Banco Itau Chile

SGO:ITAUCL

Earnings Call Transcript 2018-Q2

[Operator]

Thank you for standing by, ladies and gentlemen, and welcome to the Itaú CorpBanca conference call on the second 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, the conference is being recorded today.

We now pass the floor to one of your speaker, to Ms. Claudia Labbé. Please go ahead, ma'am.

[Claudia Montevecchi, executive]

Good morning. Thank you for joining our conference call for our second 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 for our reports for further details.

Now Mr. Moura will continue with the presentation.

[Gabriel De Moura, executive]

Thank you, Claudia. Good morning, everyone. Thank you for joining us for the second quarter conference call. Today, we'll be going through our results for the second quarter of this year, then I'll be giving you an update on our retail strategy. And finally, we will review once again the steps we have planned for the year and what we have delivered so far.

Let's start -- to start, let's move to Slide 3, where we will briefly be discussing our view on the market scenario for both countries.

So in Chile, we are seeing an important recovery from both sectors, and that is going at a faster pace than we initially expected. Confidence is up, copper prices are still elevated, inflation is low and monetary policies to expansionary.

As a consequence, we have adjusted our economic projections to a GDP growth of 3.8% this year, up from the 3.6% we have on our previous conference call. In the quarter, durable consumption continued to be a further driver of activity, while service consumption picked up. Construction investment is back into positive territory for the first time since the first quarter of 2016.

This increasing activity, together with some advancements in the implementation of our retail strategy, is helping to drive a satisfactory expansion of our consumer loan book for another consecutive quarter, in line with our strategy to better diversify our portfolio.

We believe the Central Bank would start its monetary policy normalization process at the end of this year rather than the early 2019, as expected until recently. Next year, we still expect 4 rate hikes, taking the policy rate from 3.75% to -- from 3.5% we had previously.

When we look at Colombia, we see recovering industrial production, retail sales and consumer confidence. We see inflation stabilized slightly above the 3% target, which diminishes the appeal for additional monetary easing. We believe that the Central Bank will likely maintain a slightly expansionary interest rate for the time being, as it continues to elevate the activity recovery and inflation outlook. With political uncertainty cleared and oil prices rebounding, confidence levels are recovering, and we now see consumers holding an optimistic outlook following a 27-month pessimistic spell.

The recovery in the labor market on the other hand is lagging this confidence and activity rebound. Self-employment is currently key job creator, and so for the consumption recovery to persist, we need to see some improvements in the labor market dynamics. In this context, we are expecting a 2.5% GDP expansion for 2018, with risk tilted on the upside.

Going to the next slide, we show the reconciliation between our accounting and managerial returns. We ended the second quarter with CLP 57.9 billion accounting net income and with a CLP 100.7 billion for the first semester of 2018. Adjusting for nonrecurring events, our managerial recurring net income reached CLP 64.9 billion in the quarter, an increase of 31% from the second quarter of 2017 and a total of CLP 115 billion in the semester, which represent a 52% increase when compared to last year. We will review these results in more detail ahead.

Please remember that a more detailed discussions on this managerial adjustments that we made for better and more comparable information can be found in our MD&A report published on our Investment -- or Investor Relation website.

Moving to Page 5. We can see the evolution of our managerial return -- recurring return on tangible asset. Under this view, we invested in the second quarter of 2018 with a 13.7% consolidated net return and a 16.9% return from our Chilean operations alone. These are the highest returns we have presented since Legal Day One, an important milestone in this merger process.

If we look back on what we set out to do a couple of years ago, we set out a 3-year plan to merge and to build a profitable and sustainable bank, leading here and in Colombia. The year of 2016 was centered on the implementation of the merger, building our management team, corporate governance and risk management framework as well as strengthening our balance sheet and our liquidity to provide the basis for the construction of our project.

Last year was what we consider a transition year here in Chile, completing our retail migration and client segmentation, initiating our rollout of our digital banking initiatives and helping resume business growth in retail.

During last year, we also introduced the Itaú brand in Colombian retail market and started migrating clients to a single core system. This year of 2018 has been represented on what we consider a construction year for the bank in Chile, where we are already completing technological integration, while advancing with our digital agenda, improving our processes, digital offer and time-to-market, while centering our focus on client satisfaction.

In Colombia, where the plan moves basically with a 12-month delay in comparison to Chile, we are on our transition year and have concluded all of our client migration this semester as planned.

While Colombia is showing a bottom line neutral performance, as we expected this year, coming from losses on the past 2 years, Chile is performing on track to deliver the 16% to 18% sustainable result, a return that we set out to achieve. We still have a lot of work ahead, but I think this year's returns are an indication that we are on track. Now moving on the presentation, we will have a look in more detail at these results.

On Page 6, we have the P&L for the Chilean operation. Here, we can see a positive trend in terms of the operating revenues, despite some lower commissions when compared to last quarter due to [indiscernible] wholesale [indiscernible]. In terms of other operating income, we see a lower result when compared to previous quarter due to less contribution from the sale of corporate offices and higher operational losses recorded in the quarter.

Overall, revenue trends, especially in the retail segment, are showing a better performance. On the cost of credit risk side, we continue to see a positive trend, both on retail and wholesale, although the quarter was affected by the restructuring of some credits. These impacts on loan loss provisions was compensated by [indiscernible] in collateralized credit and credit value adjustments as well as methodology improvements.

Looking at this first 6 months , we see [indiscernible] trend in revenues, while an underlying improvement in the contribution from our retail business. We see a more stable and normalized cost of credit, and operating expense has grown in line with what we planned. Overall, I believe our results are starting to reflect a lot of the efforts we have taken on the last -- on the past year since Legal Day One.

If we move to Slide 7, we can see the evolution of our credit portfolio here in Chile. We're still growing below the market in terms of the overall portfolio as it reflects 2 different dynamics. First, on the commercial loan side, where we are still seeing implications of our effort to improve diversification, reduce certain exposures and improve risk-adjusted returns. We started to resume some growth, but portfolio adjustments we set out to do still leaves us lagging behind in the overall market.

The second side of this equation is our performance in retail, particularly on consumer loans. Here, for the fifth consecutive quarter, we're showing growth in market share, growing at a pace that is over 2x that of the overall market. Part of this is catching up to what we could be seeing as our fair market share, but it also shows the results of what we accomplished so far and the implementation of our strategy for a segment that are growing the sale more later on.

Moving to Slide 8. We see some more detail in our -- on our performance on provisions for credit and counterparty risks. Here, as I mentioned, we continue to see what I think it is, a more normalized credit cost behavior, both on the retail and in the wholesale side. As I mentioned in previous calls we held, we expect the bank to run on a level of credit cost to loan of around 70 to 90 basis points in the medium term, just as what we have seen this year so far.

Going to Slide 9, we see the trends on our main credit quality indicators. We continue to see a competitive provision portfolio with a marginal improvement in delinquency rates in all of our portfolios. If we look at the NPL operation metrics, which better isolates the effect of portfolio growth, we are still -- we are also presenting an important improvement for the second consecutive quarter, as detailed in our MD&A report.

Moving to Slide 10, we will discuss our results for the bank in Colombia. So results in Colombia so far in the year have been neutral to our consolidated net income, as we expected and mentioned previously. In Colombia, we just recently finished client migration and technological integration and are still turning portfolio mix to reduce concentration and improve profitability, while operating a still slow market environment.

In turn, results reflect a still slow dynamic on client's revenues. This is compensated by strong results on the banking book as interest rates decline reversed back some of the losses we recorded during the past monetary tightening cycle. It's also compensated by lower cost -- credit costs that reflects in part all of the effort we took to review exposures and decrease volatility on this line.

And lastly, it's compensated by lower hedging costs that are also a product of low interest rates, narrowing the gap with the Chilean policy rates.

Overall, in Colombia, we are seeing results that reflect the transition period, coming from 2 consecutive year of losses in face of the important balance sheet adjustments and challenging macroeconomic environment. We now are transition this year to what we expect to be incremental positive contributions to our consolidated results.

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 the 120% of our regulatory minimum and the average of our main peers. This ratio is basically flat when compared to the first quarter as the effect of the appreciation of the Colombian pesos in our cost-denominated risk assets was compensated by better core capital generation.

Looking at Basel III equivalence in order to keep you up to date with our view on the subject, our main assumptions for the impact of the upcoming regulation have not changed from what we've been communicating to you over the last -- past quarters. We are divesting intangible assets and net deferred tax assets from our Tier 1 ratio and work with the assumption that the incorporation of operational and market risk requirements are offset by changes in credit risk ratings. Under this scenario, we estimate a fully loaded 7.3% Basel III Tier 1 capital ratio, which leads to a maximum usage of Tier 2 instrument of 3.6% and a estimated 10.9% fully loaded capital ratio. We'll continually keep you posted on future developments on this topic and how we assess the impacts in our capital plan.

So now, moving along with the presentation, I'd like to give you an update on what we've been doing in our retail business. Starting with Slide 13, let's talk about our client segmentation and model for retail. Alongside the migration of legacy CorpBanca clients to Itaú core system, we fully implemented the segmentation of our client base in order to optimize service level per client based on current relationship and potential revenue. This is one of the main pillars of our retail strategy, and it allow us better to direct our efforts and investments, maximizing client satisfaction and profitability for the bank. Currently, we have 22 dedicated personal bank branches with defined regional identity in a segment with a decent value proposition from the regular retail segment with lower account loan depreciated services, offers and benefits.

Moving to Slide 14, I'd like to talk a bit about our digital banking efforts and how it reflects us on client experience. Since the merger, we've been working on the construction of a stronger and more agile technological platform as well as redesigning process end-to-end in order to allow for our implementing of better digital experience for our customers, which is based on a more complete digital offer and a more fluid and seamless digital experience.

One of the benefits of this merger is exactly the fact that it obligates us to truly review our policies and processes we have, and we are doing it with a focus on allowing for a modern and client-centered culture inside the bank. Some results from this process that we are already being able to roll out to our customers are reflected on the improvements we've been doing on the look and feel of our digital channels.

New services and offers on our digital platform, we still have long pipeline of enhancements to come and the revision of some benefits we could offer -- we offer to our clients with a focus on increasing transactionality and relationship.

So moving to Slide 15, we show how this strategy starts to reflect our clients' interaction with the bank. Looking at consumer installment loans as an example, we can see that improvement in our digital banking platform in offer has led to roughly 80% of our origination coming from digital channel, both banking and websites. This is a significant increase, though coming from a low base, to a very satisfactory level; a more efficient offer for both the client and the bank that has driven to an increasing 93 basis points in share over the last -- the past 12 months.

Now moving to the last part of the agenda before our Q&A, let's go through once again on the steps that we set out for this year. So here on Slide 17, we list the main objectives we set for 2018 on our fourth quarter last year conference call. In Chile, as I set out to show you, we are advancing the integration and digital agenda. We have a pipeline of initiatives to enhance the client experience, which will help increasing client relationship and satisfaction. We're also working on a daily basis on solidifying Itaú's culture throughout the organization, which is, in the end, what keeps our deliveries consistent with our strategy and business proposition. And we are also working to keep presenting you better and sustainable results.

In Colombia, we have finished both client migrations and technological integration and working on implementing business strategies for the wholesale and retail as well as advancing with our corporate [indiscernible]. I believe that this quarter's results represent an important milestone in this merger, an indicator that we are moving into the right direction. Now if you would like, we will open this call for answering your questions.

[Operator]

[Operator Instructions] And your first question from Scotiabank comes from the line of Jason Mollin.

[Jason Mollin, analyst]

My question is about the returns that you're reporting. Indeed, we were impressed with the double-digit ROEs and the highest level we've seen in some time, overall. We did see, and part of the reason, at least from what we're looking at, for the real improvement, came from a very low effective tax rate of 5.7%. And in fact, when you -- if you try to normalize that in -- for the Chilean operations, I think it would be lower. And obviously, you have a tax reversal in Colombia. I guess, it's related to the losses. But if you can talk to us about returns with a normalized tax rate, what you think on that. And if you can be specific in terms of Chile and Colombia, that would be helpful.

[Gabriel De Moura, executive]

Sure. Thank you for your question, Jason. Yes, I think that there is the evolution of the returns that we've been seeing. I think, this -- on this first semester, we have some operational effects within our results that, I think, it's important to discuss them. First, in the first quarter, as we previously mentioned, we have the sale of some corporate offices and that, at the same time that it is a return that we have on the first quarter, is also a higher expense that we have on the following quarters as most of these corporate losses we are selling, but we also have new rental. So you have both an effect on this. On this quarter, you have little bit of the effect of the credit value adjustments. So we have changes in model in house, also better rating for the client. But on an overall basis, if you take a look at what is the cost of credits we have of 70 basis points, I think it's aligned with the goal that we have of converging this to a more normalized level.

On the tax side, I agree with you, when we take a look at this quarter, we had a lower impact on taxes. There are some effects from the goodwill amortization tax that we had in Colombia that still goes through our balance sheet. I do not have a number here in terms of what is the normalized level for us, the results that we are posting, they are not recurring in the next year or weeks. Nevertheless , I think that we are on the path of converging the ROE to the targets that we are always -- always discussed. I think that in order to do this fully convergence, and if I can -- may answer your question in another way, we need to see some more growth in the credit portfolio. So I think that we did that on the retail. I'm very satisfied in what we've been posting on retail.

On the wholesale, on the other hand, we're still losing share, and we have a smaller growth. I think that we are very -- we've been very disciplined in risk to adjusted approach for the new credits that come into the market. So most of them, they are conscious decisions that we take in terms of not having those kinds of return on our balance sheet in terms of the capital generation that we need. But I think, and again, I think that we're on the right path, I think there are some events, like I mentioned, the sales of corporate offices or the tax. But nevertheless, I think that -- I think it's solid results. But in order to keep up with those levels, I think that we need to see some growth, especially on the wholesale part. I don't think that we have completely converged on deals and this is a new normal for the bank. I think that we're still learning a path to convergence, and in order to give this some sustainability, we need to see some growth.

[Jason Mollin, analyst]

That's clear. And we definitely see the operational improvement. I think that's straightforward. But maybe another way of asking a similar question would be, so when we think about long-term convergence and long-term ROEs to, let's say, 16% -- 15%, 16%, 17%, what kind of taxes does that incorporate? What kind of tax rate do you think you'll -- you can be paying -- you should be paying in the longer term with those normalized ROEs?

[Gabriel De Moura, executive]

Let's talk about Chile. I don't think the tax rate will be much different from what you'll see on the other banks here in Chile. Remember that tax in Chile, they are affected by the West in a way that the -- all the shareholders' equity you have [ are for action ] by the West, so they tend to be lower than what is the marginal tax rate. So I don't think that we will be posting on a long-term a tax rate that is much different from what you see on the major banks in Chile.

[Jason Mollin, analyst]

And in Colombia?

[Gabriel De Moura, executive]

In Colombia, we are on the other side of the discussion is the following: in Colombia, because I ran some losses, I generated tax credit. But if you take a look at the rate that I have in Colombia, I'm generating tax credit in a lower rate than I should. And the reason for that is that if you take a long-term convergence in Colombia, tax rates went from -- went down from 40%, and now they are pointing to 33%. So I'm generating tax credits in Colombia, 33%, not at the current rate. So actually, I have a loss in Colombia in terms of factors because we're being conservative in terms of the deferred tax assets that I'm recognizing. The other way also that affects us in Colombia is that some of the expenses, they are not deductible under Colombian regulations. For instance, the over 1,000 tax that you have for financial transactions in Colombia, you cannot deduct them in terms of our -- your tax rate. So for a bank that is a running a loss or even 0 in Colombia, you have impact in terms of how you're recognizing taxes. But at the end of the day, the impact that I have is from Colombia and Chile, not exactly in Colombia. In Colombia, I think that at the end, we should see the bank running at a tax rate close to 33%, which is the marginal tax in Colombia.

[Jason Mollin, analyst]

When do you think the bank, that Itaú CorpBanca's Chilean operations would converge in terms of tax rates to the other banks in the system?

[Gabriel De Moura, executive]

I think next year, I think, is a reasonable assumption.

[Operator]

Now your next question from BTG comes from the line of Alonso Aramburú.

[Alonso Aramburú, analyst]

I had a question about margins in Chile, which if you exclude inflation this quarter, they declined a little bit, 5 basis points versus the first quarter. You mentioned lower yields. I'm just wondering if you can give us a little bit more color since you're growing the consumer portfolio at a faster pace. I mean, what's driving these lower yields in Chile?

[Gabriel De Moura, executive]

Alonso, thank you. I think that in Chile, we are seeing -- as you mentioned, I think that we are seeing between quarters is low or small changes that do not quite reflect what I think that is a trend or not. In this, we've been growing on the retail side. I think that mix is starting to change. But in order to see higher impact on margins through mix, we needed to go through this process over more quarters. I don't think that margins necessarily changed in a significant way quarter-over-quarter because of the mix, given where we started from. So here in Chile, what we've been seeing is exactly what you mentioned, the retail part contributing positively to some of the margins. I have, nowadays, when we take a look at the bank, because we are not growing so much in terms of the wholesale portfolio, I have more liquidity in the bank, so that also contributes to lower overall margins, while I have more liquidity waiting for the shift in terms of loans. So I do not quite see a trend in Chile. I do see a very strong trend in margins in Colombia for the reasons that we discussed with you before. But in Chile, we still have some positive impacts from retail and negative impact from a more liquid bank that we are waiting for the best opportunity to go-to-market strategy.

[Alonso Aramburú, analyst]

Okay. And you mentioned Colombia and the positive trends there. Now that the rate cycle appears to be coming to a stop, do you still think you can get further margin gains in the next couple of quarters in Colombia?

[Gabriel De Moura, executive]

No, I think that convergence level that we had in Colombia is pretty much stable. If you remember in previous calls, we discussed what will be the convergence level in Colombia. And I mentioned, if you take a look at what was -- what were the margins in 2014, 2015, that probably, we would converge to something around that, but not everything, especially because of the changes that we're doing inside the bank. So I think that we are running a more normalized margin in Colombia, given the mix and also the liquidity that now I have in the bank. So the next steps for margins in Colombia, in my view, is by growing the portfolio, either in retail, in wholesale, and also by growing mix. So I think it will be the combination of 2 things.

[Operator]

[Operator Instructions] Sir, there are no further request for telephone questions.

[Gabriel De Moura, executive]

Fantastic. Thank you so much for this conference call. Thank you so much for the questions. I think it was a very good quarter. We continue to work hard in here to make these sustainable results for the next quarters ahead of us. So take care. We'll see you on the next quarter.

[Operator]

Thank you very much, indeed, sir. And with many thanks to both our speakers today, that does conclude the conference. Thank you all so much for taking part. You may now disconnect. Thank you very much, Claudia.

[Claudia Montevecchi, executive]

Thank you, Jenny.

[Operator]

All the very best. Bye-bye.

[Claudia Montevecchi, executive]

Bye-bye.