Banco de Chile (BCH) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third 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, www.bancochile.cl.

I would now like to turn the conference call over Mr. Pedro Samhan, Chief Financial Officer. Mr. Samhan, you may begin.

Thank you. Good day to all of you and thanks for participating in today's call. We appreciate your time and interest in the discussion of Banco de Chile recently published results.

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, www.bancochile.cl.

Let us now move on to our presentation of today. As shown on the slide number two, first I intend to briefly go through the outcome and details of Banco de Chile outstanding quarterly result, focusing on the main drivers behind its performance.

Then we may discuss on how the financial system and particularly Banco de Chile have fared during the recent financial turmoil providing more detail on liquidity, funding structure, trade quality and client impact.

Within a rapidly deteriorating economic scenario, both locally and internationally, our very strong third quarter net profit speaks of Banco de Chile's solid fundamentals, enhanced by the advantages brought forth by the merger with Citibank Chile.

As can be seen in slide number 3, and following an also quite strong second quarter, the reported three month period posted a record CLP93.2 billion net income, a 33% year-on-year increase over the stand-alone situation and more than 45% growth when compared to the previous quarter.

The final result contributes by 34% to the system's bottom-line reflecting, as has been a constant for quite some time, and a stronger profit share than that of our current 19.5% market share of total loans.

As a consequence of this outstanding result, and as shown in the slide number 4, Banco de Chile has been able to maintain a superior position in terms of profitability. With a 31% return on capital and reserves for the three month period, our Bank stands as the most profitable bank in the Chilean system, well above the system's average, while also exceeding by 640 basis points, the average profitability shown by our main peers.

An important source of bottom-line income was originated, during this third quarter, at the operating income level showing, as seen in slide number 5, a year-on-year increase of more than 11% on top of the combined Banco de Chile plus Citibank Chile figure.

When comparing to the previous twelve months stand-alone figure, the increase jumps to an almost 41%, visibly showing the powerful impact of the merger. An improved asset mix, in the context of an almost 10% yearly growth over inflation in the Bank's loan portfolio, the positive impact on our enhanced [UF] position of the treasury's accurate forecast on inflation, plus, increased nominal interest rates, all contributed to explain the more than 21% quarterly growth in net financial income.

This component made up for 80% of the quarter's total operating income and was able to amply compensate the slight decreases experienced by fee income and other operating income.

As a result, and as shown in slide number 6, the Bank's net financial margin climbed importantly to 6.6%, involving a quarter-on-quarter impressive increase of 113 basis points on top of the already very positive figure posted on the previous quarter.

Crucial to this performance was the successful strategy implemented on the funding side which allowed us to importantly benefit from rising inflation given the positive GAAP management between inflation-linked assets and liabilities not adjusted by inflation.

As regards to operating expenses, and as pictured on slide number 7, a quite significant quarter-on-quarter reduction of more than 8% was achieved, thus speaking of an ongoing reduction of merger costs.

Additionally, on a twelve month period, expenses also diminished on a combined pro-forma basis. As a consequence, efficiency ratio for the reported period posted a well improved 43.5%, a 612 basis point reduction over a twelve month tenure, a quite remarkable reduction as it considered improvement over the combined cost platform.

In addition, this efficiency figure for the third quarter includes some non-recurring effects of the period, which on the expense side mostly relate to additional indemnities associated to the merger process of the Atlas-Credichile platforms, while on the income side, mainly reflect a remnant earning of the Visa transaction, already discussed on the previous quarterly release.

For comparison purposes, should we clean both operating income and expenses from extraordinary effects, the third quarter efficiency ratio would show a still further improved figure of less than 43%, speaking of important achievements regarding operating revenues and merger synergies.

The Bank's business strategy has also vigorously collaborated to foster customer income, both as a consequence of increased volume and also as a result of maintaining high credit standards which have allowed lower levels of delinquency and consequently lower provisions in relation to our peers.

As may be appreciated in slide number 8, Banco de Chile has shown, along the year, a cautious approach to portfolio expansion by fostering those lower risk business segments.

On a pro forma basis, foreign trade loans have increased most -- by almost 33% in real terms capturing market share against a system growing 29%. A less aggressive approach was implemented in our retail segment which grew 4.3%, a lower figure than the one posted by the system as an average, thus anticipating a tougher environment.

Equally, loans on the corporate side, excluding foreign trade, were increased by 7.4%, slightly below the rest of the competitors' average, again as a consequence of a more bearish market stance.

As a result, the evolution of the Bank's portfolio breakdown shows a reduction in the importance of retail loans with a 70 basis point lower participation in total loans, along the first nine months of the year.

Comparatively, and as an average, our main peers have maintained a more bullish performance in this sector with an increased participation in their average portfolio.

As far as commercial loans are related, on a year-to-date landscape, and in average terms, participation in commercial credits has decreased for the benefit of foreign trade loans, being Banco de Chile the most determined in enhancing the share of the latter.

This conservative policy has certainly paid out in terms of credit quality. For quite some time Banco de Chile has posted the best risk ratios among its peers with high coverage levels.

On this respect, slide number 9 shows how our Bank has been able to maintain a reduced and very stable level of past due loans standing at 0.57% of total loans, 42 and 44 basis points below the average ratio of our peers and of the system respectively.

With a very strong asset quality during the quarter, the charge-on result for provision fell to a level of 0.95% of average loans, from the previous quarter figure of 1.14%.

In spite of this reduction and because of the resilience shown by our portfolio, allowances to past due loans increased to almost 267%, thus standing 1.6 times above the average ratio of our main peers and posting the system's highest provision coverage as regards to past due loans.

As we are all aware, the implication of the financial crisis have spread out around the world and within this context, both the Chilean financial system as a whole, and particularly Banco de Chile, enjoy a very advantageous position as a consequence of a long record of prudential financial behavior on a macro and sector perspective, as well as on a very conservative track record on the part of Banco de Chile.

Therefore, though not isolated from the global slowdown, our country and the financial industry may well be considered fairly insulated and are now enjoying a thorough and timely shaped up defensive position.

However, due to the severity of the global financial crisis, local regulators, as well as Chilean government, have taken measures to facilitate and closely monitor the functioning of the financial system. In consequence, and so as to avoid any serious liquidity issues in the market at the end of September, the Central Bank announced that it would suspend its ongoing market intervention in the form of US dollar acquisitions.

It then decided to provide local financial institutions with an option to access additional dollar funding by making available up to $5 billion dollars from reserves through weekly auctions of $500 million in Swap.

In our view, this was a precautionary measure and the result of the first three auctions carried out after the announcement, supports this perception. Indeed, local financial institutions showed limited interest in participating in the auction, thus proving the point that foreign currency liquidity in the Chilean system is not importantly at stress.

The first auction on September 30 placed 78% of the amount offered while the second one was almost deserted with 6% and finally, last week's auction showed only a 40% demand.

Despite the limited demand, the Central Bank succeeded in posting the signal that enough dollar liquidity would be provided, if needed. It is also worth remembering that the vast majority of the Chilean financial system transactions are conducted in local currency where liquidity is deep.

However, Central Bank has also taken measures to further reinforce it. As far as Banco de Chile is concerned, and consistent with the strong market perception that the Bank enjoys, an expected flight-to-quality process was verified.

As may be seen on slide number 10, a 10% increase in the total time deposit balance was registered along the last September period from August 31st to October 2nd. You may also appreciate the evolution of net deposit along those same weeks, with important net capture of funds especially during the harsher last days.

On a twelve-month basis as of September 30th, as slide number 11 shows how time deposits increased by 12% in nominal terms, while non-interest bearing liabilities grew by 21% year-on-year.

This stands as an important achievement when considering that these growths are on a pro forma basis, meaning that customer funding coming from Citi Chile not only was retained, but also marginally increased in real terms.

Actually, in terms of checking accounts and again, on a pro forma basis, the number of holders has increased by 4.9% on top of the added number of checking account holders existing on September 2007 in both institutions.

On its part, borrowing from foreign banks expanded by 104% as a consequence of both organic growth and the incorporation of the dollar asset book coming from Citibank Chile and which required our respective funding.

It is important to note that due to Citibank's already high cross border exposure in Chile, as a result of its investment in the country, funding for those foreign currency operations coming from CitiChile should not be expected from the part of Citi NA.

Consequently, an important support from Banco de Chile's correspondent banks was required and was amply obtained in very good terms as regards to financial conditions and tenor.

Mention ought to be made to very relevant medium-term loans from major European and Asian financial institutions for the purpose of financing the Bank's increased foreign trade portfolio.

Additionally, Banco de Chile also benefited from the increase in customers and cross-selling consequence of the incorporation of Citibank Chile deposit base, and enjoys an improvement in its funding structure as may be seen in slide number 12.

Non-interest bearing liabilities, involving, as of last September, 24.7% of the total liability structure, have increased their contribution along the last twelve months by 250 basis points.

Accordingly, this improved composition has partially counterbalanced the general trend of higher funding costs. Moreover, and on a peer group comparison, the portion of total liabilities represented by these non-cost funding sources stands above the average of our main competitors and of the system as a whole.

Therefore, Banco de Chile's funding structure showed lower exposure to higher liability costs than the average of our peers. As shown in the chart, while more than 27% of the Bank's total liabilities are not charged with interest, our main peers and the system as an average enjoy a less favorable ratio by 160 and 190 basis points, respectively.

Along with the strength in our funding structure, and as pictured in the slide number 13, it is important to highlight Banco de Chile's solid capital base with capital and reserves reaching $2.2 billion after an increase of more than 38% year-on-year.

As of last September, the total capital ratio stood at 11.3% with a high proportion of basic capital involving 6.7% of total assets, thus eventually allowing an important increase of total capital through the potential issue of subordinated bonds, should it be required. Please now open the line for questions.

Thank you. (Operator Instructions). Your first question comes from the line of Tito Labarta with Deutsche Bank. Please proceed.

Hi, good afternoon. Can you just comment on what is your outlook let's say for next year particularly given the financial crisis going on?

How do you see that impacting the Bank as a -- particularly in terms of loan growth and asset quality. And also as inflation comes down, how do you see that impacting your margin? Thank you.

Thank you for the question. Well, really with a current environment we perceive and we kind of envision the next year well, because of the potential GDP growth, we should not expect a grow instead of the loans and all the different financial by dabbling in the market as it was this year.

Same for the credits, instead of the potential charge -- credit charge-off but instead of the increase of past due loans we expect something that would be higher than this year.

Yes, you have to re-expand that general number. It would be then finally about the -- how the -- will be the evolution of the economy worldwide and in the country.

We expect a level of GDP growth close to -- between 2% and 3%. May be the growth of loans in the markets should be no higher, we expect then 5% in real terms, more or less, very approximately number. This is instead of grow with the system.

Instead of inflation -- there are different opinion really. It could be -- could fluctuate between 3.5% or 5% depending on how the crisis will evolve, what will happen with the exchange rate in the country, what will happen the international economy.

But finally we expect that the inflation should not be as much as this year, so really the conclusion instead of the gap in profit for the US position, should be lower by sure if we assume that this will be the projection of the macro micro variable. This is my answer. Do you have any questions?

How do you see -- I mean, can you say in terms of your margins -- just given the lower inflation, how it impacts the margin?

Well, it will impact going down, no doubt about that, but as you ask me on a specific number, it is very difficult to give a specific number now.

But it should be, I think, that given this reality it should be a margin that will be closer not as much as this quarter, but maybe going down to something more similar to the previous quarter.

Okay, thank you very much.

Your next question comes from the line of [Lucas Ramirez] with Merrill Lynch. Please proceed.

Hi, thank you. I have a question regarding your provision expenses, which this quarter dropped sequentially compared to pretty high growth rates in the prior two quarters and was certainly a positive development. So how do you think about provisioning going forward?

Was this a one time situation because of high risks to that corporate [findings] in the second quarter and now you see growth to return your provisioning, or do you believe because of the actions that you have taken on reducing exposure to riskier segments that your provisions will remain stable over the next few quarters?

Well, it is a very good question. Let me tell you the following. As you said very well, the second quarter we had (inaudible) we had an impact because of a company and really this quarter is slightly more inline with what we should expect is the very, very short term.

However, depending on the evolution of the crisis, we should expect an increase in our credit charge. No doubt about that, because now we are at the level of only 1%, we should expect something over 1%, but not higher than 1.15% or 1.20%.

Great, thank you very much.

And you're welcome.

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

Hi Mr. Samhan, good afternoon. Regarding the loan growth and looking forward, what do you think that will be the segment that will be driving loan growth the following nine months?

Very well. It is a question that will -- it's an answer that will depend on what's happening in the system really, because even though we can think that the segment will grow in average terms, in [advancing] close to 5% in real terms depending on the GDP growth, the behavior of the dividend incentive could be so different.

So really we think that we are -- would be close to the market, instead of our current market share, which you expect higher growth in relative terms in the corporate side rather than in the consumer side, and especially rather than the concept on the consumer finance side.

And in really big terms, we think that the corporation and company should grow more than the consumer and especially consumer, in the consumer finance side.

Okay, and therefore do you think that there could be some impact in the provision expenses looking forward?

Well, as I told you -- I mentioned before, I think that the level of provision over the total loan, or the level of credit charge will be higher than this year. Maybe we will be in a range between 1% and 1.2%, instead of something close to 1%, as we are now.

Okay, and I have another question regarding the opening of new branches, whether you're planning to do this quarter, the fourth quarter and the next year?

No, well, instead of the quarter we still are opening some few branches, but we are in the process of making the merge between CrediChile and Atlas. So really at the same time we are reusing other branches, instead of a consumer finance.

For next year, it is very difficult to say today, but we expect to open no more than 10 branches.

Okay, thank you very much.

You're welcome.

(Operator Instructions). Your next question comes from the line of Saul Martinez with JPMorgan.

Hi, thank you. This is Saul Martinez from JPMorgan. Pedro, just a general question on your return on equity, the third quarter was very strong.

I think you said you had a 31% return on equity and certainly the higher inflation helps you -- helped you in terms of your financial market, in terms of your financial margins.

But as we go into '09, as you've said, we have slower growth, we have lower inflation, we have higher loan-loss provision levels. How should we think about what kind of profitability and return on equity you can sustain in the next two years as -- or next year and going forward as we see these trends develop?

Yes, it's not easy to give a complete answer about this question, because it depends on many of several factors. By sure, the level that we've got this quarter is a very relatively high level that is difficult to keep and to sustain.

However, because of the management that we have instead of our trade prospects, because of the management that we have instead of our treasury and corporate finance and customer business, because of the management that we are having with our expense base, by considering that the market will not grow as much as it grow in the past on one side, and the impact, instead of the business credit charge really which will go back to I think in relative terms, to return on equity level more similar to the level that we had before, a level that could be between 22% and 25% average, closer to 25%.

But it's something that is difficult to say, because it will depend on many factors, but level of 25%, we think that are relatively achievable.

Okay, so lower to mid 20% range you think is --

I think, well -- you take a range -- you continue a range that low, between 20% and 25%.

Okay, and then secondly can you give us a sense for what your net long position is in inflation-indexed assets?

Well, it really is something very volatile, or let me say in other words, is something that is managed by our treasury in a very proactive basis, so really it suffered a lot of change over the time.

So really by the -- as of now, the position is different to a position that I imagined two days ago. So really -- but in general, I would say that our position, if you consider only in today is much lower than the position that we had before when the inflation expectation was very high.

Yes.

So really in this sense, we are -- instead of this proactive management, the treasurer is taking the position regarding the expectation of inflation, vis--vis, the expectation of the market. But if I have to give you a number, I think the position today is between CLP500,000 or CLP700,000 million, more or less.

Okay. And then just finally -- sorry to take up so much of your time -- but just finally on your capital position, 11% is a decent number, obviously it's pretty -- it's a strong number, but we have had unprecedented financial turmoil globally and it's not -- comparing to even some US and European banks who have been raising capital, it's not that high.

Would you consider changing your dividend policy? Do you feel the need to reduce dividends at this stage, or do you feel comfortable paying a 100% dividend payout and that you can sustain that level?

Well, let me tell you something, instead of dividend policy we are not changing. We are not thinking so far of any significant changes.

However, there is something that may be as you know, that is we have merged with Citibank, where Citibank was well capitalized. Really, the basic capital of the Bank allow you to increase your capital and -- your capital, your patrimony effective significantly through subordinated bonds.

So really we are in condition at any time to go to the market to issue subordinated bonds and to increase our Basel ratio, our capital ratio in a significant way -- in a relatively significant way, at least 15% of all --

Now, with -- okay, would those be -- that would be Tier 2 capital?

Yes.

Okay.

Yes. That is enough to make the business in the country.

Sure, okay, thank you very much.

You're welcome.

Your final question comes from the line of Lucas Ramirez with Merrill Lynch. Please proceed.

Hi, thank you for taking another question. And my question is regarding the merger with Citibank, because it looks as though the benefits are extending far beyond the retail segment only because you've been generating pretty healthy fees on the corporate side, and corporate finance, M&A project finance.

So we're seeing pretty good results there. So can you just give us some idea of what enhanced capabilities you have now with Citi, like what can you do now for corporates that you could not do before?

And how do you stand now relative to your main competitors there which are probably the foreign banks plus Santander-Chile?

Well, really with the merger with Citibank with -- there was a connectivity agreement that was signed in order to have full cooperation and collaboration between both parties. So really now Banco de Chile has access to international bills -- international bills I am thinking in international cash program who come to Chile where you can combine very well all the powerful that Citi has offshore with all the network that Banco de Chile has inside.

And as a matter of fact you see the situation so far we have increased significantly our corporate finance business in Banco de Chile. We have increased significantly our treasury business in Banco de Chile because in all of them this principle is applicable.

On top of that, this is instead of corporate bank, and corporate cash commerce. On top of that you have the merger between Credichile and Atlas that is being finished -- all the merger process will be finished within this quarter in order to continue increasing our revenue flow, and reusing our stocks in other -- because of the synergy that we have taken.

On top of that we have the private banking rules here, where also there are people with a lot of experience who are coming from Citibank from this merger.

Well, really I don't know if you have a -- the answer was -- your question was answered or you have any remaining questions.

No, that's helpful Pedro, thank you.

You're welcome.

At this time there are no additional questions in the queue. I would like to turn the call back over to Mr. Samhan for any closing remarks. Please proceed.

Thank you very much. Thank you, operator. Banco de Chile certainly enjoys a dominant position in the Chilean financial industry, which is further enhanced in all those circumstances that may involve market uncertainty or unexpected risk.

Undoubtedly, the last days have proven this (inaudible) not only on the domestic side, but also on the international arena, allowing our bank to comparatively benefit from a very low risk perception from our counterparts and customers.

In addition, a very successful treasury management, together with a consistently conservative and prudential treatment of risk, a close monitoring of expenses and a creative merger process on the business side have all collaborated to the extraordinary results achieved in this past quarter.

However, it is fair to point out that for the near future we are clearly foreseeing a more subdued global scenario, not only on the international markets, as is evident today, but also locally.

In this context Banco de Chile is well prepared to successfully (inaudible) a less favorable environment and take advantage of it's comparative strength, while acknowledging less lustrous future performances for the financial industry as a whole.

Thank you again for your interest and time, and have a good afternoon.

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