Banco de Chile (BCH) 2013 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Banco de Chile's fourth 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 operating performance. All projections are subject to risk 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 conference over to Mr. Pablo Mejia. Please go ahead, sir.

Good morning. It's a pleasure for me to share with you our comments on Banco de Chile's yearend, and fourth quarter, 2013, financial results. As a reminder, a link to the slide presentation is available on our web page, www.bancochile.cl, within the investor relations' site.

Please turn to slide number 2.

To begin, we will discuss the developments in the Chilean economy, the results of the banking industry, Banco de Chile's results, and compare the performance. We will end the call with a discussion on the Bank's effects of the recent secondary offering of our shares by our controlling shareholder, LQIF.

Please turn to slide number 3, which contains the recent developments of the macroeconomic environment.

In 2013, GDP grew in accordance to consensus, expanding 4% year on year. Despite that GDP is below the average of previous years, it still remains above the region and the world. During the year, the slowdown was largely explained by a deceleration in investment, mainly associated with postponed mining projects and their negative effects on other sectors linked to this industry.

In contrast, private consumption, which represents over 60% of GDP, has continued to be the main driver in the economy, thanks to strong employment levels which were concentrated in high-quality jobs, together with the real wage increases and stable credit conditions in the financial markets. However, the latest retail sales' data points to a gradual slowdown in the coming quarters.

In terms of investment, despite the deceleration which took place in 2013, we expect to end the year with a figure around 27% of GDP. We believe that this level of investment will continue in the future, especially because Chile needs the developed new energy products to sustain the country's growth.

Finally, in terms of inflation, we ended the year with a figure of 3%, very much in line with the Chilean Central Bank's target range. Nevertheless, inflation measured as the [UF], expanded 2.1% during 2013, a lower figure when compared with the 2.5% reached in 2012. For 2014, market expectations continue forecasting inflation at 3% as of December. This perception could change in the future, depending on the effects of the recent depreciation of the Chilean peso against the dollar, and the current deceleration in the economy.

Please turn to slide number 4.

Before moving on to a discussion on the banking system, I would like to point out some of Chile's competitive advantages which are important in the current, less-favorable, economic environment for emerging economies.

Chile is a low-risk country rated AA minus by S&P, with very low levels of public debt, and a sustainable current-account deficit. Also, the country has international reserves of over 20% GDP, pension finances of 60% GDP, and a potential growth of 5%, based on both the highest GDP per capita in Latin America that supports domestic demand, growth, and by being one of the most open economies in the world.

Thus, we firmly believe that our country will successfully face this less dynamic cycle for the developing world, and will return to potential growth figures gradually.

Please turn to slide number 5.

The previously mentioned advantages support our attractive financial system, which is characterized by soundness and growth potential. As you can see, loans represent 82% of GDP. A large portion of this penetration is focused on commercial loans, which are mainly associated with large companies. A clear difference with our neighbors is that residential mortgage loans represent 20% of GDP. This is a result of long-term funding that is available from Chilean pension funds, and other institutional investors.

Also, as you can see on the chart, on the right, we believe our GDP per capita of $16,000 should continue growing, which should translate into a higher loan penetration, particularly in the retail segment.

Going forward, we estimate that total real loan growth for the industry should be about 2 times GDP in real terms. This translates into a figure of about 11% nominal growth for 2014.

Please turn to slide number 6 for a review of the main figures for the Chilean banking system.

Total loans for the banking system continued decelerating during the fourth quarter of 2013, reaching an annual nominal expansion of 10.3% as of December, in line with the historic relationship of 2 times GDP growth in real terms. Among products, the evolution was led by consumer loans, with an expansion of 14% year on year, followed by mortgage and commercial loans posting annual expansions of 11% and 9% respectively.

It's important to mention that loans, with the exception of residential mortgages, and isolating the positive non-recurrent effect in consumer loans which occurred in December from the incorporation of a retailer's credit card business into their banking business, showed a slowdown on a yearly basis, due to a weaker domestic demand, narrow credit conditions in the lower income individual segment, and a significant number of bond placements by local companies in foreign markets that served as alternative sources of funding.

In terms of results, the banking system's net income increased by 18% year on year, supported by strong performance in operating income which increased 13% in annual terms. This was mainly explained by positive business growth, which compensated the adverse effects in lower inflation as measured by the UF and low net fee income.

As for credit risk, loan loss provisions recorded an increase of 12% during the year, in line with loan growth of 10% and a slight deterioration in credit quality as a result of slower economy.

In terms of operating expenses, the industry recorded an increase of 10% during the period. This is explained by higher salaries and administration expenses.

In addition, the banking industry also registered higher non-recurring income from investments in other companies as a result of a sale of a banking subsidiary for CLP78 billion.

Net-net, the return on average equity for the industry averaged 15.2% in 2013, slightly above the figure achieved in the previous year.

On the next slide, number 7, is a snapshot of Banco de Chile's main income statement figures.

To begin, operating income increased in the fourth quarter by 7% when compared to the same period last year. In terms of the full year, we grew this figure by 10%.

On the following slide, number 8, is a breakdown of operating income.

As you can see on the charts, we have divided operating income into two groups. The first, customer income, is what we consider to be our core business, while the rest, non-customer income, is mainly related to revenues from activities such as gapping and trading.

As you can clearly see, we have been consistently increasing customer income each quarter, and on a yearly basis. We have grown by 9% or CLP94 billion, over 2012. This growth has been due to our proactive management of lending spreads, focused growth in loans and higher non-interest bearing liabilities, whilst fee income has remained unchanged.

On the other hand, non-customer income during the second semester of 2013 and the full year grew due to our effective management of our structural UF GAP position, together with the benefit received from the devaluation of the Chilean and US dollar exchange rate.

The latter applies on derivative positions that hedge both our exposure to allowances for loan losses denominated in US dollars, and expenses related to loyalty programs provided through credit cards.

As you can see, on slide number 9, is a review of our fee-based business.

On the chart on the left, our market share in net fees was 22.2% as of December, substantially above all our competition. This strong competitive advantage has been accomplished by effectively cross-selling our entire customer base to fee products.

The chart on the right is a breakdown of our fees by business segment. As you can see, our retail segment represents 50% of net fees, while our subsidiaries, which include our mutual fund, financial advisory, insurance and stock brokerage businesses, as well as other smaller business units, represent 36% of total fees.

On the other hand, our wholesale division also contributes an important portion of these fees thanks to our high cross-sell ratio with corporate customers.

In the same way that we have been able to offset the negative impacts of regulations already put in place, we expect to compensate the adverse effect of new regulation for early termination of insurance policies, which began in December 2013, through the expansion of our customer base, as well as an increase in cross-sell.

Moving on to slide number 10, it's a review of our loan portfolio by segment and the evolution of our market share.

We grew total loans by 11% year on year and 2% quarter on quarter, ending with a market share of 19.1%. This annual growth has been balanced between retail and wholesale loans. However, on a quarterly basis, we grew our retail book by 3% versus our wholesale book, which only grew at 1.3%.

Moreover, in terms of average balances, retail grew year on year by 12.2% versus wholesale, which grew on average 5.5% year on year. The stronger average growth recorded in the retail segment is due to our focus on increasing our profitability and penetration in this segment through tailor-made business solutions.

Accordingly, during the fourth quarter of 2013, consumer loans to middle and upper income individuals grew 5%, residential loans increased 3% and commercial loans to SMEs grew about 2%.

In contrast, consumer loans to lower income individuals continued to lag behind the rest of the book, growing only 0.3% during the quarter. The lower growth in this segment continues to be due to a more prudent risk approach that we've adapted since 2012 which was in the line with the less dynamic local economy and the recently adopted regulations.

Our strategy in this area is to increase gradually our competitive position in retail, which is the most profitable and dynamic segment. We firmly believe that there are many opportunities to improve our position by concentrating our efforts on increasing the use of transactional services, business intelligence tools and improving the productivity of our different contact channels.

Also, thanks to our consistent strategy that has focused on providing great customer service, we have achieved what we believe is the lowest attrition rate in the local industry. This is an incredible competitive advantage.

Regarding the wholesale segment, we believe that there is still room to continue increasing profitability by taking further advantage of our connectivity agreement with Citi, effectively cross-selling these customers to fee-based business services, and by using our leadership position in this segment to generate business for the retail segment by providing customers with products and services such as payroll loans and bank accounts.

On slide number 11, we show a breakdown of our funding structure.

In terms of liabilities, we continue to have the best funding structure in Chile. Demand deposits, which are non-interest bearing, represent almost 23% of total sources of funds, with an overall market share of 22% and, more importantly, retail customers represent 46% of this source of funds.

This is another significant competitive advantage that no bank in Chile has, and something that we've held historically, providing us with one of the lowest costs of funds in the industry.

It's also important to note that time deposits are a large source of funding, financing 40% of total assets. 38% of the deposits come from the retail segment, giving us more stability than institutional investors provide.

In addition, we have recently carried out several bond issuances in international markets in order to further diversify our liabilities and improve liquidity, including Hong Kong, Japan and Switzerland. As a matter of fact, bonds represent almost 17% of total funding versus 10% three years ago.

As you can see on the chart at the bottom right, all these factors have translated into an average annual cost of funds for Banco de Chile of 3.4% as of 2013, ranking us the first amongst our local peers. Please also consider that the savings for every 10 basis points of cost of funds represents roughly CLP45 million in net interest income.

In order to summarize the last three slides that we just talked about, our strong level of operating revenue is based on our focus on the retail business, our high cross-sell ratio and our lower cost of funds.

Operator, can we put the call on hold for a second?

Sure.

If you can please turn to slide 12, as demonstrated on the chart, loan loss provisions have increased 28% from CLP188 billion in 2012 to CLP242 billion in 2013.

In terms of quarterly figures, the loan loss provisions have increased 34% in the fourth quarter of 2013 versus the same period last year. It is very important to note that a large percentage of this increase is attributable to three factors.

First, the unfavorable effect of the depreciation of the Chilean peso on provisions for loan losses denominated in US dollars for CLP13 billion; second, an increase in loan loss provisions of CLP10 billion for specific corporate clients, which has had financial difficulty during the year; and finally, higher countercyclical provisions of CLP8 billion recorded in 2013.

I should also highlight that the overall annual increase in retail loan loss provisions of 11% relate primarily to the loan expansion in the segment, which grew at the same rate. Nevertheless, it's important to point out that, within this segment, we have recorded higher credit charges related to small and medium sized companies, which has been offset by lower provisions to individuals.

Please turn to slide 13.

In line with our history we have, once again, posted excellent asset quality ratios. As you can see on the chart, we ended December with a delinquency ratio of only 1.11% and the similar ratio for loan loss provisions to average loans of 1.23%. In addition, we lead the industry in terms of our coverage ratio where we posted, as of December, a figure of 2 times, or 2.5 times when we include these countercyclical provisions.

Finally, it's important to mention our consistent and excellent asset quality has been possible, thanks to both the high involvement of our Board of Directors and upper management, as well as to the important human and financial resources allocated to the developed strong credit acceptance collection and monitoring practices as Banco de Chile.

As a result, Banco de Chile, on average over the last 10 years, has consistently posted loan loss provision figures that are around 0.3% below the industry average. In dollars, this translates into a significant benefit of approximately $120 million per year for Banco de Chile.

Please turn to slide 14 for a overview of our operating expenses.

As demonstrated on the chart on the right, our operating expenses have been very much in control during the last 12 months, growing 2% year on year. This has been accomplished by closely controlling our headcount, together with strict cost control policies, a lower amounts of IT projects put in place during this year, and a more moderate business growth as well as lower operational charge offs.

Regarding quarterly figures, the higher expenses for the fourth quarter of 2013 versus prior period is mainly due to three factors. First, a non-recurring bonus is paid to Banco de Chile employees to celebrate our 120 year anniversary; second, the increase in the fourth quarter related to the period adjustment in wages due to inflation; and finally the seasonal effects related to the administration and other expenses.

Before we move on, I should mention that part of this improvement in efficiency has been due to economies of scale and improved productivity that have arisen from the growth in our retail business segment. This has permitted us to become more productive by taking further advantage of the available capacity in our branch network, back office procedures, and sales productivity gains based on the consolidated CRM system. As a result, we have posted a strong efficiency ratio of 43% for both the quarter and the full year.

Please turn to slide 15.

In summary, we had another great year and, as you can see on the chart on the left, we have increased our quarterly result substantially over the last year and this has translated into a 10% increase in net income for the year, representing 27% of the industry's net income. This outstanding result is thanks to everything we have discussed but, in particular, to a strong increase in operating income, together with great expense management.

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

Thank you, Pablo. Please turn to slide number 16.

First, I would like to say that Banco de Chile is the leader in terms of return on average equity in the Chilean banking system, as well as among our peers in LatAm, reaching 21.3% in 2013. This figure has been achieved through solid fundamentals.

First, we have achieved our outstanding revenue generation, based on a good mix of assets, high growth sales and an excellent funding structure.

Second, we have a proven approach to risk management based on strict [assessment and admission] criteria, strong monetary practices and effective collection processes that secured low delinquent loans and loan loss provisions. And finally, we have accomplished our goal of improving cost to income leverage over the time without sacrificing our service quality.

Our ambition at Banco de Chile is to continue consolidating our leadership in every segment we serve, and to continue building a bank based on a sustainable and profitable business model that creates value for our shareholders.

Please turn to slide number 17.

Thanks to our strong competitive advantage, we have repeatedly posted attractive profitability during the last four years, with the exception of 2009, when we still had higher expenses due to the merger with Citibank Chile and the negative effect of the inflation for that year.

Moreover, despite two capital increases, the profitability gap that we have with our peers has widened during the last few years. Currently, our return on average equity is 1.3 times that of our peers, and our return on average assets is 1.5 times that of our peers. It is also especially remarkable to note the stability of both indicators. This has been possible due to the quality of our earnings, supported for a focused and consistent business strategy, together with solid corporate [business] practices.

Please move to slide number 18.

Before entering into the question and answer period, I would like to quickly discuss the public secondary equity offering by LQIF.

In January, LQIF announced their intention of selling, through a public option, a portion of their participation of Banco de Chile. In light of this news, our Board of Directors agreed to collaborate with LQIF to perform all the steps necessary to complete the transaction.

The final offering that was registered locally and overseas was declared successful on January 28, 2014 by LQIF's Board of Directors. And a total of 7.6 billion (sic - see press release, "6.7 billion") shares, equal to 7.2% (sic - see press release, "7.4%") of Banco de Chile were optioned at CLP67 per share within the local market.

Consequently, this transaction has increased our free flow from 17.6% to 24.7% (sic - press release, "24.8%") and LQIF has maintained their control of the Bank by holding a stake, directly and indirectly, of 51.2%.

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

Thank you. (Operator Instructions). [Diego Batista].

I have basically two questions. The first one is related to tax shield that you have paid out into SAOS. How long do you estimate that you'll be able to maintain this tax shield? Is 2018 a good estimation for the end of this tax shield? This is my first question.

And my second question is regarding your efficiency ratio. Banco de Chile posted a major improvement in its efficiency ratio during last year. Is it possible to expect further improvement in this ratio during 2014?

Thanks, Diego, for your question. Regarding SAOS, as you know the subordinated debt that gives us this tax advantage, according to the schedule should be paid until 2036.

However, according to the level of earnings that we are generating, and the earnings distribution that we are doing, we would estimate something, if you take the same profit out of the segment, with the same policy of [the earnings] distribution of last year, this should be completed by 2020 or a little bit earlier. So [we will not have] the benefit until this year.

Let me tell you something in addition, taking advantage of your question. The other thing is the [new] tax increase that could be implemented by the new government. And I want to be very clear that, according to what we estimate, the tax rate will increase from 20% to 25% in a four-year period. This 1.25% increase per year obviously will have an impact in the Bank that it should be about [80] basis points per year, in terms of the tax rate because of the advantage that we have with SAOS.

But I have to say, at the same time, that we are going to have at the beginning, by sure, we expect to have a benefit because of the deferred tax. So really, we don't have a negative impact the first year of implementation of this new rule.

According to your second question, in terms of efficiency, really our business model is not have an efficiency ratio lower than 40% in the long run. We expect to be above 40%, between 42% and 44%. And really the efficiency ratio of last year, of 2013, was very good. It's something that is difficult to be repeated during 2014, even though our target is to go to an efficiency ratio about 42% within the next three years.

But we can suffer some impact in the short run because of different things. We have, first, some impact in terms of the salaries for our personnel that the increase was given in November affected two months during 2013, but will affect 12 months during 2014.

The other is the new regulation that obliged us to do or make some investment where you are going to have some impact also in the short term. We are continuing growing in the business and we have to deliver some IT investment in order to maintain our trend of growth in terms of business. So really, we don't expect the same rate for 2014. However, we expect to be in the range of between 42% or 44% within the next three years anyway, and closer to 42%.

Okay. Thanks for the answers.

Jose Barria, Bank of America.

I just want to get your thoughts on the evolution of asset quality here. Obviously, you guys have a very good level of non-performing loans and provisions to average loans, etc. I was just wondering what your expectations are for this, going forward, in terms of as it pertains to your strategy.

Are you expecting to see this ratio continue to increase as retail gains more exposure, or are you expecting it to increase because of the uncertain macro environment? What shall we expect from this, going forward, in terms of should it be at these levels or it should be deteriorating from here?

Yes. Thank you, Jose. Well, let me tell you the following. As Pablo explained in the call, during 2013, we have an extraordinary impact in terms of our cost of credit. And some of them maybe will be repeated in 2014, but some of them, not necessarily.

So really, taking into consideration that our strategic focus in to continuing growing more in the retail segment that has a higher trade indicator, we expect that one will offset the other. In other words, the additional increase that we could have in terms of being more oriented to the retail market will be offset because we have the extraordinary impact that we have in 2013 that were very well explained during the script of Pablo, really will be relatively offset. So really, we expect that the different ratio will be almost flat with little changes, but not significant, but almost flat.

Okay. And if I can get just your thoughts quickly on what is your expectation for ROEs. You've had a couple of things impacting results in 2014; we talked about the tax rate which you think shouldn't be an issue in the first years, but we have the tasa maxima and slower growth in the economy. Do you think the ROE for your Bank should stay at these levels, or is there a possibility that it could slightly decline from here?

No, I would say that during 2014, because of the reasons that I explained before, we will have some slight impact in terms of the return on equity, but not significant. However, considering a scenario of three years or medium term, really our return on equity will be maintained in the range of 21% to 23% in the long run.

Anyway, in any case, we don't expect a return on equity even for 2014 lower than 20%; always above 20%, but in the long run, more close to between 21% and 23%.

Okay. Thank you very much.

Boris Molina, Santander.

I have a couple of questions, a couple of follow-ups regarding your comments regarding growth in the system of around 11% nominal in 2014. Which segments of the system do you think are going to grow faster and which ones are going to grow slower? Where do you see yourself continuing to gain market share in 2014; still in consumer or is it in mortgages or SMEs? Will you give some clarification on this front?

Yes. Thank you for your questions. Well really, as we said before, we expect to continue to gain market share, and this is our focus in the consumer segment, first.

Second, when we talk about the growth of the system, we think that the growth of the system will be relatively even, but with a little bias to grow less the consumer banking segment, but especially in the consumer finance.

However, if you take into consideration the consumer A, ABC1 and C2 segment, we expect the growth very similar that the growth that we are going to have in the commercial products and in the houses, between 7% and 8% in real terms.

So really, we don't see [accruing] in the consumer finance. In terms of the market, we see a growth that will be very even within the different products.

In terms of our strategy, we are expecting to gain more market share in the consumer, but specifically in the other [main] segment of the consumer banking and not overly in consumer finance because of the reason that you know.

Okay, wonderful. And an initial clarification regarding the evolution of cost and fees, because there is obviously the impact of new regulation, and when we look at profitability in 2014, do you expect fees to be able to grow even in low-single digit, given the impacts of regulation? Or do you still expect a decline in fees next year because of the changes in regulation?

Yes. Let me answer. Given our capability to generate fees in terms of the diversification that we have in terms of products, services and [legal vehicles], we think that all the impact of new regulation will be relatively offset, offset slightly different maybe, but relatively offset with the increase in terms of our customer base, higher penetration, and trying to gain some earnings in other products where you don't have the restriction in terms of regulation.

You have to remember something and maybe, I don't know if everybody knows that, that the new regulation enacted in December is very important in terms of the insurance business where you have to give back to the customer the premium paid, the non-expensed premium paid by the service, by the insurance. This is something that will affect the whole financial system especially the banks that are very oriented to bancassurance, like Banco Chile.

However, in the explanation that I am giving you when I am saying that we expect to be relatively flat, it's considering this negative effect also.

Okay. So we should be ready to see fees flat for the year, with probably zero growth?

We think so. We expect that.

Okay. And in terms of your cost growth, the acceleration in cost would take it back to around 13%, or you expect something closer to loan growth of around 11%, 12%?

No, really, we are not expecting to be growing in terms of expense. Our policies are very clear, and we have strict control of our expense base. The only reason to grow is because of the reason that I mentioned before. So really, you should expect growth higher than last year, no doubt about that. And [only one digit] in the range of 5% to 8%, no more.

Nominal?

Yes, nominal. I am talking about nominal figures, in general, with the only exception of the market share. When you asked me the question share, I talk about real figures.

Yes. Now, in relation to Diego's a question regarding the tax shield from SAOS, and the repayment of the subordinated debt; do you expect that the stake that this vehicle has in the Bank will flow into the free flow, as you repay the debt? How do we expect the free flow to evolve across [the sphere] from now until 2020, in relation to the repayment of this debt?

Yes. Well, you know that the impact -- all the shares you convert into shares of Banco de Chile, you are talking about something between 12% and 13% of original free flow. So really, you are talking about a number between 37% and 38% of free flow, after the prepayment -- after, I'm sorry, the payment, or very close to 40%.

Okay, wonderful. Thank you so much.

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

Thank you very much. Just one clarification. When I talked about return on equity, I am talking about total equity including minimum dividend. I'm not talking about [just capital], just to [make sure].

Total equity, taking into consideration excluding the provision for minimum dividends.

Yes. In terms of my closing remarks, as we've mentioned throughout this presentation, the Chilean macroeconomic environment is very stable, characterized by its low risk and solid fundamentals. We also believe that we have a strong financial system with a positive outlook, growing in real terms around 2 times the GDP growth.

In terms of Banco de Chile, we have a competitive position that is unique, with a powerful brand in Chile. Just to mention some of our competitive advantages that we expect to maintain the future to continue growing are the following.

We are the first or second bank for most of the products and services that we offer. We have an excellent funding base that provides us with very stable and attractive rates, in order to fund our business. We have been systematically outperforming our peers in credit risk, thanks to our excellent assessments, criteria and proven policies.

We have increased [loans] operating income at attractive rates. We have continually improved operating efficiency to a level that is well above the average in the banking system to market leading levels. We have consistently posted high profitability figures.

And finally, last but not least, I would like to emphasize that we have a consistent customer [centric] strategy, which, from my perspective, makes a huge difference in our market.

Thank you, and we look forward to discussing our first quarter 2014 financial results with you soon. Thank you very much.

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