Banco de Chile (BCH) 2012 Q1 法說會逐字稿

Good morning everyone and welcome to Banco Chile's First Quarter 2012 Results Conference Call. If you need a copy of the press release issued yesterday, it is available on the Company's website at www.bancochile.cl.

Today with us we have Mr. Pablo Mejia, Head of Investors 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 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. Please refer to the detailed notes in the Company's press release regarding forward-looking statements.

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 first quarter 2012 financial results. Joining me on this call is Mr. Pedro Samhan, Chief Financial Officer of Banco de Chile.

To begin on slide number two, it's an overview of the topics which we will discuss. First as in previous calls we will begin with the discussion on the economy and the banking sector followed by key financial figures for the bank and finish off with the discussion on our superior performance.

Please turn to the next slide, number three. On the first quarter of 2012, economic highlights. According to the latest figures released by the Chilean Central Bank, the local economy grew by 6% in 2012, consolidating two years of high economic growth. This demonstrates the strength of our economy despite a period of high volatility that has affected developed nations as well as the earthquake we experienced in 2010.

On a quarterly basis during 2011, the highest growth was concentrated in the first two quarters followed by a quick down turn in the second semester associated with a process of economic stimulus withdrawal in terms of a nominal interest rates, specific issues related to certain economic factors and an increase of international tensions.

However, during the last two quarters, the economy has retaken dynamism reaching an annual rate of about 5% for the first quarter of 2012, boosted by strong growth in all economic sectors and supported by internal demand. This is explained in part by lowering employment rates which have supported the growth of private consumption and positive expectations (inaudible - background noise) which have supported the increase in investments.

As a result growth expectations have risen to around 4.5% for 2012.

With regards to inflation, after reaching a peak of 4.4% in December of 2011, the CPI has shown a downward trend during the first quarter of 2012 associated with declines in food and energy prices.

It's also important to mention that a new tax law is currently being discussed and if approved the planned reductions mainly to stamp tax, gasoline prices and import duties could reduce CPI to a level around 3% for 2012. As a result, consensus estimates that the Chilean Central Bank will maintain the monetary policy rate relatively flat throughout the remainder of the year.

On the next slide, number four, is a brief overview of the main highlights in the banking system during the quarter. After reaching a peak of 4.8% in the third quarter of 2011, quarterly growth in loans has slowed reaching a growth of 2.6% in the first quarter of 2012.

In terms of loans by product, commercial loans posted the lowest quarterly growth rate while mortgage loans continue to grow relatively stable. In turn, the banking system posted a strong 12-month growth rate of 16% with double digit growth figures in all products.

With regards to financial results, the system continues to post moderate upward trend during the quarter in terms of net income mainly due to higher offering in revenues and lower operating costs.

However, when compared to the first quarter of 2011, the 3% reduction or CPL14 billion is mainly explained by higher loan loss provision expenses which experienced an annual growth of 61% associated with a less dynamic economic environment. This together with higher operating expenses more than offsets the 9% increase in operating revenues.

In terms of profitability, the banking system continues to post strong return on average capital but lower than the levels reached in the same quarter last year.

And before we begin, I would like -- before we begin to talk about Banco de Chile, I would like to briefly speak about new regulations related to the financial system. In March, the new consumer financial protection law went into effect. This body aims to increase transparency in the financial industry especially in contracts between consumers and banks.

The new law also prohibits among others irrevocable or blank mandates, modifications of fees unless [mechanisms] to do so are based on objective factors and with the consent of the consumer and that a customer has the right to terminate a service at their discretion.

In 2011, the Chilean Congress debated bills regulating the maximum interest rates for consumer loans and insurance fees related to loans for housing. Currently, there are many bills under discussion in Congress related to the maximum legal interest rates. The most well know proposal contemplates a reduction of the factor used to calculate the maximum interest rate.

This change is expected to reduce the ceiling from around 50% to a level near 35% for loans up to $8,500, equivalent to. Since the government proposal is currently under discussion in Congress we cannot determine the outcome of the law or its real impact on interest rates.

For Banco de Chile, we expect, based on preliminary estimates that around 2% of our loans will be affected by this news.

Also, the law regarding regulating insurance fees was passed in 2011 and is effective, beginning July 2012. This new law imposes restrictions and obligations to lenders such as mandatory bidding process for insurance associated with home loans and the general provisions on committed for the organization that makes loans.

At Banco de Chile, we renew our collective insurance program on a yearly basis, therefore this change will affect us beginning 2013. These changes which affect the banking industry in Chile are however not expected to have a material effect on the operating results of Banco de Chile.

In addition, it's important to mention that we have always promoted initiatives which contribute to greater transparency which directly benefit our customers. Nevertheless, we can't rule out that these new regulations may have undesired effects on the banking penetration in Chile which is a process we have worked diligently in incorporating customers into the formal banking market.

On the next slide, number five begins our discussion of our consolidated results. We began the year with a bank posting record earnings of CLP121 billion equal to an increase of 4% year-on-year and 21% quarter-on-quarter. This translated into the highest net income figure in the industry, equal to a market share of 28% and the highest return on average capital of almost 26%.

It's important to mention that our profitability has been achieved through a sustainable business model aimed at maintaining an adequate risks return ratio where we have placed objective to lead retail banking, increase profitability in our whole sale business and improved operating efficiency. Our results this quarter are clearly the result of this strategy.

On the following slide, number six, is a closer look at our operating revenues. We posted an 11% year-on-year increase in operating revenues during the first quarter. This was due to an important increase in that interest income, 21% in line with higher nominal interest rates, higher inflation, strong growth in loans and a rise in non-interest bearing deposits.

This rise was partially offset by lower other revenues related to net financial operating and financial exchange income as a result of the less favorable yields curve and lower fee revenues from our mutual funds and stock brokerage businesses. Nevertheless, fees from traditional banking products continued growing strongly as we expand our core business.

Now if we take a closer look at our core business segments, as you can see on the right side of this chart. One can note that the retail business had the strongest growth of CLP24 billion. In addition, our wholesale treasury business also grew, posted a year-on-year increase of CLP12 billion and CPL3 billion respectively.

With regards to asset quality as shown on the next slide, number seven. Loan loss provisions following the slowdown in the local economy have increased from an exceptionally low level of CLP26 billion to CLP47 billion pesos. Nevertheless, the ratio of loan loss provisions over average loans remains very healthy at 1.08% when compared to our peers and other banks in the region.

This increase in loan loss provisions is mainly explained as a trend posted in the local industry of higher delinquent consumer loans which for Banco de Chile went from 1.4% of loans in the first quarter of 2011 to 1.7% in the first quarter of 2012, yet still, very below the average rate of 2.4% posted by the banking system.

The higher delinquent loans resulted in a higher provisions for expected loan losses as this is an important factor in our group based credit risk provisioning model. Consequently, we have tightened the credit risk criteria during the assessment stage, adjusted our pricing and we have reinforced the collection efforts with the rise in headcounts at [8%] in this area.

We continue to be very confident that we maintain a superior and efficient risk return ratio within both our retail and wholesale segments. Moreover, we consider that we remain as one of the safest banks in the local industry with a coverage ratio of nearly 2 times and the private bank with the highest level of [transistical loan] allowances in the industry of CLP95 billion equal to almost 50% of our total past due loans.

Moving on to slide number eight, operating expenses recorded a 10% year-on-year growth. The increase in line with the increments shown by our commercial activity grew in proportionately at a lower rate than our operating income. It is important to mention that personnel expenses which represent almost 50% of our total cost base experienced a 9% year-on-year growth which was fueled by inflation, since wages are index to inflation.

Salary increases related to the collective bargaining process held the year, last year, the greater headcount in our sales areas which resulted in a higher variable expenses related to the greater business activity.

Another administration and other operating expenses grew as a result of the expansion of our branch and ATM network and other operating expenses.

In terms of efficiency, this indicator dropped 46% despite year-on-year increase in operating expenses that compares very favorably to the 49.6% posted by the average in the industry.

I will also like to stress that our business strategy is even more superior to the banking industry when we consider loan loss provisions and our cost to income ratio. Under this calculation we've recorded almost a 10 percentage point difference with the industry average in terms of efficiency, net of provisions. Nevertheless, we continue to believe that we can improve this levels through projects that aim among other objectives to continue to increase productivity in their branches, improve online sales channels, redesign core processes and other main back office activities.

Now, moving on to balance sheet figures, loans continue their upward trend, despite a slower rate during the first quarter of 2012, growing by about 19% year-on-year and 2% in the quarter as described in slide number nine. The profitable growth which has a potential upside as we continue to see positive economic scenario in the local market is being led by our retail banking portfolio.

We firmly believe in our strategy, to a Company and build long term relationships with both our retail and corporate customers. Along these lines, our outlook during the last 12 months has remained in line with the Chilean economic reality and we have adjusted our risk policies accordingly, maintaining an adequate risk return relationship. In turn, we have continued to grow profitably and maintain our market share during this period at 19.7%.

On the next slide, number 10, is a breakdown of our loan portfolio. As one can clearly see, individuals in SMEs are growing at a very strong pace of 20% year-on-year and 4% quarter-on-quarter despite the fact that we have tightened our credit risk criteria.

It's important to mention that the quarterly Chilean Central Bank survey state that the industry is taking a more restrictive stance in terms of credit risks. But on the other hand as a result of positive employment and wage figures, demand for credit from individuals has increased during the quarter although at a slower rate than in prior quarters.

In terms of wholesale lending, growth year-on-year reached 18% and was relatively flat during the quarter. Nevertheless, we're focusing our efforts on improving profitability of this segment in terms of loan products which provide a more attractive spread such as leasing and factoring, and increasing cross selling in non-interest earning products.

Now to finish off, I would like to hand over the call to Pedro Samhan, Chief Financial Officer, to discuss our superior performance during the first quarter of 2012.

Thanks Pablo, good morning everybody. Our [tradition] focus has been made at Banco de Chile to outperform our peers. In many different indicators are demonstrated on the next slide, number 11. The bars of each chart except the last chart on (inaudible) average assets represent market share as of the first quarter and according to the right of each chart represents the change in basis points with respect to last year's figure for the same period.

In terms of operating accounts, net of loan loss provision, we continued our trend and ranked first with a market share of 22.8%, growing 25 basis points over the same period last year.

In operating expenses, we obtained a market share of 20.2%, 50 basis points above last year's figure, by growing significantly less than most of our main competitors. In net income we placed first with a market share of 28.4% with gain of 185 basis points.

Finally, where we maintained to stand apart from the competition is in [return] on average assets. We reached an outstanding 2.2% in the quarter, far exceeding all of our competitors. I dearly believe that all of this indicators clearly demonstrate how we have effectively implemented our sound and effective business strategy to grow our [tight] portfolio, increase profitability of our wholesale segment and effectively control operating expenses.

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

Thank you, the floor is now open for questions. (Operators Instructions). Your first question is from [Marcelo Telles] from (inaudible).

Hi guys, good morning. It's actually [Delong Francois] from Credit Suisse. I just have a quick question on the efforts quality side. So if we analyze evolution of non-performing loans, the increase can be quarter-on-quarter almost 20 bps if you consider [accounts] before charge offs, which partially explains the strong sequential growth in provisions this quarter.

I was wondering if you could please provide more color on the asset quality side, so what's the outlook you expect for non-performing loans throughout the year and the consequent behave of the provisioning expenses line. Thank you.

Hold on please, I will your question.

Hello.

Thank you for your question. Really you have a good point, really the non-performing loan is increasing mainly in the consumer banking, as you mention is instead of our nonperforming loan that has grown during the last three quarters but basically explain by the increase of our retail segment, the volume in our retail segment. This is instead of absolute numbers and instead of the relative number as an indicator. Obviously the different economic environment has impacted really this indicator a level that today is very close to [1.75%].

If we look forward we think that this type of level is very stable. We don't think that necessarily it will continue increasing in the future, because you know that the unemployment in Chile is at the level of 6.6%, that is almost full employment and we don't see any big change regarding this matter. So really I could say that we are going to continue at that level that is higher than the previous that we have six months ago. But we expect stability in terms of the indicator.

Okay, great thank you. Sorry, and regarding the provisioning expenses, the evolution of these line, could you give us some sort of guidance or something like that?

Yes, I would say that the ratio that today is very close in general at the bank, as the total number is very close to 1.1%, 1.08% we don't see major change. We see that during the rest of the year we are going to have a ratio around this 1.1%.

Okay, perfect, thank you.

You're welcome.

Your next question is from Tito Labarta from Deutsche Bank.

Hi, good morning and thanks for the -- or good afternoon, actually. And thanks for the call Pedro and Pablo. My question is on net interest margins, just want to get your thoughts on how you see that evolving for the rest of the year. And particularly if there is a reduction in the maximum rate, do you think that could have any impact? So I just want to get a sense of you know how you see net interest margins for the rest of year, thanks.

Yes. Thank you very much for your question. Really as usual in this measure, you have a lot of [fact] that kind of explain the potential evolution of this line in interest margin. On the one side, we are saying that the spread are retaking trend and is increasing steadily over the year and we see that the -- this increase will be maintained or at least to maintain the stability instead of the levels that we have during the last months, during the quarter.

This is on one side, on the other side, in term of margin, you have the impact of our mix of the portfolio because we are more concentrated in growing in the consumer banking business. Obviously we have an increase in margin because of that. However, the inflation has a negative impact because we expect a low inflation for the rest of the year than the run in that we have had so far because of the new tax reform from the government if is -- it is current, really will impact two things that are very important.

One is the Stamp Tax that has a very significant impact in CPI that is about 40 basis points or 30 basis points. This is one impact. And the other instead of that, is that the in monetary, the online rate, or internet way would continue at the levels that we have today. So, really net-net, you have a combination of some positive things and some negative things.

So really, I think that at the end of the year we're going to finish with a net interest margin very similar to the levels that we have during the first quarter.

Great, thank you very much.

You're welcome.

(Operator instructions). This concludes the question-and-answer section. At this time I'd like to turn the floor back to Banco de Chile for any closing remarks.

Thank you very much. Banco de Chile continues to enjoy a dominant position in the Chilean Financial industry which has been achieved through solid fundamentals based on a strong customer base, prudent risk management and a consistent commercial strategy which focuses in growing by building long term relationships with customers' base on exceptional service model, providing new and innovative products and services and streamlining of our organization and processes.

These initiatives aimed to continue consolidating our leadership in every segment we serve and assist in continue to improve our sustainable and profitable business model for our investors. Thank you and we look forward to discussing our second quarter results.

Thank you, this concludes today's presentation. You may disconnect your line at this time and have a great day.

You too.