Banco de Chile (BCH) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the second quarter 2010 Banco de Chile earnings conference call. My name is Meladia and I will be your coordinator for today. At this time, all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions). Joining us in today's conference call is Mr. Pedro Samhan, Chief Financial Officer and Mr. Pablo Mejia, Head of Investor Relations.

I would now like to turn the call over to Mr. Pablo Mejia. Please proceed.

Good afternoon, ladies and gentlemen. It's a pleasure for me to share with you our comments on Banco de Chile's second quarter 2010 financial results. With me today is Pedro Samhan, Chief Financial Officer, [Rolando Arias], (technical difficulty).

I'd like to remind you that a link to the slide presentation is available on our website at www.bancochile.com in the Investor Relations site.

To begin, on slide number two, a list of the main topics which will be discussed in today's presentation. We will begin with a review of the Chilean economy, followed by a brief overview of each operating segment. We'll finish up with a discussion of our financial results for the quarter and key balance sheet figures.

Please move forward to the next slide, number three. Overall, the second quarter has been positive, in terms of economic activity. The negative effects of the earthquake have been (technical difficulty). Growth has rebounded quicker than was expected. The general consensus estimate, growth for the quarter will reach approximately 5.5% and above 6% the remainder of the year.

Consumer price index has also begun to rise, reaching 1.7% during the first semester and general consensus believes that the sky rate will reach approximately 3% to 3.5% by year end.

Variation of (technical difficulty) during the same period (technical difficulty) rate affects inflation index revenues (technical difficulty).

These factors, among others, have led the Chilean Central Bank to begin increasing the monetary policy rate from an all-time low of 0.5% to (technical difficulty). General consensus again anticipates a rise of about 3.5% at year end and a rate of about (technical difficulty) 2011. That's a 3.5% (technical difficulty) 2010.

In terms of unemployment, the three month rolling average rate was 5% in 2010, down from a year earlier, 11.5%.

The reduction in unemployment during last year is partly (technical difficulty) economic growth, by the reconstruction efforts related to the (technical difficulty).

The banking sector, as a whole, also captured this economic growth, rising 7.5%. Loans, when compared to last year in the industry, has grown 59.2% in net income, basically back to normal levels. (technical difficulty) asset quality.

The Chilean selective share price is also shown an improvement rising 7% in the second quarter and breaking historical records. The Chilean market, in general, performed very well throughout this (technical difficulty) prices and downgrades of sovereign debt.

On the next slide, number four, is a brief overview of our operating segments. In Retail Banking, we've had a strong performance when compared on a year on year (technical difficulty).

Mortgage loans are growing at about 16%, consumer loans 8% and commercial loans (technical difficulty) SMEs, growing at about 14%.

Asset quality, when compared to the prior quarters, has improved significantly, with a reduction of 28% in provision expenses when compared to the second quarter 2009.

As for net income before taxes, this also rose (technical difficulty) 2009 up approximately 26%.

Our Wholesale division also grew strong (technical difficulty) 6.1%. Our profit and loss statement (technical difficulty) also saw a firm (technical difficulty) 23.7%.

(technical difficulty) asset quality figures (technical difficulty) reduction of provision charges of 67% and a noteworthy rise in net income of 26 (sic. see presentation)%.

The Treasury department also made important contributions during the quarter by placing long-term subordinated bonds that totaled approximately [$480m]. The first bond was placed at 67 basis points above the Central Bank long-term benchmark (technical difficulty). The second remarkably 33 basis points, clearly demonstrating the confidence (technical difficulty).

As for our subsidiaries, they also had important accomplishments during the quarter. Stock brokerage transactions are up 11.7%. (technical difficulty) management business also grew [CLP8.8b], up 28.%.

Insurance brokerage premiums were up 19%, unchanged to the global markets investment banking. This is the second (technical difficulty) is an international bond placed in the local market. All this translates to healthy operations of 6% compared to the same quarter last year.

On the next slide, number 5, is a closer discussion of our overall net income figures. We were able to finish the second quarter with an outstanding net income that rose 48% over last year and reached CLP108b. This was a result of higher net interest income (technical difficulty) growth and inflation index revenues (technical difficulty), revenue growth, improvement in asset quality. This allowed us to reach an excellent (technical difficulty) of 30%.

On the following slide, number six, is a closer look at operating revenues. The chart on the left demonstrates our ability of growing in each line item.

Net interest revenues, including revenues from inflation index assets, grew by CLP20b (technical difficulty). Net fee revenue grew by CLP3m, or 5%. This rise was due to higher volumes managed by our security brokerage (technical difficulty) subsidiaries, as well as higher loan origination. And net financial and foreign currency revenues grew by about CLP5b (technical difficulty).

Look at the chart on the right. Our position of the net income and net interest revenues, principally due to a rise in revenues from our retail banking operations grew by 11%, compared to the second (technical difficulty). This was in line with the loan growth experienced in this banking segment.

(technical difficulty) interest revenues also grew by about (technical difficulty) during the quarter, as a result of an effect of the positive inflation rate and long position index assets.

As demonstrated in the next slide, number seven, during the second quarter, we observed improvements in provisions for loan losses, which decreased by 42% when compared to the same quarter last year and by 33% when (technical difficulty) quarter.

Delinquencies to total loans improved from 0.77% second quarter '09 to 0.68% in the second quarter of 2010. The year on year decrease in provision expenses relates to a better overall outlook of the local economy and some specific factors such as (technical difficulty) compared to the first half.

The risk profiles of these [industries] (technical difficulty) as economic indicators are gradually (technical difficulty) from which we significantly reduced (technical difficulty) provisions in our Wholesale segment.

To a lesser extent, the Retail banking area also recorded (technical difficulty) recovery in (technical difficulty) capacity, fueled by the lower unemployment rate and higher consumer (technical difficulty).

It's important to mention that (technical difficulty) recent earthquake (technical difficulty) deteriorate the loan portfolio significantly for us and should be more than offset by the strong economic rebound in (technical difficulty).

However, even though we expect that overall credit risk charges (technical difficulty), the chance of accelerated credit risk volatility in corporate customers is still present.

Moving forward to slide number eight, we can observe that total operating expenses increased slightly 6% year on year (technical difficulty) items. This increase is mainly due to a rise of staff expenses of 4% and administrative expenses rose 7% due to (technical difficulty) related to IT expenses. However, I'd also like to point out that our headcount decreased slightly during the quarter by 3% when compared to last year.

Similar to our total operating revenue, operating expenses related (technical difficulty) banking areas. The higher amount of expenses (technical difficulty) segment (technical difficulty) demand (technical difficulty) processing cost, as well (technical difficulty) particular items discussed.

Now regarding the loan -- our loan portfolio, it grew by about 10% year on year on the next slide. Wholesale loans also have grown during the 12-month period, but at a slower pace of 6%. This rise is (technical difficulty) more positive business sentiment (technical difficulty) large companies (technical difficulty) projects that were postponed during the downturn (technical difficulty).

Our overall strong growth during the period was driven by the retail (technical difficulty), which grew 15% last year, roughly (technical difficulty). This robust growth is partly due to a rise in mortgage loans (technical difficulty) year on year and just over 5% quarter on quarter. Our growth in this product is (technical difficulty) our aggressive sales strategy, (technical difficulty) our focus to deliver our products (technical difficulty) customer service. This has allowed us to catch almost 70 basis points of market share over the last 12 months and end the quarter with (technical difficulty).

Commercial loans to SMEs have also grown during the 12-month period with (technical difficulty) 14%, while consumer loans also picked up with just under 8%. This is in line with recovery signals observed during the last quarters (technical difficulty) the economy's outlook, strong sales and unemployment level.

As mentioned, the economy is expected to (technical difficulty) of 2011. Mid-term, we also anticipate a robust demand.

On the liability side, as described on slide number 10, our quarterly average current account balances have continued (technical difficulty). The 26% rise in balances held within (technical difficulty) rise in balances held (technical difficulty). This increase (technical difficulty) our successful cross-selling initiative plus selective expense and in current account (technical difficulty) and the higher liquidity from our customers.

Accordingly, we are the market leader, in terms of balances held in our accounts. And in June 2010 we had a market share of about 24%. This funding base is one of our major competitive advantages. Our time deposits, as shown on the graph on the right, (technical difficulty) approximately 27% of our total funding structure. This is superior to that of the banking (technical difficulty) only accounts for about [17] (technical difficulty).

(technical difficulty) market conditions (technical difficulty) on the next slide, number 11. At the end of the quarter, the basic capital to total assets (technical difficulty) 5%. (technical difficulty) ratio of 15.5%, both well above the legal requirements of 3%.

(technical difficulty) the quarter (technical difficulty) this is long-term subordinated bonds and (technical difficulty), amounting to about $480b (technical difficulty) of 67 basis points and 33 basis points (technical difficulty) Central Bank long-term rate, clearly showing the market's confidence in solvency and based on our effective equity.

Finishing up, on the following slide, number 12, shows our excellent performance during the year. As of yesterday, August 3, the (technical difficulty) showed a strong gain of 31.2%. Banco de Chile compared (technical difficulty). Banco de Chile (technical difficulty) performance measured up against international markets fairly well, despite the volatile environment. This upward trend is also proof of the market's confidence on the Chilean economy, on our Bank's strength, financial crisis, and our ability to provide our shareholders with (technical difficulty) high yield investments.

Thank you. If you have any questions, we'd be happy to answer them. Operator.

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

Hi. Good afternoon, Pablo and Pedro. Thanks for the call. I just had a couple of questions. First, I just wanted to get a sense of your expectations for net interest margin going forward, as inflation normalizes for the rest of the year. And also, with interest rates potentially going up, how do you see -- would be the net impact on your margin, going forward.

And then the second question, just in terms of asset quality and, more specifically, in terms of provisions, as provisions declined quite a bit in the quarter, even though NPL ratio remained relatively stable, I just want to get a sense if you're expecting the quality to improve significantly from current levels or you think the current ratio will come down going forward? So if we could get a better sense on that, like what would be the recurring provisions, going forward. Thanks.

Hi. Good afternoon, Tito. Pedro Samhan speaking. First, I will try to answer your two questions. In terms of interest margin, you could have some different trend in the rest of the year. On one side, as you mentioned very well, we expect a higher inflation in the second half; this will be the first one.

On the other side, increasing the monetary policy rate, obviously will push -- should push the rate up for the same reason. However, because of the competition is even strongly, really we expect that maybe (technical difficulty) the loans will decrease slightly. So really, the net/net, we have positive impact. But I cannot tell you exactly how much it did. But really, you should expect a positive impact in terms of our net interest margin for the second half.

In terms of provision, as he mentioned very well, Pablo's script, really it's true that the provision and the ratio, the provision in our portfolio is going down, instead of the percent ratio. However, we cannot allow at any time the possibility of having any volatility, especially for our corporate segment customer. So we are expecting for the rest of the year a trend that should not be so different to the first half.

Okay, thank you. That's very helpful.

You're welcome.

Your next question comes from the line of Chris Hill from Goldman Sachs.

Hi. This is Jason Mollin from Goldman, here with Chris Hill. Our question is related to asset quality. And in fact, it is, despite the earthquake, I guess at the end of February, we've seen asset quality figures, at least in terms of NPLs remain relatively stable. Is this something -- were there quite a few restructurings? Is this reflected in the numbers? Is this something we should expect to see more after it takes time to filter through and some of those impacted wouldn't be able to pay after 90 days, we would expect to see some of that? Can you give us some color on how the portfolio -- now the economy seems to be moving forward at a stronger pace than many anticipated, following the earthquake. But if you can give us a sense on how that impacted the asset quality of the Bank and if we've fully seen all of those effects in the asset quality data that you post.

Thanks for your question. Let me tell you, really, in terms of our total portfolio, no more than 8% of our portfolio was booked in the area where the earthquake happened. So this is on one side.

The second -- on one side. On the other side, really most of the impact of the earthquake -- the problem of the earthquake in our portfolio, also that was already reflected really. And it was not significant. So really, answering your question, we don't see any special significant impact for the rest of the year, for the future, in terms of the earthquake impact of our portfolio.

In terms of our assets or the repair that we have to make because of our fixed assets is -- you asked this question also -- really, we have already recognized most of the repair. And we have pending -- today we have pending some recoveries on the insurance company, in terms of the premiums that we have for recovery, a good portion, a significant portion of the repair that we have to do, because of the earthquake.

So should we -- so in terms of asset provisioning levels, then, at this 1.1% of loans, this is -- clearly we're below the peak levels. But your provisioning back in the beginning of 2008 and 2007 was lower than this. In terms of the provisioning cycle, are we going into a trend that we could even see well below 1% provisions to loans?

Not necessarily, no, because 1.1% was a very good level in the second quarter. If you compare with the first quarter -- if you take the average of the half, of the first semester, it's closer to 1.3%, 1.4%. I think this is more real because you never can rule out the possibility to have any impact in terms of our corporate bonds -- our corporate loans. So really, if you are thinking that we can repeat the trend of the second half -- the second quarter having a normal trend for the rest of the year and for the future, not necessarily.

I think you should take the trend of the first half as more representative by the time being. Instead of the future (inaudible) you think, what is a normal ratio for the future, thinking in 2011, 2012. Maybe you can be closer to a ratio of 1.1%, 1.2%.

Great.

And also to remember that the consumer finance portfolio (technical difficulty).

That's helpful. And as a second question, if you can just comment on the expected tax rate given the changes in the marginal tax rate. We saw a pretty low level this quarter. I guess we should anticipate next year that that should be closer to the 18%. Is that correct -- 19%?

Per cent, you say?

What would you expect for your effective tax rate? Or the marginal tax rate increase, what will be the impact on Banco de Chile's effective tax rate?

In terms of effective tax rate, the impact should be easy. You have an increase of 3% to not be more than 2% in [our reduction]. However, you could have some impact. We have had the mining now instead of the deferred tax. Because of the change of the tax rate, you have to update the calculation of the deferred tax. And maybe it would have some impact -- positive impact that would not be so significant in the second half.

Okay. Thank you very much.

You're welcome.

(Operator Instructions). Your next question comes from the line of [Marina Mansud] from JP Morgan.

Hi. Good afternoon, everyone. My first question is regarding operating expenses. I understand there was a big amount of other operating expenses, especially regarding to an expected credit risk, the durations and greater expenses related to loyalty program. What can we expect on the next quarter on these lines?

Well you said very well in the first half, in general. And in the second quarter, we have some impact that are non-recurrent as a consequence of the contingency provision on one side, and some -- still we have some impact in terms of the earthquake.

For the third -- for the rest of the year, maybe some additional impact we could have. But you asked me how we will compare with the first half; I think it should be lower. So really, we should expect, in terms of expenses, a trend that -- a not increased trend, something that would be more similar to the behavior of the first half, but with a slight decrease because of not these non-recurrent expense to be repeated in the same -- at the same level that we have it during the first half.

Okay, thank you. And the second quarter is regarding capital and reserves. You had a decrease on that line. And do you expect to be -- that to be flat for the next quarters and the next year, on the total capital risk adjusted assets?

Can you repeat the question, please?

Yes, on the total capital risk adjusted assets, the base ratio, do you expect that to be flat on the coming quarters?

You are asking for the risk adjusted assets?

Yes.

Total capital to -- you are talking about our capital ratio.

Yes, exactly.

Well, as long as we increase our loan level and because we are not thinking to increase our capital in terms of an issue of subordinated bonds necessarily, so really, you should expect a decrease in this indicator. A decrease. But even though you should expect a decrease, it's a very sound indicator. We expect to finish this year with a very sound indicator, something that could be closer to 12.5%, 13% instead of the term that is required by law.

Okay, thank you.

You're welcome.

And at this moment, there are no further questions on the line. I would like to turn the call back over to Mr. Samhan for closing remarks.

Thank you Pablo. To close, I would like to draw attention to the impacts of our results, which during this quarter has broken records in terms of reported net income, pushing CLP108b, equal an equity return of 30% and an asset return of 2.5%.

This historical high return has been achieved through a sustainable business model and maintaining an adequate risk return ratio where we have placed the objective to grow stronger in retail banking business.

Our strategy of maintaining adequate asset quality level has been an important factor during the last 12 months. And we have seen this improvement in our result, which is mainly related to the better overall economic conditions in Chile and abroad.

However, as was mentioned before, even though we expect that asset quality should return to its mid-term levels, the chance of isolated volatilities emerging from a specific corporate customer continue to be present.

Also I would like to highlight that our leadership in non-interest bearing deposits will maximize the benefit from the Chilean Central Bank shift towards tightening the monetary policy rate. In the mid-term, the competitive advantage should lead an increased gain because of our lower cost of funds when compared to our peers.

In terms of continuing our growth plan, the issuance of long-term subordinated bonds at very attractive spreads demonstrates the market confidence in our Bank and provides us with ample room to grow, while preserving our solid capital and liquidity base.

Each of these points mentioned before has assisted in building our sustainable business model and shall position the Bank for growth in this effective positive economic environment.

Thank you. We look forward to discuss our next conference call on the third quarter result.

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