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Earnings Call Analysis
Summary
Q1-2023
The company experienced a significant 74% decrease in financial margins due to lower inflation but doesn't foresee further substantial impacts. Commissions and fees grew by 4.2% year-over-year, largely from higher Financial Advisory and credit-related fees. An anticipated partnership with Cardif is expected to enhance insurance brokerage revenues. Despite a rise in non-performing loan (NPL) ratios and a slight coverage decrease, the firm maintains strong credit management, with provisions within their 1.1% to 1.5% guidance. Cost containment efforts showcased a normal quarter for noninterest expenses after a high Q4, enhancing efficiency. In Colombia, fewer branches and staff reductions illustrate continuous cost improvements. The company's capital and liquidity ratios remain competitive with industry peers. Looking ahead, brighter quarters are expected as credit cost pressures ease, market margins recover, Cardif's partnership influences fees, and efficiency strategies progress.
Thank you for standing by. At this time, I would like to welcome everyone to the Banco ItaĂş Chile First Quarter 2023 Financial Results Conference Call and Webcast. [Operator Instructions] Thank you.
Rodrigo Couto, CFO. You may begin your conference.
Good morning. Thank you for joining our conference call for the first quarter of 2023. I would like to remind you that our remarks may include forward-looking information and that our actual results could differ materially from what I discussed in this presentation. I would also like to draw your attention for the financial information included in the management discussion and analysis presentation, which is based on our managerial model in which we adjust for nonrecurring events and apply managerial criteria to disclose our income statement. Please remember that since the first quarter of 2019, we are presenting our income statement in the same manner as we do in service. This managerial financial model reflects how we measure, analyze and discuss financial results by segregating long commercial performance; two, financial risk management, three credit risk management; and four, cost efficiency. We believe that this for representing our results will give you a clearer and better view of our performance from these different perspectives. Please refer to pages 9 to 12 of our MD&A report for further details.
Now our CEO, Gabriel Moura, will continue with the presentation.
Thank you, Rodrigo. Good morning, everyone. Thank you for joining us for this first quarter of 2023 Conference Call. Today, we will update you on our progress implementing our strategy as well as present the highlights of our first quarter results. Starting on Slide 3. We are proud to tell you that from now on, the name of our bank is ItaĂş Chile. We have completed all the necessary formalities as of March 28, 2023. And in connection with this change, the ideation code of ItaĂş Chile shares in the Bolsa Justin cargo, changes to ItaĂş Chile as of April 24, 2023.
In the tiger symbol for the American depository shares of Bank ItaĂş Chile traded on the New York Stock Exchange, changes from TCB to ITCL effective from May 1, 2023. On Slide 4, we present the new composition of our Board of Directors, which was elected in the General Shareholders' Meeting of Banco ItaĂş Chile held on April 20, 2023. A Consequently, the following 7 principal members and 1 alternate member were appointed in accordance with the bank's bylaws. Board members, Mr. Pedro Samhan and Mr. Luis Octavio Bofill were appointed as independent directors.
On the next page, #5, we show the reverse stock split proposal. We will group our shares by decreasing the number of shares of the bank capital we divided in a ratio of 4,500:1, while maintaining the amount of the banks subscribed in paying capital. Our goal with this process is to make our share price more comparable with fiscal share prices in the market, improving user friendless for investors. There will be no financial impact for investors, and no investors will cease to be a shareholder as a result of this process. The cost to the bank of compensating investors who own fractions to shares after the reverse on split are negligible. The role of the stock -- the reverse tax split are detailed in the minutes of the January 29 extraordinary shareholder meeting that approved it. We expect to complete this process by the end of May 2023.
Moving on to Slide 6, under our customer centricity pillar. We highlight one of our initiatives to help customers to prevent electronic fraud. In this case, and because of our focus is on customer first and foremost, we are targeting banking clients and nonclients a lot. We are creating content for the digital security of our customers because protecting our personal and financial information is everyone's responsibility. Our customer focus has been recognized by our clients, which made us the most recommended bank by individuals and companies in Chile.
On Slide 7, we are proud to announce that our happy in a partnership received the iF Design Award in recognition of excellence in marketing design -- we won the award for the launch campaign of our Rapid card credit cards in the communication category. If international from Germany is one with the world's oldest independent design organization. And if design award is one of the most prices in the world as a hallmark of design excellence.
Moving on to Slide 8. We are also happy to share that we were recognized by Morningstar as the best asset managers for fixed income in Chile in 2023. We also achieved the first position in the fixed and income mutual funds according to the salmon awards. This achievement demonstrates our commitment to make the best products and have the best performance for our clients while also offering ample choice through our open investment architecture.
Now let's move on to Slide 9, where we show the latest functionalities of our ItaĂş mobile app. We have an accelerated deployment of new functionalities through our agile squads, which are continuously working on improving our app experience. We continue to rank #1 in customer satisfaction and continue to develop new functionality to find different ways to make life easier for our customers.
On Slide 10, we show that we are the bank with the largest social media following Chile. We have worked on setting trends and developing communities in terms of content that is of interest to our current and potential customers through different platforms, such as LinkedIn, Instagram, YouTube and TikTok. This approach has clearly worked as we are #1 across all those platforms.
Let's now move to Slide 11, where we show that we are one of the 10 best companies to work for in Chile, according to -- Great Place To Work. Therefore, we have achieved leadership in employee satisfaction as well as in customer satisfaction as the most recommended bank by customers. The progress we made in customer satisfaction and employee satisfaction as well as in our financial performance are certainly not a coincidence. It is a result of a lot of hard work put in each of those dimensions that reinforce one another of each as it improves. It took us a long time and effort to create this positive momentum, and we will keep pushing forward in building upon it.
On Slide 12, we will address 2 ESG topics. On the chart on the left-hand side, we show that we have managed to systematically decrease our carbon emission footprint. In 2022, this reduction reached 40% as a result of different initiatives, such as switching to 100% renewable energy. Despite this accomplishment, our ambition is greater, and we are committed to further reducing our carbon footprint in the next 7 years. Our goal by 2030 is to reduce the impact of our nonfinancial carbon emissions by 42% according to science-based target initiatives.
Moving towards diversity and inclusion. I'm pleased to announce that we became the first private bank in Chile to commit to supporting United Nations women's empowerment principles, which will guide our gender equity strategy going forward.
Now moving to Slide 13, where we present financial highlights for the first quarter of 2023. Our consolidated net income reached PHP 78.8 billion, decreasing 28.9% year-over-year. Net income in Chile decreased by 24.6% to COP 84.3 billion. Consolidated financial margin with clients grew by 24.7%, boosted by high volumes, especially of assets and liability portfolios as well as high average interest rates in both Chile and also in Colombia. Consolidated fee income grew by 6.9%, primarily due to higher results in financial advisory services, development in Chile and Colombia as well as higher credit-related fees. Consolidated noninterest expense increased 6.6% year-over-year as a result of a higher inflation observed during the previous year, leaving the efficiency ratio basically stable at 49.1%. Consolidated cost of credit increased by 114.7% along the low base recorded in the first months of the year in 2022, which was positively impacted mainly by the pension fund withdrawal in Chile.
When we look at our credit portfolios, we grew at 12.5% in Chile and 0.7% in Colombia in constant currency compared to March 2022 with consumer and mortgage loans in Chile and wholesale in lending in Colombia as our biggest contributors. This first quarter results represent a start our year in Chile according to our plan. As set to the financial margin with the market, as you will see later, which is in line that -- which is a line that is a little bit less predictable. The cost of credit came in higher than expected at this point of the cycle, but within our guidance. Colombia came a little weaker than expected as a result of a more difficult market scenario there. As a result, our consolidated return on tangible equity, which was 11.54%, was below our medium-term target of a range between 13% and 14%. But should recover in the next quarter as the pressure on cost of credit subsides, financial margins with the market improves from this low base, and we begin to see the impact on fees with our alliance on [ Carbinsurance ].
Moving to Slide 14. We can notice that our financial margin with clients in Chile decreased by 5.9% during this quarter and increased 23.3% over the previous year. The decrease relative to the fourth quarter has to do with a couple of seasonal effects, namely the low number of calendar days in this first quarter and the sale of student loans that positively impacted the Q4. Another factor was the migration of demand deposits to time deposits, which is an industry-wide trend related to higher interest rates.
On Slide 15, we can see that in the first quarter of 2023, our financial margins with the market was CLP 12.4 billion, which is a 74% decrease from the fourth quarter -- the decrease is largely explained by 1.2 percentage points lower inflation during this period. We have been reducing our inflation exposure as inflation falls. So we do not expect further inflation decreases to significantly impact financial margins with the market.
On Slide 16, our pension is on fees, which grew 4.2% year-over-year, even though they fell slightly relative to last quarter. The year-over-year growth was driven by higher financial advisory fees as well as credit-related fees. Insurance brokerage is one of the lines where we expect a big boost from our exclusive partnership with Target, which will allow us to improve the penetration of noncredit-related insurance products.
Here on Slide 17, we present our major credit risk indicators in Chile. In the first quarter, the cost of credit was CLP 76.5 billion, which represents an annualized rate of cost of credit to the credit portfolio of 1.4%, which is within our guidance of 1.1% to 1.5%. The total NPL ratio increased by 17 basis points and coverage declined slightly but remained high at 156%. We are fully focused on managing the point -- at this point of the credit cycle -- having made the necessary adjustments to the concession and pricing policies as well as boosted collection efforts. We believe we have the right strategy and execution capital capabilities for this point of the credit cycle as well as prudent level of provisions, including additional provisions.
Here on Slide 18, we show noninterest expenses for the quarter, which came in at a normal level after the seasonally high Q4 of 2022 and the efficiency ratio fell back to 42.9% in line of last year's. In accordance with our strategy and long-term commitment to efficiency, our noninterest expenses grew significantly below inflation over the last 12 months. The graph on the right side of the page shows that our headcount fell by 8% between 2019 and 2022, even while we have almost 300 people dedicated to IT and digital business development. Over that period, our efficiency ratio improved by 12 percentage points. That long-term view shows that we not only made significant progress in envisions but also relocated the bank resources towards technology and digital.
Let's move to Slide 19 on Colombia. Where we saw a slight improvement in profits and returns relative to last quarter despite a more difficult macro environment. Our improvement team in Colombia continues to push forward with the transformation while managing the bank through a more challenging stage in the cycle. Progress continues to be most visible on the cost side, where we closed in the first quarter with 17 fewer branches as well as a reduction of 12% in headcount year-over-year.
On Slide 20, we show that our capital and liquidity ratios are pretty much in line with those of our main competitors -- that will complement the picture that we have been showing of the convergency of returns with those of the industry. That is to say in the critical dimensions of profitability, capitalization and liquidity and may I add credit quality as well. Our position is comparable to that of our main peers, which again highlights the convergence in financial strength and performance that we have achieved.
On Slide 21, we recap the key messages for this presentation. We started the year with a consolidated return on tax-law equity of 11.4% and 13.9% return on tangible equity in Chile. While returns fell relative to prior quarters, which was expected, results were broadly in line with our plans with the exception of financial margins with the market, which is a little bit less predictable. We expect that the coming quarters will be stronger as cost of credit pressures subside -- financial margin with the market improves from this quarter's low base, and we begin to see the impact of our alliance with Cardif on fee income. We continue to make progress across multiple fronts, both in the external dimensions of customer satisfaction, asset management performance and ESG as well as in key internal dimensions of employee satisfaction.
We remain focused on managing through current economic cycle, having adjusted credit concessions and pricing policy with double focus on collections as well as manage our structure market risk exposures to adjust sensitivity to interest rates and inflation. We will continue to actively manage our business as the cycle in folds and new information comes in. Finally, we have achieved convergence with our main competitors, not only in returns, but also in financial strength more broadly as our capital and liquidity ratios are strong in line with those of our peers.
With this, we conclude the presentation that we have for you today, and we would gladly take any questions that you might have.
[Operator Instructions] Your first question is from Juan Recalde of Scotiabank.
My first question is related to the NPL ratios. So we have seen a continued increase. And I wanted to ask where do you think that we are in the cycle and whether you expect further increases? And when can we see NPLs peaking in -- both in Chile and Colombia.
I think that perhaps is the greatest question this here is about the NPL cycle. As we have predicted, we -- in the last conference call, we talked about this is that we would see a first quarter more pressured in NPLs. We still think that we are mid-cycle. I don't think that we are at the end of the cycle of a more tight credit market. Perhaps as we see -- what are the leading indicators, let's put it that way, that we will see a convergence to NPL normalized levels. I think we still need to see lower interest rates than we see right now.
So perhaps at the second semester of this year, we're going to see the start of an easening cycle in monetary policy in Chile and perhaps in Colombia, I think it's too early to say that in Colombia. So I think NPLs should rise a little bit more in Colombia than we are seeing right now. In Chile at a margin, we see better numbers.
But I think that the easing cycle and lower inflation, lower interest rates will have a higher impact to a lower level of NPLs. It's also important to see that the convergence that we are seeing in or levels that we saw, at least in our case, similar to those in 2019. So I think there is also a meaning conversion effect of NPLs for this cycle. But we are still waiting incorporating information in our models in order to have a clearer view of the end of the cycle.
And the second, I have a follow-up, but related to financial margin with the market. You -- I think that you have mentioned that the expectation is for this line to improve. But I wanted to ask you, particularly about the Colombian operations -- do you think that we can see an improvement there.
I think that we have seen negative financial margin with the market of more than 20 billion in the past couple of quarters. So my question there is how do you expect this to evolve? And how is this impacted by the rates in Colombia because they were right last week. So I'm just trying to understand that.
Sure. I think in terms of volatility, that's the line that we also predicted will have the most impact this year. As you know, clearly, the market and us as well manage the banking book more in real terms. So it is a combination of inflation and also with interest rates. And because we reduced our exposure to inflation, we think that we have pretty much our balance sheet covered here in Chile for the volatility of the next cycle.
In Colombia, we also have a very small exposure to interest rates. But because of the shift in interest rates is high in Colombia, we are marginally affected there. All the mark-to-market impact on the balance sheet is very small compared to our capital -- so it's less than 30 basis points, the impact on full mark to market. Nevertheless, on margins, we are going to see this year more pressure in terms of financial margins with the market. I don't think it is that different from the expectations that we have. We were waiting for Colombia to signal the end of the monetary tightening process. I think that the last meeting of the Central Bank put it a little bit on those terms.
But we need to see an incorporates information throughout time. What we are doing in terms of financial margins with markets is that we are being very conservative since last year. So if you take a look at the exposures we have in interest rates and inflation, both in Chile and Colombia, we reduced our exposure, especially predicting this convergence in monetary policy. So it is according to plan, but it is a headwind for us.
Your next question is a web question from Daniel Mora.
I know that you do not provide a [ rota ] but the current figure of 11.4% is well before below the long-term target of 13% to 14%. From here, where should we observe the improvements to reach the long-term goal? Will it be higher financial margin with clients, fees, better cost control, the operations in Colombia.
The main guidance that we always talked about is the guidance that we have for Chile of a return on tangible equity between 14% and 16%. And we also said that the operation in Colombia normally dilute us between 2% and 1% of the results. That's why we were talking about between 13% and 14% for the consolidated. If you separate the 2 discussions in Chile, we had a return of 13.9%.
So I would say mainly that we are in line with what we expected for our return in Chile. So it's within the range of 14% to 16%. What I think is taking a little bit longer as far as in Colombia. That's why you see the difference between the consolidated and in Chile. And because of the Marcus cycle in Colombia is more challenged than we predicted for the first quarter.
So I think that we are still confident in Colombia with everything that we did in the bank, the transformation that we had in terms of risk management as well, I think that we are well prepared for the cycle in Colombia. If you take a look at the results of the banking industry in Colombia, especially some of the banks were negative in the first quarter in Colombia. So compared to the industry, I think that we are sailing through a more challenging cycle here.
Nevertheless, I think it's a little bit worse than our expectations, but we continue to push forward on this. So in Chile, we are within the range, and we expect to be within the range this year. In Colombia, is still more volatile and pet dependence for us to have a less dilution of our return in Chile on a consolidated basis.
As a follow-up from Daniel Mora, I saw that the U.S. net exposure is practically 0. What would be the effect of this in the upcoming quarters, considering the decrease in inflation.
Daniel. As you know, we manage interest rates and inflation in an active way in our balance sheet. So last year, we started the process of decreasing exposure that we had in interest rates and also on inflation, especially because we saw a more tightening scenario for monetary policy in all the countries that we operate. In Chile and nowadays, we have a lower exposure to interest rates and also a lower exposure to inflation.
According to the benchmark -- the internal benchmarks that we have to the industry compared to our capital, I think that we are the bank with the lowest exposure to interest rates and also to inflation. That's the active risk management that we do for this cycle in order to protect our balance sheet. So what we expect is that we increased the accrual part of our banking book, and we are less exposed to volatile movements in interest rates and also inflation.
So as we hedged our exposure to inflation more, we are somehow hedging in a certain level of inflation that is independent of the month-to-month changes in inflation. I think that we are hedged in the number that we are very comfortable with. And then again, we are managing through the cycle. In Colombia, we did the same last year. The exposure that we had in interest rates in Colombia in the banking book was very low compared to historical level, it continues to be that way.
And this is something that we are used to. That's, I think, the main advantage of managing banks in Brazil, in Chile, in Colombia, Peru, Paraguay, Uruguay, Argentina, is that we are very used to movements in interest rates. And that's why we are very active in risk management, and I think that we are capable of defending our margins in the banking book very actively on the left, I would say, 18 months.
We have no further questions at this time.
Fantastic. Thank you so much for your time. As always, Rodrigo and I are available for any questions or follow-ups that you might have, and we'll see you next quarter. Take care.
This concludes today's conference call. Thank you for your participation. You may now disconnect.