financial Officer

Claudio Melandri -- Chairman of the Board

Robert Moreno -- Investor Relations

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

Jason Mollin -- Scotiabank -- Analyst

Tito Labarta -- Goldman Sachs -- Analyst

Alonso Garcia -- Credit Suisse -- Analyst

Sebastian Gallego -- Credicorp Capital -- Analyst

Yuri Fernandes -- JPMorgan -- Analyst

Tibad Alessandri -- CrediCorp -- Analyst

Jorg Friedemann -- Citibank -- Analyst

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