Banco de Chile (BCH) 2015 Q1 法說會逐字稿

Good morning, everyone, and welcome to Banco de Chile's first quarter, 2015, results conference call. If you need a copy of the press release issued on Tuesday, it is available on the Company's website.

Today with us we have Mr. Rodrigo Aravena, Chief Economist & Senior Vice President of Institutional Relations; Mr. Pablo Mejia, Head of IR; Miss Victoria Gabens, Investor Relations Officer; and Daniel Galarce, Head of Research.

Before we begin, I would like to remind you that this call is being recorded and that the 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 notes in the Company's press release regarding forward-looking statements.

I will now turn the call over to Miss Victoria Gabens. Please go ahead.

Good morning. It's a pleasure for me to share with you our comments on Banco de Chile's first-quarter 2015 financial results. Please turn to slide number 2.

Similar to other calls, we will start with a discussion on the macro environment in Chile, followed by a review of the results of the banking industry and end with an announcement of Banco de Chile's strategy and first-quarter 2015 results.

Please turn to slide number 3, which contains the economic highlights. After a disappointing 1.9% GDP growth rate in 2014, there is a wide consensus that the Chilean economic activity went through a modest rebound in 2015.

Current figures exhibit mixed signs. On one hand, the labor market remained solid; export [growth]; and both fiscal and monetary policies are strengthening.

On the other hand, foreign investment is still struggling. Consumer confidence has not yet recovered and inflation remains high. In fact, the monthly indicator of economic activity, or IMACEC, on the top left, shows an upward trend that began during the last quarter of 2014. With the progress (inaudible), indicated [on the left], reveals mixed results.

The soundness of the labor market, or the unemployment rate, stayed at 6.1% and nominal wages grew about 7% in annual terms, have pushed up retail sales and currently grow around 2% on a yearly basis. This soundness however, does not translate into durable consumption. Car sales, for example, are shrinking at an annual rate of roughly 30%.

This outlook confirms the scenario revealed by the last release of national accounts data, corresponding to the fourth quarter 2014 where investments continue to drive down domestic demand and the currency depreciation helped with exports, as you can see in the lower left chart.

Please continue to slide number 4. As you can see on the upper left-hand chart, both headline and core measures of the annual inflation have remained above the Central Bank's target ceiling of 4% for roughly a year now. The narrow [flatness] of the labor market and the sizeable trend for depreciation have increased the CPI and the core measures notably.

Even though international energy prices have fallen in recent months and, therefore, headline inflation has decreased marginally, core measures are still high. In particular, the price index of non-tradable goods grew about 5% on a yearly basis, which implies that regardless of the currency depreciation, output and labor market gaps are lower than anticipated; a fact that has recently been acknowledged by the President of central bank.

Even though inflation expectations on a two-year horizon are well anchored at the policy target of [2%], the central bank signaled a possible monetary policy rate hike towards the end of 2015 during a release of the last month's credit policy report at the end of March.

This has partly explained -- has partly been explained by the consistent current inflation, but such an announcement also paves the way to avoid further currency depreciation or its efforts at normalizing its monetary policy.

The graph on the bottom left shows how the exchange rate weakened for the most part of 2014 and beginning of 2015. This can attributed to several factors, such as the stronger multilateral dollar; the path of domestic monetary policy, shown in the top right; and lower copper prices

The Chilean peso has depreciated 17% since the end of 2013 and 1.5% since the end of 2014 to April 20, of this year.

Public finance has remained strong. According to official figures, in 2014 there was a fiscal deficit equivalent to 1.6% of GDP, which is slightly below the official estimate released in October 2014. The breakdown shows that this decrease was due to the weak 1.5% increase in fiscal revenues, led, in turn, by the 8.2% real annual contraction in copper revenue.

On the other hand, fiscal funding rose 6.5% as a consequence of the 7.4% increase in its capital component. The structural balance of the central government, however, was only minus 0.5% of GDP and total fiscal savings of minus 12.9% of GDP, suggesting that Chile still has enough room to implement a countercyclical policy.

Regarding overall prospects for 2015, there is a broad consensus that economic growth will improve this year. Private forecasters point toward a 2.9% GDP expansion and a survey conducted by the Central Bank indicates a 2.8% growth. This is consistent with the Central Bank's forecast, which shows that GDP would expand between 2.5% and 3.5% in 2015.

These estimates suggest that Chile will grow below potential, even though we are starting to see a discussion regarding the exact magnitude of the local GDP growth potential where the official figure is 4.3% annually.

As a wrap-up for this section, let us look to the main factors underlying the economic recovery and the risks faced by the Chilean economy. The key factors include the rise effect from interest rate cuts that are still at historically low level; the positive contribution of net exports, due to the weaker currency; the expansionary fiscal policy; and finally, the robustness of the labor market.

Regarding downside risks, either an additional slowdown from China or a faster than anticipated monetary policy tightening in the US will certainly induce [us doing] adjustment in the outlook we have [discussed].

Please turn to slide number 6 for a review of the main figures for the Chilean Bank book [system].

On this slide we can see loan growth by product for the industry and also accumulated net income to March since 2012. The weaker dynamism in loan -- in real loan growth during 2014 has continued this quarter with total loans growing only 4% year on year. Mortgage loans are the only exception, growing at a solid 10% year-on-year growth.

Growth in consumer and particularly commercial loans has been decreasing steadily, in line with the weaker economy that has seen a strong drop in both investment and consumption levels, reflecting the current negative business and consumer confidence.

In line with this economic context and lower inflation, net income as of March reached CLP466 billion, compared to the CLP595 billion to the same date last year. This 0.2% decrease is mainly associated with the strong drop in inflation, which went from [1.2%] to 0% variation in the US to market each year.

This variation affected operating income negatively and the higher [cumulative] inflation during the last year affected expenses, since most of these are indexed to inflation.

Please turn to slide number 8 where we present our strategic pillars. In order to compensate our efforts and accomplish our medium and long-term goals, we have defined strategic objectives, which are listed here. These are used as guidelines for our business strategy and, consequently, for the initiatives we undertake to create significant economic value for all of our stakeholders.

This first quarter we continue to make progress in each of these objectives, particularly in leading the retail and wholesale business through a focused commercial strategy, and also by diversifying our funding structure. We have also made important developments in service quality and in building social [responsibility].

Over the next few slides we will share you our progress in the three strategic pillars listed to the left, beginning with our growth in the retail and wholesale business.

Please turn to slide number 9. Our commercial policies, which combine our business goals with a suitable risk return relationship, are targeted towards the most attractive markets and segments. This approach has enabled us to outperform the industry and be competitive with profitability ratios, amongst other indicators.

Our achievements can also be attributed to the importance we place on commercial initiatives in the retail segment. Our objective is to grow by continuously developing and improving a global offering of products and services that provide considerable added value to the final customer.

As shown on the left, overall loan growth was 4.4% year on year. Despite this low figure, it's important to point out that this growth was driven by our respective business strategies and continued deepening our penetration in attractive areas of the retail segment.

As such, the retail segment grew almost 10% year on year with important increases in key products. In turn, mortgage loans grew 12% year on year; followed by consumer, middle and upper-income individuals, which grew 10% year on year; and SMEs, which increased 7% year on year.

These rates have been achieved by understanding our clients' specific needs at each stage of their life. And also, our continuous efforts to implement new and better initiatives that are based on providing the best possible service.

At the first line of this strategy (inaudible) [are the] development in business in (inaudible), which allow us to get to know our customers on a more personal level. This permits us to select the best channel to offer our products and services at the right price and at the right time.

Additionally, we have put greater emphasis on digital channels that have allowed us to get online sales up by more than 200% over the past two years.

Along with this initiative, almost 70% of all pre-approved customer loans are sold online, which has doubled when compared to the pre-implementation of the sales strategy.

This effort in providing a better user tool has also been reflected on various innovation centers in 2014 for both Banco de Chile and Creditchile remote banking platforms. As a result, Banco de Chile was recognized as Best Place to Innovate in 2014.

Regarding our Credichile consumer loans, these expanded a modest 1.2%, which is in line with the information presented by the Central Bank Survey on loans concerning the lower demand seen on behalf of households for the growth.

This, together with the fact that most banks, including Banco de Chile, have begun reducing their risk appetite for this segment, due to the weak economic environment and stricter regulations that have recently been implemented and effective fundamentals of this business unit.

The wholesale segment, on the other hand, decreased 1% year on year, due partly to a high comparison base related to short-term loans, which were granted at the end of 2013; and also, for economic reasons mentioned previously, which has had an important impact on investment and consumption during 2014.

This has led to a weak demand from customers and high competition to capture new (inaudible). As such, we are taking an approach of maintaining an adequate risk return relationship, allowing unprofitable deals to pass when they fail to meet this criteria. A recovery in the economy will allow these numbers to grow as uncertainty lessens and confidence rises.

Nevertheless, it's important to mention that we continue to, and have historically, led the wholesale business evidenced not only by our market share and commercial loan products, but also the (inaudible) of our customers and services.

Please turn to slide number 10. As we have mentioned in previous calls, our funding strategy is based on improving our liability structure by moving towards a more-diversified financing service, such as retail deposits and bonds.

First, you can see that we have increased demand deposits by 7% year on year. This growth was driven by a strong increase of 15% year on year in retail deposits. This not only means that we have obtained more stable deposits, but it's also evidence that our customer relationship strategy has had a positive impact led by becoming our clients primary bank.

Time deposits, on the other hand, have decreased by 7% year on year, while debt issued has increased by 12% in the same timeframe. This is also in line with our objective to increase the duration of our liability.

On the bottom you can see how our deposits from retail and wholesale are significantly more important than institutional funding. Retail represents over 45% of total deposits, which includes both current accounts and time deposits; while institutional represents around 15% of total deposits.

This is especially important when taking into consideration that in the medium term Chilean banks will have to comply with stricter liquidity requirements.

Finally, it is important to point out that today we have a more-diversified fixed income investor base where 26% of our total bonds have been placed in foreign markets. This strategy has helped us to open new markets and reduce our exposure to local institutional.

On slide number 11 we present service quality. Here we would like to show how Banco de Chile has increased both its net promoter score, on the left, and customer satisfaction, on the right, over the past three years based on our customer-centric business strategy and our consistent efforts on improving our service quality.

Recently, we have also initiated a customer-experience project that concentrates on giving clients an improved experience on interaction of two different context channels and while using our products and services.

We anticipate that by taking these additional steps to establish deeper emotional bonds with our customers, we can improve loyalty and retention, as well as continue to increase various customer satisfaction indicators.

Today, as you can see, our net promoter score is over 69%; a considerable increase from the 60% seen in 2012. Customer satisfaction has also seen an important increase in the call center, account managers and mobile channels.

We believe that by having a commercial focus that puts our customers as first priority allows us to understand them better in order to give them the best and most-personalized service possible. Accomplishing this, we gain more satisfied and loyal customers, who will be more likely to take on additional products with the Bank.

On slide number 12 we present our commitment towards a better and more-developed team.

Banco de Chile has consistently shown a strong social commitment with Chile through initiatives focused on health, education and entrepreneurship, among others.

Additionally, Banco de Chile has also collaborated with important organizations during national disasters, in order to help those most in need.

For Chile 2015, so far, has had a few of these events. The most important being the floods in the north during March, which left many families in vulnerable conditions. Through the organization, Desafio Levantemos Chile we have been able to help and provide aid to those who are suffering the most in these areas.

In terms of international relationships and development, Banco de Chile is a sponsor for this year's Universal Expo in Milan, an opportunity to share new technologies, innovations, art and architecture, with other countries over a six-month period.

The theme to this Expo is food and natural resources, in order to work towards solving the world's current food crisis and future supply of crops.

We chiefly come a part of these projects, among many others, because of our great commitment to Chile and to its wellbeing. Both of these initiatives reflecting points we give to social responsibility, which is one of main pillars and principals mentioned earlier in this presentation.

Now, I will pass the call over to Pablo Mejia to discuss Banco de Chile's first-quarter result.

Thank you, Victoria. Please turn to slide number 14, where we present the quarterly result for Banco de Chile.

For the first quarter this year Banco de Chile presented a healthy bottom line of CLP117 billion. This figure was much lower than prior quarters, as we discussed in the previous call, but it's also very important to establish in the credit context, since there was a payment environment of 0% inflation. This means a 1.3% reduction from the UF variation presented last year.

Under normalized annual inflation of 3%, or 0.75% per quarter, this number would have reached, [thus made], CLP144 billion, which is very much in line with our results in recent quarters.

Please turn to the next slide, number 15 on operating income. Operating income for the first quarter of 2015 was CLP381 billion; and this has been separated between customer and non-customer income.

The chart reveals that core revenues from customers have maintained solid, despite the slowdown in the economy and changes in inflation, since the first quarter of 2014 amongst other factors.

In the first quarter, customer income represents CLP297 billion and non-customer income accounts for the remaining CLP84 billion, which includes income from the contribution of the US GAAP position and other treasury activity.

As you can see on the chart, non-customer income decreased [70%] from the first quarter of 2014 and [40%] since last quarter, reflecting the important difference in inflation between these quarters.

On the right on the blue line, representing total operating income margin, shows a decrease consistent with the lower non-customer income, which is denoted by the purple line.

Otherwise, we can see that interest income from customers and fee income remains stable.

A marginal improvement in spreads, favorable change in mix and demand deposit volumes have compensated lower margins from these deposits and negative regulatory impacts.

The solid performance in customer revenues demonstrates the strength of the business model in Banco de Chile, even in the weak economy and highly-competitive environment.

Please turn to slide number 16 on loan-loss provisions. Loan-loss provisions have decreased 14% over the past year, thanks to our continued prudent risk policy, characterized by strict acceptance criteria; strong follow-up protocols; and effective collection processes.

As you can see on the chart on the right, commercial loan-loss provisions decreased CLP16 billion thanks to the good behavior of our wholesale and SME customer.

About CLP5 billion resulted from certain substandard loan payments, which [relate] provision charges. The remaining portion is due to stable and no deterioration in our customer risk profile.

In relation to our personal banking products, consumer loan-loss provisions increased CLP5 billion year on year. This increase involved mix trends in personal banking, on the one hand; loan-loss provisions in the higher and middle-income segment increased, due to both the loan expansion of 9.8% year on year and a tempered deterioration in the asset quality, principally in the lower part of the segment, which is reflected by higher delinquency rates on our consumer loans.

On the other hand, risks related to our consumer finance division, targeting the lower income segment, decreased over the same period, reflecting positive effects of our strategy of contained growth and asset quality.

Lastly, loan-loss provisions associated with mortgage loans grew modestly, CLP600 million during the same period in spite of a 12.1% year-on-year increase in volumes.

We believe that the weaker economy is driving this modest increase in personal banking loan-loss provision, but this has not been reflected yet in the labor market, since we continue to see good levels of employment, as mentioned earlier in the presentation.

Please turn to slide number 17 on operating expenses. As you can see on the graph on the left, operating expenses have increased 12% year on year, mainly due to the full effect of 2014 inflation, which reached 5.6% variation of the US.

This has had a direct impact on salaries that are adjusted twice a year for inflation and administrative expenses, as these are also indexed to inflation.

Additionally, this quarter we introduced changes in the structure of our branch networks in order to improve various aspects regarding new challenges facing the banking business. This resulted in higher severance payments of CLP3.2 billion.

Third, an increase in 3.3% in administrative expenses attributable to higher IT expenses related to internal development aimed at enhancing IT platforms; and also, higher expenses associated with our branch networks, including rentals and maintenance.

Fourth, similar to inflation, the large increase in the exchange rate also had an effect on some of our expenses denominated in dollar, which includes principally IT-related items.

And finally, to a lesser extent, increases in real weighted and benefits as a result of the collective bargaining agreement, which took place with our unions in 2014.

In terms of efficiency, we reached a level of 47% versus the 39% reported the same period last year. This large difference is due to the high inflation we experienced last year, which affected our top line positively during that quarter and also, the nil inflation for this quarter.

Under a normalized annual inflation rate of 3%, efficiency during the first quarter of 2015 would have been 44%, which is completely in line with our expectation.

Please turn to the next slide, number 18, which shows our return on average equity compared to our peers.

Banco de Chile continues to lead in profitability when compared to our main competitors. This first quarter 2015 presented a return on average equity of 18.4% when using the data from the SBIF, the Superintendency of Banks and Financial Institutions, well above the 13.2% presented by the industry.

On the bottom right (sic), we show our performance compared to our main peers, in terms of net operating margin, where we have maintained a steady leadership position.

On the left-- on the right, you can see the efficiency ratio has improved over time and has maintained lower levels than our competitors since 2012.

These results reflect the competitive advantages we have highlighted throughout the presentation, including a solid, consistent strategy complemented by proven ability to execute and adapt continuous changes in the business environment.

Before taking questions, I would like to close by highlighting that this quarter has been excellent for us concerning the environment of diverse, negative external factors, including the 0% inflation rate; a weaker economy; and a slower demand on behalf of companies, SMEs and households for loans.

We have been able to partially offset these factors with our effective retail-focused strategy, prudent risk management and the capacity to adapt to a new and challenging environment.

Now, if you have questions, we'd be happy to answer them.

(Operator Instructions). [Guillaume Costa].

I have two questions. So first, we saw that you presented some increase in the NPL ratio. Could you comment if you expect a further increase on past-due loans going forward?

And second, in the interest income from customers in slide 15, we can see that this margin is presenting a downward trend. Do you expect it to continue contracting going forward, or probably it will be stabilized in 4.1%? Thank you.

Can you repeat the question? The line, we couldn't understand you well through the line.

Okay. The first question is about the NPL ratio, if you expect NPL ratio to increase going forward.

And the second question was about the margin, the interest income from customers in slide 15. Do you expect it to continue contracting or probably it will be stable going forward?

Okay. So if we go -- well, [staying] with the net interest margin, well, the spread from customers, we think going forward, it should be relatively stable from customers. This is not taking into consideration the inflation. As you can see in the chart, it's very stable on slide -- it was on slide 15.

And in terms of NPLs, I think something important to mention on our NPLs for this quarter is that a large part of the increase was largely due to corporate lending.

And while it's due to corporate lending, it doesn't necessarily impact loan-loss provisions, because it's already been provisioned, because we analyze these customers on a case-by-case basis; so it's more forward looking. Right now, this is not based on if they don't pay on time. And those were substandard loans.

If we look -- looking forward, well, this depends a lot on the economy. We still see the economy relatively slow versus before; versus our current expectations there's a lot of mixed trends. We are positive, but we're cautious on the following 12 months.

So we could probably see -- there is a possibility we could see an increase in personal lending, because of a delayed effect, because if we look what we've done in the Bank, we've tightened our risk acceptance policy, so as to control NPLs. But there's always a delay between a positive cycle and entering into a more-slower cycle. So we could see something, but marginal.

And it's important to mention that in terms of loan-loss provisions ratio, this should be relatively stable with last year; we think something around the 1.2%/1.3% for the year. We don't think it should increase more than that, based on our current base economic scenario.

Okay, thank you very much.

Thank you.

(Operator Instructions). [Chris Delgardo].

Just given the lackluster economy, could you give us a better sense of where you see loan growth going for the rest of the year?

Well, we think the economy should be around the 3% GDP growth rate for the rest of the year. Probably based on that and based on probably certain regulations and reforms occurring throughout the year, there should be probably a better business confidence and consumer confidence. So we think somewhere in the range of 8% nominal.

Got you. And then could you give me a sense of what's going to be the key driver to that, just because the commercial book has been rather lackluster as of late?

We think the key driver to that will be improved business confidence, when there's more certainty with the new reforms being discussed in congress.

Okay, so basically you're --

Mortgage loans are growing very strongly right now. Obviously, that will be one of the key drivers as well. In consumer loans, there'll be more focus on the middle/upper segments and very little loan growth, if any, in the lower segments of the industry.

Okay, great; thank you.

[Catalina Arias].

Boris Molina, Santander. I had a question regarding your cost evolution. Could you [give] us a bit on how your strategic focus could it have an impact on the growth of your cost base throughout the year?

We've seen that the cost growth in Banco de Chile has been relatively high and we were wondering whether you think this is probably going to slow down or there are additional impacts that we could expect going forward.

I think if you look at the efficiency ratio, the efficiency ratio should improve throughout the year, because -- and the top-line growth should be much better. We're going to have a concentration of all the inflation in the next three quarters.

If you look at the first quarter this year, you have to take into consideration that salaries are indexed twice a year, in May and November. Last year, we increased salaries by 2.6% in each month. So there is 5.2% increase in just inflation, [plus] any real growth rate.

In addition, if you look at the first quarter of 2014 and the first quarter of 2015, we have an important increase in severance pay related to restructuring and improvements in our branch network.

Probably a normal rate, taking all of this into consideration, should be somewhere around the 9%/10% growth rate for efficiency or a nominal for the year.

A 10% nominal cost growth, you mean?

9%/10% nominal cost growth.

Wonderful. Okay, thank you so much. And then in regards to confidence, etc., that you were alluding initially, President Bachelet announced just earlier this week that she was going to start in September a constitutional process.

Is there any indication of how this process is going to take place? And whether she is going call an assembly of citizens or people who are -- how's it possibly going to work? Because we're looking at Chile and then we think that this is probably create some uncertainty going forward. What could you tell us about this?

President Bachelet mentioned that in September, she'll update -- there will be a discussion regarding how this will be implemented and the changes to be done, which is in line with her program. But really, there's not much more information than that.

Okay, wonderful, thanks.

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.

Well, thank you for listening and participating in our call. We look forward to sharing our next quarter results with you. Bye.

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