Banco de Chile (BCH) 2011 Q1 法說會逐字稿

Good morning, everyone and welcome to Banco de Chile's first-quarter 2011 results conference call. Today with us we have Mr. Pablo Mejia, Head of Investor Relations and Mr. Pedro Samhan, Chief Financial Officer.

Before we begin, I would like to remind you that this call is being recorded and that the information discussed today may include forward-looking statements regarding the Company's financial and operating performance. All projections are subject to risks, uncertainties and actual results may differ materially. I will now turn the call over to Mr. Pablo Mejia. Please go ahead, sir.

Good afternoon. It is a pleasure for me to share with you our comments on Banco de Chile's first-quarter 2011 financial results. As mentioned, joining me on 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.bancochile.com, within the Investor Relations site.

To begin, I would like to share with you on slide number 2 first-quarter 2011 highlights. As we can see, the Chilean economy continued showing firm signs of improvement during the quarter. This assisted us to begin the year with outstanding figures. We obtained the record quarterly net income and the highest return on equity in the Chilean financial system.

During the quarter, we also posted excellent core banking revenue growth based on a significant rise in retail lending that is very in line with our overall strategy and successfully placed almost CLP200 million in the first stage of our equity offering with a demand that far exceeded the issuance, clearly demonstrating investor appetite for our stock.

Please move forward to the next slide number 3. Before going further into the results of the quarter, I would like to briefly discuss the positive expectations for 2011 and the coming years. In terms of GDP growth, the consensus is expecting a figure of around 6% for 2011. For the next three years, GDP growth is expected to stay above 5%.

With respect to unemployment, the average rate has steadily dropped and is expected to reach a level near 7.5% for 2011. In 2010, the main drivers for employment creation were the retail and construction sectors in part due to reconstruction efforts and the better expectations for the economy. Obviously, the lower unemployment rate estimated for 2011 should continue to translate into decreasing delinquencies, which is very important for our figures. For example, if provisions for loan losses decrease by 10 basis points, we increase earnings before tax by about CLP30 million. This effect is very noticeable within the risk figures as you will see later on in the presentation.

In addition, inflation measured by the Consumer Price Index reached 3% at the end of 2010, in line with the objectives of the Chilean Central Bank, which seeks to maintain annual inflation in the range between 2% and 4%. However, in 2011, inflation is expected to reach above 4%. This is mainly due to increases in commodity prices, especially food prices. As a result, the Chilean Central Bank has also withdrawn stimulus, rising the monetary policy rate quicker than the market expected, reaching 4.5% in April and is expected to reach a level around 5.5% to 6% at year-end.

And the combination of the rises in inflation and the monetary policy rate should assist the banking industry's revenue generation as banks have a long structural position in UF and a significant portion of funding from non-interest-bearing deposits.

Banco de Chile should especially benefit from this scenario because we have the largest portion of funding from non-interest-bearing deposits in the financial system and therefore, we can take greater advantage of the higher inflation and nominal interest rates.

The next slide, number 4, begins our discussion on the consolidated results. As mentioned, we began the year very strong, posting record earnings of 117 billion pesos. I would also like to emphasize that during the quarter, we achieved two other records. In January, we recorded the highest monthly net income figure of about 44 billion pesos and in March, we recorded earnings before tax of 51 billion pesos. These results were achieved through strong growth in core business operating income and a significant decrease in credit risk provisions. As a result, we recorded an outstanding return on average equity of 28.1% placing us as the leader in the Chilean banking industry.

Also worth noting is the effect of the 3% increase in the statutory corporate tax rate, which rose income tax expenses for this quarter as compared to a year earlier.

On the following slide, number 5, is a closer look at our operating revenues. On the quarterly basis and despite the excellent level that we achieved in the first quarter of 2010 related to the higher-than-average revenues from net financial and foreign exchange transactions, we posted a rise of 5% in total operating revenues as demonstrated on the chart on the left.

This rise was primarily due to a firm increase in net interest income and fee-based revenues, which rose 12%, as you can see on the chart on the upper right corner. This positive evolution in net interest revenue was prompted by a higher yield associated to our non-interest-bearing current accounts and demand deposit balances, which grew 13% year-on-year in an environment of increasing nominal interest rates.

In addition, but to a lesser extent, our net interest income was fueled by a 13% year-on-year rise in total loans that more than offset a decrease in lending spreads, which was explained by the higher competition within the Chilean financial system from traditional banks and other market players, as well as improved risk profiles as a result of the economic recovery.

The strong 17% growth in fee revenues was a result of the higher commercial activity in our insurance business, greater revenue from mutual funds and the rise in stock trading turnover and the greater activity in credit cards based on the positive trend of the economy and household consumption along with commercial initiatives intended to reinforce the use of this payment channel.

In summary, 2011 revenues are more based on recurring core business and less on financial operating income and foreign exchange transactions, as you can see the evolution of these items on the chart on the bottom right.

With regards to asset quality, as shown in the next slide, number 6, loan loss provisions in line with the more optimistic outlook for the local economy have decreased by more than 50% when compared to the same quarter last year and as a percentage of average loans, we reached a figure of 0.7%. This favorably compares to the figure posted by the financial system ex-Banco de Chile, which equaled 1% for the quarter.

In addition, the better economic conditions and improved collection processes, which are based on a strategy that groups customers on their profile, length of time that they are delinquent, exposure level, among other limits, has assisted in the strong increase in recoveries of nearly 66% over the same period last year.

Overall, we are very confident that we maintain superior and efficient risk return ratios within our retail and wholesale segments. This includes our ability to manage effectively all aspects of the credit risk cycle, including the rigorous credit assessment before approving loans to ensure customers fall within the predefined target market, firm controls to guarantee proper application of credit policies and detailed monetary changes in the portfolio risk.

Moving on to slide number 7, we can observe that our efficiency ratio during the first quarter has remained stable at 46.6%, in line with our 2010 average and despite the year-on-year increase in operating expenses. As you can see on the chart on the upper right, this was mainly attributable to administrative items principally from outsourced salesforce, IT and marketing expenses as a result of higher business activity.

It is important to mention that personnel expenses, which represent almost 50% of our total cost base, experienced moderate growth that is in line with evolution recorded by inflation. This cost control is a result of improvements in productivity that has enabled us to overcome the higher commercial activity with a steady headcount.

I would also like to stress that one of our main strategic focuses is to continue improving our operating efficiencies through projects that aim, among other objectives, to continue to increase productivity in our branches, improve online sales channels and redesign core processes and automate back-office activities.

Now moving on to balance sheet figures, loans continued their upward trend growing firmly during the quarter and picking up speed as our total loan portfolio grew about 13% year-on-year and 4% in the quarter as described on the next slide, number 8. This growth, which we expect to maintain, is clearly being led by our retail banking portfolio as demonstrated on the chart on the right, which grew almost 18% year-on-year and 5% quarter-on-quarter. This strong rise is consistent with improved unemployment figures, the firm economic growth and positive expectations for the following years that have encouraged individuals and SMEs to increase their borrowings.

The evolution shown by retail lending products have permitted us to increase this proportion in our total loan portfolio from 46.7% in the first quarter to 48.5% in the first quarter of 2011, which is in line with our midterm strategic objectives.

On the next slide, number 9, is a breakdown of our retail loan portfolio. Both these charts demonstrate that loans to individuals and SMEs are growing at a very strong year-on-year pays pace of 18% and 17% respectively. Of this growth, mortgage loans continue to lead, rising 19% year-on-year. Consumer loans, as mentioned in previous calls, continue to increase its velocity, growing at a rate of 16% year-on-year and approximately 6% quarter-on-quarter. It is also important to emphasize that a consumer finance division, which we call [Credit] Chile, which serves lower income individuals and represents approximately one-third of our consumer loan book, is also growing at 16% year-on-year.

As for loans to small and midsize companies, this area is leading our commercial loan growth with a rate of 17% year-on-year. Our strategy is focus on investing and improving products and value-added services, optimizing service models, especially areas outside of Santiago and improving response times with regards to credit risk analysis and approvals.

Our focus on retail banking has translated not only to loan growth, but also into higher marketshare as demonstrated on the next slide, number 10. Particularly in mortgage loans, we have increased our marketshare to 15.3%, which is 37 basis points above our December 2010 figure. In regards to our consumer loans, we have increased our marketshare by 23 basis points during the same period.

Overall, our results have outperformed the competition in a diverse range of variables as shown on the following slide, number 11. The bars on each chart, except the chart on return on capital, represent marketshare as of the first quarter and the column to the right of each chart represents the change in basis points with respect to the year-end marketshare of each bank.

As you can see, we are the second largest bank in terms of operating income net of loan loss provisions with a marketshare of 22%. However, it is important to note that we were the leader in terms of growth during the quarter with a rise of 101 basis points over December 2010, considerably shrinking the marketshare gap with the leader from 220 basis points to a mere 20 basis points. In the operating expenses, we have obtained a marketshare of 19.7%, 50 basis points below last year and considerably lower than our marketshare in operating income net of loan losses.

This in turn led to a considerable rise in net income with a marketshare of 26.3%, which is almost equal to the market leader and finally, where we truly stood apart from the competition is return on capital with a figure of 34.1% and a rise over December of 426 basis points, clearly demonstrating our sound and effective business strategy.

Now, to finish off, I would like to hand the call over to Pedro Samhan, Chief Financial Officer, to discuss in greater detail our successful advances in the implementation of our midterm financial and commercial strategies.

Thank you, Pablo. [We hope to follow] on slide number 12. As Pablo mentioned earlier in the presentation and in prior conference calls, we have directed our efforts in growing our market position in retail banking. This segment offers attractive and recurring returns and important growth expectations for individual and SMEs. Moreover, our effective penetration in this segment has permitted us to post significant results in the first quarter of this year, increasing our net income in this segment by 66% over last year's figure. We aim to continue growing our customer base in both individual and SMEs and we are paying special attention to enhancing our payment products, including credit cards and debit cards.

In order to achieve this goal, we are not only reinforcing our marketing efforts, but we are also enhancing our distribution network as we firmly believe that customers require easy access to branches and ATMs to meet their everyday banking needs. Accordingly, during the last 12 months, we added 24 branches and 275 new ATMs to our local network.

As for our wholesale strategy, we currently hold the highest marketshare in commercial loans of 20.1%. As opposed to our strategy in the retail segment, the focus in this area is to increase cross-selling. In addition, it is important to emphasize that the merger with Citi provided us with important improvements in terms of cost structures and (inaudible) synergies, which combined, the know-how of Citi and Banco de Chile's distribution network and customer base.

As you can see, this strategy improved (inaudible) from this segment by 30% over the same period last year. Also, the measures have provided important future growth opportunities, which we will continue to leverage in order to develop more international business and implement best practices for internal processing and service quality, among others.

Looking forward, we are optimistic with regard to the future economic environment and the growth expectation of the banking industry, which we expect, based on historical elasticity of loans to GDP, a growth of around 46% nominal in the next three years. Due to this expectation, as was stated, on the following slide, number 13, at the beginning of this year, we announced a capital increase of approximately $500 million and successfully issued the first stage of this offering of around $186 million with a demand of 1.4 billion that exceeded the supply by more than [13] times.

It is also important to mention that, on April 29, 2011, we completed the second step of this three-stage process, negotiated with the preemptive rights of our remaining shareholders with the exception of SAOS reaching a subscription of 84%, which raised approximately CLP92 million. The stock related to a non-exercised preemptive rights portion will be issued to the market on a future date. The final stage related to the shares of our shareholders, SAOS, which are pledged to Chilean Central Bank and of which account for about CLP158 million, should begin in mid-May.

Now if you have any questions, we would be happy to answer them.

(Operator Instructions). Tito Labarta, Deutsche Bank.

Hi, good morning and thanks for the call. So a couple of questions. First on provisions, Pablo, you mentioned that you expect delinquencies to decrease. Just want to get a sense how much more can the NPL ratio improve or would it be more stable from here on out and what would then be the expectations to provisions? Could they come down more from the level we have seen here or is this kind of a recurring level that we should expect going forward?

And then my second question in terms of net interest margin, so a little bit of pressure this quarter, but I just want to get a sense of your outlook for the year with inflation picking up, but also a higher interest rate and the shift into retail, how you see that will all impact your net interest margin. Thank you.

Well, Tito, thank you for your questions. The first one -- I would try to go through both of your questions in the same order. In terms of provisions really, we think that the banks, not only Banco de Chile, but in general the financial system in Chile is reaching a level of LRP more compatible with the past with a sturdier level. So really during the third quarter, we had a ratio about 70%. We expect to be from here to the end of the year, if you take the total year, we expect to be in a range between 70% or 80% and 90% -- about 90% or 0.9 basis points in total. So really we expect a level that is much better than the level that we had last year.

The second question regarding the net interest margin, I think that you say very well you have two different forces here. On one side, you know that the spreads in the financial system, they are decreasing. On the other side, you have an inflation where our expectation is about to be between 4 and 4.5 from here to the end of the year. That is a higher inflation than we expected when we made the planning process.

On the other side, you have the PPM or the overnight rate going up or so that even though we have a short-term impact because the repricing of the liabilities that are earlier than our assets, at the end of the day, you have a net positive impact and you start to (inaudible). So really taking all of this into consideration within that, our net interest margin would be at the level that we finished the first quarter or about. But in any case, lower than that.

Okay, great. So just to clarify and first on the provision, you said expect it for the year to be around 0.9% of low (multiple speakers)

No, I tried to say in a range between 0.7% to 0.9% and could be up to 0.9% or 0.9% in total. Remember that we are growing in consumer business especially. So really when you estimate these numbers, you have to consider the higher influence in your portfolio for the one retail banking segment. So really we think that the level should be in a range that in any case will be higher than 90 basis points.

I'm sorry, that it would not be higher than 90 basis points?

No, be higher than 90 basis points.

Okay. And then on the NIM, you expect it to be either stable or higher, but not lower, is that correct?

No, not less, a little lower because we are increasing our participation in the retail segment, as you know.

Okay, great.

Because it is easier to be lower. Well, anything can happen because you have an improvement in some other sector in the economy, maybe you had to reverse some provision, but you know something that we are expecting now. So anything is possible, but I think the range should be between 30 and 90 basis points more or less. Difficult to be above 90.

All right, thank you very much.

(Operator Instructions). Boris Molina, Santander.

Yes, thank you for taking my call. I have a question regarding the evolution of your cost. Can you please go over a little bit of which are the drivers of your cost increases and how could we expect this to influence your efficiency ratio going forward and whether you expect to increase the pace of the number of branches that you plan to open in the year and how could we think about this interest rate to infrastructure and branches going forward?

Really, I will tell you that, in general, as you know very well in the first quarter, we had a significant impact in terms of expenses, but mainly in administrative expenses, not in terms of human resource expenses because of being (inaudible) basically as you mentioned very well. And here you have one side that we are increasing our number of branches. On the other side, we are increasing our level of the salesforce payment instead of the higher level of sales. And the last is our marketing campaign in order to launch a new product and to the campaign of the image of Banco de Chile that started by the last quarter last year.

You look forward now, really even though we expect some increasing [several] expenses for the same risk, increasing our sale level, increasing obviously our number of branches, ATMs, etc., we think that the increase in terms of revenues that we expect for the rest of this year will allow us not to increase our efficiency ratio. We should be at levels that are similar to the current one, to the current level of the first quarter or slightly better.

Thank you very much.

Tito Labarta, Deutsche Bank.

I have a follow-up question just in terms of fee income, maybe you can give your outlook on what you are expecting in terms of fees.

Yes, well, instead of fees, really we think that the trends of the first quarter should be maintained. Even though you have always some threat regarding your relation here like the insurance regulation, we think that the implementation of the new regulation that is something that we are reviewing now but it is not something definitive will be enforced by the end of the year or very close to the end of the year. So really we don't expect a special negative impact for that for this year.

So really in general, we look for a similar level that we are obtaining in the first quarter. And to have participation in the market that should not be lower than 25% of the total fees in the market. As you know that in our fees, we are very strong in terms of insurance, mutual funds and then retail markets. So really easy to grow and our focus is there.

Great, thanks.

And there is (inaudible) also where we are making money.

Yes, that's good. Thank you very much.

Was answered your question?

(Operator Instructions). At this time, there are no further questions. I would like to turn the floor back over to management for any closing remarks.

Thank you, Maria. I would like to finish by reinforcing that Banco de Chile is an excellent investment opportunity. We have a leading market position in a wide variety of products and services. We have developed a strong brand position. We have demonstrated a solid profitability record and we have contracted a customer-oriented commercial strategy. We should permit us to continue consolidating our (inaudible) in every segment we serve and assist in continuing to improve our sustainable and profitable business model for our investors. Thank you and we look forward to discussing our second-quarter 2011 financial results with you.

Thank you again for joining us for Banco de Chile's first-quarter 2011 results conference call. You may disconnect your line at this time and have a great day.