Banco Itau Chile (ITCL) 2016 Q3 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Itau CorpBanca conference call on the Third Quarter 2016 Financial Results. We have with us 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 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 one of your speakers today, Ms. Labbe. Please go ahead.

Good morning. Thank you for joining our conference call for our third 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 Itau Chile and CorpBanca deconsolidated in our subsidiary SMU Corp., which is no longer considered strategic as of June 30, 2016, and excluding non-recurring events for the periods prior to the second quarter of 2016, is presented in the management discussion and analysis presentation.

The pro forma income statement has been calculated as if 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 Itau Chile and CorpBanca as filed with the Superintendencia de Bancos e Instituciones Financi-eras, SBIF; two, the deconsolidation of SMU Corp unaudited financial statement as filed with the SBIF; and three, the exclusion of non-recurring events.

The pro forma combined financial information included in the 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 on January 1, 2015.

Now, Mr. Moura will continue with the presentation.

Thank you, Claudia. Hello, everyone, and welcome to Itau CorpBanca's third quarter results conference call. As you see from all the presentation, we have been increasing the transparency and deepening our analysis provided for operations in both Chile and Colombia. I strongly recommend your reading our MD&A that is available in our website for more information.

As we have mentioned in our previous conference call, it's important to consider that Itau CorpBanca is in a transition year. Since Legal Day One in April, we have been working with focus and discipline to interpret policies, operation, processes and systems, as well as to align people with Itau's corporate culture. We believe we've made significant progress. Nevertheless, as we also have mentioned in the past, we expect this merger to have a three-year horizon to matured levels of return in synergies we are aiming for.

If we now move to page 3, we begin with a brief macroeconomic overview of Chile and Colombia. First in Chile, although our activities [decelerate] on the margin, we continue to see slow economic growth throughout the quarter, with lower private consumption as a result of a weakened labor market. On the other hand, inflation and inflationary pressures continue to decrease and could lead to an easing monetary policy rate next year. We expect 1.5% increase in GDP for this year and 2% for 2017, as confidence levels starts to recover.

In Colombia, the economy, as you know, has been hit by low oil prices and high inflation that led to an extensive 325 basis points tightening cycle in monetary policy with interest rates reaching 7.75%. On the other hand, inflationary expectations have been declining and we expect tightening cycle to start to unwind next year, starting in the first quarter and with interest rates reducing to 6% by the end of 2017.

The easing in monetary policy coupled with more favorable crude prices and higher investment could lead to a 2.7% GDP growth for next year. It's also important to mention that Colombia is advancing in its tax reform, which helps to reduce the uncertainty in the economy. On October 19, the national government has presented a proposal tax due to the Congress that will take effect starting January 1 next year. The total effect of this reform to our numbers is still being assessed as the bill has not yet passed in July and changes and amendments can be made.

Therefore, although we had an adverse macroeconomic scenario for both Chile and Colombia in 2016, we do foresee better growth and lower interest rates for 2017. Hence, we should expect a more virtuous macroeconomic environment for our results next year.

As we move to slide number 4, we discuss our latest results under our managerial view. On slide number 4, we would like to remind you that we adjust our accounting results to exclude the effect of non-recurring events, such as our restructuring costs that we incurred due to the merger process, as well as making pro forma consolidation adjustments to our historical numbers to provide a clearer view of our performance and better basis for comparison.

On the third quarter, we have posted a net profit of CLP19.2 billion under Chilean GAAP. To this number, we add CLP5.4 billion. We had non-recurring events mainly in restructuring costs due to the merger. And the result is a recurring net profit of CLP24.7 billion under our managerial view.

If we move to the next page, you will see some new information we are providing with a more detailed view of the breakdown between our operations in Chile and in Colombia. From now on, we will start to present our results in each operation separately to give you a proper look of the contribution of each one for our consolidated results.

On top of adjusting our numbers for pro forma consolidation non-recurring events as seen on the previous slide, we are assigning to Colombia the expenses that are incurred in Chile for investment and tax hedging purposes. For the periods before the merger, we also adjust intangibles that were generated by the acquisition of Santander Colombia by CorpBanca Chile and we are amortized in our Chilean book.

It's also important to reinforce that while these numbers reflect our view of our investment in Colombia, they differ from the results posted by our Colombian business on a standalone basis. The main differences are the adjustments in credit provisions under Chilean GAAP, the consolidation FX under the purchasing price allocation process for the business combination of the Itau Chile and CorpBanca under IFRS 3, and the managerial adjustment explained on this page.

On the first nine months of the year, Itau CorpBanca posted a managerial recurring net income of CLP73.9 billion with a breakdown of CLP94.1 billion for the Chilean business and a net loss of CLP20.2 billion for the Colombian business.

On the next slides, we will discuss the major drivers for the impact in return we saw in 2016. On slide 6, we present our results in Chile, where we have seen a 17.5% reduction in profit in the quarter, mainly affected by a reduction in our net interest income due to lower [trading] gains in inflation index assets. This line was also impacted in the quarter by a reclassification of some securities from available-for-sale to the held-for-trading category.

As all income for trading instruments is recognized in financial transaction line in the P&L, about CPL3.2 billion of year-to-date accrued income was reclassified from net interest income to this line. We also had an increase in loan loss provisions in the quarter due to the review of the credit ratings of some of our corporate clients. The other relevant impact in the quarter was the review and increase of the amortization of intangible assets, as well as an increase in marketing and other administrative expenses. When looking at personal and administrative expenses alone, we see a 1.8% increase when compared to the third quarter last year, well below inflation and even better when compared to the banking industry.

On slide number 7, we have a deeper look in our asset growth. This year, the banking industry in Chile is experiencing lower growth compared to previous periods due to the deceleration in growth and investments. Moreover, our business mix with more than 70% of our loans in wholesale and our leading position in corporate banking, make us more cyclical than our main competitors. Thus, we are flat on growth in the quarter and we are posting a 2.4% growth in the past 12 months.

Compared to the industry, we are almost on par on the commercial segment, but we are trailing in consumer and mortgage segments. The performance in mortgages is mostly explained by the diminishing appetite of CorpBanca for long-term assets in the past. We are in the process of merging our operations in retail and implementing Itau's management model and segmentation on branches. With this implementation, we expect to close the gap on consumer growth next year as increase -- as increasing the [weight] of retail bank in our portfolio is an important part of our strategy.

On the next slide, we can see how net interest margin has fluctuated in the last 12 months. Moving to slide 8. We can see that our net interest margin in Chile has been mainly driven by lower inflation when compared to previous quarters. When looking at our margins without this indexation, in fact, our NIM has been behaving slightly better than the Chilean financial system over time, gaining 2 basis points in the last 12 months, against a minor decline observed in the system.

As we discussed in previous calls, the main difference of our net interest margin to that of our competitors is not on the price of individual segments, either on assets or deposits, but on the mix where we have a lower share in consumer loans and on current account deposits. Looking forward, we continue to see inflation converging in 2017 to the midpoint of the Central Bank's target range of 3%, against 3.3% in 2016, what may lead to marginal pressure on nominal margin. On the other hand, we are looking for opportunities to increase real net interest margin as we reprice our risk appetite and continue to work on our long-term goal to have a more balanced mix.

Moving to the next slide, we see the evolution of our loan loss provision expense. In slide number 9, you can see that we had a small increase on credit provisions in the quarter due to the deterioration in rating of a couple of our corporate clients in face of a more adverse economic scenario. 2016 has proven to be a challenging year for our credit portfolio as we experienced two important credit events related to companies in the energy sector in both Chile and Colombia in the first quarter.

Moreover, we had to increase provisions due to change in regulations and merger effects on common clients for both banks. Therefore, on our second conference call, we mentioned that we expected credit provisions in 2016 to be between CLP80 billion and CLP120 billion, higher than that for both banks in 2015. As of September, we are roughly 70% -- CLP70 billion up this year, whereas the first quarter accounts for the vast majority of this variance. And as we adjust risk, ratings and policies for the loan portfolio, we still think that this guidance is the best representation of our expectations for 2016.

In addition, we continue to maintain a close follow-up on [service] indicators of our clients in provision accordingly as we will discuss in the next slide. On slide 10, we'll have a look at some of our credit quality ratios. Here you can see the evolution of our 90-day NPLs in our (inaudible) according to SBIF classification. Moreover, you can see our provision level evolution for both metrics, as well as a comparison to the market according to monthly SBIF data.

As you can see, we have maintained the provision level aligned with the market with some minor fluctuations between months as differences may occur based on loan guarantees. When compared to 2015, we can see that our provisions were mainly driven by the deterioration of corporate clients in the commercial loan segments. The mortgage portfolio has also showed a minor deterioration as we increased coverage due to changes in the regulatory framework, while the consumer segment remained relatively stable.

On the next slide, we will discuss our operating expenses. We continue to pursue our goals on synergies and is as you can see, we have a reduction of personnel expenses in the last 12 months. This difference is even greater when you adjust the number by inflation. Please remember that salaries are highly indexed in Chile. This is the first milestone for efficiency and within this period, we have reduced headcount by 7.5% with a higher impact on the managerial level.

As per administrative expenses, we do observe an increase of 10% in comparison to the same period last year, mainly due to higher rent expense as we integrate management in a single new building and we've obtained synergies through the divestment of owned real estate in 2017, and also due to higher marketing expenses in the period. We believe there are opportunities for synergies in administrative expenses starting in 2017 when we finish the integration of systems and processes.

Moreover, we are working with a consultant on implementation of a zero-based budgeting process that will enable us to better quantify and capture synergies on this line. The total operation expenses is also impacted by an increase on intangible amortization as a result of the business combination under IFRS 3 on Legal Day One. On our next release, we will isolate this impact as it facilitates the comparison to previous periods.

On next slide, we can discuss a little bit our operation in Colombia. On slide number 12, you can see that we had a timid growth in our credit portfolio in Colombia in the last quarter and in the year. The slowdown in the economic cycle, along with the concentration, the contraction in our margins, led us to a more conservative approach on credit approval in pricing.

Our business mix in Colombia like that of Chile has a higher share of commercial and corporate credits, thus leading to a higher cyclical volatility in our business compared to our peers. Moreover, we are deepening our knowledge in understanding of credit models in Colombia in order to maximize the relationship of risk and return within the portfolio and (inaudible).

As a result, in this moment, we have taken a more cautious stance on credit growth. On the next slide, we can discuss the variance on our net interest margin. As you can see, the rise of interest rates in Colombia led to a repricing of our deposits on a faster pace than our assets. In terms of interest sensitivity, we are on par to other players in the market. However, because we have lower share in current account deposits and a higher share in short-term deposits on a relative basis, the transmission velocity of short -- our short-term interest rates in our net interest margin is higher than that of our peers. As a result, although NIM was flat in the quarter, we saw a contraction of 82 basis points in the last 12 months.

On the last few months, we have implemented the same risk liquidity and asset liability matching framework that we have in Chile, in Colombia, in order to have a more integrated outlook on risk exposures and risk management. Moreover, we invited the former Head of Treasury of Banco Itau Chile to take the position of Treasurer in Colombia to facilitate this integration process. By 2017, we expect interest rates to fall to 6% from the current level of 7.75%. And although long and medium-term rates already incorporate some of this reduction, we do foresee positive externalities to our net interest margin next year.

On the next slide, we can discuss our credit provision in Colombia. As you can see on page 14, we had higher credit provision expenses this year concentrated in the first quarter. In addition, we continue to see a deterioration of NPLs due to the adverse macro-economic scenario in the commercial and corporate segment. On the other hand, some of this increase was already anticipated in the first quarter credit provisioning process, as we have a prospective view on corporate ratings prior to any delinquency.

Although we do not see a major shift in consumer segment's NPLs in Colombia in the last 12 months, we will continue to have a cautious view on credit in the next few months. It's also important to note that the regulatory criteria that we have to follow for the Colombian loan portfolio for consolidation purposes only, is to apply the most conservative provision rule between Chile and Colombia. This mechanism leads to our coverage ratio of 265% for the 90-day NPLs and we continue to -- we monitor continuously our portfolio with this conservative credit provisioning approach.

On next slide, we can discuss our operating expenses in Colombia. In Colombia, we have the same disciplined approach to expenses as we see personnel and administrative expenses growing only 3.1% in the last 12 months, less than half of the inflation in the period. The bank has achieved important milestones in synergies with the merger of CorpBanca Colombia and Helm. However, there are still opportunities as the banks continue to operate in segregated operational platforms, systems and processes. As we discussed on our previous call, we expect to achieve the operational integration of our Colombian business at the end of 2017, paving the way for further expense synergies.

On the next three slides, we're going to give you an update on important milestones of our integration plan in Chile. First in slide 16, I would like to give an update on our client and branches' migration process. As of today, we have migrated more than 26,000 clients in 18 branches from CorpBanca to system processes and brand used by Itau in Chile. We have been planning and preparing the bank for this migration for the last 12 months. And as we have mentioned in previous occasions, we have decided to do this migration in waves and not in a single switch in order to minimize risks and guarantee a smooth transition for our clients.

On the next slide, we can discuss some changes we had on management. On page 17, you can see the composition of our Board of Directors and Executive Committee. In the last few months, we had important additions to the team in order to better mix experiences from the Chilean and Brazilian markets, as well as increase capabilities for the challenges we face. As our new board member, we have Pedro Samhan, who previously served as the CFO for Banco Chile.

On the Executive Committee level, we invited Julian Acuna to be responsible for our retail business. Julian has more than 20 years of experience in retail in Santander in both Chilean and Colombia markets. We have also brought Mauricio Baeza as our new Chief Risk Officer. Previously, Mauricio was the CRO of Banco Chile and he will help us developing new credit model and policies for challenges in retail growth and consolidation of our corporate banking platform.

We have also promoted Christian Tauber as Head of our wholesale business. Previously, Christian was responsible for Itau BBA in Chile and has extensive knowledge of the management model that we use in Itau Brazil for corporate and investment banking.

Finally, a few months ago, we brought in Cristian Toro as our Chief Legal Officer. Cristian has served the same position in LatAm and Citibank Chile in the past. We are very happy to have attracted this level of talent for our management team as we feel better prepared for the many challenges we will face with this merging.

Here in conclusion, the main idea is that we are moving forward with discipline and focus towards the development of a strong franchise with the integration of Itau CorpBanca's operation under a single platform and brand, strong management capabilities, development of a common and shared corporate culture and leverage on Itau Unibanco's unique extensive expertise and management model. We think we are paving the way for a competitive profitable, sustainable, franchise in the (inaudible) region.

Along the way, we are increasing corporate governance and transparency by giving a deeper and broader view of our businesses and challenges both in Chile and Colombia. As we mentioned before, it is important to consider that Itau CorpBanca is in its transition year and although we believe we've made a significant progress, we expect this merger to have a three-year old horizon to mature at the levels of return and synergies we are aiming for.

Now we are available to answer any questions you might have. Thank you very much.

Nicolas Riva, Citigroup.

Yes, thanks Claudia and Gabriel for taking my questions. Well, two questions. The first one on NPLs in Colombia, so we saw the NPL ratio in Colombia increasing 40 basis points quarter-on-quarter. You mentioned in the earnings release that this was driven mainly by higher NPLs for corporate. So my question is, if it was concentrated in one specific center, and if it was, how well covered is the exposure to this center? And also what's your outlook for the NPL ratio in Colombia fourth quarter and also for next year?

And then my second question is on margins. So, we saw a big decline in the net interest income, 20% year-on-year and 10% quarter-on-quarter. You mentioned the lower inflation in Chile, higher funding costs in Colombia. Now, I believe that you are liability sensitive in both Colombia unlike your peers and in Chile like your peers. So my question is, what's the sensitivity of your net interest margin in both Chile and Colombia to a decline of 100 basis points in the monetary policy rate? Thanks.

Hi, Nicolas, answering your question on NPLs, in Colombia, one thing that I think is important to take in consideration when analyzing NPLs, ratios or coverage, because 70% of our portfolio is mainly driven by corporate credit. We do provision on a prospective view, meaning that we are taking a look at ratings and also probabilities of defaults and loss given default models. So when a corporate enters into delinquency, most of the time we have already provisioned that. So the effect that you see in Colombia's NPLs, the major impact right now is the delinquencies that we had on the first quarter that we provisioned for any specific corporate client. So it's concentrated on -- as we mentioned in the first quarter on the energy sector, specifically in one project in Colombia.

Looking forward, we do expect NPLs to continue to pressure our business in Colombia, we do see recovering economy taking a look in 2017. Nevertheless, as our growth in 2016 improves, we are taking a very cautioned approach on credit. We don't have a specific guidance, we're just in the process of discussing 2017 numbers. So we don't have any specific guidance right now.

You asked about margins in Chile, in Colombia. And more important you have the SBIF numbers for the sensitivity and (inaudible) that we have for interest rates. But more important than that is I think the discussion not only on the sensitivity you have interest rates are for the balance as a whole, for instance, duration, but how fast that incorporates into the margin.

Because we have such short-term deposits on both banks, especially because of current account deposits, I think that accounts for most of the difference, and as interest rates go higher, the difference incurred in an account becomes bigger, because it's zero compared to some interest. And as this interest goes higher, the difference is even bigger.

If you take a look at the number that we issued on the balance sheet, we have the notes and on risk, we have the sensitivity. We don't have a specific number to give you in terms of the impact of 100 basis points on margin, but you have the number for the balance sensitivity as a whole. I think most important is to take a look at what we foresee for the next year.

In Chile, we do think that we continue to see pressure on margins, because of inflation, but we are more concerned right now, in terms of the things that we can manage and it's the balance sheet exposure to inflation and also the repricing of some of the portfolios and clients that we have. And in Colombia, we do see interest rates going lower, and especially when that affects us in the shorter term, I think that we are going to see a higher impact. At this moment, I do not have for you the number of 100 basis points sensitivity on NIM.

Okay, Gabriel thanks. The point is that in Colombia you would expect margins to expand next year assuming lower interest rates and in Chile, there's some pressure on margins basically because of lower inflation. Your expectation there is what 3% inflation next year in Chile?

Yes, we have a 3% of inflation in Chile next year. If you take a look at in the quarter, it's almost on par on what we have right now. So in terms of nominal and real NIM, you shouldn't have much difference. And in Colombia, because of lower interest, expected expansion in margin.

Jason Mollin, Scotiabank.

Hello, everyone. Gabriel and Claudia, thank you for the presentation. You highlighted that 2016 is a transition year for the newly combined Itau CorpBanca and that the merger will be a three-year process to achieve a more mature level of profitability. Can you talk about these longer-term mature profitability levels in both Chile and Colombia, the disclosure you're providing is very helpful, and also add, therefore, the more mature profitably level for the combined entity in the longer term?

Sure. Thanks, Jason. If we take a look at both banks in the past and exclude for all the effects that they had on transaction for instance, all the expenses we have for lawyers, investment banking and one-time expenses such as defined from that CorpBanca incurred on the last quarter, both banks were running at an ROE between 16% and 18%. So in the longer term and on the Chilean operation, I think that's a feasible target for us.

When we take a look at Colombia doing the same adjustments, and there is an important part to that, is that we have signed all the hedging exposures that we have to Colombia, and please take into consideration that hedging Colombia from Chile because of the difference of interest rates went up, it cost us and carry around between 3% and 4% per year. So, we see a reduction of our ROE in Colombia. Prior to that, the bank was running the bank was running around 10% to 11% ROE. I think that's a fair target level for the short term. In terms of Colombia, we are having a more cautious view in terms of thinking that it will take longer for us to achieve higher levels of profitability. First, because the bank in terms of scale has a different scale than that of what we have in Chile. And second, because of the macro-economic environment that we are [leading] that we think it will run for a longer period.

So there is this difference in ROE between both Chile and Colombia, and we're reporting a special focus now in Colombia in order to better understand the business, the platform that we have and how we can achieve higher levels of profitability.

Carlos Gomes, HSBC.

You have made some additional changes to your management team. Should we assume that it is complete or do you still expect additional additions in the coming month? Thank you.

We are always assessing management on a meritocratic way. At this moment, we don't have any particular announcement to do in management.

Sebastian Gallego, Credicorp Capital.

Hi, good morning everyone. Thanks for the presentation. I have two questions. First, I would like to have more color on the Colombian operation. I mean we're seeing a loss of market share, lower margins, profitability is much -- is negative. Can you provide more color on this strategy, how to compete with the big names in Colombia, and can you also talk about how the IT project has delayed much of the strategy as a bank?

And the second question I have is, can you provide some color on how are the new branches that you launched on the pilot tests, how are they coming and are they working and can you describe what's the outlook for the conversion of new branches in Chile? Thank you.

Sure. I think on your first question about Colombia, and I think that you kind of answered the question itself, meaning that the impact that we now see on the business, I can relate to two different things. The first one are the level of interest rates and the liability sensitivity that we have on balance sheet that we already discussed. The second one, it was exactly what you mentioned, was the integration of both banks in the IT project that CorpBanca had.

You have to -- I think a little bit of history serves us well here, is that if you remember, CorpBanca Chile acquired Santander Colombia. And the core system of Santander was not part of the deal as all the core system was -- run from Mexico, the platform. So, CorpBanca started to develop its own platform for the region. A few months after that, CorpBanca Colombia acquired Helm Bank that has its own platform.

And now we are talking about three different platforms and a convergence strategy that was with the planning of two years and some important milestones were achieved. Nevertheless, when we take a look at the bank and saw the strategy, we thought that the better strategy would be for us to align with the same methodology that we are applying in Chile, for instance, it's not a switch on approach coming from two different platforms to one of them, but from migrating in waves clients from the systems of CorpBanca Colombia and the systems of Santander to Helm Bank.

This change in the strategy impacted the time frame that we have from 2016. We didn't think it was feasible to finish all the implementations for 2016 and moving that through 2017. So if you take all the costs related to merging the two banks that effectively operate as two banks in Colombia, the synergies happened at the top level, but didn't go all through the processes and everything there delayed two years. The entropy of running two different processes in Colombia associated with the margins that we spoke earlier, they led to the results that we are now seeing.

In terms of margin, we discussed the measures that we take in terms of the IT project. We also restructured the project and now have a more clearer view and simpler view to the implementation. So we feel better with the strategy that we now have. However, the challenges that we face are as you mentioned -- it's not easy competing with the larger banks in Colombia. It's a very different market from us than the platform that we have in Chile. In Chile we have a platform that is already on scale, that's not the case in Colombia. So, I think that we are going phase by phase here, in terms of aligning credit policies and risk policies, aligning what we have in terms of implementation of IT and then taking a look at the bank -- of other opportunities that we have to gain scale and take the profitability to another level. That's the plan that we're going through and that's why I said in terms of timing, it feels that Colombia has a slower pace than Chile in terms of our expectations to convergence in profitability.

Jose Burmester, Itau Asset Management.

Hi, good morning. Thank you, Gabriel and Claudia for the conference. My question is related to the credit cycle we are having in Chile. And especially, I would like to ask you if you have a target of the ratio of provisions over (inaudible) in the commercial segment, because there is a gap between the financial system average and Itau CorpBanca ratio? So can you give us -- [as it will be more caller allowed] provisions and if you have a target on this specific ratio?

In terms of -- no, we don't have a target and I will take the information we are giving here, the analysis, that is public information. So anyone can take a look at SBIF data and do the same analysis that we did here. We don't believe that we have gap -- you have to take this with a grain of salt because the structure that you have in guarantees differ within different transactions.

So this is a number solely based on PDs, it's not adjusted by LGDs, meaning that the levels of provisions also affect how much you are provisioning. So we feel comfortable with the levels of provisions that we have. Of course, within the commercial portfolio in corporate banking, it's always about events, meaning that you have a higher concentration on credits that you have on retail that it follows more a statistical approach.

So I don't think that we have a material difference for the market. And when I take a look at the portfolio as a whole, our portfolio performs better than a market not on this year, but historically it was the case. So I don't think that we have any significant difference to the market.

Alonso Aramburu, BTG.

Hi, good morning. Thank you for the call. Two questions, first on expenses and synergies, one area where we're seeing definitely some benefits of the integration on the expense line. I'm just wondering how or what is the level of growth of expenses you are modeling or you're expecting for the next year, and if you are on track on the cost synergies or how much more of these synergies should we see in coming quarters and in 2017?

And my second question is on the funding strategy. I mean, you talked a little bit about that, but one of things we've seen in the last couple of quarters is your demand deposits coming down. They are down 15% versus last quarter, and your long-term funding has gone up assuming that you're taking basically -- do you have a better [match] of your liabilities in your assets? How should we see this evolving, [if any of] your demand deposits will continue to decline from these levels?

Thank you for your question Alonso. First, the point of expenses, I think that we need to analyze in two ways. First, I think it is important to isolate the impact of the expenses on intangibles that we have due to the merger. So, excluding that and just talking about the personnel and administrative expenses. On personnel, you can clearly see the synergies, I think the synergies now are concentrated on the managerial level, that's the first impact that you have on the merger.

I think that when you go through all of these structures, there are still opportunities for us to make the bank more efficient, but that needs to come along with changes in processes, because effectively, of now, we are still operating two banks. We are migrating the branches from one bank to the other that will enable us to realize some of the synergies, but effectively, now we have the same processes running in parallel.

In terms of guidance, we stick to the same guidance that we have in the past, of the [CLP100 million] in synergies on the third year. I think that we achieved a lower part of the synergies on top management and there are lots of opportunities for us, especially on administrative. We talked about the rental expenses that we had, because some of the buildings we owned than when we're changing to new buildings and selling the assets that we have, so I think there are important synergies on that, that are not reflected yet on the numbers, as well as all the integration processes.

So I think that one important goal for us aside from new projects that we might have within the bank and we have a digital strategy that we need to pursue and everything, aside from the old bank, let's put it that way, all the synergies that we are achieving, I think that we should grow less than inflation in order to make the synergies happen. But we don't have any more specific guidance than the one that we issued before.

In terms of funding, your second question, yes, we do see another important effect for us was, how our cost of funding reduced on the last few months. When we take a look at since Legal Day One, all the issuances that we did on that, we are approaching almost on par to what are our main players in Chile. So we are happy with that. At the same time, you're right, we had a shift in strategy in terms of reducing our exposure to short-term deposits and having higher long-term bonds. And the reason for that is that we are converging to liquidity levels more closely to what we think works for the policies of Itau UniBanco as a whole.

If you think about LCR and all the movement towards Basel III, I think it will lead institutions to have more liquidity and that generates a cost on the shorter term, that's true. But at the same time, we feel that it's more aligned with our risk appetite and a more sustainable future view of the bank. We are well over 100% in the LCR on a consolidated basis, that's why we feel very comfortable with the level of liquidity that the bank now has in its results of the strategy that you mentioned.

(Operator Instructions) There are no further questions, please continue.

Well, thank you very much for your questions for this conference call. As I mentioned, I think that we are improving disclosure, we are improving the analysis that we have for both operations separately. I recommend your reading of the MD&A that we have on the website, and we are glad to answer any questions you might have in the future. Thank you so much.

That concludes today's conference call. You may now disconnect. Thank you for your participation.