Banco de Chile (BCH) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2009 Banco de Chile Earnings Conference Call. My name is Noelia and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions). As a reminder, a PowerPoint presentation is available on the Company's webpage at www.bancochile.com.

I would now like to turn the presentation over to Mr. Arturo Tagle. Please proceed, sir.

Thank you, Noelia. Good morning, ladies and gentlemen. It is a pleasure for me to share with you our comments on Banco de Chile's fourth quarter 2009 financial results. As the operator mentioned, a slide presentation is available to download at our webpage, www.bancochile.com.

To begin, on slide number 2 you can see a list of the main topics which will be covered in today's presentation. I will begin with a review of the Chilean economy in a more optimistic global environment, followed by a discussion of our financial results for the quarter and yearend.

On the next slide, number 3, we can see that the Chilean economy has continued to show positive recovery signals in the fourth quarter. GDP and private consumption ended the year at minus 1.7% and minus 0.2%. Nevertheless, both these indicators picked up speed during the third and fourth quarters.

Most economists also agree that Chile will continue to rebound and GDP in 2010 should be in a range of 5% to 6%. In fact, the newly elected president has stated that his government will provide Chile with an annual growth rate of 6% during his four years in office.

In terms of unemployment, this also reached its peak in 2009, with a rate of 10.7% in the second quarter, dropping to 8.6% in December. Job creation also began to rise during the year, after reaching a low of minus 2% in the first quarter and ending the year at 2.1%.

With regards to the evolution of inflation and the monetary policy interest rates, the chart on the bottom left clearly shows the reaction of the Chilean government to reduce inflation and to mitigate other negative economic factors through, among others, the sharp reduction in the monetary policy interest rate from 8.25% in December 2008 to 0.75% in June 2009, and bottoming out at 0.5% in July.

This response, along with the improved economic environment, was able to end the three-quarter deflationary trend by posting a positive US index inflation unit of 0.5% during the fourth quarter of 2009. I would like to emphasize the effect of the annual deflation and the reduction in the monetary policy interest rate had on banking related revenues.

First, deflationary periods reduced the Chilean banking system's revenue because banks operating in Chile generally have a long capital position in the inflation index assets, as long term loans are generally indexed to inflation through the US/Chilean currency unit. Second, the lower monetary policy interest rate reduces the spread obtained from loans funded with non-interest bearing liabilities. As for 2010, we expect that inflation will begin to pick up during the second quarter, reaching a level of about 2.5% at yearend.

The market has also taken note of this positive recovery signals. This has led to a sharp drop in Chile's risk premiums, more so than the rest of Latin America as seen in the Global Emerging Market Bond Index, shown in the chart at the bottom right. Spreads between sovereign bonds and US bonds have been decreasing since the beginning of 2009.

In fact, Chile's sound economic policies have limited the rise in the spreads to only 351 basis point, about two times its previous size. As opposed to the Latin American Index, with rates more than triple its previous size during the same period. By the end of 2009, Chile was able to quickly reduce this spread to about a third of its size.

Now, concerning the Banco de Chile, we were able to overcome important obstacles during 2009. These highlights are summarized on the following slide, number 4. We ended the fourth quarter with a net income of CLP67 billion ending the year with CLP258 billion. These results were achieved through a focus on profitability, credit risk controls, productivity improvements and cost reductions.

Treasury excelled in the year, in part reflected -- reflecting the added benefit of the integration with Citibank Chile. Revenues increased by 60% over last year, taking advantage of the greater volatility of the financial markets and the reduction of the interest rates, compensating the effect of deflation on our net interest revenues.

Additionally, we were very active in the financial market, increasing our presence through the sale of more complex financial products, including derivatives. Moreover, during the first half of 2009, both commercial and retail segments incurred an important increases in risk levels. However, during the second semester, we witnessed a downward trend in risk, resulting in a lower provision expenses.

We in the banking system experienced strong growth during the second semester in all loans. This was due to improved economic perspective, which caused a rise in demand. And to some clients, interest in anticipating loans due to the gradual reimplementation of the Stamp Act that is levied on loans and that had been temporarily suspended.

We have also taken large strides in improving our funding mix during 2009 by continuing to diversify our foreign financing sources and increasing our balances in current accounts. During the year, we acquired new sources of foreign funds and increased our market share in current accounts balances by 100 basis points, or to 24.2%.

On the following slide, number 5, is our review of our financial results. Looking back at 2009, we can easily conclude that it was a complicated year for Chile. The country and the local banking system were challenged by the Chilean salmon industry prices, the global recession and deflation. However, despite these challenges, we were able to more than adequately provision our specific risk and maintain profitability above the average posted by the Chilean financial system during such an uncertain year.

On a year-on-year basis, we decreased our net income by 26% in IFRS comparable figures. Under IFRS, 2008 figures do not include an expense for price level adjustment. In summary, this drop was due to lower operating revenues, mainly as a consequence of deflation on our interest revenues and a rise in risk, which was partially offset by cost reduction and improvements in productivity.

On a quarter-on-quarter basis, our fourth quarter '09 net income reached CLP67 billion, with a return on average equity of 17.4%, in line with the prior quarter and the same period last year. However, it is worth mentioning that this result includes voluntary provisions which amounted to CLP20 billion and were recorded to offset any unpredictable event which could occur in the medium term.

On the next slide, number 6, is a detail of the two main causes for the decrease of CLP88 billion in operating revenues. Net interest revenues decreased by CLP103 billion, and other revenues dropped by CLP47 billion. The former is fundamentally explained by two macroeconomic variables. First, the reduction in internal demand, exchange rates and commodity prices provoke a persistent reduction in inflation, reducing our interest revenues from inflation index assets.

Second, the expansive policies put in place by the Chilean government to improve the economy brought forth an important reduction in the monetary policy interest rate, which, on average, was 7.1% in 2008 and dropped to an average of 1.8% in 2009. This change implied a reduction in the contribution net interest margin that our leadership offers in non-interest bearing demand deposits.

However, these factors were partially offset with a rise in the spread charged to customers in order to maintain an adequate relationship between risk and return, and improved funding structure through a 23.6% rise in the average balance sales in demand deposits, and a 3% rise in average interest earning assets. The drop in other revenues is only due to the nonrecurring sale of US branches in 2008 to Citigroup and the partial liquidation of our shares in Visa, both for a total of about CLP50 billion.

This decreases were partially offset by the improvement in our fee structure and treasury activities. Fees increased year-on-year by CLP15 billion, or 6.5%. This change was driven by our subsidiaries and through our traditional banking services. Our securities brokerage unit and our mutual fund subsidiaries increased fees by 54% and 9% year-on-year respectively.

The securities brokerage unit especially benefited from the improved market conditions and the consequent higher trading volumes. Its outstanding performance was achieved through an increase in 10% in trading volumes and a rise of 47% in transactions.

With regards to the mutual fund subsidiaries, its growth was due to an incredibly 31% increase in assets under management, which especially picked up speed during the second semester. Accordingly, this rise is due to the increasing appetite for risk shown by investors, low nominal interest rate that discouraged fixed income investments, and the introduction of new mutual funds launched to meet our customers' needs.

The rise in traditional banking fees revenues was accomplished in spite of the new regulation effective July 1st, which restricted the variety of fees that banks can charge customers on checking and side accounts. We introduced a new product called Overdraft Credit Line Agreement, which we developed as an instrument to cover unexpected overdrafts. Our goal is to continue to reinforce our fee base income through an enhanced customer base, together with a strengthened lines of business and improved products and services.

In the second quarter of 2009, we redefined our customer segments in individual banking in order to better serve our customer needs. Through this initiative, we aim to improve our customer relationships and increase cross-selling and customers' loyalty. Additionally, and as explained earlier, results coming from our financial operations increased significantly as a result of the excellent year for treasury activities.

Moving forward to slide number 7, we can see that operating expenses have decreased year-on-year by 13% and on a quarterly basis, we have continued to maintain lower expenses than the average posted last year. In 2009, we placed exceptional efforts to focus on cost controls.

Specifically, this reduction were achieved through a decrease in the size of our workforce by 5.9% during the rise -- due to a rise in productivity, lower business activity in 2009, and a 5% decrease in administration expenses due to lower marketing supplies and technology related expenses. Although I must recall that 2008 figures include some onetime expenses related to the merger with Citibank Chile of approximately CLP45 billion, and CLP13 billion related to collective bargaining agreements.

I should also mention that the fourth quarter of 2009 includes roughly CLP5.4 billion in severance pay and employee incentive provisions. Consequently, we have reduced our participation in annual expenses by almost 309 basis points, reaching 19.8% market share and accumulated efficiency ratio of 48.8%, as compared to 2008 with a ratio of 51.9%.

During the fourth quarter, we continued to observe improvements in credit risk. This resulted in a 28% quarter-on-quarter reduction in provision expenses and a drop in our provision expenses to total loans from 2.1% in the third quarter to 1.5%, as shown on slide number 8. The improvement of credit risk remains even after excluding what we consider extraordinary items related to the fishing sector and a onetime charge of CLP5 billion due to an accounting change related to the method used to evaluate the SME portfolio, which change from individual to group analysis.

Likewise, delinquencies suffered deteriorating during 2008 and the first half of 2009 began to show signs of improvement during the second semester and closed the year, in the most part, lower than 2008. As the economy continue to improve, delinquencies should continue to decrease. Accordingly, lower provisions expenses should be expected for 2010.

It is important to mention that for the first time, banks will disclose their impaired loan portfolio in their 2009 yearend financial statement. The main difference between past-due and impaired loan portfolio is that the past-due portfolio only includes the payment that is 90 days or more overdue, and does not consider the principle amount outstanding.

On the other hand, impaired loans, in addition to considering the principle amount outstanding and the customers' other loans, evaluates past payment behavior, the generation of cash flows, credit classification and breaches of contract, to determine the inclusion or not in this impaired portfolio.

As for coverage ratios, we have maintained our healthy past-due coverage ratio of 360%; besides the ratio of total allowances to total impaired loans portfolio is 52%. We consider that both indicators are in line with the Bank's conservative credit risk standards and well above the 178% average past-due loan coverage ratios posted by the Chilean banking system. Our impaired loan ratio should also compare positively with the industry's average ratio. However, there is no public information available at this time.

Regarding our loan portfolio, we grew significantly, as described in slide number 9, during the second semester of 2009. During the first semester of 2009, there was a general negative trend in loan growth. However, this changed in the following semester with the banking system posting loan growth of CLP2.2 trillion.

According, the quarterly survey prepared by the Chilean Central Bank revealed that the second semester was the beginning of a rise in demand, which was not seen since the third quarter of 2007. We were no exception and in fact, we were the leader in loan growth, with a quarter-on-quarter increase of 2.8% in the third quarter and 4.7% in the fourth quarter.

We acquired over 40% of the industry's loan growth during the second semester, increasing our market share by 75 basis points. This growth was led by commercial loans with an increase of CLP635 billion, or 7.8%, followed by mortgages and consumer loans, with increases of CLP183 billion and CLP108 billion, respectively. We continued to be the second largest bank in term of total loans, and the financial leader in commercial loans, with a participation of 20.4%.

On the liability side as described on slide number 10, quarterly average current account balances have increased significantly over last year. Current accounts held by companies have increased by 16%, and individuals by 27%. In addition to the lower interest rates, this increases are due to our successful cross-selling initiatives and our selective expansion in current accounts customers.

Accordingly, we are the market leaders in terms of balances held in our accounts and as December 31st, 2009, we had a market share of 29% in individual current accounts and 22% in commercial accounts. This funding base is one of our major competitive advantages. Our demand deposits to loans ratio are also superior to the Chilean banking industry, with a prominent year-on-year rise to 28.2%.

In response to the improved market conditions in Chile, our capital adequacy ratios provide us with ample room for growth, as presented on slide number 11. At the end of 2009, we had a Tier 1 capital ratio of 8% and a total capital ratio of 12.7%, both well above the legal required limits of 10% and 3% respectively. The application of the new accounting rules regarding capital requirements for contingent loans implies a decrease of our total capital ratio by 0.5%. Should a capital increase be necessary, we have about CLP260 billion to grow in subordinated bonds.

With this in consideration, the Board of Directors has recently proposed a dividend payment of approximately CLP3.49 per share. This payment includes a pending amendment to the bylaws of the Bank, which will adjust distributable income earnings by an amount equal to the effect of inflation on our capital and reserves.

This change will allow the Bank to maintain capital and reserve constant in real terms. For 2009, this means an increase in distributable earnings of CLP30.7 billion and a nominal payout ratio based on last year's ex dividend share price of approximately 10%, an historic high for the Bank.

Summing up, our results have been quite positive during the year, despite the economic environment, negative inflation and the salmon fishing crisis. Our higher level of loans coverage ratio provided an excellent ability to cope with any eventual implications which could occur in any industry.

Additionally, our sound risk policies are in line with our profitable business model, which has consistently preserved a healthy risk/reward ratio. Moreover, we aim to continue to improve our cross-selling to progress and streamlining processes to maintain our excellent funding base and to preserve an adequate level of capital, thus providing our stakeholders confidence in our ability to grow and to cover risk.

Thank you. Now, if you have any questions, I will be happy to answer them.

Ladies and gentlemen, we are ready to open the line for questions. (Operator Instructions).

Your first question comes from the line of Saul Martinez with JPMorgan.

Hi. Good morning, Arturo. Want to get some -- little bit more clarity on the -- what you estimate the impact will be of the new allowance requirement. I think you mentioned 50 basis point impact to your capital ratio. But in your release, you mentioned that the new regulation would have about a CLP500 million impact for the Chilean financial system.

I just wanted to clarify, does that include both the portions that were going to be implemented on January 1st and on July 2nd, or is that just the second piece of that on July 2nd? It wasn't clear -- I wasn't clear on the wording there. And secondly, is it fair to say that the ultimate impact on you will be something commensurate with what your share of the banking system is? In other words, I guess something like --.

Okay, thank you, Saul, for the question. First, what I mentioned regarding new regulations is the requirement of capital for the contingent loans. So, we now are counting contingent loans in average risk weighted assets. So, that is the 0.5% requirement, additional requirement of capital.

Although there is new requirement of allowances, one, which was -- which is going to be required by -- was required by January 31st this year and will impact our net capital and reserves, which we -- I can estimate today is something about CLP15 billion. But that will go reducing -- will reduce our capital and reserves.

In terms of the impact on results, you know that the superintendency of banks [Sato Congo regulate -- that rule] until July 1st. In the case of Banco de Chile, we estimate a very slight impact that could be something around CLP5 billion. That will be recognized in the first semester of this year. The CLP5 million are rough estimation -- the CLP500 million that we estimate is a rough estimation for the financial system as a whole.

And second question?

Okay, so, the CLP5 billion is the impact of the -- what you estimate the impact would be to your earnings of what's going to be -- what's planned to be implemented on July 1st?

Yes. And -- yes, that's right. And your second question was?

That was my second question.

That was your second -- okay, okay.

Yes, that was the question. Thanks a lot, Arturo. That was very clear.

Thank you, Saul.

(Operator Instructions).

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

Hi. Good morning, Arturo. Just to follow up on that, so what do you think, then, will be your recurring level of provisions going forward? And also, if you could mention in terms of asset quality. We saw a slight improvement in the quarter. Do you think this can continue to improve as the economy recovers? And how low can NPLs get as a percentage of the loan portfolio? Can you give any more color on that as well? Thanks.

As I said, we ended the last quarter last year with a level of provision expenses to total loans annualized of 1.5%. I think we will see that level during the first semester of this year, although in the long term we have also said that that will -- that's not the long term range for Banco de Chile. We also -- we continue considering that something closer to 1.1% of provision expenses to total loans is a normal level for Banco de Chile and we should be reaching that level by the end of 2010.

Okay, great. Thank you. And what about in terms of asset quality in terms of non-performing loans? How much do you think those can improve this year?

In terms of non-performing loans, I don't foresee big changes in the near future. So, probably we will keep some figures like what we are seeing by the end of last year and slightly decreasing during the year. But I can't give you a figure -- a precise figure at this point.

Okay, thank you.

Thank you, Tito.

Your next question is a follow-up question from the line of Saul Martinez with JPMorgan.

Hi, Arturo. It's me again. Wanted to ask you about the sensitivity of your margin, of your net interest income to inflation. When you compare '08 to '09, you mentioned it was a negative impact of CLP137 billion. And obviously in '08, we had positive inflation of 9% versus deflation of 2.4% this year. So effectively, you had a swing of about 11 percentage points in inflation one year to the other, which had CLP137 billion negative impact on your net interest income.

Can we make any sort of -- draw any sort of conclusion as to what the impact of every percentage point of change in inflation would be? Because it seems like from these numbers, every percentage point change in inflation is roughly something like CLP12 billion impact to your net interest income. Is that a reasonable sort of way to think about it or is it more complex than that?

I feel, Saul, that it's a little bit more complex since the net position in US assets is very varied depending on our expectation on inflation. Although, as I said during my presentation, we have a structural net asset position in US but since 2008, we decreased our net US position as much as we were able to do it without affecting the prices at the market. So, it's not exactly, although the direction of your estimate is not that wrong.

Okay.

But it's a little bit lower than that because of the decrease in our position, net position in US and of course, after this deflation period, we can start -- we could start, I don't want to say that we will, but we could start increasing again our net position in US assets.

Okay, got it. Thanks a lot.

And at this moment, I'm showing that there are no further questions in the queue.

Okay, thanks, Noelia. Let me make some final remarks. We -- let me say that we finished 2009 strong, with posting the highest loan growth in the industry during the second semester, facing the trend of rising provision expenses and improving our solid funding base.

We also introduced novelty products, such as the Overdraft Credit Line Agreement, which I already mentioned, as well as [wreck chilo], a service which gives our customers the ability to transfer funds to anyone, even if they don't have a bank account, through the Banco de Chile ATM network.

And we were the first to introduce the banking account which is linked to a mobile phone called Cuenta Movil. In 2010, we plan to capitalize on this advancements and continue to seek new and novelty products to fit our customers' needs and to further differentiate us from our competition.

Thank you, and I look forward to our next conference call on our first quarter 2010 financial results. And I would also like to remind you that we will be publishing our yearend financial statements under IFRS format next week. Have a good day.

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