Banco de Chile (BCH) 2012 Q3 法說會逐字稿

Good morning, everyone, and welcome to Banco de Chile third quarter 2012 results conference call. If you need a copy of this press release issued yesterday, it is available on the Company's Website at www.bancochile.cl.

Today with us, we have Mr. Pedro Samhan, Chief Financial Officer, and Mr. Pablo Ricci, Head of Investor Relations.

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 Ricci. Please go ahead, sir.

Good afternoon, and welcome to our third quarter 2012 conference call. It's a pleasure for me to share with you this quarter's results.

To begin, on slide number two, I would like to highlight or outline the main topics of this call. First, we'll talk a little bit about what's been going on in Chile's economic environment and the banking industry, followed by a review of our financial results and leading profitability, and finishing off the call with a brief overview of our recently approved equity offering.

Please turn to slide number three. During the quarter, the economy continued to remain strong despite the global economic downturn, achieving economic figures over market expectations.

In GDP, we grew 5.4% year over year in the third quarter, maintaining the pace of the previous quarter, and accumulated an annual increase of 5.4% as of September.

Positive expansion in the Chilean economy is explained by sectors such as Commerce, Construction, and Services, which boosted by a total performance of aggregate demand above 5%.

In fact, aggregate demand during the last two quarters returned expansion above GDP, as you can see on the chart on the upper right, driven by higher dynamism of private consumption and stable performance of investments.

This has generated a strong fundamental, such as low unemployment rates between 7% all year, higher consumer and enterprise confidence level, (inaudible) banking sector and dynamic (inaudible).

However, during 2012, sectors related to external demand have been affected by global economic tension causing a decreasing growth in exports, due to lower external demand, commodity prices as compared to 2011.

This together with slower decrease in imports has impacted our current account deficit to reach a level of around 3% of GDP.

Nevertheless, growth expectations for 2012 have steadily revised upwards. The last economic surveys point to GDP growth of around 5% for 2012 and 4.5% for the next year.

Please turn to slide number four. Unemployment continues strong during the quarter with a very low rate of 6.5% in line with positive evolution of GDP and the sentiment from enterprises.

Regarding inflation, CPI evolved slightly below midterm goal of the Central Bank's 3%, reaching a figure of 2.8% year on year at the end of the quarter. On a quarterly basis, third quarter CPI grew 1% while the US was negative 0.2%, due to the lag of which CPI is due at discount rates, still taking -- the US still taking into account the negative variation of the CPI ratio in the second quarter of 2012.

According to the last figures of inflation, we expect the CPI rate will increase by about 0.5% in the fourth quarter of 2012 in the US and change by around 1.3% in the same period.

So, we expect at the year end, CPI should reach a level of around 2%. And for the US, it should be around 2.7%.

Regarding monetary policy, the Central Bank has kept the interest rates at a neutral value of 5% (inaudible) economy that growth is at level (inaudible) long-term rate, lower unemployment, and stable inflation expectations. Regarding this, the market doesn't expect changes in upcoming months.

Please turn to slide number five. During 2012, total loan growth for the banking industry has shown volatility amongst quarters. After rising the second quarter, loan volumes grew modestly at 1.5% in the third quarter of 2012.

On a yearly basic, total credit reached 12.5% year over year, increase in nominal terms continuing with the slowdown projected for 2012.

The quarter moderations was mostly driven by this deceleration in commercial loans, which grew 1.1% in the third quarter of 2012, boosted by the appreciation of the Chilean peso and the drop in inflation.

This is partly offset by an acceleration in consumer loans in line with the solid fundamentals for private consumption.

In terms of results, net income recorded a decrease this quarter when compared to both the prior quarter and the same period a year earlier. This was mainly due to a reduction in operating income and the rising operating expenses.

The drop in operating income quarter on quarter compared to the same period last year was influenced by the deflation which occurred during the third quarter affecting the US structural gap position of the banking system and also the higher operating expenses when comparing the year-over-year figure.

Please turn to slide number six, which begins our discussion on our consolidated results. The third quarter remained very [possible] despite the lower-than-average inflation, posting a 2% increase as compared to the same period last year and a decrease of 7% quarter on quarter.

Nevertheless, our solid business strategies continue to outperform the market and have further consolidated our leadership position in the Chilean banking industry. As a result, we recorded CLP329 billion year to date and CLP100 billion during the quarter, far exceeding all of our competitors.

As you can see on the chart on the bottom right, we managed to represent an impressive market share of 32.7% during the quarter, almost doubling our closest competitor and equally [inspiring] 28.9% of market share in the year-to-date figure.

It is also important to mention that tax reform that increases the Company tax rate from 17% to 20% was officially put into place during the quarter, generating a one-time net gain in our results, due to the normal deferred tax assets banks hold on the balance sheet.

Moving on, the generation of a robust net income figure can be clearly seen on the next slide, number seven.

Despite the large -- despite the drive from the large decrease experienced during the last quarter in inflation, the lower financial income from US dollar-peso position due to the appreciation of the Chilean peso, our core business operating revenues have remained very strong, generating CLP305 billion in the quarter.

The strong growth in our core business is unmistakably seen in the chart on the right side.

Our customer revenues have grown constantly, offsetting the temporary reduction of noncustomer revenue. It is also important to mention that this expansion has been generated from our strong loan grown combined with the proactive cross-sell and lending to spread management.

All of this is (inaudible) by our competitive advantage in funding cost, explained by the leadership positions we hold in noninterest-bearing deposits together with our lower cost of (inaudible) interest-bearing liabilities due to their excellent credit rating.

Going forward, we expect our core business will continue to grow strong, while noncustomer revenues should increase as inflation, investor revenues return to more normal life level.

On the following slide, number eight, is a snapshot of our loan portfolio. Here, you can see that total loan volumes grew by 10% during the 12-month period and were flat quarter on quarter.

However, if we break this down by the two segments as shown on the slide, we can see that wholesale has grown at a slower pace, where we recorded a 4% year-on-year growth and decreased by 2.3% during the quarter as a consequence of both a slowdown in the industry and a decision to balance growth and return in light of the risk we assume in approving loans.

On the other hand, our retail book has continued to grow at double-digit rates of 15% year over year and 2.5% quarter on quarter, in line with our strategic focus.

Mortgage loans also posted, once again, one of the highest growth rates of -- very high growth rate of 19% year over year and 2.4% quarter on quarter, reaching a market share of 17.1%, while commercial loans to SMEs also grew strongly at 14% year over year and 2.7% quarter on quarter.

In terms of our consumer book, this product grew at 11% year over year and 2% quarter over quarter. This growth is due to our more prudent approach regarding the lower-income consumer division, which was put in place in the second semester of last year.

Excluding this area, consumer loans to middle- and upper-income individuals grew 14% year over year and 3.3% quarter on quarter.

Before I move on, I'd like to highlight a few of the successful initiatives that we've implemented in order to continue increasing the penetration in the retail segment.

First, we have been diligently improving our loyalty program in order to increase the usage rates for debit and credit cards. These improvements have grown, have generated a growth of around 21% year over year revolving credit on cards.

Secondly, we have continued increasing our presence in residential mortgage loans, ranking us first in terms of volume growth year over year and raising our market share in 109 basis points, based on our comprehensive plan to attract customers as well as competitive [risk].

Finally, we've continued our strategy to increase our penetration in SME segment by means of a relationship-based service model and tailor-made financial services that prospered, especially in regions outside of Santiago, and that helped to gain an important increase in market share.

In relation to asset quality, as shown in the next slide, number nine, loan loss provision reached CLP40 billion in the third quarter of 2012, dropping by CLP10 billion quarter on quarter and CLP5 billion when compared to the same period last year.

The main drivers for this decrease were, first, improvements in our wholesale book, which was in -- which were influenced by the release of provisions related to one specific customer of approximately CLP8 billion and, on the year-on-year figure, the positive effect of the appreciation of the Chilean peso on provisions for loans denominated in foreign currencies.

And second creative provisions from our individual book of CLP15 billion year on year and CLP6 billion quarter on quarter, which were associated to the following, volume growth in consumer loans of 14% with a focus on credit cards, which have a higher provision rate but have a larger spread, a more risky environment that has impressive following the (inaudible) event, as well as a one-off related to the bicentennial write-off, eliminated all the negative information for debts below $5,000, approximately $5,000, from historical records.

These factors have been offset by proactive management of our loan book, which -- where we have loan growth especially in the lower consumer finance division and implemented important initiatives to enhance the collection process, including a rise in headcount, specialized personnel, and changes to our collection strategy.

As you can see on the chart on the left, these initiatives, we have been able to successfully lower our individual nonperforming loan-to-loans ratio from a peak of above 1.3% to 1.07%, significantly below the average in last year.

Moving onto slide number 10, we can see that our operating expenses remain under control, recording a 5% increase over last year and just 2% above last quarter. Higher personnel and administrative expenses explain the year-on-year rise.

Personnel expenses increased in line with first the 12-month accumulated inflation since wages are invested at the CPI rate; second, salary increases related to the collective bargaining process carried out in 2011; and third, a moderate increase in headcount in our commercial, call center, and collection areas to cover our growing commercial activity.

In terms of administrative expenses, the rise was mainly profit by an increase in marketing campaigns in order to maintain a leadership position in brand recognition and to a lesser extent outsourced workforce expenses related to credit assessment and sales personnel.

Through strict expense management, we have maintained our efficiency ratios under control. For example, when we look at our accumulated cost-to-income ratio, as seen on the chart on the left, this indicator was flat year over year and, when considering the collective bargaining agreements held last year, at 48.7%.

This figure compares very favorably with the average of the industry which was more than 400 basis points higher than our ratio.

On a quarterly basis, this cost-to-income rose in the third quarter due to lower operating revenues, mainly explained by lower-than-average inflation for the period.

Management obtains the commitment to continue to gradually improve our efficiency ratio.

On the following slide, number 11, the closer look at funding and capital ratios, I think the most important highlight of this quarter is the fact that we have continued diversifying and extending durations in our funding base.

In the third quarter, we issued in bonds in Hong Kong for equivalent to $50 million. And subsequently, in October, we were the first bank to issue bonds in Peru for a total of about $28 million.

These new issuances are part of our strategy to diversify, to increase our visibility, and to increase our visibility abroad. We also issued local bonds for $212 million during this period -- UF, sorry, UF212 million, although these issuances have allowed us to increase the duration of our funding book.

Similar to our prior bond places, both of these foreign issuances were placed in local currencies and swapped back to Chilean currency.

On the deposit side, we recorded a rise of 9% year over year equal to an increase of 24 basis points in market share, thus maintaining our leadership position with the participation of 23%.

This leadership position is financing some demand deposits together with our excellent credit rating of A-plus, the highest in Latin America financial industry amongst private banks. And their very large retail customer base with -- base have allowed us to continually -- continuously post a lower average cost of funding amongst private banks of only 3.5%, as you can see in the bottom left side of the slide.

When compared to our peers in the banking system, we maintain an advantage of around 50 basis points in cost of funding.

Regarding the capital base, our capital ratios remain above our regulatory limit of 10% per Basel index. But, as a result of our successful growth strategy, they have decreased to a level similar of that we had prior to our last equity offering.

And lastly, on the following slide, number 12, I would like to highlight how we have capitalized on our equity offering, which occurred almost two years ago.

During this time, we have become the largest bank in terms of net income in Chile. And we have become the private bank with the best credit rating in Latin America.

In addition, we have also quickly recovered a profitability multiple in terms of return on capital with respect to the banking system and our main competitors.

By September, we have generated more than 1.9 times the average return on the system and 1.4 times the profitability of our peers. In fact, this performance even exceeds multiples produced prior to the 2011 capital increase.

Now, to finish off, I'd like to pass the call over to Pedro Samhan, Chief Financial Officer of Banco de Chile.

Thank you, Pablo. Please move to slide number 13. To begin, I would like to emphasize that our plans in the midterm are as ambitious as they were in 2011, when we raised capital. Since that time, we have grown larger than expected, positioning the Banco de Chile as the leading financial institutions in many of our business lines and becoming the market leader in terms of profitability.

There is an equity raising announcement of CLP250 billion to be [priced] and finish it around the end of November. This is aimed to support future growth while maintaining capital adequacy ratios.

The decision to raise equity is based on the following. First, we expect that the Chilean economy and financial system in coming years will continue to grow strongly. We project an annual growth rate of around 5% for GDP per year for the next three years.

And consequently, we estimate an annual (inaudible) growth rate of about 10% per year for total loans of the system. Our goal is to grow above this, while maintaining a clear focus on expanding the retail business.

Second, this goal requires an appropriate balance between growth and capital adequacy. If our growth reaches the (inaudible) rate and we hypothetically capitalize 30% of the (inaudible) income of this financial year, by 2015, our total capital ratio will reach near 17%, the minimum required by the local regulator.

This new rating will allow us to maintain higher ratios that will continue to support our rating classification. That allows us to continue to benefit from low-cost funding in local and international markets.

Lastly, the capital increase should aim in improving the daily trading volumes of Banco de Chile, especially due to an extension of LQIF to not subscribe their shares in second (inaudible) held and directly through SM Chile.

A higher liquidity in our stock is important as it attracts more investors and can affect positively the [origin] of our share.

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

Thank you. The floor is now open for questions. (Operator Instructions). And your first question comes from the line of Chris Delgado with J.P. Morgan.

Hi. Good morning. I just had one quick question. Just given the recent weakness in inflation in Chile, what is kind of your outlook going forward for net interest income and your NIM kind of looking at the fourth quarter and into 2013? Thanks.

Yes, thank you very much for your question. As you said very well, the inflation of the last quarters that we expect -- more than inflation, the US variation that is the relevant variable in order to measure our business that we estimate as be close to 1.2%, 1.3%, that is the highest quarter in the year, will allow us to project some NIM in the last quarter that could be something very close to the first quarter of this year, something between 4.6% or 4.7%.

Instead of that, we can end up the year with another close to 4.4%. And the projection for the next year could be a little bit similar to the level of 2012. We don't see major change instead of the NIM projection for next year. You compare with the total number for this year.

That is important to mention. That is, you compare our estimation of the NIM for the last quarter vis-a-vis the -- for this quarter of the -- the fourth quarter of this year vis-a-vis the third quarter, we are talking about an increase instead of percentage of about 20% more or less, between 15% and 20%. That is a very significant number.

Okay. Great. Thank you.

You're welcome.

Your next question comes from the line of [Philippe Delatorec] with CHG.

Good evening, everybody. I would like to ask something regarding the capital increase. Would like to know if SAOS is going to sell their share of the capital increase like an open book or they are going to ask something like a close reduction. I believe that the last year, it was a closed action, not an open book.

Yes, well, this is exactly the same of last year. They fixed the price and then make a sale, a closed sale, but fixing a price in advance, similar exactly -- the similar process to the process that we had last year.

Okay. But, last year, they offered their options to the Sociedad Matriz closed -- .

-- Yes, exactly the same -- .

-- But not to the market.

Yes, it's exactly the same as for the shareholder of SM, no different because of that.

Perfect. But, LQIF is going to not -- isn't going to buy those shares. So, what's going to happen with those shares?

It's Pablo Ricci. You're referring to SAOS, right, the shares are (inaudible) the Central Bank?

That's right. The SAOS options.

The process how that works is, first, those options are offered to the shareholders of series A, B, and D of the SM Chile. And that period is called the special preferential rights period. And that lasts for 30 days. And this occurs after the first preferential rights period, approximately 15 days after the end of that period.

During this timeframe, the shareholders of these series from SM Chile don't exercise their rights to purpose these options, the Central Bank can offer these options to the market. And they have a period of six months to do so.

Right. But, LQIF is going to -- referring to those stocks?

Well, LQ already declared their intension not to subscribe the special offering of the second part that was mentioned by Pablo. What it means, it means that the shares will be offered in the market. And so, this is exactly the same that happened the last year, but that year was a little bit different because they resigned in both process, in the first and in the second.

In this case, only the intention that they declare is only not to subscribe during the second period, in which case will be a similar process to the last year, offered to the market.

All right. Thank you so much.

You're welcome.

(Operator Instructions). Your next question comes from the line of Christopher DiSalvatore with IM Trust.

Hi. Thank you for taking my question. Just a quick follow up to the cost-income ratio that you mentioned, I'm just wondering, looking into -- because we've seen a trend for the industry over the past one year, and I know a lot of that has to do with income coming down.

But, I'm just wondering, what is your view going into 2013, and how much do you see the bank leveraging this and coming down to targets closer to your 45, 43 targets that you've mentioned in the past?

And I mean, how quickly do you expect that to rollout? And when might we expect -- and at what levels could we maybe expect in the near term, end of 2013 and maybe going beyond the '14, '15? Thank you.

Yes, well, instead of efficiency, we have said before, the intention of the plan and the focus, it's [improving] the efficiency gradually over the time and always trying to overcome the market instead of the variation in the future, instead of improving better than the improvement that the rest of the market could have instead of the time.

But, really, if you consider the efficiency, this year, in 2012, really, we expect to finish in the numbers that would be between 47% to 48% and from there on to continue improving gradually at levels more or less of 1% per year. In order to reach a target number close to 45%, we need two or three more years.

Okay. And this -- and how can we translate that? I mean, do you guys still see mid-level return on equity as feasible as well, like you say, just kind of one point average? Do you see that leveraging into higher ROI in the short term as well, or do you see this kind of mid-level ROI that's always been talked about by your competitor and yourself?

Is lower NIM spreads going forward a bit of a challenge? And do you see a newer target a bit lower than that, or do you still see 25 or mid-level range ROI that's very feasible?

Well, you don't find everything because you have the following environment here. First, we expect to improve efficiency in the future. We expect to continue with the level of NIM similar to a level that we have today.

We expect to increase our capital at the level that we already mentioned. So, really, in the short run, we should expect a decrease but slightly decreased instead of the return on equity in order to go back to the current level within the two or three years.

But, obviously, with all this trend that we have already mentioned that are continually consistent being disclosed, but given the fact that we are increasing the capital in about $530 million, that will [concern] about 15% of our capital base.

In the short run, we should have some insight instead of (inaudible). But, we don't see a very significant impact. Obviously, we are going to try to do the same that we did the last capital increase, where even though we increased our capital, we were able to keep our multiple even better than the rest of the industry that at the level that we had before the capital increase.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Boris Molina with Santander.

Yes, good morning. Thanks for taking my questions. One question regarding capital, could you tell us if you have any guidance regarding what potential (inaudible) capital ratio come from (inaudible) markets (inaudible) going forward?

And my second question is whether -- .

-- I'm sorry. Could you repeat because the -- your voice is not so clear in the line.

I'm sorry. Is this better?

[Not much] better.

Okay. My question was regarding capital, whether you have an guidance or analysis related to the impact that potential increases in operating and market risk associated to transitions to Basel II and Basel III could have on your capital ratios over the next year, or do you have any analysis on this front?

And my second question was, will you have an idea of what effect on the free float would take place from the current capital increase that you are performing and decision regarding the (inaudible) describing their shares [or not]? What would we expect in terms of free float expansion?

Well, instead of Basel III, we are, as you mentioned very well, we have to consider macro risk and operational risk. You know that (inaudible) are doing some exercises in order to better [mind] what would be the impact. But, as you know well also, in Chile, we don't have yet a roadmap well defined by the regulator. So, really, we have made some exercise here. But, really, it's something that is very roughly because there is not yet clear guidelines.

If you ask me about the numbers, here, you can see what is happening in the international market, where the presentation of Basel III could be for 2015. But, you are going to have an increase over the year from 2015 to 2019 really -- and exercise that we have many, we consider that this capital increase that we are doing now is very consistent in order to position the bank in a very good part for the current Basel I and thinking also and being prepared for Basel III because, if you review today what are our indicators, instead of capital, you can see that the -- instead of Tier I capital basis, we are very close to 8.8%.

And even though you can include the other risks that are not so significant instead of the ratio, you can see that we would be in an area between 7.5% and 8% that, for the time being and including the capital increase I mentioned before is very according with the potential new request of capital for Basel III.

Thank you. And in relation to the free float?

Instead of free float, you remember that, before, we had about 12%. With the last capital increase we were -- we went up to the 15%, between 15% and 16%. And now, we are thinking to be in the range of 17%, 17.5%.

Okay. Wonderful. Thank you very much.

You're welcome.

This concludes the question-and-answer section. At this time, I would like to turn the call -- the floor back to Banco de Chile for any closing remarks.

Thank you very much. Thank you, all, for joining us in our third quarter 2012 conference call.

To close, I would like to highlight our excellent performance during the first nine months of 2012. During this period, we have continued consolidating our market position, generating almost 30% of the total net income produced by the banking industry, and we had (inaudible) multiple relation to the banking system, which have significantly higher than that of same prior to the last equity offering. We have a very good (inaudible).

This outstanding performance is clearly a result of our solid business strategy, here with our proper execution and our experienced team that has been able to (inaudible) creating value for our shareholders.

We are confident that we have the tools and competitive advantage to continue doing this.

Thank you, again. And we look forward to sharing with you our year-end results.

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