Banco Itau Chile

SGO:ITAUCL

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to the Itaú CorpBanca's Second Quarter 2020 Financial Results Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Claudia Labbé, Head of Investor Relations. Thank you. Please go ahead.

[Claudia Montevecchi, executive]

Good morning. Thank you for joining our conference call for our second quarter 2020 financial results. Before proceeding any further, let me mention 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 on our managerial model that we adjust for nonrecurring events, and we apply managerial criteria to disclose our income statement.

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 clearer and better view of our performance under these different perspectives. Please refer to Pages 9 to 12 of our report for further details.

Now let's continue with the presentation. First, Mr. Moura will comment on 2020 second quarter results. Afterwards, he will -- we will be available for a question-and-answer session. It is now my pleasure to turn the call over to Gabriel.

[Gabriel De Moura, executive]

Fantastic. Thank you so much, Claudia. Good morning, everyone, and welcome to Itaú CorpBanca Second Quarter 2020 Earnings Conference Call. As you were about to see, we have broken down this presentation in 3 parts: an update on our COVID-19 pandemic, the second quarter 2020 results and our current priorities to -- and next steps.

So moving straight to Slide 3. As we show here, the macroeconomic outlook has deteriorated relative to what we expected at the end of the first quarter. We now expect a decline in GDP for this year of 7% in Chile compared to the decline of 1.9% we expected in our first quarter conference call. There is still considerable uncertainty regarding the timing and speed of the economic recovery, which is reflected in our alternative scenarios, in which we have a plus or minus 2 percentage point spread around the mean expectations for GDP growth for both Chile and Colombia.

The expectations for inflation and interest rates are also strongly impacted by the uncertainty around the economic activity. But it also looks like that both inflation and rates will be lower for a longer period of time.

If we can please move to the next slide on Page 4. In terms of our banking operations, we continue to be fully operational with higher-than-ever availability in our digital channels as well as 96% of our physical branches open. Clients continue to increase the utilization of digital channels, and we have now reached a point where the majority, 53% to be precise, of our clients' transactions are made through our web and mobile channels, up from 35% a year ago. This is a very strong trend, which has profound implications for how banking is going to look like in the future and which provide us with big opportunities to serve our customers in a more convenient and efficient way.

If we move to Slide 5. We can see that given the economic backdrop, the Chilean government has continued to provide relief measures to support the economy. In addition to COVID-19 credit lines, the Ministry of Finance has also launched an aid program to the middle class. The Central Bank of Chile has continued to provide liquidity. And the CMF, in addition to the postponement of the Basel III roll-in process and other measures, also intends to adjust the risk weighting of FOGAPE COVID guaranteed credit lines, providing further capital relief.

Finally, Congress has passed the bill allowing the population to withdraw 10% of their pension funds that will ultimately provide economic relief, which will positively impact credit risk in the economy as people will have more funds available to pay their bills.

We continue to be part of the solution and play an important role in this process by providing credit relief to our customers as well as providing new money, especially through the COVID-19 lines. We have disbursed over CLP 600 billion of FOGAPE-guaranteed credit lines, focusing on relatively larger companies which are more resilient and therefore, had lower credit risk. This comes within an overall strategy of targeting our credit concession to lower risk clients and products at this moment.

On Slide 7, we now move into the second part of the presentation with the second quarter results. As we announced in our conference call on July 10, we recognized accounting adjustments to goodwill and related intangible assets with a nonrecurring earnings impact of CLP 764 billion. This was a noncash charge with no impact whatsoever on capital liquidity or the risk profile of the bank. From an economic standpoint, nothing changed in the bank. And as you can see, we continue to operate in the same way. Given the nonrecurring nature of this charge, we have excluded it from our managerial recurring net income.

We proceed now to the presentation of our managerial recurring net income for the second quarter, which was CLP 21 billion.

On Slide 8, we can see the highlights of our financials. Our consolidated recurring net income declined 38% relative to the first quarter. Managerial recurring net income for Chile was CLP 22.7 billion, down 22.9% relative to the last quarter. The main reason for this decline was an increase in income tax expenses due to the lower variation of the UF in the second quarter relative to the first quarter. As you know, income taxes in Chile consider the monetary correction of the value of the equity. Therefore, lower inflation results in lower monetary correction; and therefore, a higher income tax expense.

Income before taxes was nearly flat, 2.6% less in a consolidated view. In Chile, income before taxes actually grew 33% quarter-on-quarter, as a 15% rebound in revenues more than compensated for the 32% increase in cost of credit, which was mainly due to the CLP 19.5 billion in additional provisions we did. In terms of return on tangible equity, we reached 4.3% on a consolidated basis and 6.6% in Chile. The highlights are the growth of 12% of our loan portfolio year-over-year and an improvement in spreads in assets and derivatives with wholesale clients which was partly offset by lower margins on our liabilities due to the lower interest rates in Chile. Overall, our financial margins with clients grew 4.1% year-over-year. Our cost control remained quite strong as we had 0.5% lower noninterest expense year-over-year and an improvement of our efficiency ratio of 80 basis points, also on a year-over-year basis.

In addition to taxes, the other negative impact of our earnings in this quarter was the increase in cost of credit. That was mainly driven by the additional provisions of CLP 19.5 billion we made in Chile for the consumer and mortgages portfolios as well as the increase in provision for our wholesale clients impacted by the COVID-19 pandemic.

Moving to the slide 9. We show how we have been developing our credit portfolio growth strategy. Our total portfolio growth was in line with the market and concentrated in lower customer -- lower-risk customers and products. In mortgages, we continue to grow well above the market pace. Our commercial portfolio growth, which was strong, although is slightly below the market, was concentrated in FOGAPE COVID -- FOGAPE guaranteed COVID-19 lines.

With respect to our consumer portfolio, we continue to follow to be more cautious approach we have had since last year's social unrest, which resulted in a 2.7% decline in our customer portfolio, which compares to a 5.7% decline of the market as a whole.

On Slide 10, we present our financial margins with clients, which grew 4.1% year-over-year and 3.8% quarter-over-quarter. The chart on the top right demonstrates that our net interest margin rate has been resilient despite the fall in the monetary policy rate. On the waterfall below, we see that both in terms of our assets and liabilities, our volumes have been the drivers for the increase in financial margins with clients.

Asset mix has had a negative impact that stems from a more cautious approach we have been taking on credit risk. On the liabilities margin side, the decline in spreads due to lower interest rates more than offset the effects of the larger volumes.

Moving to Page 11. Our financial margins with market was strong this quarter, well above the 1 year moving average. Our net interest exposure to the UF was slightly smaller in the second quarter, as the variation of the UF was only 0.3%, which had a negative impact on our financial margins with the market as well as in our income tax expenses, as we mentioned before.

Moving forward, let's talk about our cost of risk and credit quality. Here on Slide 12, we can see our main credit risk indicators in Chile. Cost of risk in the second quarter was CLP 73.7 billion, which corresponds to 1.5% of our average loan portfolio. It's important to keep in mind our portfolio mix, which has a smaller share of consumer loans than our peers. The NPL ratio fell 50 basis points in this quarter, driven by the fall of the NPLs of our commercial portfolio due to the restructuring of credits of one specific client. The NPL coverage ratio reached 150%, which is the highest level in our history.

Following our expected loss approach to credit provisions, we have made CLP 19.5 billion in additional provisions, despite falling commercial and mortgage NPLs and only a small 10 basis increase in our consumer NPLs. We will continue to make the necessary provisions according to our best estimates of expected loss.

Now moving to Slide 13. We see our noninterest expense evolution. As we mentioned, we had a strong quarter in cost control with 0.5% lower expenses in nominal terms year-over-year. The reduction in personnel expenses was 2.1%, was even more significant. We continue with our trend of growing expenses significantly below inflation. We expect that trend to continue in the future.

Our headcount remained basically stable during the quarter, consistent with our focus of protecting our employees during these challenging times. We have 5 branches closures as part of our strategy of optimizing our footprint.

On Slide 14, we see the estimated fully loaded Basel III capital ratios improved in this quarter. The improvement results from risk-weighted assets efficiencies we had in Colombia as well as positive mark-to-market effect to our equity position.

In addition, we expect a positive impact from risk-weighted of the FOGAPE-guarantee loans. With that, our estimated fully loaded Basel III ratio for the quarter would reach 10%, which will be nearly 0.5 percentage point increase relative to where we were in March. In terms of CET1, we would have a 30 basis points improvement relative to March. This underscores the resilience of our balance sheet and our capital position during this challenging environment. We also demonstrate that the impairment charge had no impact whatsoever in our capital.

Now moving to Slide 15. We can discuss our liquidity. And I think that our liquidity position has never been stronger with LCR and NSFR ratios at their highest level ever. We continue to achieve very strong deposit growth, significantly outpacing the market as well as our own loan growth.

On Slide 16, we can see the evolution of our net income for the Colombian operation. The net income reached COP 7 billion in the quarter, and our credit portfolio basically remained stable. The environment in Colombia has been very challenging with even stricter lockdown measures than what we had in Chile. The main focus of our efforts in Colombia right now is to manage through the current situation, is on the credit risk management as well as cost efficiency.

Our recovery in revenues will very much depend on how the quarantine and epidemic evolves and the revival of the economic activity in Colombia. Regarding the guidance of 2020 previously disclosed that was under the review last quarter, we now suspended this guidance due to the considerable degree of uncertainty on the economic forecasts we have for this year, which stems from the unpredictability about the duration and lockdown or isolation measures and the pace of recovery in the second half of 2020.

If we can please move along to the Page 18. We can see that in the current challenging and uncertain situation, we have been focused on 3 basic things: taking care of our clients, taking care of our people and taking care of the bank.

We have always been available in supporting our clients. Our digital channels had over 50% increases in margins and 100% increases in transactions. We made over $1 billion in government-guaranteed loans and provided credit relief by postponing about 30% of our customer and -- consumer and mortgage loan payments due over the next few months. We supported our people through 130 prevention, support and communication actions during the crisis.

Additionally, we did a massive renovation of infrastructure, equipment and applications, which enable us to have over 90% of corporate functions of the bank in home office. As a result of those actions, we had our best result ever in our employee satisfaction survey.

The COVID-19 pandemic has brought about important cultural shifts in our customers. We have accelerated the shift to digital and will value more than ever convenience and simplicity in their banking relationships. The pandemic has also accelerated our own development process, strengthening our ability for agility, digitalization, empathy, proximity and productivity.

Our goal now, as we begin to move away from the crisis management to building the bank of the future, is to accelerate our evolution, building upon the strengths we developed over the last few months.

If we can now please move to the Slide 20. With me here with me today in the conference call is Rodrigo Couto, our newly appointed Chief Financial Officer, as shown on the Slide 20. Rodrigo joined Itaú Unibanco in 2008, where he worked both in risk and finance, notably as Head of Capital Management for the last 10 years as well as CFO for both the wholesale and retail divisions of the bank. Previously, he was a consultant for McKinsey & Company, specializing in corporate finance and risk management as well as in the Central Bank of Brazil as a bank supervisor. Rodrigo has a business degree from the Federal University of Rio Grande do

Sul and holds an MBA from the Wharton School at the University of Pennsylvania.

So glad to have you on the team, Rodrigo. And I don't know if you want say a couple of words.

[Rodrigo Couto;Chief Financial Officer, executive]

Sure. I'm happy to be with you today and very happy to join Gabriel and the Itaú CorpBanca team. I'm looking forward to meeting you and working with you all in the future. And Claudia and I are available to answer any questions you might have. Thank you.

[Gabriel De Moura, executive]

Fantastic. Welcome to the team, Rodrigo. With this, we conclude the presentation we have for you today, and we would gladly take any questions that you might have.

[Operator]

[Operator Instructions] Your first question comes from the line of Sebastián Gallego from CreditCorp Capital.

[Sebastian Gallego, analyst]

I have 2 specific questions today. The first one is related to the recent announcement made by the CMF in Chile, the regulator, providing a new extension for the special treatment of provision expenses, given the environment of the COVID-19 crisis. I just want to understand better from Itaú CorpBanca, the need for additional provisions going forward? And what could be -- even though it is highly uncertain, what could be the outlook at least for the upcoming quarters in terms of the need for additional provisions?

And the second question is a bit different and is regarding branches and the presence in Colombia. I noticed that when you look at branches in Colombia and also ATMs, you guys have been reducing the presence here in Colombia. So I would like to understand a little bit better what could be the strategy going forward considering the bank's current market share in the local market in Colombia?

[Gabriel De Moura, executive]

Fantastic. Thank you so much for your questions, Sebastián. Your first question was about 2 things. I believe the first one was the announcement of the CMF. As you remember, for all the postponements of credit that the banking industry did in Chile, especially for the consumer and the mortgages cases, the CMF has issued specific regulations in how you were supposed to treat those postponements in terms of the credit provisions. And it was due to the end of July 31 on the credit giving at the end of July. And now we postponed a little bit this treatment. In terms of the demand for postponement is increasingly lower, I think that, in our case, we saw markets more interested in postponing, given the level of uncertainty between the end of March and the month of April. And since then, the level of demand we have for clients in terms of postponing their consumer credit on mortgage have been very low.

So in our case, I don't see that the specific announcement of the CMF has a major impact in our credit strategy. But when we take a look at the second part of your question regarding the additional provisions, what we did is because as we take a look at the NPL ratios, of course, they are lower than we expected, especially because of all the negotiations of credits that went through the banking systems in Chile, the same happened in Colombia, Brazil and other countries.

So we have less visibility of the true NPL of the portfolio right now. So what we did in our case was establishing a second model, in which we somehow project what would be the level of NPL based on other macroeconomic variables that we have calculated. And for that, we use the additional provisions. So we don't want to lose our ability to make expected loss provisions based on the future, especially because I think that in terms of the information that we have right now, we can incorporate that in the portfolio. We did, as I mentioned, 19.5% -- CLP 19.5 billion in provisions. If I take a look at that as a percentage of our portfolio in Chile and with what I saw in the other banks, I think that we did very well, especially when you take a consideration that the other banks have roughly 50% more participation on their mix for consumer than I do. So in terms of the relative provisions that we did for the portfolio, I think they are okay. But I do foresee that we are going to make further additional provisions throughout the second semester. We've been taking a look at the models, incorporating all the information that we have. And I think that the best tool that we have in our toolbox right now in terms of incorporating all this information into the provisions, while maintaining a forward view in terms of expected loss, is through additional provisions. So I do expect to use them in the next few months.

Your second question was about Colombia and the branches that we eventually closed in Colombia. I think that the strategy is similar to what we see in Chile. With the advances that we have on digital and the increase of the preference of the clients to transact over digital channels, when we take a look at the footprint, there is a margin for us to reconsider the footprint that we have and close some of the branches. We did that in Chile since Legal Day 1. Of course, there is a limit to what we can do. And I still believe that the branch network has an important role in the relationship with the clients, in the same way that we have other strategies than the mobile and the Internet which is our digital branches that somehow captures a market that falls between what is the physical branches attention and the self-serving characteristics of the digital offering.

We follow the same strategy in Colombia. Of course, Colombia is a country more diverse geographically than Chile in terms -- more dispersed geographically than Chile in terms of its economic activity. So we also assess that in our model. But I do believe there are still opportunities for us, especially in Colombia, to revisit our footprint and adapt to the digital preferences from our clients. We do see that one of the, if I might say, the positive effects of the pandemic is that there is a full acceleration culturally from the clients in pursuing an offer that is more remote, more convenient. And in that term, even on the retail business as a whole, in the banking business, in other sectors of the economy, we are going to see an acceleration of the digital preferences. And that will enable, I think, that everyone to take a look at their physical footprint and adjust to that. I don't know if I answered your question, Sebastián.

[Sebastian Gallego, analyst]

Perfect. Yes, very clear, Gabriel.

[Operator]

[Operator Instructions] Your next question comes from the line of Alonso Aramburú from BTG.

[Alonso Aramburú, analyst]

I had a follow-up on the provisions question, but more focused on Colombia, which -- the voluntary provisions you did in Chile, but you didn't do that much or you didn't do any voluntary provisions in Colombia. Can you comment about the cost of risk that you expected in Colombia and whether you will be making more provisions also in Colombia in the second half?

[Gabriel De Moura, executive]

Alonso, thank you for your question. Yes, I think that the answer that I gave before applies to both Chile and Colombia. You were right, we did the provisions in Chile. In Colombia, we are in the process of developing the same models that we have in Chile. I do expect our strategy to be the same. Remember that Colombia, in terms of the cycle of the pandemic, was a little bit behind what we saw in Chile and in other countries. The curves are still growing in Colombia as we have to incorporate more information in our models.

But I do believe that akin to what we are going to do in Chile in the second semester, we will need to take a look at the provisions in Colombia, especially because the traditional models do not quite capture what the market is doing in terms of the NPLs. The regulations in Colombia were a little bit softer in terms of how we calculate the provisions during the pandemic. So I think it's necessary for us to do additional provisions as well. But as we -- we lost somehow one of the main variables that we had for this analysis with the NPLs. We need to incorporate other things in our model. We are ready to that -- to do that in Chile. We already did some part of it. But I think that we need to move further along.

And the same in Colombia. If you take a look at the cost of risk, it was a little bit lower in the -- if we don't do the additional provisions based on the current models that we have from the regulators in Colombia, you would see even lower provisions than we have right now, which I don't think it made quite sense in terms of the credit cycle we are leaving.

So I think that it's necessary for us to do the additional provisions. But please remember that some of these provisions, these additional provisions, they are in substitution to what we have through the traditional methods as we see NPLs lower mainly due to the renegotiation. So I think there are some part of that it is in addition to the normal provisions that we have due to the cycle that we're leaving. But some part of it is in substitution of the provisions that we have, given that the NPLs lost a little bit of their predictability in terms of the credit quality of the portfolio.

[Alonso Aramburú, analyst]

Okay. And just to follow-up, you commented on the demand for postponement or rescheduling of loans being lower or improving in Chile. Can you give us some numbers on that? And also, can you give us maybe some numbers on -- in the case of Colombia, where we're seeing the lockdowns continue to extend, are you seeing also there less demand for rescheduling of loans?

[Gabriel De Moura, executive]

On the margin, yes. As I mentioned, the higher part of the demand was around April, I would say. When we take a look at the curves in terms of the demand for the clients of their reprofiling of their cash flows, it was in the past.

So the marginal demands are lower. The number of the total portfolio that was -- total portfolio of consumer and mortgages that was affected by it, it's kind of similar in both countries. It's kind of similar with the industry. It's around between 30% and 35% of the credit. I think it's much akin to what I see in other countries based on research that I see on the market. So I think there are less demand for it. Of course, part of this -- the renegotiation process went through in April. So you're going now to start to see the repayment for that. And in some cases, you're going to need to do the reflow of some of the credit. Of course, all the initiatives that the government has in terms of increasing income for the population help on this process.

The same goes for the Brazil, Chile and in Colombia. But I do foresee that in terms of -- we are going to need more time in order to stabilize the cash flows for our clients. And you're going to see everything during this process. You're going to see businesses, for instance, they are good businesses with a good and sound financial profile with good products, clients and everything, but they are not selling much right now. So the same liquidity process that the banking industry went through 2008, for instance, is not happening right now on the financial system, but it's happening for clients. So it's a liquidity crisis somehow for the clients as they had to adapt for their cash flows.

So in terms of the firm value of that, I think they're fine. Of course, the equity takes a part of the impact for the families and the clients -- for the family and the companies, I'm sorry. Nevertheless, I think that everyone will need to somehow reprofile the cash flows in order to adapt to the moment that there was less income in the market, there was less sales in the market. And I think that the banking industry has done that.

Of course, there is a need to recognize that, that affects the portfolios in terms of the expected loss. And hence, we are going to see more provisions.

[Operator]

There are no further questions at this time. I turn the call back to the presenters for closing comments.

[Gabriel De Moura, executive]

Fantastic. Thank you so much for your questions. And as always, Rodrigo, Claudia and I are fully available for you if you have any questions about the bank, about the economy. And we will see you next time. So take care. Bye-bye.

[Operator]

That concludes today's conference call. Thank you, everybody, for joining. You may now disconnect.