Banco Itau Chile

SGO:ITAUCL

Earnings Call Transcript 2022-Q2

[Operator]

Good morning and welcome to the Itaú Corpbanca Second Quarter 2022 Financial Results Conference Call and Webcast. [Operator Instructions] Thank you. I would now like to send the call over to the CFO, Rodrigo. You may begin.

[Gabriel De Moura, executive]

Hello, everyone. This is Gabriel Moura, the CEO for the company. I don't think that Rodrigo is on the call. I think that we're having some problems connecting. So we'll start here. So thank you for joining us on our conference call for the second quarter 2022. We would like to remind you that our remarks may include forward looking information, and our actual results could differ naturally from what is discussed in this presentation.

We would like also 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 adjust for no recurring events and apply managerial criteria to disclose our income statements. Please remind that since the first quarter of 2019, we are presenting our income statement in the same manner as we do internally. This financial model reflects how we measure, analyze and discuss financial results by segregating our commercial performance, our financial risk management, our credit risk management, and also our cost efficiency. We believe that this form of presenting results will give you a clearer and better view on how our performance is from these different perspectives. And you can please refer to the pages nine to 12 of our report for further details.

With that, we start our presentation today, and thank you for joining us on the second quarter '22 conference call. I would like to update you on our progress and our strategy, as well as present the highlights of our second quarter results. So, if we can start on our slide four, as part of our marketplace strategy, we are now partnering with TalkTalk, complementing our housing ecosystem. This alliance will allow us to integrate our mortgage lending products into each customer's housing acquisition journey.

TalkTalk is a marketplace that publishes properties for sale and rent that currently offers more than 130,000 properties and 1,500 real estate projects in Chile. The TalkTalk marketplace had more than three million visits during 2021. It provides online appraisal services, market research information, as well as advertising spaces that will help us cross sell our financial products. We have an initial value offering in which we have a total of 7,000 pre-approved bank clients with mortgage credit. We will have access to a more agile process and a better experience. Over time, we will add functionalities to create the best integrated housing marketplace in Chile.

On slide six, as part of our strategy for the wealth management business, we have acquired MCC, a financial boutique with more than 40 years of experience, enhancing our capabilities as well as our scale by effectively tripling our assets on the management for private banking clients. Along with the integration of MCC, we have launched our own private bank backed by the largest private bank in Latin America. Through our private banking platform, our customers will have access to a broad range of investment services locally and internationally, including the possibility of opening accounts and invest in our banks in Miami and also in Switzerland. Develop proposition for our clients is to offer a comprehensive advisory service through a multidisciplinary team of bankers and investment specialists supported by the ITAU international network to deliver the best investment alternatives, advice, and also our experience.

Moving on to slide eight, we present the values of our new YouTubers culture, which viewed upon long-lasting elements of our culture, such as ethics and result orientation; while in society, new areas to focus, such as diversity and external orientation. Customers increased in collaboration complete the six core values for our culture. We believe that with this new culture that we were launching simultaneously with the [indiscernible], we will help just celebrate the transformation of the mindset in behaviors that we need to continue building the bank of the future.

If we can move to slide 10, we now present the growth rankings for the Chile market, which demonstrate that we continue to make progress towards becoming the fastest growing bank in Chile. Over the last 12 months, we were the fastest growing bank in mortgages, consumer starting loans, and [indiscernible] export loans. And the second fastest growing in factoring credit cards and [indiscernible]. Over the coming quarter, we'll continue to strive to be the fastest growing bank in Chile by building upon our competitive advantages in product differentiation and customer experience while remaining very selective on growth opportunities in terms of pricing, as well as risk cases.

On slide 11, our ESG commitment, including managing environmental impacts of our operations, managing the social environment that reach our total and supporting our clients in their ESG efforts. At the operational level, the increasing digitalization of our operations has allowed us to reduce our carbon footprint by 16% between 2019 and 2021 with significant reductions in energy, water, and paper waste. We have also become supporters of the task force for climate-related financial disclosure. In this matter, we will start the implementation of their 11 recommendations.

For us, climate change is an opportunity as well as a challenge. We have been actively supporting our clients' transition towards sustainable growth, granting them either green loans or sustainability linked loans, which at the same time allow us to pursue our own climate-related ambitions.

Finally, I would like to mention that we have asked [indiscernible], a longtime investment relations officer, to lead these efforts, reflecting the dimension and importance of the ESG agenda for our bank. Investment relations will become part of our financial planning and analysis function under the leadership of [indiscernible]. I thank Claudia for all the contributions over the years and wish all the best on her new role, leading our ESG.

Now moving forward to slide 12, where we present our financial highlights for the second quarter of 2022, our consolidated net income reaches 145.4 billion Chilean pesos, growing more than 105% year over year. That income in Chile grew even more by almost 122% to 151.6 billion Chilean pesos. Consolidated result return on tangible equity was of 22.1%, while return on tangible equity in Chile reached 29.1% in this park. When we look to our profitability in the first semester, we have a 19.4 return on tangible equity on a consolidated basis and 24.8% in Chile, which is the highest in our history.

Consolidated financial margin with clients grew by 36.8%, boosted by higher volumes, especially of price in Chile and Columbia, as well as high interest rates. Consolidated fee income grew by 18.3% primarily due to higher results in financial advisory commissions, both in Chile and Columbia, as well as higher results in insurance brokerage, in current account services, and overdraft fees, especially in Chile. Consolidated no-interest expenses increased by 13.1% year over year. It's longer impacted by inflation as well as by volume growth that we experienced over this period.

Nonetheless, the consolidated efficiency ratio improved by 13 basis points, reaching 45.3%. The consolidated cost of credit increased year over year from a very low base, which had been positively impacted by the pension funding with loss and other pandemic related support measures.

We obviously had a very strong second quarter to close a very strong first half of the year. In that period, we benefit like most major banks in Chile from some macroeconomic tailwinds. However, let not that distract you from the underlying performance of our business.

In addition to our financial performance, our positioning growth rankings, our improvement in NPS clearly reflected progress that we have made as a bank. While we do not expect to maintain the same level of return on equity over the coming quarters, which are likely to be more difficult from a market perspective, we have clearly succeeded in closing most of the profitability gap against our peers. Moving to slide 13, we see that our financial margins with clients in Chile grew by 34.5% year-over-year, and 8.7% in the quarter.

As we can see on the graph on the bottom of the page, the main drivers of this improvement are relative to the first quarter of the credit portfolio growth, as well as improvements in the liability spread in capital financial margins due to higher interest rates. On slide 14, we see that our financial margins with the market was 66.9 billion change in business in the second quarter. Way above the one year moving average, and very positively impacted by the inflation in the period. We expect financial margins with the market to fall back to levels more in line with the historical average as inflation declines at some point over the coming quarters.

On slide 15, our focus is on fees, which grew 13.5% year-over-year. We have seen good growth in most of our fee-based business lines, especially insurance brokerage and cash management, as we highlight on the graphs in the right hand side of the page. The one exception has been asset management, which has been negatively impacted by volatile markets, as well as by product substitution. Here on slide 16, we see our main credit risk indicators in Chile. Cost of credit in the second quarter was 57.7 billion Chilean pesos, which corresponds to 1.1% of our average loan portfolio, impacted also are 50 billion Chilean pesos in additional provisions that we made. Looking at our NPLs, mortgage credits remained stable and consumer credit shows a 30 basis point increase in the quarter. The movement that we see in the commercial NPLs and total NPLs are mostly explained by a few specific cases, and therefore do not reflect overall portfolio trends.

Overall, we are seeing NPLs going back to more normal levels as the effect of the EFP withdrawals and other liquidity measures wear off within the economy. Our provisioning model had anticipated this effect, and that is why NPL coverage ratio has come down as NPLs went up. Nonetheless, considering the high level of uncertainty of our current macroeconomic environment, we increased our additional provisions by 15 billion pesos in this quarter, and we continue to do so as needed in the future. On slide 17, we show non-interest expense for the quarter. We show a 5.9% increase quarter-over-quarter as a result of an increasing personal expense, mainly due to seasonal effects of the first quarter associated with provision for employees vacation and variable compensations established in this quarter. The graph on the right side of the page shows that our head count has remained basically flat, even as we increase our technology stack by almost 17% over the last 12 months as we continue to invest in technology, internalize personnel for key IT roles.

In terms of our overall efficiency trends, as we can see in the two graphs at the bottom of the page, our cost continue to grow much less than inflation, and our efficiency ratio continues to improve. Let's move to slide 18 on Columbia. As well you know, we are implementing a transformation program in Columbia that has a major efficiency component, which you can see in the significant reductions that we have made in branches and head count over the last 12 months, as well as the improvement in the efficiency ratio. Credit quality also has been positive in declining NPLs and cost of credit over the last 12 months. We expect to see a more significant impact of the transformation on the bottom line over the coming quarters, and especially when the current environment of high inflation, fast increasing interest rates and market volatility [indiscernible].

On slide 19, we show our capital ratio. That has remained [indiscernible] despite the market volatility in the peer in which we have major current evaluations, as well as rising interest rates.

More importantly, on slide 20, I think that we can recap the key messages that we have for you on this presentation. First, we had a strong first half of the year, and with a consolidated return on tangible equity of 19.4%, and 24.8% return on tangible equity in Chile. While we do not think that our return on tangible equity will remain on that level for the coming quarters, we have closed the gap against most of our competitors. We continue to focus proactively on managing the potential effects of the current cycle of high inflation and high interest rates on our business going forward, as demonstrated by the decision to increase additional provisions in this quarter. The third point is that we continue to advance towards becoming the fastest growing bank in Chile, while remain selective on growth opportunity in terms of risks, and also in returns. And finally, we are making progress in our transformation in Columbia by improving our efficiency. With that, we conclude the presentation that we had for you today, and we would gladly take any questions that you might have.

[Operator]

And we do have a question over the phone coming from Jason Mollin from Scotiabank.

[Jason Mollin, analyst]

Hello, Gabriel. Congratulations on the strong quarter. I wanted to follow up on your comments on the efficiency transformation in Columbia. Looks pretty impressive when you're showing the reduction in headcount and branches over the last year. Maybe you could talk about how that can in the future impact long-term profitability, and what we should be expecting there, in particular relative to what you're looking for in Chile. [indiscernible].

[Gabriel De Moura, executive]

Sure. Thank you for your question, Jason. As you well know, Columbia has always been challenging for us. We have changed the strategy that we had for Colombia last year, and started this new plan mainly based on the analysis that we have for profitability on the bank. If I divide the bank in Colombia in three major businesses, we can see that they have very different dynamics in things that we can expect. For instance, we have a treasury and trading business in Colombia that is -- It's very profitable against our cost of equity. I think that we are active, I think that would be managing that well through different cycles, so we have high hopes of staying that way, increasing our penetration in Columbia. There are many things that we can do regionally, and also leveraging Itaú Unibanco's positions in other countries for multinationals and institutional investors with the position that we have in Columbia.

The second strong business that we have in Columbia, in which nowadays we receive more than our cost of equity in Columbia, is our wholesale business. It comes from the businesses that [indiscernible] used to have, that [indiscernible] used to, and also the business that we had from Itaú BBA in Columbia. In terms of corporate investment banking, and also middle market, I think that we are well-positioned. Most of the view is in Columbia, we are into the flow of the clients, having discussions in structuring positions. We are strong in project finance, so I think that we have a good wholesale operation in Colombia.

I think that the main challenge that we always had was our retail business in Columbia, in which, at the end of the day, we lose money on that. And the compound of everything so far, had led us to a return between 3% and 4% in return on equity in Columbia, with two business that are going very well in one business that has a way to go in terms of being profitable.

The analysis that we had for Columbia was based on the footprint that we had, based on the business that we saw in the Columbian market. We had a decision of either leveraging the current capabilities that we have in Colombia and growing the bank with the branch network, so on and so forth. And we try to do that for a couple of years, and as the market changes, as the digitalization process changes, it became clear for us that we need to change that strategy, and that's the footprint in all the structure in retaining Columbia to the client base that we currently have, and develop new capabilities for the bank in Columbia, in order to grow it.

What that means, that the future growth in Colombia is not based on current capabilities and the distribution network that we have from the branches, but from everything that we've been developing Chile in terms of digitalization now, and also leveraging from Brazil. That's why we focus the strategy in being very efficient in Columbia, towards in being very efficient in Columbia towards the cost base that we now have. We expect to be at break even in our retail business in Columbia by this year end. So, this is the ambition that we have. And we think, as we have been discussing with you so far, that we are able to converge to our cost of equity in Columbia.

We started this last year or so. In the next two years, we will be able to converge to our cost of equity. That was always the ambition that we had. I think that it's feasible for the assets that we have, but we do change at the strategy by increasing the business volume that we have on wholesale and also in treasury. And reevaluating, I would say, the footprint that we have on retail and developing the digital capabilities to growth in the future.

It seems a more feasible strategy. It seems a shorter term, in terms of the latency of doing everything that we need to do and obtaining the results. And, that's why we are on this right now. And if you take a look at the numbers, I think that we've been very disciplined in delivering the results that we have mentioned.

[Jason Mollin, analyst]

That's super helpful. Maybe a second question on the outlook for regulatory change and perhaps the perspective that the Itau Corpbanca has, given your controlling shareholders experience in Brazil. So, it sounds like we're seeing potential open banking rules and regulations, as well as a new FinTech Law. Do you have any comments on how that could impact the market and Itau Corpbanca, future opportunities? Thanks.

[Gabriel De Moura, executive]

I think that's great, especially because I'm not an incumbent on the marketing Chile in Columbia, so everything that happens that helps increase competitivty generates more changes on the market for us is positive. And moreover than that, I think it's positive for the marketing for consumers to have more choices, to be a more fluid market. I mean, at the end of the day market in Brazil, Chile, Columbia, we are efficient market in terms of banking, marketing cheerleader, very efficient.

So I don't think that the changes will do a completely turn around in the market in the same way we saw that in other markets, but I think it helps. And for us, the way that we have positioned ourselves of being the leading bank in NPS, and we take a look at the numbers, the increase that we have in how we position ourselves in the market, the lead that we have in satisfaction for our clients, within our applications, if you take a look at iOS store or Android store, the customer chooses, and I think that's great.

So, we are part of that discussion within the association of banks in Chile. We are participating with that. If you take a look at the associations that we did with [indiscernible], in Top Talk, other discussions that we have, I think that we are part of this change. We are embracing it. I think it's a great opportunity for everyone. But, you do need to adapt. You need to adapt the business models. You need to adapt the culture. You do need to adapt the way that you're doing things, so that's what we've been doing the last two years. It's adapting the bank to that. On the flip side to that, if you are a traditional bank that don't want to adapt in terms of culture, how you do things, I think it'll become harder.

[Jason Mollin, analyst]

Gabriel, any comments on the timing of implementation of open banking rules or just passing of the FinTech Law?

[Gabriel De Moura, executive]

No, I don't have a specific timeline for that. I know that regulators have a strong agenda for that. I think that the banks have been very, very responsive in terms of working together with FinTech. But specifically, I don't have a timeline for that.

[Operator]

We have a question coming from the webcast from Abram Martinez saying, "Hi, and thank you for the presentation. Please can you give more color about the bank exposition and regulated health sector and also in real estate?"

[Gabriel De Moura, executive]

Sure. Hi, Abram. In the health business, I think that your question is specifically to the Zapiz business in Chile. We have a very low participation on this. So, I don't think that it's significant to make any major comment about our exposure on the rapid market. On real estate, yes, we have a larger portfolio within real estate. We are more on the commercial side of real estate in terms of development. And when we take a look at the guarantees in how we structure some deals, we are comfortable with the cycle. I mean, what we have been seeing on the market is increasing costs for developers that made some products more challenging to obtain the levels of profitability that they expected, and we've been managing through the cycle. But, that's true for the impact of interest rates and also prices that we see in many other sectors.

But in terms of how we set up the businesses that we have, the guarantees that we have, on our real estate business, and also on the mortgage side, how we operate in our loan to value levels, I mean, I think that we are comfortable with the way that we have provisioned those portfolios, in the way that we are managing the cycle. But, there is a lot of activity in terms of talking to clients, taking a look at the exposures, refraining guarantees, following up on projects. I mean, that's part of what we do, and we've been quite successful on the past few years. But, it's a more challenging cycle for sure, but I think that's the part of managing the bank like we did during the beginning of the pandemic, and now with all the after effects of prices and interest rates. So, it's managing through risk cycles.

[Operator]

And, we have another question coming from the webcast. Coming from San Diego, Alba saying, "Single challenging scenario coming ahead, especially in Chile. How do you think loan growth behavior will be for the end of the year and 2023, and which will be the more affected segments."

[Gabriel De Moura, executive]

Hi. Thank you. As I mentioned during the presentation, we are focused on growing the bank. At the same time, we are very aware of risk in return ratios in management with being disciple. So, if you take a look in how we were able to grow our consumer business in the past, I would say, four years, in how we manage our NPLs and provisions, I think that we did very well. And, we continue to grow that business, but we are more aware of all the impacts that we are seeing. We want to grow, but we will be very specific in risk factors that we have where we are doing our business, and also the returns that we are getting back.

I can give you an example. On the other side, if you take a look at the commercial credit, I think that we've been in the last 12 months, probably the fourth largest bank compared to others. And the reason for that is that in terms of risk, and also in terms of returns, there are things that don't make much sense for us. So, in the same way of the question of Abram about sectors, and also kind of exposures that we have, in terms of growth it's the same thing.

I think there are lots of opportunities for us to grow, and we are pursuing that, but through a value proposition of service, digital that had enabled us to grow our portfolio with a well behaved risk management. I think that's a key part of the process. If you do not have a strong value proposition in terms of credit, then it becomes a process of adverse selection, right? If it is only per credit, I mean, at the end of the day, it's difficult to manage relationships and also credit portfolio within the cycle.

So, what we want to make sure is that on the commercial side, we have a very strong offering of cash management, of commerce that enable us to grow within client of factoring that we've been growing guarantees that we have in structuring deals with clients in a more ongoing relationship than just making sure that we have available credit. In consumer, in mortgages is the same discussions, making sure that we have principality, that the clients are coming, and we are growing not only because of our credit offering, but because of the value proposition that we have. I think that's how we've been managing that. But then again, we are not on the market.

But then again we are not on the market, just so you know. We are going to grow everything and that's more important of the bank. No, we are very sustainable in the way that we do business. We are very active, as you know, in risk management and we are very deep in the analysis that we do. And if you take a look at the numbers, I think it shows. But, it is a more challenging cycle as we have predicted from the discussions that we've been having with you since last year.

[Operator]

Thank you. We have another question over the webcast coming from [ George Morrow ], saying NPL formation in Chile was very high this quarter, around 160 billion CLP. Can you give us more color on what happened here and what to expect in the upcoming quarters? Thank you.

[Gabriel De Moura, executive]

Sure. I think that what you need to separate from this discussion, George, is what is the NPL formation from different segments, right? What is the discussion in consumer market and also commercial? So if you take a look at our businesses in commercial, let's first talk about mortgages. It's been quite stable, the NPLs that we have on mortgages. If you take a look at consumer, I think it is growing in much more aligned with our view of then going back to the levels that we saw previously to the pandemic, in those levels.

The formation of NPLs that we have here on this part, they are very specific to the commercial portfolio, to some cases that we have been discussing in the past portfolio of the bank and things that we have guarantees, that we have well provisions, that we did additional provisions for that. So, I don't think that the levels of NPLs that we have on the quarter, they represent a trend in the portfolio some things to expect.

I think they have to do with how the portfolio is set up for the bank, with the concentrations that we have on the wholesale part. And if you take a look at a little bit of our history, you have more volatility on this given how our portfolio is. Going forward, we do not have any specific guidance for NPL specifically because of the volatility. But, we do have a guidance on cost of credit. If you take a look at the numbers, I think that we've been consistent with the guidance that we have. We are a little bit more on the up side of the guidance specifically because of all the additional provisions that we've been making, and that we will continue to do so, as we see opportunity to strength our balance sheet moving forward.

But, I think that if you take a look at the MDNA, it deepens a little bit of your views. You see that it's very concentrated and volatile in some specific portfolios that we had, in which we do provisions well before the NPLs, right? So, there is this distinction between what is the consumer in market in the diversified portfolio in which NPLs drive the provision process. In the wholesale, the NPLs at the end of the day, they are the end of the process of all the ratings downgrades that you did way before in our portfolio, in our model of expected losses. I think that's the way that we manage it.

[Operator]

We now have a question over the phone coming from Yuri Fernandes from JPMorgan.

[Yuri Fernandes, analyst]

I have a follow-up on quality. I guess you already explored the real estate, and now this question on the formation, but two quick things. One, which sectors are the wholesale exploration like the few corporate cases you had? If you can comment on the segment per se, which one drove those sort of thing. And looking to 2023, what should we expect? Because I guess the concern we have here is that rates are super high Chile, above maybe the neutral rate, and we are seeing acceleration in the economy. So, what should we see going forward under guidance for this year on the cost of risk? But first, let's look at three. How concerned is the bank on this kind of environment? Are you concerned at all or not really?

[Gabriel De Moura, executive]

No, I think first talking about sectors exposure, and it is an interesting thing, Yuri, that you can do without the new regulations from the CMS in the way that we report information for them and all the banks in Chile, what they call the [Foreign Language]. There are a lot of information for you about sector exposures within the banks. That's public information. We take a look at it, and I think that you also can.

In terms of sector exposure, when you take a look at our bank in all other banks in the industry, based on that, they're not that different. In points, I can tell we have a lower exposure, I would say, in the other business. Compared to our peers, we have a higher exposure, I would say, in commerce, in infrastructure. But, there are not major differences on that. At the end of the day, of course, everyone is limited. [indiscernible]

[Yuri Fernandes, analyst]

Hello? Gabriel? I guess I lost you on the second part of your answer here.

[Operator]

Yeah. His line got disconnected. I'm sorry about that. Okay. So this is all the time we have for today. Thank you all for connecting today. This concludes today's conference call, and you may now disconnect.