Banco de Chile (BCH) 2015 Q2 法說會逐字稿

Good morning, everyone, and welcome to Banco de Chile's Second Quarter 2015 Results Conference Call. If you need a copy of the press release issued on Thursday, 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 Investor Relations; Ms. Victoria Gabens, Investor Relations Officer; and Mr. Daniel Galarce, Head of Research.

Before we begin, I'd 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. Our 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 Ms. Victoria Gabens. Please go ahead.

Good afternoon, it's a pleasure for me to share with you our comments on Banco de Chile's second quarter 2015 financial results. Please turn to slide number 2. We will briefly discuss the macro environment and the banking industry results for this quarter. This will be followed by an announcement on Banco de Chile's strategy and second quarter results.

Please turn to slide number 3, which contains the economic highlights. After a slow 1.9% growth rate in 2014, the Chilean economy showed promising signs of modest recovery during the first quarter of this year, but soon began to falter. This seasonally adjusted monthly index of economic activity or also known as IMACEC, has been flat for the last few months. As you can see in the top left chart, the year on year few months average growth shows a downward path of the favorable record over last December to January.

According to the economic expectation survey conducted by the Central Bank, (inaudible) now expect ET to pose a 2.3% expansion in 2015 and 2% in 2016. The main drivers of this model growth include a list of international and domestic factors. First, a larger amount of trading partners and also loan commodity prices are hitting investment in the domestic mining sector where the comps are roughly 85% of total deposits.

On the other hand, the top right chart shows domestic consumer and business confidence are unique and therefore are delaying the recovery in domestic demand. (inaudible) in line of the developments in international commodity motives and strong case of the dollar, local currency has depreciated strongly about 7% since last December, which has [completely ensured] chase by increasing the contribution from net exports to economic growth.

Please continue to slide number four. Despite the cool down of local activity, labor shown signs of deterioration until recent months. As the top left chart, since the end of 2014, nominal wages have been growing at roughly 7% year-on-year and unemployment rate has remained at levels of around 6%. However, related to this effect of slower activity on labor market there, presenting an unemployment rate of 6.6% and nominal wages as marketable jobs. One of the most noticeable aspect of the Chilean economy since May 2014 has been the increase in inflation. As the top right chart shows, until May of this year both headline and core measures same tributary. Our revision data recorded an additional take off in the employee targeting up 4%. Indeed, headline inflation grew4.4% year-on-year. The core inflation showed a 4.7% increase. Both the depreciation of the local currency and particular food and energy items are the main driving forces behind these last figures. Even though core inflation is above the policy (inaudible) Chile's Central Bank reinforces [mutual bias] in the last monetary policy meeting. In a context where most of the economists in the market expect the Central Bank to maintain the monetary policy rates, at least to the end of the year. This scenario is sustained by well-anchored inflation expectation over a two-year horizon as a 2% target. The net change is a slow growth observed or projected for the year.

As the bottom left chart shows, both nominal and real [loan] rates have shown slight decreases in [minority] developments of international financial markets. Although public finances remain strong, the finance ministry adjusted its fiscal deficit estimate to 3% of GDP for this year from 1.9% of GDP in the original budget because higher-than-expected expenditures and lower growth of revenues as a consequence of the [domestic burden. Net debt of presented] remained at a negative 0.4% with the debt which suggests that Chile will have room to perform countercyclical policies, even though I have problems in the 19.9% recorded in 2008.

Please turn to slide number 6 for a review of the main figures for the Chilean banking system. First, as seen on the chart on the left, loan growth for the industry posted an increase of 5.6% year-on-year in (inaudible). Market loans were the main drivers behind this figure with a year-on-year increase of 11%. The behavior of market loan growth has surprised us given the current economic cycle. The general view on this is that individuals are anticipating home practices of changes into -- which is of 2014. And include the implementation of on public and may increase price in 2016. On the other hand, consumer and commercial loans joined (inaudible) that is more in line with the weaker economy, low confidence levels and rising lets to 3% and 4% year-on-year respectively.

In terms of results, the banking industry posted a strong bottom line of CLP665 billion which is a 43% increase over the prior quarter, in line with higher inflation that reached almost 1.5% this quarter versus 0% last quarter. Additionally, it was also accompanied by good asset quality indicators; in fact, no los provisions ratio of only 1.1% compared to the 1.13% in the first quarter of 2015. However, year-to-date net income as of June 2015 has decreased by 9%, mainly due to the effects of high inflation presented last year.

Please turn to slide number 8 where we present our strategy focus. Banco de Chile has five main strategic objectives which define our medium and long-term goals. Each of these pillars cares of the guidelines of the new project initiatives in all areas of our bank in order to continue saving value for all of our stakeholders. The foreign slides (inaudible) in order to meet the [earnings] objectives.

Please turn to slide number 9. Loan growth (inaudible) growing 8.3% year-on-year and 3.5% over the previous quarter. The main factors that improved loan growth this quarter was a pickup in the wholesale [funding] which grew 5.2% year-on-year versus what we presented last quarter when volumes [check] on a year-on-year and quarter-on-quarter basis. The increase was primarily the result of commercial decisions implemented to grow selectively in trade finance and short-term working capital loans with very low risk and high-cost customers, thus reinforcing our [business transition].

On the retail side, also remains strong, increasing 11% year-on-year and 2.5% quarter-on-quarter. Mortgage loans continued to drive flow with a 13.4% increase year-on-year and 5.1% quarter-on-quarter due to new tax regulations that are in for cyclic customers some certified home purchases in our digital version about gain value added taxes. Consumer loans and other income individuals also carry on showing good growth of 10.9% year-on-year and 1.9% quarter-on-quarter, as opposed to the decreases that a occurring to lowering in some consumer loan portfolio which is in line with our approach to the segment.

Finally, SME loans have picked up this quarter, posting a rise of 9.7% year-on-year, up from the rate posted last quarter. This growth was due to our strategy to continue penetrating the segments together with several (inaudible) initiatives to improve royalty amongst these customers. Through technological improvements, we have been able to create new [virtual] account for our customers to get to know and use our products and services. The progress that has been made on all online platforms undoubtedly allows us to continue strengthening our relationship with customers and providing them with better service. Thanks to these online and technological initiatives, Banco de Chile was awarded the Best Digital Bank Award for 2015 by Global Finance Magazine. This prestigious magazine recognized Banco de Chile for its digital strategy, emphasizing especially on the side of mobile app that was introduced last year. Please turn to slide number 10. As we announced earlier this month, we have entered into an agreement to acquire a loan portfolio from a local bank for approximately $590 billion, which represents just below 3% of loans outstanding. Due to our size, we were capable of obtaining funding for the operation without problem, closing the deal is record time. This portfolio will be gradually recognized in the bank's book between July and September.

Some key facts of the transaction include, first, over 90% of the total loans are with customers that already have relationships with the bank. Second, over 80% of the portfolio is wholesale and is concentrated in the middle market segment. And third, (inaudible) loans outstanding is about two years and the duration of approximately 1.7 years. The benefits of this transaction are even more enhanced due to the [employment synergies that realized] from the scale of operations. First, since most of the customers are already Banco de Chile clients, the additional operational cost inside [by equipment] portfolio are minimal. Finally, this transaction entails an important increase in loans and market share, as you can see on the chart on the right, increasing our market share today by approximately 40 basis points.

(inaudible) is lower loan growth, acquiring this loan portfolio was very attractive, given its profitability. [Encouragingly], we have converged organic growth over inorganic growth and even though it continues to be (inaudible), we know this particular opportunity undoubtedly creates great value for our shareholders.

Please turn to slide number 11. In terms of funding, we continue to diversify our liability structure while also improving the stability of our liabilities in terms of liquidity. Core deposits continue to play a key role in our funding structure, representing 26% of our funding on average. Demand deposits and debt issued in particular have increased significantly year-on-year and have decreased their participation from its retail customers, providing more stable sources of funds.

On your left, you can see that current account deposits have increased 18% year-on-year. 49% of those are retail deposits. The remaining demand deposit [shows growth] in wholesale and institutional, representing 43% and 8% respectively. The strong growth in these deposits is due mainly to (inaudible) in retail funding as a result of a strong customer relationship strategy, which is far more stable than institutional funding. This has been achieved through diverse mechanisms, including a [clear domain services] and important developments in client satisfaction.

On the other hand, time deposits seen on the right have increased 4% year-on-year, in line with expectations. Currently, 42% of the deposits are retail. 34% are institutional and 25% are wholesale.

Total deposit for institutionals only represent around 20%, which is significantly lower than the industry, especially when comparing to small banks, and [comparing] much more on the source of funding.

In terms of debt issued on bottom left, this has increased 16% year-on-year, in line with our growth in mortgage loans. This is a result of initiatives seeking to open new international markets and weekly exposure to local institutions. Today, that issue represents 19% of total funding, which is remarkable increase from the 10% it was in 2010.

As we see here on this chart on the bottom right, our strength in funding has translated into an average annual cost of funds of Banco de Chile above 2.4% as of June 2015, ranking us first among our local peers. This is very impressive, especially when you consider that the savings for every 10 basis points of cost of funds represents roughly $85 million in net interest income.

On slide number 12 we present service quality. A strong focus on the strategic pillar is one of main reasons we have been able to achieve greater competencies over the past year. Today it is the core of our business strategy. On the left we see that our net promoter score have had positive trend in this spot, moving from 60% to 70% this quarter. This increase is partly due to important developments in our customer experience program, which speak to give our customers the high satisfaction on hiring and using our products and services.

Another important factor is the ray of online and mobile commission that has been introduced to facilitate all bank operations for customers. These initiatives have also continued to empower our brand as it's been clearly right. Our strong brand name has always been a competitive advantage, but today it is enhanced by an improving level of customer service, which is facilitating growth in this competitive environment. Please turn to slide 13. In terms of operational excellence, we have also made important progress in various projects since the first half of 2015. Amongst these, three initiatives stand out that are focused on modernizing different bank services in order to make operations easier for our customers. The first will be, [again], a new online platform for retail customers who will now be able to [buy our] currencies directly from the computers or mobile phones and allow them to collect the cash quickly at any branch. This service will be given to all individuals and SME clients who hold a current account with us.

The second project consists of a new service related to credit card [setup], which will now be delivered actually on the same day, thanks to advanced technology that allowed our sales force to collect the necessary documentation and receive approvals faster than your traditional process. This will greatly improve logistics and delivery in activation of this product and should help [easy sale].

Finally, we've come together with [Certibank] to enhance cash withdrawal availability in Chile. Certibank is a company that provides various transaction operations for individuals such as bill payments and deposits. This service will allow customers to make withdrawals on deposits at Certibank branches seven days a week, thus boosting our 1,500 ATM networks by 350 Certibank service points.

These are just some examples of the projects currently being developed to offer our customers fast and better solutions to everyday needs while also identifying operations in areas that need improvement.

Now, I will pass the call over to Pablo Mejia to discuss Banco de Chile's first (sic - see Press Release) quarter results.

Please turn to slide 16. We'll present the quarterly results for Banco de Chile. This was a record quarter for us with a net income of CHP168 billion, which represents an increase of 9% year-on-year and 44% quarter-on-quarter. Thanks to this historically high result, we've almost completely closed the gap with 2014 accumulated earnings, which was extraordinarily high as a result of inflation. This was achieved by effective and prudent risk management, which has permitted us to record lower levels of provision expenses together with successful implementation and execution of our commercial strategy that consistently generates growth and stable core revenue and customer revenues.

In terms of [sustainability], we posted a 26% return on average equity this quarter versus the 18% for the first quarter which consequently results in a 22.3% return on average equity for the first half of this year.

Please turn to next slide, number 16. Operating income for this quarter was CHP419 billion, a 10% increase quarter-on-quarter and a 1.6% increase when compared to the same quarter last year. This strong quarter-on-quarter rise was mainly driven by non-customer income, which increased from CHP84 billion in the first quarter to CHP119 billion this quarter. This result was mainly due to US structural gap, thanks to the euro variation that rose from zero to 1.5%.

When we compare this quarter to the same quarter last year, the 1.6% growth was driven by customer income, despite the higher inflation posted last year during the same period. The main drivers behind the year-on-year customer income growth were, first, an 8% rise in fees, mainly related to good financial performance from our mutual fund business and democratic administration, in line with customer growth and inflation; secondly, a 6.1% year-on-year expansion in average loans, which was partially compensated by both a mix effect, residential mortgage loans growing faster than consumer and commercial lending, and a slight drop in lending spreads of commercial loans; and finally, a positive effect of our FX hedges, which are mainly related to US dollar-denominated allowances for loan losses amounting to about CHP2.6 billion, due to the appreciation of the Chilean Peso versus the US Dollar. Please turn to slide 17.

Loan loss provisions decreased 18% year-on-year from CHP72 billion the CHP59 billion this quarter due to the effective and prudent risk management which has greatly improved provision levels in our wholesale and SME segments. This result is also a consequence of higher comparison base since recording a non-recurring additional provisions in 2014 in the second quarter. The variation on the chart on the right shows these main drivers. As you can see, this decrease was concentrated in additional and commercial loan provisions, which decreased by CHP19 billion. This was mainly due to the strong financial position of our larger customers and higher recoveries from government-backed loans to SMEs. This was partially offset by the negative effect of about CHP3 billion due to the depreciation of the Chilean Peso on dollar-denominated allowances, [hedged] in operating income, as I mentioned earlier and provisions from consumer loans by CHP7 billion, in line with the weaker economy. And the higher unemployment rate as well as growth.

Overall, the decrease in provisions together with our loan book expansion resulted in healthier risks indicators. As a result, our loan loss provision ratios for this quarter is 1.1% which is significantly lower than the 1.4% reached during the second quarter of 2014. Non-performing loans, on the other hand, presented a moderated decrease from 1.31% in the second quarter of 2014 to 1.29% in the second quarter of 2015.

Please turn to slide number 18 on operating expenses. As presented on slide on the left, expenses quarter-on-quarter decreased by almost 4%, due mainly to extraordinary factors. On a year-on-year basis, expenses increased marginally by only 1.6% and the main factors explaining this year-on-year increase are direct impact of inflation on salaries, which grew 8% since these are adjusted by inflation twice a year. The increase is also due to benefits negotiated in the last collection bargaining process with the union. The effect of inflation and an increased exchange rate on various administrative cost, including higher IT and communication expenses. These expenses grew 8% year-on-year.

These factors were partially offset by last year's extraordinary payments for our collective bargaining agreement with the unions and also the establishment of non-credit-related contingency provisions established in the second quarter of 2014. As shown on the blue line on to the right, we present an efficiency ratio this quarter of 41%. The green line presented an adjusted efficiency level of 44% under normalized inflation scenario of 3%. However, we believe that our fixed cost control policies together with our productivity improvements should continue to provide us with first-rate efficiency levels that stand out when compared to the banking industry as a whole.

Please turn to slide number 19. As represented by the blue line, Banco de Chile continues to lead profitability with a 26.2% return on average equity compared to the 18.1% presented in the industry in the second quarter. On the bottom right, you can see our operating margin net of risk where we maintained a significant gap with our peers. This quarter, we present a 6.5% net operating margin versus the industry's 5.7%. On the left, you can see our performance compared to the industry in terms of efficiency which has greatly improved over the past years, moving from almost 49% in 2009 to 41.3% this quarter. Whereas the industry has slowly been increasing the cost-to-income ratio in the same time period, reaching above 45% this quarter. The large gap in all of these indicators versus our peers has been made possible due to the quality of our earnings, which is supported by a focused and consistent business strategy together with solid corporate governance practices. This has led us to consistently take greater advantage of new opportunities and once again break records and post the highest net income figure in our history.

For the second half of this year, it's important to keep in mind that the economy continues to present weak indicators which have gradually decreased growth expectations for 2015 and have kept confidence levels low. However, we are confident that these factors can be overcome if we continue to apply a consistent strategy and a [prudent] risk management. In particular, the capacity that had identified business opportunities like our recent loan acquisition. These actions are proof of our unique skills and capacity, which will allow us to look at the future with confidence despite a (technical difficulty).

Ladies and gentlemen, please stand by, the conference will resume momentarily. Once again, ladies and gentlemen, please stand by. Please continue to hold the conference will resume momentarily. Go ahead.

Sorry, I think to go. Hello. I think we're left off, it's basically, we believe that our actions in the last period, for example, the purchase of the loan acquisition we had earlier this couple months provide us with [group] of the unique skills and capacities, which would allow us to look at the future with confidence despite the weaker economic context.

So if you have any questions, we'd be happy to answer them now.

Thank you. The floor is now open for questions. (Operator Instructions). [Gilihan Costa, Itaba].

Hi, good morning guys. (inaudible). So first, congratulations on the results. I have two questions, first, about the loan growth. We saw that you showed an increase in the loan expansion during the second Q. Do you expect the loan growth should expand further this year? Do you believe commercial and customer loans could show higher growth going forward and to possibly offset the expected deceleration in mortgage during 2016 as a consequence of the increase in taxes for housing market?

And then, my second question is about asset quality. Could you comment if you expect a deterioration in your [NPA] ratio and if so, from what second, do you think it could arise and what are expectations for the cost of risk going forward? We saw that the cost of risk achieved 1.1% this quarter and last year. it was 1.4%. Do you expect this to increase or you don't?

Thanks. I think it's important to mention that what we expect for the system to grow this year. We believe that the loan growth for the system should be around 8% to 9% nominal, with growth being led by mortgage loans, thanks to customers anticipating home purchases because of this new tax law that is being implemented beginning 2016 followed by commercial and upper-income consumer loan. I think that the lower income probably won't grow as you've seen in past regulations on provisions for the maximum interest rate has limited the risk appetite for the segment. And for us, we believe we should end the year with a growth in line with this probably it could be slightly above or in that range. This is the loan portfolio we purchased from another bank insurance, which is equivalent to 3% of our loans outstanding and between 2% and 3%.

And your second question on asset quality. This first half of the year was very good, much better than last year. It was better than expected. We think that for the second half of the year which the economy of Chile isn't growing as fast as anticipated and unemployment rate is increasing. So that could be figures more in line with the figure that we had in mind in prior quarters for the full year of 1.2% for the second half of the year. So that would mean probably a full-year result somewhere below that 1.2% if everything goes in line with our base economic scenario.

Okay. Perfect. Thank you.

[Catalina Araya], JPMorgan.

Hi, thanks for taking my question and congrats on the great quarter. My question is related to expenses. We saw a significant improvement quarter-over-quarter and slow growth year-over-year. So I just wanted to get your thoughts, how do you see expenses growing through the second half? And then, my second question would be, I just wanted to know what -- under a normalized inflation environment what's your ROE expectations? Thanks.

In terms of expenses, I think something that's very important to mention is the stability that we've had in expenses over the last couple of quarters. The first quarter this year, there were certain one-timers which increased expenses, as you can see in the press release that I'm sure you're well aware, but if you look at the year-over-year figures you mentioned, the expenses are growing somewhere around the 8% range and that's what we're expecting from year-end, taking into consideration or excluding the negotiation with the trade union that took place back in December and June of last year.

So we take that into consideration, which is about CLP45 billion. You should expect similar levels of operating expense growth for year-end. And the reason for that increase, which is around 8% to 9%, is growth [in terms of still growing] and there was a higher inflation last year as mentioned earlier in the call that the inflation affects salaries and different expenses as most expenses are indexed to inflation.

Also exchange rate affects the operating expenses on per IP. And your second question was? The second --

ROE under a normalized, yes?

Normalized, yes.

I would say ROE under a normalized range is between 20% to 22% and then as we think of a long-term ROE, including the tax reforms of what we know, is -- the discussion has been taking place right now. So based on what we know and without having the subordinated debt payments of one of our shareholders, it should be around 20% ROE as well in the long-term.

Great. Thank you.

(Operator Instructions) Victor Galliano, Barclays.

Hi, there. Congratulations on the quarter. Just really following up on credit quality, there is a lot of talk out there clearly about an economy that's softening. It looks like the cycle may be turning here, may be bottoming out. How do you look at this now, say, looking 12 months hence? I mean, you've made your comments about where you think NPL ratio could be. Could you give us a sense here about, Pablo, where we might be in terms of cost of risk on an annualized basis, looking by the year-end? Do you expect any sort of a significant pickup in terms of cost of risk and where do you see the biggest risks on credit quality? Would you say that's in the SME portfolio, in the consumer portfolio? Thank you.

Well, I think it's important to say that the copper price has been falling for a while now. So mining companies aren't paying the cost over the last couple of years. So these investments are on hold. So because of this and [cycle dimensions], this has affected companies, providing products and services to the mining industry, but this is already taking place. So we believe a large effect of this is already taking place. It's difficult to quantify, but buyers with largest amount have already taken place and we don't expect that this should have significant impact on provisions. Obviously, it depends on how long it's expected that this figure should -- these levels of copper prices should be maintained.

If you look at what's foreseen in the coming years, it's a recovery in the copper price, as seen by many private analysts. So government spending should be higher, higher government participation should be expected as well as the investments in the medium term should pick up. We don't expect us to have a significant impact in terms of risks. And for the second half of this year, as I mentioned, we should probably be more in line with the level of 1.2% or a figure as we mentioned earlier for a full year.

Mainly I would say unemployment is probably going to rise and that always has an effect or generally has effect on [operating] expense.

Okay.

And it's still in risk area right now, there isn't any particular area where we are very concerned about. So if you could stay concerned, which is just what every analyst would think of Chile, it's more macro, more what's happened with China and how that affects Chile.

Okay. Thank you.

You're welcome. Thanks.

That will conclude the question-and-answer session. At this time, I'll turn the call back over to Banco de Chile for closing remarks.

Thank you for [the interest in our call and thanks for] participating as we look forward to sharing our next quarter results. Thank you. Goodbye.

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