Banco Itau Chile (ITCL) 2014 Q3 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the CorpBanca conference call on the third quarter 2014 financial results.

We have with us Mr. Fernando Massu, Chief Executive Officer; Mr. Eugenio Gigogne, Chief Financial Officer; and Ms. Claudia Labbe, CorpBanca's Manager, Investor Relations.

(Operator Instructions)

I must advise you that this conference is being recorded today, Thursday, November 13, 2014.

I will now pass the floor to your speaker today, Ms. Labbe. Please go ahead.

Good afternoon. Thank you for joining our conference call for our third quarter 2014 financial results. I'm Claudia Labbe, Head of Investor Relations. Here I am with Fernando Massu, CEO, and Mr. Eugenio Gigogne, CFO.

I would like to remind you that all figures are presented in Chilean pesos unless otherwise stated and that my remarks may include forward-looking information and our actual results could differ materially from what is discussed.

To begin, I would like to highlight that in third quarter 2014 net income attributable to shareholders totaled CLP54.6 billion, reflecting a 94.1% increase when compared to third quarter 2013 year-over-year. This increase mainly reflects the commercial activity in both Chile and Colombia, the positive impact of higher inflation rate in the local market combined with a lower monetary policy interest rate, as well as asset and liability management performance and the consolidation of Helm Bank for a full 3 months in the third quarter 2014 as compared to 2 months in the third quarter 2013.

Total loans, excluding interbank and contingent loans, reached CLP14.7 trillion as of September 2014, allowing CorpBanca to achieve a market share of 11.97%, an increase of 51 basis points as compared to fourth quarter 2013 as a result of all business segments performance.

As of September 2014, CorpBanca was the fourth largest private bank in Chile in terms of loans and deposits and had closed the gap to the third ranked bank. By the end of third quarter 2014, according to the Colombian Superintendencia Financiera, CorpBanca also ranks as the sixth largest private bank in Colombia in terms of total assets, total loans and total deposits.

Other important highlights for the third quarter 2014 are; net operating profit increased by 9.7% quarter-over-quarter, mainly due, once separated from the impact of our fiscal hedge effect, asset and liability management and provision releases.

Net provisions for loan losses decreased by 23.8% quarter-over-quarter as the result of provision releases consecutive to debt payment and increases in guarantees associated with commercial loans, and total operating expenses increased by 7.7% quarter-over-quarter primarily due to higher expenses in our Chilean operation as well as expenses related to the Colombia merger process.

Before starting with the presentation, Fernando would like to comment some recent highlights.

Thank you, Claudia. Good morning all of you. The results during the third quarter 2014 showed a significant improvement compared to last year, year-over-year as we expected. Third quarter 2014 results fully consolidated Helm Bank, although one-time integration costs still partially offset the benefits of the acquisition.

It is important to mention that CorpBanca's outstanding third quarter 2014 and year-to-date performance reflects both a greater business diversification, which results in more stable revenue stream, and the increase in the UF variation combined with a lower monetary policy in the local market year-to-date.

The higher UF variation compared to the expected variation for the year only represents an additional CLP15 billion before taxes approximately compared to an income before taxes of CLP266 billion year-to-date, equivalent to 5.6% only.

Despite a lower GDP growth rate in Chile in 2014, local commercial activity remains favorable for CorpBanca assets as in previous quarters, along with a positive economic trend in Colombia.

As examples of our commercial activity in Chile this year, I would like to highlight CorpBanca's participation in financing and/or advising projects like GIP, Global Infrastructure Partner, (inaudible), Javiera [HPA] photovoltaic part and Antofagasta Hospital among others, which have not only contributed to our net interest, but also to our fees and commissions revenues. These transactions reflect our leadership in two key segments that have been the engines of the economy.

On the other hand, our cross-border operations continued to increase their contribution to the consolidated net income. To-date CorpBanca Colombia post merger synergies are being generated as scheduled initially.

The extensive tax reform bill passed in Chile in September 2014 had a non-material negative net impact of CLP1 billion, equivalent to 0.6% of the year-to-date net income or 0.1% to the equity attributable to shareholders.

In September 2014 we issued senior bonds in the international market for $750 billion in line with our strategy to diversify funding sources, expansions, liquidity and finance commercial activities.

In connection with the pending merger between Itau Chile and CorpBanca, on October 16th another important second regulatory approval process was achieved when the Brazilian Central Bank authorized Itau Unibanco to participate indirectly in the equity of the merged bank. We expect to finalize the merger during the first half of 2015 once the regulatory and the shareholder approval has been obtained.

Now, Claudia will refer to CorpBanca's strengths during the third quarter 2014.

Thank you, Fernando. To begin, let's move to slide 3. The chart to the left shows our 12 months trailing net income from December 2006 through September 2014. During this period, our net income for the 12 months trailing September 2014 reached record levels of CLP198.4 billion excluding one-time revenues of CLP16 billion in fourth quarter 2013, an increase by 44% year-over-year. As I previously mentioned, third quarter 2014 results showed a significant improvement compared to last year, CLP54.6 billion, a 94.1% increase from CLP28.2 billion in third quarter 2013.

Next slide, page number 4, the following table presents the result generated in each of Chile and Colombia for the third quarter 2014 to show separately the impact of each country's operation of the consolidated result of CorpBanca.

The financial results of CorpBanca Chile include some expenses associated with our Colombian operation, particularly interest expenses in connection with a part of the acquisition of Banco Santander Colombia, now known as CorpBanca Colombia, that was funded with -- that was not funded with equity; amortization of the intangible assets generated in the Banco Santander Colombia further to the acquisition of Helm Bank; and the impact of our fiscal hedge. That fiscal hedge corresponds to a derivative that is used to cover the valuation of our investment in Colombia for tax purposes from the volatility of the exchange rate of US dollar to Chilean peso. This effect has to be analyzed along with the income tax expense.

This adjusted result for third quarter 2014 allow primarily the separation of the Chilean result from any impact related to our Colombian operations. The adjusted third quarter 2014 results represents in our opinion an unbiased result achieved in Chile.

Our operations in Chile generated CLP41.7 billion of adjusted net income in third quarter 2014, while our operations in Colombia generated CLP24 billion. This figures shows that greater business diversification has resulted in an increasing revenue stream.

Adjustments are related to CLP1.7 billion associated with funding for the acquisition of CorpBanca Colombia; CLP14.4 billion of hedge taxes in US dollar counterpart in income tax expense, not included here; and CLP3.2 billion of intangible asset amortization and integration cost in Colombia.

Moving along to slide 5, profitability. We achieved an average annual return on equity, ROE, of 17.3% between January 2011 and September 2014. Capital increases between 2011 and 2013 to enable our organic growth in Chile and our acquisitions in Colombia, totaling approximately $1.6 billion, an increase of 137.1% over the same time period impacted our ROE since the third quarter 2011.

Regarding our return on average asset between January 2011 and October 2013, the main drivers were the increase in our corporate loans with lower credit risk profile and lower spreads than in our retail loans in 2011 and beginning 2012; the accrual of Banco Santander Colombia, now known as CorpBanca Colombia, net income commencing in second half of 2012 and of Helm Bank for the last 5 months of 2013 compared to full-year in 2014.

Regarding our return on average assets between January 2011 and October 2013, the main drivers were the increase in our corporate loans with lower credit risk profile and lower spread that in our retail loans in 2011 and beginning 2012; the accrual of Banco Santander Colombia net income commencing in second half of 2012 and of the Helm Bank for the last 5 months of 2013 compared to full-year in 2014.

Next slide; page number 6, we talk about our market share. In Chile, our market share as of September 2014 and on an unconsolidated basis reached 7.5%, an increase of 20 basis points in comparison to as of December 2013, reflecting our growing commercial activity during the first half, highlighting project finance and infrastructure performance. As of September 2014, according to the SBIF, we were the fourth largest private bank in Chile in terms of the overall size of our loan portfolio, with 12.0% of market share on a consolidated basis.

During third quarter 2013, CorpBanca added $5.3 billion in loans through the acquisition of Helm Bank, which contributed to our increase in market share on a consolidated basis.

In Colombia, despite the ongoing process of the Helm Bank merger, our market share remained stable, reaching 6.5% as of September 2014 according to Superintendencia Financiera de Colombia, reflecting favorable economic fundamentals, low banking penetration and increasing commercial activity.

Moving along to number 7, we talk about our asset quality. Persistent with one of our core strategies, CorpBanca has one of the lowest credit risk indexes -- that is loss allowances to total loans -- in the banking industry in Chile. Specifically as of September 2014, CorpBanca had the lowest credit risk index in its Chilean loan portfolio compared to peers, 1.33%.

Next slide, number 8, continue to talk about asset quality. CorpBanca's high asset quality was maintained following the acquisition of Banco Santander Colombia in May 2012 and Helm Bank in August 2013. The chart to the left illustrates how our consolidated non-performing loans ratio compares to the industry average in Chile. We believe that our risk management processes and methodology enable us to identify risk and resolve potential problems on a timely basis.

Finally, on slide number 9 our capitalization levels. The increase of capital during the first quarter 2013 in connection with the acquisition of Helm Bank additionally improved the trend in our BIS ratio in 2013. Capital ratio remained strong, reaching 12.6% in September 2014.

Thank you. Now, if you have any questions, we would be happy to answer them.

(Operator Instructions)

Boris Molina, Santander.

Yes. I had a question regarding the news today in the Chilean press that Itau is negotiating to incorporate the IFC in the shareholders agreement of the Bank. Is there something that you could tell us about -- what are the terms or conditions under which they would participate in the shareholders agreement?

And secondly, do you foresee that the renegotiation of the merger agreement or the shareholders' agreement could potentially lead to a renewed round of regulatory authorizations in the different jurisdictions where you are seeking regulatory approval?

Hi. This is Fernando Massu. We are not able to comment anything because that has not affected directly to the Bank. It has affected -- if there are any change, it's going to be at the shareholders' agreement. So the Bank doesn't have anything to do over there.

But doesn't the shareholders agreement be a part of the package of information you submit to regulators in all the countries in order for them to approve --?

Yes. But us, we are talking about the -- you have the CEO and administration, but we don't have any knowledge of what -- if there are any change in the shareholder agreement at the moment. So there is nothing to inform.

Okay. Wonderful. Thank you.

(Operator Instructions)

Alonso Aramburu, BTG Pactual.

I have one question regarding the trading and investment income. I was wondering if you can give us some color as to what drove the large increase on this operating line, which was significantly higher than in previous quarters?

What we have there is the -- what we have called the fiscal hedge. Just to remember, for the purposes of reducing the volatility in the tax that we have to pay for the investment in Colombia -- just to remind, we have an investment in Colombia made by CorpBanca Chile of $1.5 billion, which were not really made in US dollar, but for the purposes of the IRS in Chile they are in dollars.

So when we translate that into Chilean pesos every month to compute the taxes, we are subject to the volatility of the exchange rate between US dollars and Chilean pesos, and there was a significant volatility in the last quarter regarding that exchange rate.

That is why the amount of the investment translated into pesos moved significantly because of that. That makes us to have to compute a larger or a lower tax rate because of that.

So [what's] the decision that CorpBanca made last year is to have a derivative to hedge that volatility. The problem is that that hedge, which is quite significant because of the amount of the investment that we are hedging -- is that we cannot compute it in the line of the income tax expense. We have to compute it in the line with the rest of the derivatives.

So that effect for the bottom line is neutral because the hedge is almost perfect. But when you look at the operating revenues of CorpBanca and of course if you look at the derivative line, you will be impacted or we will be impacted because of that volatility.

One way that you can confirm that is by looking at the table that is in our press release on page number 7, where the income tax spends grew significantly from CPL9.4 billion in second quarter 2014 to CPL31 billion in third quarter 2014. That is the affect that Claudia is explaining.

And something that is important to emphasize, CorpBanca doesn't have as part of the business strategy to have a strong presence in proprietary trading. CorpBanca prefers to allocate the risk in customer driven businesses.

Of course some of those businesses are related to derivative and structure solutions to our customers that, because of the way that we have to release the information in our income statement, we have to show in separate lines all the ones that are related to loans in the net income -- interest income, those that are related to fees of course in the net fees and commission income and those that are related to financial structures, derivatives or other kinds of revenue like that in the net total financial transaction.

Thank you. That's very clear. But that table, the table on page -- when you are looking at the total net financial transactions, you don't have actually the value of the gain from the hedge there. What was the value this quarter just to get a sense of what exactly is the net amount between the taxes and the gain on this hedge?

Just without releasing any additional information, you could see that the net income before tax is very similar in the two quarters, even though the income tax expense is roughly CPL12 billion higher. So a portion of that is included in the line of total net financial transaction. I would say that it's in the range of CPL14.3 billion, which are actually disclosed in our press release page number 8.

That's great. Thank you for that. And then just one more question on Colombia, maybe you can give us some color as to how -- you mentioned that Colombia's synergies are growing in line with your expectations, but you do have some expenses this year. Just wondering if you can give us some color as to how that operation is going?

Okay. Regarding the synergies and regarding the expenses related to get those synergies, as we have mentioned previously, we are in line with our schedule. The extraordinary or the one-time expenses, which -- just to remember, we said that to get the synergies it would take us 3 years since the acquisition of Helm.

So we have just fulfilled one year and we already we have started to get the synergies, mainly the one related to human resources and some administrative expenses. So the one related to cost savings, which is very reasonable, and then we will focus on the revenue synergies.

Of course there was one of the synergies that we immediately had. It was the one related to the tax benefit and the tax benefit was related to the fact that the transaction -- the acquisition of Helm was made in Colombia by CorpBanca Colombia. And that is how we obtained -- because of the Colombian GAAP, we obtained that tax benefit, which is already in play.

Regarding the cost savings, what we are expecting for this year is -- well, maybe you remember when we acquired Helm we immediately made the first important restructuring, which was to name one senior management for the two banks even before the legal merger of the two banks.

Then we made the secondary restructuring by November 2013. Of course we had immediately the savings, but also all the severances and other expenses related to that process. So at the end of the day, for 2013 we had higher expenses than the savings that we could get in a 5 months period.

For this year on an annualized basis, we are expecting to have the same amount of expenses that we had last year and getting more synergies, probably having enough savings to be even with one-time expenses. For next year what we are expecting is to have lower expenses and higher -- in that comparison -- and higher savings.

And starting to get -- and currently we have -- for this year we have part of the revenue synergies, which has been an extraordinary performance in that sense for our bank in Colombia, and continue to focus on the remaining savings. For example, the one related to the IT migration, which is scheduled for the second half of 2015.

With that, we will not only reduce the cost related to the IT and operating system, but also we are going to be able to finalize the restructuring process related to that specific area.

And then we have a remaining part of 2016 to complete the remaining synergies coming from revenues, which most of them are related to the cross-selling between the clients of the two banks, let's say, that way, since it is only one bank today because they have already merged.

So in terms of our forecast for the expenses related to the merger process, there are others, more -- what I want to say is that the expense is related not only to the merger process specifically, the expenses related to get the synergies are going to be in the range -- for 2014 in the range. And I'm not going to include there the goodwill amortization because under Colombian GAAP it's future amount that we have to amortize.

It is not the same way that we have to compute it under IFRS. But it impacts the results of CorpBanca Colombia under Colombian GAAP.

I'm just referring to the extraordinary or one-time expenses related to, for example, human resources or administrative expenses, which are going to be in the range of roughly $35 million to $40 million this year. And for the quarter, it's just -- you have to make the division by quarters. It's almost even during the year (inaudible).

That's great. Thank you very much.

Claudia Benavente, Scotiabank.

I just wanted to know if you can give us some more color on Colombia since the operations have been pretty strong there. You are operating under a very interesting -- increasing interest rate environment and with a strong retail growth of your loans. So I was wondering like excluding all these one-timers due to the consolidation process, if you can give us some more insight of what we should be expecting for Colombia next year? Thank you.

Well, in terms of economic and macroeconomic view, we expect that Colombia also next year is going to grow at a rate of around 4.5% to 5%. We don't expect that interest rates are going to be higher than the ones that you observe now. We think that the loans in industry are going to grow at the rate of 12% to 12.5%.

So those are some figures that I could give you that are our expectations. But also we think that CorpBanca could do better than the figures that I gave already to you. So we think that -- we expect to gain a little bit in terms of market share because we already -- as Claudia mentioned, we already went through the merger with Helm Bank, so we are going to have a lot of focus in terms of doing a very good year next -- during 2015.

What else could -- let me --

In general terms, as Fernando mentioned, even though we think that the market will expand in Colombia in the range of 12% in terms of total loans, we expect to grow closely to 15%. At the same time there are some segments that we expect to have a better improvement in spreads, even though there are some pressure by the competition regarding that.

So we expect that our net interest margin plus commission and plus financial revenues will be growing at the rate similar to the one that we have been facing in the past. We don't foresee any kind of deterioration in terms of the credit quality in Colombia. Provision could -- can grow in Colombia because of the growth that we are expecting. But we don't see any effect in that in terms of credit quality.

It's important to understand that next year we start the third phase of the integration process. We expect to move to the new systems during that year, so we should be facing additional expenses in terms of severance payments. But all of them are, as we mentioned before, absolutely in line with our expectation.

Of course there are some concerns regarding the final impact of the tax reform that is commented in Colombia. We don't think that that is going to change in any material way our forecasted result. So we feel very comfortable with the future of CorpBanca Colombia.

Great. Thank you.

Thank you very much. There seems to be no further questions at this time. If you wish to continue.

Juan Dominguez, Credicorp Capital.

I have a question regarding Colombia also. I mean the adjusted results in Colombia were quite impressive during the quarter. We saw two digit growth in adjusted net interest income in Colombia --

[Amelia], sorry, we cannot hear you at all.

Okay.

Can you repeat please?

Can you hear me well?

Yes, yes --

Yes.

-- much better.

Better? Okay. I was telling you that the adjusted results in Colombia in the quarter were quite impressive. I mean you had two digit growth rates in both the net interest income and the net fee income. And when you compare with peers in Colombia such as Bancolombia that already released its third quarter results, the performance seems quite strong.

I wonder if you could give us color of what happened in the quarter and what could we expect in the next quarter especially in the cost to income ratio, which lowered to a 49.9% adjusted basis, which is -- it's quite a significant improvement? And maybe how -- what was the role of foreign exchange in the results in Colombia during the quarter?

Okay. We understand that some banks in Colombia during the quarter had some one-time expenses that were not current and that might present our result much higher than the one that those banks present. What we think and what we see is that the net income of CorpBanca Colombia is quite stable in terms of the bottom line, which of course is something that we value and we think is a special characteristic of the Colombian market.

Of course when we start to export the wholesale banking model to our Colombian operation, we start to promote structure product derivatives and all that kind of products to the customers, especially the customers that we obtain through the merger with Helm Bank. That of course expands the base of customers that we were able to provide those services.

And what is something that is very interesting for us is that those structure products in Colombia we are not only targeting large corporations, but also midsized companies. And the number of new transactions shows that the potential of that market in Colombia is quite significant, because the spreads in Colombia are much higher than the one that we are facing in Chile. The same thing happened with fees and commission and the profitability that you can obtain through those structured transactions.

Of course that means that in our effort in the future we should maintain the dynamic and the way that we are handling the relationship with our customers. Distribution desk has been a very important channel to deliver those products and also the way that we have been implementing our distribution money desk, emphasizing the regional capability that the Bank has will also allow us to take advantage of that. So from our point of view, our challenge is to maintain the rhythm and we are very optimistic regarding that in the future.

Just a follow-up on the question. I think that the most shocking figure in my view was the 14% quarterly increase in net interest income. Is that -- I mean is that -- that is from a lower cost of funding or is a better deal on loans? That's one question about Colombia.

And I have another question but regarding Chile. Actually OpEx in Chile surprised me on the upside and you mentioned in the report a collective agreement. I wonder if you could give us more insights on the expected trend on cost to income ratio in Chile under a more normalized inflation scenario.

And also you have streamlined your ATM network significantly year-to-date. I wonder how much will you save in 2015 from this strategy in Chile.

Okay. Let's answer first regarding the net interest margin in Colombia. What we have been seeing is that compared to the industry, our net interest margin has been improving roughly in 20 to 30 basis points. That is the combination of the way that asset rate as well as liability rate have been moving.

What we are trying to do is to emphasize more on stable funding and more retail driven funding. As Fernando mentioned, current accounts are the ones that we are looking for, which allow us to have more stable and to push -- and to pressure in a lower level the institutional investor segment.

So that is part of a strategy. It takes time to modify the liability structure. But we have been very successful in doing that.

In terms of Chile, you asked about the operational expenses, right?

Right.

Well, there we have a few things that are impacting. Inflation rate in Chile has been higher and we have some part of our expenses that are also tied to the UF. So that has been increasing our base. Also, we have -- we finalized in a very successful way the negotiation agreement with our unions that of course that they imply some expense increase.

But also we have some expense provisions that are related to the merge that we have -- with the process that we have with Itau. So that is pushing up our base with -- those expenses are non-recurrent. Of course once the merger is accomplished, we will have faced the part of the $85 million that we have been explaining that the merger will cost us.

So roughly are one-timers that increase in expenses. Of course the higher inflation rate puts a higher level base. But we don't foresee that expenses is going to increase dramatically in the next couple of years.

Okay, thanks. And maybe -- I wonder if you could give us a guidance on how much will you save from the streamline of your ATM network? I mean you have closed 18% of your ATMs year-to-date.

There's two things that are related to the ATMs. As you are aware, in the business of the ATMs the revenues that you obtain are the number of transactions that you are able to sell to non-customers of the bank and sometimes our ATMs are not reaching the point of equilibrium. So we have been rationalizing those ATMs in terms of the number. We maintain our ATMs in the location where it's more profitable for us.

I wouldn't say that those are going to impact significantly in our expenses. I don't think that that could impact more than $1 million in lower expenses. So it's more related to rationalization, a better use of our resource, but without a quite significant impact.

In order to complement the answer that Eugenio has given to you, I could say to you that, as you mentioned, around 18% of ATMs were taken off from the market and the saving for each one it's around $15,000. So the calculation that Eugenio mentioned, it's exactly what we are maybe saving because of the infrastructure that you have to put due to the new regulatory norms.

So the savings are not significant. So (inaudible), as Eugenio mentioned, a more --- rationalize the 400 that we have in the market.

Okay, thanks. That was very clear. Thank you.

Claudia Benavente, Scotiabank.

Yes, I do have one more question. Do you have cross-border loans in Colombia, and if you do, for how much of the loan book?

No, it's -- if there is any [issue], most of the loans are directly done in Colombia to Colombian companies.

Okay, so it's all in Colombia?

Most of them, if there are any. It's not even significant.

Okay, thank you.

Thanks very much. And there are no further questions on the phone line. Please continue.

Well, thank you for joining our third quarter conference call and I'm looking forward to our next one. Good bye.

Thank you very much. That does conclude the conference call today. Thank you all for participating and you are now free to disconnect.