Banco Itau Chile (ITCL) 2014 Q4 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the CorpBanca Conference Call on the Fourth Quarter 2014 Financial Results. We have with us Mr. Eugenio Gigogne, Chief Financial Officer and Ms. Claudia Labbe, CorpBanca's Manager of Investor Relations. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today.

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

Good morning. Thank you for joining our conference call for our fourth quarter 2014 financial results. I'm Claudia Labbe, Head of Investor Relations, here I'm with Eugenio Gigogne, CorpBanca's CFO. I would like to remind you that all figures are presented in Chilean Pesos unless otherwise stated. And that our remarks may include forward-looking information and our actual results would differ materially from what it is discussed.

To begin, I would like to highlight that in the fourth quarter of 2014, net income attributable to shareholders totaled Ch$66.2 billion, reflecting a 21.7% increase when compared to fourth quarter 2013 year-over-year. The main side of this year-over-year increase were the growing commercial activity in Chile, the writing contribution of CorpBanca Colombia despite one-time expenses due to the merger process and excluding one-time profit coming from an additional (inaudible) and the positive impact of the higher inflation rate and a lower monetized policy interest rate in Chile.

These factors more than offset one-time expenses in Chile related to the pending Itau-CorpBanca merger. Total loans excluding interbank and contingent loans reached Ch$13.2 trillion as of December 31, 2014 with Ch$9 trillion attributable to our Chilean operation. This loan portfolio increased 13.4% year-over-year allow CorpBanca to achieve a market share of 7.4% in Chile, 18 basis points higher as compared to fourth quarter 2013. This fourth quarter 2014 loan expansion was the result of all business segment performance reflecting a significant contribution of project finance and infrastructure activity.

As of December 2014, CorpBanca was the fourth largest private banks in Chile based on loans and deposits, and had slightly closed the gap to the third ranked bank. As of November 2014, according to the Superintendencia Financiera de Colombia, CorpBanca also ranked as the fifth largest private banking group in Colombia based on total assets, total loans and total deposits.

During the fourth quarter of 2014, net operating profit before loan losses increased by 6.3% year-over-year, due to higher net interest income and some performance of asset and liability management. These factors surpassed our fourth quarter 2013, one-time profit of Ch$16 billion coming from the sale of 31 real state properties in that period that was in the line with our strategy of efficiency.

Net operating profit before loan losses decreased by 1.8% quarter-over-quarter, mainly due to the impact of depreciation of the Chilean peso in derivative contracts valuation that was partially offset by an increase in net interest income.

Net provisions for loan losses increased by 67.4%, or Ch$17.3 million quarter-over-quarter and by 67.9%, or Ch$17.4 million year-over-year, in both cases primarily as the result of the variation of the US dollar against the Chilean peso exchange rate that has negatively impacted loans denominated in US dollars, homologation of the criteria in Colombia and higher provision expenses resulting from a change in the loan loss provision model applied to Creditos con Aval del Estado or CAE, which are student loans for college guaranteed by the Chilean state.

Nonetheless, the CAE portfolio generated a profit of Ch$10 billion in 2014. On a quarter-over-quarter analysis, the net provisions for loan losses were particularly low in third quarter 2014 in comparison to fourth quarter 2014, due to higher loan recoveries and prepayment, as well as an increase in commercial loan guarantees.

Total operating expenses increased by 6%, equivalent to Ch$7.1 billion, year-over-year, mainly due to higher bonus provisions and salaries, advisory services related to proposed merger between Itau Chile and CorpBanca, higher rent, and an increase in the expenses related to the new regulation regarding ATMs security in Chile. On a quarter-over-quarter analysis, operating expenses decreased from Ch$129 billion to Ch$125 billion, primarily as the result of lower amortization expenses.

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

Thank you, Claudia, good morning. In 2014, we achieved an outstanding net income attributable to shareholders of Ch$226.3 billion, equivalent to an increase of 45.9% from Ch$155.1 billion in 2013.

This result gives CorpBanca the second highest increase in contribution among banks to the Chilean Banking Industry's net income rising from an 8.2% market share in 2013 to a 9.3% market share in 2014, a 112 basis point increase in 12 months. Thus, CorpBanca's market share in net income exceeded its market share in loans, 9.3% versus 7.4% in December 2014.

This achievement is a direct result of favorable commercial activity in Chile, despite a lower GDP growth rate in our country during 2014, and benefiting from a strong focus in project finance and infrastructure. This year we also profit from lower provision expenses combined with higher than expected loan recoveries.

Additionally during 2014, our Colombian operation increased its contribution to consolidated net income compared to 2013, although one-time integration cost, that still partially offset the benefits of deposition. To date, the schedule CorpBanca Columbia post-merger synergies are being generated in line with our plan. Thus, CorpBanca is part of a successful project that relies on a highly competitive and healthy sound bank.

While favorable net income in 2014 was generated in a scenario of higher than expected inflation rate. This extraordinary only contributed in approximately Ch$15 billion to the consolidated net income. As a whole, inflation explained less than 20% of increase in our profit. The remaining 80% is as mentioned, the result of our commercial performance in Chile and Colombia's increased contribution.

The extensive Tax Reform Bill passed in Chile in September 2014 had a non-material negative net impact of Ch$2.3 billion, equivalent to 1% of the year-to-date net income or 0.2% of the equity attributable to shareholders.

Regarding CorpBanca Columbia, the fourth quarter results benefited from one-time profit of Ch$10 billion coming from an additional goodwill, the so-called (inaudible) under Colombian GAAP, generated by the final assessment of the superintendencia financiera de colombia regarding the legal reserve of Helm Bank. On the other hand, as a consequence of the New Tax Bill passed in Colombia in December 2014, we had to recognize the effect of the new rates on deferred taxes resulting in a non-material positive impact during the fourth quarter of 2014. We expect to finalize the proposed merger between Itau Chile and the CorpBanca during 2015, once the regulatory and shareholders approvals have been obtained.

Now Claudia, will refer to CorpBanca's trend during fourth quarter of 2014.

Thank you, Eugenio. To begin, let's move to slide 3. The chart showed our 12 month trailing net income from December 2008 to December 2014. During this period, our net income for the 12 months trailing December 2014 reached record levels of Ch$226.3 billion, an increase by 63% year-over-year once excluded Ch$16 billion of one time profits from the sale of 31 real estate in 2013.

As you can see, there is a significant improvement in both, even in Columbia, particularly during 2014. As of December 2014, the Chilean operations stock out Ch$150.1 billion and CorpBanca Columbia totaled Ch$76.2 billion, equivalent to 1.0% of CorpBanca's consolidated net income compared to only 15.3% in 2013. Our 2014 financial results demonstrate that greater business diversification has resulted in an increasing revenue stream.

Next slide page number 4. The following table presents the results generated in Chile and Columbia separately for the fourth quarter 2014. The financial results of CorpBanca Chile include some expenses associated with our Columbian operations, particularly interest expenses in connection with the portion of the acquisition of Banco Santander Columbia now known as CorpBanca Columbia that was not funded with equity.

Amortization of intangible assets generated in Banco Santander Columbia acquisition and the impact of our fiscal hedge, which is the consequence of the management decision in order to hedge the impact of the volatility of the US dollar against the Chilean peso exchange rate in the net income attributable to shareholders, otherwise it would not exceed.

The adjusted fourth quarter of 2014 results present in our opinion, the closest approximation of CorpBanca on a standalone basis. These adjustments mentioned above are related to Ch$9 billion associated with the funding for the acquisition of CorpBanca Colombia, Ch$4.3 billion of hedge taxes in US dollars, Ch$2.6 billion of intangible assets amortization and integration costs in Colombia. Taking into account these adjustment, our operation in Chile would have generated $50.4 billion of adjusted net income in fourth quarter 2014.

Moving alone to slide 5, profitability. We achieved a return on average equity of 15.7% by the end of 2014, compared to 12.5% in 2013, representing an increase of 321 basis points, which reflects the significant increase in net income during 2014.

Previously, between third quarter of 2011 and fourth quarter of 2013, our RoAEs were impacted by the capital injections to enable our organic growth in Chile and our acquisitions in Colombia, totaling approximately Ch$1.6 billion, up 137.1% increase year-over-year the same time period.

The trend in our return on average assets changed since December 2013. This shift was the result of the consolidation of CorpBanca Colombia for a full year since 2013 and of the Helm Bank for a full year since 2014 and the higher UF variation last twelve months observed in December 2014, an increase of 2.1% in 2013 versus an increase of 5.7% in 2014 along with decreasing monetary policy interest rate in Chile that benefit to all banks.

Next slide number 6. Let's start with our market share. In Chile, our market share as of December 2014 on an unconsolidated consolidated basis was 7.4%, an increase of 18 basis points compared to December 2013, reflecting as previously mentioned, our growing commercial activity, particularly project finance and infrastructure activity.

During third quarter 2013, CorpBanca added US$5.3 billion in loans through the acquisition of Helm Bank, which contributed to our increase in market share in Colombia. Since then, our market share in the country has remained stable, reaching 6.4% as of November 2014 according to Superintendencia Financiera de Colombia, despite the ongoing process of the Helm Bank merger.

Moving along to metric status. I spoke about our asset quality. According to the SBIF in Chile, CorpBanca has maintained one of the lowest credit risk indexes. That means, total loan loss allowances to total loans in the banking industry in Chile over the past five years, consistent with one of our core pillars regarding high quality loan portfolio.

Next slide number 8 continue to talk about asset quality. This chart illustrates how our consolidated non-performing loan ratio compares to the industry average in Chile. We believe that our risk management processes and methodology enable us to identify risks and resolve potential problems on a timely basis.

CorpBanca's high asset quality was maintained following the acquisition of Banco Santander Colombia in May 2012 and Helm Bank in August 2013. For a country breakdown, please refer to section 9 on our earnings report.

Finally on slide number 9, our capital liability. Following the capital increase during first quarter 2013, our last, in connection with the acquisition of Helm Bank, CorpBanca has maintained strong BIS ratios.

With the consolidation of Helm Bank's risk weighted assets and the goodwill deduction, the trend in the capital ratios remained sound.

Thank you. If you have any questions, we would be happy to answer to answer that.

Thank you very much. (Operator Instructions) Juan Dominguez, Credicorp Capital

Good morning, and thanks for hosting this call. I have a question regarding asset quality in Colombia specifically. As you know, most analysts of same banks are lowering the macro outlook in Colombia. I wonder if you have any guidance of what is going to happen in terms of cost of credit in Colombia and in terms of NPL ratios? Thank you.

Okay. In general, we have to consider that our loan portfolio in Colombia has very high provisions regarding the fact that focus on data consolidation processes for the Colombian portfolio, we have to apply both the Chilean regulation related to provision and the Columbian regulation. And for the Columbian portfolio, we have to keep for each segment of product the highest one. So, that is something that is very important to mention, because it may set CorpBanca -- it makes CorpBanca to have a very significant research for the portfolio in Colombia, whatever is a macroeconomic situation. So, that gives us a lot of room for (inaudible) duration.

Regarding the impact that we can see -- we can foresee in relation to the portfolio related to the oils or energy in our consolidated portfolio, it brought us no more than 3.7%. That's our total exposure for those sectors. We have some exposure of that in Chile, most of them, it's in Colombia. We have for that portfolio in particular, good research so far.

We haven't seen significant deterioration, because most of the loan exposure that we have there are, was there. I would say the strongest Company from the sector. So, it seems quite difficult that those Companies would go to the worse. I mean, would (inaudible) right. So, we have so far to answer your question, we haven't seen any deterioration in terms of non-performing loans. If you look at the breakdown that we have disclosed in our earnings report, you can concern that our portfolio in Colombia, the non-performing loans are quite stable. So, I would say that we might expect first time duration, but we do not expect any significant income coming from that in our results.

Just a followup in the question. What is the normal -- the normal amount of provision expenses that you're expecting for the next quarters, I mean, clearly, the plus Ch$40 billion amount that was recorded in the last quarter had some recurring items such as calibration of models. So I wonder if you can give us a guidance of what is the normalized cost of credit?

Okay, yes. Sure. Give me a moment please.

It's difficult to use one quarter as a base for forecasting the trend on the loan loss provision expenses. What is clear for us is that, based on our profit brand, the amount of growth that we expect to have with respect to slow higher loan loss provision expenses in 2015 compared to 2014. How much higher? It's difficult to say, because for example, in 2014, we're expecting to have higher loan loss provision expenses compared to 2013, but at the end of the day the number was not that different. Nevertheless during 2014, we faced both in Chile and in Colombia special situations that we do not expect to repeat in 2015. For example, in Chile, we've had recoveries in the first half of the year that we're close to probably Ch$20 million that we do not expect to have that in 2015.

But on the contrary, in Colombia, we had in the first half of the year extraordinary loan provision expenses. There was a consequence of their amortization of the models in the two banks that we're marching, that explain probably Ch$20 million of extraordinary loan loss provision expenses. So answering your question, we are thinking that loan loss provision expenses should be growing probably between 20% compared to 2014, which are as I mentioned before very low levels, because of the quality of our portfolio.

Just a last question in regarding another different topic. In terms of effective tax rate, do you have any guidance on how the effective tax rate will look like in the long run after the two tax bills that were signed one in Chile and one in Colombia?

The experience that we have is that, on average, the effective tax rate compared to the corporate tax rate is between 2% to 4% lower rate. So let's say that the tax rate is 22.5%, we should expect an effective rate in Chile in the range of 18% to 20%. And in the case of Colombia, which moved from, let's say 34% to 39% is almost the same between 2% to 4%, what is important is you have to consider adding Colombia. We have the benefit from the amortization of the Great American deal, which of course reduce significantly the base that we pay taxes, but for the principles of the IFRS rules, which are the one that follows the consolidated financial statements in Chile reverse that impact.

So in general, I would say that between 2% to 4% below the corporate level of tax rate is a fine estimation.

Boris Molina, Santander.

If we just forget about the eventual merger with Itau Chile, could you give us an idea of more as how is your outlook for the year in terms of how good loan growth be performing in Chile and Colombia. There have been a lot of changes in the macro environment with currency movements in oil price is declining. So, I don't know if you have an updated view of how you expect the main lines of your results perform in 2015, margins or costs, just to give us an idea of how you expect the profitability of the bank to perform this year whether you expect to see an improvement given the lower intervention costs in Colombia and then if you could just tell us a little bit of what is your thinking regarding the time of the merger with Itau Chile with something that could it happen in the first half of the year, which is something we should expect towards the end of the year?

Let me give you first a view about what we are foreseeing regarding the results. It is very clear than in Chile there are some macroeconomic situation that's would have less optimistic regarding the result of the bank in 2015 compared to 2014 is very normal that in Chile banks benefit from higher inflation, and the reason for that is that the prices that include the forecast inflation when the reality is higher than the one that is suspected, that create a benefit. Also, there are some premiums in terms of the determination of the interest rate debt also, because of the GAAP the banks manage also create benefits. And of course, we are not expecting to see the same levels of inflation in 2015.

If difficult today to forecast precisely that number, and it is very clear, for example that the market today -- and we are participant of that market has been not very successful in forecasting one-month inflation ever citing the range of 0.3%. So I would say that if we benefit last year in the range of Ch$20 billion before tax because of highly inflation, I should not expect to see that again in 2015. So that means a lower base in our revenue potential even though the average interest rate that banks are going to pay in 2015 are probably going to be on average lower than the one that we pay on average in 2014. So, it might be a kind of compensation.

In term of Colombia, I'm less pessimistic than in general analysts referred to the situation in Colombia, I know that some of the new forecast regarding GDP growth rate in 2015, because of the level of oil prices that are estimated for this year. It seems that the GDP is going to grow in the rate that might be 1% below what was originally expected. That means that instead of growing 4.7%, it is going to grow 3.8%. My experience shows that a 3.8% growth in Colombia is still a very fine growth rate.

So, we expect to continue developing and improving contribution of Colombia in term of our books. This year, we are starting the third phase of our integration process in Colombia. Our experience showing that it is taking a little bit longer than the one that we were expecting a quarter ago. It might take one quarter maybe one semester of addition of efforts that those are not going to severely affect our estimation of the benefits, that is something that that we foreseeing. But in term of what is CorpBanca Chile, we expect that Colombia will represent probably 25% of higher net income contribution, when we compare the normalized benefit of Colombia in 2014 with 2015.

As I mentioned and Claudia as already mentioned, we benefits from the deferred taxes in Colombia that are not recurrent. So our results, even though we are not (technical difficulty) to see those one-time benefits. We expect that 2015 Columbia contribution will grow in the rate I mentioned. So, in answering your question, on average I'd say that there is some macroeconomic situation that will not benefit the banking industry. We are part of the industry, but the advantage that we have is that we have an operation in Colombia, which is not moving by the same factors that are moving the economy in Chile and that allow us to reduce the dependence for example all the inflation rate in Chile.

We have more stable revenue generations and that help us to have a more stable net income every single month. And also you have to consider that Colombia is the economy that we are -- on average I would say more optimistic that in general the analysis and so far the facts and the figures are supporting our view in that sense.

Regarding the merge with Itau. We are working in all the requirements that are demanded for the extraordinary shareholder meetings that we expect to be calling quite soon to be held in late March of this year. And so far, we have all the approvals that are requested, the only thing that is spending our shareholder approval and after that the final approval of the Superintendencia of banks in Chile.

If everything goes as expected and we have this approval by the end of March, we should being able to merge the first state of this process by the last part of 2015 that is probably fourth quarter of this year. So far, very close to what we expect in terms of accomplish this process by the end of this year.

Okay, wonderful. Thank you so much.

(Operator instructions)

Claudia Benavente, Scotiabank.

Hi. Thank you for the call. Just wondering if you can give us some more color on why are you expecting the merger to take place by the end of the year considering that at the beginning you're giving guidance for the Q3. It seems everything is going like you were expecting it even you already the consent of the IFC, so I'm wondering why the delay?

Okay. Hello Claudia. Well, the delay is because the IFC just formalized the documents related or require for these consents. So what you hear and what we are read in the media in early December last year was just a verbal consent, which of course represented the decision -- at that time, the decision process was made. And then, we have to receive the different documents to be signed or executed for this -- for the former consent.

As you know, one of the requirements, and it was a very important one to terminate the current shareholders agreement each in CorpGroup an IFC was to execute a new shareholders agreement with Itau Unibanco. So if that document was not executed, it was impossible for the CorpBanca's Board to call for any meeting, because it would be that the current shareholders agreement is still valid and then still CorpGroup should have the commitment not to lose the control. So that is what just this week's IFC announced that the process was formalized by that.

As you know, they take timing, and those documents are legal documents. So, it wasn't really in our hands to speak much more than what happened.

Okay, got it. So then, we should expect the merger to take place probably a November since that would be the last month for any constraint the legal one right?

Yes.

Well, the point is that we first need to have a shareholder approval, the final consent of the Superintendents of Banks, we expect that the Superintendents of Banks will say okay at the moment of going live, what we call the legal one.

And of course, we should be -- if everything goes the way we expect, we should be asking in front of our customers as one entity by the end of 2015. But as we mentioned before, the full merge -- the full integration of the two banks operating with one core system and operating with one operational model is something that will take more than 24 months. So answer your question, the first stage, which is legal be one, yes, we expect that to be doing the fourth quarter 2015.

(Operator Instructions) Alonso Aramburu, BTG.

I have a question on asset quality, looking at your NPL ratio you win up both in Chile and in Colombia for the quarter, just wondering if you can give us some color as to what was the increase?

The most significant -- let's say in relative terms, actually the most significant increase was in Chile rather than in Colombia, the increase in Colombia is really regional. So in Chile we had an increase quarter-over-quarter from 1.33% to 1.48%. I would say that the main reason for the increase in Chile is due to, I think that I can mention the Company, because it was already in the media, so that is why I will disclose the name, but probably you have read that in the newspaper in Vermont, which is someone company is in the process of being sale. So they had a payment not only with CorpBanca, with many banks in December, so they went back to you, because they were in the process of negotiation with the banks and due to the filling or the Company which is interested in buying this Company is trying to negotiate with the banks.

So we have the full amount of that debt going past you and that increased the amount in the portion -- mainly in the portion that you see during the last quarter, which was something that happened really in the last month of the year in December. So, we have a significant provision for that Company. And due to the negotiation process once it's pay, we will release part of our provisions. So, that is not something that and I understand the question because when you see an increase in the non-performing loan immediately it is absolutely correct assume that there is -- we started to show some deterioration due to the GDP growth rate, but it's very particular-- a very particular situation that is explaining the most of the increase for the quarter in Chile.

Okay, thank you for that. And can you remind us the level of non-recurring expenses you expect to have in 2015, both in Chile and in Colombia?

Sorry, for 2015?

Yes. So, in Colombia (inaudible) due to the merger with Helm, what extra expenses do you still need to incur and also in Chile because of the process with Itau?

Okay. So what we are expecting in Colombia due to what (inaudible) explained regarding the final stage of the growth of synergies process, which is the IT migration, which has a delay of one quarter to two quarters may be delay. We shouldn't see significant one-time expenses for this year in Colombia. So that is why we are so confident about our forecast or our budget for the net income coming from Colombia particularly, because it is mostly built on the benefit that we are going to be able to see this year -- for the already gained seniority and not having, let's say for a while that's before this year, the sign of one-time cost that should be more part of 2016 due to the migration process. So we shouldn't see any significant one-time expenses in Colombia due to the Helm Bank's merger process and Chile probably has some more accurate number for one-time expenses.

We expect to have very senior to the one that we've in 2014, should be like Ch$15 billion probably that's what is included in our budget.

Thank you. And we have no further questions at this time. Please continue.

Okay. Well, thank you for joining our fourth quarter conference call. (inaudible) are looking forward to our next one. Good bye.

Good bye.

Thank you very much. That does conclude our conference for today. Thank you for participating. You may all disconnect.