Banco Itau Chile

SGO:ITAUCL

Earnings Call Transcript 2019-Q2

[Operator]

Good morning. My name is Kelly, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Itau CorpBanca Second Quarter 2019 Financial Results Conference Call and Webcast.

[Operator Instructions] Thank you. Claudia Labbe, you may begin your conference.

[Claudia Montevecchi, executive]

Thank you. 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 & Analysis presentation, which is based in our managerial model that we adjust for non-recurring events and we apply managerial criteria to disclose our income statement.

Please remind that begin in the first quarter 2018, we are disclosing our income statement in the same manner as do we internally, incorporating additional P&L reclassifications. This managerial financial model reflects how we measure, analyze and discuss financial results by segregating commercial performance, financial risk management, credit risk management and cost efficiency. We believe this form of communicating our results will give you a clear and better view of how we fare under these different perspectives. Please refer to pages 9 to 12 of our report for further details.

Now, Mr. Gabriel Moura, Itau CorpBanca's Chief Financial Officer will continue with the presentation.

[Gabriel De Moura, executive]

Thank you, Claudia. Good morning, everyone. Thank you for joining us for this second quarter 2019 conference call. Today, we'll be going through our results for the quarter and reviewing our perspective and drivers for the remaining of the year.

Starting on Slide #2, we have recently updated our expectations for 2019 macroeconomic outlook for both Chile and Colombia. When compared to our original forecast, our main change is related to interest rates and GDP growth. In Chile, we are now forecasting a 2% interest rate for the end of the year, 150 basis points below our original expectations and 2.4% GDP growth.

In Colombia, we are also considering a 75 basis points reduction from our original figures of interest rates and a 70 basis points reduction from our original expectations of GDP growth to 2.6% in 2019. It's important to highlight that despite those reductions, we will maintain our loan portfolio growth projections between 8% and 10%.

Moving onto Slide 3, we show the highlights of our performance in the quarter. We ended this quarter with a CLP 60.4 billion consolidated recurring net income, which represents an 11.9% recurring return on tangible equity. If we look at the bank in Chile on a standalone basis, it represented a result of CLP 52.8 billion and a managerial return of 13%.

As mentioned in our last call, we continue to pursue the sustainability of our commercial performance as a way of us to deliver continuous cost discipline. This translates into a positive performance of our financial margins with clients, which grew 4% in Chile in this period and into a non-interest expense growth in line with inflation in a consolidated basis.

Moving to Slide 4, as we discussed in our first quarter conference call, our loan portfolio continues to converge to the market growth base, but mainly by the dynamics we have been highlighting over our previous calls, the acceleration in the commercial loan portfolio growth, which has been responsible for most of the overall underperformance since our merger as we concluded the reduction of non-core exposure and strengthen client relationship and service level.

And the performance -- the positive performance of our consumer credit portfolio, which continues to outperform the overall market speed by over 20%, leveraged by our segmentation strategy, our improvements in digital offer and overall client service. That dynamic should continue to lead our rebalance towards a higher yield portfolio mix.

We still have some work to do into our mortgage portfolio in order to redesign our operational model and value proposition for our clients prior to see us go into market on that segment.

On Slide #5, expanding on our recent performance in the commercial portfolio, I would like to highlight that our corporate and middle market portfolios have grown double-digits in the past 12 months. In the same period, our real estate portfolio decreased 4%, as we continue to reorganize our loan book and be more aligned with our risk and return appetite. As shown on this slide, the segment portfolio has begun to pick up this quarter and we expect this trend to continue in the coming quarters.

On Slide #6, we present our financial margins with clients. As our overall portfolio growth continue to pick up, so does our margin with clients, which grew 9.1%, when compared to the same period of last year, benefited by higher volumes and higher yielding mix as retail continues to lead the expansion. When compared to the first quarter of 2019, the 4% increase is also related to higher volumes in the period.

Moving on to Page 7, let us comment on our financial margin with market and how it evolved within the quarter. As stated in our last call, a relevant part of our assets with our client is denominated in an official inflation-adjusted index, the UF. We actively managed loan position and inflation in our banking book under the guidelines of our risk appetite and risk limits set by the Board and the asset-liabilities committee.

We have also mentioned that we expected a positive effect in the following quarters that would probably compensate the lower performance in the first quarter. This quarter, [ as the ] UF increased 1.2% and compensated the new behavior observed in the first quarter. We have a positive contribution of our banking book to the overall financial margins with the market. Now going forward, let's talk about our cost of risk and credit quality.

Here on Slide 8, we see our main credit indicators. In the first quarter of the year, our cost of credit amounted to CLP 41.9 billion, which came in line with our projections for both wholesale and retail as the NPLs returned to a more normalized level, especially in the consumer portfolio. As for our perspectives for the year of 2019, we are reiterating our guidance of credit cost to average loans between 0.7% and 0.8%.

Moving to Slide 9, we are advancing with discipline and focus in our plan for digital transformation of the Bank. This translates into a significant increase in transaction through our digital channels and a relevant percentage of our clients adopting those alternatives. I would also like to highlight that during this quarter, we officially launched our first digital brands to our clients in a strategy, similar to what we have in Brazil.

We provided a full relationship between our clients and our branch managers through remote and digital communication channels such as telephone, e-mail and web chat in our Internet banking from 8:00 AM to 7:00 PM. This framework provides a more agile response to our clients' request in a more cost efficiency structure that will enable us to significantly grow our client base with a lower marginal of costs.

Now moving to Slide 10, we see our non-interest expense evolution. When look over that 12-month period, our expense base grew at a rate of 2.2%. Furthermore, if we isolate depreciation and amortization that affect -- that reflect all the investments we have been making in our business platform, expenses have remained literally flat year-over-year. We always have a diligent focus on the efficient use of our resources and reiterate our belief shared on with you on our last conference call that we still see further space to reap synergies from the merger. And as our commercial results continue to pick-up, we expect efficiency to gradually improve throughout the next quarters.

On Slide 11, we present our adjusted non-interest expensive evolution. Here as reviewed in previous calls, we adjust our baseline by excluding expenses consolidated from our Colombian operations, provision expenses related to credit risk and non-recurring expenses; in line with the reclassification we do in our MD&A report.

Lastly, we removed depreciation and amortization as these are related to long-term income generation. We then apply the same methodology to the financial system as a whole. Since the merger we consistently present an expense evolution below market average. Our adjusted expenses reduced 1.3% in the first 6 months of 2019. The overall industry, on the other hand, grew 7.4% in the same period. Cost discipline and continued search for efficiency opportunities are part of the DNA we are creating for this Bank.

Going to Slide 12, we can access how these translating to the estimate of synergies captured since the merger. By comparing how our expenses grew in the period, which we can see on the top of the chart to what they could have grown at the average market rate, we can measure a gap and estimate synergies can be captured. On this basis, we calculate a total of CLP 68 billion in synergies or about $101 million.

Now moving on with the presentation, let's jump to Slide 13 and go over our capital structure. As we have been discussing with you in the past couple of years, our estimates for the new regulatory environment suggest a minimum regulatory CET1 of 8% for 2024 once Basal III is fully implemented. As shown here, our current CET1 one position is 7.6%.

Our plan is converging in profitability in having a core capital generation and retention that will be able to comply with all capital requirements in the time frame that is being discussed. We continue to work with regulatory entities to close monitor the evolution of the new regulations and so far all details publicly available for the requirements in transition coincided with the estimates we have on our models.

On Slide 14, we go over the results for our operation in Colombia that have been exceeding our expectation this year. Here we can see the evolution of the recurring net income of the Colombian operation, which contributed with CLP 12.6 billion during the first semester of 2019 and represented a 12.6% of the consolidated recurring net income in the second quarter of 2019.

On the Slide 15, we can see that the cost of credit continues to be under control in Colombia, besides some pressure from specific cases in the corporate segment, we saw during the first semester. At the same time, non-interest expenses continue to grow below inflation as we keep focusing in efficiency gain opportunities. Our main challenge here continues to be resuming the expansion of portfolio and business volumes, as we implement our go-to-market strategy.

On Slide 16, we can see our main perspectives for financial performance in 2019 that we have shared with you on the fourth quarter of 2018 conference call and that we are reaffirming as our current perspective for this year. However, it's important to mention that due to changes in our perspective for GDP and interest rates, we might end up around the lower end of the range for the loan portfolio growth.

To close our presentation and before opening up for our Q&A session, I would like to update you on the acquisitions of the shares of Itau CorpBanca Colombia from Helm Group. As previously disclosed, on February 28 of 2019, a 3 member tribunal of the International Court of Arbitration in New York has ordered Helm LLC to sell Itau CorpBanca's share of Itau CorpBanca Colombia. The purchase of these shares is subject to regulatory approvals in Colombia, Chile and Brazil.

As we have also mentioned in our Form 20-F in 2018 we have also sought regulatory approval to purchase the share held by Kresge Stock Holding Company Incorporated in Itau CorpBanca Colombia, which represent 1.38% of the capital stock of our bank in Colombia. On July 4 2019, we have received approval from Chilean regulators and we're still waiting for the remaining regulatory approvals from Colombia and Brazil. We will keep you posted, as we always had, on further news and developments on this matter.

Lastly, we have announced the acquisition of MCC, the wealth management business Itau had in Chile in a transaction that was part of the original merger deal between Itau and CorpBanca. This acquisition will enable us to have a stronger position in the private bank and asset management segments and will also enable us to distribute Itau offshore products and services to Itau CorpBanca's private client base. We are also waiting for regulatory approval for this transaction.

With that, we conclude our main presentation today and we can now open for your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Gabriel Nobrega from Citi Bank.

[Gabriel da Nóbrega, analyst]

During the quarter we saw other 2 listed competitors announcing that they will be entering into the merchant acquiring markets, which is in line with the view that the system should have more than 1 player. So what I wanted to understand with you is, if you are planning to maybe do this or maybe even planning to on leverage hedge from Itau to -- and come into Chile? And I'll ask a second question afterward.

[Gabriel De Moura, executive]

Okay, thank you for the question, Gabriel. Nowadays, we are on the, on the merchant acquirer business as we are shareholders of Transbank, which is the largest acquirer in Chile. As for now, we are still studying the options that are available for us. We do like the acquiring business. I think there are opportunities to develop new products and services within the Chilean markets. But so far, our position is to maintain the business that we have with Transbank. Having said that, we are always taking a look at opportunities in the market, but we do not have anything to announce so far.

[Gabriel da Nóbrega, analyst]

All right, perfect. Thank you. And my second question, it's actually on provisions, and I would just like to maybe understand if you have already done all of the necessary provisions to adequate your risk models to the new group loan methodology? And also if you can maybe talk about how Alto Maipo is going and if you expect any reversals from this loan for the remainder of the year?

[Gabriel De Moura, executive]

Sure. If you take a look at the financial statements that we have published yesterday, one of the things that we mentioned as following transaction for those financial statements is that we are provisioning the Group level changes in regulations as per our financial statements in July. We expect the effect of that should be less than CHL 25 billion, which is a little bit lower than the expectations we have shared with the market at the beginning of the year. And please remember that we didn't change the guidance that we have for overall cost of credit, as we do believe that we have all the provisions in our balance sheet that perhaps we need to reassess and we will generate benefits in order to counterbalance this expenses. Most probably, we are going to see all those effects playing now in the results of July. And then again, we are maintaining our view that the cost of credit for the Bank should be within the year something around 0.7% and 0.8% in Chile.

[Operator]

And your next question comes from the line of Nicolas Riva from Bank of America.

[Nicolas Riva, analyst]

Yes. Just one question, you have a bond maturity in September of $750 million. If you can share thoughts in terms of how you plan to finance that? And -- or we could issue a senior bond or an AT1. And also regarding the AT1 bonds, given than Basel III is going to be implemented in Chile, your thoughts in terms of timing for the potential issuance of AT1 bonds. Looking at one of your slides, you have that bucket of 1.5% for AT1. So in my numbers, you could issue around $500 million in an AT1, if that's the case.

[Gabriel De Moura, executive]

Thank you for your question, Nicolas. Yes, we have that loan coming due. We already have our cash position in order to take out that bond, so we don't see ourselves issuing a new bond outside Chile. Nowadays, in our view, it is more expensive to do the issuances outside Chile than within the local markets. So we've been financing ourselves within the local market, and that was true for the bonds that came due last year and it's the same thing for this year. As for AT1 as you mentioned, we are still waiting for better confirmation of the regulators and what is the framework around AT1 in Chile. Within our models we do make use of AT1. Probably, we are going reissue AT1 bonds and the timeframe for that is probably around 2021, but there is one specific part of the regulations here in Chile is that the first the Tier II that was issued is grandfathered into the Tied II for the new regulations. And furthermore, there is a transitioning period where you can use Tied II as additional Tier 1 for 3 years. So that indeed helps us in order not to have to issue any bonds in the short term. But on the longer term, as we move towards 2024 and transition ourselves out of this Tier II grandfathering that we have for the additional, probably you will see us coming to market and in issuing additional. It's still pending the confirmation, what is the market, what are the characteristics of the bonds, what is the cost, I mean there is too much things that we need to know.

[Nicolas Riva, analyst]

On that grandfathering of the Tier II bonds, that applies to Tier II bonds issued in Chile, right?

[Gabriel De Moura, executive]

Yes, their issue in Chile. And as per our Tier II bonds were issued in Chile, I think that's true for pretty much most of the market.

[Operator]

[Operator Instructions] Your next question comes from the line of [ Sebastian Gallego ] from Credicorp Capital.

[Unknown Analyst]

I have 3 questions, the first one, you mentioned in your MD&A that there were some downgrade of corporate clients in Chile. I just want to get a sense if you can provide some color regarding this type of clients or weather the -- which sectors are they in, and if you see any potential downgrades going forward? The second question is regarding just a little bit on strategy, you have been very vocal about being focused on the consumer segment in Chile and probably in Colombia, even though you guys are -- the operation runs behind at least one year. But I'm wondering, when we look at the figures of loan growth for Colombia, it seems that the consumer portfolio, it falls or declined year-on-year, whereas the mortgage portfolio is the one that leads the growth in Colombia. So I'm just wondering if there are any specific strategy for Colombia on that segment, considering that you're more cautious in Chile. And the third question is regarding capital. When we look at also at your press release, the Bank targets an optimal capital ratio greater -- or 120% of the minimum regulatory capital or the average of the 3 largest private banks. When we look at Slide 13, it seems that none of these aspects are complying as of now. So I'm just wondering, and the question is, how are you planning to converge towards those optimal targets?

[Gabriel De Moura, executive]

Thank you for your questions, Sebastian. Let me tackle that in the order that you asked them. So in provisions in Chile, I don't see anything special in the provisions that we did on the wholesale. Remember that the dynamics of provisioning in wholesale is quite different than on retail. In retail, you have a more statistical behavior in which you distribute the provisions that you have according to delinquencies of the credits throughout the year. So you have a very normal distribution throughout the years in terms of provision. That's not true on the corporate market. The corporate market is more event-based in terms of the evolution of specific companies within the portfolio. So, it is true that on the second quarter we had more provisions than the first quarter in terms of corporates. But it's not different from the expectations we have throughout the year. So I think it's within our estimates for the year. I don't see any behavior here that is different from the expectations we had so far. So your second question was about our strategy, especially on consumer in Colombia. I think that the main difference here in Colombia is that, please remember that within the consumer portfolio, credit portfolio in Colombia, you have the payroll loans, the Libranzas business within it.

And if you remember, that's a part of the portfolio that we were restructuring Colombia for the last 2 years. So I still have a negative effect from this portfolio. I still have a decrease in the portfolio during the second quarter. We believe that we are stabilizing this part of the portfolio, probably on the third quarter, but when I take a look other portfolio such as credit card, such as consumer loans installments, lines of credit, then I see a positive evolution. So you're right in terms of the numbers that you take a look on an aggregate basis. Mortgages have grown more than what you saw in consumer. But if you eliminate this part of the Libranzas business that we are still restructuring them, you're going to see probably a different picture. From the -- from your third question about the way that it set up the transaction agreement between the parties and talking about the 120% or the largest of the 3 players, we are complying with that, because remember that we are not in the initial period of the transition of the Basel III in Chile. In our view, probably that will begin to happen at the end of 2021 -- the 2020 until -- at the end of 2020 until the end of 2024 as the CMF issues all regulations. So by the current regulations that apply to ourselves through the CMF, yes, we are still larger than 120% and the 3 largest banks. As we move forward, then I agree with you, especially when we think about the individual limits of what is CET1, what is Tier I and what is total capital for the bank. Then we are going to have a better discussion in how we converge to those levels. I mean in terms of risk appetite, I don't think that the Bank change its position of being on those levels, but perhaps we need to have a discussion on what we need to do during this transition period for the capitalization of the Bank.

[Operator]

And there are no further questions at this time.

[Gabriel De Moura, executive]

Fantastic. Thank you so much for participating in our calls. As always Claudia and I are readily available for any questions you might have. And we are going to be on the conferences for BTG this September in New York and we'll be in the London conference of Itau-BAA in November, if you want to see us. Take care, bye-bye.

[Operator]

And this concludes today's conference call. You may now disconnect.