Banco de Chile (BCH) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Banco de Chile earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's remarks there will be a question and answer session. Instructions for queuing up will be provided at that time. As a reminder, a slide presentation can be viewed at Banco de Chile's webpage, www.bancochile.com. I would now like to turn the presentation over to Mr. Pedro Samhan, Chief Financial Officer. Mr. Samhan, you may begin.

Thank you. It's a pleasure for me to share with you our comments on Banco de Chile's third quarter 2009 financial results. As the operator mentioned, a PowerPoint presentation is available to download at our webpage, www.bancochile.com.

To begin, slide number two lists the main topics which will be covered. I will begin with an overview of the Chilean economy in an environment where other major nations have begun to demonstrate certain positive signals and a rise in investor confidence. We will then discuss the evolution of the Chilean financial system and, in particular, the results of Banco de Chile during the third quarter, summing up with a few final remarks.

On the next slide, number three, we can see that the Chilean economy has begun to recover from the world financial crisis. In fact, Chile, thanks to its economic policies, is projected to have a strong GDP growth during the fourth quarter of 2009 and, especially, during 2010. Furthermore, unemployment, job creation and private consumption in Chile have begun to stabilize and they are showing positive trends.

With respect to inflation, the last three quarters have been deflationary and, thus, reducing our revenues and that of financial system as a whole, because banks in Chile in general have a long structured position in inflation-indexed assets.

Taking a look at our third quarter income, we were in line with our previous quarter results, as shown on slide number four, in spite of the higher deflation experienced during this quarter. Even though we have a relatively higher long position in inflation-indexed assets when compared to the Chilean financial system, we acquired 21% of the Chilean banking system total in net income, exceeding our market share in total loans and, thus, demonstrating our capacity to generate recurrent income.

The year-on-year change is mainly due to a reduction of CLP46b in operating income, which is more than explained by the result of the effect of inflation on our interest-bearing assets and a higher charge of CLP31m for provisions related to loan losses. Improvement in efficiency during this period partially offset these decreases with a gain of CLP10b.

Overall, our third quarter 2009 net income reached CLP69b, with a nominal return on annualized equity of 18.9%, versus a return on annualized equity of 38.5% during the third quarter 2008. This decrease, as mentioned, is due to the favorable effect of the high inflation rate experienced during the third quarter 2008 on our result.

When adjusting return on annualized equity to real terms, the difference between the third quarter 2009 and the third quarter 2008 is reduced to 5%. In fact, the impact from deflation on our revenues during the third quarter 2009, when compared to the same period last year, represents CLP81b, which was partially offset by higher customer and treasury revenue, and described on slide number five.

On a year-on-year basis we significantly improved our core revenue from loans and fees by CLP17b, in addition to non-US GAAP treasury income by CLP19b. This translates to a rise in recurrent customer revenue of almost 3% year on year, in spite of the lower contribution from the non-interest bearing liability as a result of the decrease in nominal interest rates. The 4.4% year-on-year increase mainly from credit lines, sight deposits and ATMs, more than offset the impact of regulatory change that prohibit charge for non-agreed in advance overdraft fees.

With regard to our subsidiaries, the securities brokerage and mutual fund companies were the highlight for the quarter, with fees from the former which almost doubled that of the previous year quarter, with an increase of 60% in trading volumes, and the latter with a 28% increase in assets under management which led to an 8% rise in [fee earners] and a total market share of 24.3%.

Our goal is to continue to reinforce our fee-based income through an enhanced customer base, together with strengthened lines of business and improved products and services.

Moving forward to slide number six, expenses have continued a downward trend, decreasing just over 8% when compared to the same period last year. This noteworthy decline is a result of our strategy to lower expenses through cost controls, focused on centralizing processes and renegotiating contracts with suppliers.

On a year-on-year basis we decreased -- reduced staff expenses significantly by a decrease in the number of employees by 3.6% and lowered administration expenses by 10%, which was largely due to a reduction in marketing supplies and technology expenses.

This trend is even more apparent when analyzing core expenses, excluding other operating expenses, which show important decreases each quarter; CLP120m in third quarter 2008, CLP112m in second quarter 2009 and CLP110m in third quarter 2009.

Consequently, we have consistently, on a quarter-on-quarter basis, reduced our participation in expenses by 152 basis points, reaching 19.5% market share during the period. This focus has translated to improvement in our efficiency ratios, which during the last two quarters have been slightly below the average in the financial system.

During the third quarter we continued to increase certain allowances in loan granted to the salmon industry and credit condition related to one other specific customer. This results in a slight quarter-on-quarter increase of 4% in total provision expenses, as can been seen on slide number seven.

Excluding these two events, total provision expenses increased by only 33% year on year, as a result of the current economic condition. Nevertheless, we maintain a healthy impaired loan coverage ratio of 154%, in line with the Bank's conservative credit risk standard and well above the 76% average posted by the Chilean banking system.

This positive comparison in risk with our competitors is reinforced when comparing our impaired loan portfolio to total loans, which his half the size of the average posted by financial system. As mentioned in prior conference calls, we strive to build and maintain a strong and focused coverage ratio for potential impaired loans.

In response to the better economic environment, we had positive decreases in provision expenses during the months of August and September when compared to the second quarter. This drop was mainly due to an increase in collection, a proactive renegotiation of impaired loans and a better payment behavior observed from our customers, especially from non-commercial customers.

However, aggregate demand and unemployment rate are still weaker than those figure recorded one year ago, [which obviously] required high operational level. As the economy continues to improve lower operational expenses might be expected.

Regarding our mix of allowances for loan loss, as described on slide number eight, the largest change has mainly been the result of the Chilean fishing segment, specifically the salmon industry, and, to a lesser degree, to the current economic conditions. The salmon companies and related industry represent almost 2% of our total loan book, and approximately 15% of total allowances.

As you may be aware, an agreement was reached between the main companies in the sector and their banking counterparts. This agreement allowed companies to restructure their obligation in order to ensure business continuity. In addition to this agreement there is a law in congress which is pending modification that will further aid this industry, as it's key to Chilean trade and to the [economics] in those regions for the countries.

Regarding our loan portfolio we grew significantly, as described in slide number nine, during the third quarter. The industry, including Banco de Chile, grew by CLP601b and we acquired over 56% of this growth. Our strong growth translated to a rise of 34 basis point in total market share. Total market share is, today of 18.7%, led by an increase of 39 basis point in commercial loans. We continued to be the single largest Bank in term of total loans and the financial lever in commercial loans with a participation of 9.9% (sic - see press release).

On the liability side, as described on slide number 10, current account balances have increased by 22% year on year and 2% quarter on quarter. In addition to the lower interest rate, these increases are due to our successful cross-selling initiative and our selective expansion in current account customers. This has result, as published in May 2009 by the [Soviet] International Bank in an average balance per account in non-commercial customers of CLP1.7m, a year-on-year increase of 11% and, in commercial customer of CLP18.8m, an increase of 14%.

These increases produced an even better deposit-to-loan ratio of almost 27%, the highest in the Chilean banking industry and, thus, significantly reducing our funding costs. We remain the market leader in current account balance, with a market share of 25.2%.

In response to the improved market condition in Chile, our capital and equity ratios provide us with an ample room for growth, as presented on slide number 11. We currently have a Tier 1 capital ratio of 7.7% and a total capital ratio of 13.4%, both well above the legal required limit of 10% and 3% respectively. This provides us with room to grow and to take advantage of the improved economic condition without the need of new capital or subordinated bond issuances in the near term. Should a capital increase be necessary, we have about CLP214b to grow in subordinated bonds.

Overall, our result has been quite positive during the year, despite the economic environment. The salmon fishing crisis, a larger [US] loan position in a scenario of negative inflation and our higher relative participation of non-interest bearing liabilities in a low, short-term interest rate environment.

However, our performance in term of customers, revenue growth, improvement in efficiency in term of core expenses, and diversified and efficient management of our source of funds, and the improvement in our impaired loan coverage ratio has allowed us to partially offset the prior-mentioned impact.

We are quite satisfied with our performance during this quarter. Thank you. Now if you have any questions, I will be happy to answer them.

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

Hi, good morning. It's a couple questions. If you can tell us what are you expecting for GDP growth for next year? And then how do you see that your loan growth will be on the back of that?

And then a second question, in terms of what do you think would be a more recurring level of ROE? We could see ROE decline a bit this year, given the deflation, while last year it was much higher, given a high inflation. So what inflation do you expect for next year and how do think -- what kind of recurring ROE do you think that could lead to in 2010? Thanks.

Thanks. Let me go to the first. First, the GDP growth we think that should be about 5% for the next year in real terms, more or less between 4.5% and 5.5%. And in term of the loan growth we expect something [in term] of the average of about between 7% and 8% in real terms. In term of non-recurring level of return on equity, really we have -- we can take some range in order to give a better answer.

We think that level of return on equity like this -- like the level that we have this year, will not be recurrently. And we expect something closer for the next year, something closer to a level between 22% and 25%. In term of the inflation that we expect for the next year, it's something between 2.5% and 3%, more or less.

Okay, great. Thank you very much.

You're welcome.

(Operator Instructions). You have a follow-up question from the line of Tito Labarta.

Yes, sorry, there's no further questions. Maybe you could also give a little guidance in terms of your margin, given the inflation you just mentioned. How do you figure margin will be impacted by that? Thanks.

Well, as you can see in the explanation, you see that the impact of the negative inflation in term of Banco de Chile is very significant because of the position that we manage in term of the loan US position. So really, as you can see there, you could see an impact of CLP80b when you compare the third quarter of this year with the third quarter of the last one.

Obviously, none of them are representative of the normal inflation. In one case it was so high, and in another case it was so low, it was negative. So really we expect a normal inflation of something closer to 2.5% or 3%. Just for this concept you could have an impact closer to about CLP50b approximately.

But it's not something that I can observe very clear because you know that these position are very volatile over the time. The treasurer can say some position have reduced. So really it's not something that I can assume with a 100% confidence. However, if you take some range, you can think that the range of inflation that we expect for the next year, vis a vis this year, should have an impact of -- by the order that I communicate before.

Right. Now how much would you say then, if you look at the net interest margin? I'm assuming, then, that you expect that to increase for next year. Could you give maybe a range how much it could increase in terms of margin?

In term of the margin? Let me see in the presentation. Let me calculate for you. Hold on, please. For this impact, just for the inflation, you can -- we can expect something between 30 and 40 basis points, approximately.

Okay, perfect. Thank you very much.

You're welcome.

At this moment I'm showing you have no further questions.

Well, no more questions?

No.

Yes. I'll make some final remarks. Banco de Chile enjoys a dominant position in the Chilean financial industry. It has been built on a fundamental base, on a strong customer base, where there is a strategy of development and pursuit of new business opportunities.

Our focus is to generate growth by building relationship with our commercial and retail customers through improving customer service quality, providing new and innovative product and service, and streamlining our organizational processes. This, in addition to advances in customer revenues, a stern control with management and our strong capital base, allows us to be in an unparalleled position to take advantage of the expected economic recovery. Thank you very much.

I look forward to our next conference call on fourth quarter 2009 financial results. Thank you very much.

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