Banco Itau Chile (ITCL) 2015 Q2 法說會逐字稿

Thank you for standing by, ladies and gentlemen and welcome to the CorpBanca conference call on the second quarter 2015 financial results. We have with us Mr. Fernando Massu, Chief Executive Officer; Mr. Eugenio Gigogne, Chief Financial Officer; and Ms. Claudia Labbe, CorpBanca's Head 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 the conference is being recorded today Wednesday the 12 of August, 2015.

And 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 second quarter 2015 financial results. Here I am with Fernando Massu, CorpBanca CEO and Eugenio Gigogne, CorpBanca's CFO. I would like to remind you that all figures are presented in Chilean peso unless otherwise stated and that our remarks may include forward-looking information and our actual results could differ materially from what it is discussed.

To begin, I would like to highlight that in the first half of 2015 net income attributable to shareholders totaled CHP96.22 billion equivalent to 8.7% decrease compared to first half of 2014. Sound loan growth in all business segments both in Chile and Colombia when measured in each local currency, synergies already delivered in Colombia and lower tax rates were partially offset by higher provisions for loan losses and the negative impact of a lower inflation on net interest margin. Nonetheless we achieved first half of 2015 with 103% compliance regarding our budget for the period.

In second quarter 2015, net income attributable to shareholders totaled CLO56.5 billon equivalent to 42.4% increase quarter over quarter and 13.4% decrease year over year. The main drivers for these periods results are explained below.

Total loans1 reached CLP14.7 trillion as of June 30, 2015, equivalent to a 2.4% increase quarter over quarter and a 0.9% increase year over year. After achieving a long period of sustained growth in both countries, this quarter showed a flat loan growth activity in Chile, following a similar trend in the Chilean banking industry, and a slower pace in Colombia.

Net operating profit before loan losses increased by 8.8% quarter over quarter and decreased by 2.4% year over year. In second quarter 2015 we achieved an annualized net interest margin of 4.23%, similar to 4.22% in second quarter 2014 and showing an improvement compared to 3.09% in first quarter 2015. This improvement is mainly the result of higher quarterly UF variation in Chile, as well as growth in commercial and consumer loans and investment portfolio in Colombia.

Net provisions for loan losses increased by 12.7% quarter over quarter and 30.8% year over year, mainly as the result of higher reserves in Colombia to prevent further deterioration in a complex economic context.

Regarding year over year expenses second quarter 2014 provisions for loan losses were particularly low due to extraordinary provision releases related to our corporate portfolio. Total operating expenses were flat quarter over quarter and decreased by 5.7% year over year, primarily as the result of synergies that have been delivered in Colombia.

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

Thank you, Claudia. Good morning. Second quarter 2015 net income achieved CLP56.5 billion, an increase of 42.4% quarter on quarter; that breaks in CLP42.8 billion for Chile and CLP13.8 billion for Colombia, confirming the low correlation between both economies and allowing CorpBanca to be in line with the budget for this period.

In Colombia, the banking industry has faced a slower growth path than expected. Nevertheless CorpBanca Colombia has been able to offset this economic context with the positive impact of cost savings already achieved from the completion of some of the stages of the merger between CorpBanca Colombia and Helm Bank.

In connection with the pending merger between Itau Chile and CorpBanca, on June 26 and 30 CorpBanca and Itau Chile extraordinary shareholders meetings approved the merger along with the amendments to the transaction agreement. The amendments are related to a special dividend for current CorpBanca's shareholders, a reduction of Itau Chile dividend, a new dividend policy for 2015 fiscal year, an extension of the deadline for the purchase of all the stake in CorpBanca Colombia and set the closing date for the merger between January 1, 2016 and May 2, 2016.

The special dividend agreed in May 2015 in order to ensure the extraordinary shareholders meetings approval, was voted for by almost 90% of all CorpBanca's shareholders. Accordingly once approved by Banco Itau Chile extraordinary shareholders meeting, CorpBanca accounted the corresponding provision for that payment. Despite the payment was wired on July 1, it impacted our capital ratios since June 30, 2015, decreasing from 11.8% in first quarter 2015 to 9.7% in second quarter 2015.

The $552 million pending capital injection committed by Itau Unibanco prior to the merger in addition to Banco Itau Chile ample TIER one capital will significantly strengthen the capital base and ratios for the merged bank. We estimate merged BIS ratio to be between 13% and 16%.

Meanwhile CorpBanca will show temporary BIS ratios between 9% and 10% always with room above the regulatory minimum. The next steps towards the materialization of the merger will be the approval from the Chilean Superintendency of Banks.

Thank you.

Now Claudia will refer to CorpBanca's strength during second quarter 2015.

Thank you, Fernando. To begin, let's move to slide 3. The chart below shows our 12-month trailing net income from December 2008 through June 2015, in Chile and Colombia. During this period, our net income reached CLP217 billion, an increase of 26% year over year. Our Chilean operation totaled CLP142.4 billion and CorpBanca Colombia totaled CLP74.6 billion, equivalent to one third of CorpBanca's consolidated net income compared to 15.3% in 2013.

Next slide, page number 4, the following table presents the results generated in Chile and Colombia separately from second quarter 2015. The financial results of CorpBanca Chile include some expenses associated to our Colombian operations, which have to be excluded from our Chile's book in order to observe Chile's stand-alone results. These adjustments are, interest expenses in connection with the portion of the acquisition of former Banco Santander Colombia that was not funded with equity, the impact of our fiscal hedge, which is a consequence of management decision to hedge the impact of the volatility of the US dollar/Chilean peso exchange rate in the net income attributable to shareholders, which would not otherwise exist in the absence of such decision, amortization of the intangible assets generated in the former Banco Santander Colombia acquisition and the adjusted second quarter 2015 results present, in our opinion, the closest approximation of CorpBanca on a stand-alone basis in Chile.

These adjustments mentioned above are related to CLP6.4 billion associated with the funding for the acquisition of CorpBanca Colombia, CLP3.9 billion of hedge taxes in US dollar, CLP2 billion of intangible assets amortization and integration costs in Colombia. Taking into account these adjustments, our estimated result for our operations in Chile is CLP52.3 billion of adjusted net income in second quarter 2015.

Moving along to slide 5, profitability. The trend in our returns on average asset and on average equity changed since December 2013. This shift was the result of the consolidation of CorpBanca Colombia for a full year since 2013 and of Helm Bank for a full year since 2014 and the higher UF variation in 2014, a variation of 2.05% in 2013 versus 5.65% in 2014 along with low monetary policy interest rate in Chile. During second quarter 2015 RoAE remained stable compared to December 2014 and the industry average.

In second quarter 2015 we achieved a return on average equity of 15.4%, equivalent to an increase of 169 basis points compared to 13.7% in second quarter 2014. After being impacted by the capital injections to enable our organic growth in Chile and our acquisitions in Colombia, between third quarter of 2011 and fourth quarter 2013 totaling approximately $1.57 billion, a 137.1% increase over the same time period, our RoAEs have been recovering showing the early stages of the ongoing merger process in Colombia.

Our second quarter 2015 returns demonstrated that greater business diversification has resulted in an increasing revenue stream and our focus on profitability.

Net slide, page number 6, let's talk about our market share. The chart below shows the evolution of our market share in both countries we operate. According to the SBIF, our market share in Chile, on an unconsolidated basis, was 7.4% in June 2015, similar to December 2014 and reflecting a decrease of 22 basis points when compared to June 2014.

In Colombia, despite the ongoing integration process related to the Helm Bank merger, our market share remained stable, reaching 6.4% as of May 2015, according to the Superintendencia Financiera.

Moving along to number 7, let's talk about our asset quality. The chart below shows how our consolidated non-performing loans ratio compares to the average industry in Chile. According to the SBIF, CorpBanca has maintained one of the lowest credit risk indexes defined as total loan [loss] allowances to total loans in the Chilean banking industry over the past five years, consistent with one of our core pillars related to high-quality loan portfolio. We believe that our risk management processes and methodology enable us to identify risks and resolve potential problems on a timely basis.

Regarding to provisions, net provisions from loan losses increased 17% quarter over quarter and 38.7% year over year. During the second quarter our loan portfolio grew in all segments in Colombia, even though the pace decreased from two digits to one digit. At the same time, to improve loan losses reserves we downgraded some specific loan positions in Colombia, in particular in the oil and gas sector and contractors in general. Our current exposure to oil and gas sector was barely 3.7% of our consolidated loan portfolio, of which 2.6% represented Colombian exposure to such sector. In Chile our provisions for loan losses increased due to the negative impact of the appreciation of the US dollar against the Chilean peso on our US dollar denominated loan portfolio.

Additionally we downgraded a specific portion of our Chilean corporate loans due to the economic environment. The year over year increase is mainly explained by significant provision releases in second quarter 2014 for the amount of CLP9.10 billion related to the prepayment of the Sinergia fund credit.

Next slide, page number 8, continues to talk about asset quality. This chart illustrates that despite of the increase in our provision expense, our consolidated non-performing loan ratio compared 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 Santander Colombia in May 2012 and Helm Bank in August 2013. For a country breakdown for the non-performing loans, you can go to Section VIII, page 21 of the [earnings] report.

Finally on slide number 9, our capitalization level. On January 2014 Itau Unibanco, Banco Itau Chile, CorpBanca and CorpGroup entered into an agreement, involving the merger of Banco Itau Chile and CorpBanca, creating Itau CorpBanca. Itau Unibanco will control Itau CorpBanca, Itau Unibanco and CorpGroup will sign a shareholders' agreement, Itau CorpBanca will control CorpBanca's and Itau Unibanco's Colombian entities, CorpBanca to be the surviving legal entity. On June 26 and 30, 2015, CorpBanca and Banco Itau Chile extraordinary shareholders meetings approved

the proposed merger and agreed to modify the aforementioned agreement involving, special dividend for current CorpBanca's shareholders in the amount of $400 million, from which on July 1, 2015 were paid CLP239.86 billion, the pending [UF 124,105] will be paid at time of 2016 AGM, the reduction of Itau Chile 2014 dividend by CLP16.4 billion, new dividend policy for 2015 fiscal year, the extension of the deadline for the purchase of CorpGroup's stake in CorpBanca Colombia and the closing date to be set between January 1, 2016 and May 2, 2016.

Following the approval of both aforementioned EGMs, a special dividend provision in the amount of CLP239.86 billion was materialized on June 30, 2015. In that specific context, our capital ratios decreased from 11.8% in the first quarter 2015 to 9.7% in the second quarter 2015, as the result of the aforementioned provision that impacted regulatory capital combined with higher risk weighted assets due to loan growth during the second quarter.

Once the merger is performed the combined capital ratios will improve significantly, boosted by $552 million capital injection pending prior to the merger from Banco Itau Chile. Furthermore the shareholders' agreement with Itau Unibanco has a strict policy regarding minimum capital levels of the merged bank, requiring the maximum between 1.2 times above the regulatory minimum and the average of the three largest banks. CorpBanca estimates that the combined BIS ratio should achieve a range between 15% to16% along with a TIER one ratio between 12% to 13%.

Thank you. Now, if you have any question, we would be happy to answer that.

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

Good morning. Thanks for inviting us to this call. I have a couple of questions. First, maybe if you can provide us some guidance or some color on what to expect in terms of delinquency going forward now that the economic backdrop in both Colombia and Chile have impaired in recent months? And also my second question regards to the infrastructure sector in Colombia. You have previously said that you are interested in participating in this 4G concessions projects. I wonder if you can give us some color on how is the balance sheet structure of the Bank right now in order to cope with those long-term disbursements. Thank you.

Hello. This Eugenio Gigogne. It is important to realize that in Chile delinquency non-performing loans and credit quality in general have been maintaining the level that present late 2014 and the first quarter of 2015. We do not expect big changes in terms of the credit quality in Chile and also if you analyze the delinquency levels that are presented by the retail segment and delinquency level of the commercial loans in general in the Chilean banking industry are in levels that are below the historical average. So even though the economic situation is worse than the one that we originally forecast in late 2014, we have not yet seen a significant deterioration at all.

We don't expect to see further changes. However this situation, of course, is the economical slowdown is deeper, we should start seeing some deterioration.

To give you an idea in 2009 when the delinquency in the retail segment reached 4%, which was the worse situation in the most recent economic slowdown, we reached -- the market reached 4% a maximum, today are below 2.5%, they are close to 2.2%. And one thing that is important to

understand is that all the changes in the regulatory environment for retail loans, especially those that are tied to maximum rate levels because of this reduction by law that maximum ceiling that are allowed moved some of the most riskier borrowers to outside the banking industry in Chile. So what we are seeing today is a more -- is a higher credit quality loan portfolio and in the case of CorpBanca, we are not different to that situation.

In Colombia what we are seeing is that in the last couple of months there has been some increases in the loan loss provision expenses which are, as Claudia mentioned, showing some impacts related to the economic environment in Colombia. However, we think that that is going to be transitioned and because the growth rate in general in Colombia is not as strong as it was in the past, we think that no new loan loss provision are going to be required in general.

Regarding the concession.

This is Fernando Massu. As we mentioned, we would like to be very active in our participation in the concession area in Colombia. As you know, we have a very important bank in Chile in that area. We think that we are very well prepared in order to participate in that industry in terms of capital in our bank in Colombia. Also we are going to be prepared in order to issue bonds locally and of course after the merge, I think that Colombia is also going to be prepared, if that is the case to issue bonds internationally.

We are going to analyze case by case any transaction. And just in case if you see the capital ratio of Colombia is right now around 14%. So we have a very solid capital base in order to assure a good participation and a very solid balance sheet for that purpose. That's all I could say there. We do have a very solid balance sheet in order to participate in that industry.

Thank you. (Operator Instructions) Michael Holme, CQS.

I'd appreciate if you could give us a little bit more color how the synergies are coming together in regards to the two Colombian operations that you have and when effectively the Colombia unit will be operating as a single entity from the point of view of your customers and what the Bank can offer them and so on? Thank you very much.

Good morning, Michael. So far we are in the middle of the merger process in -- of the stages of the merger process in Colombia. As you are aware, the Bank was legally merged June last year and according to that, we are still meeting the last part or the last stage of the cost saving process which involves the IT migration that was originally planned for the second half of this year but it has a delay and we are expecting that this process is completed by mid 2016. So we are talking about two quarters delay in this process which is quite a significant stage and involving all the other savings.

So that means that for this year we are already benefiting from the savings already achieved, though we will not have or will not save extraordinary or significant extraordinary expenses due to the fact that the final stage will be completed next year. So we are pretty much on schedule regarding the synergies and especially the amount involved in the savings that we have already achieved. And as you can see, it has benefited already our results and we are very focused on completing this process in Colombia to have all the synergies that we committed.

To give you some color regarding the amounts that they are representing, for example, we analyze the trailing of the HR expenses and the depreciation and amortization expenses and we could say that if I compare trailings in 2014 versus trailing -- 12-months trailings in 2015, there is a close to a 10% reduction in those expense line.

What is important is to realize that there are a lot of expenses in Colombia that are tied to inflation adjustment as well as some of expenses are tied to the dollar contract and of course those have been growing in Colombia. Even though that situation, we have been able to show those reductions. We have probably compared to the originally periods of time of the merging process, we have some delays between probably six months compared to the original date, which in a process like this is not -- and from the point of view of the earnings synergies, all these things are related to treasury activities, leasing -- financial leasings and also the wholesale banking business, we are very much in line with our expectation.

Michael, your last question regarding having one network for CorpBanca in Colombia, it will be as soon as we complete the integration process and the IT migration and all the operating results and it will be next year.

Thank you very much indeed. And at this point ma'am, there are no further questions. So I shall pass the floor back to you for closing remarks.

Well, thank you for joining our second quarter conference call. We are looking forward to our next one. Good bye.

With many thanks to all of our speakers today that does conclude our conference. Thank you all for participating. You may now disconnect. Thank you Ms. Labbe. Thank you gentlemen.