Banco de Chile (BCH) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second 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 over Mr. Pedro Samhan, Chief Financial Officer. Mr. Samhan, you may begin.

Thank you. Good morning from Santiago de Chile to all of you, and thank you for participating in today's call. It is a pleasure for me to share with you some insight on our result for the second quarter of this year.

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.

Let me start. As shown on slide number two, I intend to concentrate on two main subjects. In the first place, I will go through the drivers that made Banco de Chile's second quarter net income a very successful one. In consideration to the relevant changes experienced by some of the lines, we have made an important effort in highlighting the extraordinary effect on operational results, thus, discriminating those fields to be credited to the merger process from those to be explained by other non-recurrent costs.

Secondly, we will focus on loan evolution and client base expansion, elaborating on credit quality, coverage and business performance.

Within a less favorable economic scenario, both locally and internationally, our strong second quarter net profit speaks of Banco de Chile's solid fundamentals, enhanced by the advantage brought forth by the merger with Citibank Chile.

As far as net income for the quarter is concerned, and as can be seen in slide number three, Banco de Chile showed an outstanding result within this period. The figure of almost CLP62b stands 8.7% above the previous year's quarterly output and roughly repeats the post-merger profit obtained in the first quarter, in spite of the extraordinary effect that I will later analyze.

This bottom-line result provided for 26% of the system's total net income, largely exceeding our share in total loans and involving an increase over the contribution shown in previous periods.

As a consequence of this advantageous relative position, and as may be seen in slide number four, it seems interesting to note that our Bank's strategy of progressing towards a portfolio mix that assures a high yield and growing business base, together with a favorable financial structure that has taken advantage of market conditions, has allowed us to obtain outstanding returns in terms of asset yield, with almost CLP3.2b of quarterly return per each 100 basis point of market share, a 3.3% increase in a 12-month period, the Bank has been able to outperform the system and its main competitor in terms of market share yield.

This figure involves a 47% excess on top of the system average and also exceeds the average yield of our main competitors by nearly 7%, speaking of a business and funding synergy that turns out as being the most profitable among its peers.

Let me now comment on how the operating income result, as shown in slide number five, stood up to the total of CLP233b, (sic -- see Press Release) almost 14% above the year-on-year figure on a comparable basis to the combined Banco de Chile plus Citibank amount, and of course posting a much higher increase of almost 41% when referred to Banco de Chile's standalone operating income from 12 months ago.

Two were clearly the main drivers behind the total operating income figure. On the one hand, net financial income growing by 13% quarter on quarter and, on the other hand, income from fees posting a 20% increase for equal period.

Let's save for a while the analysis of both lines, and point to the opposite effect created by the line of other operating income, which contributed with CLP16b, a 69% (sic -- see Press Release) reduction from the previous quarter.

It is fair to say, however, that important extraordinary effects were present in both quarters of 2008, as regards to other operating income items. During the second three-month period in common, a non-recurrent positive effect amounting to CLP8.2b coming from the sale of Banco de Chile's participation in Visa as a consequence of this company going public, was verified. This positive effect in the previous quarter was affected by even more important extraordinary income of CLP43b, which proceeds stem, as you may recall, from the sale of the Bank's foreign branches, as required by the merger agreement.

In consequence, though total operating income appears to be comparatively jeopardized by a lower contribution from the line of other operating income due to a lower extraordinary effect, it was mostly compensated by an extraordinary result of CLP189b in net financial income, the largest figure ever obtained by the Bank.

As may be observed in slide number six, a quarter-on-quarter increase of 13% was obtained, even when comparing to the already favorable figure obtained in the first quarter of 2008. Proactive steps taken to increase spread in higher yielding segment was reinforced by a successful strategy on the funding side, which allow us to importantly benefit from rising inflation, given the positive gap management between inflation-linked assets and liabilities not adjusted to inflation.

This allowed us to post a record-high 5.5% net financial margin for the 2008 second quarter, 64 basis point above the previous quarter figure and 100 basis points in excess of the quarterly margin obtained by Banco de Chile on a standalone basis 12 months ago.

A second driver boosting the total operating income line was the important increase experienced by fee income, as it's pictured in slide number seven. On the quarterly period, this line of fee income grew by more than 20%, speaking of our enhanced customer base, together with strengthened lines of business and improved products and services brought together by the merger.

A good example of this is the increase in the financial advisory business, which contributed with almost CLP4b in net fees, almost 7% of the total amount of net fees perceived during the quarter, up from a quite modest contribution along most of the previous periods.

Also, an important increase of more than 24% year on year was registered in respect to fees coming from our core business, reflecting client base, checking accounts and credit card growth. Thus, fee yield as a percentage of the Bank's average interest earning assets has increased from 1.57% a year ago, to 1.69% for this last quarter, on a comparable Banco de Chile plus Citi basis.

Additionally, total fee income for the quarter covered 42% of total operating expenses, well above the 37% average for the rest of our competitors.

Another relevant driver acting on operating income is related to credit quality. Slide number eight shows how provisions have been evolving, posting during the second quarter an increase of almost 32% quarter on quarter, and 78% on a yearly and pro forma basis, evidencing the impact of a less dynamic economic environment, plus the bank's ongoing strategy towards higher yielding segments.

However, and in spite of this strategic higher risk business focus, the total operating income, net of provisions, obtained as an average for each dollar of our interest earning asset portfolio, is substantially higher by 150 basis points to that of the system as an average, and also higher than the average figure of our peer group.

Moreover, the $6.8 yield in terms of operating income after provisions obtained by each $100 of those assets that earn interest shows an improvement compared to the $5.9 obtained on a combined Banco de Chile plus Citi standing a year ago.

Of course, it is worth remarking that this result, which has allowed a conservative credit approach without jeopardizing yield, has been possible by the very good performance of our financial income and fees lines.

On respect to extraordinary effects on the -- of the quarter, these have been isolated and detailed in slide number nine as non-recurring items. On this occasion, they not only relate to the merger process, but also to some other events I will now explain.

As far as non-recurring income effects, we may consider the proceeds from the Visa participation sale previously mentioned, amounting to CLP8.2b. On this part, non-recurring expense consists, firstly, of CLP5.8b involving an extraordinary merger bonus and a further down-payment on the second and last stage of the staff restructuring after the merger.

Secondly, we can identify a CLP13b charge explained by the collective negotiation process with employees, which was anticipated as a way of stabilizing the bank's labor force and strengthening its commitment with the employees. For the purpose of having a comparable basis to the previous quarter, this one-time effect has been removed from the income line of both quarters, thus disclosing some CLP82b of regular 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 11.3% over the comparable quarter-on-quarter figures. On its part, the impact of the non-recurring costs in the operating expense line is illustrated in slide number 10. with an amount of effective operating expenses standing to almost CLP164b for the first quarter of 2008,the 2008 second quarter value falls almost CLP137b, a reduction of more than 16%. These figures, however, include the full amount of the non-recurring effect on both quarters. For comparison purpose, should we clean both figure of their respective extraordinary cost effects, they both fall to roughly CLP118 and CLP117 (sic -- see press release) respectively, thus showing a quite stable operating cost base.

However, these clean total cost figures respond to very different income lever, thus, allowing the second quarter efficiency ratio to show a quite improved ratio of roughly 46%.

As it was previously mentioned, the Bank's business strategy has also vigorously collaborated to foster customer income, both as a consequence of increased volumes but as well as a result of maintaining high credit standards which have allowed a low level of delinquency and, consequently, lower provisions in relation to its peers.

As may be seen on slide number 11, on a year-on-year comparison, total loans to customer grew by 7.5% in real terms on a combined pro forma basis. That's widely compensating customer overlapping and eventual attrition, both normal consequences of a merger process.

This total volume growth spread along the different products with strategic increases of 8% in conventional loans, more than 5% in consumer credits and 7.6% in houses mortgages. It is important to underscore that this ongoing increase in loan volume, favoring higher yield segments such as those contracted through CrediChile and Atlas, which now accounts for CLP572b, estimated in some 21.5% share in this market segment, has been achieved complying with the Bank's conservative risk policy.

As may be seen in the slide, past due loans to total loans maintained its declining trend, reaching a 0.57% ratio in the second quarter of 2008, against a 0.7% pro forma 12 months before.

Nevertheless, the Bank has maintained its conservative stance, considering the mentioned increase in higher risk loans, added to a somehow subdued sentiment as regards to the global economic performance. Consequently, total allowances have increased and now exceed our past-due loans by more than 2.6 times, the highest among our peers and well above the system average.

Equal outstanding performance has been verified in the different lines of products where Banco de Chile's delinquency ratios stand well below the system average. It is clearly the case of commercial and consumer loans where our respective past-due ratios post 18 and 15 basis point below average, as well as that of the residential mortgage segment, which shows a remarkable ratio, standing 63 basis points below the system.

The portfolio expansion has moved hand in hand with an increase in products such as checking accounts and credit cards, as well as in the number of clients and debtors.

Slide number 12 shows the evolution of the total number of checking accounts. Sorry, I will repeat. Slide number 12 shows the evolution of the total number of checking accounts which, in spite of their more vulnerable position as a consequence of the merger, have shown an important year-on-year increase of 5.5% on top of the combined volumes of both pre-merged banks.

In a 12-month basis, the number of checking accounts increased by 19% on a Banco de Chile standalone basis. As far as total number of debtor is concerned, the first quarter of 2008 has apparently absorbed the overlapping effect and a net growth of more than 3% has already been achieved.

On its part, slide number 13 depicts the increase in the number of credit cards, which has expanded by 11%, as compared to the year-ago combined volumes.

It is worth noting that Banco de Chile's market share on total credit card purchases has stretched to 32.6 from the 26.4 share held by the Bank as a standalone 12 months ago.

Allow me to finish up pointing to the distribution network, one of our Bank's strengths. Slide number 14 shows how the merger with Citibank Chile involved the incorporation of 108 additional branches and points of sale, totaling as of last June, 415 sites representing an increase of 42% compared to Banco de Chile's franchise a year ago. In addition, our ATM network has also importantly expanded, adding more than 100 machines in the last 12 months.

Please, now open the lines for questions.

Sorry, operator?

Yes?

Yes. We can go along with the question session if there is questions.

Thank you.

(OPERATOR INSTRUCTIONS). And the first question is from the line of Tito Labarta with Deutsche Bank. Please proceed.

Hi, good afternoon. I just have a couple of questions. First, on your fee income, you see a large increase in the quarter and although part of it was due to the financial advisory business. So I just wanted to get a sense of the recurring either nature of that or what do you expect for fees for the full year?

And then also the second question, just given the high inflation in the country, what are your expectations for asset quality? You saw it pretty stable in the quarter, but do you think that will continue or do you expect a deterioration there? Thank you.

Could you repeat me the second part of your question, please?

Sure. The second question was -- .

[You're working to last].

Sorry?

Could you repeat me the second part of your question, please?

Sure. So the second question, just in terms of asset quality, is given the high inflation I'm seeing in Chile, what do you expect for asset quality? Do you expect it to remain stable or any expectations for deterioration going forward?

Yes. Thank you very much for your question.

In terms of fee income, really this merge between Banco de Chile and Citibank did show in its results and, really, we expect to continue with the same trend for the rest of the year. Because I think -- especially in businesses like corporate finance, where really the potential is of having a very good branch network in Chile with every -- with very wide customer base.

In addition to all the products that we do have, it has allowed us to reflect important earnings during the first half and we expect that we can continue with the same trend for the rest of the year.

And in all the other fees, always to compete also with the trend that we have had so far. This is the first part of your question.

Regarding the -- well, you know that there is a systemic issue in Chile because of the lower -- low economic environment. And, obviously, it has increased sale of provision instead of credit. However, recognizing that, and recognizing that this trend will continue, we don't see in the case of Banco de Chile an especial deterioration in terms of our credit charge for the second half vis a vis what we have had within the first one.

These are my answers.

Okay. Thank you.

Your next question comes from the line of Paula Vicuna with Santander Investments. Please proceed.

Hi, good morning. I have two questions. The first regarding the number of branches you will be opening in the following year?

Also regarding Atlas and CreditiChile, if -- do you -- if you have news and the brand that will continue to serve these segments?

Yes. Well, regarding branches, as you know, we already have a very healthy 415 branches, so really even though we are going to continue growing, the growth will be in a lesser extent in the fact that we already are very well consolidated on this matter.

It's -- we are expecting to open, oh, between five and ten branches from now until the next six or nine months. This answers the first part of your question.

Yes.

Regarding the second, we are still working with Atlas and CrediChile separately, and for the time being we are going to continue with that. So we don't have any change so far. Because -- because there we don't have a final conclusion in terms of saying that we have to have just one brand and we want to take advantage, but better now to take advantage of the two very good brands that we have.

Okay, I see. I thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS). The next question comes from the line of [Jorge John] from [Euro-America]. Please proceed, sir.

Hello. My first question is regarding your funding needs. Do you see any bond issuance in the near future? My other question is regarding the -- what is your opinion on the expected impact of price level restatements in this year and during 2009, given the higher levels of inflation we are seeing actually in Chile?

Yes, excellent. Well, instead of bond issuance, you know that with the merger between both banks we are more capitalized. And now you know that we are very close to 11.5 instead of the [buffer] of inflation vis a vis the 10.5 that we had one year ago, more or less.

So really -- we are really in a situation now in order to see if it's justifiable to insure a subordinated bond in order to increase our capital. You asked me, so far, really I think it's not (technical difficulty) to go to issue a bond during the rest of the year. But it's highly likely to do something like this in 2009 unless we have to advance the insurance for this year, by the end of the year because of [continuous] growth.

Instead of the inflation and expectations, instead of the inflation at this stage and instead of the impact of -- in the P&L, where as you know, so far between assets and CPI adjusted -- sorry, CPI-adjusted assets and non-CPI adjusted liabilities, this pattern has been very good and has allowed us also to make some money. As long as the inflation rate is concerned and is maintained at the current level, we can take advantage for the same reason that we can take advantage during the rest of the year or the next year of the same thing.

However, the inflation always implies some problem in terms of the global economic environment and has some consequence on impact in terms of the credit side. And, because of that, we are monitoring very well, [but that] the implication of that in terms of our risk profile, but we don't see a significant or important impact in the short term because of that.

Okay. Thank you very much.

You're welcome.

And there are no other questions in the queue at this time. I would like to turn the call back over to Mr. Pedro Samhan for closing remarks.

Thank you. We are confident of the consistency of our strategy, as well as on the strength of the business model we have succeeded to enhance by the recent venture with Citibank Chile.

The challenge seems to have been worthwhile, as the benefits of this acquisition are already paying in, thus, offering (technical difficulty) investment opportunity within the banking industry.

Thank you again for expressing interest in discussing Banco de Chile's results and enjoy a nice weekend. Thank you very much.

Thank you all for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.