Banco de Chile (BCH) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2008 Banco de Chile earnings conference call. At this time, all participants are in a listen-only mode. Later, we will open up the call for your questions. Instructions for queuing up will be provided at that time. As a reminder, a slide presentation can be viewed via Banco de Chile's web page at www.bancochile.cl. I would now like to turn the conference call over to Mr. Pedro Samhan, Chief Financial Officer. Mr. Samhan, you may begin.

Good day to all of you and thank you for participating in today's call. It is a pleasure for me to share with you some slides on our results for the first quarter of this year, moreover, when this time, at the first reported period of the merger operation of Banco de Chile and Citibank Chile. As the operator has already mentioned, a slide presentation that may allow you to more easily follow some of my comments can be viewed at our web page, bancochile.cl.

Before moving into analyzing our results, allow me to take a few seconds to acknowledge my recognition to my predecessor in this position as Chief Financial Officer for Banco de Chile. I am quite aware that many of you had the chance of personally meeting Arturo Tagle and were able to take advantage of his immense knowledge, not only of the industry and the Bank's performance, but also of banking business itself. As far as I am concerned, I have benefited from his experience and reliability, for which I forward my sincere thanks. I am sure he will keep on delivering in many significant ways for the benefit of this Company. For my part, I trust my several years as CFO for Citibank Chile will provide an important source of experience so as worthily collaborate with Banco de Chile Executive Team.

Let's move on our presentation of today. On slide number two, an outline of the subjects to be covered today is provided. In the first place, you -- we will briefly go through the recent dividend distribution of the 2007 net earnings. To then elaborate on Banco de Chile's result for the first quarter of 2008. We have made an important effort to isolate the different effects that extraordinarily have affected the quarter's performance. In particular, merger impact will be analyzed, both on cost and income sides. We will expand on how loan volumes and credit quality have evolved in this merger scenario, together with highlighting how the Bank's present equity base will provide support to our future growth. I intend to end up with an overview on our customer in response to our enhanced franchise.

As far as shareholder value is concerned, slide number three shows how, in spite of the growing market turbulence that has strongly tarnished the value of banking share, Banco de Chile shareholders have experienced a substantial increase in dividends. As recently approved in our shareholder meeting of last March, a cash dividend of CLP3.36 was distribute, involving a payout ratio of 100% over 2000 net income -- 2007 net income. This dividend involved a nominal increase of 70% over the cash amount received by Banco de Chile shareholders in the previous period, while representing a dividend yield of 7.3% over 2007 investment.

It seems worth emphasizing that the important increase in earnings and dividend per share obtained during the first quarter and related to the 2000 period was achieved in spite of a 4.3 expansion in the number of shares outstanding. This expansion being the consequence of both the 30% dividend capitalization of the 2006 income in the fall on new shares and the capital increase materialized in 2007 have an equivalent of $240m to the capital base.

Turning now to slide number four, the quarterly performance picture in terms of net income, disclosing a very relevant first quarter period which stands for referred result of the combined operation of Banco de Chile and Citibank Chile after the merger by absorption of the latter. With a quarterly net income in excess of CLP60m, this full merger result involved a year-on-year real increase of 17.5% of Banco de Chile's standalone figure, and almost flat performance when compared to the combined net income of Banco de Chile plus Citi, calculated as (inaudible) for the 2007 third quarter. In the context of the merger, being able to repeat the combined result, proved the capacity of absorbing and eventually netting the one-time income and cost effect of the merger. I will later expand on the other extraordinary costs and income effect.

As for the result for the fourth quarter of 2007 and, as you may recall, Banco de Chile net income figure stood at an all-time high with more than CLP79b. This extraordinary result was strongly influenced by a high valuation in the inflation rate of 2.3% in U.S. terms, boosting up the financial margin line. As a result, the comparable inflation for the first quarter of 2008 only reached a 1% variation.

Slide number five explains the quarter-on-quarter change in the main income line. Expressed in CLP billion, that blue line shows the variation of a effective post-merger first quarter figures compared to Banco de Chile's standalone result. The light blue line shows Citibank fourth quarter performance that when subtracted from the previous, reveals the isolated additional performance during the first quarter.

It seems relevant to know that in spite of the already mentioned strong result obtained at the operating income level during the past fourth quarter, the Bank was able to obtain a positive operating result in excess of the combined Banco de Chile and Citibank Chile's figures for the fourth quarter. It seems fair to say, however, that extraordinary income is included in this marginal contribution, while conversely, one-time costs related to increased provision due to the loan expansion and the unification of trade criteria in both portfolios, as well as merger related expenses, more than compensate this original operating income.

The mentioned extraordinary effect has been detailed in slide number six in non-recurrent items. For the purpose of having a comparable basis to previous quarters, this one-time effect has been removed from the first quarter 2008 income statement line, but disclosed in some CLP72b of clean income before tax for the quarter. As may be seen in the top right-hand side of the chart, this amount represents an increase of almost 26% over the comparable year-on-year figure.

As for non-recurring items that were pulled out from those active income lines, they mostly referred to the amount received from the sale of the U.S. branches that Banco de Chile held until last December 31 and which represented a net figure of [CLP74b] that entered into the balance sheet along the first quarter. As accounted effect, merger-related expenses and non-recurring provisions amount to CLP38.5b mostly covering severance costs for roughly 75% of the amount, administration and depreciation costs for 11%, and other expenses and one-time provisions for the remaining 14%.

On each part, the impact of the non-recurring costs in the operating expenses line is illustrated in slide number seven. With an amount of operating expenses coming to almost [CLP134b], representing the combined operation of Banco de Chile and Citi for the fourth quarter of 2007, the post-merger value climbed to CLP160b. This figure, however, includes the full amount of non-recurring costs associated to the merger, representing CLP43.9b, previously explained. For comparison purpose, the pre-merger combined figure should be appraised against a clean amount, which more accurately represents ongoing operation expenses. That, when deducting the CLP43.9b merger cost, the ongoing operational expense drops to CLP116b involving a 5.9% reaction over the combined pre-merger base.

As a consequence, the post-merger 61.5% efficiency ratio for the reported quarter, falls to only 53.4% when deducting the non-recurring effect both on the expense and on the income side. These figures stand well below the [73.4%] cost-to-income ratio post for the full 2007 period on a combined Chile plus Citi basis.

Allow me now to focus on our commercial performance during the quarter. As shown on slide number eight, on a year-on-year comparison, total loans to customers grew by 22% in real terms, while during the first three months of 2008 loans grew by more than 9%. Both increases, on top of the Banco de Chile standalone basis, should we include Citibank Chile's portfolio, the total Bank growth rate declined to roughly 10.4%, quite in line with the 11.8% in industry growth, corrected by natural portfolio reduction due to customer overlapping and eventual attrition as a consequence of the merger process.

This strong increase also proved true among all the different markets. Banco de Chile's commercial loans grew by more than 20%, while the consumer portfolio increased by almost 42%, and housing mortgages did so by 14% on a year-on-year basis. As well as consumer loans and related, the 12-month growth of 12.8% on a combined Chile figure basis, outperformed the systems rate of 8.4%, reflecting the strength of other portfolio, Citibank Chile consumer finance platform.

It is important to underscore that this ongoing increase in loan volume, favoring high-yield segment and naturally involving higher risk, has been achieved, complying with the Bank's proven risk policy and, as may be seen in the slide, past due loans to total loans maintained its declining trend, reaching a 0.55% ration on a post-merger scenario. Indeed, the amount of past due loans declined by almost 3% on a yearly basis, in spite of the newly incorporated Citi portfolio.

Always the Bank has maintained its conservative stance [considering dimension], increasing higher-risk loans added to a somehow subdued sentiment as we are to a lower economic performance. Consequently, total allowance has increased and now exceeds our past-due loans by more than 2.5 times the highest level among our peers and well above the systems average. Consistent with these high allowances, provision established during the quarter grew by 36%, thus reflecting portfolio increase and credit criteria valuation for both banks. In net terms, provision equaled 0.88% of average net loans for the quarter.

The observed portfolio expansion has moved hand-in-hand with increase in products, such as checking accounts and credit cards, as well as in the number of clients and debtors. Slide number nine shows the evolution of the total number of checking accounts, probably the most vulnerable product in merger situation. In a 12-month basis, the number of checking accounts increased by more than 19% over Banco de Chile basis. As of March 2008, the more than 529,000 accounts is the result of overlapping of checking account holders of the combined banks of roughly 3% of Banco de Chile's December base, plus the first quarter net growth. In the case of the total number of debtors, the first quarter of 2008 has apparently absorbed the overlap effect and a small net growth has already been achieved.

Slide number 10 points to the strengthening of the Bank's network. The merger with Citibank Chile involving the incorporation of 108 additional branches and point-of-sale totaling 402 sites represented an increase of 67%, compared to Banco de Chile franchise as of last December.

Allow me to finish up with one of the important added values of this merger, related to the strengthening of the Bank's capital base, the priority to ensure future growth capacity. Slide number 11 speaks about -- speaks of how our Company has increased its capital base along the year. [Doing] capitalization as well as new share issues has been crucial for ensuring a sustainable growth platform. As a consequence of the merger, total capital in reserves of Banco de Chile grew by almost [38%] as from December 2007, allowing our total capital to risk-adjusted asset ratio to climb to a very comfortable level of 11.5%. Worth mentioning is the fact that Citibank equity structure was very strong in basic capital. So the total capital ratio previously mentioned enjoyed a strong component of basic capital, thus allowing additional issues of subordinated capital should it be necessary. In spite of this equity increase, Banco de Chile profitability ratio still excels among its peers.

Slide number 12 shows how return on average capital for the first quarter of 2008 stood at 32%, above the average of its main peers and well above the less than 14% post by the system, excluding Banco de Chile.

Please now open the line for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Mario Pierry with Deutsche Bank. Please proceed.

Hi. Good morning. I just have clarification actually. On page six of the slides it says that the expenses related to the U.S. sale are CLP8,400m and in the footnote it says CLP5,400m. So maybe I missed it, but would you just explain the difference there?

Sorry Mario. It's (inaudible) here. Which slide are you looking at?

Slide six.

Slide six, yes?

It says the expense related to the U.S. sale and provisions is CLP8,400m and then in the footnote it says CLP5,400m. Is that related to the same thing or --

Yes. Well in the number, in the total number that you are seeing there, the trade provisions are included. That represents CLP3,000m. This is the difference between both lines. One is expense and the other are trade provisions. But both were non-recurring effect for the first quarter.

Right, so there's an additional CLP3,000m in provisions that are non-recurring.

Yes, that is included in the bottom line, but it's not on expense line.

I see. Okay. Great. And then just in terms of, what would you say are your expectations for the year, just in terms of the main, in terms of loan growth and fees and expenses? Could you kind of give us a sense of what you're expecting this year?

Well I can say that for the year, really you can take into consideration what has happened in the first quarter. And this slide that represents, this slide number six, where you can isolate the non-recurring impact, could be a good reflect of what is our current situation today. And we are expecting -- above that, we are expecting an increase in our business and our loan volumes between something very similar to the market because this is the first year of the merger and our intention is not to decrease our market share.

And in terms of market share, we expect an increase -- I'm sorry. In terms of market growth, we expect that increase between 8% and 10%. And our position is to grow according -- or to keep, at least, our market share as today. This is in terms of growth of business.

In terms of credit provision and audit, I think the first quarter represent a situation very peculiar of what is going on today in terms of the credit situation in Chile. In this quarter we have some extraordinary impact as you could see in the same slide. And we are expecting, for the rest of the year, a similar behavior to the first quarter. However, considering that, because of the market behavior, we could have some gradual increase in terms of provisions.

Okay. And do you expect any other extraordinary items for the year?

Really, I think that any extraordinary action that we could expect for the rest of the year could be net. We could have some extraordinary items in terms of income and some extraordinary items in terms of expenses. Net, I think -- this should be net or something very close to be net.

Alright. Thank you.

Let me clarify something. When we talk about the other CLP3m, according to your question I think was in the expense line, and in the expense line we have the impact in additional to a credit line that's in the other slide, is the tax impact of CLP3,000 that we had during the quarter in terms of the expense line, because of the sale of the branches.

Alright. Thank you.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of [Alvaro Forenz] with INCA Investments. Please proceed.

Yes, good morning.

Good morning.

My question has to do with the fact that 2007 was an extremely good year for Banco de Chile. And one of the reasons was that inflation was unusually high. Now since your assets re-priced at a faster rate than your liabilities, that contributed greatly to the fourth quarter's very good numbers. My question is, assuming that interest rates this year do not change, wouldn't that catch up to the Bank in the form of lower spreads? Thank you.

Hold on, please.

I guess to make my question clearer, wouldn't the liabilities re-priced this year catching up with what happened to asset rates last year?

Yes. You are saying if our liabilities re-pricing, that is faster than our assets could catch up?

Yes. Well since interest rates increased -- I'm sorry. Since inflation increased last year and that affected the rate that you charge on your assets very quickly, wouldn't your cost of funds this year sort of catch up with that increase in inflation?

Instead of -- let me explain there's an impact here -- how the impact is being produced, in order to answer your question. Instead of the inflation impact, as you know, Banco de Chile has a structure, a position in terms of U.S. or CPI adjusted assets. And this structural position is relatively high, or relatively significant instead of the balance sheet side. When the inflation goes down, obviously this impact disappear and/or is being reduced on one side.

In terms of the interest rate -- when you talk about the interest rate, the faster mover in terms of the re-pricing of the interest rate in the liabilities side, I think this impact is not significant in order to generate a really significant effect for the result of Banco de Chile during the year. The only impact will be, again, that this inflation rate that we don't expect to be the same, will be -- will have a lower revenue impact in our P&L during the year.

Thank you.

As there are no further questions in the queue, I'd like to turn the call back over to Mr. Samhan for closing remarks.

Well during the last year, Banco de Chile has undergone different challenges with very successful results, building a permanent process of value creation. Such profitability, commitment to service quality, efficiency goals in our everyday decisions and empowerment of our human resources, are the criteria that lie behind our involvement in our fast and efficient development. We are confident that this strong foundation will allow the Bank to keep up with our high standards towards our clients, our shareholders and our employees.

Thank you for joining today in discussing Banco de Chile results and have a good day. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.