Banco de Chile (BCH) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2010 Banco de Chile Earnings Conference Call. My name is Veronica and I will be your coordinator for today.

(Operator Instructions). I would now like to turn the conference over to your host for today's call, Mr. Pablo Mejia, Head of Investor Relations. Please proceed.

Good afternoon, ladies and gentlemen, it's a pleasure for me to share with you our comments on Banco de Chile's third quarter 2010 financial results. With me today is Mr. Pedro Samhan, Chief Financial Officer of Banco de Chile.

As a reminder, a link to the slide presentation is available on our web page, www.bancochile.com or .cl within the Investor Relations site.

To begin, on slide number two you can see a list of the main topics which will be discussed in today's presentation. The presentation begins with a review of the Chilean economy, followed by an overview of the financial highlights of Banco de Chile and finishes off with a discussion on our financial results for the quarter and key balance sheet figures.

Please move forward to the next slide, number three. Overall, the third quarter has been very positive in terms of economic activity. GDP remained extremely strong during the quarter, which is estimated to be above 7%. For the year-- this growth has been driven by domestic demand and, in particular, private consumption and investment. For the year-end, market consensus estimates a GDP growth of about 5% to 5.5%.

With respect to unemployment, the rate has steadily dropped, offsetting typical increases during winter months and reaching 8% in September. This increase is thanks to the reconstruction efforts due to the earthquake and the better overall economic environment. Unemployment is expected to continue decreasing as the economy improves and as summer months approach, which generally results in higher seasonal employment. The year is expected to close around 7.5%.

For the Consumer Price Index, measured using the UF currency unit, it has also remained at more normal levels, accumulating 2.14% in October. In line with rising inflation, the monetary policy rate reached 2.75% in October from an all-time low of 0.5%. The general consensus expects that inflation will reach slightly above 3% and the monetary policy rate to end at approximately 3.25%.

On the next slide, number four, is a brief overview of our financial highlights during the period. The quarter marks the third quarter in a row which we have posted above CLP100 billion in net income. This translates to earnings per share of CLP1.21 and an excellent return on average equity of 26.1%. This was accomplished with a solid capital ratio, which remained strong at 8.8% for tier one capital, over total risk-weighted assets, and 13.6% for our total capital ratio.

On the next slide, number five, are the financial highlights of our operating segments. Retail Banking has posted very strong performance, growing 15% overall and reaching-- and each loan product line growing 17% in mortgage loans, 11% in consumer loans and 16% in commercial loans, which are related to small and medium-size companies.

In terms of asset quality, there has been a significant improvement, with a reduction of 20% in provision expenses over the same quarter last year. This high growth, combined with lower provision expenses assisted in attaining a net income before tax figure that is 67% above that posted during the same quarter last year.

As for our wholesale divisions, worth noting is the very strong performance in fee revenue, which has continued to increase quarterly and post a 33% increase over the same period last year. Provision expenses for this segment have also decreased, in line with the improving environment, reaching a level that is 48% lower than the same period last year. Moreover, operating expenses for the segment decreased by 23%.

Taking a look at Treasury, this segment also made important contributions for the quarter, posting revenues that are 65% higher than the same quarter last year and the segment placed two bonds in the local market for a total amount of $339 million US, denominated in Chilean currency, with a spread between 51 basis points and 70 basis points above the central bank benchmark rate, once again demonstrating the confidence that the market maintains with the bank.

Our subsidiaries have also achieved important accomplishments during the period. Stock brokerage volumes are up 25%. Asset management and mutual fund business have also grown strongly, by 20%. This had led to a healthy increase in net income from our subsidiary operations of about 16% when compared to the same quarter last year.

On the following slide, number six, begins a discussion on our consolidated results. As mentioned, the third quarter was the third time in a row that we consistently posted above CLP100 billion in net income. This marks a rise of 46% over the same quarter last year and allowed us to reach an excellent return on average equity of 26.1% during the quarter and 27.5% for the year.

This rise is due to the higher net interest income of 18% related to loan growth and from inflation index revenues, which are due to the successful balance sheet management of our long position in US currency, consistent and strong fee revenue growth of 21% and an important improvement in asset quality, reflected in a 32% decrease in provision charges.

This was partially offset by a controlled increase in expenses of 8%.

On the following slide, number seven, is a closer look at operating revenues. The chart on the left clearly demonstrates the relatively stable revenue generation. To note our net interest revenues, including revenues from inflation index assets grew by CLP30 billion over last year, or 19%. Net fee revenue posted a CLP12 billion growth, equal to 20%.

This growth was partially offset by income statement line items, net financial operating and foreign exchange income, which decreased by CLP11 billion when compared to the same quarter last year.

With regards to net interest income, the chart on the right shows the composition of this figure. The rise of CLP30 billion is due to a 6% rise in average interest-earning assets and to a more than 40 basis point rise in our net interest margin as a result of our proactive approach in managing our balance sheet UF GAP in a more normalized inflationary scenario.

With respect to the prior quarter, the decrease is mainly due to the lower inflation rate posted during the third quarter of 0.65% as opposed to the 0.97% recording during the prior period.

The next slide, number eight, demonstrates the capability of our Treasury area to generate complementary revenue, which increased by 55% when compared to the same period last year. This growth was due to the proactive and strategic management of the UF GAP balance sheet position, as previously mentioned, and the positive effect associated with funding peso-denominated assets by US-dollar denominated liabilities, hedged with derivatives.

On the next slide, number nine, demonstrates our strong growth in all transactional products and the significance of our retail bank in this figure. Total fee revenue grew by about 20% over the same period last year, mainly driven by the Retail segment. The most significant gains were seen in trading securities and securities management and portfolio management, which together made up almost CLP9 billion of growth, or a 47% increase. Additionally, card services also grew strongly over last year, with a growth of about CLP2 billion or 21.4%.

Moving forward to the next slide, number 10, it demonstrates our superior asset quality and the continual improvements in risk, given the better overall economic environment and the benefit we received on provisions from the lower peso-US dollar exchange rate on the US-dollar-denominated loans.

This led us to record 32% less in provision expenses when we compare this quarter to the same period last year and if we remove a set of particular downgrades in risk ratings to a specific wholesale debtor, we see a clear downward tendency in risk.

I should also mention that we have completed recorded the new rule established by the Chilean Superintendency of Banks to provision 0.5% of the normal individual analyzed portfolio.

This new rule also introduces a set of modifications oriented principally to the method used to evaluate the individual debtor portfolio, which now considers a wider range of categories. These categories are classified into three groups -- normal, sub-standard and in default. The rule also permits the use of counter-cyclical provisions which may be established to safeguard against the risk of macroeconomic fluctuations.

The full effect of this new risk model and the use of counter-cyclical allowances are still being-- are being evaluated, so we cannot rule out any potential impact on our results.

As for our asset quality ratios, provisions to average loans increased during the quarter when compared to the prior quarter, but at significantly less than what was recorded during the same period last year. This rise is mainly due to the previously mentioned wholesale debtor, which led us to recognize CLP14 billion in provisions during the quarter.

Also worth noting is the level of our coverage ratio as shown on the chart on the right, which reached 410% during the third quarter and the continued improvements in past-due loans, which fell to 0.6% during the period.

The latter measure is based on the installment, but (inaudible) does not include the principal amount. When we calculate this based on the principal amount, the figure decreases from 1.55% in the second quarter 2010 to 1.41% in the third quarter of 2010.

Moving on to slide number 11, we can observe that our total operating expenses decreased quarter on quarter CLP127 billion, posting a slightly lower efficiency ratio of 45.4%. When compared to last year, this figured remained relatively stable. Moreover, if we adjust these figures by the cost of the earthquake and other non-recurring items, one notes a subtle rise from the third quarter '09 to the third quarter 2010, which is related to bonuses due to the higher commercial activity and our improved performance, advertising expenses due to more aggressive marketing campaigns intended to take advantage of the economic momentum and higher IT expenses as a result of more dynamic business activity.

The chart on the right details our adjusted operating expenses and illustrates the effect of the earthquake and other non-recurring items. The earthquake cost the bank a total of CLP8.4 billion. Of this amount, CLP6 billion can be traced back to operating expenses related to maintenance repairs, asset impairments, donations and assistance to our employees. The remaining CLP2 billion is the effect of the earthquake on credit provision expenses related to both the retail and wholesale segments and were recorded as such.

As for non-recurring items and as a reminder, the second quarter includes CLP4 billion related to an adjustment of commissions over-accrued during prior periods, greater expenses of CLP5 billion related to a customer loyalty program intended to reinforce the use of our credit cards, and charges related to contingency provisions for CLP6 billion, which was reversed and charged to provisions during the quarter.

Also in the third quarter, we incurred approximately CLP3 billion in extraordinary bonuses granted to our staff for commemorating Chile's bicentennial, bicentario.

No moving on to our balance sheet figures, our loan portfolio grew by about 9% year on year, as described on slide number 12. This growth was primarily a result of the very strong growth rate we experienced in our retail banking portfolio, which grew 15% year on year and is consistent with the improved unemployment figures and the firm economic growth which Chile has experienced throughout the year.

On the next slide, number 13, is a more detailed breakdown of the retail portfolio. Both these charts demonstrate that loans to individuals and SMEs are growing at an equal pace of 15%. However, mortgage loan growth has reached 17.5% and is outpacing the growth of consumer loans, which are growing at a rate of 11.5%.

This strong growth has led us to increase 67 basis points in market share for mortgage loans and 35 basis points for consumer loans. Nonetheless, consumer loans have been picking up speed during the year and we expect that they will lead growth during 2011 because currently growth by lower-income individuals still reflects this segment's uncertain economic outlook.

On the liabilities side, as described on slide number 14, is another one of our competitive advantages. We have the highest market share in non-interest-bearing deposits in the industry and we managed to increase the proportion of this lower cost of funding from 22% in September 2009 to 26% in September 2010.

The chart on the right shows that we have moved from maintaining CLP3.4 trillion in non-interest-bearing deposits to CLP4.3 trillion, which translates to a 26% increase and funds 31% of our loan book versus the industry excluding Banco de Chile, which only funds 23%.

Moreover, our market share in balances held in checking accounts amounted to 24.3% and increased by 12-- on a 12-month basis by 72 basis points.

In relation to our capital adequacy ratios, we have ample room for growth, as presented on slide number 15. At the end of the quarter, we had a tier one capital to risk-weighted assets of almost 9% and a total capital ratio of 13.6%. Worth mentioning is the composition of this effective equity or our total capital, which is composed principally of capital and reserves and subordinated debt. Chilean banks are not permitted to use hybrid capital instruments.

Finishing up on the next slide, number 16, shows our excellent share performance during the year. As of yesterday, November 2nd, the IPSA showed a strong gain of 38%. Banco de Chile, on the other hand, compared favorably with an increase of 66% during the year.

We believe this upward trend is proof of the market's confidence in the Chilean economy and the bank's strength to adjust and capture this upturn in economic performance and our ability to provide our shareholders with consistently high yields on their investments.

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

(Operator Instructions). And your first question comes from the line of Tito Labarta from Deutsche Bank. Please proceed.

Hi, Pablo. Thanks for the call. Just a couple questions. First, in terms of net interest margins, I want to get a sense of your outlook in terms of like how you see inflation and how that will impact margins going forward, as well as an increase in interest rates, so what the net impact would be to margins?

And then, the second question, in terms of asset quality and provisions, is just do you think there could be some more room for asset quality to improve? And what kind-- get a sense of recurring provisions going forward. Is that going to stay around these levels or just kind of what you expect that to be? Thanks.

Okay. For the net interest margins, we see on the short term or the mid term some pressure on NIM due to the raising monetary policy rates as liabilities reprice quicker than assets and rising competition. However, this should be counter-balanced from our growth strategy to grow more in profitable segments in retail banking, where we feel we have ample room to continue growing and especially our leadership position in non-interest-bearing deposits, which should fund-- which fund more than 30% of our loans and which will take greater advantage of this in the mid-term, of the rising monetary policy rate.

For the inflation, for the next couple of years, we're looking at around 3%, what the central bank is saying.

And for your question regarding the provision expenses--

Yes, for internal provision, as you know, we have a more stable economic scenario, so really we expect-- in the same way that we are expecting that maybe the spreads will be a little bit lower, we expect a certain set of provisions, because of the economic cycle that we are facing now. We expect a lower indicator instead of the ratio of-- the ratio vis-a-vis the total loss growing down gradually to where that would finish about 1.2%, I think.

Just 1.2% of loans?

Yes, by the close to the year-end of 2011.

Okay, great. And then I know you don't know the impact of these counter-cyclical provisions that you mentioned earlier, but I would expect those would-- most like, you would need to increase provisions because of that, or just any kind of color you can provide on that.

Can you repeat the question?

Yes. Just on the counter-cyclical provisions that you mentioned earlier in the call. I know you don't know what the final impact would be, but just get a sense. I think that would maybe to higher provisions going forward or just any kind of color you can give on that?

Well, it's something that we cannot rule out, because we have the opportunity today that when we are in fear of a better economic outlook, we can make some provisions, some counter-cyclical provisions and this is under review now in the line in order to make it official.

Okay.

But this is something that is completely separate to the other instead of the line where we have to recognize it, these same patterns.

Okay, great. Thank you.

When I talked before, I talked about the normal provisions.

Right, thank you.

You're welcome.

Ladies and gentlemen, there are no further questions. I will now hand the conference over to Pedro Samhan for closing remarks.

Yes. Thank you. To close, I would like to draw your attention to our consistent ability to generate for the third quarter in a row over CLP100 billion of net income. This year clearly demonstrates the excellent loan origination capability of our solid and sustainable business model.

(inaudible) already is committed to provide high-quality customer service to differentiate us from the competition. This has led us to develop a variety of initiatives, which include, among others, new customer service models, improvement in our call center platform and reassigning customers to more specialized portfolios.

With our conventional strategy, our (inaudible) capital base to take better advantage of the economic momentum and permit us to grow strongly during the mid term. This should be reflected in loan growth, revenue generation and in improvement in asset quality. However, the effect of the new banking regulation regarding provisioning and counter-cyclic allowances are currently being reviewed, so we cannot rule out any potential impact in our results because of this reason.

As per our growth strategy, we aim to grow our retail segment by, among other initiatives, enhancing sales to existing and new customers through (inaudible) products and services, opening more than 20 branches and over 250 ATMs during the last year and more throughout 2011.

In wholesale, we seek to grow by cross-selling customers to more profitable products and services, such as foreign exchange, the realty and cash management.

Finally, I would like to mention that we are prioritizing cost control on an organizational basis. Efficiency is becoming increasingly more important in order to compete profitably in this competitive environment. As such, we are investing in information technology and developing simpler, more manageable business processes to obtain a faster response time and high productivity.

This eventually (inaudible) consolidating our leadership in every segment we serve and assists in continuing to improve our sustainable and profitable business model for our investors.

Thank you and we look forward to discuss our next conference call on the year-end results.

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