Banco de Chile (BCH) 2014 Q1 法說會逐字稿

Good morning, everyone, and welcome to Banco de Chile's fourth-quarter 2013 (sic) 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 risks and uncertainties and actual results may differ materially. Please refer to the detailed notes in the Company's press release regarding forward-looking statements.

I will now turn the call over to Mr. Pablo Mejia. Please go ahead, sir.

Thank you. Good afternoon, it's a pleasure for me to share with you our comments on the first-quarter results. To begin, please turn to slide number 2.

We will discuss developments in the presentation of economic environment, the results of the banking industry, followed by a review of Banco de Chile's excellent results, and lastly Pedro Samhan, the CFO of Banco de Chile, will end the call with some closing remarks.

Please turn to slide 3, which contains economic first-quarter 2014 highlights. As you know, in the fourth quarter 2013, GDP posted deceleration, which implied the activity averaged a 4.1% year-on-year expansion after three periods growing at a pace of around 6%. The latest activity figures confirm that this less positive scenario continued during the first quarter of 2014, where we had put a GDP expansion of 2.4% year on year.

In FX, the slowdown continues to be largely explained by a deceleration in investment, mainly associated with postponed mining projects and less than (inaudible) construction sector, a drop in machinery and equipment imports, some uncertainty associated with the proposal of the tax reform, and future energy challenges.

In terms of private consumption, which represents over 60% of GDP, has continued to be the main driver of the economy. But growing at a slower pace due to a weaker labor market and the depreciation of the exchange rate, which has raised the price of durable goods. In fact, unemployment reached 6.5% as of March, a higher level when compared to the prior quarter and the 6.2% figure posted in the first quarter of 2013.

This, together with a slower increase in real wages, will affect the purchasing power of households, reducing the performance of private consumption in the coming quarters. In this scenario, and in spite of lower aggregate demand pressures, inflation rallied during the last six months, reaching a 3.5% year-on-year variation as of March 2014, approaching the upper limit of the Central Bank's target range. The rapid acceleration in inflation has been explained by higher prices in gasoline, utilities, and foods.

In addition, the recent depreciation of the Chilean peso has reinforced those effects in tradable goods. For year-end the range of expectations is wide, but has shown an upward trend moving to that inflation figure of around 3.5% for the year.

In terms of the monetary policy, the Central Bank has reduced the referential rate by 100 basis points to 4% within the last seven months. Despite that, during April the monetary authority decided to take (inaudible). We expect more cuts in the rate will be made in the coming months to reach a value of at least 3.5% as of December 2014.

For the next quarter, we expect a gradual improvement in activity as strong contraction in investment eases, especially because Chilean companies remain in good shape and financial conditions remain accessible to medium and large companies. In addition, we also expect a gradual positive effect in aggregate demand in line with the establishment of a more expansionary monetary policy.

Before moving on to a discussion on the banking system, I would like to briefly mention the main proposals of the recently announced tax reform. The main challenges of this bill -- the main changes that this bill establishes are, first, the corporate tax increase from 20% to 25% in the next four years. Second the decrease in the maximum rate in personal income tax to 35% from 40%.

Third, the end of the tax deferment and retained earnings fund, called the [foot], moving from a system based on taxation of cash distribution of earnings to one based on accrual. Fourth, the higher attribution in the Chilean tax growth to reduce tax avoidance and evasion.

It is also worth mentioning that the main purpose of this reform is to carry out important changes in our education system so as to improve quality and to gradually shift towards a free universal education system. This reform seeks to collect approximately CLP8 billion, or 3% of GDP.

We expect that there will be political willingness to deeply analyze the tax proposals in order to modify and introduce all the necessary changes so as to avoid undesired effects on investment. However, it's too early to make an accurate estimate about that implication, but we do know that the Chilean economy is strong enough to implement these measures gradually and face any possible adverse effects that could emerge maintaining our well-known economic stability.

As for Banco de Chile, initially we can mention two possible effects. First, we expect a one-time positive effect from the gain of our net deferred tax assets, which will be repriced at a higher tax rate. And secondly, a gradual increase in our net effective income tax rate.

Please turn to slide number 4 for a review of the main figures for the Chilean banking system.

For a better understanding of the banking system's performance, we isolated in this analysis the volumes that subsidiaries abroad, the non-recurring consolidation of a consumer loan portfolio carried out by Chilean banks related with the retail company, which added approximately CLP430 billion on the industry's balance sheets in December of 2013. Also variations for loan volumes of the banking industry are presented in real terms.

So total loans grew 7.1% year on year as of March 2014 compared to the 7.6% expansion in December 2013 and a 9.6% in March 2013. The current deceleration in loan volumes has been gradual and slower due to the economic cycle, hence we expect it should continue as such in the short term as the economy loses momentum. Also, in terms of -- in the short term, the banking industry activity should reflect stricter credit conditions because of the prudent risk approach that defines the Chilean banking industry.

A breakdown by products shows that commercial loans grew at 6.1% year on year as of March 2014 versus 6.8% as of December 2013 following a similar downward trend, like investment. This behavior was amplified in March 2014 when commercial loans experienced a month-on-month decline resulting in an annualized quarterly growth of only 3.4% during the first quarter of 2014.

Consumer loans also lost dynamism over the last quarter in lines of a gradual temperance in private consumption. Thus on a yearly basis this product grew by 7.4% as of March after a peak of 8.7% as of December 2013.

On the other hand, mortgage loans continued to display stable annual growth rates by recording a 9.3% year-on-year growth in the first quarter of 2014. Finally, in terms of loan volumes, we believe that total loans should grow by 7% real year on year in 2014 as a result of improvements in the macroeconomic scenario boosted by a decrease in levels of uncertainty and the effects of more expansive monetary policy established by the Central Bank.

As for results, industry net income totaled CLP595 billion in the first quarter of 2014, a 57% rise over the first quarter of 2013. This notable variation was principally explained by larger operating revenues, which more than offset higher provisions in operating expenses. As a result, the banking system's profitability climbed to 18.2% return on average equity in the first quarter of 2014 versus 13.2% in the first quarter of 2013 and the 60% for the full year 2013.

The annual gain of CLP215 billion in the bottom line was driven by higher operating revenues for the month of CLP452 billion, in line with the profitable expansion on loan volume and the comparative higher expansion in the US during the quarter, posting higher benefits from the structural US net asset position maintained by the industry. The bulk of the evolution in operating income was partially offset due to a larger loan-loss provision by CLP64 billion caused by the deterioration in the payment behavior of individuals and companies and a rise in operating expenses of CLP133 billion, due to higher personnel and administrative costs.

For the second quarter of 2014 we also expect positive results in the banking industry, aligned with important effects from inflation, which should offset the deceleration in loans and the riskier economic environment.

On the next slide, number 5, is a snapshot of Banco de Chile's main income statement figures. To begin, operating income increased in the first quarter of 2014 by an impressive 20.4% when compared to the same period last year. The strong increase was due to a variety of factors as explained on the following slide.

Please turn to slide number 6. On this slide we present the breakdown of operating income by interest income from loan deposits, fees, and treasury income, which is mainly related to income from activities such as [gapping] trading and the management of our capital and reserves. As you can see, part of this increase in the first quarter of 2014 was attributable to the management of our US GAAP structural positions and the treasury-related activities.

In the first quarter of 2013 inflation only reached 0.13%, while in the first quarter of 2014 inflation rose to 1.28%. Additionally, our Treasury areas took advantage of the reduction of the long-term interest rates, which increased the value of our securities portfolio, generating revenues of approximately CLP7 billion in the AFS securities and CLP3 billion from our trading portfolio.

Also, we benefited by a moderate steepening in the yield curve structure and a positive exchange rate effect on our net asset position in US dollars that hedge allowances denominated in that currency. On the other hand, net interest income from loans rose 7% year on year, which was slightly lower than the 9% increase recorded in loan balances during the same period, principally due to the reduction in the interest rate caps. Additionally, we were able to maintain the contribution coming from [BVAs] by successfully growing average volumes in the double-digit range, which completely offset the effect of the reduction in the overnight rate.

Lastly, due to a variety of reasons, fees have been under pressure during the last few quarters. The main elements that explain this year-on-year decrease are: first, the impact of regulations which limit the flexibility and pricing of banking products and services we offer; second, the recent regulation that obligates to refund insurance premiums in the case of early termination of insurance policies, which took place in December 2013; and third, the negative effect of the depreciation of the Chilean peso on co-branding expenses being offset in FX revenues by hedging this position.

Moving on to slide number 7 which is a review of our loan portfolio by segment. Loans continue to grow strongly, up 9% nominal year on year. However, when compared to the fourth quarter of 2013, growth dropped to 0.5%. The slower quarterly growth is consistent with the less dynamic Chilean economy. This has led to decreases in demand from both individuals and companies combined with a stricter credit acceptance criteria.

In addition, during the quarter there were a few short-term wholesale loans which came due for about CLP260 billion and which were originated in the fourth quarter of 2013. Nevertheless, thanks to our focused retail strategy that has been concentrated on improving customer business intelligence and productivity, we were able to grow our retail book at a pace of 11% year on year and 3% quarter on quarter, which more than offset the lower growth experienced in wholesale banking, which grew 7% year on year and decreased 2% quarter on quarter.

These excellent results in our retail book have been achieved through the implementation of comprehensive business intelligence models which include improvements in pricing strategies by sales channels, new propensity models, and optimizing our incentive models for account offices. Thanks to these enhancements we are able to increase sales, improve spreads in consumer loan campaigns, and for the first time ever, Internet sales became the main sales channel for installment consumer loans in March, a fantastic achievement.

On slide number 8, we show a breakdown of our funding structure. In terms of viability, as we commented in prior releases, we continue to have the best funding structure in Chile. Demand deposits which are non-interest-bearing represent 25% of assets with an overall market share of 22%, and more importantly, resale customers represent over 40% of this source of funds.

As you know, funding from retail customers is more valuable because of its stability as compared to wholesale deposits. This is also true in terms of our time deposits, which have a high proportion of funding from retail customers. During the quarter, we've continued to carry out bond issuances in international markets in order to further diversify our liabilities and improve liquidity.

In February we issued $350 million in Switzerland, in March we placed $20 million in Japan, and in April we issued $70 million in Hong Kong. As a result of this strategy, as of March 2014, debt issued represents just over 18% of total assets, 363 basis points above only one year ago. This reduced our exposure in shorter-term time deposits by 310 basis points.

All of these factors have translated into generating an excellent cost of funds ratio of only 3.7%, significantly below the average of the system of 4.2%. Also, on the chart on the right we compare the cost of funding and time deposits by currency, which is, in our opinion, a good indicator for comparison purposes due to the fact that they are more similar in terms of durations than other liabilities.

As you can clearly see, we excel our main tiers in funding in pesos, UF, and foreign currencies. It's also important to mention that Banco de Chile has one of the lowest concentrations in funding from Chilean pension funds and mutual funds, representing only 13% of this source of funds.

Please turn to the next slide, number 9. As demonstrated on the chart, loan-loss provisions have increased 53% from CLP50 billion in the first quarter of 2013 to CLP76 billion in the first quarter of 2014. However, it is important to note that this increase is due to four factors.

First, the strong loan growth experienced in our retail business, which increased provision charges by CLP 6 billion. Second, a release of provisions of approximately CLP9 billion related to a specific corporate customer loan in the first part of 2013, which reduces the comparison base. This was due to an upgrade in the risk classification of a wholesale customer that experienced financial difficulties back in 2012.

Third, the effect of the depreciation of the Chilean peso on provisions for loans denominated in US dollars were CLP5 billion. And finally, a credit deterioration in line with the weaker economy, which affected the wholesale and SME segments for an aggregate amount of CLP7 billion.

In summary, loan-loss provisions as a percentage of loans increased during the period to 1.45%. If we exclude the effect of depreciation of the Chilean peso, this figure reaches 1.38%. This higher level of provisions is consistent with the less expansive economic cycle that has been reflected in the less dynamic economic environment for companies in higher levels of delinquencies and weaker financial environment.

The Bank has been taking measures to mitigate these effects by restricting exposure in certain products [connected] to the economy, following more closely the performance of companies and strengthening collection activities.

Please turn to slide number 10 for an overview of our operating expenses. This has once again been an extraordinary quarter in terms of efficiency. We reached an outstanding ratio of 39.2% in the period, significantly below our average levels in the past thanks to our very strong operating revenues and our strict expense control.

As demonstrated on the chart on the right, our operating expenses have been very stable during the last 12 months growing 7% year on year. The main drivers for this increase as compared to the same quarter last year is mainly due to an increase in salaries, which are indexed to inflation adjusted every May and November and a slight increase in headcount to reinforce our business areas. Higher administrative expenses reflecting the increase in business activity, in particular the expenses related to credit evaluation, IT, and maintenance.

Before we move on, I would like to reinforce that the excellent efficiency ratio posted this quarter has been achieved not only thanks to strong operating income but to also improved economies of scale and higher levels of productivity that have arisen from the growth in our retail business segment. This can clearly be seen if you look at the evolution of our cost-to-asset ratio, which has consistently improved, decreasing from 2.6% in the first quarter of 2013 to 2.3% in the first quarter of 2014.

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

Thanks, Pablo. Internally we had another great quarter and you can see on this chart on the right all the factors which Pablo mentioned in the presentation have permitted us to consistently grow our [segments]. This quarter was not an exception.

We reached a record quarter in terms of net income, operating income, and efficiency, with triggers of over CLP150 billion in net income, for the quarter and above the same period last year, CLP408 billion in the second, and lower than 40% in the [last]. However, the challenges of the (inaudible) quarter cannot be ruled out. I will say there were [many] changes combined with a growing economy.

Despite these factors, I truly believe that our ambition to (inaudible) Banco de Chile, the leading bank in every segment we serve, has been accomplished in a sustainable and profitable manner, which has provided a foundation for Banco de Chile to outperform our competitors throughout the economic cycle.

Thank you. If there are any questions, we will be happy to answer them.

(Operator Instructions) Jose Barria.

Good morning, gentlemen. Thanks for taking my question. I want to focus on provisions, given the tone and the messages you've given with regards to the weakening macro environment and the impact that we saw on provisions this quarter.

The first question is are we seeing a new level of loan-loss provisions to average loans at this 1.5%; if you expect it to remain there or perhaps increase with maybe a weaker macro environment? Second is I wanted to get your thoughts on the change to the provisioning methodology that the superintendency is evaluating for mortgage loans. If you have any further updates in terms of when that could be expected and what the impacts would be on your results that would be great. Thank you.

Yes, thank you for your question. Let's talk about the first one. In terms of provision, the (inaudible) very well. We did well at the level of 1.5%, [but it's 1.45%], first. And second as you accrue the (inaudible) it's not necessarily something that will be repeated the rest of the year. You are talking about [1.58%].

As to (inaudible) to your question, we don't see that (inaudible) will increase. (inaudible) we think that will be even lower in the rest of the year, thinking that really we are going to be about in the range of 1.3 to 1.4, no more than that. And the reason is very well explained in terms of the slowdown of the economy (inaudible) to be focused in the retail market and (inaudible).

Regarding your second question, the (inaudible) for provision, well, it's something that we will review. It's under consulting, consultation, but really we don't have any new developments. (inaudible) it should have a very significant impact for the banking system in general, instead of numbers. But within that, we have to be [careful with the authority] and we expect that some change will be in place before the final measure or (inaudible) will be applicable. But the impact (inaudible) is significant for the banking system and for Banco de Chile. No doubt about that, but we expect some changes instead of the (inaudible) that has any news during the last one or two months.

I see. In previous years or in previous locations when the banking regulator has looked at provisioning methodologies and perhaps change of another portfolios, have they allowed direct additional reserves to be taken against equity or have they generally flown through the income statement? Just wanted to get a sense of what the history shows in terms of these changes as brought by the superintendency.

In general, it has been against equity and by [shares] if something happens in the future. We have said, again, that will be against everything. So (inaudible) against equity.

And the other (inaudible) that you have to consider in the new methodology also is considered the possibility you have (inaudible) more. However, the only thing that we have to discuss with the authorities is that you are using (inaudible) model and you have a difference higher than 30% in the model, you have to apply at least the 70% of the regulatory renewal. [Well, not any more]. This is something that you have to place a consideration on.

Got it. Okay, thank you very much.

Thiago Batista.

Thanks for the opportunity. I have basically two questions. The first one I've got in the Bank's ROE. Your profitability was really very strong the first Q and probably this will continue at least in the second quarter due to the high level of the US.

In this scenario, how much do you believe you could achieve for the whole year in terms of the ROE? And also in the medium term, what do you believe will be your medium-term ROE? This is my first question.

The second question is regarding the loan growth. You (inaudible) [the season] posted a kind of modest expansion the first quarter in terms of loan growth. How much do you believe you can expand your portfolio during this year?

Thank you for your questions. (inaudible) has been [a negative]. On that the first quarter wasn't an ordinary quarter for the impact -- because of the impact of the US. However, (inaudible) [generally is] the rest of the year (inaudible) this level of (inaudible). However, considering that the second quarter [to have also] relatively high inflation, not the same the third and the fourth.

We should be in the return on equity between -- I think between 22% and 24% by the end of the year. However, you asked me for the loan loss, we are facing something (inaudible). Level [over] 25% is very difficult to deal with (inaudible), but I assure you that Banco de Chile will be in the long run. I think and I expect (inaudible) will be higher than 20%.

Okay.

In terms of volume growth, well, the first quarter for us was essential because we have some payment of very important loans in the large company area. But we are operating for the year a 7% growth [in real time] for the system and we think that we are going to be very close to the market or slightly lower [instead] of our goal, so we should grow between 6% and 7%, something similar. Always putting more focus in the consumer banking growth.

In the mortgage, could you comment your strategy on mortgage? Do you believe you would be able to gain market share in the mortgage?

Well, as you know very well, during the last few years we have increased Banco's share in mortgage because our purpose and our objective was to grow from a level of 14% to a level higher than 17%. [To regarding] a level of 17.2%, so really we are [taking] to a little group higher than the market, but not at the same [path] that we did during the last two or three years, but because we are very concerned also about the price (inaudible).

Really we are going to [rise] maybe a little bit higher than market, gaining some slightly market share, but without (inaudible) in the space. I know we are thinking in a very [reasonable equation].

Okay, it makes sense. Thanks for the (inaudible).

Boris Molina.

Good morning, thanks for taking my question. I wanted to see if you could also expand on what other regulatory challenges the Bank may face going forward. In your closing remarks, you mentioned that this was a factor and we know that the provisions is one of them.

Is there anything that we could expect throughout this year in terms of regulatory changes associated with either the implementation of Basel III or others that might be planned?

As you said, the name could be that we know so far is the change in terms of provision that we already comment. The (inaudible) that is more in the long run is Basel III, no doubt. And the other area -- some changes that already happened but (inaudible) has been seen and we will see it in the next quarters.

(inaudible) that already impacted also during the first quarter. And the insurance that we fund, [that kind of] insurance where we have to (inaudible) when we have an early termination of [insurance]. But really over there you have four changes, some of them are already in place, some are in the relatively short term, and some are in relatively longer term.

Would you say that the increase in taxation from the tax reform, could it -- a combination of the lower rate cap for consumers could affect the possibility of continued growth in this segment? Is this something that you think is going to negatively affect lower margin products that might need to be repriced?

You say that the tax reform? Because the other (inaudible) and was a very good question for (inaudible) of potential impact [that we saw]. Really I talk about just (inaudible) of the financial system but not talking about the tax reform.

For the tax reform let me tell you something before I answer your question. The main impact for us instead of the tax reform I think will be first the net income, because we are going to have a higher tax rate (inaudible). However, even though we are going to have a negative impact because of tax, we are going to have enough one-time positive impact in terms of the deferred tax assets that we have in our book that should be a very important impact in the short run once the new regulation [were being] implemented. That is something that we see that is very clear.

(inaudible) instead of our return on equity, the higher tax rate we think that should have an impact in the short term, assuming that it's fully implemented. 100% should not be, in terms of our return on equity, higher than 1%. It will be around 1%. Yes.

Now instead how this would be compared to price, (inaudible) is there [anything else to say there]? I think the market at the end of the day will be adjusted with a new regulation and maybe the pricing will be a little bit higher, but we don't think that necessarily we are going to have an essential impact in terms of the volume of our (inaudible). Instead of consumer or instead of (inaudible), but I think the market [is to] adjust to these new conditions.

But the positive here that we expect that it would be very gradual, I think this is something positive in [terms of the consequence].

Now given the changes in the reform, wouldn't you have to reflect an effective tax rate, which could be as high as 35%, given that you will be withholding taxes for shareholders?

(inaudible) we have to [reflect]. (inaudible) remember it is a reform that has not been enacted yet and in under discussion. We think that the 35% after the full year is the (inaudible). You have to replace the 35%. Instead of the additional [10%] I don't see, if I understood your question well, I don't think we will have an impact in [terms] of our net income. But it would have an impact instead of retention of the earnings or the focus of [premium] for our shareholders.

Okay, I understand. Thank you.

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. Before ending the call, I would like to close by saying that despite the challenges we face, we are certain that our strategy to grow our consumer base, especially in the (inaudible) our wholesale customers. (inaudible) [stature] and taking advantage of the implementation of the (inaudible) will translate into delivering [further] results and definitely contribute to preserving our leading profitability figures.

In summary, we are confident that we have the pure results that in [general requires] relative changes effectively so as to whatever created value for our shareholders. Thank you and we look forward to sharing with you our second-quarter 2014 financial results. Thank you very much.

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