Banco de Chile (BCH) 2011 Q3 法說會逐字稿

Good morning everyone and welcome to Banco de Chile's Third 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 and 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 third quarter 2011 financial results. Joining us 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.bancodechile.com within those investor relations sites.

To begin, I would like to share with you on slide number two, our third quarter highlights. During the period, the Chilean economy has continued moderate -- moderating economic growth to a level closer to its long-term rates.

In terms of the banking industry, return on average equity has remained strong, although at a lower rate than recorded in prior quarters with loan loss -- with loan growth accelerating to 5% quarter-on-quarter.

In terms of Banco de Chile, we posted the highest quarterly net income figure in the Chilean financial industry. And more importantly, on the quarter -- on the quarterly and accumulated basis we posted the highest return on average equity in the industry. Our loan growth has also remained strong during the quarter, allowing us to capture both market share in the resold segments and the wholesale lending.

In terms of our focus on continuing to grow in the retail business, this is not only translated into a significant growth in terms of loans, but also into an important increase in earnings before taxes. Finally, I would like to mention our efforts to improve our stock liquidity, has also been achieved. We've managed to significantly increase our daily trade in volume during the past two years. This has been achieved thanks to our excellent preference, as well as a conscious effort to make the bank more attractive and visible to investors.

Please move forward to the next slide, number three. During the first semester, the Chilean Economy posted strong GDP growth, associated the dynamic demand and a lower comparison base as a result of the 2010 earthquake. During the third quarter, the economy slowed returning to a level closer to their long-term rates.

At the sector level, industries associated with domestic demands such as commerce and services have shown the highest dynamism. In addition, construction and financial services are also showing a strong performance. However, expert sectors such as industry and mining have grown slower than expected. Especially the latter, associated with supply problems such as strike, and also lower grade ores. During economic slowdown, unemployment has remained stable during the year reaching 7.4% in the third quarter.

This figure has been fundamental for the performance of private consumption and credit expansion. Important to note, is that the Chilean economy has -- has had strong growth fundamental. Such as dynamic labor market, solid financial system, favorable trade term, and a diversified export basket and controlled inflation which should allow us to maintain growth rates during the following years in line with the historical trend.

Inflation as described in the following slide, number four and measured by the general price index has remained stable, fluctuating slightly above 3% over the past three months, reducing inflation expectations, which during the second quarter experienced an important increase associated with the higher commodity prices.

As of September the accumulated CPI rate was 3% and it's estimated that by year end this figure will grow to around 3.5%. However, it's important to mention that core inflation remains closer to 2%. Consistent with the afore mentioned and with the external economic environment, the Chilean central bank suspended the raising of the monetary policy rate which began in the year at around [325] and remained at -- 325.

Up [525] since June. According -- according to market expectations, the monetary policy rate is not expected to experience future -- or further increases and may decrease during the coming months. Recent international events have questioned -- questioned the microeconomics stability of the developed countries.

The next slide, number five, describes a few of the strengths of the Chilean economy which would aid in the event of further deterioration in the international economy. First, Chile has a very low sovereign risk. When measured, through CDS spreads, we compared very similarly to countries such as Germany and France and as compared to other emerging economies, we excel.

We were viewed positively because Chile has maintained an outstanding performance in terms of stability, a low public debt, and is complemented by structural surplus role which isolated us -- isolate public spending during economic cycles. As of September, the economic and social stabilization fund accumulated $13 billion, representing just over 5% of GDP.

Additionally, the central bank holds reserves of approximately $38 billion, representing 16% of GDP. Another important factor, is the revolve -- the diversified export basket with business partners from all over the world. Of which, are mostly concentrated in emerging market -- the emerging markets.

In terms of the Chilean banking system, the next slide number six, demonstrates the positive figures posted during the third quarter. Return on equity remains strong at 17%, however this was lower than the prior quarter or the same period last year, due mainly to lower operating revenues, and higher provisions for loan losses.

Operating revenues decreased quarter-on-quarter due to lower margins as a result of a decrease in revenues from inflation index assets and higher competitions as well as a decrease in fee income. In relation to higher loan loss provisions recorded during the quarter, we understand that the rise is not associated to deterioration in the macroeconomic environment, but more to isolated events and business growth.

Loan growth, as demonstrated on the chart on the right, accelerated during the -- during the period. This strong increase was lead by a rise of almost 6% in commercial loans influenced by a sharp rise in the US dollar, Chilean peso exchange rate and to a lesser extent, consumer loans which grew by almost 4% and mortgage loans which rose by 2.5%.

On the next slide, number seven, begins the discussion of our consolidated results. As mentioned earlier, we posted another solid quarter with respect to the financial industry in terms of net income, recording the highest figure in the sector. This clearly -- this is clearly demonstrated on the chart on the upper right.

Our net income of CLP98 billion during the quarter generated a return on the average equity of 21% and ranked us well above the -- our nearest competitors. Year-to-date, we have recorded CLP329 billion in net income, closing the gap significantly with the financial leader and posting the highest return on average equity of 25%. In addition, it's important to know that we have also posted the highest return on average assets amounting to 2.2% or 28 basis points higher than the next leading competitor.

On the following slide, number eight, it is a closer look at our operating revenues. On a quarterly basis, we remained -- we maintained our high revenue generation growing 9% over the same period last year. The main drivers for this increase over the third quarter were, first greater yields from our non-interest bearing liabilities as a result of higher interest rates.

Second, a strong rise in our loan portfolio, and third, additional revenues from a US dollar-peso hedge associate to allowance denominated in US dollars. This was partially offset by two main factors. A decrease in income from the management of our balance sheet gaps as a result of the lower inflation and higher funding costs.

In addition, there was a reduction in spreads due to higher competitions and a portfolio with a larger mix of corporate and residential mortgage loans. Similar to prior quarters, revenues from our core business segments have lead growth as shown on the chart on the right.

The retail segment has grown be 11% over last year while our wholesale segment increased by 23%. Our subsidiaries, which includes stock brokerage, and our mutual fund business have remained relatively flat year-on-year due to weaker economic outlook which led customers to seek safer investments and thereby decreasing stocks trading turnover and a transition to fixed income mutual funds and other safe investments such as time deposits.

Finally, the treasury of decrease operating revenues by 44% mainly due to higher funding costs and rate changes in the US-peso swap spread.

Another key competitive advantage is a solid fee based revenue generation capability as demonstrated on the following slide, number nine. Our solid fee generation is based on our attractive value offering which we provide our customers, thus generating opportunities to increase capital and up-sale ratios in every segment we serve.

Most importantly, checking accounts and credit card fees grew by 12% over last year, thanks to a rise in public usage rates, especially credit cards which increased by 34% and represents almost 13% of our total fees. And to an expansion of our ATM network.

Also important to note is a strong growth in insurance fees as a result of our firm growth in retail and our ability to effectively cross-sell customers with products that suit their needs. This growth was offset by lower business activity in our securities brokerage firm mainly as a result of a reduction in the stock trading turn over and a 9% decrease in average assets under management.

In our mutual fund business, in line with a riskier external environment, and uncertainties regarding future developments in the local and international markets. In addition, we also recorded lower fees from loans due to a decrease in prepayments from corporate customers.

When compared to our peers, we're the leading bank in terms of fee generation. We captured 26% of all fees generated in the banking industry, substantially greater than our closest competitors. Moreover, fees produced 25% of our total operating revenues and covered more than 50% of our operating expenses, clearly setting us apart from our peers.

Loan growth continues to be one of the key drivers for revenue generation. This quarter has demonstrated on slide number ten, was another upstanding quarter in terms of growth. On a year-on-year basis, we grew 23% quarter-on-quarter, an impressive -- and quarter-on-quarter an impressive 6%. When compared to the top five banks, we ranked second in terms of both quarter-on-quarter volume growth and in terms of market share expansion, where we captured 17 basis points during the period.

However, year-on-year we ranked first in terms of growth with a very strong market share expansion of 102 basis points. In addition, we have maintained a solid growth figures in retail banking as demonstrated on the following slide.

The charts on the left show that loans to individual, the [SMEs] are growing at a very strong year-on-year phase of 20% and 19% respectively. Important to note that loans to individuals have accelerated their rate of growth from 4% to 5% this quarter, with the most important increase in consumer loans that went from 1.9% last quarter to 4.8% this quarter capturing 17 basis points and closing the quarter with a market share of 22.3%.

Mortgage loans continue to excel growing at a rate of 5% this quarter and have captured 117 basis points in market share over the year, reaching 16% as of June. As for loans to SME, this area is growing very strongly with a rate of 19% year-on-year and represents roughly 12% of our total loan portfolio.

On the wholesale front, our loans in the segment have grown very strongly at 26% year-on-year, reaching CLP8.5 trillion. We associate the strong growth in commercial loans to our competitive lending offering together with the positive business [incentive] that has driven the high investment rates. Nevertheless, it's important to mention that part of this increase in wholesale lending was due to the strong rise of 9.3% in the US dollar-peso exchange rate as 20% of our commercial are denominated in US dollars.

On the next slide, number 12, begins the discussion of credit quality, a key competitive advantage of Banco de Chile. Loan loss provisions reached 1.1% during the quarter. However I've mentioned earlier, a sharp rise in the US dollar-peso exchange rate negatively affected our provisions in US dollars leading to a increase in provisioning loans.

However, the tension -- this is hinged in other operating revenues. Excluding this effect, our loan loss provisions would have been 0.94% during the quarter. In terms of delinquencies as measured by our total past due loan portfolio, which include the principal amount and installments that are 90 days overdue, has had a consistent improvement from 1.41% in the second quarter of 2010 to 0.97% in the third quarter of 2011.

Year to date we continue to maintain the lowest loan loss provisions ratio as demonstrated in the chart on the right. In this regard, we are confident that we maintain the superior and efficient risk return ratio within both our retail and wholesale segments. This includes our ability to manage effectively all aspects of the credit cycle including the rigorous credit assessment aligned with our segment policy. From controls to guarantee proper application of credit polices and detailed monitoring changes in portfolio risk.

Moving on the slide number 13, we can observe that our efficiency ratio has increased during the third quarter reaching 49.1% due to the following factors. An extraordinary charge of almost CLP6 billion in additional salary expenses related to the collective bargaining process. The remaining rise in expenses is primarily from IT out sources, sales force expenses, maintenance, and rental expenses as a result of our higher business activity and branch network growth.

Additionally, it's important to note the sharp rise in the US dollar Chilean peso exchange rate -- rate co-branding expenses significantly which are related to our incentive programs due to the fact that these costs are based in US dollars.

Excluding the temporary effect of the collective bargaining agreements, our cost to income ratio would have been 47.2% in the third quarter, in line with prior periods. I've mentioned in other calls, I would like to stress there are strategic continues to search for new ways to improve our operating efficiency through projects that aim among other objectives, to continue increasing productively in our branches, improving online sales channels, redesigning core processes, and automating back office activities.

Moving on to slide number 14, I would like to discuss in further detail the strong results of our retail segment. As one can observe on the chart on the left, our retail business in line with our long-term objectives is growing strongly, posting an increase in terms of earnings before taxes of 22%. On the contrary, other segments have remained relatively flat with the exception of the treasury area which is decreased net income due to the strong rise in the monetary policy rate raising funds faster than interest earned and rate changes in the US Peso swap spread that negatively impacted the results of derivative positions in the third quarter of 2011 as compared with the results of the third quarter of 2010.

The main drivers behind the increase in the retail segments earnings before income tax were the following, a strong growth in all credit products, which grows almost 20% year-on-year, with a significant rise in credit card loans of 28% year-on-year. The positive effect of higher interest rates on the contribution of the segment's non-interest bearing liabilities, and a solid rise in terms of fees which grew by 10% over last year and were mainly due to higher revenues from insurance brokerage and an increase in the usage rates of transactional products.

We believe that the retail business continues showing a chronic growth opportunities. For this reason, we have invested and expanded our branch and ATM network as demonstrated on the next slide, number 15. As you can see, we have strongly expanded both our branch and ATM networks by 7% and 14% respectively. This has led us to have one of the largest branch and ATM networks in Chile with 429 branches and just over 2,000 ATMs as at the end of the third quarter.

As we mentioned during the beginning of the year, our plan for 2011 was to open 31 new branches. Most of these branches will be opened by the end of this fourth quarter, as you can see on the chart on the right.

Now before I hand over the call to our CFO, Pedro Samhan, I would like to briefly mention the improvements and the liquidity of our stock. Please move to the next slide. For the past few years, the bank has increased its efforts in improving the liquidity of our shares. Since 2008, our total daily average trading volume has increased from just under $2 million to $7 million as of October 2011.

We believe its rise is due to our excellent results, our equity offerings, which increased at pretty close to 15% and a conscious effort to make the bank more visible. Now to finish off, I would like to hand the call over to Pedro Samhan, chief financial officer.

Thank you Pablo. Please move to our next slide, number 17. The third quarter has been very challenging due to the uncertainty in international market as well as its effect on the local market. In spite these, we are able to post solid growth figures in that of loans which grew to 23% over last year as well as in [demand] deposits. One of our key competitors advantages, which grew 8% year-on-year.

In addition we recorded a 7% gain in accumulated net income which translated into 25% return on average equity and closed the gap significantly with the leading competitor to only CLP7 billion. And finally, our total balance (inaudible).

(Audio gap - two minutes)

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

Hi, yes good morning and thanks or the call. A couple of questions, this first one on your net interest margin, it fell quite a bit in the quarter, I know partially because of the lower inflation. But just want to get a sense on how you see the line evolving? There's a bit of a shift in the loan mix it and a faster growth on the corporate segment. So just want to know, how much that contributed? Also, given that you're growing, faster than the system, are your rates declining maybe to capture some market share? Could that have also, kind of, pressured the margin a little bit? So I just want to see how you see that evolving going forward --.

Speak up.

Yes?

Can you repeat the question and speak up a little bit? Sorry, we weren't -- we couldn't hear you.

Okay, sure. Yes, so the first question, in terms of your -- your net interest margin. It fell a bit in the quarter I know partially because given the lower inflation, but also there was a bit of a shift in the loan mix with higher lending to corporate, and given than you're growing faster than the system, I just wanted to know if that had any pressure on your margins, so I just wanted to see how that -- how you see your net interest margin evolving going forward. Now I have another question after that, but.

Well Tito, thanks for your question. You're absolutely right the last -- in the third quarter we have had some pressure. In terms of the net interest margin because of many reasons. The repricing of the liabilities which is on our asset on one side, the inflation on the other. And other is very important in the spread -- to general to corporate and consumer customers had go down during the last quarters.

So really, and this is the reason why you have the -- net interest margin that is lower than we had before. If you look forward, really in terms of the different trend we can see a higher spread, I think in the future because maybe we are going to face high -- a higher risk or so. So in terms of [this] return, we are going to increase the -- the trend will increase and the rates also and whole operation should increase a little bit on one side.

In terms of inflation really, we face a very good [amount] in terms of the last quarter, but if you predict for the next year, maybe we are shrinking in inflation close to 3%. That is not so different to a lower inflation in the long run in Chile.

However, with lower, according to our estimations of inflation that we have during this year, so really, we will go against in terms of our net interest market. In terms of repricing, obviously I think is something that is going to -- is really aside because really we think that we are finishing with the process of the repricing of liability if we can lend our assets.

So really this is a force and it's in our favor. So, really, if you combine the different force you should not expect NIM, that are going to be so different to the levels that we have during the last quarter. And if we say that maybe the last quarter, but a little bit lower than the year-to-date numbers.

Alright, thank you. And then I -- just a second question. Given that you're growing faster than the market, but you also saw an increase in provisions and just kind of given that the global uncertainty, just want to see if -- you see that's going to evolve going forward. Any concerns with either a significant slowdown in lending or that the faster growth -- could see some increase in NPLs and therefore continuing to see a higher level of provisions. So I just want to see how you see that going forward, thanks.

Well as I mentioned before, really the risk scenario is a little bit different looking forward. Not so much different, but a little bit different. And I with respect -- maybe slightly higher level instead of a loan operation versus loans. In terms of the percentage. Really it's because the rich environment, as I mentioned before, on one side. The other that has an influence in the case of Banco de Chile is that according to our strategies you can see that we are growing more in general.

With exception of last quarter, but our focus is to grow more in retail and SME segment, so really, because of that, even though you have better spread. It's in favor of our NIM and at the same time, it's against our non-operation ratio. So really we should see in the future a ratio that could be a little bit higher than the level that we are planning today in general.

Okay, thank you.

On top of that you have a significant growth in terms of loans this year and we are going to continue, we expect with an important grwoth the next year.

So then maybe, what kind of growth do you see for next year?

Really, we think that the system, but it's an estimate, very broad estimate. We think that the system will grow approximately about 8% in real terms and our intention is to gain market shares anyway.

Al right, thank you.

Your next question comes from --

You're welcome

-- the line of Boris Molina Your next question

Yes, I would like to probably a little bit -- discuss a little bit more about your outlook for next year in terms of where do you see GDP growth and the level of interest rates. And you already talked a little bit about the volume growth for next year, but maybe talk to us a little bit also on the evolution of expenses and how do you see the current rate of activity and branch openings affecting your cost base and your efficiency next year, given that probably you are going to see slower loan growth and not much an impact in margins?

How efficiency is going to play into the equation of return on equity and where you expect return equity to remain stable next year or how do see this evolving in the medium term?

Well you are asking me a lot of things at the same time.

Yes, I understand.

I have to make you a joke now. Well, let me try to answer. First, in terms of GDP growth we think that obviously Chile is going to grow at lower levels than this year. If I have to give a growth range, we have not finished our planning process yet, so really I don't have final numbers, but in general as a growth estimate, we are thinking in a number that would be close between 4% and 4.5% in terms of GDP growth.

In terms of lending, as I mentioned before, we think that in general that most people love try and match the lending growth because if [GDP grow] will continue, so really we should expect level of lending growth or loan growth close to 8% in real terms, something very close to that. So really how you [sent] that, what do we think in terms of our business? Obviously, the bank will continue growing in terms of terms of loans and in terms of the business and trying to gain market share at -- has been the situation during the last year.

In terms of expenses, our key focus, you know that our focus for growing are to grow especially in retail segment and SME, to try to improve efficiency and to maintain a good level of quality. In terms of efficiency, we are doing a lot of effort in order to improve our operations and we are going to continue doing that.

In terms of different projects, well maybe in short term, you have to make expense but you have the paid back in the medium or long-term. And we are going to continue with that. In terms of branch opening, I don't know if we have a question that you asked me, we think that we're going to continue opening new branches. I don't think that necessarily we are going to grow as we grew during the last two years, where we open about 55 branches to year.

I think we are going to continue doing that, but thinking in something more about 15 branches for the next year. That's if a normal trend in the long run, I think would be the most likely scenario.

So really in general, we think in terms of NIM and all the other things that I mentioned before to people, clearly nothing changed in terms of what I said before. In terms of provisions we really expect to maintain our indicator very -- with some improvement related to this year anyway because it's part of our strategic focus and I think so that you have all your questions, or most of your questions answered there. You have anything pending, please [within matters].

No, no, maybe something, an additional topic in obviously the issue of regulation is high in investors and analysts' minds with the transition to Basel III, et cetera. How do you see the evolution of regulatory just going forward with -- what is the probably the area where you think you're going to have to dedicate more efforts?

Is it Basel III or is it new regulation related to the collateral impact from what happened in La Polar where do you see a change in the landscape of -- in competitive landscape between retailers and banks in the consumer segment. What could we expect from the regulatory point of view?

Well in general obviously we see that there would be new regulation for the next year. We don't know exactly how we come in terms of first, if you talk about the maximum interest rate, if it's being issued in January, March, or June? And it would be the interest rate, the maximum interest rate [75, 40 or 30] but really be sure that something would come and really we have to face this change.

And clearly, it will impact the business for the whole banking industry. Very clear. In terms of mortgage, also the same, in terms of insurance, obviously you can expect some regulation and it's obvious that the -- it will have impact not only in Banco de Chile, but in the financial system as a whole.

I'm really, all with the bank -- the bank has a growth range of [4] and always it tried to innovate in order to [validate] (inaudible) in different product in order to offset the impact that this regulation could come. And on top of that, to try to improve efficiency, because with in (inaudible) that we are going to face in the future. Together with the new regulation that very sure will come, some of them, it's a matter of timing when it will come, if it's January or June.

Really we have to make additional labor in order to improve our wide efficiency and it's part of our strategic focus.

Wonderful, thank you very much.

You're welcome.

(Operator Instructions. Your next question is from Jose Barria, Bank of America/Merrill Lynch.

Hi -- hi everybody, thank you for the opportunity. I have two questions. The first one is with regards to NIM. Given the sort of change in the risk reward profile that we can expect, given your growth in retail and then the provisions that that brings. Where do you see your NIM after provisions going? Should we expect it to change from the levels that we see now or increase decrease? Just want to get your thoughts on that.

And then, also with regards to NIM, can you tell us a little bit about what in your sensitivity to inflation is with regards to your US linked assets? If you can disclose what your net position is and how we should see that affecting NIM next year? Thank you very much.

You're welcome.

(Operator Instructions).

Just one second.

Well the NIM, net of risk or provision, we think that maybe it should come down a little bit because you are going to see -- of course comparison with 2011 not in comparison with the last quarter. In comparison with 2011, because of the reason that we mentioned before, expect that the non-operation, maybe will increase in terms of ratio.

Even though [peso] should increase at the same pace or maybe even more. But you have all the other impacts, the inflation that you mentioned, inflation that we expect for the next year, and the market is affected because all the numbers that I have given you, are the numbers that have been discussed in terms of the different economies in the market.

We expect the inflation will close at 2%, 3% not 3% and 3.5% or 3.7% that would be the inflation for this year. So really this should have a negative impact. So really, if you take all into consideration, ultimately you should have a negative impact, not so strong but you should expect a slightly negative impact in terms of the net interest margin, net of provision.

In terms of the other market factor, if you consider US dollar, well you know, in our portfolio we had maybe similar to the rest of the banks. We had a portfolio more or less between 10% and 15% of our portfolio in dollar and really, obviously it's the exchange rate.

The exchange rate is very volatile. And really is very difficult to say that the exchange rate the next year will go down to [CLP450] or will go up to [CLP530]. But really we are prepared in terms of our portfolio, in terms of banking [rapid] portfolio [to view] when necessary on one side.

In terms of the savings that we have in the bank in order not to have an impact, special impact because of the fluctuation in the exchange rate in our P&L we are absolutely prepared and we have the hedge mechanism in order to avoid any special impact because of the fluctuation of the volatility of the market factors.

In terms of the sensitivity of inflation, it's clear if we have another (inaudible) position in terms of CPI adjusted assets, vis-a-vis liability, obviously a lower inflation has a negative impact if you compare the projection of 2012 vis-a-vis 2011 where we have had a positive inflation and inflation that is over the 3% of the long term target of central bank. This is my answer.

(Operator Instructions). There are no further questions at this time.

Thank you [Andrea] (inaudible). But for Chile just, the dominant position in the Chilean financial industry. We have been built on solid fundamentals based on a strong brand name, loyal customer base, extensive distribution channels and (inaudible) policies.

Going forward our focus is to continue generating growth by building profitable relationships with our retail and convention capital. Including service quality and stream lining our renovation and processes. We are confident that our solid fundamentals and strong balance sheet position will set us apart from the competition and position us accordingly for the opportunities and challenge that lies ahead. Thank you very much and we look forward to discussing our fourth quarter results.

This concludes today's conference call, you may disconnect.