Banco de Chile (BCH) 2012 Q4 法說會逐字稿

Good morning everyone and welcome to Banco de Chile's fourth-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. Pedro Samhan, Chief Financial Officer, and Mr. Pablo Mejia, 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 note 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, and welcome to our fourth-quarter and year-end 2012 conference call. It's a pleasure for me to share with you our comments on this quarter's financial results.

As in other calls, I would like to begin by outlining the main topics which we will go through. First, we'll present the highlights of economic environment and the banking industry in Chile, followed by a review of our financial results, the progress of our recent equity offering and finish off with the review of the most significant achievements in 2012.

Please turn to slide number 3. During the last quarter of 2012, the economy consolidated its resilience to the downside in the global activity achieving a GDP growth of 5.6% year on year, maintaining the pace of the previous two quarters and accumulating an annual expansion of 5.6% during 2012. As a result, Chile ranked among the countries with the highest GDP growth in Latin America.

The positive expansion of the Chilean economy is explained by 12 known strong fundamentals and the solid trend of aggregate demand, which boosted sectors such as commerce, construction and services which led economic activity and more than offset the effects of the weakened external scenario.

In fact, aggregate demand continued posting expansions above GDP, reaching an annual growth of over 6% in 2012 driven by higher activity in private consumption and investments. This was generated by excellent conditions in the labor market and higher confidence levels of consumers and enterprises.

As you can see on the chart at the bottom, the recent performance in the Chilean economy has raised expectations for Chilean GDP in 2013. In fact the improvements in external scenario associated with the measures of the European Central Bank to the preserve the financial stability in the eurozone and the better performance in the Chinese and US economy would permit Chile to maintain a solid GDP growth during this year with an expansion of around 4.8% according to the last survey.

Please turn to slide number 4. We think it's worth mentioning the outstanding figures of the labor market. In the last quarter, unemployment reached 6.1% posting an annual average of 6.4% in 2012, the lowest figure in more than a decade. Moreover, job creation has been driven by good quality employment, encouraging the increase in real wages during the entire year. In addition, the support in the solid performance in private consumption, the current unemployment level should maintain a positive scenario for the retail loan expansion in 2013.

Regarding inflation, CPI grew a moderate 1.5% during 2012 and 2.5% as measured by the UF. This was mainly due lower fuel and energy prices, which offset the rise in prices of food and non-tradable goods. For 2013, it is expected that inflation will return to mid-term levels posting an annual increase of around 3% at the end of the year.

As for the monetary policy, the Central Bank has kept interest rates at a neutral value at 5% for the last 12 months due to a solid expansion of the aggregate demand, lower unemployment and stable inflation expectations. Regarding this, the market doesn't expect changes in the coming months.

Please turn to slide 5. After a moderate slowdown in the third quarter, loan volumes recovered during the fourth quarter of 2012 growing 3.6% quarter on quarter. With this, total credit reached a 12.4% year-on-year increase in nominal terms as of December in line with our expectations and posted a (inaudible) up to two times the expansion of GDP.

On a yearly basis, total loan growth was explained by double-digit growth rates in commercial, residential mortgage and consumer loans, reflecting the positive Chilean macroeconomic environment.

In terms of results, fourth quarter net income recorded an increase of [60%] compared to the third quarter mainly due to a positive UF variation which boosted operational income and in a lesser extent the lower provisions. On an accumulated basis, the Chilean banking system reached a total net income of CLP1.6 trillion, 5% lower than last year due to higher provisions and operating expenses and the negative effects of the lower inflation in the UF asset position maintained by the banking sector.

Consequently, the Chilean banking industry posted a ROAC of 16.2% in 2012, which translates into a 340 basis point reduction compared with 2011 figures due to the lower net income and a stronger capital base.

Please turn to the next slide number 6, which begins the discussion of our consolidated results. As you can see on the left, this quarter was excellent in terms of net income. We posted CLP138 billion in the bottom line, a historical quarterly record, which translated to an increase of 38% over the same period of last year and the prior quarter.

On a yearly basis, we posted a 9% increase over last year, reaching CLP466 billion in net income. This is a result of a higher commercial activity in terms of our loan portfolio, our focus in proactively managing lending spreads, a change in mix towards becoming a more retailed oriented bank, our growth in non-interest bearing deposits and to improvements in efficiency.

As you can see on the chart on the right, our solid business model has consolidated our position ranking us first with a substantial gap to our competitor in terms of net income and return on average capital and in annual net income growth.

Then turn -- our operating income, slide number 7, demonstrates how we have grown our core income over the last few quarters and on a yearly basis. I should mention for the purposes of the analysis of the slide, we have added back a CLP42 billion charge in the fourth quarter of 2011 relating to the effects of a sale of a loan portfolio which was recognized as a loss in net financial operating income and simultaneously released in loan loss provisions.

Saying that, on a quarterly basis, we improved our total operating income by 14% when compared to the same period last year and 22% when compared to the prior quarter. The latter is mainly due to the large variation in inflation that moved from minus 0.2% in the third quarter to 1.1% in the fourth quarter. In terms of the yearly figure, we increased our operating income by 6%.

As you can see on the chart on the bottom right, these figures are very noteworthy as we were able to continue growing our business even in a more complex regulatory environment with lower inflation that was 1.5% less than the prior year and a solid yield curve that reduced the possibilities for term gapping.

In terms of core customer revenue, we managed to grow consistently in every quarterly and on a yearly basis. We grew by almost 12%. This expansion is a product of our strong 14% loan growth in retail loans, stable credit spreads, excellent funding base with non-interest bearing deposits that grew almost 11% in average balances and a first class credit rating which provide us with lower cost of funds.

Please turn to slide number 8. Total loan volumes grew by 8% in 2012 and 2% quarter over quarter. However, our retail banking segment drove growth at a rate of 14% per year and 4.4% quarter on quarter. This annual growth was led by mortgage loans that are 16.4% followed by commercial loans to SMEs at 15.3% and consumer loans at 10.2%.

We have achieved these figures through successful initiatives that continued increase in penetration in the retail segment. For example, we have improved our loyalty programs in order to increase usage rates in credit cards. We observed a higher presence in residential mortgage loans based on comprehensive funds to attract customers as well as our competitive rates.

Also, we have continued our strategies to increase our penetration in the SME and microenterprise segments by a relationship-based service model that has prospered especially in areas outside of Santiago.

A moderate growth in consumer loans was due to our prudent approach regarding our lower income consumer division, which was put in place at the end of 2011 due to changes in regulation and other events that adversely affected the payment behavior of individuals.

Excluding that division, consumer loans to middle and upper income individuals grew by 13% year over year. However, due to the solid economic figures in the latter half of 2013, particularly employment, we [reached up] growth during the fourth quarter, ranking number one in the industry by increasing almost 5% in consumer loans during the quarter.

In terms of our wholesale portfolio, we have grown at a slower pace of 2% year on year and remained relatively flat quarter on quarter. This was primarily a consequence of our decision to balance growth and return. Nevertheless, we continue to actively manage lending spreads during the quarter and promoting the higher -- promoting growth in the higher profitable segment in products such as leasing and factoring. Saying that, our strategy continues to target wholesale companies and to maintain our leadership position in terms of commercial loans.

Finally, I would like to emphasize our consistent commercial strategy has successfully continued to improve the mix of our loan portfolio with the retail loans increasing from 49% of the total -- of total loans in 2011 to 52% in 2012. This is very important for us because the retail segment offers greater growth potential, more stable earnings and deposits and higher profitability.

In terms of penetration, as most of you know, Chile has a ratio of over 70% of loans to GDP, which is easily the highest in Latin America. However, as we break this down, one sees the commercial loans to SMEs are less penetrated in Chile with the ratio lower than 10%. This is one of our target areas.

On the other hand, individual loans have a higher penetration in comparison to peers, especially in mortgage loans. Despite this, we believe that the country -- as the country continues to grow, there will be room to expand individual banking especially in the middle income segment.

Please turn to the next slide, number 9, to see asset quality. It's important to mention that we have also adjusted these figures in order to analyze loan loss provisions cleaned of extraordinary events. So we have adjusted the fourth-quarter 2011 by CLP45 billion for the same events that we mentioned earlier on in the presentation in operating income and we have excluded counter-cyclical provision expenses of CLP24 billion in 2011 and CLP2 billion in 2012.

Saying that, adjusted loan loss provisions reached CLP48 billion in the fourth quarter of 2012 and on a yearly basis, it increased 28%, reaching CLP186 billion at year-end. The increase in the full-year figures was mainly due to the, first, the growth we experienced in our loan portfolio of 8%. Second, the greater mix of retail loans in our overall loan book. And third, the gradual deterioration in consumer loan payment behavior which occurred at the industry level and that began in the second half of 2011. This was stabilized in the second quarter of 2012 when we reinforced our acceptance criteria and our collection strategy.

The increase in loan loss provisions to individuals was partially offset by lower provisions from companies as it continues to show strong balance sheets and good payment behavior versus 2011.

In summary, we continue to post solid figures when compared to the industry with non-performing loans to total loans and loan loss provisions to average loans, both at 1% and both significantly below our peers and the average in the industry, as you can see on chart on the bottom of this slide.

Additionally, we remained as one of the safest banks in the local industry with a coverage ratio of over two times and we are the private bank with the highest level of counter-cyclical allowances in the industry, equivalent to 0.5% of total loans.

Moving on to slide number 10, you can see the operating expenses remained under control recording a 4% increase in the fourth quarter of 2012 over last year and only at 3% when compared to the fourth quarter of last year. It's important to mention that in 2011 we had collective bargaining agreement with our bank unions which increased 2011 operating expenses -- union expenses going forward.

Additionally in 2012, two of our subsidiaries also had collective bargaining agreements. If we exclude these charges and operating expenses of CLP28 billion for 2011 and CLP4 billion for 2012, the increase for 2012 would have been closer to 8%. The rise is due to the greater salary expenses due to the larger workforce and commercials and collection areas and the higher admin expenses from our larger distribution network, additional IT expenses associated with new technology projects and higher marketing expenses related to sales campaign.

All in all, this moderate growth in expenses has translated into an excellent cost to income ratio which closed 2012 at 47.2% and compared very well with the average in the industry of 51.2%, and the increase in trend showed by our peers in 2012.

Additionally, we recorded even better efficiency ratio in the fourth quarter of 2012 of 43.5%, substantially below the average of the banking industry. Saying that, I want to emphasis that the management continues to maintain a firm commitment to improve gradually our cost to income ratios.

On the following slide, number 11, is the review of our recent equity offerings of $530 million. The fundamentals of this equity offerings are the positive outlook for the economy and the financial system for the next three years to sustain business growth in the mid term in line at least with the banking industry's growth rate, to strengthen our capital base in order to continue growing without deteriorating our capital ratios, and finally, to continue increasing liquidity and market depth of our shares. This is especially important because this makes us more attractive to investors, particularly to foreign funds. This offering will allow us to increase the capital ratios by about 1.1% and the free float by around 2.6% reaching above 17% once we issue all of the shares.

As you can see on the right, the equity raising process has two main steps. First, the ordinary preemptive option period which occurred between December 5th, 2012 and January 4th, 2013 for the shareholders of Banco de Chile and SM-Chile. This period was very successful with an exercise rate of 94% of total loans of 355 million of this stage.

The second step of this offering called the special preemptive rights option period began on January 19th, 2013 and will end on February 17th, 2013. This period is related to the shares that one of our shareholders, SM-Chile, has pledged in favor to the Chilean Central Bank and represents around 33% of issued shares. To date, we have been very successful during this period with an exercise rate of roughly 60% of a total of $171 million. After these two periods occur, any shares and options which were not exercised will be auctioned to the market.

Now, I would like to pass on the call over to Pedro Samhan, Chief Financial Officer of Banco de Chile.

Thank you, Pablo. Please move to slide number 12. 2012 was another full -- a year full of achievements. I would like to go briefly over 10 of the most important achievements for this period.

First, it was the first time in our recent history that we became the undisputed leader in terms of net income and profitability. We posted a net income figure of CLP466 billion that is almost $1 billion with an excellent market share of 28.6% and a return on average capital of 26.4%. All of these figures were substantially higher than our closest competitor.

Second, we also became the safest bank in LatAm and we were upgraded to A-plus by Standard & Poor's in 2012. This rating distinguished us locally and internationally and has been especially noteworthy when considering that the recent trend has been to downgrade banks.

Third, consequently due to and part of this excellent credit rating, we have began a strategy to diversify our funding base, which has been very successful in accessing international markets such as USA, Mexico, Hong Kong and Peru. We got to continue searching for new markets, which provides attractive funding conditions.

Number four, instead of commercial loans to SMEs, we have been focused on strengthening relationship with the customers by providing product and service which better fits our customer needs, increasing pre-approved loan, optimizing government-backed loans and incorporating favourably products such as leasing and factoring. In fact, we outgrew the competition and ended the year with a market share over 20% in this segment.

Five, we also continued our goals in deepening our footprint in areas outside of Santiago in both retail and wholesale products. This initiative begun three years ago in order to increase the market share that the Bank has nationwide. The goal was to achieve a market share of 19% by 2012 requiring significant growth in [accruals] and which was overcome by demand.

Six, additionally we have reported growth in the mortgage loan, with a rise of 82 basis points in market share thanks to the right set of strategies which includes commercial synergies between segments, marketing efforts, sale incentive and very competitive rates.

Seven, in line with our commitment in [addition to] Chile to shift towards becoming a more developed country, we initiate a project called Caja Chile, which has to do with POS terminal to provide financial services in communities where there is no or limited banks. At the end of 2012, we have one Caja point in more than 320 communities nationwide.

Number eight, during the year we invest significantly in technology to increase processing capacity and enhance our datacenter networks for us to improve our current account services via Internet and mobile form banking platform, where we have been ranked the best in the country.

Nine, as we mentioned, we also started an equity offering for a total of roughly $530 million due to the positive growth outlook for the economy and business volumes in the banking industry. This issuance has been received very well by investors due to their confidence in the Bank to quickly make the way profitable.

Ten and finally, our excellent performance has awarded the confidence of investor resulting in outstanding performance in our stock price. In 2012, the total return of our shares rose 16% and significantly outperformed the IGPA 3% growth. Consequently, at [GRM] we position ourselves as the largest bank in Chile in term of market cap and the fourth largest in Latin America including Brazil.

Thank you. If you have any question, we would be happy to answer that.

(Operator Instructions).

Jose Barria, Bank of America.

Thanks for taking my question and congrats on your achievements in 2012. I have a couple of questions, mostly related to your 2013 expectations. The first one is on operating expenses. I wanted to know if you think that you can maintain this pace of growth that we saw in 2012 of low-single digits in operating expenses, and if so, what would your expectation for cost-to-income ratio be? That's the first question.

The second is, given the inflationary -- that the inflationary environment in the fourth quarter helps your profitability for the quarter, for the year, I wanted to know if you think that the level of ROE that you posted for the year is completely sustainable in an environment of potentially lower inflation? And I will stop there and maybe we can circle back for other questions later.

Well, instead of going to your first question, operating expense really is -- as you can see during the last years, especially during 2012, Banco Chile has improved its efficiency and our trends for the future is to continue improving in a very gradual way according to our business model.

According to that, we expect to continue controlling the operating expenses and to have a very normal growth that make a lot of sense in term of what we are expecting to grow instead of ROE.

But really we think that the increasing trend of operating expenses to be around -- between the range of 6% to 9%. That is absolutely compatible with the increase in term of revenue in order to continue improving our efficiency ratio in gradual terms.

Instead of being saturated environment, really the fourth quarter has been extraordinary because inflation or UF variation of 1.1%. It is difficult to really repeat it or maybe come to repeat by just one or two quarter per year. So really, we should not expect a performance during 2013 similar to the last quarter.

However, if you consider the total inflation or UF variation that we have during 2012, again the fact that we expect to improve --- that the inflation will be a little bit higher or whether we expect a better performance for the whole year in this indicator. However, I have to tell you that the behaviour within the quarter will be very different because during the first quarter, maybe the inflation or the UF variation will be very close to zero, as you will have inflation closer to 1% during the last three quarter according to our expectation.

Okay, excellent. And maybe just to drill down on exact numbers for efficiency and ROEs on a sustainable basis. Obviously, the fourth quarter was extraordinary for the reasons you just explained. Where do you see your efficiency ratio ending next year and what sort of level of ROE do you think is sustainable, somewhere in the low to mid-20s or above that?

Well, it is difficult to give you a final number for that. However, you have to think of the following. Our intention is to continue improving efficiency ratio gradually in order to reach in the range between 42% and 43% for the next three years more or less.

So really -- and we think that we are going to achieve that in a very gradual basis, trying to reduce about 1% per year. That is regarding the efficiency.

In term of return on equity or return on asset, obviously the return on equity with increase of capital that is higher 20%, even though you can maintain the different ratio instead of efficiency and the result of the Bank, finally the higher capital will lead us to a decrease in term of our return on equity. That should be in a range of about between 22% and 24%, more or less.

Okay. Thank you very much.

You're welcome.

Tito Labarta, Deutsche Bank.

My question, I just want to get some more color in terms of your expectations for loan growth, but more specifically by the different segments. We saw a strong growth in consumer and mortgage loans. Do you think that type of growth will continue and you will be growing faster than on the corporate side and if you can maybe give some more color on what kind of growth do you expect in those segments? And then, also, how that would then impact your net interest margin and also your provisioning levels as you grow more on this retail segment? Thank you.

Yes. Well, instead of the loan growth, really our strategy will continue in order to grow more in term of market share in the retail segment. So really we expect that the shift in general, the growth of the financial system for the next year in real term should be between 8% and 10%. And we expect that we should grow at least according to the growth of the market or a little bit higher.

And in this way, our focus will continue being in the retail segment and in the retail -- in all the assets, first, in term of mortgage, consumer and commercial loans to SME. However, in term of the mortgage, I've to tell you that if you remember three years ago, our market share was close to 14%. And our strategy was clear, we have to improve this market share, we have to grow because [retail] has a lot of other externalities. That is very good for our business as a whole.

Now we are in a market share that is over 17%. So really our plan to continue growing in the future is two. We are going to gain more market share but I don't think at the same speed that we did before during the last three years. All the numbers that I told you are in real terms. I don't know if you asked me another question about -- oh, in term of risk.

In term of risk, really you see that our ratio in term of loan loss provision, in term of funding obligation during the year were very reasonable. However, the mix in term of the loan growth, the fact of not having necessarily an exchange rate that will go down at the same speed as last year to determine that this ratio can increase a little bit, but not dramatically.

You know why? Because in terms of consumer is very well constrained the higher rate that we have during the second quarter than the first and second quarter and because of the employment in the country has been behaving very well. In general all the other micro indicator, even though at a lower rate than last year, we think that the increase of this ratio will be not dramatically, very reasonable.

So to just to, I guess, clarify on that, so do you think provisions should go, I guess, in line with loans or do you think there would be slightly faster growth in provisions?

Well, you can have -- as I told you before, you have two factors where your ratio would increase a little bit, so really to be higher than your loan loss. One is the mix of your portfolio and the other is a positive impact that you have this year in term of the exchange rate.

Remember that when you have a portfolio in dollars and the exchange rate goes down, the same classified portfolio improves in term of UF provision because in local currency our -- is a lower amount of money. So really this factor will we see so clear from next year. And the factor is a mix of the portfolio where we are going to continue growing in the commercial area instead of consumer and SME. And these two factors obviously motivates that the ratio would increase, but a little bit. We don't see a significant increase. If you ask me directly, I would say that is not more or about between 8 and 12 basis points.

Okay. So just to be clear, so you get maybe slightly higher provisions from the shift in loan mix to the retail side but offset by maybe slightly lower provisions given improvements in the currency which leads to lower risk in their dollar portfolio. So net thinking maybe 8 to 10 basis point increase in provisioning level, is that correct?

That's right between 8 and 12 basis points.

Okay, great. And then just the other question was that, how do you see the shift in loan mix? Is the shift going impact your margin, excluding inflation, just from the shift in mix? How do you see that would impact?

Well, I see -- if you take into consideration the whole year, the 2012 whole year, our net interest margin is 4.62%. However, if you take the last quarter, was extraordinary, and especially impacted by inflation was about 5%. This year, in 2013, really our expectation is to improve our margin for different reasons that I can explain to you but not as much as the level that we have during the last quarter of this year -- of 2012.

You have here a higher inflation -- we expect a higher inflation, a higher UF variation in 2013. We have a capital increase where you have some additional income because of that. And the other is the mix in term of return of wholesale, where in those spreads we don't feel that we will improve dramatically, but at least should not decrease. And the mix always are going to help to get better results.

So net you should see slightly better margins, is that what you are saying, for the year?

Yes, vis-a-vis 2012, no doubt. We think and we expect better margins. But not at the level of the last quarter of 2012 because was very positively affected by the higher inflation.

Okay, great.

And we have volatility by sure instead of each quarter. You will have first quarter with a lower net interest margin and you should have the rest of the year, the last three quarters, as a highlight.

Great. Thanks, Pedro. That's very helpful.

You're welcome.

Luis Guzman, Santander.

I just wanted to ask you regarding the capital ratio after the capital increase. You guys mentioned that the capital ratio would increase 110 basis points. Just to clarify this, are we talking about a BIS ratio or Tier I ratio?

And the second is, if you guys have made a model including Basel III? I know that Basel III is still longing in Chile. By just to have an understanding at where we are standing on Basel III?

Well, thank you. Well, in term of capital ratio, the first thing that I have to clarify when we say 1.1% (inaudible) is talking as a one-time, one-time when we may decrease. And after that it will start decreasing because we increasing volume instead of asset and loan.

The same was in term of Basel I. So really in term of Basel I we expect to finish 2013 at a level that should not be very different to the level that we finished 2012. In term of Basel III, regarding in the Basel Committee in Chile, and really we will see a clear roadmap from the regulators in term of the implementation of Basel III.

So really we have to work regarding external exercises in order to have some sensitivity of what will happen if Basel III will be implemented. But in any case, we would have a roadmap in the future. I am sure that implementation to be very gradual in term of the requirement from the regulator.

So really, we will see no major risk in term of implementation of Basel III for Banco de Chile. And we are prepared always in order to choose among different alternatives in term of capital adequacy in order to be on line with the new regulation. Either way, increasing capital, as we have made during the last three years, or we are using the UF or any other alternative.

Okay. Thank you very much.

You are welcome.

(Operator Instructions).

At this time, I am showing no further questions. This will conclude the question-and-answer section. I would now like to turn the floor back to Banco de Chile for any closing remarks.

Thank you very much. As you can see, 2012 was very positive year for Banco de Chile. We met our targets as we grew in products and segment which we are trying to penetrate further. Before I will end this call, I would like to emphasize that management has the commitment and the expertise to continue creating further value for our shareholders and customers.

We firmly believe we can achieve this because we still have ample room to grow in the retail segment; important opportunity to maintain increase in profitability in the wholesale segment and a space to improve our current efficiency levels. Thank you and we look forward to speaking with you regarding our first-quarter 2013 financial results.

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