Banco de Chile (BCH) 2011 Q2 法說會逐字稿

Good morning, everyone, and welcome to Banco de Chile's second-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's a pleasure for me to share with you our comments on Banco de Chile's second quarter 2011 financial results. As mentioned joining me in this call is Pedro Samhan, Chief Financial Officer of Banco de Chile. As a reminder a link to the slide presentation is available on our website, www.bancochile.com within the Investor Relations page.

To begin, I would like to share with you on slide number two, second quarter 2011 highlights. During the second quarter, the local economy in an environment of monetary tightening has continued showing strong GDP growth and an outstanding performance in the labor market.

In terms of the bank, we have continued posting excellent results this quarter reaching a net income of CLP114b and a return on equity that exceeded 26%.

We also recorded double-digit growth figures in loans and attractive gains in market share this quarter. We believe that this is evidence that we have entered into a solid growth cycle.

Finally, we have successfully completed the last step of our equity offering collecting roughly $450m through the placement of 3.4b shares.

Please move to the next slide, number three. The local economy continues growing steadily while moderating its velocity due to a slowdown in consumption and continued withdrawal of monetary and fiscal stimulus. Notwithstanding, sectors associated to private consumption such as commerce and services continue to lead growth.

Meanwhile, investment continues to grow strong due to positive business sentiment and expenses associated with the post-earthquake reconstruction process. We expect that GDP during the second semester will moderate growth and converge towards 5% ultimately recording a growth above 6% for 2011 and above 5% for 2012.

In terms of employment as shown on the second slide -- on the second chart on this slide, one of the key factors of rapid -- of the rapid recovery of the local economy has been the strong creation of jobs which has kept the unemployment rate around 7%, holding the dynamism of private consumption.

The outlook for the remainder of 2011 is positive, making it possible to expect that the unemployment rate will be located below 7%, reflecting the positive seasonal effects of agriculture activities during the last quarter of this year.

On the following slide, number four, it shows the upward trend that has been observed in the inflation as measured by the Consumer Price Index during the last twelve months, accumulating 2.2% (sic - see presentation) between December and June and 3.4% year on year. However, the core CPI rate which excludes volatile components such as food and fuel experienced a more limited growth.

Importantly, inflation expectations after a rise during the first quarter that accelerated the rate hikes of the monetary policy interest rate in the second quarter of 2011 have trended downwards. Indicators are now pointing to an inflation rate of about 3.5% in one year and 3% in two years.

During the second half we expect inflation to be lower than in the first half, accumulating at the end of 2011 an annual increase of 3.5% to 4%. According with that, we expect more moderate increments in the policy rate for the second semester ending the year at a rate around 5.75%.

In relation to the performance of the banking system on the next slide, number five, demonstrates the positive evolution of the banking industry in terms of results and business volumes. If you look at the chart on the left you'll see that net income reached CLP488b in the second quarter of 2011 up by 12% over the same quarter last year and equivalent to a return on equity of 21% -- on average equity sorry. This performance is totally due to the higher operating revenue.

In terms of volumes, volumes increased 13% year on year in line with the macroeconomic performance. By product, consumer loans led growth with a 17% year-on-year increase substantially higher than what was recorded in mortgage and commercial loans. For the remainder of the year we expect a slight moderation in the growth rate where total loans should grow at an annual rate of around 14% to 15% nominal year on year.

In terms of P&L we should see a positive effect in net interest revenues due to the rise in loans and higher margins in deposits due to the related increase in interest rates and a negative effect due to the lower inflation revenues from the net US GAAP position that the banking industry has.

Undoubtedly, the bottom line for the future quarters will depend on the ability of the banking industry to keep credit costs low and maintain high levels of efficiency.

On the next slide, number six, begins our discussion on our consolidated results. We posted another solid quarter with a net income of CLP114b which represents approximately a 6% year-on-year increase.

The chart on the right provides a brief introduction to these results. As one can observe, the rise in net income was driven by a strong increase in operating revenues and a moderate improvement in credit quality, which was partially offset by an increase in operating expenses related to certain extraordinary provisions. The latter will be discussed in greater detail further on in the presentation.

On the following slide, number seven, is a closer look at our operating revenue. On a quarterly basis we have been able to consistently raise our operating revenues over the last few quarters. When compared to the second quarter of 2010 we raised this figure by 10%. This was primarily due to a high growth rate in net interest revenues and fees as shown on the chart on the right, which generated 18% more over the same period last year.

The rise in net interest revenue was supported by our strong growth in loans, the factor of monetary policy rate hikes which permitted us to generate higher interest revenues due to our excellent funding structure and non-interest bearing liabilities and the rise in inflation due to our net UF asset position.

These gains were partially offset by temporary repricing effects as a result -- as our interest-bearing liabilities reprice more quickly than our interest earning assets.

Similar to the first quarter of 2011, our financial operating income and foreign exchange transactions have generated less than their historic running rate. This is mainly due to the strong rise in interest rates and its effect on our fixed income securities and derivatives which resulted in lower trading revenues and realized gains from AFS instruments. Additionally, the lower volatility in different market factors has negatively impacted the results from trading positions during the quarter.

On the following slide, number eight, is a closer look at our operating revenues from our core business segments. Operating revenues from our core business segments rose 15% over last year representing 97% of our total revenue generation versus 92% in the second quarter of 2010.

The key drivers for these figures were a firm rise in loan volumes, a strong increase in fee revenues especially from our retail segment, higher business activity in most of our subsidiaries, the positive effect of the increase in the monetary policy rate on demand deposit accounts which rose from 0.5% in the second quarter of 2010 to 5.25% in the second quarter of 2011 and finally, the positive effect of inflation on our net UF denominated asset position. These drivers were partially offset by lower spreads due to the higher competitive environment.

Loan growth has definitely been one of the key drivers for revenue generation this semester and we expect this for the coming period. This quarter as demonstrated on slide number nine was outstanding in terms of growth. On a year-on-year basis we grew 18% and quarter-on-quarter an impressive 7%. When compared to the top five banks we ranked first in terms of quarter-on-quarter volume growth and in terms of market share expansion where we captured 47 basis points during the period and 76 basis points in 12 months.

In addition we have maintained our solid growth figures in retail banking as demonstrated on the following slide number 10. Both these charts on this slide demonstrate that loans to individuals and to SMEs are growing at a very strong year-on-year pace of 19% increasing their velocity during the quarter 4% and 6% respectively.

Of this growth, mortgage loans continued to excel and have captured 90 basis points in market share reaching 15.7% at the end of June. As for consumer lending, the positive economic environment has maintained strong loan growth, posting a 19% increase in installment loans and a 24% rise in credit card loans.

As for our loans to SMEs, this area is leading our commercial loan growth with a rate of 19% year on year and represents roughly 13% of our total loan portfolio. Our strategy is focused on improving products and value-added services, optimizing service models especially in areas outside of Santiago and improving response times with regards to credit analysis and approvals.

One of the key competitive advantages of Banco de Chile is based on our more profitable funding structure as demonstrated on the following slide number 11. Our solid brand has permitted us to obtain the highest market share in zero-interest-bearing demand deposits of 24.2%, in other words almost CLP1 of every CLP4 deposited in the banking system are trusted at Banco de Chile. As a result these funds account for 25% of our total funding as demonstrated on the chart on the right, which is substantially higher than the closest competitors and the average in the banking industry. And thus this funding structure allows us to capitalize more effectively the rise in nominal interest rates, generating higher revenues from our demand deposit accounts.

Another key competitive strength is our solid fee-based revenue generation capability as demonstrated on the following slide number 12. Our solid growth in fees is based on our attractive value offering which we provide our customers thus generating an opportunity to increase cross-sell and up-sell ratios in every segment we serve.

Most importantly, checking accounts and credit card fees grew by 11% year on year thanks to a rise in product usage rates and expansion of our ATM network. Mutual fund fee generation also grew strong as a result of an improved offering that translated into higher margins. Our firm growth in retail products drove an increase in insurance revenues as a result of our ability to effectively cross-sell customers and the strong year-on-year rise of 57% in trading turnover rose fees in our stock brokerage business by an impressive 30%.

As compared to our peers we are the leading bank in terms of fee generation. Our ability to capture 26% of the market share in fees which generate 25% of operating revenues clearly sets us apart from the competition.

On the next slide, number 13, begins our discussion of credit quality, which is another key competitive advantage of Banco de Chile. In terms of delinquencies as measured by our 90-day past-due loan portfolio and demonstrated on the chart of upper left we have consistently improved the ratio from 1.55% in the second quarter of 2010 to 1% in the second quarter of 2011 in line with the better economic situation seen during these last twelve months.

This improvement in asset quality translated into lower loan loss provisions as a percentage of average loans when compared to the current -- when comparing the current quarter to a year earlier. Today and when compared to our peers and the banking system we continue to maintain the lowest loan loss provisions ratios as demonstrated on the chart on the right. In this regards we are very confident that we maintain a superior and efficient risk return ratio within both of our retail and wholesale segments. This includes our ability to manage effectively all aspects of the credit cycles including our rigorous credit assessments aligned with our segmentation policy, firm controls to guarantee proper application of credit policies and detailed monitoring of changes in the portfolio risk.

Moving on to slide number 14, we can observe our efficiency ratio dipped during the second quarter reaching 50.2%. This rise in costs was mainly due to a CHP22.4b pencil provision related to partially recognize the effect of collective bargaining agreements. To date we have reached agreements with two of the three groups that represent our unions and which amount to about 74% of the unionized workforce anticipating the related collective bargaining process. The collective bargaining process for the other group, which corresponds to approximately 1,600 employees, is still in progress.

The remaining rise in expenses is primarily from IT, marketing, outsourced sales force expenses and our distribution network as a result of higher business activity.

Excluding the temporary effect of the provisions for collective bargaining agreements, our cost/income ratio would have been 43.3% in the second quarter of this year.

I would like to stress that our strategy continues to search for new ways to improve our operating efficiency through projects that aim, among others, to continue to increase productivity in our branches, improve online sales channels, and redesign core processes and automate back office activities.

Moving on to slide number 15, I would like to discuss our successful equity offering. The process was formally approved at an extraordinary shareholders meeting held on January 20 and was fully completed in July, successfully collecting approximately $450m. The offering had an extraordinary reception from the market, reflecting the great confidence that exists in our management and our financial strength, our growth strategy and our competitive position to achieve the goals we set.

This offering allowed us to increase the capitalization of the bank with a rise of approximately 1.2% in our [Basel] index, without considering the usage of subordinated bonds. The increase -- this also increased our free float from 12.1% to about 15.5%. s

Now, to finish off, I would like to hand the call over to Pedro Samhan, Chief Financial Officer.

Thank you, Pablo. Please move to the next slide, number 16. First I would like to emphasize that our net income has been very strong during the quarter in spite of the extraordinary provision expenses. We recorded solid balance sheet figures, with an impressive 7% growth in loans within the quarter, and captured 47 basis points of market share.

In addition, our equity offering provided us with sufficient regulatory capital to continue growing strongly without restrictions.

As shown on this slide, in spite of our capital increase, we have retaken our leadership position in return on average capital, posting an excellent return of 30.4% for the first semester of 2011, clearly demonstrating our ability to implement our solid strategy.

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

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

Hi, good morning, Pablo and Pedro. Thanks for the call. Just a couple of questions. First, in terms of your net interest margin, I saw a nice increase in the quarter. Just wanted to get a sense of your expectations going forward. Do you think there could be some further margin expansion for the rest of the year, or do you think now it will probably remain stable from these levels?

And then a second question in terms of asset quality, also saw somewhat of an improvement in the quarter. Just want to get a sense, if going forward, if you think there could be further improvements, or when do you think the cycle will start to change and we'll start to see some deterioration in the loan portfolio. Thank you.

Thanks, Tito, for your question. Let me go one by one. In term of the second semester or the next quarter, really you have different forces in term of the implication -- the underlying implication in term of the results. On one side, we think that we are going to continue growing in our asset level, in our lending volumes. And really we displayed that maybe it would be going down a little bit more, on one side.

On the other side the inflation, obviously that is a factor for the rest of the year. It's lower than the inflation that we have during the first quarter. On the other side, you have some impact in term of the repricing of our asset and liability that we mentioned before, but this impact mainly will end up during the -- by the end of the third quarter or the beginning of the fourth.

So really you have a lot of forces that could make it a little bit better or a little bit worse the next two quarters. So really, making a summary, I could say that we expect something that should not be lower than what we have done during the first semester, but not necessarily in order to think that we are going to grow strongly during the second semester in term of the net income.

In term of the other question the asset quality, that is another factor that really is important to mention. As you can see during the presentation of Pablo, really we already recognize some impact in term of some specific corporate customers. So really the provision against the total loans indicator should be a little bit better or more or less the same, but, in any case, it will be deteriorated.

Sorry, so just to clarify, so first on the -- you said you expect that net income will be stable for the second half of the year or --

No, no --

[Was that for] net interest income --

No, no. Let me tell you -- you talk about net interest margin?

Yes.

In term of the net interest margin we think that all the forces that I mentioned before will mean that the second semester will be slightly lower than the first one. Because of the impact of inflation that we expect, the repricing of the asset and liability will be higher than any other positive impact in term of the lending growth or the loan growth that we have. So really, net-net, we think that could be slightly worse, but not significantly. Just slightly.

Okay. And that's for the net interest margin, right?

Yes.

Okay, great. And then also you said in provisions, you said the asset quality could be similar or better, but then that provisions could get worse? I didn't completely understand you.

No, no. I told you before that the provision level that we expect for the second half should be a little bit better than the level that we have during the first one, similar or a little bit better.

Okay, great. Thank you.

You're welcome.

(Operator Instructions). And your next question comes from the line of Boris Molina of Santander. Please go ahead.

Yes, thank you for taking my call. Congratulations, fantastic results. I have a couple of questions regarding the parameters of these collective bargaining agreements and how do we expect this could affect results going forward. I know you made a provision, so just to understand a little bit the mechanics of how this should move going forward and whether we should expect pressures on the cost side from wage increases.

The second question I have is regarding the evolution of consumer finance lending in Chile in your operations, whether you expect consumer volumes to continue strong accelerating? What type of consumption is being financed here? Is it durable goods; is it a bit more discretionary spending? How do you feel this is going to evolve going forward?

Yes. Answering your first question in term of the collective bargaining agreement, as we mentioned before, most of the impact was recognized during the first half and during the second quarter. We have still something pending that could have an impact, an additional impact during this quarter, but it should be much less -- much lower than the impact that we had during the second quarter. So really, in this case, my answer is there is some -- still some impact that should come, but it should be much lower than the impact that we had during the first and second quarter.

On top of that, you have another impact in the negotiations that is obvious because you're giving some additional [contingent] to the workers that already should have some impact in term of the operating expense, but is not something significant.

So really, net-net, we expect additional impact, but much lower than the impact that we have in the second quarter.

In the -- what was the other question related to consumer finance lending?

Yes. What type of -- what are the sources of demand in terms of income segments and what type of credit lines or consumption is being financed? Just to get an idea of how you perceive the confidence in consumers and the sustainability of growth in consumer lending.

Yes. Well I would say that, in general, you have two effects here. On one side, in general, in the second half you have first, for seasonal reason, you have more activity in term of this segment. However, having said that, at the same time, the trends, the growth trends that we have had during the first half has been impressive. So really we should not expect something similar during the second half.

If you combine both effects, you should have a growth that should be similar or slightly lower to the growth that we have in the first half in term of the market and in term of the bank.

And are people financing a discretionary spend, or do you see more acquisition of consumer goods, cars or -- how do you -- how do we understand what Chilean consumers, what type of demand are they satisfying? How do you feel that the -- is it a sign that confidence is improving and we expect this is going to be --- because there was a sustained, relatively strong consumer finance cycle a couple of years ago. And then when the economy slowed down, this turned out to be a source of a little bit of problems. So my question is more to see understanding of whether you feel that we are entering another positive cycle that could last several years, or this is some, a more steady cycle relative to the previous one?

I would say, as I mentioned before when I told you that during the second half we don't see the same trend except -- with the exception of for seasonal reason, is because really we think that this trend of very high consumption in term of consumers will be reduced during the -- from now on.

Okay.

It will reduce and should not follow the same trend that we have had so far, but not so much. I am not thinking that really we are going to have a recession or something like this. But not with a similar trend that we had during the first half, with the only exception that we have a seasonal -- some seasonal reason during the last quarter that could compensate the trend that I mentioned before.

Wonderful. Thank you very much.

You're welcome.

(Operator Instructions). And I'm showing that there are no further questions at this time. I will now turn the call back over to Mr. Samhan for any closing remarks.

Thank you. I would like to close this call by emphasizing that our strategic goals, as you can remember, of growing our retail segment, increasing profitability in wholesale, improving our efficiency, and enhancing customer service, really is paying off, and is evident in the growth figure of our core business segment and in our healthy asset quality. This, in effect, is setting the path to continue reporting attractive results even in a period of more normal inflation and higher competition. Thus we are confident that we will continue our solid track record and generate greater value for our shareholders. Thank you and we look forward to discussing our third quarter results.

Thank you. This concludes today's second quarter 2011 results conference call. You may now disconnect.