Banco de Chile (BCH) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to Q1 2010 Banco de Chile Earnings Conference Call. My name is Janita, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a Question-and-Answer session. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Pablo Mejia, Head of Investor Relations. Please proceed.

Good morning, ladies and gentlemen. It's a pleasure for me to share with you our comments on Banco de Chile's first quarter 2010 financial results. With me today is Arturo Tagle, Senior Vice President of Institutional and Investor Relations, and Pedro Samhan, Chief Financial Officer.

As the operator mentioned, a slide presentation is available at our website, www.bancochile.com, within the Investor Relations site.

To begin, on slide number two, you can see a list of the main topics that will be discussed in today's presentation. I will begin with a review of the Chilean economy, followed by a discussion of our financial results for the quarter.

On the next slide, number three, we can see that the Chilean economy has continued to show positive recovery signals from the financial crisis during the first quarter. Based on our estimates of GDP and Private Consumption, we'll end the quarter at 1.8% and 5.5%. This is the second quarter in a row to show positive figures. Nevertheless, the recent earthquake experience in February has consumated costs to the government about $ 4.8 billion during the period of four years. Approximately $5 billion will be financed by reallocating the fiscal budget, a temporary increase in taxes to large corporations, and an issuance of severance [dead] in foreign markets.

Equally, we'll probably see a reduction in GDP during the first semester. And we expect that growth will pick up during the second semester with the majority of the reconstruction investments taking part in 2011.

In terms of unemployment, we estimate that we will end this year slightly above 10% as the earthquake affected an area which concentrates roughly one fifth of the working population. However, this rise will continue to partially offset the positive job creation rate, which has been growing in an upward trend since the third quarter of 2009.

On the next slide, number four, you can see a chart regarding the evolution of inflation and the monetary interest on policy rates. The chart on the left clearly shows the reaction of the Chilean government to reactivate the economy and to mitigate other negative economic factors through, among others, a short reduction in the monetary policy interest rate from 8.25 in December of 2008 and bottoming out at 0.5% in July of 2009. The general market consensus believes that inflation will rise above 3% during 2010.

Now the (inaudible) expected pre-earthquake. As a result, we expect the Chilean central banks to increase the monetary policy rate, beginning in the second semester and ending the year around 2.5%. I would like to emphasize the effects of the higher inflation rate and the rise in the monetary policy rate will have on the bank accumulating revenue.

First, inflation increased the Chilean banking system revenues because banks operating in Chile generally have a long structural position in inflation index assets, as long-term loans generally index the inflation through the US currency units. Second, higher monetary policy interest rate increases, rather than paying from loans funded with non-interest bearing liabilities.

With regards to the global emerging market bond index, as shown on the chart on the right, we see that Chile has maintained a reasonably low risk premium, with respect to its peers, and has maintained these low levels despite the earthquake, ending the quarter with a spread of 128 basis points.

Now concerning Banco de Chile, we were able to finish the first quarter with an outstanding net income of MXN101 billion, or MXN1.2 per share. The quarter's highlights are summarized on the following slide, number five.

We ended the quarter with an annualized ROE of 26.5%. Our net interest margin was up by 130 basis points, and ended the quarter at 4.86%. Non-interest revenue also excelled during the quarter, rising fees by 19.4%, and financial operations by 16.4%.

We have continued our commitment with expense control, maintaining expenses relatively flat year-on-year, and hold to an efficiency index of 43% during the quarter.

Moreover, we've maintained a firm growth in mortgage loans during the quarter. And have also continued to see positive trends in provision expenses when removing the effect of a downgrade of very few commercial customers.

On the following slide, number six, is a review of our financial results. Looking back at the first quarter '09, we can easily conclude that it was a complicated quarter for the financial industry and the country as a whole. The first quarter of 2009 was challenged by the global recession and deflation. As a result of improved economic conditions, we have more than doubled our net income from a year ago and grown more than 50% quarter-on-quarter.

The year-on-year rise is explained by upgrade revenues, rising 59 billion, year-on-year. Operating expenses, provisions, and other expenses remained relatively flat when compared to a year earlier.

On the next slide, number seven details the main changes in operating revenues during the two periods. Net interest revenues increased by MXN45 billion. This is fundamentally explained by a positive inflation rate, measured by the US Index of 0.3% versus the negative inflation rate of 2.3%.

Our commercial efforts to raise average spreads in order to maintain an adequate relationship between risk and return, an improved funding structure through 23% rise in balances helped incite in-demand deposits.

The income also rose by MXN10 billion. This is related to higher core bank fees as well as trading volumes and returns observed in the stock market at the beginning of 2010.

Net financial operations in foreign exchange positions also rose over last year. This rise of MXN5 billion was principally due to better results from our security portfolio and other financial derivatives.

As we look at the chart on the right, it shows the distribution of total operating revenue by segment. The largest change can be observed in the treasury and money market segment, which increased its proportion in revenue from 8% to 15%. This rise is due to the revenues produced by our US [personnel] and asset position, and in a lesser degree, this also (inaudible) an increase in revenues resulting from the market for financial securities provisions.

Moving forward to slide number eight, we can observe that our total operating expenses remained relatively flat year-on-year. However, we noted a significant decrease in administrative expenses as a result of cost reduction projects carried out during 2009 in order to reach a higher efficiency and lower expenses in marketing technology and infrastructure maintenance.

Worth noting is that approximately MXN2.8 billion in expenses in the line item "other" are directly related to the earthquake. This amount comprises of charges related to the infrastructure [impairment] for 1.1 billion, certain extra contributions to support our personnel in the most affected areas, and cash donations.

Due to this catastrophe, as of the end of April, we still have eight branches closed for a total of 60 in the affected areas. Nonetheless, we have a complete coverage in those areas affected by the earthquake, where some customers are being attended to in other branches in those areas. Or, in certain cases, we have set up temporary branches. The total coverage of the affected area has maximized our customary retention during this crisis.

Similarly to our operating revenue, operating expenses are mainly related to our retail banking areas. The higher amount of expenses assigned to retail segments in 2010 is due to the higher demand, which influences product processing costs.

However, on an overall basis, we have maintained expenses flat year-on-year and we've raised operating revenues, thus providing us with an excellent efficiency index of 42.6%, a significant reduction when compared to the 53% posted last year.

During the quarter, we have continued to observe improvements in credit risk. However, as the next slide demonstrates, number nine, during February and March we downgraded certain large customers; which rose provision expenses significantly during the quarter. We adjusted provisions for extraordinary charges in the fourth quarter by what we considered extraordinary items associated to a one-time charge of MXN5 billion due to an accounting change related to the method used to evaluate the SME portfolio, which changed from individual to group analysis.

We see a flat quarter-on-quarter and a 20% year-on-year decrease in provision expenses. The effect of this downgrade are observed on the charts in the right, which show our wholesale banking segments increasing the proportion of provisions from 19 to 35% in 2010. As a result, we improved our credit risk, reducing expenses from MXN42 billion to MXN35 billion year-on-year, a decrease of 16%.

With regards to the earthquake, although it will have some impact on credit risk, we expect it will not severely affect our loan portfolio growth or credit quality. Loans in the affected areas account for approximately 8% of the total loan book.

Now regarding our loan portfolio, we grew about 2% year-on-year, as described on slide ten. The year-on-year rise was driven by the retail portfolio, which accounts for about 28% of our total loan book. On a quarterly basis, it remained relatively flat.

As mentioned, we expect the economy will continue to grow in 2010 despite the recent earthquake. The second semester should partially offset the effect of the quake due to higher investment activities. And in the midterm, we should see a more robust demand for commercial loans as long as the rebuilding and reconstruction process is underway.

The composition of our retail banking book is described on the following slide, number eleven. As mentioned, the retail portfolio grew by nearly 10% year-on-year and by 2% quarter-on-quarter. This robust growth was principally due to a rise in commercial loans of 14% from a year ago, and just over 2% quarter-on-quarter.

Our growth in this product is thanks to our aggressive sales strategy and firm focus to deliver our products with excellent customer service. This has allowed us to capture approximately 50 basis points in market share over the last twelve months, and in the quarter with a participation of 14.5%.

Consumer loans have also grown during the twelve month period with an increase of 4%, while loans to [estimates] grew 9% over the same period. This trend is in line with the recovery signals observed in the second semester of 2009, which showed positive signals regarding consumer confidence on the economy's outlook and positive signals regarding unemployment, higher inflation, and business sentiment.

On the liability side, described on page number twelve, our quarterly average current account balances have continued to increase with a 29% rise in balances held with individuals, and a 15% rise in balances held with companies. These increases are due to our successful cross-selling initiatives and selective expansion in current account customers.

Accordingly, we are the market leaders in terms of balances held in our accounts, and at March 2010, we had a market share of 29% in individual current accounts and 23% in commercial accounts.

This funding base is one of our major competitive advantages. Our demand deposits to loans ratios are also superior to the Chilean banking industry with a prominent year-on-year rise of 30% to 30.5%.

In response to the improved market conditions in Chile, our capita adequate ratios provide us with ample room for growth, as presented on slide number thirteen.

At the end of the quarter we had a tier one capital ratio of 6.5% and a total capital ratio of 11.9%, both well above the legal required limits of 10% and 3%.

Application of new accounting rules regarding capital requirements for contingent loans implied a decrease in our opening balances of our total capital ratio by 0.5%, and a dividend distribution of 100% of 2009 earnings, in addition, to a charge of approximately MXN31 billion pesos related to a transitory article in our bylaws to adjust the capital in reserves by inflation also put pressure on these capital ratios.

Nonetheless, it's worth mentioning that in April of 2010, we issued long-term subordinate aided bonds in U.S., amounting to about MXN110 billion, at a rate of 60 basis points above the Central Bank's long-term reign. Clearly showing the market's confidence in our sovereignty. This placement will increase a solid total capital ratio by about 60 basis points.

Finishing up, on the following slide, number 14 shows our excellent dividend pay-out ratio. In 2010, we provided our share holders with an excellent 10% dividend yield, or a payment of approximately MXN3.49 per share. This is historic for the bank. Since 2005, we have provided our share holders with consistently high yields on their investments.

To conclude, in 2009, we are faced with an adverse scenario, which we confronted by provisioning our risks appropriately and by growing selectively in the first three months of that year. This approach assisted us by providing a head start when we began seeing recovery signals at the end of 2009. Our plan for the short and midterm is to grow in market share with a special focus in our retail segment and to continue to streamline processes, thereby improving our efficiency ratio.

Thank you. If you have any question, we'd will be happy to answer them.

(Operator Instructions) And your first question comes from the line of Jason Mollin with Goldman Sachs. Please proceed.

Hi, this is Jason Mollin. Hello everyone. My question is related to asset quality. We saw in the quarter that we saw, a little bit if deterioration in your past-due loan ratio. And we saw that you did create some additional provisions that you suggested in February and March for some wholesale clients. You know, should we continue to see deterioration as the impact of the earthquake is reflected in your numbers? As, let's say, 90 days pass and loans potentially become past-due or will they be restructured? And will we see that, you know, the outlook for provisioning we should see kind of a back-up as the level they expect losses increase in, let's say, the second or third quarter before we start to see what you described as an expected recovery maybe the end of this year or next year? And secondly, if could you comment on the recent management changes. And congratulations to Arturo, but if you could tell us a little bit what's going on there and if there will be any other changes in management going forward?

Hello, Jason. This is Arturo Tagle. Regarding your question in relation with the raise in portfolio risk in past-due loans. In effect, we recognize some extra provisions in the first three months of this year related to some specific customers. It's not a significant change in terms of the total portfolio; although, the amounts were quite important. And in terms of past-due, there were some -- first let me say that in the written segment, specifically consumer loans, we have seen especially in the third month some increase in delinquencies -- a slight increase in delinquencies. Although, I have to say that the total impact of the earthquake in the past-dues regarding consumer loans, the total effects are not seen yet. So we put a warning note there that the -- although that impacted just a portion of our portfolio in a specific area in Chile, in that area that can have an impact in delinquencies.

Regarding the commercial portfolio, I think that there were some very specific clients which were temporarily considered as past-due loans, but it's not a big change for us. So we don't have doubts on the quality of our commercial portfolio.

And regarding your question about the change in management -- well, we have made public the announcement of [Desi Quinas] to resign. I am very glad and very happy to assume this CEO position, and I can tell you at this point that you will not see very significant change. I have been part of the team of the management of the bank. I have been working closely with Mr. Quinas, so you shouldn't expect to see big changes in the management and the strategy of the bank in the next month or few months.

Thank you very much. Best wishes as you start the CEO.

Thank you.

(Operator Instructions) Your next question comes from the line of Steven LaVarta with Deutsche Bank. Please proceed.

Hi. Good morning, everyone. Something to follow up in terms of the impact from the earthquake--Also, given, you know, if inflation increases, how do you think that will impact the your margin? Do you think that would offset any increase in non-performing loans? I just want to get a kind of a net impact that you'd see for the whole year. And then the second question I have is in terms of trading gains, which were pretty high in the quarter. I know it's difficult to forecast, but I just want to get a sense if you think that level is sustainable going forward. Or what do you think is more recurring level of trading gains going forward? Thanks.

Hi. It's Pedro Samhan speaking. Let me go one-by-one. In terms of inflation really, [respect] I know we have some positions, very significant positions, really we should expect that during the rest of the year, which would be in a better position if inflation goes higher than inflation that we have during the first few months. So really we expect a pretty good trend. We expect that inflation would be between 3% and 4% this year, and in the US, maybe between 3 and 3.5%.

In terms of the trading portfolio, really we had a (inaudible) but we have had something during the first quarter. The first is really analyze (inaudible) our sales portfolio to really impact the first quarter in. Secondly, the decrease in total internal trade has, in both things, in making some profit it (inaudible) sales and in making some trading profit in spite of the current market in our trading portfolio. You ask me if we expect to continue with this trend? I cannot say that. I am not sure what will happen with interest rates for the rest of the year. We should expect that even though the short-term overnight rate will increase, not necessarily the same will happen for the long-term rate. But maybe it will be some gradually or very small increase. So really, it's difficult to expect that this trend will remain during the rest of the year, but It is something we cannot rule out for now.

I don't know if there is something remaining for your question.

Yeah, no. That's really helpful. Just to follow up on the increase, you know, you said 3% to 4% for the year, but I just want to get, kind of, your expectations on how that will impact your margin. I know it's beneficial. I just want to get a sense of how much more beneficial. Could you see a large expansion in the margin? Because I just want to get a sense of the sensitivity of your interest margin to the higher rate inflation.

Is true, the inflation increased over the level that we have been in the first quarter, you will see an increase in the interest of the base margin, obviously.

Complementing Pedro on the question regarding the portfolio and the earthquake's effect, that you asked (inaudible), let me say that, as mentioned in our press release, 8% of our loan portfolio is in the affected area. We have a lower than average margin in that area. But we have been closely following all our clients. And we have been provisioning when necessary. But we do not have a large impact. Up to this moment, we have recognized a total cost of about MXN2.2 billion regarding extra provisioning. But it's hard to say, at this point, what's going to be the total effect. But we are -- but we feel quite comfortable with the loan portfolio and the clients that we have in those loans.

Ok, great. Thank you very much. And congratulations to Arturo.

Thank you.

At this time, there are no further questions.

Now for closing remarks, I'll pass the floor to Arturo Tagle.

Our results have been quite positive this quarter. The high inflation, yet lower than the historic average, and improved economic conditions have benefitted our bottom line. As mentioned, during the rest of 2010, we plan to continue growing strongly in mortgage and consumer loans and pick up the pace in commercial loans. (inaudible) risk cost should continue to decline in inflation, and the monetary policy rate should pick up during the year. All these factors should provide us with an attractive profitability rate for the next few quarters.

Thank you and we look forward to our next conference call on our second quarter results.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect, and everyone have a wonderful day.