Banco de Chile (BCH) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 Banco de Chile Earnings Conference Call. At this time, all participants are in 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 to 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. It is a pleasure for me to share with you our comments on Banco de Chile's results for the second quarter of 2009. As the operator has already mentioned, a slide display that may allow you to more easily follow some of my comments can be viewed at our web page, bancochile.cl. Please move now to our presentation of today starting on slide number two that highlight the main topics to be covered.

In the first place, I will go though the key drivers behind the substantial increase experienced by our financial result in an environment where core economic indicators are still trying to improve, while a mood of increased confidence seems to be catching up with the business community.

We may then discuss on how the Chilean financial system, particularly Banco de Chile, confer with this scenario, along the second quarter and first half of the year elaborating on the loan market evolution, the impact of subdued activity on credit quality and spread, as well as comment on our very good figures, regarding funding and liquidity.

With this mixed feeling environment, both globally and locally, the Chilean stock market has shown -- in slide number three -- has shown a substantially improved behavior, but in one of the most successfully average performances among exchanges along the current year. And almost 37% IGPA increase along the year stands as quite an achievement in view of more generalized slowdown, in particular when compared to the meager 6.4% Dow Jones increase in equal period.

In this context, Banco de Chile's ADR has certainly outpaced the market with an appreciation of more than 44% in dollar terms in the last seven months. The Chilean share has also shown a quite robust price performance, building up value by more than 25% along the same period. Trailing behind the local index, which was, as said, effectively strong, our stock still seems to offer some upside as regard to its solid fundamentals.

Moving to slide number four. Our strong second quarter net profit speaks of Banco de Chile's strong capacities to generate income, enhanced by the advantages brought forth by the Citibank agreement. [More] provision provided our clients with enhanced international capabilities. As a consequence, Banco de Chile showed a superior result during this period. The figure in excel of CLP73 billion, stands 49% above the previous quarterly output and followed shortly behind the year-on-year figure, in spite of much less favorable underlying condition, of which I will expand later.

This bottom line result provided for 26% of the system's total net income, amply exceeding our share in total loan and involving an increased [other] contributions shown in previous periods. As a consequence, a return on average equity of 21.2% was obtained for the quarter, outperforming by 850 basis points the one offered by the system at an average.

As compared to the previous quarter, the increased net income figure was obtained, as pictured in the chart, in spite of a substantial increase in loan provisions of almost 21%, thus revealing an important strengthening of core income and a successful process of ongoing cost control.

For slide number five, we may observe (inaudible) CLP264 billion of total operating income involve a more than 15% increase over the previous quarter and almost flat performance on a year-on-year basis, in spite of the non-recurring income effect accounted for in 2008. Two were clearly the main drivers behind this increase in total operating income. On one hand, net financial income growing by 16% quarter-on-quarter, and on the other, income from fees posting a 17% increase for equal period.

Slide number six takes account of the increase on net financial income to CLP196 billion, up by 16% on a quarter-on-quarter basis and by almost 5% on top of the very favorable figure obtained in the second quarter of 2008. Several factors were beneath the quarterly financial income increase. On one hand, it is negative US variation played more favorable on the [continued income] management between inflation-linked asset and liability now adjusted by inflation. And improved funding structure importantly fostering non-interest bearing liability has allowed us to further build up on this effect on the other.

It also seems relevant to mention that the financial income increased for the quarter under review as compared to that of 2008 equal period, came about even in spite of the negative effect of the US decrease experienced in the quarter against a US increased for the year ago period. This remark brings us to a second factor behind financial income expansion, namely, the relevant increase in spreads we have taken shape along the last quarter.

Let us say for a while (inaudible) and may I only point -- I point out that the (inaudible) increased by 21 basis points in the average [fell] of our loan portfolio observed along the last 12 months has been able to partially counterbalance the favorable impact of reduced inflation.

(inaudible) rising of spread has been for sure the result of recent relapse throughout all that is in a market, as well as a tighter grip on liquidity consequence of the general financial differential. In sum, we have experienced an important expansion for net financial margin by 104 basis points on a quarter-on-quarter basis, regardless of the more than 6% reduction in average interest earning assets.

A second driver booked in the total operating income line was the important increase experienced by fee income, as this picture in slide number seven. On a quarterly basis this line of income grew by more than 16%, speaking of an enhanced customer base together with a strengthened line of business and improved product and services, in spite of regulatory guidelines involving limits to some fee income line.

Core fee income coming from the bank's main product and services, mainly checking account and credit card growth, involve some 58% of consolidated fee income. Other important sources of enhanced fee income were stock brokerage and the financial advisory companies in response to the heightened market activity. The latter shows an almost three time increase and involve an 18% contribution to the quarter-on-quarter expansion in total fee income. Thus the income for the quarter now covers almost 56% of total Banco de Chile's total operating expenses, excluding other operating expenses, well above the 43% average for the rest of our competitors and 420 basis points above our main peer average.

The good news from the peer ratio is two-fold. They improved not only of the enhanced fees, but also of a successful effort in the control of expenses and it is evident in slide number eight. With the decrease of more than 3% along the quarter over an operating expense base, excluding other operating expenses, already quite stabilized our serious commitment to cost control has given us space to progress in our efficiency ratio. Thus we've been on top the quarter-on-quarter 15% enhanced operating income figure. As a consequence, efficiency ratio improved by 810 basis points along the quarter and stood some 150 basis points below the existing average.

The improved cost base has been the result of a long lasting and consistent effort of adding intelligent and updated technologies to operational processes. Our aim is to reach a market share participation in cost closer to that of our lower loan market share. Having said this, the said market share has been persistently giving in and shows a cutback to 20.1% for the reported quarter from 22.8% 12 months ago, or 20.5% if we exclude the non-recurrent expenses of the second quarter of last year.

Another relevant driver acting on net income is related to credit quality and provision. The slide number nine shows how provisions have evolved contributing in the second quarter an increase of almost 21% quarter-on-quarter and more than 36% on a year-on-year basis. (inaudible) the impact of a less dynamic economic environment plus the bank's consistency in maintaining high trade quality standards.

Nonetheless, and according to a profitable business model, that has been able to consistently pre-sale a healthy ratio. Banco de Chile has been capable of showing at an average higher net dues as related to its productive asset than those obtained by the remaining competitors and our main peers. The operating income net of provision in excess of CLP5.5 is CLP100 of average net interest. Banco de Chile makes CLP1.2 more than the remaining competitors at an average.

The result is yet worthier when we observe on slide number 10 how allowances have been built up permanently above the existing average and that of our main peers. As I have mentioned in previous occasion, Banco de Chile will try to build and maintain a strong and focused coverage for eventually in per loan for as long as needed and we will not ease in our effort until sign of improvement in activity level after this. [This interest bearing] on credit risk does allow the bank to show lower level of delinquency, both in absolute terms and also in relation to our peers.

As of last June, the Basel ratio for Banco de Chile stood at 3 basis points below the average ratio for our main peers and 72 basis points under the industry average. As this may be appreciated by the loans experienced all across the distance a substantial increase during the quarter. For Banco de Chile, the increased risk 28 basis points of average past due ratio similar to the average of main peers and below the 29 basis point increase experienced by the rest of system as an average.

For Banco de Chile the main contribution to the lower past due loan portfolio came, as has been commented on previous calls, from the fishing sector, and in particular from the salmon industry, with a more than five time increase in past due loans since last March 2009. This sector represents less than 2% of the total loan book of the bank in the salmon industry and is related companies some 70% of the fishing sector.

Banco de Chile holds allowances for 17% of total loans relative to salmon industry. Following a cautious and preventive approach, it started quite early in time. As you may be aware an agreement was reached between the main company in the sector and its banking counterpart that will allow the Company to restructure its obligation in conditions such as (inaudible) continuing. [Other sensitive] economic sectors are retail stores and related services with [other sale] risk index and social and personal services with 2.2%. Basel loan on both sectors are covered by allowances in 264% and 184% respectively.

As for the Bank as a whole, allowances covered 288% of past due loans, a robust ratio compared to an average coverage of 154 for the rest of the bank and even lower period for our main competitors. This very controlled performance and finance risk related is partly sustained in the composition of the bank's portfolio as shown in the slide number 11, which leans more intensively on commercial loan which in turn show a better risk standing. With commercial loans involved in 66% of our total loan book, a higher proportion than that of the system average portfolio and corresponding in per loans for low 1.52%, a resulting lower risk mix is obtained.

A similar situation can be observed with residential and consumer loans, where either the loan proportion or the relative risk ratio proves to be lower for Banco de Chile. As a result, our bank overall ratio for the per loan stands to 1.7%, well below the almost 3.2% posted by the system as an average. [By this] we still consider the possibility of further portfolio deterioration though the market finance seems to be looking more promissory.

Let us now take a closer look to the bank loan portfolio and how it has evolved in view of the price and scenario involved in lower activities, higher unemployment, reduced consumption and lower commodity prices. That can be seen on the slide number 12.

Total loans have shown a meaningful reduction of almost 10% along the three months period of 2009. This behavior has repeated across all market segment, though more intensively in the wholesale market, and we are a special dealer in the larger corporation and multinational. These companies better prepare financially and enjoy superior risk rating, have increased liquidity through debt issuances or have simply avoided when possible deal with more stringent financial conditions that's clearly preparing outstanding loans.

However, on the positive side and in spite of this behavior, a more cautious approach to lending has given way to a higher yielding portfolio with the spreads increasing a total loan book level and will [ask] for the most of the market segment.

As may be seen in the chart, growth spread for total loans grew by 69 basis points in the first half of 2009, while growth yields projected to the retail markets have increased the most. Consistently, this market segment posted larger increases in the spreads mainly individual and consumer finance are the ones show a lower reduction in volume of loans. This current behavior has allowed the bank to maintain a very favorable risk to return ratio.

On the liability side, as maybe seen in slide number 15, and we commented in previous calls, the process of reallocation of funds along the system, as a consequence of a more risk-averse approach from the part of customer and depositor, has kept growing though at a slower pace. As a result, and added to the impact of lower interest rates which have jeopardized clients' alternative investment those larger and deeply rooted banking names have emphasized their advantage and as such Banco de Chile's non-interest bearing liabilities have grown by almost 11% along the last 12 months. Non-interest bearing liabilities now involve 38% of total loans, up from 34% a year ago, thus providing a lower cost funding structure.

Finally, and in a very relevant note, I will devote a moment to comment on some outstanding awards Banco de Chile have recently obtained. In a poll conducted by the most recognized company in the field of measuring market opinion, the more respected companies for the rating in Chile were rated Banco de Chile still among the best ever rated company in several of the more relevant futures measures.

Answering to a question of how well the Company [has held] to a financial eruption? Banco de Chile held the second place. We ranked third in reliability and solvency and reached a fifth position in integrity and transparency. Banco de Chile employees together with its manager and Board members cherish this award with great pride as they rely in the best of our relationship with our customers and the general public. We expect to keep up with this very favorable assessment. Thanks.

Please now open the lines for questions.

Thank you. (Operator Instructions). Our first question is from Tito Labarta with Deutsche Bank. Please proceed.

Hi. Good afternoon. You mentioned higher margin had benefited from higher spreads and also I guess of less deflation and better funding costs. But just want to get your outlook going forward now that rates have probably stabilized, and your assets will begin to be priced at these lower rates and also as inflation picks up in the second half of the year. How do you see that will impact your margin going forward? Thanks.

Well, I would say the following. Really during the first quarter, we have several factors, some of them were positive instead of improving our operation income and some of them were negative. In the second half, mainly we should expect some changes as you mentioned very well, but some of them will improve and some of them will not improve by (inaudible).

But finally, I could tell you that the impact that will improve and counterbalance or counteract the impact that will not improve. Let me tell you, first, the inflation. Inflation really we hope or we expect inflation for the second half maybe not -- will be negative, even though for the year could be negative. But during the first half, we have negative US CPI adjusted inflation of more than 2%.

So really having a structural net assets provision positive, net asset provision in US we should expect some additional revenue for this line. Instead of the (inaudible) we should expect lower revenue. Instead of volume, we should increase not asset [behavior] that we had during the first half not significantly but it's difficult to think that we are going to continue decreasing our volume.

So really if you take into consideration the positive and negative factor maybe, which will be something relatively similar to that. I cannot tell you exactly, but relatively similar, that maybe something lower, something higher than we have in the first half.

All right. Thank you very much. That's helpful.

You're welcome.

(Operator Instructions). And your next question is a follow-up from the line of Tito Labarta of Deutsche Bank. Please proceed.

Hey, just another question. Just in terms of your fee income, I know that increased quite a bit and part of it was due to a large increase in the securities brokerage fees. Just wanted to get a sense of how much of this is recurring going forward? And or was it kind of some one-time gains in the fee income? I was just trying to get a little more color in terms of your fees going forward. Thanks.

I will say that -- thanks. I will say that really you had some non-recurrent fees generated in the first half. But for the same reason we are going to have some non-recurrent fees in the second by sure. This is the first thing. The second instead of the recurrent fees we have set a trend that will be continue growing slightly, but continue growing instead of different onset of commission for current account, credit cards, et cetera.

So really answering directly your questions we think that the behavior [in fees] and commission should not be lower than the behavior that we have in the first half and the combination instead of recurring and non-recurring is more to by far that of recurrent, but we can generate in non-recurrent commissions something similar to what they have instead of -- [Board] have been more importantly instead of the financial (inaudible) business.

Okay. Thank you.

You're welcome.

And there are no further questions in queue at this time.

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. Though for the near future, we are clearly foreseeing a still subdued growth scenario. There are signs of optimism that market have partially internalized. Banco de Chile is certainly working to take advantage of its premium position. Thank you again for your interest and time, and have a good day. Thanks.

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