Banco Itau Chile (ITCL) 2016 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Itau CorpBanca conference call on the second-quarter 2016 financial results. We have with us Mr. Gabriel Moura, Itau CorpBanca's Chief Financial Officer, and Miss Claudia Labbe, Itau CorpBanca's Head of Investor Relations. (Operator Instructions)

I must advise you the conference is being recorded today. And we now pass the floor to one of your speakers, Miss Claudia Labbe. Please go ahead.

Good morning. Thank you for joining our conference call for our second-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 is discussed.

In order to allow for comparison with previous periods, historical pro forma data of the consolidated combined results of Banco de Chile and CorpBanca deconsolidate in our subsidiary SMU Corp, which is no longer considered strategic as of this quarter and excluding non-recurring events for the periods prior to the second quarter or 2016 is presented in this management discussion and analysis presentation.

The pro forma income statement has been calculated as is the merger of Itau Chile with and into CorpBanca occurred on January 1, 2015. The pro forma information presented here is based on, one, the combined consolidated historical analytic financial statement of each of CorpBanca and Banco de Chile, as filed with the Superintendia de Bancos e Instituciones Financieras, SBIF. Two, the deconsolidation of SMU Corp and the latest financial statement as filed with the SBIF, two; and three, the exclusion of nonrecurring events. The pro forma combined financial information included in this MD&A presentation is provided for illustrative purposes only and does not purport to represent what the actual combined results of Itau Chile and CorpBanca could have been had -- if the acquisition occurred as of January 1, 2015.

Now, Mr. Moura will continue with the presentation.

Thank you, Claudia. Good morning, everyone. As you know, Itau CorpBanca is the merged entity of Banco Itau Chile and CorpBanca since April 1. And today is our first quarterly conference call as we will discuss our results for this first 3 months and give you an update on the merger process.

If you could please move to slide number 3, we can discuss the macroeconomic environment. So we continue to see a deceleration and economic growth in Chile and Colombia. For Chile, our expectation is a GDP growth of 1.5% in 2016, and 2% in 2017, coming from a 2.1% expansion in 2015. The direct consequence of this lower economic growth is a more accommodative monetary policy, and we expect interest rates to be flat on 3.5% per year until the end of 2017, and inflation to converge to Central Bank's target of 3% per year in 2017.

In Colombia, we expect a GDP growth of 2.3% in 2016, and 2.7% in 2017, from a 3.1% growth last year. The country is experiencing an important tightening cycle in monetary policy with interest rates rising 325 basis points to 7.75% in the last 12 months, as you see on the graph.

As we will discuss later, this had an important impact on net interest margin in Colombia, as the bank had a mismatch in assets and liabilities duration. Going forward, we expect another tightening of 25 basis points in Colombia, moving interest rates to 8% per year until the end of 2016, followed by an [easing] cycle that should lead interest rates to 6.5% in the end of 2017.

Now if we could please move to slide number 4, we will discuss the results for the last quarter. On this slide we are reconciling our managerial view that excludes nonrecurring events with our accounting results under Chilean GAAP. On the second quarter, we had a net income of CLP28.5 billion. To this value we are adjusting nonrecurring events, such as the restructuring costs associated with the integration of both banks like [itemization], consultants, systems, and we are also adjusting to one-time credit provisions due to new regulations and to the overlapping of clients between the two banks merged.

Finally, we are also excluding the results from accounting adjustments as we integrated internal accounting policies and revenue recognition, deferred tax assets and intangible amortization, for example. As a result, our managerial recurring net income in the second quarter was CLP48 billion compared to CLP1.2 billion in the first quarter of 2016, and CLP90.3 billion in the second quarter of 2015.

If we could move to the next page, we can view the highlights of the last quarter under this managerial view. In my opinion, the main highlight on the second quarter is improvement in virtually all P&L lines when compared to the first quarter, with a 7.6 quarter-on-quarter increase in our net operating profit before loan-loss provisions.

Our second highlight would be loan-loss provisions returning to historical levels. As we mentioned in our previous call, on the first quarter we had two important credit events related to corporate clients in the energy sector in both Chile and Colombia. In the second quarter, we saw credit performance more aligned with our expectation and with historical behavior, as provision expense was flat compared to the same period in 2015.

Credit portfolio performance continued to move according to our expectations, as NPLs over 90 days remain stable quarter on quarter with a slight deceleration year on year, due to slow economic activity. We will discuss more credit portfolios later on in this presentation.

The third highlight is having our expenses under control. We have a decrease in the personal and administrative expenses of 2.9% quarter on quarter and 3% year over year, compared to an inflation of 14.2% in the past 12 months. We start to see some effects of the merger synergies. However, as we discussed before, we will see higher impact next year as we start to deactivate legacy systems and process of CorpBanca and we finish branches' integrations later this year.

Finally, our managerial recurring ROE that excludes goodwill from our equity for a more adequate historical and fair comparison reached 9.5% in the second quarter, with the Chilean operation reaching a ratio of 13.7. This is a transition year for Itau CorpBanca as we discussed before on our last call, as we integrate management systems processes and policies.

Moreover, the adverse economic scenario, especially in Colombia, led to a more challenging environment for credit growth within our risk appetite and capital return goals, and also for net interest margin. However, we continue to move forward with a long-term goal to convert our ROE to the level of the three largest banks in Chile.

We now move to the next slide where we have the discuss on performance [attribution] for the second quarter. If I take a look at the first waterfall, we have the performance of the second quarter compared to the first quarter of the year. As we discussed on the previous slide, we do see an improvement in virtually every line of the P&L.

More importantly, I would like to discuss the second waterfall where we have the performance of the last quarter compared to the second quarter of 2015. First, we see a reduction of CLP30 billion in net interest income due to a low net interest margin. This decrease in margin happens mainly due to lower inflation in Chile and higher funding costs in Colombia as we will discuss in the next slide.

Second, we have a reduction of CLP7 billion in fee income, coming mainly for fewer credit restructuring and project finance deals.

Finally, we have a CLP10.3 billion reduction -- pesos reduction -- in financial operations income, coming from lower trading gains on inflation, lower (inaudible) activity on derivatives, and higher financial costs to hedge our exposure in Colombian pesos coming from our investment in CorpBanca Colombia.

On the next slide, we can further discuss the evolution of our net interest margin. In slide number 7, you see that our consolidated net interest margin contracted 79 basis points compared to the second quarter of 2015. However, we feel that it's very important to analyze Chile and Colombia separately in order to fully understand the variation.

On a standalone basis, the net interest margin of our Chilean operation decreased 54 basis points on a year-over-year basis, with performance similar to that of our closest peer according to our calculations. Moreover, when we exclude the effect of inflation indexation on assets and liabilities, we see our net interest margin only 10 bps lower year on year with a relative performance slightly better than that of our peers.

Finally, we do see slightly improvement on net interest margin since Legal Day One, as we experience lower funding costs and implement a better price segmentation.

On the other hand, in Colombia we suffered a 145 basis points reduction in net interest margin on a year-over-year basis, coming from 4.7% to 3.2%. This 325 basis points hike interest rate in the last 12 months led to an increase in our cost of debt faster than our ability to reprice assets, as the bank had an important mismatch in asset and liability [duration].

For the next couple of months, we expect a slightly deceleration of our net interest margin in Colombia, as interest rates should rise more than 25 basis points. For the next year we expect a reversal of this trend as we reprice assets, monetary cycle turns into (inaudible), and we implement an asset liability matching process more aligned with our current risk appetite.

If we move to the next slide, we can discuss the evolution of our loan portfolio. At the end of the second quarter of 2016, our total credit portfolio reached CLP21.6 billion, increasing 0.7% from the previous quarter and 2.3% from the same period of the previous year. In Colombia, which is responsible for 25% of our total loan portfolio, an adverse economic scenario along with a more restrictive credit quality led to an increase of 1.5% in the loan portfolio in the last 12 months in local currency, which translates into a decrease of 4.9% year over year when measured in Chilean pesos.

Business mix has stayed constant in last quarter, with commercial loans responsible for roughly 70% of our portfolio. As we continue the integration of business platforms in Chile and in Colombia where we are merging the business we acquired from Santander and Helm, we will pursue as a long-term strategy a higher participation of consumer loans in our portfolio (inaudible).

Moreover, the current growth rate of our portfolio is still affected by the integration process and should improve as we integrate branches and implement a better segmentation strategy.

On the next slide we have a different look into our credit quality. So if we can please move to slide number 9. When we look at credit quality, we are seeing stable delinquency ratios overall in the last quarter. In the last 12 months, we saw a 19 basis points increase that is mostly due to an increase in the commercial portfolio and concentrated on the third 3rd quarter of last year. We constantly monitor our loan book and act upon any sign of deterioration.

As we have seen last quarter, we have already provisioned for the deterioration in ratings of some of our corporate clients that are not yet overdue, and we are comfortable with the current level of provisions for the present scenario.

In Colombia, we are facing some deterioration in credit quality due to the economic environment, with a 18 basis points increase in consumer delinquency on the quarter. However, we believe we are well covered for that and are constantly looking for any signs of a worsening scenario.

It's worth mentioning that for our consolidated balance sheet, our provisioning standards for Colombia is always the strictest between the local and Chilean regulatory guidelines.

So on the next slide, we will discuss our funding status and strategy. I think on slide number 10 we have two points worth mentioning for our funding structure. First, we continue to see an improvement in our funding costs in Chile when compared to our closest peers. For short-term deposits, we had on average a spread of 10 basis points over the cost of our peers after Legal Day One.

This number compares to 30 basis points spread over what CorpBanca had in 2015, and 50 basis points previously to the merger announcement. Moreover, our recent bond issuances have presented the same narrowing spread effect, thus helping us on improving our net interest margin in the medium-term.

Second, we are gradually increasing our exposure in long-term debt as shown by the increase in that instrument, as we pursue a better equilibrium in balance sheet exposure to interest rates and increase liquidity to Basel III standards such as LCR.

On the next slide, we can have a deeper look in our operating efficiency and expense. As mentioned before, we decreased our personal and administrative expenses by 2.9% last quarter and 3% when compared to the second quarter of 2016. When compared to inflation of 4.2% in the last 12 months, and these expenses are heavily indexed to the IPC, we had an inflation-adjusted saving of roughly 7% on the second quarter of 2016 compared to the same period last year.

As we move forward with our integration plans for CorpBanca's branches in Chile until the end of this year, we will pave the way for further synergies as we will deactivate legacy systems in process during 2017.

Restructuring costs in the first half of 2016 totaled CLP27.4 billion as we have an important operational effort to integrate both banks to the Legal Day One and have the effects of severance packages to the reduction in headcount as seen on the graph below that also includes senior management.

On the next slide we can have a look at our efficiency ratio. Our efficiency ratio improved 3.9% in the quarter for the reasons that we discussed in the previous slide. Moreover, we had an important improvement on risk-adjusted efficiency ratio that includes loan-loss provisions, as we saw credit provisioning returning to historical levels. However, efficiency ratio remains above last year's levels, mainly because of lower revenues as we discussed before.

On slide number 13, we can have a closer look into our capitalization numbers. Our capitalization ratio increased by 20 basis points to 13.2% under Chilean regulatory capital framework. As established in the transaction agreement for the merger, Itau CorpBanca will target a capital ratio based on the greater of 120% of the minimum regulatory capital requirement or the average of regulatory capital ratio for the three largest private banks in Chile and Colombia.

As of April 31, 2016, the last public information published by the SBIF, the average regulatory capital ratio of the three largest banks, private banks in Chile, was 13%. Thus, we are 20 basis points above the minimum required by the transaction agreement.

On slide number 14, we can have an update on our core system and migration strategy in Colombia. After a deep evaluation, we have decided to change Colombia's core system implementation strategy. On the left side, we have the previous strategy where we were migrating Corpbanca's Colombia, former Santander Colombia, and Helm's platform to IBS.

As you know, IBS is the core system platform that CorpBanca Chile has and that we are migrating to Itau's Chile platform, Altamira, until the end of next year this year. In order to reduce the implementation time, risks and costs, as well as to mitigate any impact on clients, we elected Helm Bank Phoenix platform as the core bank legacy system for Itau CorpBanca's operation in Colombia. We are already executing this new strategy and we expect to conclude all branches' migrations on system processes and brand by the end of 2017.

On the next slide, we have an update on our execution metrics and a discussion on next steps. We are executing this merger with a disciplined and focused approach consistent with the experience that our parent company, Itau Unibanco, has in Brazil. So far, we achieved within our timeline expectations all the major milestones we have set for the integration of both banks.

We integrated management systems in Legal Day One as defined by the transaction agreement. We have filed timely all combined financial statements since the integration, and more recently we achieved another milestone. In order to enhance our corporate governance practices and transparency, we decided to adopt a quarterly audit review of financial statements.

In our website, we have BWC's report for the second quarter of 2016. While this is not a common practice for Chilean banks, we do believe in a continuous improvement in reporting in corporate governance.

Finally, we continue to work on a full brand and branch network integration in Chile to be fully completed by the end of this year. This is pretty much the updates for the second-quarter results and strategy, and we would welcome any questions that we might have. Thank you very much.

(Operator Instructions). Diego Ciconi, Scotiabank.

Hi, good morning. Thank you for the opportunity of asking a question. I have two actually. One is regarding the fees and commissions lines. We see a slight decrease in that line, and I wonder when do you expect to reach levels similar to the pro forma posted in 2015, and if that's ever going to happen?

And the second thing is regarding loan growth. We see a slowdown specifically in the retail segment. I wonder if this is the impact of restructuring the book like cutting limits, duplicate clients; and what would you expect to be the reasonable loan growth for the year? Thank you.

Thank you for the question. I will answer first your second question, and then I'll go back to the first one. No, I don't think that the impact that we see on growth are based on limits that we have with clients, because we pretty much add up all the limits that we had in retail for clients, so there's not that much impact on that.

What we do see is less activity, especially on SMEs, and also we positioned ourselves in a more conservative way on mortgage loans. So if you see, most of the market share that we lose are on mortgage loans since last year.

Of course, the merger process creates an interplay between the two branches network that we are seeing that start to decrease. So our expectations for the next few months as we put all the branches together that lead to a new segmentation strategy is that we will resume what we do (technical difficulty) -- merger. And as we finish everything, the merger of two branches network until the end of this year and implement a new segmentation for retail that we have, I think that we will resume growth on par of what we see on the market.

On your first question was about the fees and the structure in project finance fees, we do see lower growth. There are actually two causes for impact on fees. One of them is the fewer deals that we see on project finance and credit structuring. The other one is the accrual of fees, a difference in policies between Itau and CorpBanca, in which we adjusted CorpBanca. So you are going to see lower fees in the month of May that was this adjustment.

Nevertheless, most of the fees that we have come from the wholesale market; 70% of our portfolio is within the wholesale market. So for that purpose, we are very cyclical in terms of fee income. Therefore, I don't believe that we are going to see for that line of credit structuring and project finance any major movement until they meet up next year.

Got it. Just to follow up on the loan growth, you mentioned that you expect the level to converge to the system level after you have integrated both branches, the two banks, but is it something you expect to happen this year? I don't think so, right?

No, I think we have a lag in growth of about more three months as we do the integration process. But I do expect us to be fully aligned at the end of this year and start to resume growth as market next year.

Got it, thank you so much.

(Operator Instructions). Alonso Aramburu, BTG.

Hi, good morning. Thank you for the call. I have a question on margins in Colombia. We are seeing the negative trend in your margins, but looking at other banks in the system at least the last couple of quarters, they have been improving margins as they are more sensitive.

Is it your balance sheet that you don't have -- are your loans not tied so much to DPF in Colombia? I'm just wondering why the main difference between your balance sheet and that of the bigger competitors in Colombia.

I think in terms of net exposure to interest rates in Colombia, we were more exposed than the other banks, especially because of the mix. If you take a look at the loans, we have 70% in commercial loans and some of them in project finance as well. So we have a higher duration than that of the system.

If you think about deposits, I would say that two-thirds of our deposits of our loans, they are repriced within 30 to 60 -- (technical difficulty) -- I'm sorry, I thought that we dropped the call again. So two-thirds of our deposits they repriced within 30 to 90 days window, and two-thirds of our assets they reprice in a period of three years.

So this was -- of course, some of this mismatch we hedge it with derivatives and also there are notional differences. However, I do see that we had an exposure in interest rates higher than the other banks that now we are in the process of implementing the same asset liability matching framework that we have in Chile that is similar to what we have in Brazil.

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

(Operator Instructions). At this time, sir, there appear to be no further questions. If you'd like to make your closing remarks, I'll pass the floor back to you.

Fantastic. Well, thank you so much for your questions. Claudia and I remain available for any of the questions you might have, and we see you all in our next conference call. Bye-bye.

Thank you very much indeed, and with many thanks to both our speakers today. That does conclude the conference. Thank you all for participating. You may now all disconnect. Thank you so much.