Banco Itau Chile

SGO:ITAUCL

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Itau CorpBanca Third Quarter 2020 Financial Results Conference Call. [Operator Instructions]

Please be advised that today's conference is being recorded. [Operator Instructions]

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

[Claudia Montevecchi, executive]

Good morning. Thank you for joining our conference call for our third quarter 2020 financial results.

Before proceeding, 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 in which 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 through these different perspectives. Please refer to Pages 9 to 12 of our report for further details.

With us today in this conference call in Santiago are Mr. Gabriel Moura, CEO; and Mr. Rodrigo Couto, CFO. First, Mr. Moura will comment on 2020's third quarter results, our strategy as well as recent events. Afterwards, 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]

Thank you, Claudia. Good morning, everyone, and welcome to Itau CorpBanca Third Quarter 2020 Earnings Conference Call.

Today's presentation has 3 parts: our third quarter 2020 results, our early release results as the end of October and an update on our strategic agenda.

So moving straight to Slide #2. As we show on Slide 2, the macroeconomic outlook improved slightly in Chile and remained stable in Colombia. Our current expectation for Chile is a 5.5% decline in GDP this year and 4.5% growth in 2021. The latest news on vaccine have been positive. So we will probably see an upward review, which may also include the second withdrawals from the AFPs in Chile.

If we can please go to the next slide, on Page 4. We had a loss of CLP 10 billion in the third quarter, mainly as a result of the additional provisions we made to reinforce our balance sheet for this challenging credit cycle according to our expected loss provisioning [ premium ].

Our revenues were impacted by low inflation, which was only 0.1% in the third quarter, as well as by lower revenues from derivatives, which had been very strong in the second quarter.

On the cost management front, we made the biggest headcount reductions since the merger, which is a clear sign of our progress in the efficiency and simplification fronts, which we will discuss more in the last part of the presentation.

Moving to Slide 5, we show that we continued to perform better than the market in mortgages and consumer credit, while we are growing our commercial portfolio less than the market. Commercial credit demand has been weak after the first wave of the FOGAPE program. And we have also been selective both in terms of risk as well as in terms of required returns, in line with our focus of improving the return on capital.

On Slide 6, we present our financial margin with clients, which declined 7.7% in the quarter. The main drivers for this decline were lower revenues from derivatives, which had been especially strong in the second quarter, as I mentioned before, as well as a lower capital financial margin, which also have been positively impacted in the second quarter by an adjustment in the deferred income of our student portfolio. Apart from these 2 effects, our financial margin with clients was basically stable on a quarter-on-quarter basis.

Moving to Slide #7, we show that our financial margin with the markets was CLP 18.8 billion in the third quarter, about CLP 11 billion lower than that of the second quarter. The main driver for the lower financial margins with the markets was the very low inflation in the third quarter, where the U.S. varied only 0.1%, while our exposure to the U.S. increased to CLP 2.9 trillion. Despite that impact, we have been able to maintain our 1-year moving average of financial margins with the market, which have been quite stable since the fourth quarter of 2019.

On Slide 8, we show our noninterest expense for the quarter, which were negatively impacted by the severance costs as well as seasonal factors. Still, expenses remain very much under control, growing only 1.1% year-to-date.

A main highlight is the headcount reductions of 4.5% this quarter, which was the biggest structural adjustments since the merger. We simplified our organization structure with proportionally bigger reductions at the top of the pyramid. We also did it in a way that took care of our employees who were let go, by providing extended health care insurance as well as outplacement and training benefits. This adjustment had a negative impact in the quarter but sets us for great efficiency in the future.

We also had 4 branches closures as part of our strategy of optimizing our footprint, totaling 10 branches closed in the last 12 months.

Now moving to Slide 9, we show that our liquidity position remains very strong, with both LCR and NSFR at historically high levels.

Let's move to Slide 10. Here, we can see the evolution of our net income of the Colombian operation, where net income reached COP 5.4 billion in the quarter, and our credit portfolio fell slightly. Consistent with our focus in Colombia on credit risk management and cost efficiency, we highlight the 27.5% reduction in our branch network as well as an 8.8% reduction in our headcount year-over-year in Colombia.

Moving forward to Slide 12, let's talk about October early release results. As you know, we have a credit risk provisioning framework in which we recognize allowance for loan losses in a forward-looking way. In the month of October, we increased our loan losses allowances to protect our balance sheet from possible impacts from the pandemic that might materialize in the future, considering macroeconomic prospects in Chile and Colombia as well as sector-, product- and client-specific aspects.

Our goal in this process was to front-load the provisioning cycle and make sure that, going forward, we have a clear view of the operational performance of the bank. As a result of this process, we have a cost of credit of CLP 234 billion in October 2020. In Chile, cost of credit was CLP 170 billion, mainly driven by the CLP 86 billion for corporate and SME clients of the sectors impacted by the pandemic, CLP 33 billion in additional provisions for our retail portfolio and CLP 17 billion for the deductible of the FOGAPE-COVID loans.

We implemented the same process for Colombia. And as a result, we have a cost of credit of COP 64 billion, of which COP 44 billion were additional provisions.

Considering these provisions, we have a negative net income for October of CLP 156 billion.

On the next slide, #13, we see the results of these increasing provisions in terms of our NPL coverage. As you can see, our coverage is one of the strongest in the Chilean banking sector. We are confident we have sufficient provisions for the current credit cycle.

Therefore, we believe that our cost of credit will be fairly normal levels, going forward. In fact, we project cost of credit of between 1% and 1.3% for 2021, probably a little higher than our target since 2021 will still be a year of economic recovery, but way below the levels we saw in 2020. Where we end up in the range, it will depend on how the economic situation involves.

Ultimately, we believe that we have put 2020 behind us and prepare our balance sheet for a new cycle of growth and sustained improvement in profitability as the economy recovers and we move forward with our transformation plan.

On Slide 14, we see that our fully loaded CET1 capital ratio improved since the second quarter, even considering the impact of the October provisions. We reached 7% in the third quarter, mainly due to improvement in efficiency in treasury and in Colombia, where we believe we have more opportunities given the high risk-weighted assets density we have there. We project a 30-basis points negative impact in October due to the provisions we have just discussed, leaving us at 6.7%, with a very well protected balance sheet.

Let's move on to the next part of the presentation, starting on Slide 16. As we mentioned in our second quarter conference call, we have moved on from crisis management to a transformation agenda to build back the future. On this slide, we present the key pillars of our transformation plan: client centricity, digital experience, simplification, talent development in an agile working model, all leading to sustainable results.

On Slide 17, we see our financial portability offer, which is a great example of customer centricity. We are attacking profitability with a powerful offering that combines convenience, value and freedom of choice to attract new customers.

On the convenience side, we offer 100% digital portability experience as well as our digital channels with digital payments. We also facilitate portability to our bank by a process of data aggregation so that our customers do not have to manually enter their transfer and payment data to their new accounts with us. We do it automatically for them.

We have launched a mixed-rate mortgage product, called Bipotecario, which allows customers to take advantage of the current low interest rate environment.

We have also opened our loyalty program, enabling customers to exchange the Itau points freely for travel tickets and products of their choice as well as cash back.

We will talk about open investment platform on the next slide, #18. On the product offering side, we have opened the investment architecture, as shown on Slide 18. We want our clients to have freedom of choice, with the best investment options available in the market as well as independent advice. That is why we are partnering with top local and global asset managers.

I would also like to highlight that our own asset management business is recognized as a leader in responsible investment, corporate governance and sustainability research. This is a good example of how ESG aspects are integrated into our business.

As you might remember, back in March this year, in our fourth quarter 2019 conference call, I had mentioned that responsible banking is at the core of the things that we do. We believe that having good governance, taking care of the environment and being positively engaged with the society in general and in communities are part of the business that we have.

The strong trend towards digital channels and transactions continues, as we see on the Slide 19. We see two- or threefold increases in transfers and deposits year-over-year, while maintaining high availability. That is why we have been investing heavily in our digital channels.

In this quarter, we launched a whole new app, leveraging a lot of the technological components from Itau Unibanco. Over 180,000 clients have already migrated to this new app.

We were the first bank to launch a digital token for companies, providing additional convenience and security for our corporate and SME clients.

We have also launched a new and more convenient personal banking website, optimized based on customer transaction preferences. And as a result, we have experienced a 55% increase in utilization.

Moving on to Slide 20, let's talk a little bit about simplification, which is a key element of our strategy to drive customer satisfaction and efficiency. On this slide, we give 2 examples of our simplification initiatives: robotic process automation and simplification of our organizational structure.

We have been working with robotic process automation for a while now. Having completed over 60 projects enabled us to save 0.5% of our cost base in 2020. We reduced our customer onboarding unit cost in almost 60%, which is a key, given the growth we have been experiencing in our customer base.

We also simplified our organization structure, with the most significant reduction in the headcount since the merger and proportionally higher reductions in the top layers of the organization.

Let's move to Slide 21. In a pioneering initiative in the Chilean banking market, we have announced a new flexible working model that is Remote First. That means that our employees working from home will be the default option, rather than the exception. We have found that such a working model is not only possible, but preferable, because of the convenience and flexibility it provides to our employees. We fully expect this flexible working model will be a competitive advantage in talent acquisition and retention as well as in efficiency in the years to come.

On Slide 22, we can show some results of what we have achieved so far. In the last 12 months, we have managed to grow more than the market in new accounts. We are the second bank in account openings this year. If we look at the last 12 months, we also grew 2x the market in individuals and 4x in companies.

To enhance this trend, we are attacking financial portability, as we have shown before, with a fully digital experience. It is still early in the process. But so far, we are 1.6x inbound portability versus the requests that we have outbound.

On Slide #24, we present Baruc Saez, the new Chief Executive for Itau Colombia, effective now on November 1. Baruc has been working with Itau Unibanco for 10 years, lately as the Head of LatAm Investment Bank. Before joining Itau, he worked in investment management and wholesale banking positions at Marathon Asset Management, Deutsche Bank, ABN AMBRO and ING Barings. He has a master’s in international economics and finance from the Brandeis University and a bachelor from Bard College.

After a period of adjustment and reorganization of our Colombian operations under the leadership of Alvaro Pimentel, Baruc comes with a strong commercial background to lead the next phase of evolution of our bank in Colombia.

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 Jason Mollin, of Scotiabank.

[Jason Mollin, analyst]

Maybe you can give us -- obviously, we've seen a lot of pressure on the bottom line in this difficult environment, negative returns on tangible equity. Perhaps you can talk about that and how you think about the forward on return on tangible equity versus your cost of equity that Itau looks at and presents in a detailed fashion on a consolidated basis, Itau Unibanco.

And then secondly, as just a follow-up on what you showed, that Itau CorpBanca is the second bank in account opening in 2020. I'm imagining that's in Chile. If you can tell us what's driving that and how are you differentiating your products to achieve that.

[Gabriel De Moura, executive]

Fantastic. Thank you for your question, Jason. I think that we have on a typical year, when I take a look at the P&L, and I do see 2 different forces that impact our return on tangible equity.

The first one, and the major one, are the provisions. As I mentioned, we are doing this year, we are incorporating with all the information in a forward-looking way all the provisions that we think that we need for our portfolio. And that's why you saw this jump in coverage, and now we are the second largest coverage in the Chilean market. So we are preparing the bank in terms of its balance sheet for a new phase that will start in 2021 in terms of our looking for better results.

The second, I think, force that drives results down this year is interest rates, especially the financial margins with liabilities and also with our capital. In terms of the next year, I do expect this pressure to continue. We do see interest rates still low in the market. But I think that we're going to see a certain pickup as we stabilize economic growth.

But then again, I think that when we take a look at provisions, that's the main driving force.

If you take a look at margins, we were able to grow spreads from our corporate clients. We were able to maintain the spreads that we have on the consumer side. On a part of the mix, because of new regulations, especially on line of credits, we were a little bit affected. But I think in terms of revenues, I think that we quite got to defend the portfolio on this process.

Going forward, I think growth is key, and that somehow connects to the second part of your question. We've been growing our consumer business twice the market for some years now. We still have a challenge in terms of mix. We still have a mix from the business in retail compared to the business in wholesale different from the other banks. We came from a lower basis of comparison, but I think that we are moving along in the right direction.

So in terms of profitability, I think that scale, efficiency and growth are absolutely crucial for us.

In terms of the things that we've been doing so far, I think that the value proposition that we put forward in retail, I think it was quite strong. As I mentioned before, we came up with 7 different offers and pillars for our retail business. For instance, we opened our architecture in investments, as we did in Brazil a while ago.

We generated new products for the mortgages business for some flexibility of the interest, giving clients a little bit of lower interest rates at this period.

We came up with products permitting account aggregation and data aggregation from other banks in order to make all the transition from one day to the other possible.

We made a process fully digitally revamping the app that we have, the website that we have. And also all the portability process that we have, it's fully digital for our clients.

I think those -- aside from the offer that we have from the digital branches and the value propositions that we have for products, credits, so on and so forth, I think that we, so far, have been fortunate enough to be growing the bank more than the market.

And I do see that the market is perceiving this offer. As a proof, when I take a look at portability offer, as I mentioned, we are 1.6x inbound than outbound with the offer that we have.

In terms of results, I think that probably we are going to see next year with much better results. I think that we are on the path of convergence to what we have first in 2019 [ and then in 2018 ], which was the best year that the bank had in Chile. We have a 13.5% return on tangible equity in 2018. I think that's a little bit of the path to convergency that we are expecting.

In terms of the targets, I don't think there is a change. Of course, the timing for that with all the pandemic, the social unrest generated an impact from us. But we do think that for the Chilean operation we will converge in the next 5 years to a return on tangible equity around 16%. That's the target that we have, and that's what we think is possible.

When you take a look at the Colombian operation, I think that we are ready to enter a new phase, and which we were at the last 3 years, more involved with the innards of the bank, changing the policies, changing the risk, arranging structure, digitalizing the bank. And now we are on a more go-to-market strategy.

I do think that we have a tougher path to convergence in Colombia. I do think that we are going to see 5 years from now a return on tangible equity in Colombia between 12% and 13%.

So as I mentioned, the targets that we have and the ambition that we have and that we think is possible haven't changed. The timing for that did, mainly because of the expectations that we have in 2016 and the arrangements that we had to do in terms of risk management and technology were different than expectations. And the economic environment that we expected was different since 2019 and now with the pandemic in 2020.

But we remain very optimistic. Itau Unibanco side is the same. They remain very optimistic with what we can achieve with those operations.

[Jason Mollin, analyst]

That's very helpful, Gabriel. You really did address those questions. I guess they are long-term targets, and there have been a lot of disruptions. But if we look at these October numbers that you show here, the loss was large due to these provisions. Is this now -- is that it? So I guess the message is that should be enough, based on what you know today. Clearly, things could change. But based on what you know today and the difficulties that we're still going to face for the rest of this year and next year, I guess, as well, the worst is behind Itau CorpBanca in terms of provisions?

[Gabriel De Moura, executive]

I think that's the message. And to make even that clearer, we are giving a guidance for cost of credit next year between 1% and 1.3%. So I think that we are incorporating a forward view in these provisions, especially, as I mentioned, I think to put the worst behind us, having our balance sheet prepared. I don't want to have discussions into 2021 or 2022 about the credits of 2020 and about the pandemic. We are putting this behind us.

It's a big adjustment. If you take a look at impacting results, that's significant. But then again, I think it shows the fact that we are going forward and putting all the discussions of the past in the past, of the pandemic in the past, in having the coverage that we need and somehow hoping for a better scenario than we expected. And as we see talks about the vaccine, as we see talks about the new 10% of the AFPs on the market, of course there's still uncertainties about the constitutional process in Chile, but we remain positive, but we prepared for the worst.

[Operator]

Your next question comes from Daniel Mora, with Credicorp Capital.

[Daniel Mora, analyst]

I have one question. Can you please tell us what has been the evolution of the payment behavior of clients that asked for any type of benefit at the beginning of the crisis? And what percentage of the loan portfolio is still under any type of benefit?

[Gabriel De Moura, executive]

Daniel, thank you so much for your question. I think that we saw a positive evolution in terms of the portfolio that we gave more time here in Chile. In terms of the consumer part, remember that during the months of April, May and June, we gave clients the option of extending for 3 months those credits. Most of them came due and with a payment higher than 95%.

When you take a look at mortgages, we did the same thing for 6 months. So there is still a part of it, a minor part of it, that is still coming due. But the numbers that we see so far, they are very good.

Nevertheless, and I think this is an important point, Daniel, to make a connection with the provisions that we did. We believe that what is happening right now on the market, we see a better-than-expected performance from credit, mainly due to the government incentives and also the 10% withdrawal from the pension plans. I think that generated an excess income to people. And what we saw in Chile is that with an excess income people are paying their debts, which I think, institutionally, it's a good thing.

The question that we have, and that's why we did more provisions, and perhaps there is an upside for that on us, is, how is that going to play out in the following months? Because at a certain point, the 10% withdrawal is used, net levels of unemployment are still high. But then again, with a new 10% withdrawal from the funds, a vaccine, the reactivation of the economy sooner than the second quarter of next year, I think it generates an upside scenario for us related to the provisions that we are doing right now.

But nevertheless, we wanted to be cautious. We wanted to be conservative in the things that we are doing right now, because there is still uncertainty on the market.

But answering your question, I think the performance so far has been much better than we expected.

[Operator]

I'm showing no further telephone questions at this time. I will now turn the call back over to the presenters.

[Gabriel De Moura, executive]

Fantastic. Thanks so much for your questions. 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. Take care. Bye, bye.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.