Banco de Chile (BCH) 2013 Q2 法說會逐字稿

Good morning, and welcome to Banco de Chile's Second-Quarter 2013 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.com.

Today with us we have Mr. Pedro Samhan, Chief Financial Officer, and Mr. Pablo Mejia, Investor Relations Manager.

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 the 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 second-quarter 2013 financial results. Again, as a reminder, I link to the slide presentation that is available on the website at www.bancochile.com under Investor Relations.

To begin, please turn to slide number 2. During this call, we will discuss the economic environment, the results of the banking industry, Banco de Chile's results during the quarter, and we will end the call with a peer comparison.

Please turn to slide number 3, which contains an overview of the recent developments in the macroeconomic environment. After three years of strong growth of around 6% per year, the Chilean economy has showed signs of deceleration in activity during the first semester of this year, posting a GDP growth of about 4% year-on-year. This downward trend has been widely expected by the market due to a slowdown that has been seen in the emerging economies, a weak recovery in developed nations and a local aggregate demand that has leveled off to a more sustainable long-term range.

This decrease in economic activity has been mainly due to a contraction in investment, boosted, among other factors, by a drop in corporate confidence due to lower commodity prices, higher operational costs, and more cautious outlook regarding the social and political scenario.

Private consumption has also decelerated, but more gradually, in line with persistent positive fundamentals for the Chilean household. As a result, the outlook for GDP growth for 2013 decreased from 5% in March to 4.4% according to the latest estimates.

Despite the reduction, this figure implies an improvement in GDP during the coming quarters. The more optimistic view for the rest of the year is based on the persistent lower unemployment rate which maintains a positive consumer confidence, relatively flexible conditions in the banking system and the positive effect of -- from a more optimistic outlook in developed economies.

Regarding inflation, at the end of the quarter, CPI began an upward trend, posting a 12 month increase of 1.9% in June 2013, approaching the Central Bank target range and more in line with historical range. In fact, the most recent forecast adjusted CPI variation may total 2.4% at the end of the year, according to the last expectation survey of the Central Bank.

As for the momentary policy, the Central Bank has kept the policy rate at 5% since January 2012 due to a solid performance in the economy and an anchored inflation expectation. However, it's worth mentioning that the current deceleration of the activity has increased the probability for a downward adjustment in the policy rate in the coming months, an option that was confirmed by the Central Bank during its last monetary policy meeting, where they pointed out that a further deterioration in the GDP growth would require more expansionary monetary policy.

Please turn to slide number 4, to review the Chilean banking industry's main figures. In terms of total loans volatility continues. After a moderate increase of 1.5% in the first quarter of 2013, total loans grew 3.2% during the second quarter despite a less dynamic scenario. However, on a yearly basis, total loans continued to slowdown from previous quarters but still with double-digit growth rates in all major product lines, reflecting the resilience of credit demand of corporations and individuals.

In terms of results, net income during the second quarter recorded an increase of 6% compared to the same quarter last year, mainly due to an increase in operational income that more than offset the lower inflation figures, higher loan loss provisions, operational expenses and the rise of the corporate tax rate.

Consequently, the Chilean banking industry posted a return on average equity of 13.9% in the second quarter of 2013, which translates into 121 basis points reduction compared to the same period of 2012, due mainly to stronger capital base in the system. It's also worth mentioning that we are expecting an upward trend in inflation for the reminder of the year, and consequently, an improvement in net income for the industry.

On the next slide, number 5, is a snapshot of Banco de Chile's main income statement figures. As can be seen, operating revenues increased 8% over the same period last year and 2% over the prior quarter. On the following slide, number 6, is a breakdown of operating revenues. Customer revenues, which comprise of net interest income from loans, deposits and net fee income, grew 9% over the same period last year and 3% over the first quarter.

This trend continues to be driven by a proactive management of lending spreads, growth in loans, especially retail loans, growth in non-interest bearing deposits and to a lesser extent higher fee based income. All these factors have been obtained through a sound commercial strategy that has focused efforts in strengthening areas which are more profitable while maintaining an adequate risk-return relationship in our loan book.

On the other hand, non-customer revenue, which are mainly composed of income from contribution we generate from managing the Bank's term and currency mismatches [on the balance sheet] as well as trading activities, reminded relatively flat over the same period last year and the prior quarter. This result occurred despite the lower contribution from our net asset position indexed to the US, as this currency recorded variation of minus 0.07% as compared to the positive variations recorded in the other periods.

Additionally, during the quarter we recorded an initial charge of CLP8 billion related to the adoption of counterparty value adjustment for our positions in derivatives. On the contrary, this charge was more than offset by the positive effects of the hedge we manage in US dollars indexed loan loss provisions amounting to roughly CLP5 billion; the positive one-time effect of a sale of Master Card shares for approximately CPL4.8 billion, and other trading gains of about CPL5 billion.

Moving on to slide number 7, is a review of our loan portfolio by segment and the evolution of our market share. During the quarter, we continued to expand our retail book in line with our long-term business strategy, which focuses on profitable growth. In terms of our total loan book, it expanded 6% year-on-year while our retail book, where we have focused our efforts to grow, expanded 12% during the same period with a focus on SMEs, mortgage and middle-income consumer loans.

This focus has resulted in a gradual change in mix of our loan portfolio as our total loans granted to SMEs grew well above average of the total loan book by recording an annual expansion of 14%, reflecting the Bank's consistent focus on this segment.

The strong growth has been achieved through a solid commercial platform consisting of around 150 nationwide branches with specialized SME account managers, improved loyalty programs and enhancement in incentive structures in order to better align branch manager's targets with the corporate strategy.

Also, we have been very proactive in taking advantage of government backed guarantees for SMEs, which are lower risk and represent an important portion of the flow of new loans into Bank as well as the volume we manage.

In terms of consumer loans to individuals, these represent roughly 15% of our total loan portfolio and has grown at a pace of 10% year-on-year, reaching a market share of 21.7%. If we break these figures out further, one can see that CrediChile, which is our area for lower -- loans to lower-income individuals, has grown at a slower pace of 3% year-over-year.

The lower growth in this product is mainly due to our more prudent risk measures, which are in line with the less dynamic economic environment and due to the wave of regulations which were passed during the last couple of years and some are still being discussed today. As for our traditional banking area, this area grew 12% over last year, focusing gaining customers in the middle-income segment. One of our strategies has been to get consumers to use our products more frequently to improve services and benefit on cards.

The effect of this is that customers begin to use us as their primary bank. This in turn moves Banco de Chile into a more strategic position to target higher quality and less risky customers through pre-approved loans, which is an important percentage of loan growth in the segment.

In terms of product mix, we have significantly increased credit card loans by 17% year-over-year and to a lesser degree installment consumer loans by 12% year-over-year. In terms of mortgage loans, we continue to show attractive growth rates of 13% year-on-year, reaching a market share of 17.4%. In recent months this product continues to grow strongly but a slower pace, basically because we are reaching a level that is more in line with our overall market share.

In addition, we've also adjusted pricing in order to reflect the new market realities and having customer requirements in terms of loan to value. Nevertheless, we plan on continuing growing mortgage loans as this is a great product in retaining customers and providing opportunities for cross-selling.

Overall, during the last 12 months, we have increased the retail segment mix from 48% to 51% of our total loan portfolio, and we will continue growing in the future given the positive outlook in consumption fundamental and private and public policies orientated to strengthen entrepreneurship through the creation of new SMEs.

In terms of our wholesale segment, loans have grown only 1% year-on-year. This lower pace in growth is the result of our strategy to focus our efforts on more profitable customers which provides higher operating margins and higher cross-sell opportunities in our wholesale segment.

As such, loans to large companies with sales between $3 million and $140 million have grown 13% year-on-year, while our corporate banking book which services customers with sales above $140 million of sales per year decreased by 10% year-on-year. Nevertheless, we have increased our operating margin in the corporate book by almost 10 basis points when comparing the first semester of 2013 with the same period last year, clearly demonstrating our strategy to improve profitability and [avoid] growing for the sake of gaining market share.

On slide number 8, we show a breakdown of our funding structure. Similar to previous quarters, we have continued to increase non-interest bearing deposits in the Bank from both individuals and companies. Individual current account balances have increased 9% year-on-year while companies have increased 4%. These increases have been the driving process -- permitted us to improve funding from non-interest bearing deposits, representing 24.2% of total funding at the end of the quarter, 22 basis points higher than the same period last year.

It's also worth mentioning that we have continued our strategy of diversifying our funding base this quarter by issuing $635 million in bonds in the Swiss market at historically low spreads for a non-government foreign corporation. This focus of diversification has allowed us to increase the proportion of funding from bonds by around 230 basis points over last year, representing about 15.9% of total funding today.

As you can see on the bottom right, we continue to lead the industry with the lowest cost of funding of only 2.9% due to our strong reputation, first rate credit rating and leading market position in current account deposits, where our total market share is 24%, and more importantly, above 30% for individuals.

Please turn to slide number 9. As you can see, provision expenses have grown 8% quarter-on-quarter and 7% year-on-year. On the other hand, operating expenses have grown more moderately, posted an increase of less than 1% when compared to both periods.

On the next slide, number 10, is a breakdown of loan loss provisions by segments. As can be observed on the chart on the left, retail loan loss provisions have remained relatively stable, decreasing CLP4 billion quarter-on-quarter and increasing CLP3 billion year-on-year. The year-on-year growth in retail provisions is simply due to our double-digit growth rate in these loans. It's also important to mention that this modest increase is the result of solid risk management practices together with prudent acceptance criteria which has permitted us to grow at these levels while maintaining stable credit risk figures.

On the other hand, wholesale loan loss provisions reached CLP6 billion in this quarter, which demonstrate our excellent asset quality in this portfolio. Moreover, the charge in provisions is mostly due to the effect of depreciation of the Chilean peso on our provisions denominated in US dollars, which are related to foreign currency loans. As a result, we recorded a charge of CLP5 billion pesos due to this effect and, as mentioned earlier, the results associated with the hedge are reflected by equal and opposite amount in operating income.

As for overall credit risk indicators, as shown on the table on the right, we've continued to record strong asset quality during this quarter. Our ratio of loan loss provisions to average loans remained flat year-on-year despite the effect of exchange rates on provisions. This stable behavior was also seen on our past-due loans ratio, allowance for loan losses and our coverage ratio.

Please turn to slide number 11 for an overview of our operating expenses. As demonstrated on the chart on the right, our operating expenses have trended flat over the last five quarters, incurring expenses of about CLP150 billion per quarter. This was accomplished by controlling personnel expenses closely with strict policies as well as moderate growth in business activity, which have maintained administrative expenses growth flow.

I should also mention that we are also seeing the fruits of our investment in terms of economies of scale that have arisen from our growth in the retail business. This has permitted us to be more productive by taking further advantage of the available capacity in our branch network, back-office procedures and sales productivity gains based on our consolidated CRM system. As a result, our cost control strategy and economies of scale have permitted us to post the best efficiency ratio among our peers during the quarter of only 43.7%, substantially below 2012 figures.

Please turn to slide number 12. The results of our excellent commercial initiatives together with prudent risk policies and strict cost control have permitted us to post very positive figures during this quarter despite the negative inflation which impacted figures for all banks in Chile.

The latter is especially noteworthy when we take into consideration that the second quarter of 2013 was almost 50 basis points lower in inflation and even with that, we posted a net income before tax that was 18% higher than last year. It's important to note also that our effective tax rate was also higher this quarter when compared to last year due to the change in the corporate tax rate that went from 18.5% to 20%, and due to lower inflation in the quarter which affects taxable net income.

Despite these factors, we still had an excellent quarter in terms of net income after taxes, which reached CLP122 billion during the quarter, slightly higher quarter-on-quarter and 14% higher than the same period last year.

Saying that, I will pass the call over to Pedro Samhan, who will go over the next slide, number 13.

Thank you, Pablo. The following chart summarizes our successful financial performance and business to the Bank, to our team. First of all, as shown by the chart on the upper left, our net operating margin measured as operating income net of credit charge over average interest earning assets reached 5.3% at the end of the quarter, well above all of our competition.

This figure is even more impressive if we consider that we are a bank that still has room to continue growing in the retail segment, which is significantly more profitable than the wholesale segment. In terms of operating expenses, we became for the first time in our history the bank with the best cost-to-income ratio among our peers, posting a figure of 43.9% for the first semester of 2013.

As mentioned by Pablo earlier in this presentation, this ratio has been achieved through the gradual interaction of a cost control culture that aligns incentives with corporate goals, as well as diverse projects and initiatives that aim to improve productivity in our commercial and back office areas. We are very proud that we have been able to post these figures and we are confident that in the mid-term we can continue to improve.

As a result of our excellent operating margins net of risk and our cost-to-income ratio, we have posted a very large [gain] in our favor as compared to our competitors in both return on average equity and return on average assets, as you can see in both of the charts at the bottom of this slide. Taking together these indicators, clearly demonstrates our capacity to effectively implement our business strategy by growing our retail portfolio, increasing profitability of our wholesale segment, controlling operating expenses effectively and maintaining a prudent risk approach.

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

(Operator Instructions).

Tito Labarta, Deutsche Bank.

A couple of questions. Just looking at your loan growth, you have seen a slowdown in the quarter. Do you expect that trend to continue or do you think loan growth can pick up after kind of the slowdown we saw? And also if you continue plan to grow more in the retail segments? Also, could you give us some expectations on how you think that would impact the asset quality? Thank you.

Thank you, Tito. Well, first of all, we are seeing a slightly downward trend in terms of loan growth in the financial system, and our intention is continuing growing at a similar pace of the system but without sacrificing our risk-return equation. That has been one of our clear policies during the last years. We are -- in some business we prefer not to gain market share because of the risk return that we are generating if we try to gain in this field. So in conclusion, we will see the system this year maybe growing a level of 10% in nominal terms, more or less, and we see Banco de Chile growing at a similar trend or a little -- slightly maybe below, what means to recover some market share participation during the second half.

In terms of the asset quality, well, exactly that. Really in terms of the [usual] banking business we have not participated, for example, in last -- in the month of July. There was some campaign in some banks. We are in the middle of a campaign now, so really we expect to recover some participation there. But not sacrificing asset quality in order not to grow. So, matching the consumer finance business because of that risk.

So you think then asset quality should remain around the levels that we are seeing today? Just so I can get some color in terms of where you see NPLs trending towards?

No, it is very similar. We are seeing a very similar trend in the rest of the year. So really with the trend that we have shown during the last quarter, in order to reach a number by the end of the year between 1.1% and 1.16% in terms of loan loss provision vis-a-vis the total loans.

I see. All right, thank you very much.

You're welcome.

Thiago Batista, Itau BBA.

I have one question about regulation. Could you give an update to us about the two projects that are in the Congress, the first one about the cap interest rate, the tasa maxima, and the second one regarding the consolidation of the credit bureau? Do you believe that those projects will be approved this year and how much asset quality of individuals could improve in the medium-term with the consolidation of the credit bureau?

Yes. Well, regarding the maximum interest rate, it is something that has been discussed in the Congress and we expect that by the end of this year, by the last quarter, maybe the law will be passed. So the impact for this year should be minimal because of that result. In the future, as you know, in this implementation there is a gradual trend. At the beginning you have a more significant growth, but after that you have a gradual trend. So really the impact during the year, during the next year will be also gradual in this trend.

In terms of the other law, really it is something that I cannot tell you that is -- will obvious that will be enacted this year. We are not sure about that. But probably any debt consolidation is very positive for the banking sector. So really we are looking forward to seeing this law enacted as soon as possible.

Okay, thank you.

You're welcome.

Jose Barria, Bank of America.

Just a follow-up on regulation; can you just tell us what's going on the fee income side with regulation as well and are there any other regulatory issues that could be of a concern to you as we look at the next 12 months? And second, I wanted to understand exactly where you -- or what the impact of a potential cut in benchmark rates would be in terms of our NIM? We understand obviously their sensitivity to the US inflation, but there we were to -- we were to see a cut in rates later this year how that would affect your NIM?

Thank you very much. Hold on please.

Saul Martinez, JP Morgan.

Sorry, if I can --

Yes, I will hold off on asking my question until you respond to the prior one.

Okay.

First of all, in terms of fee income, obviously we see that the regulatory environment can affect the level of commission of the banks in general and Banco de Chile in particular. However, in our case, because of the diversification in terms of different business that we have with a number of legal [vehicles] in order to generate revenue in terms of mutual funds, stockbrokerage house, insurance, et cetera, we think that we are prepared in order to try to counterbalance any impact that we could have in terms of the commission reaction because of some regulatory change.

One of them could be, yes, in terms of [commencement] of the transaction in order that the customer has to say -- okay, when you make a change in terms of the commission. We'll receive a preliminary draft in order to be review and we see if any positive that this allows to do something that in terms of closing the account of the customers you don't receive an answer timely. So really in this way we think that it's in the right track.

But nevertheless, going to the NIM and all the impacts that the commission number could have, we don't see a very significant impact because of that -- because we have some other source of revenue in terms of commission that can increase in the future, that are very well reduced today because of the condition of the market, for example, mutual fund stockbrokerage houses, et cetera.

In terms of the UF and CPI, obviously we have a very significant impact, not only Banco de Chile, but all the banks during the first half. And we see very positively and during the second half owing the inflation to a normal basis. You see today that inflation was 30% basis point as you have a UF variation of -- in both months about 70 or 33 basis points vis-a-vis almost zero that you have during the rest of the year.

If you take this into consideration and you project an inflation for this year or a variation of UF about 2% or between 1.5% or 2%, maybe the impact in the NIM for the rest of the year could be between 20 and 30 basis points easily in our favor, vis-a-vis the first semester.

Okay. So this is Saul. I guess I will ask my question now. Two questions, one is more macro oriented. And I think Pablo mentioned that part of what is dragging down investments are social, political concerns. Can you -- and obviously, there is some concern about the election and the implications. Can you talk a little bit broadly about what you -- what a Bachelet presidency would mean in terms of policy making, the economy and how you think that would impact the banking sector more broadly?

And secondly, you had a very healthy ROE of 22% more or less -- 22%, 23% in the quarter, with deflation essentially over the course of the quarter. In a normalized inflation environment how do you see your ROE evolving?

Yes. Well, let me go one by one. The first question in terms of the economy, the Chilean economy, the fundamental of the Chilean economy, we think that we will maintain. You will have some different priorities depending on the new government. But in terms of the fundamental, a free market economy, and really allowing the Bank to do the business as we are doing today, we will see a major risk. It will have some different intensity, but it doesn't mean that your business necessarily will suffer.

However, it is very preliminary to give a final opinion. We don't see -- we're not sure today what is going to happen. And you can see that even in the case of the Bachelet program there have been some changes in terms of the graduality and the intensity of the reforms, as you could see before the primary election and you have seen today, where some people from the center political spectrum are being integrated to the team. So really it is very preliminary. But we don't see -- in terms of the fundamental of the economies we don't see major significant changes.

In terms of the UF, what happened with the return on equity because of the UF or the inflation of not having the positive variation in terms of the CPI during the first half, we think that the impact of that easily in terms of return on average equity is between 3% and 4% in terms of the return. If you go to a more normalized inflation scenario, your return on average equity could improve in 300 or -- between 300 and 400 basis points, all the other things equal.

So in other words, you think under a normalized inflation environment your ROE could be 25%, 26%?

Yes, it's very similar to the return that we have had during the last year.

Okay, great. Thank you very much.

You're welcome.

Boris Molina, Santander.

We have a question regarding your exposure to SMU. Could you please give us a detail of how much loans you have lend to this retailer, and if you have lend to [FIPs] or investment funds that are exposed to the equities of this Company?

Yes, well --

One second please.

In terms of SMU, I wouldn't -- I would like not to give you very specific numbers for obvious reasons. But in general terms, I could say that our participation in terms of our market share in the country is below the participation that we have in terms of the loan market. And obviously, we are seeing -- we are always monitoring the financial situation of this Company as well as we monitor the financial situation of any other company, especially when you have this kind of issues or this kind of problems.

But really the Bank is taking all the measures that are necessary in order to define its position and -- as to try to review the situation and finish with a relatively lower exposure than we have today in order to minimize any impact that we could have over our P&L because of that. And we are doing that already.

Is it possible (inaudible) you have lend to the FIPs related to this Company or not, even if you don't have any exposure?

No, we don't have any exposure to FIP. This is the other -- it's a very good point that you're mentioning, that I was missing.

It's okay -- that's okay. Wonderful.

Only loans.

Excellent. Thank you so much.

You're welcome.

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

Thank you. To close, I would like to mention that the first semester despite the weaker economic environment and low inflation was very good for us, thanks to our commercial efforts in improving operating margins, our proven risk approach and excellent efficiency figures.

As for the second semester, despite the evolution of a more complex environment for the banking system, we expect a stronger performance, we have already seen a pick-up in inflation, maintaining all the other things equal obviously. This together with our focus on improving profitability should allow us to post excellent results during the second half of the year.

Thank you very much and we look forward to discussing our third quarter 2013 financial results.

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