Banco de Chile (BCH) 2015 Q3 法說會逐字稿

Good morning, everyone, and welcome to Banco de Chile's Third 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 and Senior VP of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations; Ms. Victoria Gubbins, Investor Relations Officer; and Mr. Daniel Galarce, Head of Research.

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 note in the Company's press release regarding forward-looking statements.

I will now turn the call over to Ms. Victoria Gubbins. Please go ahead.

Thank you. Good afternoon, everyone. It's a pleasure for me to share with you our comments on Banco de Chile's third quarter 2015 financial results.

Please turn to slide number two. We will briefly begin discussing the macro environment and the banking industry's results for this quarter. This will be followed by an analysis of Banco de Chile's strategy and third quarter 2015 results.

Please turn to slide number three for economic highlights. After a disappointing 1.9% growth in 2014, the Chilean economy continued to show weak performance according to latest data releases. As the top left chart indicates the Central Bank [perceived] a 2015 GDP growth between 2% and 2.5% but the September drop in economic activity, which was minus 1% month-on-month seasonally adjusted suggest that even the 2% threshold will be more challenging to each. Official estimates for 2016 according to market consensus point towards a GDP growth of around 2.5%.

The sluggish GDP growth seen since 2014 has been explained by an important drop in investments which in turn has been driven by domestic and international factors. As the top right chart shows the global slowdown mainly induced by China has been affecting all commodity exporters, in Chile particularly lower copper prices, which account for nearly half of Chile's exports. This has dragged the investment down in mining related sectors, decreasing government revenues and depreciated in an important matter the local currency against the dollar as the bottom left panel shows. Slower growth from trade partners explain only part of the below trend growth of the Chilean economy. Several domestic factors such as subdued consumer and business confidence and the recent slowdown in the real wage bill have also contributed to the weak performance in domestic demand.

Please turn to slide number 4. Since a large portion of goods that are included in the CPI basket are imported, inflation has remained above the Central Bank's 4% [current viewing] as a result of the peso slump. This inflationary scenario, as the top left chart shows, is expected to slowly disappear towards the end of 2016 as oil prices remain low and the local labor market starts to deteriorate.

Even though the economy is growing slowly both the persistent records of high inflation and a slight increase of two-year ahead inflation expectation led the Central Bank to increase its monetary policy rate in 25 basis points during its last meeting as shown on the top right chart. Such a move was expected by the majority of analysts as the Chilean Central Bank signaled its intention of beginning this tightened cycle before the end of the year.

The press release that accompanied the decision suggested that future path of the monetary policy rate will depend on the evolution of the macro scenario. According to the Central Bank's expectation survey market analysts expect further rate hikes in the next quarter reaching around [3.75%] in 2016. As it is in the case of the monetary policy, fiscal policy will also be tighter in 2016. The Finance Ministry announced a 4.4% annual real increase in the fiscal spending in 2016, falling from an expected 8.8% rise this year. This decision followed a reduction in Chilean's long-run potential GDP which went from 4.2% last year to 3.6% and the intention of reducing the structural balance. However, the deficit is still expected to be roughly 2% of GDP [in such year] of the consequence of lower copper prices.

Please turn to slide number six for a review of the main figures of the Chilean banking system. Loan growth for the industry was 6% in the year-on-year in the third quarter of 2015, which is still low from past figures but the highest we've seen since the second quarter of 2014. The main reason for the slow growth continues to be the weak economic activity, low levels of confidence and high uncertainty in line with the quarterly survey on bank credit conducted by the Central Bank. In this survey on average, banks reported becoming stricter in terms of their credit risk acceptance criteria in all segments and customers show weaker demand on most product families with the exception of mortgage loans and commercial loans for SMEs.

In line with this demand and despite stricter acceptance criteria, mortgage loans continued to be the main drivers for growth, increasing 10.5% year on year based on high demand from expectations regarding the effect of the tax reform on property prices and the low rate scenario.

Secondly, commercial loans have reported a 4.8% year-on-year expansion, which is due in part to the effect of the weaker peso exchange rate on dollar denominated loans and good growth from SME customers.

Finally consumer loans grew 2.9% real year on year, a slight decrease from the 3.6% year-on-year growth presented last quarter and the same period last year in line with the credit survey.

In terms of results, the banking industry posted a net income of CLP546 billion, about 20% below third quarter 2014 results. This decrease is mainly explained by an important increase in provision for loan losses and to a lesser extent an increase in operating expenses due to the effect of past inflation on salaries and the impact of the depreciating peso on administrative expenses.

Finally, in terms of ROE the industry reached a figure of 15% versus 20% posted in the same period last year and 18% recorded during the prior quarter, reflecting the lower dynamism in the economy.

Please turn to slide number eight where we present our strategic pillars. Our six main strategic objectives define our medium and long-term goals and serve as guidelines for new projects and initiatives across our entire organization. The following slides show advances made in order to meet some of these objectives.

Please turn to slide number 9 where we discuss our advances for first and second strategic objectives. As you can see we have picked up considerable loan growth this quarter. Thanks to our effective commercial strategy. We target the most attractive markets and segments while maintaining a good risk return relationship.

As detailed on the table to the left, overall loan growth was 12.2% year on year and 6% quarter on quarter. We achieved this, thanks to strong growth in the retail and wholesale products which are further enhanced by the acquisition of a loan portfolio from a local bank for approximately CLP564 billion, which represents just 3% of loans outstanding.

Due to our scale, we were able to close the deal in record time. Also as mentioned in the last call, it's important to remember three things. First, over 90% of the loans -- of total loans are with customers that already have a relationship with the Bank. Second, over 80% of this portfolio is wholesale and concentrated in the middle market segment. Third, the residual average term of the loans outstanding is about three years and the duration of approximately 1.7 years. Additionally, since most of these debtors are our customers, the additional operational costs of incorporating the portfolio are minimum.

Since we find ourselves in a weak economic context with lower loan growth, acquiring this loan portfolio was a very attractive opportunity given its profitability. Historically, we have privileged organic growth over inorganic growth and even though this continues to be a solid belief, we know this particular opportunity undoubtedly create great value for our shareholders.

In terms of the retail segment, mortgage commercial loans for SMEs and consumer loans for middle and upper income individuals had great dynamism during the quarter growing year on year, 17%, 14% and 12% respectively. These rates have been achieved by better understanding our customer' specific needs at each stage of their life cycle and providing the best possible service.

At the forefront of this strategy are new development and business intelligence tools which allow us to get to know our customers on a more personal level and to select the best channel to offer our products and services at the right price and time. Additionally, we have put greater emphasis on digital channels that have allowed us to drive online sales up to record levels. In line with this initiative, an employment part of all pre-approved customer loans are sold online, which have increased 30% when compared to last year. This effort in providing a better experience to the customers has also been reflected in launching various innovations during prior quarters for both Banco de Chile and Credichile, remote banking platform, for example new mobile app. This growth in the upper income and SME segments not only allow us to grow interest income, but also help drive noninterest income revenues from fee-based products as you will see later in the presentation.

Regarding our Credichile consumer loans, we have decreased 1.2% in line with our lower risk appetite for this segment due to weak economic environment and stricter regulations that have been implemented and effective fundamentals of this business unit. The wholesale segment on the other hand increased 12% year on year and 6% quarter on quarter due in part by the loan portfolio we purchased amounting to approximately CLP564 billion and also to good loan growth in other commercial loans which is the result of business decisions implemented to grow selectively and trade finance and other wholesale loans with low risk and cross-sell potential, thus reinforcing our business relationship and fee income.

Looking forward, we believe that strong competition from banks, continued weak economic figures, and growing uncertainty in emerging banks limit possibilities of strong demand which is the main reason that our loan growth should slow down in the coming quarters' levels more in line with the industry average.

Please turn to slide number 10. On the left you can see that our net promoter score that measures customer recommendation has continued its positive trend, reaching 71.4% this quarter. This is a clear reflection of the results of customer satisfaction initiatives that we have introduced such as our customer experience project, workshops, and specific branches throughout the country and the defining and following up quality measures.

In order to achieve our organizational objectives, we believe that we will have a clear integration of our goals with those of our employees. In line with this, we seek to enhance the skills of our employees hence enabling them to deliver the best service and complement their careers. So, we are pleased to share with you the results of our most recent climate survey achieving 87% for total workplace satisfaction which took into consideration climate, commitment, culture and overall satisfaction level. These scores have been achieved through diverse programs and benefits that we have provided in order to offer a great work environment and the opportunity to grow within the Company.

Through these workshops and training process we have been able to improve employee satisfaction and offer better service quality while also giving individuals new skills to become more self-reliant and productive. These results challenge us to keep working hard to continue improving these levels and further provide our workforce with the tools they need to achieve our corporate goals.

Now I will pass the call over to Pablo Mejia to discuss Banco de Chile's third quarter results.

Thank you. On slide number 10, we present the quarter results for Banco de Chile. Banco de Chile presented a bottom line of CLP134 billion this quarter. This figure is lower than prior quarter mainly because of additional provisions of CLP31 billion which were established in September which we'll discuss in more detail further on in the presentation.

Excluding additional provisions, net income would have reached a level of around CLP158 billion implying a ROE for the quarter of 24% and more in line with the prior quarter.

Please turn to slide number 13, on operating income. Operating income for the third quarter of 2015 was CLP432 billion. Thanks to good growth figures accompanied by higher than normal inflation. As you can see on the chart on the left, despite a weaker economy core revenues from customers show a stable year-on-year and quarter-on-quarter growth. Specifically, we posted CLP305 billion of customer income during the quarter which is 3% above the same period last year and 2% above the prior quarter. These figures are primarily a result of good loan growth and a pickup in fee income.

If we look at the red line on spreads on the chart on the right, net income from customers has decreased from 4.4% in the third quarter 2014 to 3.9% this quarter. First, it is very important to mention that last year we recognized a higher margin of approximately 20 basis points due to a large one-time loan prepayment from a corporate customer. This variation in operating margin is also due to a change in mix since we have been growing fundamentally in mortgage loans, consumer loans to upper income individuals and commercial loans. This is further intensified by the large commercial loan portfolio we purchased in the third quarter which had attractive spreads for the wholesale segment, but are lower than the average spreads of the overall loan book.

Finally, other factors that have an impact on profitability include higher competition in the market with low growth. Nevertheless it's important to point out that the excellent evolution of our fee income which has remained stable as a percentage of average loans at 1.3%, as you can see on the chart represented by the green line, despite the very strong growth experienced this quarter in loans.

In terms of non-customer income, we recorded a CLP127 billion this quarter, more than a 40% increase over last year and a 7% increase over the prior quarter, which is also shown on the chart in the purple line on the right.

As a reminder non-customer income includes proceeds from the contribution of our UF GAP position and other treasury activities. The strong year-on-year increase reflects mainly the important benefit we received from our structural GAP in UF, the positive FX effects from US dollars that hedge allowances denominated in this currency due to the strong depreciation of the Chilean pesos this quarter, lower charges related to CVA for derivatives due to lower risk premium and the sale of the loan portfolio this quarter.

Please turn to slide number 14, on fees. As mentioned in the previous slides, fee income has been growing in line with loan growth. Fees grew 17% compared to the same period last year and 5% compared to the prior quarter. Despite the fact that this quarter had a couple of one-timers that drove fee income to be higher than normal, I would like to concentrate on the quality of our fee income generating capacity. Thanks to our leading position in customers in the upper income segment and our ability to be the primary bank account for most of our retail and wholesale customers, we have developed an outstanding capacity to generate consistent and stable net fee income.

As you can see on the chart on the right, net fees are mainly generated from our retail division and subsidiaries which are mostly retail related. These two segments represent 84% of our total fee income while the remaining 16% is generated from our corporate wholesale customers. This mix provides us with a superior position versus our peers in this source of revenue. If we break down fee income from subsidiaries the main segments that generate fees are our mutual fund business which are leaders in Chile with the market share of over 20% in assets under management and their insurance brokerage unit. As a result, this provides us with more stable and recurrent fee income.

Please turn to slide 15 on loan loss provisions. A strong deeply rooted risk culture is a core aspect of our risk management approach at Banco de Chile. In this view we maintain a solid track record of managing risk achieved by strict and prudent risk policies and meticulously monitoring risk factors that can impair our loan portfolio. These firm policies ensure that our credit exposures are adequately provisioned and well collateralized. Additionally, we have very rigorous and effective collections processes.

This quarter loan loss provisions increased almost 70% over the same quarter last year. However, it's very important to understand that the greater part of this increase was not due to deterioration, but other factors including; first, as shown on the chart on the left, we recorded additional provisions amounting to CLP31 billion this quarter. These provisions were made in view of the slowdown in the local economy and expectations over the next quarter. It's also important to note that these allowances do not relate to any specific customer or industry sector [concerned to] an overall outlook and the evolution of the economy.

Second, in line with our business strategy loans have been growing 12% year on year. As a result the effective greater loan volumes and loan loss provisions was equivalent to CLP7 billion when compared to the same period in 2014. Third, the net effect of CLP2 billion due to exchange rate shift affecting our US denominated allowances for loan losses which we previously mentioned in operating income. And lastly, the net deterioration of CLP3 billion mainly due to two specific customers in our wholesale book, which was partially offset by the good payment behavior of our retail banking customers.

The effectiveness of our credit risk management is clearly demonstrated in their loan loss provisions and coverage ratios. Taking these factors into account, we posted loan loss provisions ratio this quarter of 1.78%. However, if this figure is adjusted for additional provisions it would have a presented a figure around 1.25% which would be even further reduced if we exclude the other effects previously mentioned.

In terms of coverage ratio, we maintained the highest ratio amongst our closest compares with the multiple of 1.8 times. This ratio is further increased when we take into consideration additional provisions. Our excellent figures have been achieved through our credit risk management philosophy. These beliefs drive us to have a constant and deep presence throughout the entire credit risk cycle including approval, granting, monitoring, and collections in order to consistently reduce risk and improve the returns to our shareholders.

Please turn to slide number 16 on operating expenses. As you can see on the chart in the left, operating expenses has increased 11% year on year. This is mainly due to the effect of high inflation on salaries as they are adjusted twice a year for inflation and administrative expenses as these are also indexed inflation. This explains nearly half of the increase while the rest is explained by real wage growth based on merit together with benefits associated in the last bargaining progress and a slight rise in head count. Also higher risk -- higher country risk provisions which are expected to decrease [certain] cross-border loans expired during the year. And finally higher advertising expenses in light of recent campaigns we carried out as the result of the new Delta Air Lines strategic alliance and to reinforce our brand name.

In summary, it's important to highlight that our cost base has increased because of specific issues, including inflation and country risk expenses. Excluding these factors, expenses on a recurring basis have only grown around 1% to 2% real annually which is below our loan growth. In terms of efficiency, our ratio remains flat as compared to last year 43% and compares favorably to our main peers at 45.2%. Year-to-date we continue to show positive levels with 43.7%.

Please turn to slide number 17. The results achieved this year have shown Banco de Chile's great capacity to adapt to the weaker economic scenario by using our competitive advantages and specific skills to maintain a leading position in high ROEs as you can see on this chart. Thanks to our prudent risk management and consistent strategy and strong customer base have been able to preserve a stable risk return relationship identifying important business opportunities and make important progress in digital innovation and continue deepening the relationship with our customers.

Now if you have any questions we'll be happy to answer them.

Are you ready to take questions?

Yes. If there is any questions we'd be happy to answer them.

Thank you. The floor is now open for questions. (Operator Instructions) Catalina Araya, JPMorgan.

So, my question is related to the new credit provision measures. I wanted to know what you expect in terms of provisioning regarding mortgages. And then more in particular, what is the loan to value of your mortgage loan book and also what percentage of this book has a loan to value above 80%? And then just finally, my second question more related to interest rate sensitivity. Given our 100 basis point decline in the UF inflation, what is your impact to net interest income? Thank you.

Thanks, Catalina. While regarding the new models for risk for the mortgage loan portfolio, it's important to mention that because we have a good coverage ratio and we have loan to values for the book of around 70% and the policy is on average, so I expect [cost] new loans with loan to values of around 80% at 80%. This should actually have a material impact for our results.

With regards to the effect of the inflation on net interest income, well the gap that we generally have on the balance sheet tends to be around CLP3.5 trillion to CLP4 trillion, it depends on how our treasury department is managing given at any moment in time. So, that effect of 100 basis points should to be around 15 basis points in net interest margin or you could also consider something between CLP35 billion to CLP40 billion in net interest income the effect.

Great, thanks. But do you have any estimates or let's say like 5% of pre-tax earnings for next year in terms of provision? Do you have more of like an absolute number on initial estimates for provisions?

For the provision of the mortgage loan book?

Yes.

Sorry, one second. Regarding the portion just for the adjustments in the risk model for the mortgage loan portfolio, it shouldn't be a material impact based on our current -- the current levels of the payment behaviors of our customers and risk that we're seeing today. Obviously, if that changes in the next few months, when this new role is implemented, that could change the outlook, but currently, it shouldn't be a material impact.

Boris Molina, Santander.

I think a follow-up question on the mortgage impact. You said that you have a high level of coverage, et cetera and there is no material impact. Do you say that there is no material impact because your loan to values are low and therefore the relation doesn't have an impact or the impact of the regulation is going to be taken care with the stock of excess provisions that you have created over the last year which currently is around CLP84 billion, CLP80 billion?

And the second question is regarding the competitive dynamics in the market and evolution of margins, if we strip out the effect of the UF. We've seen a gradual erosion in your margin fixed UF over the last, I would say, year and a half. And we don't know if a change in the competitive environment could be leading to stability in this or if you are forecasting that competition is going to remain intense and which are the segments where you feel the competitive pressures is the strongest, is it in the individuals, is it in mortgage, is it in large corporates?

If you could give us an idea of what do you think your impacting margins excluding the UF should they be stable going forward or you think they're going to continue to slip?

Regarding your first question, I wouldn't say our risk model provision what we consider to be adequate to the levels of risks that we're assuming, not that they are excess provisions, but for the model producers saying that what causes us to have a lower or this marginal not material impact on the result is that we have a good levels of loan to values in our book of around 70%. And very low overdue loans, good payment behavior from our customers.

So the level of provision is less for the models power that's how our models are produced today and that's -- and in terms of your second question, net interest margin looking forward, I think it's important to look at the slide number 13 where you can see our interest income from customers and how that's evolved. There is a slight decrease there, but it's important to mention, but there is an important change in mix in the last quarter where we grew significantly in commercial loans which despite a large portion of that was because of a portfolio that we purchased that had very good spread. It's still lower than the overall book because you have to take into consideration. Our overall book is split between something around 50% retail loans and 50% wholesale loans. So the retail loan book has higher spreads. So incorporating this larger portfolio, this large portfolio of commercial loans into our overall loan book that has an impact on our overall spread, despite that the spreads were very good.

And another important factor is that the industry as a whole has been growing strongly in mortgage loans which as you know that also has a lower spread. So as that enters the portfolio of bank books that affects spreads, the overall spreads. And we've had strong growth in the upper income segments as well which obviously when you're growing in upper income segment, less in lower income segment the mix there is also changing. And we can't say that there is similar effect, but there is also an effect, but less -- to a lesser degree in terms of competition.

Okay. So competition is not an important factor going forward because we have the --

The factors that we have seen today, the most important factors is the issues of change in mix, the purchase of this loan portfolio and if we compare to last year there was a very large prepayment of a commercial loan which when those prepayments occur which are just big, and those fees flow through net interest income not through fees. It's part of interest received in accounting.

(Operator Instructions) Victor Galliano, Barclays.

I was just wondering if you could just give us a bit of an idea of how you see loan growth developing? Looking into 2016 growth is not great. I mean, obviously you have the impact of the higher VAT on mortgage. How do you see that and what should we look at in terms of the sort of multiple of nominal GDP growth for loan growth for 2016 in the different segments? Thank you.

For next year you have to consider that GDP should be around 2.4%. And if we look at the real growth rate for the industry, it should be around the 4.3%, 4.4% overall, but it's very important to take into consideration the composition of that growth where we think that the industry and still will be growing strongly still and mortgage loans around 8% to 9% real because there's still a lot of mortgage loans in the pipeline because of pre-home sale from all these issues which I'm sure you're aware in Chile regarding the tax reform on real estate properties which have been driving growth.

And when you look at the consumer book, well if you go with the consumer book that should be growing somewhere around 1.5%, but we expect that the lower income segment will probably for the industry be decreasing while the upper -- middle and upper income segments will be growing above that 1.5%. And in terms of commercial loans, we see something around the 3% range where large companies and corporates should be growing slightly below that 3% range. And if we look at the SME commercial loans should be growing above that by a couple of percentage points.

Okay.

And that's our view for next year. So strong -- in summary strong growth still coming from the mortgage loan book, from SMEs. So good growth we see there followed by good growth in middle and upper income individuals and large companies and corporates growing slightly below the 3% level that I mentioned for commercial loans as lower income probably are decreasing -- lower income individuals decreasing.

This concludes the question-and-answer session. At this time I would like to turn the floor back over to Banco de Chile for any closing remarks.

Okay. Thank you. And we look forward to speaking with you for our full year end results. Thanks.

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