Banco Itau Chile

SGO:ITAUCL

Earnings Call Transcript 2021-Q3

[Operator]

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Itau CorpBanca Q3 2021 Financial Results Conference Call and Webcast. [Operator Instructions]. Claudia Labbe, you may begin your conference.

[Claudia Montevecchi, executive]

Thank you. Good morning. Thank you for joining our conference call for our third 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 and 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. Mr. Moura will comment on the progress on our strategy and 2021 third quarter results. Afterwards, we will be available for a question-and-answer session. We have included a Q&A box on the console where you can type in your questions if you are not connected by phone. We will take questions from both the phone and the console. For the latter, we will read and answer your questions verbally. It is now my pleasure to turn the call over to Gabriel.

[Gabriel De Moura, executive]

Thank you very much, Claudia. Good morning. Thanks for joining us for today's conference call. Today, we will present you the progress we have been making in our transformation program as well as the highlights of our second quarter results. So starting on Slide #3, we will recap the 5 pillars of our ongoing transformation based on disruption, customer centricity, simple and digital, innovative organization in culture and finally, sustainable results.

On Slide 4, we give you some concrete examples of the progress we have been making on these 5 pillars. On the disruption front, we are quickly advancing towards launching the first credit cards with our Rappi alliance as well as making progress in scaling up our business model for investments centered on independent financial advisers, on customer centricity we have made major strides in improving our NPS, which has been the fastest growing in the banking industry.

On the simple and digital pillar, we have the best-rated banking app on the Apple and Google stores as well as the best banking website for SMEs. We have been moving quickly with the organization shift towards agility, expecting to end this year with 400 to 500 staff working in agile working model. Finally, we have achieved a turnaround in our performance in Chile. We have a clear and actionable plan for Colombia, and our strong ESG focus has been widely recognized.

On the next slide, we'll go over some of these examples with more detail. On Slide 6, we present an update of where we are with the Rappi alliance. We are underway with the family and friends phase and will go live with the credit card launch on the first quarter of 2022. The first product will be credit cards with benefits in the Rappi [indiscernible] no commissions and fully digital. We will provide physical cards to customers who want them, and we expect many new want them because it's, in fact, a beautiful card. But it can also be a virtual card for those who want it.

The onboarding process will be fully digital in risk models, leverage on Rappi customer data. New functionalities will be incorporated throughout the next year as we progress towards a more comprehensive digital product offering. Moving on to Slide 7. We provide an update about how we are scaling up our business model for the investment business based on independent financial advisers. We have reached 60 independent financial advisers, covering not only Santiago region, but also other main regions of Chile where we had 10 advisers.

We have also enabled the pershing platform for offshore invest. As we ramp up the number of advisers and customers in our IFA model, we are already observing how powerful this is for acquiring new customers for a full-fledged banking services. Up to this point, we have seen that 44% of our new IFA customers open accounts, for instance, on our private bank. Let's now move to Slide 9, where we show the progress we have made in customer satisfaction.

We are the bank with the fastest improving NPS in the country according to the latest Pulso Service poll survey. We have improved our internal NPS by 44 percentage points, which is a remarkable improvement in a short period of time based on the experience of the specialist consultants that we work with. We are very happy to have achieved an NPS of 62, but by no means satisfied. It is not enough for us to have a good NPS compared to other banks as we are obsessed with customer experience, and customer expectations are constantly evolving, challenge us to compete with leading players for every consumer industry.

Now let's move to Slide 11, where we present the evolution of one of the key aspects of our service model, our digital branches. These digital branches provide personalized service as well as the full functionalities of physical branches in a model that is more convenient for our customers, for example, due to the extended [indiscernible] service as well as being more efficient. Ultimately, our customers choose the best service model for them. So we only encourage customers to try the digital branches, if their profile indicates that they will be better served through those.

NPS numbers clearly indicate that our customer satisfaction with digital branch model [ being ] sustainable on the longer term. We are pioneers of digital branches in Chile, and we are now rapidly scaling up the model. We expect to the end of the year with 6 digital branches expanding to 12 next year. In terms of customers, we expect to end 2021 with 42,000 customers in digital branches and more than double that to 100,000 next year.

On the next slide, on Page 12, we show how we are positioning ourselves as digital leaders, both through the content we generate and through the development of opportunities we provide to our employees. Our leaders vision in YouTube likes keeps going strong following the [indiscernible] of Steve Wozniak, Christopher Gartner and with the [indiscernible] of Kevin Mitnick, formerly the world's most wanted hacker, who shared his tips of how to keep safe in the digital world.

We believe that talent development as well as attraction is one of the main drivers that defines the speed and extent of our transformation process. Therefore, we'll be heavily investing in employee training and development of key capabilities for our digital transformation. Moving to Slide 14, where we show our progress in lamenting agile@scale model. We started last March with the first 3 agile communities.

By the end of this year, we have -- we will have 500 staff internal and external, working in 18 agile communities. Our plan for next year is to triple this number of staff in agile working model to 1,500 distributed in more than 30 communities, which will cover all of our main products in service lines. The implementation of this agile@scale has been very important in increasing the speed of product innovation and adaptation to our customer practices, which we believe would be one of the main drivers for further boosting our customer experience and NPS.

On Slide 16, we further expand on the topic of ESG. As I have mentioned in previous call, we have incorporated an ESG focus in all of our business. I have recently told you about our strong ESG commitment in our asset management business, about our wholesale bank in ESG portfolio as well as our adherence to global sustainability principles such as the UN Global Pact, the equator principles and the principles for responsible investments.

We now highlight how we have been providing access to financial services to SME with over 11,000 new SME clients year-to-date. We have also financed several SME sustainable projects such as pellet plant and solar energy projects we show as examples on this page. We also highlight our industry-leading team that assess the projects we financed along the key dimensions of environmental and social risk management practices.

Let's move on to the next part of the presentation. On Slide 17, where we present the financial highlights for the third quarter of 2021. Our consolidated net income was CLP 59 billion, mostly in the Chilean market that we operate. Consolidated return on tangible equity was 13.2% and return on tangible equity for our Chilean operation was 17.2% in this quarter. When we look to our profitability, in 9-month period, we had a return on tangible equity of 16.9% on a consolidated basis and 20.8% in Chile.

Financial margins with clients grew 9.2% year-over-year, mainly due to strong position contributions from higher deposit volumes, increasing our net interest margin from 2.2% to 2.6%. This reflects our strategy, especially in the wholesale bank, where we have been selective in deploying our capital only at acceptable return levels. Fees grew 30.6%, primarily due to higher financial advisory fees in Chile and Colombia as well as an improvement in insurance brokerage fees in current account services and overdrafts in Chile.

Noninterest expenses increased 0.9% relative to the third quarter of last year, which is much lower than inflation for the period. Cost of credit was down 42.7% year-over-year, reflecting the benign credit conditions that we have experienced. When we look at our credit portfolios, we grew 0.6% in Chile and 2.7% in Colombia in constant currency, compared to September 2020, with mortgage loans in Chile and retail loans in Colombia as the biggest contributors. In line with our goal of becoming the fastest-growing bank in Chile, we are monitoring our position in ranking in terms of credit growth.

Over the last 12 months, we have ranked #1 in mortgage credit growth in both 3-month and 6-month period and have ranked #2 in customer installment loans in the last 6 and 12-month periods, again, consistent with our strategy of increasing the share of retail in our business mix. On Slide 18, we see how our loan portfolio mix evolved in the last 12-month period in Chile. Consistent with our strategy, we increased the share of retail loans in our portfolio from 32.8% to 36.3%, an increase of 353 basis points. Since merger in 2016, the share of retail in our loan portfolio increased by 7.84%.

We still see more attractive returns from growing retail so we expect the share of retail in our portfolio to continue to expand, especially once consumer lending begins expanding again after the effects of the [indiscernible] with loss subsides. Nevertheless, with our new Head of Wholesale Banking, Sebastian Romero, having just came on board in September, we are now starting a major transformation in our wholesale business, which we will enable us to grow with attractive returns in wholesale banking as well.

Moving on to Slide 19. Financial margins with clients grew 1.3% quarter-over-quarter, mainly driven by liability financial margins. The chart on the right-hand side shows that our net interest margin was quite resilient over the last several quarters of low interest rates. Nevertheless, we believe our NIM, will benefit from higher interest rates to an increase in liability spread as well as in financial margins from our own capital. On Slide 20, we show the evolution of our noninterest expense, which declined 1.9% year-over-year. Looking at the first 9 months of 2021, we see an increase in noninterest expense of 0.7% compared to the same period of last year.

The chart on the bottom-left side compares our cost growth with inflation over the same period and demonstrates that our costs have grown much less than inflation over that period, which is consistent with our long-standing commitment of cost control. Even more significantly, the chart on the bottom-right side shows us that the efficiency ratio has improved over the last 4 quarters. Here on Slide 21, we can see our main credit in [indiscernible] in Chile. Cost of credit in the third quarter was CLP 29 billion, which corresponds to 0.6% of our average loan portfolio.

That is closer to the bottom of our revised guidance of between 0.5% and 0.8% for the year and also below what we consider our steady state cost of credit of 0.8%. Cost of credit did increase relative to the second quarter, but one must keep in mind that the second quarter figure was very low base of comparison as it was positively impacted by some large wholesale credit recoveries. NPLs declined in the quarter as the good portfolio performance continued amid a benign credit condition.

Nevertheless, and consistent with our expectation loss provisioning model, we established additional provisions for the wholesale credit in sectors that we believe are still at risk of deterioration because of lingering effects of last year's credits. Let's move to Slide 22. Net income in Colombia was up to COP 32.3 billion. NPLs were down and NPL coverage was up as we also proactively reinforce provisions for some wholesale credits consistent with our expected loss provisioning approach. Our turnaround plan for Colombia consists mainly on focusing growth on target segments and improving efficiency.

We are starting to see some results on the growth front as our portfolio grew by 3.1% last quarter. On the efficient front, the downward trend continue in terms of the number of branches and headcount. We did have a one-off effect on administrative expenses this quarter. Nevertheless, even considering that effect, expense growth in the first 9 months of 2021 relative to the same period of 2020 was 1.9% well below inflation. We are moving on with the implementation of our transformation program in Colombia, which we expect will have a major impact on efficiency next year.

Here on Slide 23, we see that our fully loaded CET1 capital ratio was stable quarter-over-quarter. We are completing today the first round of the equity offering for increasing the capital of the bank, which we will address our capital position. We will be providing updates for that process as information becomes available. Now we move on to Slide 24, which is our last slide.

We present a comparison of our performance in the first 9 months of 2021 with the same period of 2019, which was the less normal, we say, 9 month period that we have. The main message is that the bank has achieved a major turnaround in performance, improving return on tangible equity from 9% to 16.9%, while surpassing precrisis revenues with much lower cost of credit and a very controlled cost growth. On top of that performance turnaround, we are implementing a fully fledged digital transformation, both in Chile and in Colombia, touching all performance levers as well as positioning the bank as a disruptor in key markets.

Our ambition is to be the fastest growing bank in Chile and achieve 13% to 14% consolidated return on tangible equity, including the capital increase in the short to medium term. We are on our way and confident we will get there. With this, we will conclude the presentation that we have for you today, and we'll gladly take any questions that you might have.

[Operator]

[Operator Instructions]. Your first question comes from Alonso Aramburu from BTG Pactual.

[Alonso Aramburú, analyst]

I have a couple of questions. The first one on what you mentioned on Colombia on the efficiency efforts and the possibility of large cost-cutting next year. I mean, where is your focus there? Is it on cutting branches, more branches? Is it personal? Can you give us a little more color on where the cost guiding will happen in Colombia?

[Gabriel De Moura, executive]

Sure. You mentioned 2 questions, Alonso, do you want to [indiscernible]

[Alonso Aramburú, analyst]

The second one is on retail growth, which did nicely this quarter, both in Chile and in Colombia. It was a little surprising and good to see that the growth in Chile, given the liquidity in the system. So I just wanted to get a bit more color there as well. If you're seeing that as maybe as a one-off this quarter? Or are you seeing a recovery continuing in the fourth quarter as well?

[Gabriel De Moura, executive]

Fantastic. Thank you for your questions, Alonso. When we take a look at the plan that we have in Colombia, we did a bottom-up approach and we [indiscernible] to refi initiatives that we have for Colombia. If I were to divide the business in Colombia in 3 different main pillars. We have a wholesale business that is -- it's very close to remunerate our cost of equity in Colombia. We have a solid performance on treasury that from the last few years and this year also continues to remunerate our capital in Colombia. And the new challenge for us is in our retail business, given the scale that we have in all the structures around retail distribution, product and this kind of operations and kind of support that our retail business needs.

So the main focus for us is taking a look at the whole bank. But of course, the most impact that we see on the short to medium term is on our retail position. If you take a look at the level of branches that we have for our client base as well in terms of structured products that we operate, I think there are many things that we can take with synergies from Chile to repeat as we did distribution in terms of the digital branches that we have operated in Chile.

So I don't think it's only taking a look at the footprint on branches, but taking a look at the whole retail business, and rethink them. I think for some time, we did in Colombia a strategy that was based in [indiscernible] Chile, meaning that we have the same structure, the same [indiscernible] as a universal bank. But the problem is that in Chile, we have roughly 13% participation in wholesale in the market, something around 8% on retail. And when we talk about the retail in Colombia, we have 3%, 4% of the market. So I think that we have to rethink the strategy, adapting the structure that we have in Colombia to be more focused on the affluent client base that we have that were based on the acquisitions from the business from Santander and also with [indiscernible] and preparing the growth in retail to happen more through the digital strategy than from the distribution network that we have nowadays.

So I don't think there is a silver bullet in Colombia saying that, no, we do this. We will converge. I think the products in wholesale that we are getting out of them, security service is an example of a business that we are rethinking in Colombia. But most of the effort goes in our retail operation. The second question, you asked was about retail growth in Chile. And for sure, we see a dynamic in the market that given the withdraws from the pension plans, the market is flooded with liquidity.

We see that effect of the consumption, we see that effect on inflation. And all the effort that the Central Bank put change in monetary policy goes to the same diagnose -- diagnosis of what is happening to the market. The flip side for that discussion is that we indeed see a lower aggregate growth in the economy. But then again, given the share that we have, I think that we can grow in some segments. For instance, in credit cards, our participation is much less than the fair market share that we should have given the size of our operations.

So I think there are interesting credit opportunities for us in the market. But for the market as a whole, as you mentioned, I think that given the prospects of a possible forced withdrawal from the pension plans, what we will see the continuous liquidity on the market and a lower aggregate growth, if we especially consider what is the long-term elasticity, of credit growth compared to nominal GDP. I think that we don't know that. But then again, I think that we were able to take share from consumer credit in the last few years. And our ambition is to continue to do so in the next few years.

[Operator]

Our next question comes from Jason Mollin from Scotiabank.

[Jason Mollin, analyst]

Gabriel, I have 2 questions. First would be just if you can provide an update on the capital raise? And then with that new capital, talk about, obviously, the use of funds, we know you're going to buy the stake in. The intention is to buy the stake in the Colombian -- Colombia that you don't own. And then with that new capital, if you can talk about forward-looking profitability level, sustainable profitability levels in Chile and Colombia. We've seen -- obviously the 9 months looks great so far on some metrics, but we wanted to get your views.

[Gabriel De Moura, executive]

Sure. Thank you, Jason. As we mentioned, the capitalization process, the capital position that we have at Itau CorpBanca is something that we have been discussing with the market in the last few years and how we were going to do the convergence to the minimum capital levels with the implementation of the Basel III in Chile at the end of 2025 [indiscernible] implementation. So the capital increase that we are doing, I think it helps us in 3 different phases -- or not phases, but objectives.

The first one is for us to do a full convergence to the peers that we have on the market. So when we take a look at the capital capitalization levels, on an aggregate levels in Chile is something between 9% to 10% for the largest banks. So I think it's important for us to do this convergence. And of course, the capital increase is an important step in that phase. The second one is, as you mentioned, the acquisition of the participation that we don't have in Colombia.

That's an ambition that the bank has since 2014 when the merger of Itau Chile and CorpBanca happened. And we intend to do that at the beginning of next year. And the third point has to do with all the investments that we are doing, technology, the digital transformation that we are doing for the bank. At the end of the day, have a more sustainable capital base will enable us to continue the level of growth and investment that we've been doing in the last few years.

In terms of profitability, if you take a look at the returns that we now have, we never said that we would sustainably have the result and the results -- the return on [indiscernible] of 19% to 21% that we are seeing in Chile, especially because with the higher level of capital that will be diluted. So the expectation that we have is to -- after the capital raise, having a target between 13% and 14% midterm on a consolidated basis, return on tangible equity. That means a little bit more in Chile, a little bit less in Colombia, but a nonconsolidated business. That's our target.

If you take a look at the growth that we have, the normalization of the cost of credit that we have, the discipline on costs that we are having and project that on time, probably you're going to see an impact similar to what we were talking about. So that said, at least it's our expectation is where we've been positioning the bank and investing in the last months.

[Jason Mollin, analyst]

That's very helpful. So just to confirm, at the consolidated level of bulk killing Colombia, target medium term 13% to 14% return on tangible equity. And in Chile, higher and in Colombia, lower than that?

[Gabriel De Moura, executive]

Yes. We think that we can achieve the plan that we have for Colombia is that we should be able to achieve our cost of equity in Colombia, close to 36 months from now, from 18 months from now, probably we are at 60% of the target, converting fully in 30 to 36 months to our cost of equity. In Chile, we will operate a little bit higher than that.

[Operator]

[Operator Instructions]. We have no further audio questions in queue. I'd like to turn the call back over to the presenters.

[Gabriel De Moura, executive]

Fantastic. Thank you so much for more -- one conference call. And if you have further questions, Claudia, Rodrigo and I are always open for you. Take care, we see you next quarter.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.