Banco de Chile (BCH) 2016 Q1 法說會逐字稿

Good morning everyone and welcome to Banco de Chile's First Quarter 2016 Results Conference Call. If you need a copy of the press release issued on Friday, it is available on the Company's website. Today with us we have Mr. Rodrigo Aravena, Chief Economist and Senior Vice President of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations; Ms. Victoria Gubbins, 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 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 morning, everyone. It's a pleasure for me to share with you our comments on Banco de Chile's first quarter 2016 financial results. Today with us we have Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations, Pablo Mejia, Head of Investor Relations, and Daniel Galarce, Head of Research. We will begin with a brief overview of the economic environment, followed by an analysis of Banco de Chile's first quarter 2016 results.

I will now turn the call over to our Chief Economist, Rodrigo Aravena?

Thank you Victoria, Good morning, everyone. It's a pleasure for me to share with you my comments on the economic environment in Chile. Please turn to slide number 2. The GDP is still expanding at a below-trend pace. According to the Central Bank, National Accounts, the GDP posted 2.1% expansion in 2015, following a modest 1.9% increase in 2014. Therefore, GDP has accumulated a 2% growth in the last [two] years, well below the 5.3% posted between 2010 and 2015. The GDP breakdown showed that growth investment remains in negative territory, falling by 1.5%, while consumption continued to support the expansion by growing 2.2%. We think there were both, external and domestic variables, explaining the local slowdown. Among external factors, which highlight the lower growth in China, a country (inaudible) nearly 25% of our total exports, [worse trends] of trade due to a drop occurring in copper prices, given the fall in oil prices and the recession in Latin America. These factors have partially offset the positive contribution posted by the weaker currency. These and domestic factors (inaudible) expectation has played a critical role in this negative cycle. Based on this scenario, expected growth for this year has been continuously [adverse], mainly due to the worse external conditions, as was outlined in the baseline scenario recently released by the IMF.

Global conditions are relevant for Chilean, as it is the most open economy in the region. The moderation in global growth and the sharp adjustment in copper prices will likely lead to a GDP expansion below 2% this year. Preliminary estimates for 2017 are pointing towards an expansion between 2% and 2.5%, still below trend.

Despite the relatively low economic growth, the employment rate has been hovering around 6% in previous month, which is even lower than in 2012 when the economy grew twice as much than it is today. However, there are two main temporary factors behind this. First, the contribution from a dynamic housing sector, as a consequence of the increase in VAT tax considered in the 2014 tax reform. Secondly, the expansionary fiscal policy has also led to higher job creation. However, the breakdown of the labor market shows a deterioration of the employment composition. There is an increase in self-employment and (inaudible) contraction in the wages employment, resulting in lower growth of the real Wage Bill, although it is still in positive territory and continues to support retail sales, as you can see in the bottom left chart.

It is also worth mentioning that nationwide, our employment rate increased to 6.3% in March, from 5.9% in February, according to the National Institute of Statistics.

Now please to turn to slide number 3. The Chilean peso remains weaker than a year ago, as seen on the top left chart. It has been largely explained by both, a lower copper price and the less (inaudible) by the Federal Reserve. In the Chilean economy, the weaker peso has generated several macroeconomic adjustments. One of them is the higher translated CPI, which has remained above this 3% target since the beginning of 2014. In March, it posted a 4.5% annual increase. Most part of the percent of inflation can be explained by the continuous -increase in tradable inflation, as seen on the top right chart. Since below-trend growth will likely persist, the convergence of inflation is likely, although at a very gradual pace, because the of the laggard effect of the weaker currency. It is reasonable to expect a CPI around 3.5% at the end of this year.

The second main consequence of the weaker currency is the adjustment of external accounts, as seen on the bottom-left chart. Particularly, the current account deficit has fallen to 1.4% and 2.1% in the last two years, after posting a 3.5% and 3.8% deficit in 2012 and [2013], respectively. That narrowing is noticeable, especially considering the lower copper price, commodities at 12%, more than half of total Chilean exports. In this context, Chile's current account deficit is one of the lowest in LatAm.

Finally, on the economic policy side, the government announced a reduction in the fiscal [trending] for this year, [given into] 0.25% of GDP, due to [what's expected] in the long run, copper price. It confirms that fiscal policy will be less expansionary relative to the last year.

On monetary policy, the Central Bank has maintained the interest rate at 3.5% since December, despite the high inflation rate, basically. The Central Bank has justified the decision on the weak external scenario and the downward adjustment in GDP expectation in the policy horizon. Therefore, we cannot rule out that the Central Bank will maintain the interest rate this year and then will resume the tightening cycle by few increases only in 2017.

Now I will pass the call over to Pablo Mejia, our Head of Investor Relations to give a review of Banco de Chile's first quarter financial results.

Thanks, Rodrigo. Good morning, everyone. My comments will follow the presentation, starting on page 4. We had another year of good profits. Despite the weaker economic environment, the inflation rate on an annualized terms was slightly lower than the figure estimated for 2016.

Net income for the quarter was up 13.5% year-on-year, reaching CLP133 billion, with a return on average equity of 19%. And earnings per share reached CLP1.38, up 12% from the same period last year. This result was also similar to the last three quarters earnings and as shown on the chart on the right, enable us to post once again extraordinary net income market share, reaching 27.9% as of this quarter, demonstrating a superior ability to generate attractive returns for our shareholders. Thanks to a consistent strategy that is capable of adapting to challenging economic circumstances, outstanding risk management and well diversified customer base.

Please turn to slide 5. Loan growth was up 12% year-on-year, benefiting from important developments and strong growth in key business segments, which added over CLP2.6 trillion in loans. As you can see on the table on the right, Retail segment was the main driver behind this increase with an annual expense of 15.3% versus 8% recorded by the Wholesale segment. Undoubtedly, mortgage loans set the trend with an annual growth of 18%, closing the quarter with a volume of CLP6.5 trillion. Robust residential mortgage loan demand caused by the anticipated impact of the tax reform and attractive interest rates are the factors that mainly explain this growth.

Total consumer loans also presented a solid increase with an annual growth of 12%, ending the quarter with a stock of CLP3.8 trillion. The middle and upper-income segment drove this growth with a 14.7% year-on-year increase, while the lower income segment basically maintained loan volumes stable, growing only 1.3%, consistent with our prudent risk approach, as this business area is more vulnerable during negative cycles. Retail's commercial loans grew at similar levels to the middle and upper-income segment, increasing 14.3% year-on-year. The growth in consumer and retail commercial loans were supported by implementing strategies that use business intelligence analytics in the design of sales campaigns, improving pricing by channel, customer and risk profiling and fine-tuning the segmentation of our portfolio. As a result, we improved the coordination of sales efforts among different service channels, optimizing our product offering and the end result drove sales.

As part of our multi-channel distribution strategy, we are also continuing to enhance our network by implementing new branches and service points for private and preferential banking, as these segments have shown greater dynamism in recent quarters and have lower relative risk within the Personal Banking segment.

We also continue to make good progress in our customer loyalty initiatives. This quarter, we added Iberia Airlines to our existing travel loyalty program, which provides our customers with more alternatives to accumulate travel rewards for international flights. This new benefit is part of our permanent effort to enhance our loyalty programs, thereby consolidate and increasing the relationship with customers and reinforcing our value proposition.

All of our efforts in strengthening our relationship with customers are not only intended to grow in assets, but also in deposits, particularly those from Retailer segment. We believe that growth in Retail's deposits will be crucial in light of the new liquidity standards that will make the source of funding more valuable. These improvements have allowed us to post double-digit growth in demand deposits of 12% year-on-year, which added over CLP800 billion in deposits.

Please turn to slide number 6. The banking industry continued showing signs of slowing growth this quarter, in line with the weak economy. Total loans for the system grew only to 0.7% quarter-on-quarter versus a reduction of 0.2% during the same period. The slight drop in Banco de Chile's quarter-on-quarter loan growth was a conscious and strategic decision, where we refocused our commercial efforts to grow in segments that present a better risk-return relationship. Specifically, in Wholesale commercial and mortgage loans, we increased the requirements from customers in terms of spreads and the flow of new loans with the expectations of higher risk, anticipating the future implementation of Basel III, which could have higher capital requirements for banks. Consumer loans, on the other hand, continued growing strongly at 2.1% quarter on quarter, well above the industry average of only 1.5%, supported by the successful implementation of the previously mentioned initiatives.

Please turn to slide number 7. Customer income drove operating income growth this quarter, which reached CLP411 billion, up 7.7% year-on-year. Thanks to the rise in their loan volumes, together with strong demand deposit growth, we grew customer income by 4.9% year-on-year. Fee growth also remained strong, growing 7.4% year-on-year, driven mainly by transactional products of the Retail segment. This increase is clearly seen on the chart on the upper right, where the proportion of non-lending revenues to lending revenues has gone from one times to almost 1.2 times due the greater cross-selling. In turn, non-customer income grew sharply 15.6% year-on-year as a result of higher inflation, a decrease in charges related to CVA for derivatives and higher income from the management of fixed income securities held for trading.

Also, on the chart on the bottom right, our margin from loans slowly began showing improvements in the first quarter of 2016 after a period of decreasing trends. This evolution was due to a variety of factors, including mix and aggressive competition. Specifically, strong growth in mortgage loans on an industry level and a further expansion in consumer loans, focused on customers with higher incomes and lower margins decreased our overall spread. However, this quarter, we're pleased to say that new loans of all products have shown improvements in spreads and this should hopefully continue throughout the remainder of the year.

These positive results were complemented by effective risk management that allowed us to maintain our loan loss provisions low, closing the quarter at only 1.1%, as demonstrated on the next slide, number 8. Through our focus and prudent risk management approach, loan loss provisions ended the quarter roughly at the same level as last year's CLP65 billion, and even decreased when comparing loan loss provision ratios. As you can see on the chart on the bottom, provision expenses from volume growth and the impact of local regulatory changes related to the implementation of new definitions of impaired loans and the possibility (inaudible) provisions for guarantees and [tax rate], loans were completely offset by the positive effect of allowances for loan losses denominated in US dollars, as there was a strong appreciation in the Chilean peso this quarter as compared to the depreciation last year. Meanwhile, the intrinsic credit quality of the aggregate portfolio has remained almost unchanged, thanks to certain macroeconomic variables, such as employment that has not yet affected credit quality of individuals, in addition to adequate levels of risk in Company segments.

As we've mentioned in prior calls, we pride ourselves that comprehensive risk management is a cornerstone of our business strategy and a distinguishing element with respect to our peers. Thanks to this philosophy, which is deeply present throughout the entire credit risk cycle, NPLs remained at reasonable levels and well below those presented by our peers, as you can see on chart on the right. Our credit risk strategy takes into account the current and future economic environment, and in-depth knowledge of our target customers and markets. We then manage our credit risk in two large segments. First, the Retail segment, we rely on automated processes for individuals on a group basis and for the most part, parametric models for small and medium-sized businesses. Second, the Bank manages credit risk in the Wholesale segment using case by case analysis for large companies and corporations. Organizationally speaking, we have tried to place risk teams as close as possible to business areas. This arrangement allows risk officers to participate throughout the entire loan process, until a decision is made and then perform subsequent monitoring, ensuring ongoing control and consequently, significantly reducing losses.

Please turn to slide number 9 on operating expenses. As you can see on the chart on the left, operating expenses increased 8.4% year-on-year. This increase was mainly due to personnel expenses that increased CLP12 billion year-on-year, which was a result of inflation in the salary adjustments,. higher variable compensation and higher severance payments. Administrative and other expenses posted a CLP4 billion year-on-year increase, due to more marketing costs related to commercial campaigns, intended to reinforce brand recognition and loyalty programs, and also higher IT and communication expenses. Additionally, we had higher depreciation charges related to the renewal of our stock of ATMs and more expenses in security and transportation services. The increases in expenses of these last two items come from the implementation of stricter security standards.

In terms of efficiency, our ratio increased from 46.9% in the first quarter of 2015, to 47.2% this quarter, mainly due to the second round effects of inflation and foreign exchange on certain line items, such as personnel and IT expenses, but still compares favorably to our main peers and the industry as a whole.

Cost control is a permanent challenge for organizations, and this is the reason why an important part of our business strategy is to keep costs down. In this regard, we initiated a project called [Pro-II] that focuses on optimizing internal processes, and there is improved efficiency and service quality, as well as to decrease operational expenses. Improvements will be implemented in sales and post-sales processes related to mortgage, consumer, and SME commercial loans, cash management and treasury.

We have also begun to implement the paperless project that focuses on reducing costs associated with managing hard copy documents, streamlining workflows, electronically tracking digital documents and reducing fraud associated with paper copies. These initiatives should allow us to better serve our customers and help keep our efficiency at adequate levels.

Please turn to slide number 10. On this final slide, you can see how Banco de Chile has outperformed peers in four different aspects this quarter, thanks to various initiatives mentioned throughout the presentation, including projects to improve our value proposition to key segments, process optimization, sales effectiveness, service quality, among others.

On the top left, you can see that we lead among our peers with a 6.7% operating margin. This is due to a mix of factors, including an excellent and diversified loan portfolio, a high cross-sell model, low cost of funds, due to demand deposit leadership and excellent risk ratings, and an effective business strategy.

Second, our loan loss provision ratio remains at very low levels, once again reflecting our effective risk policies and capacities that adapt to a challenging economic scenario. Third, our efficiency ratio of 47.2% compares well against our peers and has room to improve, through new projects and initiatives similar to those recently mentioned. And finally, on the bottom right, you can see the comparison of our return on average equity for Banco de Chile and their peers. Undoubtedly, we continue to lead the industry in terms of return on average equity of [19.4%] this quarter, due to superior competitive advantages and a demonstrated capacity to implement our strategy.

To close, I believe that these results are a consequence of Banco de Chile's 120 years of history and experience of customer service and dedication. Our primary focus is to offer clients from all segments the best possible customer service. Along these lines, we have implemented various initiatives to enhance the experience through significant advances in mobile banking, a new online banking side for companies, better up-times, streamlining credit processes, and improving customer complaint response times. We are also working on various additional projects, which we are confident will make a difference and continue to position us as the leading bank in Chile.

Thank you for listening, and if you have any questions, we'd be happy to answer them now.

(Operator Instructions) Guilherme Costa, Itau BBA.

I have two questions. The first one is on consumer loans. We saw that you show a small deterioration in the consumers loans. What is your expectation for this segment going forward, given the lower GDP growth? If you could also comment on your expectations for the overall income ratio and the cost of risk expectations for the coming quarters.

And then the second question is about the evolution of your loan portfolio. What segments do you believe will lead the growth in the coming quarters? Do you believe mortgage will continue leading the year-over-year growth?

As you mentioned, right now I think the biggest doubt that remains in Chile is what's happening with the labor market. So looking forward, the NPLs, we think that probably there could be an increase in the consumer loans or NPLs, due to an increase in unemployment rates, but we haven't seen that as of yet. So there is a risk there. We are working with the level of around 7%, but that could increase in the future, depending on the evolution of the labor market and the situation that we've seen recently.

And in terms of the evolution of loans, we think that our focus will continue to be in the middle and upper-income segments and SMEs, which is a very profitable segment to grow in and shows attractive opportunities. In mortgage loans, there is still a lot of mortgage loans in the pipeline from pre-home sales in 2015. So customers have to come this year to obtain the mortgage loans. And for trade, Chile is a lower income segment, that should remain relatively flat.

I think another important thing to mention is in mortgage loans. If you look at the new sales of properties, have decreased significantly and that goes in line with the anticipation that consumers were doing last year to purchase homes -- trying to purchase homes before value-added tax was added to home prices. And it's been seen now with less demand in mortgage loans, but probably it should continue a strong growth this year.

Just confirming, you're expecting unemployment rate to increase to 7% from the current 5.9%, right?

Yes, it should be at least 7%.

Actually we're thinking that 7% in average. So we can rule out some volatility in this number to try and stay flat. In average, we can think a number of around 7%, which is [natural] in the Chilean economy when it is growing by 2%.

And the latest figure from the National Institute of Statistics is 6.3% for the three months moving average as of March for unemployment.

And additionally, we have to remember that there is a delay within the labor market and real activity growth. So, slightly an additional increase in the unemployment rate [for this year].

Tito Labarta, Deutsche Bank.

Couple of questions. One, I guess just following up on the first question in terms of asset quality and the cost of risk. So given the rising unemployment and maybe some deterioration in the consumer portfolio, do you think that your cost of risk should go up from here or what level should we expect in terms of provisions for the rest of the year?

And then my second question is on expenses. Your efficiency remained pretty much under control, but has deteriorated the last few quarters, expenses are growing above inflation and I know you mentioned some policies to try to control that, but what kind of expense growth should we expect for the rest of the year, given you are trying to control costs in this environment? Thank you.

In NPLs, I think it's important to mention that there will probably be a deterioration, but the impact in terms on loan loss provisions should be more marginal. It's not a huge -- we don't expect a huge impact. So you could think something reasonable. Today, we have a level of around [1.1%], probably, it's on the lower end of the scale, we could have. More reasonable would be a clean effect of around [1.2%] for the year-end.

It's important to mention that the current LLP ratio includes an FX effect. So if you clean that effect from the LLP, you have 1.2%, which is what we are expecting for the rest of the year approximately.

And when we say clean also, that take into consideration things like additional provisions, which is something that's approved and implemented by the Board of Directors. In terms of efficiency --

Sorry, just one follow-up there. That was pretty clear, but do you expect any additional provisions from the system in terms of normalized provisioning methodologies, or is that done?

From the new methodologies for the mortgage loan, no.

And on the consumer side neither?

The consumer side, the Superintendency mentioned that when they released the new mortgage loan provision in standard model that there will be at some point, I understand, a change for the consumer loan book and the SME loan book, whereas there will also be a standard model implemented. But as of yet, there is nothing defined. We don't have any additional information of when that would be. They're trying to do it soon enough.

In terms of efficiency, what we can say is for the full year, you should expect something a little bit lower than what we've seen today. We should think that Banco de Chile looks to try to contain expense growth below double-digit figures. So that would mean something in the 45%, 46% range that we've mentioned in the [four] prior quarters. And obviously that depends on inflation as well. So if inflation drops, it can affect our operating efficiency level. And if it increases, it could possibly be better than the 46%.

So I guess the 8% growth that we saw this quarter is kind of reasonable to expect for the rest and with the cost reductions that you are looking to do, would that mean could be a bit lower than that?

It's reasonable, because the cost reductions offset other increases and expenses related to regulatory changes. So everything that we do to reduce costs generally tends to offset all these new regulations that have been implemented.

[Carlos Gomez, Banco De Chile].

I have two questions. The first one is, if you could give us an indication for your expected tax rate for the year? The second, obviously you had a change in management announced during the quarter, so I wanted to say thank you to Arturo for his services all these years and to know if Mr. Ebensperger has any plans or any novelty that he would like to introduce to the Bank? Thank you.

The effective tax rate, obviously it depends on inflation, because in Chile the tax authorities use price level restatement for calculating the tax payable. So when inflation goes up, since banks have large non-monetary liabilities versus non-monetary assets, there's is a large charge for price level restatement. So it really depends a lot on inflation, but based on our expectations of around 3.5% for inflation, we should expect something similar to what we recorded this quarter, which is the 13% level.

Could you repeat the second question, please?

I would like to know if we should read anything into the change in management and we should have any expectations of any modification at all, if any, in your strategy going forward?

I think it's important to mention that the new CEO Eduardo Ebensperger has been with the Bank for many years, over 25 years, and he's held many different strategic commercial positions in the Bank. And one of the things that he said is that the current strategy will continue going forward, so that there may be some fine-tuning, but large changes we don't expect to see.

Catalina Araya, JPMorgan.

I just wanted to get a sense of what you're thinking in terms of NII growth. Mostly if we exclude the impact of inflation, we estimate that NII grew around 3% year-on-year, well below loan growth. However, on the call, you talked that you expect lending spreads to remain relatively stable. So just want to get a sense of how should we think about NII growth? Thank you.

I think one of the things that we mentioned that I should point out and emphasize is that around early 2015, mid 2015, we were seeing spreads going down because of a change in mix. We were growing strongly in mortgage loans and in upper -- middle and upper-income individuals, where spreads was a little bit thinner and higher competition. From around the third quarter probably of last year, we are very focused on our risk-return relationship, improving the spreads of flows of new loans, which you don't actually see that effect until January and February of this year, where you start to see an improvement in the spreads. So there is dip, it's like a U. So right now, we should see an increasing trend, hopefully, in spreads throughout the remainder of the year, where we should have more or less the same spread ex-inflation at the end of 2016 with the end of 2015. But there is a recovery in process. So, we should continue to see improvements in spreads, ex inflation.

Jason Mollin, Scotiabank.

I just wanted to see how is the Bank's views on the expected changes in capital requirements moving towards Basal III. We are expecting to hear some comments about what the proposal would be, if you can give us an update on your thoughts and the process? Thank you.

Hi, Jason. Right now there's not much additional information available. As of yet, the Superintendency hasn't mentioned a timeline or much specifics regarding Basal III. We expect that at some point this year -- I've heard that soon -- there may be more information regarding Basal III, but nothing is clear as of yet.

Are we expecting to hear some proposals in May at the Chile Day in London? Is that something -- that's something we were hearing. Is that still anticipated? I believe that's next week or the week after.

The announcement maybe will be announced in Chile Day, but like the specific details will continue going forth. So I don't know how specific will be the announcement.

And Chile Day would be showed next week.

And something additional to mention is that we did -- anticipating maybe this change which could make capital requirements stricter for banks, we made a change in our dividend policy, where we are now capitalizing or we're paying out in cash 60% versus 70% of distributable net income.

(Operator Instructions) (inaudible).

My first question is, have you seen any impact because of the bankruptcy law in the portfolio?

As you can see that loan loss provisions is very low. So there hasn't been much of -- we haven't seen yet much of an impact. There is still some uncertainties and it's not clear what could be the impact in the future. But right now, as of yet, we haven't seen any material effects of the new policies.

And what are those impacts that you are looking forward or expecting? How could that -- the bankruptcy law, how could it impact on the quality of your portfolio?

I think the new regulation, together with other regulations obviously impacts the risk-return relationship and the areas that the Bank is looking to grow in. So, obviously -- and the industry. So obviously this new regulation will affect the risk appetite for banks and probably decrease the growth in more risky segments, because basically, like any new regulation that can affect increased losses, that would be the effect, NPLs or loan loss provisions will increase. So obviously, the Bank and the industry will probably -- the end effect will be slower loan growth in those segments that show higher risk. But as of yet, we haven't seen an important impact.

And my second question is regarding the trading book. How do we read the increment quarter on quarter of that book, the trade book?

The investments, those are short-term investments. The trading book is very difficult to make estimates going forward.

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

Thank you for listening to our call and participating. We look forward to share with you our second quarter results. Thanks.

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