Banco de Chile (BCH) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to the Banco de Chile 2010 Fourth Quarter Earnings Conference Call. Today, we have with us Mr. Pedro Samhan, Chief Financial Officer, and Mr. Pablo Mejia, Head of Investor Relations.

We would like to inform you that this call and slides are being broadcast via the internet at the Company's website, www.bancochile.com. This event is being recorded. And all participants will be in listen-only mode during the Company's presentation. After the Company's remarks are completed, there will be a Q&A session. At that time, further instructions will be given. (Operator Instructions)

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco de Chile's management and on information currently available to the Company. They involve risks, uncertainties, and assumptions because they relate to the future events and therefore depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Banco de Chile and could cause results to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to Mr. Pablo Mejia, Head of Investor Relations. Mr. Mejia, you may begin your conference.

Good afternoon, ladies and gentlemen. It's a pleasure for me to share with you our comments on Banco de Chile's fourth quarter and year-end 2010 financial results. And joining me in this call is Mr. Pedro Samhan, Chief Financial Officer of Banco de Chile. As a reminder, a link to the slide presentation is available on our webpage, www.bancodechile.com within the Investor Relations site.

To begin, please move to slide number two, where 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 a discussion of our financial results for the year, comments on key balance sheet figures, and finishes off with a summary of our plans for capital increase, which was approved in the extraordinary shareholders' meeting held on July 20th, 2011.

Please move forward to the next slide, number three. Overall, 2010 has been a very positive year in terms of economic activity. In terms of GDP, it is estimated to reach about 5.5% during the fourth quarter and 5.2% for the year. Moving onto 2011, the market is expecting a further expansion of approximately 6% in GDP growth, driven mainly by retail, services, and the greater contribution of the manufacturing and construction industries.

With respect to unemployment, the rates have steadily dropped, reaching a three-month rolling average of 7.1% in December. Also, this figure -- also the figure that measures job creation continued to show a positive trend, increasing 2% from the previous quarter, while the figure for the labor force posted the second largest increase in 2010, up 0.7% from November and 1% in the previous quarter. For 2011, unemployment is expected to continue decreasing as the economy improves.

As for the banking industry, loans again began to grow and increased on a year-on-year basis about 9%. Consumer loans led the improvement, reaching 11.9% year-on-year, followed by mortgage loans and commercial loans, which grew at 11.6% and 6.9%, respectively.

For 2011, loan growth is expected to reach a rate around 16% nominal when considering an average elasticity of loan-to-GDP growth of two times. Inflation measured by the Consumer Price Index has also shown a gradual increase, reaching 3% at year end and in line with the objectives of the Chilean Central Bank, which seeks to maintain annual inflation in the range between 2% and 4%.

As for general consensus, expectations for inflation for 2011 are higher than 2010, due mainly to commodity prices, which in turn will increase this figure to at least 3.5% at year end and with a monetary policy rate above 5% as the central bank continues to withdraw monetary stimulus.

The combination of the rise in inflation and the monetary policy rate should assist the banking industry in 2011 revenue generation as banks have a long structural position in UF and have a significant portion of funding from non-interest-bearing deposits. Banco de Chile should especially benefit from having a larger position -- portion of funding based in non-interest-bearing deposits and thus take greater advantage of the interest rate hikes.

On the next slide, number four, begins our discussion on our consolidated results. We posted a significant accumulated increase of 47% on non-adjusted net income, reaching CLP379 billion. Adjusting for countercyclical provisions and for additional provisions related to anticipating the new provisioning method as set by Chilean regulators, which come into effect in January 2011, both recorded during the fourth quarter, we obtained a net income of CLP417 billion, or a very strong increase of 55%, with an adjusted return on average equity of 27%, or approximately 9 percentage points gains over 2009.

Also worth mentioning is that we posted the highest return on average equity adjusted for contingency provisions amongst our peers. On a quarterly basis and as mentioned in previous earnings calls, we have managed to consistently post adjusted earnings above CLP100 billion by adjusting a return on average equities to the previously mentioned amounts, which were posted against our fourth quarter 2010 results. We reached an excellent 26% for the quarter.

On the following slide, number five, is a closer look at our operating revenues. On an accumulated basis, total operating revenues in 2010 increased by 14% over last year, and as a percentage of average interest-earning assets, also rose, reaching 7.2% at year end. This excellent result in operating revenues was a result of, first, firm increase in net interest income, which rose by 17% and was mainly due to the loan growth, active and effective management of our UF gap and other positions, and the positive effect that the rise in the monetary policy rate had on our non-interest deposits.

Second, the strong growth in fee-based revenues, which was -- which grew by 15% over the same period last year, this rise was mainly due to a 14% increase in assets under management, a 27% rise in trading turnover and our stock brokerage subsidiary, and by a lesser degree an increase in core banking fees.

As a result, our important increase in revenue generation allowed us to take a greater slice of the market, share-based, and operating revenues, which grew from 19.6% to 20.9%, well above our market share loans.

In the next slide, number six, demonstrates the excellent results in all of our operating segments. Before I continue, I'd like to mention that the gap in earnings related to the core business, which previously was shown under treasury segment is now being assigned to each segment according to their contribution to create the gap on the balance sheet. We believe that this new allocation criteria discloses better the revenue generation of each operating segment.

Our retail segment is growing very strongly at 14% year-over-year, representing approximately 57% of our total operating revenues, while our wholesale segment rose 9% during the same period and represented 24% of total operating revenues.

The increase in our retail division is mainly due to loan growth, expansion in non-interest-bearing deposits, and its business contribution to gap earnings, which grew accumulated net interest revenues by 19%, and fee income, which grew 7% during the same period.

The growth mentioned in our wholesale segment was also due to net interest income, which grew 11%, and fee income, which rose by 29%. The growth in fee income was in line with our cross-sell strategy for the segment and was mainly related to credit factoring and the rise in activity related to cash management services.

Subsidiaries also grew strong during the year, increasing the operating revenues by 15%. The rise was mainly due to fee income, which rose by 22% and was related to the previously mentioned increases in assets under management that was also more concentrated in variable income and fixed income funds, higher transactions from our stock brokerage area, and to a lesser degree revenues from our insurance brokerage area.

Lastly, the treasury segment increased operating revenues by 26%, reaching CLP64 billion at year end and was a result of the proactive and effective management of intra-day trading and overnight positions, including derivatives and fixed income securities.

With regards to asset quality, as shown on the next slide, number seven, provision expenses remained in line with a more optimistic outlook for the economy and remained low at a ratio of provisions to average loans of 0.9% during the quarter and 1.2% for the year. This compares favorably to the average in the financial system, ex-Banco de Chile, which posted 1% for the quarter and 1.3% for the year.

The very positive provisions for loan-loss figure reflects both the ability of our credit risk models to interpret the economic momentum, its impact on our customers' risk profiles and the improved financial situation of certain corporate customers, which has reduced provision charges associated to their loans.

Also worth noting is the level of our past due coverage ratio, which has reached almost five times by the end of the fourth quarter versus the average in the banking industry, which is 1.8 times, ex-Banco de Chile, and the continued improvement in delinquent loans in terms of past-due loans to total loans, which dropped 0.51% versus the average in the banking industry of 1.45%.

I should also mention that we have anticipated the regulatory accounting changes related to individual commercial portfolio, recording CLP22 billion in additional provisions during the quarter. It is important to note that these charges relate to regulatory changes and not to higher credit risk of our loan portfolio, which remains healthy.

Specifically, this new rule introduced a set of modifications oriented principally to the method used to evaluate the individual debtor portfolio, which now considers a wider range of categories and imposes a minimum provision for each of these categories. The rule also permits the use of countercyclical provisions, which may be established to safeguard against the risk of macroeconomic fluctuations. Accordingly, the board agreed to establish countercyclical provisions for about CLP20 billion during the fourth quarter.

If we move onto the next slide, number eight, we can observe that our efficiency ratio increased from 49.3% to 50.3% due to unusually high increase in certain expenses, which occurred during the fourth quarter and went from an quarterly running rate of around CLP130 billion to almost CLP200 billion. This rise was principally due to certain expenses charged during the quarter amounting to CLP42 billion and a total for the year of about CLP55 billion.

These charges mainly related to previously mentioned anticipation of the regulatory changes to the individual loan portfolio, amounting to CLP22 billion, countercyclical allowances for CLP20 billion, write-offs of CLP6 billion related to commissions over accrued during prior periods, and earthquake expenses net of insurance recoveries of CLP3 billion.

Adjusting our efficiency ratios by these charges, we reached the level of 45.6% for the year, well below 2009's accumulated adjusted ratio of 48.1%. When excluding these non-recurring items from operating expenses, we posted a controlled 8% growth, which was related to higher business activity incurring greater variable expenses, our efforts to enhance customer loyalty programs, which resulted in higher marketing expenses, and the effective inflation on most of our line items.

However, I would like to stress that one of our main strategic focuses is to continue improving our operating efficiency through many projects, which aim among others to increase the productivity in our branches, improve online sales channels, redesign core processes, and automate back office activities.

Now moving onto balance sheet figures, loans continued their trends, growing firmly during the quarter and picking up speed as our total loan portfolio grew about 9% year-on-year, as described on slide number nine.

The strong growth, which we continued to experience, is clearly led by retail banking portfolio, as demonstrated on the chart on the right, which grew 14% year-on-year and is consistent with the improved unemployment figures and the firm economic growth of which Chile has experienced throughout the year and is expected to continue throughout the next years.

On the next slide, number 10, is a breakdown of the retail loan portfolio. Both these charts demonstrate that loans to individuals and SMEs are growing at an equal pace of 14%. However, mortgage loans are leading the growth and are reaching -- and reached almost 16% year-on-year.

Consumer loans, as mentioned in previous calls continued to increase their pace of growth, reaching a rate of 12% year-on-year. It's important to mention that our Credit Chile division, which attends lower-income customers and represents approximately one-third of our consumer loan book, is growing 9% year-on-year in consumer loans, which showed a very strong fourth quarter with a growth of 6%.

As for loans to small- and mid-size companies, this segment is leading our commercial loan growth with a rate of 14% year-on-year. We obtained this excellent growth by investing in improving products and value-added services, such as taking advantage -- taking greater advantage of the FOGAPE program, a government-funded program to create -- created to encourage banks to lend to SMEs through partial credit guarantees, which increased loans related to this program by 100%, optimizing service models, especially in areas outside of Santiago, and improving response times with regards to credit approvals.

On the next slide, number 11, is a description of our funding structure. This is clearly one of our competitive advantages, as we are the market leader in terms of non-interest-bearing deposits with 23% market share and in terms of the proportion of these deposits to total funding, which reaches 26% and lowers significantly our costs.

Moreover, we were able to increase the proportion of these deposits by 3% during the year versus the industry ex-Banco de Chile, which only grew 2% and accounts for only 18% of total funding.

In addition, the Chilean Central Bank continues to increase the monetary policy rates. The significant size of non-interest-bearing deposits in the balance sheet becomes even more important and is a differentiating factor amongst the banks in Chile. Through a conscious effort, we have successfully improved our funding structure to take advantage of these hikes and consider our asset and liability structure will benefit positively during 2011 in this environment. As previously mentioned, we expect that the monetary policy rate will end 2011 above 5%.

Also, during 2010, we continued to diversify our funding sources, of which the most important achievements were placed -- were the placement of senior and subordinated bonds for approximately US$1 billion, obtaining a loan from the China Development Bank for US$1 million, and recently closing a working capital syndicated loan entirely from Asia for US$2 million. Now to finish off, I would like to hand over the call to Mr. Pedro Samhan, Chief Financial Officer, to discuss our plans for the capital increase in more detail.

Thanks. Good afternoon, ladies and gentlemen. To begin, I would like to emphasize that our plans in the meantime are ambitious. As a result, our medium-term strategic objectives are aimed at positioning Banco de Chile as the leading financial institution in the country in terms of loans, profitability, efficiency, and service quality. We believe that not only do we have the strategic skills to obtain this objective but also are faced with a positive economic and financial environment that will aid in the advancement of these goals.

First, as was mentioned, the positive projection for the Chilean economy and financial system in coming years leads us to project a 6% growth rate for GDP in 2011 and approximately 5% for 2012 and 2013.

For the period, we estimate an annualized annual growth rate of 20.4% for total loans of the system to achieve approximately CLP100 billion by 2013. This implies a total industry growth of 34% real terms over the next three years and assuming an annualized annual inflation rate of at least 3%, nominal growth reaches around 48% for that period. The bank's goal is to capture positive growth by strengthening our value proposition and through a more aggressive [provincial] strategy but within the standard that characterize us in risk management.

Second, to capture part of this growth, we have focused our efforts in the medium term to expand the retail business through comprehensive value proposition that covers the entire cycle of customer relations from which we will continue enhancing our institution network, foster the development of our debit and credit card business, as well as strengthen our strategy and mix of product targets to SME customers.

From the wholesale side, our objective is to maintain our leadership but with a clear focus on initiatives to achieve greater profitability based on greater commercial synergies between divisions, including cross selling and prioritizing a comprehensive service and product offering to the customer. Based on these elements and assuming a theoretical scenario where we maintain market share, total loans should increase nominally by about CLP6.3 trillion by 2013, which like the industry would imply a nominal growth of about 48% from the year 2010.

Third, our medium-term goals require an appropriate balance between growth and capital adequacy. If our growth reaches the previously mentioned rate during the next three years and if we hypothetically capitalize 30% of the distributable income of each financial year, by 2013, our total capital ratio will reach near 10%, the minimum required by the local regulator. This should be the case [if we don't make] capital increase.

Finally, the capital increase will aim in improving the liquidity of the shares of Banco de Chile in the stock market, especially due to the intension of LQIS to not subscribe their preferential right to their shares. We consider the decision to be beneficial for all shareholders of Banco de Chile.

In summary, the capital increase is for the amount of CLP240 billion, approximately US$500 million, by issuing about 3.4 billion common shares. The price of the issuance will be set within 120 days of the extraordinary shareholders' meeting. And an order book auction may be opened prior to a preferential rights offering for the sale of waived rights. As mentioned LQIS has waived its preferential rights to the offering period. We would be happy to take your questions now.

Thank you. The floor is now open for questions. (Operator Instructions). Your first question is from Tito Labarta of Deutsche Bank.

Hi, Pedro and Pablo. Thanks for the call. Just a couple questions, just first in terms of -- you mentioned you want to be the market leader in terms of loans and profitability. So just want to get a little more color just in terms of being able to capture some market share in terms of loans. Do you think there'll be some pressure on your net interest margin? Or how do you see competition in general impacting your net interest margin.

And then being the leader in terms of profitability, what do you think would be a sustainable level of profitability? I know 2010 was a very strong year, but just want to get a sense of where you think ROE could be in a longer term, you know, as you kind of execute the strategy.

And then another question just in terms of provisions and asset quality -- saw some improvement again in the quarter. And provisions have come down quite a lot. So just want to get a sense of how you see that for 2011 in terms of asset quality and provisioning levels? Thank you.

Yes, hold on, please. Well, I will try to answer your question because there were many in one.

Yes.

Let's start with -- for the loans. Well, we expect to increase our level of loans at least at the level of the industry, at least. Probably our intention of doing this capital increase is to try to do more. But, however, really, as the industry will grow significantly according to what we are expecting from the economic outlook, really, we think that even keeping our market share, our growth will be very significant, always keeping the focus in the retail market because if even to grow in the total market share is X number.

But as you grow more, where your strategies and where your focus is, this is our intention. So really, for us, it's more important to not only to increase market share or to keep market share in total but to try to gain market share in those segments where our strategy focus is.

In terms of competition, obviously, the competition will be fierce because really many banks is going to the market offering a different product, offering a lower interest rate. So really, the competition is there. And we are prepared to work with the competition.

In terms of the net interest margin, well, in the industry, you have different forces here. On one side, you have an interest rate that is going up. Really, it helps the financial system in both ways, first, instead of [EBITDA] balance because we have a lot of source of fund with non-interest bearing, and second, because of the structural position instead of inflation, because of the structural position of the financial system, the funding system specifically.

So really, taking into consideration both in one way, the significant growth that is expected in terms of (inaudible) and in the other side the capitalization of this impact in terms of the higher interest rate that is expected and higher inflation that is expected, you can think that the medium-term projection or from here to one or two year, three year will be to have a net interest margin that would be relatively flat to the number that we have today and maybe with some decrease but very slight because of the factor that I mentioned before.

In terms of profitability, I would say that, really, because of all the factors that we've mentioned before and the need that some bank should increase capital, really we expect level of profitability not so different to the level that we have this year.

In the case of Banco de Chile, you know that we are in the range of 25% to 30%. We will have significant change. At the first stage when we made the capital increase, obviously, the return of the total net worth would decrease a little bit. But I think we do not be relevant [side] of the equation.

In terms of asset quality and provisioning, I think the trend will continue, maybe not at the pace that has improved during the last six months. It has had a significant improvement. So but anyway, it will continue to improve and a lower trend. I think that all your answer -- all your questions are answered. Or you have anything pending?

Yes, Pedro thanks. That's very helpful. Just one follow-up question in terms of asset quality, just how you see that will impact your provisioning levels. Do you think you could see another decline as we saw in 2010? Or it's just kind of -- what kind of growth do you think you see in terms of provisions?

Well, as I mentioned before, really, we expect a slight decrease, but not as much as we have during the last six months. So really the trend will continue but going to a more stable base because most of the reaction or the decrease was evidenced during the last three or four months.

Alright. Thank you very much.

This is our expectation.

Okay. Thank you.

You're welcome.

Thank you. (Operator Instructions). The next question is from Wesley Okada of Goldman Sachs. Mr. Okada, your line is open to speak. If you're on a speaker phone, sir, if you could please pick up your handset. There is no response from the line. (Operator Instructions). Thank you. This concludes the Q&A section for today's call. At this time, I would like to turn the floor back to Mr. Pedro Samhan, Chief Financial Officer, for closing remarks.

Thank you. To close, I would like to emphasize that the bank's business strategy is based on the premise to create value for our shareholders in a sustainable manner or time, which requires a clear commitment to growth. This requires us to take advantage of business synergies and operational efficiencies to be generated from an economic of scale, while accompanying our existing customers in their endeavors as well as addressing new segment of the population entering the market as the country continues to grow.

Our plan to raise capital will assist us in attaining those goals and to continue offering excellent returns on investment to our shareholders. Thank you. And we look forward to discussing our first quarter 2011 financial results with you.

Thank you. This does conclude today's presentation. You may disconnect your lines at this time. And have a nice day.