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Thank you for standing by, ladies and gentlemen, and welcome to the Itaú CorpBanca conference call on the first quarter 2018 financial results. We have with us Mr. Gabriel Moura, Itaú CorpBanca's Chief Financial Officer; and Ms. Claudia Labbé, Itaú CorpBanca's Head of Investor Relations. [Operator Instructions] I must advise you that this conference is being recorded today. I will now pass the floor to your first speaker, Ms. Labbé. Please go ahead.
Thank you. Good morning. Thank you for joining our conference call for our first quarter 2018 financial results.
I would like to remind you that our remarks may include forward-looking information, and our actual results could differ materially from what is discussed in this presentation. I would also like to draw your attention to the financial information included in this management discussion and analysis presentation, which is based in our managerial model that we adjust for nonrecurring events, for the amortization of intangibles arising from business combination and for the tax effects of the hedge of our investment in Colombia. At the same time, we adjust the managerial income statement with additional reclassifications of P&L lines in order to provide a better clarity of our performance.
Please refer to Pages 9 and 10 of our report for further details. Please also know that we have made available [ additional slides ] in our website with the historical managerial results, and we have recently added the balance sheet for the company data with a breakdown by country for Chile and Colombia.
Now Mr. Moura will continue with the presentation.
Thank you, Claudia. Good morning to everyone. Thank you for joining us on this first quarter conference call. Today, we will be going through our results for the first 3 months of 2018, and then I'll be giving you an update on the execution of what we have planned for Chile and Colombia for this year.
So to start, let me move to Slide 3, where we'll begin briefly discussing our macro environment in Chile and in Colombia and how it affects our results. So in terms of our economic activity in Chile, we are experiencing improvement in both investment and private consumptions since the final quarter of last year as well as in the first quarter of 2018. Higher copper prices in high-frequency construction data support a more positive view on investments in growth.
Meanwhile, expansionary monetary policy, low inflation, strengthened exchange and some pickup in private salaried employment will lead into higher private consumption. This is in line with our strategy to better diversify our portfolio with a more detailed credit [ portfolio ] mix and have led to a satisfactory expansion of our consumer book for another consecutive quarter.
When we look at Colombia, we saw less favorable scenario for the short term. With labor markets remaining weak in the first quarter of the year, private consumption is unlikely to recover meaningfully despite lower inflation in a slightly stationary monetary policy. Investment has also remained subdued as some political uncertainty ahead of the presidential elections in May delayed decision making. Nevertheless, we are experiencing -- we're expecting a 2.5% GDP growth in Colombia for 2018.
So moving to Page 4. You can see the evolution of our recurring return on tangible equity, which we adjust for the exclusion of both goodwill and intangibles arising from the business combination as we grew comparably to our peers in our combined pro forma results. Under this view, we ended the first quarter of 2018 with a 10.8% consolidated return and a 13.9% return for our Chilean operations alone. The improvement have been achieved by far -- by better operational trends both in Chile and in Colombia, especially from more normalized credit risk charges, as we'll discuss in more detail ahead.
Going to Page 5. We present the P&L of our bank in Chile for the quarter. Here, I would like to highlight a few things. First, on more positive quarter in terms of commissions, led by insurance sales linked to consumer loans sold via digital channels and by higher wholesale fees. This revenue increase was offset when compared to the previous quarter by lower results from the sales of corporate buildings, a process that continued this year on a smaller scale as we optimize the use of our capital and the centralized change in fewer locations. The main driver of improving the results, both when compared to the first and fourth quarters of last year, was the lower cost of credit and counterparty risks that we have returned to what we can consider a more normalized level.
I would like to highlight as well that starting this quarter, we are providing a new disclosure on our P&L for the effects of rating and collateral changes on the CVA provisions we have for derivatives with our clients. I believe that gives a clearer view of both revenues and counter-party risk adjustments on our [ new material ] P&L.
On Slide 6, we see the evolution of our credit portfolio here in Chile. In the first quarter, we have a flat portfolio when compared to both [ Chile ] standards in March last year. On the other hand, this is a result of the positive dynamics in our commercial versus our mortgages and consumer portfolios, more weighted to the retail segment. While commercial loans are stabilizing but still not growing, what should happen in the upcoming quarters, our mortgages and especially our consumer loan have been growing in the similar pace, which is in line with our strategic goal of rebalancing our portfolio mix. The growth in consumer loans, mainly installment loans, have been favored by the improvements we have made in our digital channels and that we have been discussing with you in previous conference calls.
Moving to Slide 7. We see some detail on our performance on provisions for credit and counterparty risks. After 2 years of important adjustments to our risk exposures on our portfolio as well as concentrations, we see the first quarter of 2018 that reflects a more normalized credit cost behavior. It is always important to mention that we are a more cyclical bank than the average peers due to our portfolio information. But we expect the banks to run a credit cost to loans around 0.80% in Chile, which is similar to what we are seeing in the beginning of this year. This level is higher than historical figures before the merger but significantly lower than what we have experienced in 2016 and 2017.
Going to Slide 8. We see the trends on our main credit quality indicators. We continue to see a comfortable provision for the portfolio with a marginal improvement in the latency range in both our mortgages and consumer portfolios. On the other hand, NPL ratio for our commercial portfolio increased 21 basis points in the quarter, of which 2/3 are explained by student loans, which are -- is classified as part of commercial portfolio in Chile. It's important to mention that credit losses coming from this delinquency are linked since those loans are government guaranteed. As a consequence, we saw a decline on our corporate ratio, which reflects the fact that our provisions are constituting [indiscernible].
Moving to Slide 9. We can discuss our results in the bank in Colombia. In terms of net interest income, we continue to see a positive impact from the lowering of interest rates, which positively affects our banking book, as we have previously discussed with you. This year, the Central Bank has already implemented 2 25 basis point cuts, one by the end of January and another one recently, by the end of April. We currently expect an additional 25 basis points for this year, which should favor our net interest margins marginally.
In the quarter, this was partially offset by lower [indiscernible] favorable market conditions. Similar to what we saw in Chile, a key driver for improved result in Colombia in the quarter was better results from credit risk provisions, reflecting the actions we took to ourselves and addressed all major portfolio exposures. As a result, we see a strong improvement in our bottom line in Colombia, closing in to breakeven to our consolidated bottom line, a trend we expect to sustain for the year under a [ subdued environment ] in the country.
Going to Slide 10. We see that our loan book in Colombia has been flat for the quarter as we continue to adapt our portfolio to improve our profitability going forward. That includes reassessing our exposure to payroll loans in the country based on a risk-adjusted return perspective. In terms of NIM, as a result of what I recently explained, we had reached a 4.3% rate that is in line to the levels seen in 2015 when interest rates sat at a similar level to what we are experiencing today.
Moving to Slide 11. Let's briefly discuss our capital adequacy ratios. At the end of the quarter, our regulatory capital ratio reached 14.3%, above both 120% of the regulatory minimum and the average of our main peers. This represents a 33 basis point decline that is mostly explained by a 5.1% appreciation of the Colombian peso [ traditional ] currency, increasing our cost denominated with weighted assets. It's important to remember that we hedge our equity in Colombia for translation with [indiscernible] is not a factor of consolidated equity bond. Security bond with [indiscernible] accumulates a 2.7% depreciation compared to the Chilean peso. We [indiscernible] bonds in order to keep up to date with our view on the subject.
Our main assumption for the [indiscernible] have not changed. We divest intangible assets and deferred tax assets from our Tier 1 ratio, and we're with the assumption that the incorporation of operation on market risk requirement offset by charges in credit risk ratings. Under this scenario, we estimate our fully loaded 7.3% Basel III Tier 1 capital ratio, which leads to a maximum usage of Q2 instruments of 3.7%, and that leads to an estimated 11% fully loaded total capital ratio under Basel III rules.
Now I would like to give you an update on what we have been developing and the next steps for the bank in the short and medium terms. On Slide 13, as we discussed on our last results conference call, we have 4 main objectives in Chile for 2018. We wanted to keep moving from a transactional bank to a relationship bank for our clients by fully focusing on client satisfaction that leads to better cross-sell and more sustainable results.
We are rolling out several initiatives to enhance the client experience by redesigning and reshaping several of our processes in order to deliver a more improved and better overall experience. Part of that is related to enhancing our digital banking platforms with new developments that I intend share with you in another conference call within this year.
Another objective is completing our technology integration by optimizing and simplifying our satellite [ user ] interfaces. This is going underway according to the schedule that we have and will be completed throughout this year. We are also working on a daily basis on solidifying ItaĂş's culture throughout the organization, which in the end is what keeps our delivery consistent in our strategy and business proposition for the long term.
As for Colombia, we have finished client migrations as expected, and we are working as well to complete the remainder of the technology integration. We've been working on implementing business strategies for the wholesale and retail as well as enhancing with our corporate culture agenda. I believe that we are showing consistency in the right direction for the construction of the bank we want for our clients and shareholders, which should result in gradual and consistent improvements in our results.
Now if you have any questions, I will be happy to answer them.
[Operator Instructions] We will take our first question today from Diego Ciconi from Scotiabank.
I wanted to get your outlook for NIM. For how long do you think that the Central Bank could maintain rates at current levels? I mean, we see that the consensus expectations have inflation within the Central Bank's target. But we are seeing increasing prices of oil. We see that FX has shifted from the improving trend. So I guess my question is, what do you think would be the impact for margins if rates increased from current levels this year? And my second question is for loan growth. We see that for the system, it has finally started to pick up. But you're still struggling with regaining market share. So it also seems like you switched gears and you're now focused more in the consumer segment, whereas the wholesale segment is still not that great. What is your expectation for loan growth in this year? And how do you see the mix at the end of the year?
Thank you for your questions, Diego. The first question on -- is regarding Colombia, right?
No, actually, Chile.
Chile, okay. Now in terms of net interest margin, I think that the expectation that we have for market growth in Chile and in [ what's happening ] in Colombia nowadays, I think it's between the risk appetite that we have with the banking book. So the major situations we saw in the past in net interest margins, especially in Colombia, were due to new policies that were not aligned with what we expect on the risk appetite. Moving forward, I see that -- especially in Chile, what I think is the main driver for net interest margins are not changes, for instance, in policy rates but the [ one ] inflation. We do have structural exposures in assets denominated in [indiscernible] mainly because of the mortgages portfolio, for instance. So as we see a pickup in inflation, I would assume that we have higher margins. Nevertheless, I think that the major impact in the forecast that I have for the bank in terms of mainly moving forward are related to the changes in mix. So if you take look at the numbers that we have on the yields, for instance, that we charge clients and also the cost of funds on the other side, the 2 major variables in calculating the net interest margin, they are on par with what I see in the market. The main difference for us was based on mix. So I think that relates to the second question you have in terms of changing the mix of the bank is what I expect in both Chile and Colombia to be the main driver of NIM and now specifically it's been exposed on monetary policy. On loan growth -- in complementing the second question you have, on loan growth, the expectation we have for the whole portfolio this year is something around 6% to 8%. But what we've been seeing in the first quarter, one is that we are gaining share actually on the consumer market, specifically on installment loans we've been growing more aggressively, and I think as I mentioned before, pretty much aligned with the strategy that we have on mix. Nevertheless, we are still adjusting some exposures we have on the commercial portfolio, especially on the corporate portfolio on both Chile and Colombia. I think that we are on the end of the cycle. As you can see, we are stabilizing a little bit the portfolio that we have. And I think on the next quarters, we will start to see some growth on the corporate side. As we -- I think that we'll finish our process of portfolio alignment, and also I see a pickup in minor investments in Chile. We are going to be more cautious in Colombia [ per the market analysis ] I did before. I don't believe that we are going to gain share in Colombia. I think that there are still some adjustments that we need to do in order to grow. But on the other hand, in Chile, I do expect us to be on par with the market and growing more than the market on the consumer side.
Okay. If I may ask just one more question in Colombia. Can you give us an update on the strategy there and how you expect it to impact the consolidated results going forward? So we see that, that's -- it does not look good in the recent quarters.
No. Actually, I think there is 2 ways of taking a little better. Actually, when I take a look at Colombia, I do see an improvement regarding what we had in 2016 and '17. If you remember, we impacted in Colombia in 3 ways: first, the macro side; second, the market risk because of the interest rate; and third, on credit costs. When I think about the macro side, I think it's a little bit better than we saw in '16 and '17. Nevertheless, I do see an inflection point in Chile that I did not see in Colombia. I think it will take a few more quarters to see an inflection point in Colombia. When I took a look at the market risk, I think that we completely have this under control, and we have adjusted the banking book and policies to reflect our risk appetite in the way that we manage market risk. So we were able to capture some of the market movement that we saw on decreasing interest rate and stabilizing the margins to something that we've seen before. On credit losses, I think that on the corporate side, I think it's a bit analogous in terms of the portfolio, and I think that we are -- the loan book is decent. On the consumer side, we continue to see a deterioration in NPLs that we are addressing with the credit policies. So when I take a look at Colombia, on a marginal basis, I do see that this is getting better. If you take a look at the loan losses in Colombia for 2016 and 2017, we are pretty much at breakeven on Colombia right now. And that's why I think that on a marginal basis, we are doing better. On the strategic front, in order to be where we want in Colombia because at the end of the day, I need to see my consolidated returns in Colombia. I think it's the -- in terms of the business side that we need to see further development this year. So one thing that helps us is that now we are completely integrated in Colombia. So every branch that we have is operating under ItaĂş's brand, with ItaĂş's systems, integrated along with ItaĂş's system. This what we call the [indiscernible] benefit that we have integrated everything. So I have less information on what we see within the bank. We've been doing other things in building the consumer franchise that we need. So we have a new area that we can look at the franchise model that we have been operating in Brazil. But those things take time. I think that's an important message to Colombia. It's hard to revamp our bank, especially with the change in the strategy on the consumer side from night to day. So it's something that we need, I think, a few more quarters along the way in order to show some of the results of the things that we've been doing. But we are comfortable of with the level of risks that we have right now. I think that we are more focused right now in the internal part of the banking, making sure that we integrate the teams, culture, processes, operations, business and everything that I think that we can very much along with that agenda. I think that, one, we need to work on the next few quarters especially, is more and more on the business side and the business strategy, especially on our credit transactions and also on the retail part.
[Operator Instructions] The next question is from Sebastián Gallego from CrediCorp Capital.
I have 2 questions. The first one, in Colombia, once again, just a follow-up on something, and it's related to the NPL on the mortgage segment. We saw our first quarter '18 NPL on the mortgage segment climbing above 4%. Could you comment on the outlook and whether you see this trend improving in the following quarters? Or maybe? Or maybe not? And the second question I would like to ask is related to capital. You're providing a pro forma on your capital ratios, 7.3% in terms of Tier 1. Can you -- I know you have explained [indiscernible], but can you explain once again what's your view on this type of indicator, particularly taking into account that peers in Chile should have a much higher ratio?
Sure. First, let me talk about the NPLs in Colombia. And you're right, we're seeing a deterioration, especially on the mortgages portfolio. I think that it starts as well. When I take a look at the '16 overall in Colombia, in our credit portfolio performance, we've been performing better than the market. But on the -- I would say in the last few months, especially on the mortgage portfolio, I think that we've been performing worse than the market. And the main reason I think they are our loans in terms of -- especially the integration process that we have, as you know, in integrating the bank, we actually have to integrate our processes and also the collection and the overall process that we do, we are also integrating that. So in the process of changing this, I think there are some hiccups in the process, and I think that we're going to stabilize growth by the next quarter. If I take a look at P&L's prospectively, I will be a little bit more cautious. I don't think that we saw the inflection point in Colombia in terms of NPLs getting better. I think they're either going to be stable or they're going to be a little bit worse throughout the next month. Nevertheless, I think that if we take a look at the historical data for Colombia, we're extremely one of the worst riders of NPLs of their best few years. So I think that we are going through some flat basis for the next few quarters, but I will be a little bit cautious in terms of performance getting much better in the near future. But if you take a look at the coverage that we have on the mortgage portfolio, if you take a look at provisions we have, we have modestly 100%, if I'm not mistaken, in terms of coverage for the NPLs that we have on the mortgages, so like that. I think that we are pretty much covered in this portfolio. I think that we did a good job in terms of understanding the risk, understanding the portfolio that we have in covering our basis. On your second question in terms of capital, as I always mentioned, there is still some regulations to go out in both Chile and Colombia in terms of other pursuits. When I take a look at our capital base, as I mentioned, nowadays, our estimate -- and this is estimate because [indiscernible] breakaway there is 2 [indiscernible] regarding some of the deductions that we have last year in risk-weighted assets and how they are impacted. But our best estimate based on public information is that we would have a 7.3%, as we mentioned, Q1. Prospectively, what I had mentioned in several occasions, I see that the bank needs to accumulate some Q1 capital, and it can do so by retaining dividends. So I don't think that we're going to see a payout for ItaĂş CorpBanca on the order of what we've seen on the market as 50%, 60%. I think we'd be much more aligned with what we did in this year and what we did in the past year, which is something around 30% to 40%. If you take a look at the growth in profitability we are estimating and also if we retain the routine of our capital generation, we would arrive in levels higher than that. Our best estimate for Q1 based on Basel III rules in Chile would be something around 8%, 8% to 9%. So I think that we need to be on par of that level, something around 8.5% to 9% to be comfortable. But then again, I think that we need to deepen our understanding and wait for more information regarding how the countercyclical growth, for instance, will be used in Chile, what are the basic rules that are going to be applied because nowadays, we have only ranges. But we are comfortable with the capital position that we have. We do not foresee hour-by-hour estimate and a need for raising capital that's for Tier 1. I think that probably, we are going to issue additional Tier 1 as we have more -- clearer view in what are the requirements and how we are going to use them in Chile. We do not have that clear nowadays for evaluation. But I think it makes sense for us to issue additional. I think that we are okay with the position of Q2 that we'll now have. So I think that we are comfortable, but my assumptions behind it is the convergency on profitability. So I think that we may have a challenge, and I think the first quarter shows that we are on the right direction of generating profits, accumulating capital in order to meet the regulatory requirements and also our risk appetite in terms of our capital structure.
Our next question today is from Alonso AramburĂş from BTG.
Gabriel, I mean, looking at the quarter, obviously, it was a very good result compared to what the bank had been reporting in recent quarters. Do you think this level of profitability or of net income around CLP 50 billion, do you think that's sort of the level that we should expect for the next coming quarters with the ROE around the levels we saw in the first quarter? And then my second question, just going back to a capital question that was previously asked. I mean, you mentioned this, but you don't see capital, I guess, in the short term or the medium term creating some issues for growth. You clearly have enough capital even though you haven't seen all the regulations that have come out yet for you to grow at the rates that you want to grow at Chile.
First, when I take a look at the results of the bank, we don't have specific guidance for short term, especially because we are still stabilizing the bank. What I can tell you is that I think that we arrived at the inflection point of our results, especially by stabilizing the credit costs. As I always mentioned to you is that our portfolio, especially the corporate portfolio, is more cyclical than our peers. So the hard part is to make short-term projections because we still don't have bank status on business as usual. But I think that's something in the ballpark that we have. I think it makes sense. I think what's more important within that, I think it's important to see the convergency on the medium term. The guidance specifically that we have for the market is that we are aiming to have a return on tangible equity around 14% to 16%. That's the guidance that I feel comfortable with. I think we have seen some difference along the way based on the portfolio, but we didn't see the bank stabilizing its results. And I think they are pretty much aligned with what we see on the first quarter, on the ballpark to that. On your capital questions, with the projections that we have, Alonso, we grow the portfolio. We grow the profit. I think that it's very hard for a bank on business as usual, either in Chile, Colombia or in Brazil, not to grow profit -- growing profits by not growing the credit portfolio. So we do see our portfolio growing materially through that. I think that the market will grow something around the 6% to 8% this year. And on the long term, I still think that the market has capacity of growing between 8% to 10%. I think that's comparable to the -- especially the [indiscernible] growth, GDP growth and credit growth in Chile, and it make sense for us to grow at the same pace. But I think that it also -- we can grow at that pace. We grow as a bank at that pace but changing the profitability of the bank. As you know, we are very disciplined on capital, and I think that we have to finance our growth in terms of our capital. So if you ask me if it makes sense to grow with lower profitability just to be on par with the market, I don't think so. In fact, a little bit of the charges that we book on the commercial portfolio will be more focused on rate, but especially, it should be aligned with our capital needs. So as we said, all the scenarios that we have for Basel III, for capital, for dividend, these are aligned with some assumptions. We are growing on par with the market on the numbers that I mentioned to you but with a change in mix around where we are going more on the consumer side. And also, we are picking up. Our return on assets should grow, and it does not have the profitability level that we mentioned on the first question that you asked. By combining those 2 things, I think that we are comfortable moving the capital positions that we have. I think that we are below what -- our peers in Chile, so we need to accumulate some of the capital. And that's why I think that we have a different payout policy. It's aligned with that because at the end of the day, we don't have a specific dividend payout. We have a specific capital structure that we need to have, and that is a consequence to that. And I think that with all of these and other [ issues ], we will take a look at the numbers.
Your next question comes from the line of Jorg Friedemann from Citibank.
I have 2 questions. First, just I'd like to understand a bit better, how is your strategy on the funding side? I remember that you're trying to foster the path of improving cost of funding, gathering more consumer deposits regarding this strategy. So how much better can you do on that regard also to improve net interest margins from a cost of funding perspective? And my second question, I noted in your release that you stabilized the number of branches of your consumer finance division in Chile, Banco Condell, so just wondering if this is a process that you believe is already completed? Or what are the next steps there?
First of all, on your question about SMEs in the consumer side, I think at the end of the day, one thing that I mentioned during the call, building more of a relationship bank than a transactional bank. I think that's a huge part of what we are doing here. When I take a look at, for instance, our main benchmarking where we base our management model and the way that we do things is from ItaĂş Unibanco, when you take a look at the ItaĂş Unibanco in terms of the relationship with clients and also the business structure, especially on the fee side, on the service side, it's a bank that gears towards services. And if you take a look at the value creation of the bank, that's a very important part of it. We have the same this year. We were a transactional bank. It means that we are mostly focused on credit, especially on capital market credit. I think it's really hard to create value. At the end of the day, the arbitrage between cost of equity, cost of funds and the cost of credit is an equation that holds for every single bank. So everyone converges to its cost of equity. That's why I think on the credit part, it's really hard to create value. At the end of the day, we drive our credit to at least your cost of equity. Having said that, the only way to have sustainable results in our opinion is to have a more relationship-focused bank, especially on the services, and integrate ourselves operationally with our clients. And we are firm believers on operational value. So that adds up to cash management product for corporation, for instance. If we take a look at the current accounted projects in Chile, 2/3 of these are from corporations and companies in Chile and just 1/3 from major vehicles. Having said that, I think what we have a huge opportunity here in terms of the clients that we already have in the bank. And when we take a look at the cost of funding that we had for current account deposits in each, at the end of the day, it's just a denominator of how big is your relationship with your client. It doesn't mean we are pursuing actively . I think in terms of changing the mix that we have, it will affect our net interest margin. And especially, changing our fee-based approach, more focused on services, it's something that we are really already pursuing that on the consumer side. And I think that we saw some important numbers, especially when the insurance first crossed ItaĂş and we did it on this quarter and something that we can deepen within our wholesale operations. So that's key to what we're doing. In terms of Condell, I think the complementary strategy that we have, it is a segment that is starting to show growth here in Chile. I think that we are well positioned within this segment. I think that we need to be more efficient at pretty much every business that we now have. I need to gain [ capital ] in that, and I think that the digital transition process that we are already pursuing on our bank's business, we need to do the same way with Condell. We expect to see more and more of those synergies that we would have between the business. We don't have any specific announcements to achieve these on the Condell business, but it's something that we are deepening our understanding. We like the consumer part of the business. It's something that I think that we are very active in Brazil, and I think there are good opportunities here as we have the right distribution model that is cost-effective. And this is something that we need to further improve in the year.
At this time, there are no further questions. We'll hand the call back to management for closing remarks.
Fantastic. Thank you so much for your questions. I think that we had a very good first quarter. As I mentioned, one thing that I think is key for us is a little bit of the time line that we'll make in Chile. First was the year of merger. Second was the year of transition. And I think that we are in the third year, and we always mention to you that it's going to be a 3-year process. I think we're around the consolidation year for us. So I do see a tipping point in terms of the direction that we are going. I do see things fitting to our plans. But we do not construct a bank from day to night. So there are still challenges in front of us, but I think that everyone is optimistic that we are taking. So thank you so much for your questions, and I will see you on our next conference call.
Thank you very much, sir. Ladies and gentlemen, that does include the conference for today. Thank you all for participating. You may now disconnect your lines.