Banco de Chile (BCH) 2013 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Banco de Chile's third-quarter 2013 results conference call. If you need a copy of the press release issued last Friday, 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 operations 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.

Thank you. Good afternoon. It is a pleasure for me to share with you our comments on Banco de Chile's third quarter 2013 financial results. As a reminder, the presentation is available -- the link to the presentation is available on our website, wwwa.BancoChile.com within the Investor Relations page.

To begin please turn to slide number 2. Today 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 the recent developments in the macroeconomic environment. During the third quarter GDP grew similar to the average of the past two quarters, expanding 4.4%, mainly boosted by a positive quarter for mining production and solid trends in retail sales. On an annual basis GDP accumulates an expansion of 4.4%, the lowest figure within the last three years. Accordingly, and given the less positive scenario for emerging markets, expectations for 2014 GDP growth have been repeatedly revised downwards to 4.4% as of October.

In terms of internal demand, private consumption continues to grow strongly in line with a surprisingly low unemployment rate and positive but downward evolution in real wages. However, for the coming quarters we expect a slowdown in private consumption due to a decrease in consumer confidence and lower job creation. On the other hand, investment has shown a sharper deceleration due to a drop in business confidence and to postpone mining and energy projects.

In response to the downturn in economic activity and its possible effect on inflation expectations, the Central Bank recently reduced the monetary policy rate by 25 basis points to 4.75% after 20 months without change. This decision surprised analysts and the market who expected cuts in December even in the first quarter of 2014. For the coming quarters we expect at least one more reduction in the policy rates without ruling out a broader adjustment if the economic environment requires it.

Finally, as for inflation, CPI has continued to grow modestly, evolving below its historical patterns with some volatility hosting a variation of 1.9% as of September and 2% year on year, adding an additional support to the monetary policy rate cut. Recently lower prices of oil have constrained internal inflation despite the rise in food and service prices. By the end of the year we expect inflation to be slightly above 2%.

Please turn to slide 4 for a review on the main figures of the Chilean banking system. Total loans for the industry grew 2.1% quarter on quarter maintaining the average pace observed in previous quarters in line with the stable credit demand from companies and individuals. On a yearly basis total loans rose 11% year on year aligned with a slight slowdown of economic activity and the historical elasticity of two times the GDP growth.

By product, commercial and consumer loans have gradually slowed growth to grow at low double-digit rates while mortgage loan growth has remained stable. We expect the banking industry's total loans to continue reducing as the expansion is in line with a less positive economic environment growing around 9% and 7% in real terms by the end of 2013 and 2014 respectively.

As for results, the banking system's net income totaled $487 billion during the third quarter of 2013, an expansion of 16% quarter on quarter. An improvement in net income was largely explained by solid performance in operating revenues associated with the larger benefits from the systems [US] position as a consequence of the higher inflation recorded during the quarter and the falling trend in loan and deposit volumes. Year to date net income rose 13% entirely caused by higher operating income -- more than offset large operating expenses, provision for loan losses and income taxes.

On the next slide, number 5, is a snapshot of Banco de Chile's main income statement figures. To begin, operating revenues increased significantly by 10% quarter on quarter and 26% year on year, posting an attractive result of CLP380 million.

On the following slide, number 6, is a breakdown of operating revenues. As you can see on the chart, part of the strong year-on-year growth of 26% was achieved by a sustainable and consistent positive trend in customer revenue due to a proactive management of lending spreads, focused growth in loans and higher non-interest-bearing liabilities with average balances expanding 8.4% and 11.8% respectively.

Nevertheless, non-customer income contributed to the increase in operating revenues. In fact, an important part of this quarter's increase in operating revenues was associated with higher inflation that resulted in greater revenues from our US net asset position due to a 1% rise in inflation during the quarter as compared to a deflation of 0.2% in the third quarter of 2012.

A lesser expense, our operating revenues also benefited from a positive exchange rate effect on both derivative positions that hedge our exposure to allowances for loan losses denominated in US [dollars] and expenses related to our customer loyalty program provided through credit cards. The positive impact in operating revenue has a similarly negative impact in fees and loan loss provisions. For the fourth quarter we expect inflation measured as the variation is in US will be in a range close to 0.7% which is consistent with the Central Bank's 12-month target of 3%.

It is important to note that our midterm strategic plan has allowed us to consolidate our business model based on a deepened segmentation enhanced value offerings and improved customer service quality in all of our targeted segments. This has resulted in a superior capacity to generate customer income representing more than 80% of total operating revenues and undoubtedly contributing to preserve our [seating] position in this matter.

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 our loan book grew 11% year on year and 5% quarter on quarter. Our growth over the past 12 months has been led by the retail banking area which is consistent with our focus on increasing the penetration of the segment through tailor-made business solutions.

As a result our retail book expanded 12% year on year with commercial loans and SMEs posting an increase of 14.4% year on year followed by mortgage loans and traditional consumer loans growing at 13.5% and 11.1% year on year. Lagging behind were consumer loans to lower income individuals rising only 3% during the same period.

The lower growth in the segment has been mainly due to a more prudent risk approach that we have adopted since 2012, this is in line with the less dynamic local economy and recently adopted regulations. All of which has reduced the attractiveness of this risk return relationship for some segments of this market. This strategy has resulted in a gradual change in the mix of our loan portfolio where today we are much more focused on the retail segment than five years ago.

The keys for reaching this goal have been related to expanding our customer base selectively, taking measures in order to increase loyalty amongst our customers and improving value offerings to maintain a sustained upward trend in capturing new customers. This together with the development of new service standards and long-term commercial relationships have allowed us to reduce attrition and post a 5% year-on-year increase in our customer base.

In terms of our wholesale segment, loans picked up this quarter growing 10% year on year and 7% quarter on quarter. This sharp increase quarter on quarter is largely explained by the acquisition of roughly CLP430 billion in healthy corporate commercial loans for the local financial institutions. Excluding this purchase loans granted by our wholesale banking segment would have grown by 5% year on year and 2% quarter on quarter.

This moderate organic increase in commercial loans is a result of our efforts to focus on more profitable customers which provide higher margins and cross-selling opportunities. As such, loans to large companies with sales between CLP3 million and CLP140 million expanded 14% year on year while our corporate banking book, which services customers with sales less than CLP140 million, increased by 3% year on year.

Nevertheless, we increased our operating margin in the corporate book by almost 20 basis points when comparing 2013 year to date with the same period last year, in line with our aim of growing profitably rather than gaining market share at any cost. All in all our strong growth during the quarter managed to place us first in terms of total loans for the Chilean financial industry with a market share of 19.3% excluding foreign subsidiaries.

As you can [infer], the most important gains in this market share came from commercial loans which posted an increase of almost 80 basis points quarter on quarter followed by mortgage loans with an increase of 4 basis points within the same period. This rise was partially offset by a slight drop in consumer loan market share of 17 basis points quarter on quarter mainly due to our more stringent acceptance criteria for the retail segment, particularly the lower middle income segment.

On slide number 8 we show a breakdown of our balance sheet structure. As most of the listeners to this call know, the main assets on the Chilean banks balance sheets are loans. For Banco de Chile loans represent 84% of assets while investments represent 9% of assets, as you can see on the chart on the left. This is very important because we think because we are a bank that it is more focused on traditional banking than not trading.

In terms of liabilities, non-interest-bearing deposits continue to be a strategic priority for us. We ended the quarter with an exceptionally strong increase of 19% year on year representing 23% of our total liabilities in equity. If you break this figure down between individuals and companies, current account balances for individuals increased 22% year on year, reaching a market share of 32.5% while companies have increased their balances by 17% year on year attaining a participation of 21.3%.

Accordingly, our leadership in DDA together with excellent credit ratings give us a competitive edge against our competitors in terms of funding. As you can see on the bottom left chart, we posted an average cost of funding of 3.3% as of September 2013, substantially below our peers.

It's also worth mentioning, as detailed on the table on the right, that we have continued our strategy of diversifying our funding base and improving liquidity ratios by issuing CLP754 million in bonds in foreign markets and almost CLP1 billion locally at very attractive rates.

In terms of our foreign bond issuances, these are generally placed in foreign currency and swapped back to US under hedge accounting. This allows us to fund our local currency portfolio without taking on any currency or interest rate risk on our balance sheet.

Lastly, in terms of capital, we continue to have solid capital adequacy indicators by holding total capital to risk-weighted assets of 13.2% and the Tier 1 capital over risk-weighted assets of 9.9%. It is important to note that Tier 1 in Chile is basically tangible equity so we don't have any hybrid instruments in this figure.

Please turn to slide number 9. On the next few slides we will review risk followed by a discussion on the evolution of operating expenses.

Please turn to slide 10. A strong deeply rooted risk culture is a core aspect of our efforts to manage risk at Banco de Chile. Accordingly, we maintain solid and prudent policies and continuously monitor risk factors that can impair our loan portfolio. These strict policies also ensure that our credit exposures are within levels consistent with prudent [boundaries] and internal limits.

In terms of our concentration levels, our loan portfolio, as you can see on the chart on the left, is quite diversified. Our most important sectors in the corporate book are commerce and financial services. additionally, we also hold a low concentration risk in terms of customers where the top 10 customer groups represent less than 12% of total loans and related party loans represent less than 2% of total loans.

Additionally, a basic principle of our credit risk management is our constant and deep presence throughout the entire credit risk cycle, including approval, granting, monitoring and collections.

For example, since the first semester of 2012 we anticipated a higher risk from the expected slowdown of the economy and certain negative effects of the implementation of new regulations. Accordingly, we adjusted our acceptance criteria for the lower income segment and put into practice different initiatives intended to enhance the collection process. This strategy was successful in lessening the effects of the change in payment behavior from retail customers.

The effectiveness of this credit risk management is clearly demonstrated on our NPLs to loans and coverage ratios, as you can see on the charts on the right. At the end of the third quarter nonperforming loans as a percentage of loans remained at 1.1%, significantly below our peers in the banking system. Also our coverage ratio, measured as allowances to total past-due loans, remains healthy at two times, well above our peers in the industry.

On the next slide, number 11, is some more information on provisions. As demonstrated on the chart on the left, loan loss provisions have increased from CLP40 billion in the third quarter of 2012 to CLP70 billion in the third quarter of 2013. However, it's important to note that more than 50% of this increase is attributable to factors other than loan deterioration. The chart on the right shows the main effects of this increase between the third quarters of 2013 and 2012.

First, in line with our business strategy, loan growth has been concentrated in retail loans where the balance is growing 12% year on year versus wholesale loans expanding 10% within the same period. As a result the effects of the greater loan volumes and loan loss provisions was equivalent to about CLP6 billion when compared to the same period in 2012.

Second, under our prudent criteria we charged CLP7 billion in countercyclical provisions in view of the actual loan growth, the slowdown shown in the local economy and our expectations of higher volatility over the next years. It is important to note that this provision does not relate to any specific customer or industry sector, but instead to an overall outlook on the evolution of the economy.

Third, a net effect of CLP4 billion due to exchange rate shifts affecting our US denominated allowances for loan losses. This was the result of a 5.3% decrease in the Chilean peso/US rate in the third quarter 2012 in comparison to a 0.7% drop in the present quarter.

Lastly, an important part of the change in loan loss provisions year on year is due to changes in credit risk classifications for specific wholesale customers in the third quarter of 2012 and the third quarter of 2013. On the one hand, an improved risk profile of a specific customer resulted in the release of about CLP8 billion in provisions during the third quarter of 2012 and, on the other hand, in the third quarter of 2013 we incurred CLP4 billion in provisions due to one corporate customer which we downgraded based on their financial conditions.

Net-net changes in the risk profile of two corporate customers explained CLP12 billion of the CLP13 billion that's an increase in loan loss provisions during the quarter, while the retail segment only represented about CLP1 billion of its total impact.

Please turn to slide 12 for an overview of operating expenses. As demonstrated on the chart on the right, our operating expenses have trended flat over the past five years, this has created expenses between CLP150 billion and CLP160 billion per quarter. This has been accomplished by closely controlling our headcount together with strict cost control policies, lower amounts of IT projects put in place during this year and as well as a more moderate business growth.

Once again I should mention that we're continuing to see the fruits of our investments in terms of economies of scale and scope that have arisen from our growth in the retail business segment. This has been permitting us to become more productive by taking further advantage of available capacity in our branch network, back office procedures and sales productivity gains based on a consolidated CRM system.

As a result we have posted an outstanding efficiency ratio of only 40.6% during the quarter and 42.7% year to date. However, it's important to note that the higher inflation recorded this quarter positively impacted operating income contributing to a relevant improvement in the cost to income ratio for this quarter.

Please turn to slide 13, as a result of our excellent commercial (inaudible) together with prudent risk policies and cost control have permitted us to post excellent figures this quarter. We recorded a pretax income of CLP156 billion, up 11% quarter on quarter and 49% year on year.

In terms of our effective tax rate, it's important to note that in the third quarter of 2012 we posted a lower effective income tax rate due to non-recurrent tax benefits associated with FX, a corporate tax rate increase on a deferred tax position. This resulted in an effective tax rate of approximately 5% in the third quarter of 2012. As a result of all these factors we recorded net income after taxes of CLP137 billion this quarter, 13% higher quarter on quarter and 38% greater than the same period last year.

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

Thank you, Pablo. Please move to slide number 14. This has been an historical quarter for Banco de Chile, but we have consolidated our leadership position. There to fore, as shown by the chart on the upper left, our [standalone] growth during the quarter has placed us first in [terms] of total loans with a market share of 19.3%. It was based on an effective loan (inaudible) strategy which focuses of profitable growth and compares at (inaudible) selected coverage and approach in order to ensure a balanced rate of return relationship in all of our lending activities.

In terms of our revenue generating capacity, we have also ranked first in net operating margins measured as operating revenue net of rate charges to average interest (inaudible) assets reaching 5.3% at the end of the period, far above all of our main competition. [Loan delays], it is important to mention that our businesses strategy strives to continue positioning the Bank as a leader in retail banking. Hence we feel that there is still room to continue improving these figures.

In terms of cost to income, we recorded an impressive year-to-date ratio of 42.7% below of part of our competition. This has been achieved through strict controls and (inaudible) initiatives that aim to increase productivity, improve intra customer service channels, and automate back office activities. However, as mentioned earlier, the [three years] has also been influenced by certain lower expenses related to IT [projects] which will be realized next year along with a possible (inaudible) and business activity.

Finally, we can (inaudible) ahead of our competition in terms of return on average equity with our strong double-digit ratio of almost 22%, 4 percentage points above the next leading competitor. The lead indicators have been achieved through solid fundamentals based on a strong capital base, prudent risk management and a consistent commercial strategy.

Our goal at Banco de Chile is to continue consolidating our leadership in every segment we serve and to continue building a bank based on sustainable and profitable business models for our investors. Thank you. Now if you have any question we would be happy to answer them.

(Operator Instructions). Jose Barria, Bank of America.

I have a question with regards to asset quality. So if I look at what you did with regards to these additional provisions, basically you are saying that you expect a lot of uncertainty in the coming quarters and that led you to provision a little extra this quarter. Can you give us a sense of what sort of level of provisions to average loans we should be looking at for you on a recurring basis? And also with regards to asset quality, the corporate clients that experienced deterioration over the quarter -- were these clients in a specific sector or in different sectors? Thank you.

Thank you very much. Well, let's try to answer your first question regarding our (inaudible) provision level if (inaudible). Really we think that instead of what we can see looking forward there are (inaudible) in force that can affect positively or negatively that.

But really in general with all the measures that we have taken during the last two years in order to have a managed and conservative approach instead of risk management, really we think that we have today in a level -- have a level of provisions very similar to what we had during the year with the only exception that because our strategy is to more concentrated in consumer and (inaudible) instead of the mix we would have some impact. But we are not expecting anything -- or anything more than that. This is in terms of your first question.

In terms of the client deterioration, really our (inaudible) level has increased a little bit during the last quarters. But basically impacted (inaudible) segment rather was by the wholesale and especially for the SME segment. That is something that we think that today we have at a level that we can continue having in the next quarters. We don't see a major reason in order to expect an increasing in this number for the future. We should be in a number around the number that we have today.

I see. So for provisions to average loans can -- I mean is it feasible to assume that the provisions to average loans will decrease from this 1.4% that you posted in this quarter?

Yes, by sure. I think during this quarter, as Pablo explained very well, you could see some extraordinary impacts that are nonrecurring. So really with a level more similar to the average level that we have so far on a year-to-date basis.

I see. And finally, just to follow up on the corporate or wholesale clients where you saw some deterioration, it was risk classification you changed. What sort of exposure do you have in terms of total loans to those clients? And could we see maybe further provisioning or further deterioration there in the coming quarters? Or do you think that after the move that you did this quarter that you should be okay?

Well, we discussed (inaudible) that really we have an exposure today, that we have monitored it very closely in order to see what happens. Really we are trying to -- we have the best performer here. However, we cannot rule out the possibility to increase our provision during this quarter because of that and we see any impact or any possibility that the capital could be deteriorated. So really so far we have some provision already reflected, we cannot rule out the possibility to have some increase during this quarter.

Okay. And any color you can give us in terms of exposure size and reserve size?

Well, I don't prefer to this number publicly because really we are talking about the customer. The thing that I can tell you that we have an exposure that should have been reduced over time and during the last quarter between the last two years. But during the year we have -- already we used even more. And so it is a declining trend all the time, clearly.

Okay, fair enough. Thank you very much, Pedro.

(Operator Instructions). Chris Delgado, JPMorgan.

Just given the recent rate cut I wanted to get a sense of how you saw net interest income evolving versus loan growth and your NIM for the upcoming year.

For NIM? Yes. In the NIM or N-I-M, really we expect different forces that can impact and influence this number for both this quarter, the last quarter and looking forward thinking in 2014. On the positive side we have picked a positive inflation, a higher inflation (inaudible) or more of an inflation, a higher US variation, that should be something closer to 3%; a lighter year that is closer to 2%. This is one positive impact.

The second one is the mix. You know that our strategy and our focus is to grow more in the retail segment. So really, if you have a mix oriented to the retail you have a better return in these indicators.

Third, instead of the (inaudible) there is a possibility, it's not something that is sure, but when an economy makes (inaudible) the PPM is going down, mainly you have more possibility instead of doing [some cutting] depending on the evolution of the long-term or medium-term internal rate. They follow the trend of the short-term or really if the (inaudible) has been more open and the -- (inaudible). So really these are all positive impacts.

On the negative side you have first the internal rate caps (inaudible) and we think you will be in place from the next year, may be the first quarter, maybe the second quarter. But anyway, will be in place instead of the maximum internal rate.

The second thing in the negative side is what happened with our DDA balance? Because as long as the internal rate goes down the remuneration of these accounts are lower. But at the same time you have with the internal rate cuts you have a benefit because of the repricing of the portfolio because our liability (inaudible) is shorter than our asset turn off. So really you have a positive and negative.

So net-net, since you think that we will affect or we should expect a lower level of [I&M] that could be in the range between 15 and 25 basis points in a year. But however -- this is instead of the NIM. However, we expect to continue growing in our volume that obviously is a positive trend and will partially offset -- or totally offset or partially offset the lower level of NIM.

Okay, and just so I get the number core, a 15 basis point decline over the course of the next year then, is that from the current level of about 5.3 or the full-year average of about 5?

(Inaudible - microphone inaccessible).

Okay.

Average level of this year. Because you know that this quarter we have an inflation of more than 1%, you have impact very positively the number.

Okay, great. Thank you.

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

Thank you very much. Before ending the call I would like to close by saying that 2013 has been (inaudible) year for Banco de Chile. Looking forward it is important to note that 2014 will be a challenging year for Banco de Chile. From a positive perspective we think that asset liability will continue growing at attractive rates and that the higher inflation will also help to increase operational revenue generation for the industry. Nevertheless, (inaudible) on new regulation (inaudible) that is very important also instead of the (inaudible).

In terms of insurance, other than that new regulation in (inaudible) accrue revenue and some policy is still recognizing upfront, we have a negative impact that was included in the number that I gave you before.

On the possible implementation of a bill which limits internal rate for loan less than 200,000 -- I'm sorry $200, we have an adverse impact of results in the former the (inaudible) will be temporary and chiefly influencing a change in the way fees are recorded for cash to (inaudible) base as we mentioned just recently.

In the latter we will force banks to adapt their business model in order to properly absorb these changes. We are confident that institutions like ours have the skill, resources and the scale required to address them properly so as to continue creating value for our shareholders. Thank you, I look forward to sharing with you our (inaudible).

Thank you. This does conclude today's presentation. You may now disconnect your lines. Have a great day.