Banco Itau Chile

SGO:ITAUCL

Earnings Call Analysis

Bank Navigates Economic Cycle with Prudence

The bank's financial margins were squeezed due to high interest rates and low inflation, impacting its market margins and taxes. Fee growth of 4.7% offset this, driven by financial advisories and asset management. Despite increased cost of credit by 5.5%, expenses were actively managed, with a 1.6% quarter-over-quarter decrease. Growth in consumer loans, demand deposits, and investment assets, which outpaced market rates, signal success in strategic portfolio re-balancing. The bank’s NYSE delisting aims to streamline operations, and solid capital and liquidity ratios were maintained, especially in the challenging Colombian market. Cost of credit for the next year is expected to remain stable, reflecting cautious optimism in the current tough macroeconomic climate.

Challenges in Treasury Amid High Interest Rates

The bank's financial margin with markets was pressured by the combination of high interest rates and very low inflation, resulting in significantly lower earnings of CLP 3.1 billion. These conditions made it challenging to profit from treasury activities. However, there is an anticipation of improving returns as interest rates normalize.

Growth in Fees and Asset Management

There was a notable 4.7% growth in fees during the third quarter, primarily driven by financial advisory and asset management. This growth signals ongoing business momentum despite the exclusion of one-time insurance alliance income that inflated the previous quarter's figures.

Increase in Cost of Credit

The bank reported a 5.5% increase in the cost of credit, reaching CLP 60.5 billion for the quarter. The bank remains at the lower end of its projected cost of credit range of 1.1% to 1.5% for the year.

Efficiency with Lower Noninterest Expenses

Noninterest expenses have been reduced by 1.6% from the previous quarter, a result of prudent resource consolidation following a period of expansion. This focus on efficiency and cost management is expected to enhance performance going forward.

Solid Performance in Chilean Operations

The bank's Chilean operations continue to thrive, with assets under management growing about 50% faster than the market, indicating effective strategic implementation. Notably, Chile continues to anchor the bank's performance, with strong capital and liquidity positioning it among the most resilient banks in the country.

Optimization and Simplification

The decision to delist from the New York Stock Exchange is aimed at improving efficiency and simplifying operations while maintaining high governance standards. This move reflects the bank's strategic refocus and prudent management of capital liquidity and credit in the current economic cycle.

Navigating Asset Quality Pressures

The bank continues to face pressures on the margin for nonperforming loans (NPLs), especially within the consumer portfolio due to credit renegotiations. A decoupling between NPLs and cost of credit is observed, suggesting that despite delinquency pressures, the bank anticipates a reduction in overall cost of credit impact due to higher provisioning. The guidance for cost of credit remains unchanged, indicating confidence in managing through the current pressures.

Outlook for 2024

The bank expresses cautious optimism for maintaining current cost of credit levels into 2024, despite the challenging macroeconomic environment. The focus is on enhancing the efficiency of collection processes and cautious credit risk management. The bank expects to navigate through a tough first half but is more optimistic about the second semester of 2024.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Bhavesh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Banco Itaú Chile Third Quarter 2023 Financial Results Conference Call and Webcast. [Operator Instructions]

I would now like to turn the call over to Claudia Labbe, Head of Investor Relations. You may begin your conference.

[Claudia Montevecchi, executive]

Thank you. Good morning. Thank you for joining our conference call of our third quarter 2023.

I would like to remind you 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 material model in which we adjust for nonrecurring events and apply managerial criteria to disclose our income statement.

Please remind that since the second quarter 2019, we represented our income statement in the same manner as we do internally. 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 format of presenting our results will give you a clearer and better view of our performance from these different perspectives. Please refer to Pages 13 to 16 of our report for further details.

Now Mr. Moura will continue with the presentation.

[Gabriel De Moura, executive]

Thank you, Claudia. Good morning, everyone. Thank you for joining us for this third quarter 2023 conference call. As usual, we will update you on the progress implementing our strategy as well as present the highlights of our third quarter results. We start on Slide 3, where we can recap the 5 pillars of our ongoing strategy, disruption, customer centric, simply in digital, innovative organization and culture and finally, sustainable results.

On Slide 4, we present our new investment center, which we created to receive customers who come to us seeking tailored investment advisory and other content that they find interesting. At the investment center, customers will have available not only our own investment professionals, but also in the tenant financial adverts that are part of our ecosystem. These advisers are specialized in local international investments, benefiting from the commercial agreements with the main booking centers for private banking in the United States and Switzerland. The early returns from this service model have been positive. And our investment advisers, both internal and external, have already been able to attract over $220 million from new customers.

In Slide 5, in addition, as part of our strategy to offer new investment products, we have just launched a pioneer fund in the local industry called APV win-win. Our 5 APV win-win funds are voluntary patient savings funds that only charge fees on the days when the funds have a positive return, thus aligning the incites of fund managers with those of our customers in an intuitive way.

On Slide 6, we see that we have strengthened our leadership position in customer satisfaction. As for the second consecutive year, we were the most recommended bank for both individuals and companies according to the independent NPS service test by Ipsos. Customer centricity is the corner of our strategy as it provides the main source of differentiation from our competitors, which enable both our growth and present strategies. While we are proud to be #1 for the second year in a row, we know that we need to keep pushing forward, not only to stay ahead of the other banks, but also to close the gap within the leading players from other industries.

Moving to Slide 7. We are glad to share that we've been recognized by Great Place to Work as one of the 10 best companies to work in Chile for as well as the top 10 companies with over 1,000 employees from women to work in children. I will quickly move to Slide 8 where we continue to talk about people.

In Slide 8, we see additions of our innovative organization in culture from employers for you as the seventh best company for young professionals to as well as from top employees Institute. The recognition that we have received as a result of our organization culture and working environment demonstrates that we are also leading a non-important competition for talent.

Now let's move to Slide 9. As part of our broad offering of financial services and in line with our key pillar of sustainable results, we were joint book runners for 2 new sovereign sustainability-linked bonds issued by the Republic of Chile. These bonds will also promote the reduction of greenhouse gases as well as promote gender quality in high-level positions.

As I mentioned last quarter, we are strengthening our capability in this field, aiming to become the #1 provider of sustainable finance solutions. Let's now move to Slide 10. As you might be aware, last Monday, October 30, we announced the initiation of the process to terminate the program of our American depository shares, ADS, registered in the United States of America canceled the registration of our ADS with the Securities Exchange Commission and the least our ADS from the New York Stock Exchange. The process is expected to be completed during the first half of 2024.

Our decision was taken mainly considering that our ADS program was no longer relevant as it represents less than 1% of the bank's shares and about 2% of the daily traded volume. Therefore, we decided to take the opportunity to simplify our processes and make the bank more efficient by terminating our ADS program. The decision will not affect our corporate governance, risk management and transparency standards for investors, regulators and the market. The bank will continue in compliance with SOC standards as part of a Uni Banco Group as well as listed in 2 stock exchanges in Santiago.

On Slide 11, we show our track record in generating returns in Chile since the beginning of 2021. Over the period, spending 11 quarters, our return on tangible equity was above 14% and top 3 among peers in 7 quarters. On the 2 quarters when our return on tangible equity in Chile was below 14%, including this quarter, it was still top 3 among peers. That means that in quarters that we had lower returns, our peers also did, showing that those were periods of low returns for the sector and not just only for us. In the 2 quarters where our returns were not top 3, they were above 14%, showing that those quarters or periods of high returns for the sector. Our track record over these last 11 quarters clearly demonstrates the convergence of our returns in Chile with those of our main peers as well as the sustainability of our results.

On Slide 12, we show a little bit of the macroeconomic backdrop in this last quarter, which needs to be considered while analyzing bank performance in the period. Real interest rates were extremely high level with an average monetary policy rate above 10% versus a variation of the UF of only 0.3% and which would correspond to an annualized inflation of roughly 1.2% despite the high real interest rates, the Chilean peso suffered a devaluation of 11% against US dollar, leading lending growth out low to 2.8% over the last 12 months.

Now moving forward to Slide 13, where we present the financial highlights for the third quarter of 2023. Our consolidated net income reached CLP 70.9 billion, decreasing 39.4 years Net income in Chile was COP 80 billion, also decreasing year-over-year, mainly due to high income taxes as a result of lower inflation. In fact, pretax net income in the third quarter of 2023 was nearly flat relative to that of the second quarter. Return on tangible equity was 12.8% in Chile and 9.2% in the consolidated.

Consolidated financial margins with clients grew 9.6%, boosted by high volumes as well as high interest rates in both Chile and Colombia, which positively impacted financial margin on assets and capital. Consolidated fee income reduced by 11%, negatively mainly impacted by lower financial adviser in Chile. Consolidated noninterest expenses decreased by 1.6% year-over-year as a result of lower personnel and administrative expenses in Chile and Colombia, driven by the progress of the efficiency plan momentum in both countries. The consolidated efficiency ratio for the third quarter was 46.2%.

Consolidated cost of equity decreased by 10.2% over the high base recorded in the third quarter of 2022, which was negatively impacted by CLP 20 billion of additional provisions established in that quarter. When we look at our credit portfolio, it grew at 0.8% in Chile and minus 6.2% in Colombia in constant currency compared to September 2022 with customer in mortgages loans in Chile as the biggest contributor that partly offset lower retail growth in Colombia. Overall, it was a quarter of low returns in the industry, both in Chile and Colombia. In that context, we managed to have the second-best return among our peers as well as stay above breakeven in Colombia, where several banks are sustaining losses.

We now move to Slide 14, where we show that our financial margin with clients in Chile increased by 0.9% during the quarter and 5.9% over the previous year. The increase compared to the second quarter is primarily driven by high commercial spreads on assets and liabilities as well as high capital margin due to high interest rates. The graph on the right-hand side demonstrates that our average rate of financial margin with clients has been stable over the last 3 quarters, just as we predicted in our guidance for this year.

On Slide 15, we can see that in the third quarter of 2023, our financial margins with the market was CLP 3.1 billion, which is a lot lower compared both to the second quarter and the first -- in the 1 year moving average. Our financial margin with markets has been under pressure due to high interest rates combined with very low inflation this quarter. The reality is that it is a lot harder to make money in treasury when interest rates are so high. So we expect returns to improve as rates normalize. It is also worth noting that inflation negatively impacts not only our financial margins with the market but also the effective income tax rate and the devaluation of the firm's equity due to inflation is a tax-deductible expense for firms in Chile.

On Slide 16, our attention is on fees, which grew by 4.7% in the third quarter, driven by financial advisory in asset management fees. This valuation excludes the onetime effect of the upfront income related to the insurance alliance, which previously impacted the previous quarter. We are seeing both good progress in our investment business, both in terms of assets under management and performance and we believe it will do even better as interest rates fall and investors search for yield.

Here on Slide 17, we see our main credit risk indicators in Chile. In the third quarter, the cost of credit reached CLP 60.5 billion, a 5.5% increase during the quarter. Continence for cost of credit as a percentage of the credit portfolio for this year was between 1.1% and 1.5%, and we closed the first 9 months of the year at the bottom of the range at 1.1%. We have actively managed the credit cycle for all of our portfolios through a wide range of measures, encompassing both whole process for admissions to late-stage collections and recoveries. While results so far been on the better side of the range we expected, we will continue to be vigilant throughout the later part of the credit cycle.

Here on Slide 18, we show noninterest expenses for the quarter, which decreased 1.6% compared to the last quarter and increased 0.1% year-over-year. Quarter-over-quarter decrease was driven both by low personnel and low administrative expenses. After a period of expansion in which we started several new business and activities, we believe it has come the time to consolidate and concentrate resources where we see the best prospects for success.

As you continue to see in the shaded box in the slide, even during this period of expansion, we continue to cost below inflation and improve our efficiency ratio as we adjusted both our physical structure and head count. Going forward, as we redouble our efforts in the efficiency front, we expect even better cost management performance as suggested by less further numbers.

On Slide 19, we highlight our outperformance over the last 12 months in 3 key products for our strategy, consumer loans, demand deposits and investment assets under management in consumer loans, although growth has slowed because of tighter credit conditions, we continue to grow more than the fastest market. Our demand deposits also held up better than those of our competition during a period of extremely high interest rates by Chilean standards.

Finally, our assets under management grew about 50% faster than the market. What these numbers show is that our long-time strategy of changing the mix of our portfolio towards consumer lending continues to work and that our presplit strategy is beginning to produce results, all within the context of the opportunities that exist at this point of the economic cycle.

Let's move to Slide 20 for a summary on Colombia, where we are navigating a challenging scenario while maintaining strong capital and liquidity ratios. Despite the nestable cost of those additional capital and liquidity buffers, we have been able to sustain results just above breakeven in the environment where even some of the major banks have suffered losses and the profitability of our peers fell sharply. Even though--even though much remains to be done, we have made concrete progress in our transformation in Colombia, even though we have to do it while managing through a stress macroeconomic scenario. We believe that the progress we made will become more visible in the numbers when the economy normalizes to some extent.

On the next page, Slide 21, we once again show that we are among the best capitalized and most liquid banks in Chile. The improvement of our foundation strength over the last 2.5 years, both organically and through a $1 billion follow-on stock offering demonstrates our commitment to resilience and prudent management, which is the essence of the Intel management model.

Finally, on Slide 22, we recap the key messages from this presentation. First, we continue to build on our track record of returns in Chile in a quarter by posting the second-best return among our peers. Second, we are also beginning to see progress in our principality strategy as we have outperformed market growth in key areas such as demand deposits and assets under management. Third, we decided to delist our shares from the New York Stock Exchange, which will bring efficiency and simplification while maintaining our governance control interest patency standards. Finally, we will continue to prudently manage capital liquidity and credit in this later part of the cycle, especially in Colombia.

With that, we conclude the presentation that we have for you today, and we would gladly take any questions that you might have.

[Operator]

[Operator Instructions] Our first question comes from the line of Yuri Fernandes from JPMorgan.

[Yuri Fernandes, analyst]

Thank you, I have just a follow-up on asset quality. Just your outlook, how you are seeing, is the worst behind in Chile. What should be the level of cost of risk? And just some more color on the asset quality and provision for the company.

[Gabriel De Moura, executive]

Thank you for your question, Yuri. We continue to see pressure on the margin for nonperforming loans. I think that we are on the part of the cycle that we meet separate on the consumer side, the NPLs from the cost of credit. And why is that? Us and you can see the same effect on the industry, did some renegotiations of credits beginning in the end of the year to this year. So the renegotiation of credits, normally, they have a good impact on NPLs.

But because of the high expected loss that you have on those credits, you increase the level of provisions. So at this cycle, some of the credits that we have renegotiated, they are becoming -- big clients may not pay them. So we can see on the margin, especially for that part of the portfolio, some pressure in terms of delinquencies. On the other hand, because of the higher provisions for those credits, we see a decoupling between NPLs and cost of credit.

So I think that what we are going to see is NPLs, still a little bit of pressure. I think that we are becoming -- we are seeing on a margin some pressure, but less pressure than we saw in the past. I'm not ready to call the end of the cycle, but we do see some good news on that front. And the better news for me is in terms of the cost of credit because of the higher delinquency reach rates for the part of the portfolio that was renegotiated and had higher provisions, we might see lower impact in cost of credit for the portfolio as a whole.

So in terms of guidance, for cost of credit, we are not changing the guidance that we gave. We are maintaining the guidance for this year. But because so far, we are at the bottom of the cost of credit distribution, I think it's unlikely that we are going to see much changes in that cost of credit on an aggregate level of the portfolio. I think that the market is still taking a look at it, especially I think that we need to see lower interest rates in order to be more optimistic to the credit cycle that we were leasing. Perhaps, we are going to see that stretching for the first semester of 2024.

We are a little bit more optimistic to the second semester of 2024. But now the main focus that we have is the efficiency of our collection process. The offering that we have for clients that want to restructure their credit while being very cautious vision according to risks. I think that's the main take for credit.

[Yuri Fernandes, analyst]

Perfect. On Its a little bit tougher first half in 2024, we believe in the other 8 year of 2024, should we expect cost of risk to be lower versus 2023 or working with some stable cost of risk, do you believe it makes more sense?

[Gabriel De Moura, executive]

I think that perhaps we can see a changing mix, Yuri. My feeling right now is that we shouldn't see a much lower cost of rate, especially because when you take a look at the guidance, we are in the lower part of the credit cost. I think I would be cautious to say something of being even lower that year. I think that if we can maintain the levels that we've now given the continuous pressure that we see, I think that would be good news.

I think that perhaps what we can see is that the cost of credit within the industry may change a little bit from the consumer side for some of the companies, especially SMEs companies. If interest rates are still higher. I think that the good part for us is that the mix that we have for business and credit on SMEs is very low. So that possible change in mix wouldn't affect us that greatly.

But I think that cost of credit should somehow be in nominal terms, for next year, similar to what we saw this year. So we're still doing our calculations. I mean, we're still incorporating a lot of information in our models. The truth is that we are in a very challenging macroeconomic scenario for the whole world, which you see the challenge that the central banks all have in terms of managing monetary policy in this cycle not give a guidance for 2024. But I'm cautiously optimistic that we should be able to hold levels similar to those that we have nowadays.

[Yuri Fernandes, analyst]

Makes a lot of sense. Basically, retail improving a little bit, but you still don't know what's going to happen with SME and if SMEs deteriorate, may be like a more challenging outlook for cost of risk. If I may, Gabriel just a second one on your hedge for FX, especially in Colombia, -- you had a cost on that hedge -- usually, is the rate differential between U.S. and Chile. How do you see this evolving? Because in previous calls, you mentioned that this could be a savings opportunity for the bank? How big can be this lower cost of hedge for you?

[Gabriel De Moura, executive]

I think that we are going to see a much lower cost of hedging for us next year, especially when we do see the depreciation -- the difference between rates in the United States and rates in Chile become lower. The flip science to that discussion, I think that we are going to see 2 things. I think that the result in Colombia might be better at some point that hedged cost us something around $40 million per year. So it's very expensive given the size of the investment and given the rate difference between the U.S. and Chile.

So I think that's a positive for Colombia next year. I think that the negative -- and you can see this in this quarter, as interest rate -- as inflation goes lower in Chile, you see a high tax rate for us in Chile. So in the consolidated, I'm not sure I need to take a look at the numbers. But probably you're going to see a positive in Colombia as this drag becomes much lower. But you do see some pressure in the effective tax rate that you see for us in Chile.

As the result, as I mentioned, the pretax return that we have this year, it's similar to that we have in the previous year. The main difference is on tax rate. Of course, we do not expect inflation to be at 1.2% in Chile, what happened this quarter, specifically on an annualized base. But I think that the effort that the Central Bank is doing in increasing rates, we show the results of a much more controlled inflation next year.

[Yuri Fernandes, analyst]

So basically, what you're saying is that you may have some efficiency. I don't know how much, maybe you said $40 million is the cost, $40 million? Do you believe it can be half of that, the cost -- but basically, this cost will be offset by higher tax rate in Chile, right? So maybe we don't see...

[Gabriel De Moura, executive]

I need to deepen my understanding of how is the fact on Chile. We're just updating those numbers to the inflation that we are seeing within the market. Probably the effect that we might see in Colombia is more than the half. But I'm not sure of what is the impact in Chile. I'll get back to you on this.

[Yuri Fernandes, analyst]

Super clear. Thank you very much, Gabriel.

[Gabriel De Moura, executive]

Sure.

[Operator]

There are no further questions at this time. Mr. Gabriel Moura, Chief Executive Officer. I'll turn the call back over to you.

[Gabriel De Moura, executive]

Fantastic. Thank you so much for the questions and for being here for this presentation. I think that the main key takeaway that I have is the performance that we are having, especially in our operation in Chile compared to our peers and to the target returns that we have always said that it would be possible for us to gather in Chile. So in terms of making sure that we deliver the results that we have discussed and I think that we are doing that. And even on a relative basis, I think that we are having very good results for the next last 11 quarters.

We have all the commitments for our teams to continue to have a performance like this. It is a more challenging macroeconomic environment. But having said that, even on a relative basis, we are confident with the bank that we have with the teams that we have, and we will strive our best to continue to deliver those results.

We see you on the next conference call. Thank you for participating.

[Operator]

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