Banco Itau Chile (ITCL) 2016 Q1 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Corpbanca Conference Call. We have with us today, Mr. Gabriel Moura, Itau Corpbanca's Chief Financial Officer and Ms. Claudia Labbe, Itau Corpbanca's Head of Investor Relations.

At this time, all participants are in 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 will now pass the floor to one of your speakers today, Ms. Labbe. Please go ahead.

Good morning and thank you for joining our conference call for our first quarter 2016 financial results. 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. This report is based on both CorpBanca and Banco Itau Chile unaudited financial statements since, as you know, the merger was effective the date after the date of the closing of the first quarter financial statements that we are discussing here.

Now, Mr. Moura will start with the presentation.

Good morning, everyone. It's a pleasure for us to be hosting here the second conference call for Itau Corpbanca. This will be a quick call in order to update you on the first quarter results for both Itau Chile and CorpBanca as well as provide you with some outlook for 2016.

Before we start, I think it would be good for us to bring your attention again to one point that the merger of Banco Itau Chile and Corpbanca is a business combination under IFRS 3. Hence, although Corpbanca is the legal acquiring entity on the transaction, Banco Itau Chile is the accounting acquirer, characterizing a reverse acquisition under regulations. Therefore, the historical accounting formation for Itau Corpbanca should be the one from Banco Itau Chile. Hence the 2006 results of Itau Corpbanca should be comprised of the first three months of Banco Itau Chile and nine months of results for Itau Corpbanca.

However, through this presentation, I will make managerial comparisons of what we may expect for 2016 with the pro forma sum of both banks in 2015. Although this managerial comparison might be easier to understand as we compare the banks on the same basis, it might not reflect the accounting variance on 2016 for the reasons that we talked before. In order to facilitate your understanding, we will make available with spreadsheet on our website with the relevant information.

If we move now to slide 2, we have the main highlights of the pro forma sum of Banco Itau Chile and Corpbanca in the first trimester of 2016. Total assets grew almost 7% year-on-year and are close to [CLP33 million]. As we mentioned before, the merger of both banks result in the fourth largest bank by loans in Chile. And therefore, we believe, we now have the size and scale to compete with the main players.

However, it's also important to remember that this is a transition year for Itau Corpbanca as we work to integrate the systems, align process and products, and also all the management teams. As per our loan portfolio, as you can see on the chart below, the merger dilutes the participation of Corpbanca Colombia in the total portfolio to 24%, coming from approximately 30% before. The business mix on the loan portfolio of both Columbia and Chile are roughly the same for commercial loans, but with Chile with a larger participation in mortgages, in Columbia with a larger participation on consumer.

If we now can please move to slide number 4, we have the pro forma total loans in Chile in Corpbanca for the previous trimesters. You can see that the total loan portfolio grew 4% year-on-year, although if we exclude currency effects, this growth will be close to 5%. Keep in mind that we have the portfolio in Colombia that is affected by the Colombian peso and also other currencies such as the US dollars within our loan portfolio.

We see loan portfolio is growing at a lower base in both Chile and Colombia as a result of a lower economic growth for both countries this year. The outlook that we have for 2016 on a managerial basis is growth between 6% and 9% for our loan portfolio with an marginal improvement over consumer loans to the total.

If we now move to slide 5, we have asset quality in the risk index for both banks on a historical information. As per the asset quality, you can see on the graph on the top that we have increased coverage in CorpBanca as a measure of loan losses over total loans, especially due to the downgrade in corporate clients' ratings in both Chile and Colombia in the oil and gas sector.

We will talk a little bit more about this when we discuss the results for the first three months. As measuring NPL over total loans, you can see that we've been historical variance for both BIC and CorpBanca and you can also see that we have a lower ratio than the industry that can be partly explained by the differences in mix and partly explained by our credit portfolio performance. As for NPL coverage, we are comfortable with the provisions we have as we continue to have higher coverage than the industry in consolidated terms.

If we can please move now to slide number 6, we discuss a little bit about our assets and the provisions. Now we'll be going to discuss a little bit about our deposits, and this is an important strategy for us in growing deposits as we mentioned before on the previous call, especially on current accounts and on consumer retail clients.

As you can see, we also have shifted the mix of our deposits moving more toward retail and corporate funding instead of institutional funding. We believe now that we have a better mix, and we've been working on this from the previous year even before the merger to achieve a better mix of our liabilities in terms of the segments that we have.

And another important point was the changes in ratings that we have. Moody's had just announced a few weeks ago that it upgraded Itau CorpBanca to A3 coming from the Baa3. Standard & Poor's placed Itau Corpbanca on Watch Positive and we are waiting for the final analysis from Standard & Poor's. Feller Rate had affirmed our local ratings in AA and Humphreys also, a local agency, affirmed our local ratings in AA.

Another important milestone for us is that we successfully placed our first bond issuance on the local market as a joint company. It was an issuance of CPL40 billion with a spread that is lower than we were having on the previous trimesters. So this is the first important milestone in terms of risk perception of the Company and also our placing new bonds.

If we move now to page 7, we talked about assets, liabilities and now capital. We showed you this graph before and this is an important way of us showing the strong capital position and balance sheet structure that we now have at the Itau Corpbanca. One important point is our target capital structure in that we have a target capital ratio based on the greater of 120% of the minimum regulatory capital requirement which is 10% for Itau Corpbanca under local Chilean regulations or the average regulatory capital of the three largest private banks in Chile and Colombia.

So going on the long term, this will be our target capital structure in terms of capital ratios. As of course regulations change throughout time, we will adapt to them. On the graph on the left and we showed you this before is how our current capital is comprised and we have the sum of Corpbanca and these numbers are in US dollars billions, $1.6 billion as of February plus Banco Itau Chile of $1.7 billion, including the capitalization of approximately $600 million and also the merger effects, mainly the goodwill here [as C] you can see on March 16, adding up to $4.67 billion in capital.

In order to calculate our capital ratios and this point is important as a follow-up to many of the questions that you asked us is that the goodwill is all written off in order to calculate capital ratios under current Chilean regulations. So that is the same for Basel III, so the effects that we had on capital on goodwill are already written off on the capital ratios that we present to you, including, on the right, the 13% capital ratio that we presented at the closing of March 2016 for the merger of Itau and CorpBanca. Compared to the Chilean industry, we are above the industry and we are on par to the three largest players on the market.

If we go now on page number 10, we are going to discuss the results that we had for CorpBanca and then to Itau in the first trimester. This is the last time that we have presented results separately from CorpBanca and Itau as this is the closing balance for both banks. In the first quarter, CorpBanca posted a return negative of CLP25.8 billion. And the main reasons for this are explained on the right. We have compared year-on-year lower fees especially on structured corporate loan operations and also to an economic slowdown here in Chile. We have a negative impact on the fiscal hedge that we have for our position in Colombia.

Please remember that every investment outside Chile, regardless of the currency of the investment, is treated under Chilean fiscal law in US dollars. Therefore, we have a hedge in which we buy dollars to offset this position. And throughout this year -- year-on-year, I'm sorry, we saw a loss in our hedge here. That is, we have an integral effect on income tax expense below. So, both lines here, they add up to close to zero.

On C, we did -- we have indeed increased the loan loss provisions due to downgrades in corporate clients as we mentioned in energy sector for both Chile and Colombia, and there is also an effect for new regulatory standard credit provision model on residential mortgages loans. The combined effect for this is a higher expense compared to the first trimester of the year or the first period of 2015 of CLP63 billion.

If we move now to page 12, we have the results for Banco Itau Chile. And for the first quarter of 2016, Banco Itau Chile posted a net income of $6 billion and the reasons for this variance between the first quarter of 2015 to now are not too much different from what we saw in CorpBanca. There is also a lower fees in investment banking and corporate credit structuring due to the economic slowdowns. We have lower treasury gains in Banco Itau Chile in the first quarter, and also we have the impact of higher loan loss provisions due to the change in the regulatory standard for credit provisions on residential mortgages loans.

One thing that we have done an outlook and if you add up, for instance, the provision for loan losses for both banks, the variance quarter-on-quarter of [2015 to 2016] for both CorpBanca which is CLP63 billion and Banco Itau Chile which was CLP4 billion, it added up to a difference in provisions of CLP67 billion. We expect for this year an increase on this expense for provisions between CLP80 billion and CLP120 billion. If you add up throughout the first quarter, we had an impact of CLP67 billion.

If we go now to the going forward, which is page number 14, we also want to give you an update since we last had our conference call of the things that we're doing, how we are working throughout the merger and also all the major milestones that we see going forward. So, as we mentioned before, Legal Day One and systems integration, that is checked, that was achieved on April 1.

The second major milestone happened a few days ago where we filed the first combined financial statements with the regulators. We will make this financial statements available for you today in the afternoon. So the three major milestones that we see for this year, we achieved two of them and now we have the last milestone, which is a very challenging one and that we feel strongly ready for it, which is the brand and branches integration of all the branches that CorpBanca has until the end of this year.

That's pretty much the update. As I mentioned on the beginning of the call, this was a quick update to you, especially on the closing results for both banks and we will be glad to answer any questions that you might have.

(Operator Instructions) Jose Burmester.

I would like to ask if you can give us some color about the asset quality in Colombia?

Can you -- I'm sorry, the call is now that (technical difficulty) I understood that the question is about the asset quality in Colombia, but I didn't hear the first part of your question.

Yes, that's my question, about -- regarding the asset quality in Colombia, if you can talk a little bit about and give us some color about it.

As I mentioned, there is, as well as you know, a strong economic slowdown in Colombia. Interest rates are up almost 350 basis points in the last 12 months. So we do see impact on business, we do see impact on our margins due to this higher interest rates. However, as I mentioned to you, we feel strongly about the provisions that we have.

One of the things that the local regulator asks us when we bought the business in Colombia is that for our local statements here, we use the most strict provisioning model, either that from regulations in Colombia or from regulations in Chile and that's why one of the aspects that you see that we have a higher coverage then the local markets here on provisions. So we feel strongly about the provisions that we have.

Some of the effects that we saw here when we talked about the variance quarter-on-quarter of $67 billion for both banks, part of it was in Columbia, especially on a sector that is affected by oil prices for most of this provision, as I mentioned, was due to downgrades in oil sector. If you take a look at oil sector as a total of our portfolio, it's less than 2%.

So yes, we are affected by the slowdown in economy and we saw higher provisions on that but as I mentioned, when we take a look forward, based on all the information that we have, we expect a variance on this loan loss portfolios, as a measure of the expenses that we had on the previous year, around [$80 billion to $120 billion and we have close to $67 billion] that we have already made on the first quarter.

Diego Ciconi.

I just wanted to get a better view on the results from Itau Chile. The results was pretty much a lot lower than the previous quarter in the same period of last year. Some of that is related to the change in methodology of mortgage loans, but I would want to understand a little bit better what really drove this decrease in earnings?

Okay. As you can see within the lines, for instance, in Banco Itau Chile, and we are talking about the page number 12, you can see that net interest income is 14% higher. So it's within line of what we see for other banks in Chile. There is indeed an impact on the first quarter in fees and we are talking here exclusively on fees on the wholesale bank on the business of investment banking and corporate credit structuring loans that we have. So this is cyclical, it's quite a hard comparison to do this quarter on quarter specifically on economic slowdown that we have.

On treasury, we reduced treasury exposure and risk on the first quarter of this year and there was an impact of the Basel devaluation of the first quarter of the previous year that generated more returns for the bank. So that explain the lower treasury gains and as you mentioned, I think that the biggest impact on what causes the difference as operating expenses are pretty much in line of what we did expect are the loan loss provisions.

And the loan loss provisions, they're quite the same -- the business as usual what we saw in the bank with the exception of the mortgages model. If you remember, on the beginning of the year, there was some new regulations regarding the provision credit model that the local regulators put in place that affects most the loans with loan to value higher than 80%. So, pretty much every bank in Chile was affected for it, both Itau Chile and Corpbanca were affected by it and most of the variance that you see from the first quarter of 2015 to the first quarter of 2016 on this line in loan loss provisions are explained by this one-time expense.

Okay. And in the case of the fees, do you have any pipeline already that you could maybe give us a level of what you expect coming up in the next quarters?

No, we don't have an outlook but, well, as you know, especially on wholesale bank and corporate bank, it's pretty much a cyclical business. And as we see a cyclical downturn on the business, we have those effects. I would say that we would experience lower fees this year than we had the [previous year] mainly for the economic slowdown, but we don't have a specific outlook for fees to give out now.

Okay, thank you. Just one last question, on your dividend payout for next year, which is going to be based on this year's earnings, with the losses that CorpBanca had this quarter, that is not going to be summed up to the total results of the year. As I understand, it's going straight to equity, right? But the lower results from Itau, if I'm summing up right, it's hard for you to get above the level that you compromised to pay the dividends for, of $370 million. So I would like to understand a little bit better, what is the view that you have regarding the dividend payment?

Well, as I mentioned, we have a target capital structure here for our balance sheet. And you're right, in terms of calculating the income that we have that is due to distributing dividends throughout this year, it's three months of Itau and then nine months of CorpBanca. Although the CorpBanca results on the first quarter do not affect the results for this year, it affects capital. And as you know, we have a target capital restructure for the bank. So you have to separate the discussions what would be our target dividend distribution and also the effective tax dividend distribution that we have for this year.

So, if you take a look at the payout ratios that we had on the past for CorpBanca, it was ranging between 50% to either in some cases 100%. I would say that this year probably, mainly because we also have the transaction in Colombia that we mentioned to you before, that we would acquire with our use of capital in which we are buying the participation that core group has on CorpBanca Columbia for $330 million, that will affect our capital ratios, and as I mentioned, we have a target capital restructure and we probably would see a dividend payout on the lower range of what we did on the previous years.

Thank you. (Operator Instructions) Nicolas Prado.

It's actually Luis Adaime here. Good morning, everyone. Two questions; one, if you could comment a little bit on the capturing of -- not the capture of synergies but may be on the merger process. So far, it's been too soon but any sort of steps or any analysis of the steps? Which ones have been more positive or easier to implement, which ones have been harder to implement and relative to the timing that you expected, how are things going? Could you give us a little more color on the integration process so far?

You mentioned two questions. Is there two questions?

Yes, and the second one; given the perspective for tax reform in Colombia and lower GDP growth at least for this year and next year maybe, if that has changed your view on the structural return, the structural ROE that you're going to get in the country?

Well, let me discuss a little bit about the merger steps and I can tell you, there are no easy steps while merging two banks, but I think the best part of it is that in Itau Unibanco we had tremendous experience throughout merging banks in the last 20 years and we brought people from Brazil that had over that period of experience in merging operations, merging systems, integrating branches and everything and I told you a little bit about the two milestones that we had, one for the Legal Day One where we merged the systems for treasury, for accounting for instance, and then the file of all regulatory reports that we have either for local regulations in Colombia, Chile and also Brazil as Itau Unibanco consolidates all the business, everything was according to plan. We didn't have any impact on clients, on regulators. So, so far, all the merger effects and we passed through one hard part of the process, which is merging all the legal entity and regulatory requirements for both banks that went excellent and according to plan.

What the next steps are is the brand and branches integration, and we have a plan for that, it's not a big bang, it's not the way that we are used to doing this, especially to be more efficient to clients, should not cause any disruption in business so we will move in ways of branches until the end of the year starting in August. So we feel pretty confident with what we achieved so far and we are confident that we will achieve all this integration until the end of the year.

One important point is that there is [one first] milestone for the banks in integration that happens next year. Because we are talking this year about integrating all the core systems, but there are also all the products and satellite systems that we need turn off the legacy systems and that generate synergies that we will see throughout 2017. So, so far, I have a great perception of what the merger steps were.

Regarding your question on Colombia, yes, I think it's going through the cyclicality of Latin America country. We do see [trimmed] assets, we do see interest rates going up, but our plan, it's a longer-term plan and the same goes to every country. Chile is also under new regulations, changing reforms, also tax reforms and for our longer view, we feel confident with the plan that we have.

If we take a look at Columbia, for instance, in GDP growth and also the elasticity of loan portfolio growth with the country, it seems larger than we have or other countries that we do business in. Moreover, when we think about the concentration of the market, top five players are close to 67% in participation and that numbers translates to roughly 80% in markets such as in Brazil or Chile. So it is a market that is due to consolidation and we feel very strongly that there are opportunities for growth in there.

However, you're right. It's within the cycle, we are on the cycle of downturn. I don't feel that it changes our future view regarding our investments, but it do affect the results that we will have this year.

Okay, terrific. Thank you very much for the answer.

Sure. Let me just give you a minor comment here on loan loss provisions, because we were talking about the variance between the provisions, the expense in provisions that we had last year and this year is that, on 2015 both banks combined, they post CLP100 billion in expenses for provisions, that's net of recovery and also (inaudible). And this year, what we are talking about, it's a number larger than that.

So it's from CLP100 billion that we had this year, for the growth in portfolio, we are expecting provision larger than CLP200 billion for this year, adding up for CLP300 billion. So what the variance on quarter-to-quarter is, is a variance of CLP67 billion if you take the numbers. For the whole year, between the variance that we had on 2015 to 2016, we are talking a number between -- the midpoint of CLP100 billion, between CLP80 billion to CLP120 billion. But taking the midpoint to the expense that we would see this year for both banks combined, it's something around CLP300 billion.

No further questions on the phone line. There are no further questions, please continue.

Okay. There are no further questions. Thank you very much for joining the conference call and we will look forward to our next one where we will present the results, the first results for Itau CorpBanca as a new merged entity. Thank you so much for participation, and we look forward to any other questions you might have, we can follow up directly with you. Thank you.

Thank you. That does conclude the conference for today. Thank you all for participating. You may now disconnect.