Banco de Chile (BCH) 2017 Q2 法說會逐字稿

Good morning, everyone, and welcome to Banco De Chile's Second Quarter 2017 Results Conference Call. If you need a copy of the press release, 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; and Daniel Galarce, Head of Financial Control.

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 conference over to Mr. Rodrigo Aravena. Please go ahead.

Good morning, everyone, and thanks for joining us today on our conference call for the second quarter results. To begin, I will present some comments regarding the macro environment in Chile and Pablo will begin his discussion with an overview of the results of the banking industry followed by a review of our second quarter results and our [secondary] projects.

Please turn to Slide #3. In line with previous conference calls, the Chilean economy continues to face a negative economic cycle. GDP has persistently grown below Chile's potential long-term capacity. Specifically, in the first quarter, the economy rose a weak 0.1%, the lowest expansion since 2009. However, as we highlighted in the prior conference call, the key reason for this number was the price in Escondida, the biggest copper mine in Chile, which was a temporary factor. On the other hand, several figures have been suggesting that the economy is slowly recovering, in particular, monthly GDP went up 0.1% and 1.3% in April and May, but its sequential monthly growth rose 0.5% and 0.9% in the first 2 months of this quarter after posting reductions in February and March. It is important to mention that there are differences in the dynamism between different economic sectors.

On the negative side, mining production fell by 6.1% and manufacturing production grew only 0.9% in June. On the other hand, retail sales posted a strong 5.5% rise, while new car sales grew an impressive 16%. All in all, we think these figures confirm that price and consumption continues to support GDP expansion. In the labor market, the employment rate has continued to rise, as we mentioned in previous conference calls. In June, it went up to 7%, 20 basis points higher when compared to the rate recorded 1 year ago. More importantly, the quality of jobs continued deteriorating as self-employment was the main driver behind the increase in total employment. In fact, it grew 3.8%, while salaried employment rose only 1.2%. We have been observing this trend since early 2016.

Additionally, June surprised the market with an important reduction of 0.4% in monthly inflation, which led our inflation rate to 1.7% from 2.6% in May. CPI has remained under the Central Bank target, which is 3%, since October of last year. And even core CPI is below the lower bound of the Central Bank range, which is 2%. The main driver behind lower inflationary pressures has been the decline in (inaudible) inflation. It posted 1.7% in May as the exchange rate has remained stable since the end of 2016. However, it is important to mention that lower inflation has led to an increase in the real wage bill, providing additional support to the private consumption growth. Lower inflation has also contributed to the Central Bank to conduct a more expansionary monetary policy. This year, the Central Bank has cut the interest rate by 100 basis points. The last reduction was in May, a decision that was accompanied with a neutral bias in the press release of the meeting.

In the last monetary policy report released in June, the Central Bank expected the below [point] growth to remain at least until 2018, while the interest rate would remain unchanged in the next quarter. Nevertheless, lower inflation pressures, together with weak activity, has increased the likelihood of new reductions in the overnight rates.

Now I would like to share with you our macroeconomic base plan scenario for 2017 and 2018. Please turn to Slide #4. We expect the domestic economic growth to improve, led by positive global conditions, copper prices remaining at current levels, a weak currency and a gradual improvement in domestic [content]. In this context, we expect the economy to grow around 1.4% this year, which assumes an expansion between 2% and 2.5% in the second half of the year. For 2018, we are currently expecting a rate of nearly 2.7%. On prices, we don't see material changes in the inflation rate. We are still expecting a CPI hovering around the current level as a consequence of the opposite forces between a below trend growth and a weak currency. We see a CPI inflation of around 2.3% and 2.8% by the end of 2017 and '18, respectively.

Finally, we expect the Central Bank to review the interest rate by 25 basis points during the coming months, therefore, we estimate the overnight rate to be at 2.35% at the end of this year.

Please turn to Slide #6. The banking industry posted, once again, a strong result for the quarter, 7.5% above the figures reported during the same period last year. Thanks to this, return on other equity increased by 23 basis points from 13.6% to 13.9%. In terms of the balance sheet, we continued to see weakness in loan growth principally driven by lower demand in the wholesale segment. Commercial loans only grew 2.1% year-on-year, in line with the Central Bank's survey, which reports, in the second quarter, weaker demand from both large companies and SMEs. Consumer loans also showed less dynamism, growing 8%. Meanwhile, mortgage loans posted a similar acceleration to 10% year-on-year during the quarter. This was also in line with the Central Bank's survey that reports weaker demand from individuals for these products along with stricter credit requirements from banks.

In terms of risk, NPL for consumer loans increased 13 basis points year-on-year, in line with a weaker economic scenario of lower growth and higher unemployment rate. We expect a slight recovery in 2018, when the economy is estimated to improve. Finally, it is important to mention that the government announced several changes to the general banking law, as expected, the proposals were focused on 3 main aspects; first, higher capital requirement, which aims to convert to Basel III; second, the creation of a Financial Market Commission, which is a Board composed of 5 members. The Financial Market Commission will include and replace the current role of both superintendencies. This is securities and insurance as well as the bank. Third, the third area was oriented towards updating requirements of banking resolutions. Once the new general banking act is passed by the Congress and enacted by the government, there will be some critical aspects to be jointly defined by the Financial Market Commission and the Chilean Central Bank, such as the risk which factors for assets methodologies to determine buffers for systemically important banks and countercyclical offers, among others. So far, however, there is not enough information to provide more precise estimates for new capital ratios and thresholds that will apply to Banco de Chile. In any case, it is worth mentioning that the government proposal considered a phase-in period for capital adequacy, but it has to be at least by 2024.

Now I would like to pass the call to Pablo, who will go over the results of Banco de Chile.

Thanks, Rodrigo. Our results for the second quarter have been outstanding. In the next slides, we'll go over these results, the progress that has been made toward achieving our strategic objectives, as well.

Please turn to Slide #8. Despite the persistent weak economic environment, we ended the quarter with a strong bottom line of CLP 160 billion, equal to an ROE of 22%, up 6% from the same period last year and 14% from the prior quarter. I think it's also important to note the consistency of our profitability over the quarters that has ranged within our guidance and that is this quarter, in particular, one of the best in terms of net income in our history, ranking us first amongst our peers in terms of net income and ROE.

I would also like to highlight that these figures have been recorded in a scenario of lower inflation, demonstrating our ability to cope with a less favorable economic environment and maintaining a solid top line based on strong customer income and cost control initiatives that are paying off.

Please turn to the next slide, #9. This successful track record has been a result of our customer-centric strategy that focuses on delivering sustainable and profitable growth by promoting greater penetration in the retail segment, strengthening customer experience and improving digital contact channels and making greater use of business intelligence tools. This has been done with continued improvements in productivity, while taking appropriate levels of risk for the returns that we aspire.

Please turn to the next slide, #10. Increasing share of wallet in the retail segment has been our focus in recent years and it continues to be one of our main strategic goals. We have consistently reached attractive growth rates in this segment in both loans and deposit balances as well as current account holders. Along with these lines, we are steadily increasing our customer base, as you can see on this chart on the left, by 6.4% year-on-year, outperforming by a large margin all of our peers and providing the foundation for our future growth by means of increasing cross-sales and up-sales. Additionally, we have been able to gain a deep customer insight, which has permitted us to grow steadily with no significant changes in asset quality.

In this manner, loan growth was led by the retail segment, increasing 9% year-on-year as described on the chart on the right. Within retail, SME commercial loans were the fastest-growing product, while loans to individuals grew 8% year-on-year, thanks to continued positive growth levels in the mortgage loan book.

Regarding SMEs, we keep on promoting long-term relationships by our company and customers along their life cycle. Accordingly, we expect to continue taking advantage of the dynamism in this segment while maintaining a favorable risk return equation. In addition, we expect that the dynamism of the mortgage loans should continue decreasing marginally and stabilize around 5% in real terms for us and the industry by the end of this year.

Consumer loans, on other hand, have grown 2.7% year-on-year due to weaker demand, fostered by the economic deceleration and our aim to maintain good asset quality indicators. As such, our expansion has been centered in the middle and upper income segments, which have grown slightly above 4% year-on-year. Despite the riskier environment, we were able to achieve these growth levels through our solid business initiatives, for example, our loyalty programs, new personalized pricing model, preapproved customer database that promotes higher productivity from our account managers, amongst others.

In terms of wholesale loans, this segment continued showing weakness, decreasing 2.5% year-on-year due to the sluggish investment that has reduced demand for loans from larger companies.

We expect that the long -- that as long as the economy improves, we should see a rebound in commercial loan growth from this segment, given the scenario of historically low interest rates and controlled inflation that should promote new projects. In terms of funding, we continue to lead the industry with the lowest cost of funds in local currency, thanks to our solid deposit base, which -- particularly in demand deposit accounts.

Through excellent service quality, improved attrition levels and important increases in product usage rates, our customers prefer Banco de Chile to other banks when saving their funds. This has resulted in important increases in DDAs from individuals of 8.2% year-on-year. And in turn, total core deposits grew by a similar level of 8.3% year-on-year.

Please turn to the next slide, #11. Operating income came in at CLP 448 billion this quarter, down 6% year-on-year on an unadjusted basis. However, when adjusting for a onetime sale of AFS instruments, which occurred during the second quarter of 2016, recurrent operating income was up 8% from a year earlier thanks to the robust growth in customer income. As you can see on the chart, we achieved a noteworthy year-on-year increase in customer income from both the retail and wholesale segments, which grew 8.1% and 6.7%, respectively. These figures clearly demonstrate the results of our efforts in improving spreads across all business segments, up 16% -- 16 basis points year-on-year, which more than offset lower inflation income and supported net interest income growth of 6% on an annual basis, well above the level of loan growth required for the period.

Fee income was also an important factor driving operational income growth. Fees were up 9.8% year-on-year chiefly due to higher net revenues from transactional products because of greater cross-selling and growing our customer base, due to effective commercial strategies that pursue to increase the penetration of high-income individuals. Also fee income from credit cards has benefited from an improved loyalty program that has introduced new alliances that appeal to our customers. In addition, this quarter, it was particularly favorable for our subsidiaries, which reached an important increase in fees related to stock brokerage and mutual fund management. Our subsidiaries have enabled us to take advantage of the positive figures displayed by the local stock market this year as well as the low interest rate scenario that leads investors to seek more attractive opportunities.

To a lesser degree, our insurance brokerage subsidiary has also contributed to an increase in our fee income. These positive effects were offset by lower noncustomer income, which decreased almost 32% year-on-year, but as I mentioned earlier, this reduction is largely explained by an extraordinary recognition of revenues from the sale of the AFS securities in the second quarter of 2016 amounting to CLP 60.2 billion. This was partially offset by higher revenues generated by a positive effect of CVA on derivative positions, more convenient funding due to a larger capital base and the positive impact of repricing generated by reductions in the overnight rate.

Before moving on to our next slide, I believe it's important to mention that our long-term business strategy and the progress that we have made in our key strategic projects have permitted us to keep a sustainable and consistent growth level in customer revenues. While this progress has eased a bit due to the lower dynamism of the economy, which has reduced the growth from interest income and fees, particularly at corporate clients, we have managed to support operating income by improving lending spreads.

Undoubtedly, the strong trends shown by customer income has been the consequence of a strategy aimed at strengthening customer experience, improving digital contact channels and taking more advantage of business intelligence tools.

Please turn to Slide 13. As mentioned, during the last few years, we have entered into new alliances with different airlines such as British Airways, Delta, Iberia and Sky, which further expands the benefits we provide customers through our loyalty programs when they use our credit card. In addition, to generate further fee income by increasing usage rates, these improvements have enabled us to attract new customers, reduce attrition and boost revolving credit on our cards while strengthening relationships. We are convinced that the banking model is changing, branches are being used less than before, and this has driven us to streamline our branch network and optimize how we offer services and invest in remote banking platforms. In this context, we have achieved significant progress over the years, launching world-class apps, a new line -- a new online banking platform for individuals, and we have been recognized for these achievements by prestigious publications and locally when banking customers are asked to rank their favorite mobile apps [thanking] us. We're also currently redesigning our company online banking platform, which we hope to launch by the end of this year, and we are expanding the functionalities of our mobile apps. These and another technological initiatives are critical to keep our solid track record and success in the future.

Business intelligence is another very important tool that has improved several key commercial activities, while keeping risk at market-leading levels. We have developed a personalized pricing platform in loan interest rates for retail customers, used public and internal information to make a large database of potential customers and uploaded this information to the cloud. This has allowed our account managers to gain remote access to this information from a smartphone, supporting sales activities. We have also implemented intelligent follow-up and monitoring practices to reduce attrition and increase share of wallet with customers.

In addition, we're also making progress in implementing our new CRM platform that is being built in-house, taking advantage of the know-how and the deep customer knowledge we have gained over the past. The new platform will be used by all commercial segments from corporate to consumer banking, providing a complete online 360-degree view of our customers. This is our most important project in progress and we are confident it will allow us to offer a better and faster service to our customers by delivering new functionality, independence and business management tools for our front office over the next years.

I've only mentioned a few projects that we are developing, that should help reduce lead times, increase automation, maintain better relationships with customers that, when combined, should translate into important revenue growth.

Nevertheless, some of these initiatives are already paying off as it can be seen in our high and leading Net Promoter Score, which evaluates net recommendation from customers. In June, we have reached 73%, a level that gives us an ample gap with our competitors and helps us also to maintain leading attrition indicators. Additionally, we are convinced that we must continue optimizing and streamlining processes in order to improve productivity in both front office and back office activities. These initiatives have permitted us to show improvement in operating expenses as described on the following slide, #15. Total operating expenses decreased 4% year-on-year, allowing us to reach an efficiency ratio of 44%, a very notable level. Specifically, personnel expenses grew only by 0.8% due to higher salaries in line with inflation and greater severance indemnities. These were partially offset by lower headcount as well as lower bonuses related to a nonrecurrent charge of CLP 2.7 billion in the second quarter 2016 as a result of a special bonus granted to the stock of one of our subsidiaries for the completion of the collective bargaining process.

On the other hand, administration and other expenses decreased by 8.7% year-on-year, largely owed to the establishment of noncredit related allowances posted in the second quarter of 2016. Our commitment to operational excellence and productivity are completely in line with our customer experience goals. This means that strategic projects we are undertaking to control costs better, improve contact channels and optimize our branch network are being implemented with the customer in mind in order to avoid affecting service quality standards. The first results of these actions that we took in order to improve efficiency can be seen in the reduction in headcount in branches as well as improvement in productivity figures.

More importantly, these changes have been implemented without affecting our Net Promoter Score as I mentioned earlier in the presentation.

Going forward, we are confident that our permanent focus on cost control and ongoing commercial and operational initiatives will continue boosting productivity and customer service, resulting in better efficiency and lower attrition levels.

Regarding cost control, we have also implemented diverse initiatives for specific line items such as traveling expenses, paperwork, office supplies and communications. In addition, we have begun an in-depth analysis to identify sources of cost savings that should not only translate into lower expenses in the short-term but also promote a corporate culture oriented to productivity and efficiency.

Along these lines, risk management has been one of the main pillars of our success. Thanks to a long-term sustainable risk management approach, we have consistently posted outstanding performance throughout the years and this period is no different, as described on Slide 17. In this persistent challenging environment, we recorded another quarter of low levels of loan loss provisions, reaching only CLP 62 billion and an LLP ratio of merely 0.98%, both figures well below those posted last year.

As you can see, loan loss provisions decreased sharply over the same period last year. This reduction was principally due to CLP 52.1 billion of additional allowances booked in the second quarter of 2016, partially offset by an increase in provisions owed to a slight deterioration in loan growth as well as the mix effect. It's important to note that last year represents a low basis of comparison. Actually in the second quarter of 2016, we released allowances for commercial loans, due chiefly to an upgrade of 1 corporate customer, while our risk expenses also benefited from regulatory changes related to a decrease in credit exposure factors for contingent loans.

It's always important to highlight that the key -- that part of our key capability of managing risk is as a high involvement of the Board of Directors and upper management in risk decisions. We have weekly risk committees with an active involvement of directors. This permits our Board to have greater information about the risks and challenges we are facing and it allows us to make better decisions. Also, we invest substantial in human and financial resources to develop strong credit acceptance, collections and monitoring practices. This allows us to identify risks more easily before they surge and implement adjustments to minimize our exposures.

Please turn to the next slide, #18. Before we move on to questions, I would like to go over a few key ideas that we mentioned in this call. The results of the first semester were outstanding in all areas. Growth in customer revenue, lower costs and limited risk levels were critical to achieve our high income figure and ROE of 21.7%, once again, leading the industry in net income for the quarter and year-to-date.

In our view, this achievement demonstrates that the alignment with a consistent strategy pays off in the long term.

Our good levels of efficiency and controlled operating expenses reflect the efforts and emphasis that we have put forth on improving productivity across all areas of the bank. More importantly, this has been done in a manner that has not affected customer experience as we continue to lead the industry in service quality.

And finally, the Chilean economy has presented some signs of improvement, suggesting an inflection point was the first quarter of this year. We firmly believe that our competitive advantages, robust long-term customer-centric strategy of Banco de Chile, will permit us to take greater advantage of this more positive cycle and support our market-leading profitability level. Thank you for listening. And if you have any questions, we would be happy to answer them.

(Operator Instructions) Our first question comes from Carlos Macedo with Goldman Sachs.

A couple of questions. First, in the beginning when you were talking about the economy, you mentioned that you expect unemployment rate to increase. Loan growth on the consumer side is fairly strong relative to the rest of the portfolio. What should we expect there? Is -- will you continue with the same risk appetite that you had before? Is there something that you expect to decrease? And what are the implications for loan growth on the consumer side going forward? Second question, just very quickly, if you can give us -- or remind us of what the implications are for your capital ratio, common equity Tier 1, Tier 1, Tier 2 of the new Capital Standards Law that's being -- working its way through Congress? And I do understand that we're not quite at the final version yet and we don't have many details that will come from the regulatory -- from the supervisor, but just give us idea so that we can understand where you are?

So for loan growth, we're seeing for the industry a level of around 5% for the year-end. We're expecting that Banco de Chile should grow in line with that, growing a little bit faster than the market in the next -- in this semester, particularly where we're focused in growing is in, as we mentioned, in the consumer loans, in upper income individuals and taking the advantage of SMEs and picking up some market share in commercial loans that we think will be more active in the second semester. In terms of risk, we always try to balance between risk and returns and probably what we'll see is something similar, a little bit worse levels in loan loss provisions for the second semester, but we shouldn't see an important deterioration or a significant change in our risk appetite. So levels of 1% that we've had this first semester, maybe that should increase slightly by 10 basis points. And in terms of a Basel, Daniel Galarce will answer you.

As you said, we don't have enough information in order to give a very good estimate. But with the current levels of capital that we have, we feel pretty comfortable in order to face the new regulations like Basel III. In addition, we have bolstered our capital base over the last year, 2016 and 2017, by reducing the payout ratio from 70% to 60%. In addition, you have to consider that this law or this regulation will be phased in, in the -- towards 2024 and, accordingly, we have enough time in order to reinforce our capital base if we need that. However, under some conservative assumptions, we believe that our capital ratios under Basel III and considering standardized models should be reduced by approximately 100 basis points.

(Operator Instructions) The next question comes from Tito Labarta of Deutsche Bank.

A couple of questions. Also, first on your net interest margin, we saw some good expansion this quarter, I think, benefiting from lower interest rates. But how do you see the outlook for that? Inflation, as you mentioned, fell in June, so I think there will be some negative impact of that. You talked about potentially lower rates, given low inflation and still low growth. So how do you see net interest margin evolving for the rest of the year and into next year as well? And then my second question, you talked about the investments you are doing in your CRM. And how much will these investments be? How is that going to impact expenses both from investments and also potential efficiencies that you may get from that? If you can maybe give some color on the outlook for expenses given that project?

So in terms of our net interest margin for the second half of this year, probably what we should see is a little bit less in terms of inflation revenues. So for the full year, we should have a level similar to what we've had today, between 4.3% and 4.4%. This will probably be the quarter with the highest -- or this was a very good quarter in terms of inflation. The second half will be a semester with less -- more likely less inflation than the first quarter, slightly less. And they will be partially benefited by lower overnight rates, so it will benefit net interest income. For next year, we'll have the opposite effect, lower interest, lower overnight rate, but benefiting from a higher inflation rate. So again, we should have a similar level of net interest margin for 2018 as what we should end in 2017, which would be around the level of 4.3% to 4.4%. And okay, the second?

CRM?

The CRM is a project which was probably around the 50 -- estimated around the $50 million. And it's a project which will be depreciated over a 5-year period. So as the modules are implemented, we'll see the depreciation over the 5-year period reflected in the income statement.

That's helpful. And do you expect any improvements in efficiency given that?

In terms of -- in efficiency, we think that the levels of efficiency for Banco De Chile are similar to what we have today. We're implementing a lot of improvements in automating processes, back-office activity, this should improve customer service. But a lot these activities that we're -- initiatives that we're implementing should offset the higher IT expenses that we have to implement in order to maintain good customer service levels, such as the new online banking website, new website. This is a continuous process of renewing IT platforms because they change so quickly. So we're reinforcing the apps as well. So probably the level of efficiency should be in the 44% level.

Okay. So the investments can be offset by improved efficiencies. So keeping efficiency somewhat steady and, I guess, maybe expenses growing in line with inflation then? Is that fair?

For this year, it should be below inflation, expenses. And the focus in Banco de Chile is to have a more cost-conscious culture, which should control inflation -- expense growth in the coming years.

(Operator Instructions) 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 the next quarter to share our results with you. Thanks.

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