Banco de Chile (BCH) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 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 first quarter of 2009.

As the operator has already mentioned, a slide presentation that may allow you to more easily follow some of my comments can be viewed on our webpage bancochile.cl. Let us now move on to our presentation of today.

As shown on slide number two, firstly I intend to go through the outcome and details of Banco de Chile's quarterly results, explaining the impact of both a persistently down-based economic and financial environment together with a change in accounting regulation, which in this quarter has added to the former.

Then we may discuss on how the Chilean financial system and particularly Banco de Chile has fared with this scenario, providing detail on liquidity, funding structure, credit quality, and building up of capital.

In the context of the recent deterioration of the economic scenario, both locally and internationally, Banco de Chile's first quarter result show the effect of subdued activity with a strong focus on maintaining high credit quality standard.

As may be appreciated in slide number three, and in spite of experiencing a quarter-on-quarter 5.6% contraction in balance sheet that has impacted net result, the year-on-year evolution of net income has evidenced quite resilient core earnings.

As mentioned the more than CLP49 billion posted as effective net income for the first quarter respond to the combined effect for the one part of reduced activity levels along the industry and the change of accounting standard on the other.

In particular the application of the new accounting regulation has [mattered] a slight seasonal result, we would have stood above CLP82 billion, if adjusted to compensate the almost CLP33 billion negative impact of new accounting rules applied as from January 1, 2009, reinforced by the CPI decrease for the quarter.

The last adjusted figure involves a more than 37% increase in nominal terms over the effective net result obtained in the first quarter of 2008. When comparing both effective year-on-year net income figures, a reduction of 18% was registered in the first quarter of 2009.

Throughout the last quarter net financial income has been a constant as well as an important source of operating income. Along most part of 2008 the positive impact of inflation on our structural UF position at times further enhanced in view of our treasury accurate CPI forecast together with increased nominal interest rate contributed to explain important outcomes as far as net financial income was concerned.

As for the last two quarters however, mostly on the first three months of 2009 as may be seen in the slide number four, net financial income only grew by a nominal rate of 3.2% on a yearly period and show a quarter-on-quarter reduction of almost 25%. These figures reveal the strong shift experienced by inflation during the latter part of 2008 and first three months of this year.

We had a 2.3% reduction in the UF, our local CPI adjusted unit in the first quarter of 2009 compared quite unfavorably for [these quarters] to a 1% increase in the same period of 2008.

This adverse effect was reinforced by lower interest rates involving a more than 130 basis point differential in the 12-month period dampening down the income contribution of non-interest bearing liabilities, quite relevant in the case of our bank.

On its part, the steady increase of 23 basis points in our average commercial spread observed along the last 12 months was also unable to counterbalance the mentioned impact of reduced inflation.

In contrast to the previous financial income effect mostly associated to a [consolidated] non-client income source fee income, essentially a client-related income source, showed a very strong performance along the last 12 months and may be appreciated in slide number five.

As far as total fee income is concerned, a year-on-year increase of 14.7% confirms our bank's intensified cross selling, pro-diversification, and segmented pricing strategy. Indeed this increase almost fully stems from the core clients of the bank as core fee income grew by almost 33% along the last 12 months.

On its part, fees coming from our subsidiaries showed a 10% year-on-year reduction, largely revealing relevant 2.2% GDP contraction estimated for the first quarter on a yearly comparison.

As a consequence, total fee income for the quarter, on a non-consolidated basis, covers 44% of total operating expenses, well above the 35% average for the rest of our competitors. Moreover, Banco de Chile's fee-to-expense ratio has shown an important improvement of 149 basis points along the last four quarters.

As regards to operating expenses and as pictured on slide number six, a year-on-year reduction of almost 20% was observed, mainly reflecting the full synergies from the mentioned merger. Should we wish to compare to an adjusted operating expenses figure which excludes the major cost in the first quarter, and a slight increase of roughly 5% is observed. Nevertheless, this expansion speaks of an improved cost structure as it stands quite below the more than [15%] increase experienced by total interest-earning asset in the same period.

On the operating revenue side, extraordinary income for almost $40 million was accounted for on the first quarter of 2008 thus masking the real ongoing revenue generation, and additionally aggravating the fall of operational revenue. Isolating this effect, revenue would have shown an annual 8% increase.

Consequently, the efficiency ratio which stood to an effective 52.9% for this year per quarter in the new accounting regulation and scenario compared favorably to a year ago, both effective and [measure-corrected] efficiency ratios. No doubt that this performance speaks well of the bank effort of reducing non-personnel cost and taking advantage of already ingrained IT developments.

Let us now take a closer look to the bank's loan portfolio and how it has evolved in view of the quite lingering downcast scenario of lower activity, higher unemployment, reduced consumption, and lower commodity prices.

As can be seen in slide number seven, loans to the wholesale market have expanded along the year at a much faster pace than those granted to retail customers. Indeed, total corporate loans grew more than twice as fast than retail loans, thus evidencing a more [bearish] demand for credit for individuals as well as prudent risk management in face of the negative outlook.

On the positive side, this keener focus on the corporate segment rather than on the retail one has given weight to a higher [earning] portfolio as spreads in the former have increased the most, possibly as a result of more restricted international financial markets involving reallocation of the Company's financing demands back to local markets. Thus on average Banco de Chile's total spread has increased by 37 basis points along the last four quarters -- and the comparable accounting standards.

However, and as may be appreciated in slide number eight, Banco de Chile has shown along the last 12 months a cautious approach to portfolio expansion by (inaudible) in those more [defensive] economic sectors, and slowing down in those sectors with a less favorable outlook.

As was commented earlier, our portfolio has been steering toward the corporate sector, mostly represented by the industrial, transportation, and telecom business. Conversely, areas such as retail stores, construction, social and personal services, as well as forestry and agriculture, show a reaction in portfolio share on a year-on-year basis. As said, this evolution responds to the bank's risk perception, supported by the observed behavior of the different sectors.

On slide number nine, the evolution of risk indicators, mainly provision established 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 either in net provisions, consequent of a dimmer risk perception, in the past-due ratio, or in both.

In particular as far as the fishing sector is concerned and though Banco de Chile is present in this subsector in a much lower proportion [of] our lower market share, the (inaudible) of this group of debtors in our loan portfolio was reduced by 40 basis points during the first quarter of 2009.

However, early in time and as a consequence the bearish [standstill] of the industry, the bank importantly increased the provision relating to the fishing industry, establishing during the fourth quarter of last year provision for more than 10% of the loans to the fishing sector.

On top of this, an [agreed on] amount of 1.2% of the loans to the fishing sector was established as provision during the analyzed quarter. More than 90% of those provisions relate to salmon farming companies.

As a result of a combined effort of several banks within the financial industry, a restructuring program is currently being discussed with the purpose of alleviating the salmon crisis. In the case of Banco de Chile the past-due ratio of the sector has fallen by 99 basis points to 39% along the quarter although the risk perception of the sector as may be seen in slide 10 has not yet eased, and show a risk ratio of 3.721. Following our conservative stand, allowances for loan loss covered the sector's past-due loan by more than 9 times.

Another activity group also experiencing an increasing risk perception is retail stores. In a similar fashion to the previous case the sector has reduced its incidence in the bank's portfolio by 80 basis points during the last three months.

Provisions have been established but by almost 12% of the sector loans, though past-due, have shown a quite stable performance. Anyhow as risk perception has increased the stock of [allowancing] of this portfolio now covers nearly 2.5 times the amount of past-due loans.

As I have mentioned in previous occasions, Banco de Chile will strive to build and maintain a strong and focused coverage for eventually impaired loans for as long as needed. And we will not ease in our efforts until signs of improvement in activity levels are perceived. The prudent bearing on credit risk has allowed the bank to show lower level of delinquency, both in absolute terms while also in relation to our peers.

As pictured in slide number 11 as of last March the past-due ratio for Banco de Chile stood 55 basis points below the average ratio for our main peers and 72 basis points under the industry average.

After all the changes related to new accounting principles, Banco de Chile posted a past-due ratio of 57% -- 0.57%, (inaudible) below that of the previous quarter and the lowest among all large and medium-sized banks, a huge achievement considering the dimensions and stretch of our bank.

As a consequence, these very low impairment rates have also allowed the bank to show more moderate provisions requirement than most of our peer competitors. For quite some years now, Banco de Chile's provisions for loan losses have stood below the rest in our current 1.53% on average loans, 45 basis points below the [distant] ratio as an average.

Moreover, (inaudible) speak of an above average loan portfolio in term of credit quality is that in spite of lower delinquency, the bank's past-due portfolio enjoy a robust coverage ratio of 337%, more than twice as large than the average of our main peers.

We're still considering the possibility of further deterioration of credit ratio, though market signs are -- seem to be looking more promissory.

On the funding side, and as we commented in previous calls, the purpose of reallocation of funds along the system as a consequence of a more [rate] adverse approach from the part of customers and depositors has kept going though at a slower pace. As a result, those larger and deeply-rooted banking names have emphasized their advantage.

As may be seen on slide number 12, the bank's total liabilities grew by more than 11% in 12 months, with a 9% increase in non-interest-bearing liabilities on top of a very substantial increase at the beginning of 2008. As a consequence, checking accounts and demand deposits, the most appreciated liability class, now concentrates 22 -- 72% of our bank's total pool of monetary liability, up from 68% percentage a year ago. Thus Banco de Chile holds 24.7% of the market's non-interest-bearing customer funds together with an almost 18% of interest-bearing funds.

Along with the strength in our finance structure, and as pictured in slide number 13, it's important to highlight Banco de Chile's solid capital base. As of last March total capital ratio stood at 12.7%, an increase of 100 basis points during the quarter. This ratio involves a high proportion of basic capital expanding to 7.1% of total assets which may eventually allow an important increase of total capital through a potential issue of subordinated bonds, should it be required.

At the time, the bank importantly exceeds the regulatory adequacy ratio. However, under new accounting rules price level adjustments were eliminated, so the UF asset portfolio will no longer be supported by capital adjustments. With this in mind, together without other considerations, and as for fiscal year 2008, the bank decided to capitalize a portion of the result in net income as approved in the shareholder meeting held on March 26, 2009.

As may be appreciated in slide number 14, shareholders approved a combined dividend program involving a cash dividend in the equivalent of 70% of the 2008 per share net income, equivalent to CLP2.36 per share plus a dividend in the form of shares for the remaining 30%. As a consequence, the bank's total capital was increased by an additional amount of CLP52.3 billion.

The dividend in the form of share portions was valued at the price of CLP31.26 resulting from the weighted average of the share price of 2008 last 90 days [less] the per-share income of the period. It is worth mentioning that an additional benefit will be added if it were the case that the [exceeding] price of the share after the new share distribution to be announced in a board meeting to come exceeds the CLP31.26.

Banco de Chile has again been successful in offering its shareholders an [above-market-dividend] yield to their investments. As shown in the slide a combined [average] yield involving cash per share of 8% stands as one of the largest in the market, not only locally but also abroad. Should we consider only the cash dividends the average yield stands at a very attractive level of 5.6%.

Please now open the line for questions.

(Operator Instructions) Our first question comes from the line of Lucas Ramirez of Merrill Lynch.

Yes, thank you very much. My question is on the bank's asset quality. And particularly the PDL ratio was stable quarter-on-quarter, and has been stable for the past couple of quarters despite very tough economic environments. So I was wondering if you can give us more color on what you've been doing in order to be able to sustain such healthy credit quality indicators.

And the second question is related to credit quality, but more on the system-wide level. When do you think that the deterioration in asset quality for the entire banking system in Chile should peak? Thanks a lot.

No problem. Well, you know that the -- in term of our past-due (inaudible) obligation really it has been very mathematic in term of the -- how we use and [mind] this amount, different what you may in order to establish the provision.

So really the answer is very simple, that is (inaudible) by definition we have in past-due, and really the behavior of our capital in this way reflects that reality. And we have kept more or less stable this indicator [business] very well.

In term of the second question, in term of the asset quality for the whole industry, we mentioned in the presentation really we think that the trend of additional credit expenses will continue. And we think we cannot prevail exactly what is going to happen from here until December. But if you ask me for this trend we think that the trend will continue, and this indicator, this ratio will work.

Okay, great. Thanks a lot.

You're welcome.

Your next question comes from the line of Tito Labarta, Deutsche Bank.

Hi, good afternoon. If you can comment a little bit on your net interest income. Particularly, it declined a lot in the quarter just given the negative inflation, but as inflation starts to normalize for the rest of the year, and then also given the decline in interest rates in Chile, what do you see as your outlook in terms of your net interest margin? And then also what will be your outlook now for loan growth specifically given the decline in the quarter? Do you expect that to normalize and stabilize, or what do you see for this year? Thanks.

Thank you. Well, you have a mixed situation there. On one side, you have an inflation that -- which we expect for the rest of this year that should not be as negative as it was in the first quarter. So really we've taken an increase and an improvement in terms of the margin because of that result.

However, at the same time, you have two other indicators that also affect this margin. One is the reduction in the interest rate, where -- obviously this will impact the margin strongly because of the dramatic drop in the short-term interest rate, and in some other -- a lower extent to the long-term or medium-term interest rate. So really, you have a combined effect between both.

On the other side, in terms of the spread, it has been an improvement during the last month, and our average spread rate is very good. But obviously you asked me for what will happen with the spread for the rest of the year. We are not so sure that the spread can be kept at the level that we have today, as of March end.

You have any other questions related to that, or something --?

Yes, and so you think you can't maintain it at the current levels, so you're saying it would decline going forward, even though inflation could normalize given the decline in rates. How much of a decline do you think? And the second question was in terms of your outlook for loan growth this year.

Yes. You say that the interest rate?

No, just -- you said you won't be able to maintain your margin at the current levels given the decline in rates even though inflation is normalizing. So how much of a decline would you expect for the year, do you think there could be like a 50 basis points reduction? I'm just trying to get a general sense of what the --

No, I am not saying -- I'm sorry, I am not saying that will decline necessarily. I am saying that given the fact that you have a combined effect -- the main two effects in this indicator in the margin are on one side, the inflation behavior, and in the other side the interest rate behavior.

I am saying that you are going to have -- you should expect for the rest of the year a positive impact in terms of inflation. Why? Because in Chile -- in Banco de Chile we have an (inaudible) over [both] position in CPI adjusted asset versus liability. So really we should have a very positive impact because of that, if inflation is normalized.

However, the impact of the decrease in the interest rate because of the short-term rate will drop dramatically, it's something that was not -- was seen in the first quarter because the policy of Central Bank, the application of the measure was during the quarter, but close to the end of the quarter.

So really, you will see in the rest of the year a negative impact because of that. So really, at the end I am not thinking necessarily that we are going to suffer; maybe one effect can compensate the other, more or less.

Okay, great.

Yes, and in terms of the loan growth, really we think that we are facing a different scenario today, than the scenario that we have at November or December last year.

So really, we should expect that we have some growth over the level that we have at March 31st, but obviously lower than the level that we could project six months ago when the impact of the crisis was not so clear.

Okay, thank you.

You're welcome.

(Operator Instructions) You have a question from the line of Jorge Chang, Euroamerica.

Hi.

Hi.

I have a question regarding credit risk. Could you please make a defense on the outlook you have for credit risk on wholesale loans and retail loans for the remaining of this year?

Well, I think in term of the wholesale, as we said before, we should expect some increase in term of a portfolio of the index -- the ratio index portfolio. However, it's something that it should not necessarily be so different to what we have reflected so far, until first quarter -- until the end of March. However, it could -- we could have some surprise in the rest of the year because you never know in term of how it is -- the state of each company and if something happens suddenly.

So really bottom line I would say that we should have some small -- some increase in the wholesale, but not so dramatic vis-a-vis what we have reflected until March 31st, unless we have an unexpected situation in each -- in any company.

In term of consumers, the same thing, we should expect some growth that we already have in the first quarter. Maybe we are going to have a little bit more, but not so dramatic increase vis-a-vis the situation that we had during the first quarter. This is what we expect.

Okay. And one more question for you, what are your expectations on the efficiency ratio? I know that there is some improvement, but still as a reflection for you, do you -- are you comfortable with that level? Do you have a plan or a target to reduce the ratio?

Well, we always have plans to improve the efficiency of the Bank by definition. And we are always looking for opportunities to improve the efficiency.

I would say that efficiency for the Bank for this year should be at level between -- the general level by the end of this year, between 47% and 50%. That is better than the level that we have today as of the end of first quarter. Why? Because really as you said very well, we are taking some measures in order to improve efficiency in both, in the expense side as well as in the loan side.

Okay, thank you very much.

You're welcome.

Thank you. There are no other questions at this time. I would like to hand the call to Mr. Samhan for closing remarks.

Thank you very much. Thank you, Operator. Banco de Chile certainly enjoys a dominant position in the Chilean financial industry, which has 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 this [prominence].

However, it seems fair to point out that for the near future we are clearly foreseeing a still subdued global scenario, not only on the international market, 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 your interest and time, and have a good day.

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