Banco de Chile (BCH) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth 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 webpage, 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.

Thanks. Good day to all of you and thanks for participating in today's call. It is a pleasure for me to share with you our comments on Banco de Chile's results for the 2008 fourth quarter and year end. 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 webpage, bancochile.cl.

We will now turn to slide number two. An outline of the subjects to be covered today is provided. First, I will briefly go through Banco de Chile's 2008 results, focusing on the last quarter and on the main driver behind our quite outstanding annual net income and profitability. Then, we will expand on credit quality, liquidity, funding structure and capital base and share some insight on what our expectations appear to be regarding activity and performance for 2009.

Within a sustained and widespread deterioration of the economic scenario, heavily weighing on the international arena, and now starting to gain momentum on the domestic side, Banco de Chile's strong results for the year speaks of our solid fundamentals, enhanced by the advantages brought forth by the merger with Citibank Chile.

As can be seen on slide number three, Banco de Chile net income for 2008 stood in excess of CLP272 billion, involving an increase of 3.3% in real terms over the 2007 results for the bank on a standalone basis. This figure contributed by 27.4% to the total net profit of the banking system, a much larger share than the 19.4% portion of the market represented by our loans.

It should be noted, however, that on a pro form basis which involves the combined figures of Banco de Chile and Citibank Chile branch, previous to January 1st, 2008, the bank net income for 2008 experienced a yearly reduction of 5.4% in real terms, mostly due to the fourth quarter lower results by 35% on a year-on-year combined basis.

In spite of this slowdown, Banco de Chile was able to stand out as one of the most profitable banks in the Chilean system, as shown in slide number four. The 22.4% return on capital exceeds by 130 basis points the average ratio for our main peers, and more than double, with a 1,000 basis point difference, that of the system average.

Moving on to slide number five, it also seems interesting to note that in spite of a rather eventful year, not only on a global perspective but also considering the strong effort involved in the incorporation of Citibank Chile's operation, the bank was able to keep in place a business model that has assured the highest yield within the industry. While persevering on our fundamentals, mainly responding to a strong risk control and to the consistent focus on market segmentation, the bank has outperformed the system and its main peers in terms of market share yield.

A more than CLP14 million of annualized return for each 100 basis points of market share tells of an 18.5% increase in a three-year period on a pro forma basis. This figure involves a 59% excess of the system average and also exceeds the average yield of our main competitors by nearly 12%.

Slide number six highlights the bank lines involved in the fourth quarter results. As a constant throughout the year, an important source of operating income can be found in the net financial income level. While total operating income for the fourth quarter grew by 3.8%, year-on-year net financial income was increased by 11.7%, both on a pro forma basis.

As seen in slide number seven, the increase in net financial income steps up to an almost 37% over the previous 12 months' standalone figure, visibly showing the powerful impact of the merger. An improved asset mix in the context of an almost 8% pro forma annual growth over inflation in the bank loan portfolio, plus the positive impact of inflation on our enhanced UF position, builds upon our Treasury's accurate and early CPI forecast on an increased nominal interest rate environment, contributed to explain the more than 10% combined year growth in net financial income.

On a quarter-on-quarter comparison, however, the 139 basis point reduction in the UF variation had the effect of negatively impacting net financial margins for the fourth quarter, thus showing a reduction of 103 basis points, reinforced by the 10.5% decrease in average interest and in assets.

On its part, the steady though mild increase of 26 basis points in the spread observed since last August until December was also unable to counterbalance the mentioned impact of reduced inflation.

As regards to operating expenses and as picture on slide number eight, a year-on-year increase of 12.5% against the pro forma figure of 2007 was observed, mainly reflecting non-recurring expenses incurred upon during the course of the year.

Two main items can be identified. On one part, expenses related to personnel costs by the way of indemnities and compensation agreed upon with the unions following the merger, all amounting to some CLP44.7 billion, and on the other part an amount of CLP17 billion for an additional loan loss provision in view of the potential credit risk deterioration as a consequence of the ongoing economic slowdown. As these provisions do not respond to risk requirement on specific loans, local accounting regulations establish that they should be registered in the line of other operating expenses.

Considering that these recently mentioned additional provisions were established on the last two months of the year, should we clean this effect, as well as the impact of merger-related costs, the line of total operating expenses would have shown an almost flat performance on a year-to-year pro forma comparison, thus reflecting a strong control of core expenses in spite of the real growth experienced by the loan portfolio.

On the operating revenue side, extraordinary income for a total CLP48.8 billion may be identified as a consequence of both the sale of Banco de Chile's branches in the United States, required by the US regulator as a condition for the merger, and the extraordinary income coming from the sale of Banco de Chile's participation in Visa when this company went public.

Consequently, the yearly efficiency ratio, which stood to 52.3% on all-inclusive stance improves to 48% when discounting both extraordinary expenses and income, thus speaking of enhanced core revenues and merger synergies.

Let us now take a closer look to the bank's loan portfolio and how it has been focused in view of a scenario of lower activity and higher unemployment expectations. As can be seen on slide number nine, loans to the wholesale market have expanded along the year at a much faster pace than those granted to retail customers. Indeed, the corporate segment grew at a rhythm almost twice as fast as that of the bank's retail portfolio. Speaking of reduced demand for credit from individuals, as well as of prudent risk management in face of the wide consensus of weakening activity.

This prudent burden on credit risk has allowed the bank to show low levels of delinquency in absolute terms and also in relation to our peers. As pictured in slide number 10, as of December, the past-due ratio for Banco de Chile stood 39 basis points below the average ratio for our main peers and 48 basis points under the industry average. In our case, the year closed with a past-due ratio of 0.6%, a quite flat performance all along the last two years.

This very conservative management of credit risk has not only sustained low impairment rates, but also allowed the bank to show more modest provision requirements. Undoubtedly, these have and will probably increase, however, at a less-vigorous pace than the rest of the industry. As shown in the slide, the ratio of net provisions established stood at 1.4% of average loans for the last quarter, compared to the 1.8% and 1.7% figures shown as averaged by the rest of the system and by our main peers, respectively.

Yet it is fair noting that should we incorporate the additional provisions already mentioned incurred on by the bank during the last quarter, the ratio of total provisions to average loans climbs to 1.8% for the fourth quarter.

Also worth noting is the high coverage that our bank exhibits, allowing us to feel we're prepared to face an increasingly subdued scenario. Namely, allowance equivalent to 2.8 times the total amount of past-due loans as of December 28th compared quite favorably to system figures of 1.7 times.

As may be appreciated in slide number 11, Banco de Chile showed along the year and particularly during the last quarter a cautious approach to portfolio expansion by fostering those more defensive economic sectors and slowing down the sectors with a less favorable outlook.

As may be seen on the slide, our portfolio has been steering towards the corporate sector, mostly represented by the industrial, transportation and telecom business. Conversely, areas such as retail, financial companies, social and personal service, fishery and the segment of individual show a reduced participation in our portfolio on a quarter-on-quarter basis.

As said, these evolutions respond to the bank's risk perception, supported by the observed behavior of the different sectors. On slide number 12, the evolution of risk indicators, mainly charges for provision and past-due loans, respective to total loans, has been pictured. The chart includes those more sensitive sectors where the general trend is an increase in net provision in the past-due ratio, or in both.

As far as the fishing sector is concerned, and as you may be aware, the salmon subsector was importantly damaged during 2008 because of the ISA virus that contaminated many of the fish farms. At the fishing industry level, the impact of this disease is all but negligible, as roughly 70% of the sector's exports come from salmon, involving some $2.6 billion per year at a national level.

For its part, Banco de Chile is present in the salmon subsector in a lower proportion than our global market share. However, in anticipation, and as a consequence of the bearish stance toward the industry, the bank has importantly increased the provision related to the fishing industry, establishing, as can be seen on the chart, a provision for more than 10% of the total loans to the fish sector during the fourth quarter, whereas 94% of those provisions relate to salmon farming companies. As was likely to be expected, the past-due ratio of the fishing portfolio climbed to 1.38% during 2008.

In response, as can be seen on slide number 13, allowances for loan loss covered the sector's past-due loans more than 2.3 times. We feel comfortable when observing that in those more vulnerable sectors, the bank portfolio is importantly covered by allowance. Nevertheless, it seems just to say that our efforts in building up a strong coverage for eventually impaired loans will be maintained as long as we see signs of improvement in activity levels, both locally, as well as in those areas of the world where our country has developed strong commercial links.

In this sense, though the country and the financial system enjoy a very advantageous position world- and regional-wide as a consequence of a long record of prudential financial behavior on a macro and industry perspective, the implication of the financial crisis has spread out around the world.

In view of this, the financial authorities and local regulators early on took measures to give financial support and liquidity to the companies and individuals, as well as to facilitate and closely monitor the functioning of the financial system. With this precautionary action, the central bank succeeded in posting the signal that enough dollar liquidity would be provided if needed.

Further to these financial measures, on the third week of January, the Chilean government announced a $4 billion stimulus package, equivalent to some 2.8% of GDP, aimed to achieving a 2009 growth rate between 1% to 2%. As a consequence, public spending on 2009 could rise 10.7%.

The package has been positively evaluated by the market, as being significantly focused on the final user, namely low-income jobless youth and families, exporters through tax exemptions, credit-worthy customers through stamp tax relief, employer contributions for small and midsized companies, among others. This package is intended to create 100,000 jobs.

On the funding side, as far as Banco de Chile is concerned, and consistent with the strong market perception that the bank enjoys, an expected process of reallocation of funds along the system was verified and, as a result, those larger and deeply rooted banking names took advantage. As may be seen on slide number 14, a 42% increase in non-interest-bearing liability was verified along this rough 12-month period, which accounts for the mentioned market adjustment, but also speaks of the inclusion of Citibank Chile branches in the bank's book.

On its part, interest-bearing liability grew by 20.4%, mainly as a consequence of the increase in borrowing from financial institutions. Regarding this line, and as pictured in slide number 15, borrowing from foreign banks expanded by 90% as a consequence of both organic growth and the incorporation of the dollar asset book coming from Citibank Chile, which required the respective funding.

This was amply obtained from Banco de Chile's correspondent banks in very good terms as regards to financial condition and tenure. It should be noted that along the last tough quarter, a 19% increase in foreign loans was verified. Along with the strength in our funding structure, as pictured on slide number 16, it is important to highlight Banco de Chile's solid capital base, with capital reserves reaching $1.9 billion, after an increase of more than 38% year-on-year.

As of last December, total capital ratio stood at 11.7%, with a high proportion of basic capital involving a 6.6% of total assets, thus eventually allowing an important increase of total capital through the potential issue of subordinate bonds should it be required.

It may be interesting to mention that although the bank importantly exceeds the regulatory adequacy ratio, as a consequence of the new IFRS accounting rules price level adjustments were eliminated. This brings forth the effect that in relative terms, the US asset portfolio will no longer be supported by capital to be adjusted in equal terms. Consequently, should the bank wish to maintain the dividend amount to be received by shareholders, the bank should decrease the payout ratio.

A second though more volatile effect of the eradication of price level adjustments relates to the fluctuation of the UF. On this occasion, for the current month of January and part of February, the recent negative inflation registered in December will boost the eventual long UF position as non-adjusted capital will no longer balance this position, thus intensifying the negative impact on profit for this period.

As far as capital requirement is concerned, and as has been mentioned in other calls, during 2008, the bank has been complying with the meaning of the regulatory provisions for future dividends, in the amount of 70% of net income. The final amount to be distributed will be soon decided by the Board and proposed to the shareholders to be approved in the regular annual shareholder meeting, to be held in March.

Please now open the line for questions.

Thank you, Mr. Samhan. (Operator Instructions)

And our first question comes from Tito Labarta. Tito, you may proceed.

Hi, good morning. A couple questions regarding asset quality and provisions. Just wondered if I could get a sense of your outlook for provisions for this year. Do you expect the recurring level to be the same as in this quarter, around 1.4% of average loans, or would it be higher, including the additional provisions of around 1.8%?

Just want to get your outlook and then following that, just do you have like a target coverage ratio that you want?

And then, finally, in terms of asset quality, like how much do you think the past-due loan ratio could increase this year? Thank you.

Hold on, please. Well, let me answer your question. With the current scenario and the current environment, we expect that the level of provision will increase, not necessarily dramatically, but we are sure that it will increase in the system as a whole, and Banco de Chile will not be an exception.

In terms of all the other indictors of coverage, we are going to maintain the same policy in terms of being conservative and trying to preserve the ratio that we have today, but more similar to the ratio that we have today or with some small variation, but we don't see any significant change regarding that. This is my answer.

And what about in terms of the asset quality? Like, how much deterioration do you think you could see this year, in terms of past-due loans?

Well, in terms of past due, obviously we do have some increase, an increase, but that should not be so significant, because as the history has proven, really our -- the quality of our portfolio is very strong, so really be assured it will increase, but not -- we don't consider it a dramatic level.

All right, thank you.

You're welcome.

(Operator Instructions)

And our next question comes from Paula Vicuna from Santander. Paula, you may proceed.

Hi, Mr. Samhan, good morning. I have a couple of questions, first of all, regarding the loan growth, looking to 2009. Do you have expectations for the industry and for Banco de Chile?

And second, I was looking at the total loans for Banco de Chile, and in January 2008, the total participation of the Company's loans reached almost 67.5%. In December, this participation increased 118 basis points. This is in line with what happened in the industry as a whole, and I want to know if you believe that this will continue to happen.

Let me go to the first answer. The first answer is be sure that we think, and as you can see in the trends during last month, the growth, the real growth in terms of the volume of loans will decrease -- will not increase at the same level that we have before. We think that should be no more than 2% in real terms, between 0% and 2% or 3% in total for the industry.

In the case of Banco de Chile, really, our intention is not necessarily to increase our market share in loans. Our intention is to make the bank more profitable, to increase our efficiency indicators, and to have a prudent management on risk policy and to increase cross-sell. So, really, it is not our intention to increase necessarily our market share. So, really, of that you can conclude that our growth in terms of loans should be very similar to the growth of the market, as I told you before.

The second question really maybe I don't understand the number, but what happened this year, we grow. In general, we grow very close to the market until November, maybe with 10 basis point difference, and in December we have some decrease in the commercial area, in commercial loans.

So really, we are finishing the year with a participation of 19.4%. That is 20 basis points less than November by market share. The question is, if we see Banco de Chile in the level of 19.4% or 19.6%, I think that could be any, because really the commercial loan is very volatile. So really, and this explains the main difference of December. So really, we can regard again the market share of 19.6% maybe within three months, or maybe not, but we should be in a range about that.

Yes, I understand, but my question was, like -- kind of different. The thing is that the Company's loans as a percentage of the total loans have increased in their relative importance in your total portfolio. So, do you think that this will continue to happen?

Hold on, please. Yes, I think it could happen, maybe when we continue to increase in our participation in this sector, mainly in light of the final -- light of the current economic environment. So, really that would be a trend, that our relative participation in the commercial area will increase over our participation in the usual loans for any loans related to the consumer's business.

Okay, perfect. And last, your dividend policy for this year? I know you had some detail on --

As I told you before, the shareholders meeting, the Board has to decide and propose to the shareholders meeting. This decision has not been taken yet.

Okay, perfect, thank you very much.

As soon as we know it, this country will be informed.

Okay, thank you very much.

(Operator Instructions)

And at this time, we are showing no more further questions available. Mr. Samhan, you may proceed.

Excellent, thank you, operator. Banco de Chile certainly enjoys a dominant position in the Chilean financial industry. We have been built upon fundamentals based on a strong client base, a proven risk strategy and the permanent pursuit of new business opportunities. Undoubtedly, the last months have proven [the strain on us].

However, it seems fair to point out that for the near future, we are clearly foreseeing a more subdued global scenario, not only on the international market, as has been evident for some time now, but also locally. In this context, Banco de Chile is well prepared to successfully ford a less favorable environment and take advantage of its comparative strengths.

Thank you, again, for joining us this time, and have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.