Banco Itau Chile

SGO:ITAUCL

Earnings Call Transcript 2021-Q2

[Operator]

Good day. Thank you for standing by, and welcome to Itau Corpbanca Q2 2021 Financial Results Conference Call and Webcast. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Claudia Labbe. The floor is yours.

[Claudia Montevecchi, executive]

Thank you. Good morning. Thank you for joining our conference call for our second quarter 2021 financial results. Before proceeding, let me mention that our remarks may include forward-looking information and actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks and other factors. 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 in which we address for nonresolving 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 through the different perspective. Please refer to pages 9 to 12 of our report for further details.

With us today, in this conference call are Mr. Gabriel Moura, CEO; and Mr. Rodrigo Couto, CFO. Mr. Moura will comment on our strategy and 2021 second quarter results. Afterwards, we will be available for a question-and-answer session. [Operator Instructions] We will take questions from both the phone and the console. For the latter, we will read the answer -- we will read and answer your questions verbally. 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. Thank you for joining us for the second quarter 2021 conference call. Today, we'll be going through the key points of our transformation program as well as the highlights of our second quarter results.

Starting on Slide 3. The first point that I would like to make is that our transformation is happening now. After a thorough -- after all the analysis and planning of our operations, we have launched the initiatives that are transforming us into a bank that is more customer obsessed, more agile, digitally simple, data-driven that takes risks and experiments and that learns on the way. This is all that is happening with the bank right now. In the following slides, I will go through what this transformation means for us.

Moving to Slide 4. We show that the #1 reason why we are changing is that our customers have changed. During the past 18 months, our customers have become much more digital, seeking convenience and simplicity in fulfilling their needs for financial services. For instance, app logins have increased 41% in the first semester of 2021 compared to 2020, and app transfers have increased by more than 95% in the same period. Not only [indiscernible], but also companies that have become much more digital as we see the 40% increase in transfers as well as 30% increase in investments from our wholesale clients through digital channels.

Moving to Slide 5. In line with this trend set by our clients, we are implementing a mobile-first strategy to provide digital alternatives for every product and transaction offer by our branches and contact center. All these digital alternatives that also include a new WhatsApp channel that will be available during the second half of 2021, we will add to personal communication channels, such as call center and remote assistant managers to deliver a digital bank ecosystem. This ecosystem as well as other aspects of our value proposition will allow us to reach a larger client base, boosting our growth.

On Slide 6, we recap the 5 pillars of our transformation program. The first pillar is about disrupting the market by creating new strategies and products. The second pillar is about putting our clients in the center of everything we do. The third pillar is to be simple and digital, not only in the way we interact with our clients, but also in our internal processes. The fourth pillar is about building an innovative organization and culture that is fit for the direction and challenges ahead of us. And lastly, the fifth pillar is sustainability of our results. We will go through each of these pillars in the following slides.

On Slide 7, we show a little bit of the methodology that we are following to ensure a disciplined execution of our transformation program, which we call ItauGO, leveraging the experience of Itau in Brazil. The methodology is based on a structured process of defining a high-level strategic direction and then developing the bottom-up initiatives that will take us there. We already have mapped over 240 initiatives designed by a multidisciplinary teams that are working in agile communities to implement those initiatives. The most disruptive initiatives have been channeled as speed boats, meaning that we receive high prioritization by all teams involved, so they can advance as fast as possible.

As our transformation office is in charging of overseas, the implementation of these initiatives, which are monitored through an application that is constantly updated by the initiative owners. In addition to the effective discipline, there is as well as a high level of financial discipline from the development of the business cases for each of the cases that we have discussed to the monitoring of the value that we are capturing.

Moving to Slide 8. We show 2 examples of disruptive products and channels that we're developing as people. The first is our alliance with Rappi which will give us access to a large and highly complementary client base, which will serve through fully digital products. We are also launching our independent financial advisory strategy that has proven successful in all the markets, including Brazil. We believe that this strategy complements our current value proposition for wealth management clients as well as clients' interest in different investment alternatives.

Here on Slide 8, we can see that as part of our investment value proposition, we have opened our investment platform to include funds from well-known names in investment committee. We have also managed to increase our assets under management by $440 million through our open product platform. All mutual funds, deposits and brokerage products are integrated in one place delivering an easy and simple journey for our customers. We are also preparing to integrate and we launch our private banking franchise with the complete product offering through the acquisition of MCC which is an investment platform previously owned by Itau Unibanco, allowing our clients to access internal investment opportunities. I would also like to highlight that our asset management has been recognized by the investment community, but with several awards for well-known institutions such as Morningstar, Rankia, ALAS and Premio Salmon during 2021.

Moving to -- on Slide 10. Along with our mobile first strategy, we have been expanding our digital branch structure. Our mindset is to offer best-in-class service and functionalities through each channel and giving customers freedom to decide how they want to interact with the bank. Digital branches provide convenience to customers through extended hours as well as faster and more specialized service than physical branches. Digital branches, therefore, have higher NPS and for example, in our -- in Itau Sucursales segment, the NPS of digital branches is 2x that of our physical branches. The result is a higher level of customer engagement compared to our traditional branches. On average, we have a higher percentage of clients with credit operations, especially in consumer and mortgage as well as in investments. In additional, consumer attrition in our digital branches is 4x lower compared to our physical branches. Last but not least, digital branches are about 30% more cost efficient than our physical branches.

Now moving to Slide 11. To complement our digital offering retail bank, we have also been working on expanding our digital payment solutions, following the same rationale of providing innovative and digital options to our customers. We have already implemented our digital wallet application. And now we are working to deliver additional functionalities, such as secure payments and P2P as well as digital and virtual credit cards. Our payment solutions should help us deliver a distinctive digital experience. When fully implemented, we aim to become the main payment partner of our clients, which in turn should enhance our principality as a bank. Furthermore, this interaction with different payment options, especially the use of our application, should help us to deliver a complete and enlarged cross-selling within our product base.

Moving on to Slide 12. We show the digital transformation of our wholesale bank, where we have been creating digital products that are very user-friendly. For example, the trade finance and credit guarantees. Our apps' web solution for our wholesale segment has increased the number of clients using trade finance portal by more than 130% in the last 12 months. During the same period, we have been seeing our market share increase 119 basis points, moving from 13.1% to 14.3%, enabling us to become the second fastest-growing bank in trade finance.

Our trade finance offering has been awarded with the Global Finance Best Trade Finance provider for 2021. And we are leveraging this experience to develop other products such as our financial guarantees product, where we have seen a 73% in customers using a digital solution and achieved an NPS of 88%. We are the fastest growing making this market have increased our market share by 173% -- I'm sorry, 173 basis points in the last 6 months. We will continue to roll out digital solutions for wholesale products in the coming months.

Going to Slide 13. As a result of the implementation of different initiatives which always keep the client at the center of everything we do, we have reached the highest levels of NPS in our history within a -- with a 24 percentage point increase in the overall rate in the last 12 months. That increase is a result of improvements in both our retail and wholesale segments. We have also improved significantly when compared to our peers. According to a benchmark survey made by Ipsos at our request, Itau is the bank with the highest NPS improvement among its peers in the period analyzed.

Now let's jump to Slide 13 and go over the third pillar of our strategy, based on the offering of simple and digital solutions to our clients. A clear sign of our progress is that we have the highest rated app in all platforms. We also have the best banking website for SMEs according to Servitest. During the fourth quarter of 2021, we will be launching additional features for our website in line with our digital strategy. In addition to provide simple and digital channels, we are also engaging customers through social media. During the pandemic, we launched our vision, believe it is YouTube channel in which we have hosted top speakers, such as Steve Wozniak and Christopher Gartner. With our social media content and presence, we are strengthening our position as a modern and innovative bank.

As shown on Slide 15, as part of our third pillar, we are also transforming our technological architecture to improve customer experience, time to market and efficiency. As a result, we have been able to reduce the number of systems running simultaneously and to develop more than 200 APIs. In addition, we have implemented new processes to monitor customer fail interactions and to improve customer experience and reduce operational risk.

Also related to our third pillar, we have been increasing the usage of robots to automatizing internal processes. Those robots, in average, have a 6-month payback confirming to the positive impact in terms of efficiency. On the commercial side, we have been applying advanced analytics modeling to enhance our capacity to make better commercial offers for our clients and to develop new value propositions. With that digital-centric technology, we have developed 360% more models than in previous years, which have a positive effect of CLP 10 billion over the next 3 years.

Now on Slide 16. Our fourth pillar is related to organization and cultural changes that we have implemented to reinforce our transformation process. We are moving on from a traditional hierarchical structure to a new and modern organization in which we will structure our teams in multidisciplinary working communities to generate a more agile and efficient working model. These communities are based on continuous interaction with our clients in order to create an ongoing feedback process that results on a better offering, capturing value in the short term and adjusting products and functionalities to meet the evolving needs of our customers.

We have already implemented the first 9 communities with more than 200 people working in this new organization model. By 2022, we expect to have more than 2,000 people working in this model, completely transforming the way our teams work together, especially in our commercial, products and IT departments.

Moving on to Page 17, we show the work we have been doing on the human capital front. On talent attraction, we have partnered with Universidad Catolica to develop a finance laboratory to be a magnet for students interested in finance. In addition, we have also launched the ItauTech Talent initiative where we promote challenges to attract and select the best talents. We are also promoting diversity and gender equality. We have taken concrete steps such as making sure that at least one female candidate is considered for every manager level position as well as ensuring that the employees on maternity leave are paid full bonuses.

Finally, we have launched our campaign, Itau is Orange and also bold colors to promote LGBTIQ+ inclusion. On the training side, we have partnered with Udemy and launched an internal training platform called iox, which provides over 15,000 training courses for our employees.

Finally, our remote-first working model in flexible dress codes provides flexibility and less formal work environment that is very well liked by our staff.

Moving on to Slide 18. The fifth pillar of the transformation is sustainable performance. We embrace the ESG criteria in our different operations and businesses responding to the needs of our society in order to have a green post pandemic recovery. Our commitment to ESG is recognized by the ALAS Award earned by our asset management, by our presence in the Dow Jones Sustainability Index as well by our certification of a member of the FTSE4Good.

To reinforce our asset management ESG focus, in the beginning of July, we launched the first ESG ETF as part of our diversified offer for our clients. On the credit side, 16.3% of our wholesale portfolio is composed of credits that comply with sustainability criteria defined by the United Nations.

As shown on Slide 19, we're embracing efficiency as a key factor for the sustainability of our results. Therefore, efficiency is a key work stream for our transformation program. Building upon the track record of cost control as well as leveraging the experience from Itau Brazil, we are accelerating the pace for efficiency gains following the same methodology and governance of our overall transformation program. We have already met more than 50 efficiency initiatives with the digitization, automatization and agile organization as key levers for this transformation. With our transformation program, our goal is to reach the average efficiency ratio of our previous groups in the short to medium term.

Moving to Slide 20. Regarding our operation in Colombia, we are putting in place a turnaround program following the same digital transformation methodology as in Chile, while also benefiting from the experience of Itau Brazil. We will reposition our retail bank to focus on affluent and emerging affluent segments, which have a better fit with our offering and optimize our channels to support this new position. We will bring tough digital to improve sales and customer experience. And the commercial bank will also be transformed with key initiatives around segmentation, value proposition and sales force effectiveness.

Same as in Chile, efficiency will be an integral part of the transformation thought process, digitization and automatization as well as middle office and back office automatization to feed this new strategy. Our goal in Colombia is to achieve a return on tangible equity of 10% to 12% in the short to medium term.

On Slide 21, we show that we expect to be in the short to medium term as a result of our transformation program. We will have a full implemented Agile@Scale throughout the bank which will enable us to take a step in changing our operational dynamics and our time to market. As a result, we will be able to pursue the leadership in customer satisfactory in the industry in order to become the fastest-growing bank in Chile and create value for our shareholders. The complete implementation of the strategies that we have discussed in this call would lead us to achieve our goal of a consolidated return on tangible equity between 13% and 14% in the short to medium term, after the capitalization process that we will discuss in our next slide.

Moving on to Slide 22. We are taking another major step by addressing our utilization. We are pursuing a capital increase of CLP 830 billion, around USD 1.1 billion to support our future growth in digital transformation as well as increase our investment in Colombia, while we achieve industry standard capital ratios. The shareholder meeting approved the placement procedure, which will consider 2 preemptive right periods, validating to the Board the determination of the number of shares to be placed, the price of the applicable final placement procedures. The capital increase and its placement are subject to obtaining all applicable regulatory approvals. For the details of the capital increase, we will be provided as it becomes publicly available.

Let's move on to the next part of the presentation. And on Slide 23, we can jump straight into our highlights for the quarter. Our consolidated net income reached CLP 70.8 billion, and CLP 68.3 billion in Chile. Consolidated return on tangible equity was 16% and return on tangible equity of our Chilean operation was 19.8% this quarter. When we look to our profitability in the first semester, we had an 18.7% return on tangible equity on a consolidated basis and 22.6% in Chile, which is the highest in our history.

Financial margin with clients grew 3.2% quarter-on-quarter due to higher asset spreads and income from FX and derivatives as our net interest margin grew to 2.6%. This reflects our strategy, especially on the wholesale bank, where we are being very selective when deploying our capital only at a set return levels. Fees grew 4.9%, while noninterest expenses declined 5.1% relative to the first quarter. Cost of credit was down 33.9% in the quarter, reflecting the benign credit conditions that we have experienced.

When we look at our credit portfolios, we grew 0.7% in Chile and 1.4% in Colombia in constant currency in this quarter with mortgage portfolios in Chile in retail loans in Colombia as the biggest contributors, in line with the strategy. In line also with our goal of becoming the fast-growing bank in Chile, we are monitoring our position in rankings in terms of new current accounts and credit growth. Over the last 12 months, we have been the #2 in new accounts for companies and #3 in new accounts for individuals. We also ranked #2 in customer -- in consumer and mortgage credit growth. again, consistent with our strategy of increasing the share of retail in our business mix.

Moving on to Slide 24. Financial margin with clients in Chile grew 5.7% in the quarter, mainly driven by higher spreads, resulting in higher net interest margin in the quarter. On the chart below, which explains the change in our 2 quarter '21 margins with clients compared to the first quarter, we see the effect of an increase in the commercial portfolio spreads and spreads on derivatives in FX transactions as well as higher capital financial margin.

Here on Slide 25, we can see our main credit risk indicators in Chile. Cost of credit in the second quarter was CLP 9.4 billion, which corresponds to 0.2% of our average loan portfolio. The cost of credit has been quite low as a result of the very favorable market conditions we have experienced due to our economic support measurements that have been put in place. In the second quarter, cost of credit was also positively impacted by the sale of 2 wholesale credits.

Looking at our NPLs, mortgage and consumer credits continue to perform better than expected, showing a decline in NPL ratios in the quarter. In wholesale, we did have one corporate case roll into NPL. The movements that you see in commercial NPLs and total NPLs are mostly explained by that one case and, therefore, do not reflect overall portfolio trends.

As for our perspective going forward, we expect cost of credit to remain low in historical terms for the rest of the year, although not quite as low as the second quarter. Therefore, we are revising our guidance for the full year of 2021 from the cost of credit to be between 0.5% and 0.8%.

Wrapping up, the last 6 months were the best in our history, and we are confident that this positive trend should continue. We are fully conscious that much remains to be done and that's why we are in full transformation mode to achieve our ambition of becoming the fast-growing bank in Chile. We are currently in the second or third place as well as turning around the performance of our business in Colombia. Finally, our upcoming capital increase is expected to provide us with the necessary capital strength to grow and compete effectively on this market.

With this, we conclude our presentation that we have for you today, and we will gladly take any questions that you might have.

[Operator]

[Operator Instructions] Your first question comes from the line of Sebastian Gallego from CrediCorp Capital.

[Sebastian Gallego, analyst]

Gabriel, I have several questions. The first one, if you could discuss on the efficiency front, you have been doing a great job in terms of OpEx control. But a big part of that has been driven by lower headcount, lower branches and lower ATMs. Can you probably discuss the outlook on these 3 specific topics on how you expect this going forward? And how much room for OpEx reduction do you guys currently have at the bank?

Second question, I wanted to ask you about asset quality. You just mentioned that on the corporate segment, there wasn't a specific client. I'm just wondering if you currently feel comfortable with a lower coverage ratio, particularly in Chile, we have seen that this dropped to 136 from a recent high over 200, and we are pretty much at pre-COVID levels or even social unrest. So I'm just wondering if you need -- or if the bank needs probably additional provisions in the upcoming quarters may be going into 2022, probably.

And lastly, I just wanted to ask you about the strategy on loan growth. We have seen a very strong loan growth, particularly on the mortgage portfolio and just maybe the timing when you see a recovery, mostly focused on consumer that, that was a priority before the pandemic.

[Gabriel De Moura, executive]

Fantastic. Thank you for your questions, Sebastian. First, your first question was about the efficiency. And as you mentioned, I think that since the merger, we were able to capture the synergies that we set for the deal. As you can see in the slide that we've shown, we have grown our cost base less than our competitors. And when you take a look at the financial system as an aggregate and taking all the synergies that were with the operation of Itau and Corpbanca. I think that there are still many levels of synergies that we can achieve on the operational level.

As you mentioned, headcount is always a measure when we take a look at all the digitization process that we went forward and the program of robotization that we have that was quite strong in making sure that we are making more efficient all the eventual manualities that we have in different processes as well as taking a look at the footprint that we have for our branches as customers become more digital. I think in terms of the main impact of our efficiency, we will continue to see those factors.

Of course, at a certain point, we need to start thinking about efficiency as a function of the efficiency ratio, right? Because we are also intending to grow the bank and be the fastest grow bank in Chile in growing increase your cost as you increase the amount of transaction with the bank. But at the same time, you will increase your revenues, right? And that's why one of the goals that we have is to converge to the efficiency ratio average that our peers have in the short to medium terms.

But having said that, when we take a look at all the initiatives that were implemented successfully in Brazil, all the things that we have mapped here in Chile, we think that we have our costs well under control and we will continue to work for the goal that I just mentioned.

In the second point that you had is about asset quality. I think it has to do, especially on the commercial side of the discussion, Sebastian, you tend to do provisions well before you have NPL, right? This is one of the characteristics of commercial loans when compared to consumer in mortgages that work more on a statistical base given that they are well diversified within the portfolio. So what happens in the credit cycle is that you front load the provisions in commercial as you see a deterioration in ratings. And as they become NPLs, you have already the provision that's based on your internal rating process.

So I think that we are comfortable with the level of provisions that we have, with the coverage that we have, you have to remember that, for instance, for the cases that we have mentioned that affects the NPL, aside from the provisions that we have, we also have guarantees vary from real estate to other guarantees. So in terms of the loss given the fall, we are well covered. And in terms of additional provisions, we have to take a look at the market and incorporate new information as the economy goes through the second semester to see what we intend to do. But giving all the information that we have right now, I think that we are very comfortable with the level of provisions that we have. And that's why we are revising the guidance that we have for full year cost of credit to be between 0.5% to 0.8%, which is lower than the initial guidance that we had for the beginning of the year.

In terms of total coverage, I think, it's also important when you compare us to the industry, remember that the mix that we have is quite different from the industry. We are more concentrated on corporate in large corporate loans than on SMEs in the market compared to other banks. And I think that for the credit cycle, we are well provisioned given the mix that we have. And that's why I don't think that we are directly comparable to some of the players.

Your last point was about loan growth. And here, I think that the way of putting it, I think that the market has grew less than the expectations we all had. The focus that we had was being very cautious around the segments that we are operating and the type of growth that we are having. That's why we have prioritized mortgages with all the guarantees. And we were a little bit more cautious on consumer growth.

Having said that, when you take a look at the rankings for growth within the industry, we are the second largest growth for our consumer and also for mortgages in the last 12 months. So I think that we did a good job in there. And as a consumption rekindles within the market, I think, it's feasible for us to continue to have a leadership position in consumer growth and resume our processes. But then again, if you're financing consumption, you need to see consumption in the market.

And I think that we are on the tipping point of the pandemic in which we will start to see higher consumption and stabilized employment which will give us more confidence to grow more that portfolio. As I mentioned, the main strategic goal that we have is to be the bank that has the highest growth within the system. I think that we are well positioned in the last 12 months. But there's still work to be done.

[Sebastian Gallego, analyst]

Perfect. Just if I may, Gabriel, can we clarify the guidance on cost of risk? Is that at the consolidated level? Or is that just for Chile that you mentioned?

[Gabriel De Moura, executive]

That's just for Chile, what I mentioned.

[Operator]

[Operator Instructions]

No questions at this time. Sir, you may continue.

[Gabriel De Moura, executive]

Fantastic. Thank you so much for your presence here for the second quarter results. As you have seen, we have transformation going on, we have solid results for the bank. We are part of a transformation that we are doing. And we hope to see in the third quarter with a continuous trend of the transformation that we are implementing. So see you there. Take care.

[Operator]

This concludes this conference call. Thank you all for participating. You may now disconnect.