Banco Itau Chile

SGO:ITAUCL

Earnings Call Analysis

Itaú Chile shows strong growth in net income and client satisfaction.

In the third quarter, Itaú Chile reported a 28.6% rise in recurring net income, reaching CLP 91.2 billion, driven by a steady growth in client deposits and asset management. Their Return on Tangible Equity (RoTE) held at 10.8%, while the net interest margin saw a 5.4% annual growth, supported by an increase in consumer loans. Despite a challenging market, total noninterest expenses grew by only 4.7%, keeping cost control intact. The bank successfully launched new credit card tiers and a financial literacy initiative, reinforcing their commitment to customer satisfaction, leading to the lowest client claims in three years.

Quarterly Performance Overview

Banco Itaú Chile reported a strong third quarter for 2024, with consolidated recurring net income reaching CLP 91.2 billion, a remarkable 28.6% increase year-on-year. The return on tangible equity (RoTE) decreased slightly to 10.8%, down 1.6 percentage points from the previous year, reflecting systemic pressures but maintaining overall relatively healthy profitability.

Margin Insights

The financial margin with clients grew 0.3% year-on-year to CLP 336 billion, driven mainly by improved loan spreads in retail banking and increased volumes in demand deposits. Specific strategic initiatives, like enhanced customer relationship management, supported this growth. However, the financial margin with the market faced considerable challenges, dropping 93.9% from the prior quarter, primarily due to decreased profits from fixed income securities and reduced variations in foreign exchange transactions.

Cost of Credit and Provisions

The cost of credit for the quarter reached CLP 102.1 billion, surging 25.1% year-on-year, highlighting challenges within the consumer segment. Notably, provisions for loan losses were influenced by the recognition of asset impairments, though additional provisions from prior years were successfully reversed, leading to a more favorable outlook moving forward.

Operational Efficiency Ratio

The bank achieved an efficiency ratio of 43.7%, which reflects a year-on-year improvement as expenses grew below inflation. This ratio, while slightly increasing from the last quarter, indicates the bank's effectiveness in managing costs amid fluctuating revenue streams.

Loan Growth Dynamics

The loan portfolio showed modest growth of 1% over the last twelve months, underperforming the industry, which grew by 2.1%. While consumer loan activity remains below industry averages, the mortgage portfolio aligned closely with market trends, boasting a robust 6.7% growth.

Market Position and Strategic Initiatives

Itaú Chile successfully secured the top position in customer satisfaction in the Chilean banking industry for three consecutive years and launched innovative initiatives like the 'Hablemos' campaign to enhance financial literacy among clients. These efforts aim not just for customer retention but to cultivate long-term relationships and sustain growth in assets under management.

Guidance and Future Outlook

Looking ahead, management has expressed optimism regarding the potential for loan portfolio reactivation and credit cycle improvements both in Chile and Colombia. While specific ROE guidance for the upcoming year will be shared in future communications, the bank anticipates a favorable environment for growth and asset quality stabilization.

Regional Insights and Economic Conditions

The economic outlook in Colombia reflects resilience, with GDP growth expectations around 2.5% year-on-year, despite challenges like inflation and investment dynamics. In this context, Itaú Colombia has maintained strong profitability and capital ratios compared to its peers, showing a year-over-year increase of 24.4% in recurring net income.

Earnings Call Transcript 2024-Q3

[Operator]

Hello, everyone. Ladies and gentlemen, thank you for standing by, and welcome to the Banco Itaú Chile Third Quarter 2024 Financial Results Conference Call. [Operator Instructions]

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

I would now like to turn the conference over to your speaker for today, Claudia Labbe, Head of Investor Relations. Please begin.

[Claudia Montevecchi, executive]

Thank you. Good morning, everyone. Thank you for joining our Third Quarter 2024 Conference Call. 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 managerial model in which we adjust for nonrecurring events and apply managerial criteria to disclose our income statement.

Please remember that since the second quarter 2019, we are presenting 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 way of presenting our results will give you a clearer and better view of our performance from these different perspectives. Please refer to Pages 16 to 18 of our report for further details.

Before moving on to the presentation, I am pleased to welcome Andre Gailey, our CEO, since October 1; and Matias Valenzuela, Head of Financial Planning, Analysis and Capital who are today here with me in Santiago. Good morning, Andre. Good morning, Matias.

[Matias Valenzuela, executive]

Good morning. Thank you, everyone. It's a pleasure to be here today attending the conference call for our third quarter results. Claudia will continue with the presentation and will be available for questions.

[Claudia Montevecchi, executive]

Thank you. As usual, we will start by updating you on our progress in implementing our strategy as well as presenting the highlights of our third quarter results. This quarter, we are proud to begin this presentation by sharing the results of the Servitest survey conducted by Ipsos. Remarkably, Itaú Chile has secured the top position in NPS for the third consecutive year. Additionally, we have recorded the lowest number of client claims in comparison with our industry in the past 3 years, significantly outperforming the banking system.

Customer centricity is not only a key pillar of our strategy but also one of our core values as a bank. In terms of achieving our strategic goals, maintaining the top position in client satisfaction within the Chilean banking industry for 3 consecutive years [indiscernible] for securing our leadership. This significant accomplishment underscores our dedicated efforts towards customer satisfaction and represents a substantial milestone in our journey towards principality.

On Slide 3, we delve into our latest efforts to strengthen brand positioning and introduce innovative financial initiatives. This quarter, we have launched the Hablemos campaign on social media, a groundbreaking financial education initiative. Through this campaign, we encourage our clients to engage in conversations about money and enhance their financial literacy. By doing so, we aim to contribute to their financial well-being while fostering a closer relationship as they strive to achieve their financial goals.

On Slide 4, we showcased our revolutionary product launch onto the market this quarter, which highlights our dedication to customer satisfaction and product market fit. The new credit card tiers, Blue, Black and Legend. This innovative offer underscores our commitment to customer centricity by democratizing and personalizing credit card benefits to cater to all of our clients. It empowers them to select the cost benefit combination that best aligns with their needs. Ultimately, for us, it is the client who decides what serves them best.

Moving on to Slide 5. We want to give you an update on the implementation of the changes in the Board of Directors and the Executive Committee that we communicated in the last quarter's presentation. Gabriel Moura was appointed as Vice Chairman of our Board of Directors, replacing Milton Maluhy, effective as of October 1, 2024. And Andre Gailey has been acting as Itaú's Chief Executive Officer since the same date, replacing Gabriel. We are also excited to announce that Emiliano Muratore has been appointed as the new Chief Financial Officer of the bank effective as of March 2025.

Now on Slide 6, we show some highlights of our results this quarter. In the chart on the top left side of the page, we show that our RoTE in Chile has reached 12.8% in this quarter, mainly influenced by systemic which will -- by systemic effects, which we will explain during the presentation and seasonality. In any case, we anticipate no changes in our expected RoTE for the full year.

At the top right side of the page, we can see that both net interest margin and margin with clients show a steady growth trend during 2024. The chart at the bottom left side of the page shows an enhancement in the bank's self-funding capacity, evidenced by the deposit to loan ratio and also an enhancement in terms of principality, evidenced by the deposit plus assets under management to loans ratio. On the bottom right side of the page, we can see that growth in the noninterest expenses remained below inflation year-to-date and our efficiency ratio remained stable year-on-year.

On Slide 7, let us now look at the macroeconomic dynamics that influenced this period. After a slower second quarter, economic activity improved in the third quarter, driven by increased dynamism in mining. Growth in the third quarter is expected to reach 2.6% year-on-year, surpassing the 1.6% showed in the second quarter of the year. Inflation increased in the second quarter, reaching 4% annually in September. In September, the Board of the Central Bank of Chile unanimously voted to cut the monetary policy rate by 25 basis points, closing September at 5.6% rates are continuing in fourth quarter.

In September, the financial industry's loans totaled CLP 234.9 billion, achieving a nominal growth of 2.1% over 12 months. A persistent trend of contraction in credit activity stands out in relation to the industry's performance during recent crisis episodes and its subsequent recovery. As of the end of September 2024, the banking industry's demand deposits and time deposits had an increase of 3.7% and 2%, respectively, compared to the same date in 2023. In the period, we can see a reduction in obligations with banks in the industry, reflecting among other effects, the impact of the expiration of the use of the FCIC.

Moving on to Slide 8. On the third quarter of the year, consolidated recurring net income reached CLP 91.2 billion, a 28.6% increase year-on-year. Consolidated RoTE showed a 1.6 percentage point decrease year-on-year, reaching 10.8%. Consolidated financial margin with clients grew by 0.3% year-on-year, reaching CLP 336 billion. Consolidated commissions and fees reached CLP 51.8 billion, evidencing a 13.4% growth year-on-year. Consolidated noninterest expenses grew 4.7%, reaching CLP 184.2 billion. Consolidated cost of credit had a 25.1% increase year-on-year, reaching CLP 102.1 billion. Consolidated credit portfolio reached CLP 25.3 trillion, while the consolidated efficiency ratio improved by 2.4 percentage points to 47.9% year-on-year. The consolidated common equity Tier 1 ratio reached 10.5%, a 48 basis point increase year-on-year.

On Slide 9, you can see that the financial margin with clients experienced an increase of 0.8% in the third quarter compared to the previous period. This growth is explained by a higher margin on loans and an increase in the volume of remunerated capital. Compared to the same quarter of 2023, the financial margin with clients grew by 5.4%. This increase was driven by the improvement in the spreads of the loan portfolio, mainly in retail banking, higher activity in derivatives and FX transactions with clients as well as the growth in the portfolios of time and demand deposits. These factors managed to counteract the effects of the decline in the average monetary policy rate for the current year.

We continue to observe a positive trend underpinned by the steady growth in consumer loans. This progress aligns with our core strategy of strengthening customer relationships through the verification of our funding sources and enhancing our services, particularly in asset management and client engagement.

Let's move on to Slide 10 to discuss the financial margin with the market. In the third quarter of the year, the financial margin with the market showed a decrease of 93.9% compared to the previous quarter. This was influenced by two systemic effects occurred during the quarter. The first one is related to the reduced profit recorded in the management of fixed income securities following the liquidation of the liquidity deposits maintained until July when the final payment of the SBIC was completed.

The second one is related to diminished results on U.S. variation during the third quarter derived from a smaller change of the U.S. in the quarter. However, this negative effects were partially offset by higher results achieving by the trading desk. Compared to the third quarter 2023, the financial margin with the market decreased 87%. This reduction was due to the slower growth of the loan portfolio during the year as well as the impact of the fixed income portfolio from the final FDIC payment made in July. Nevertheless, we are encouraged by the higher results derived from the management of the trading desk, showcasing our ability to adapt and optimize in a challenging environment.

Now on Slide 11, we show that during the third quarter of the year, commissions and fee income reached CLP 44.2 billion, representing an increase of 2.8% compared to the previous quarter and 15.4% year-on-year. This increase is mainly due to higher income generated by structuring services, especially for Itaú corporate clients. Additionally, the good performance in asset management commissions has been maintained, driven by a 6.4% growth in the managed portfolio balance quarter-on-quarter.

In the yearly comparison, asset management commissions grew by 61% as a result of sustained growth in the average assets under management volume during the year. These positive movements have offset the 16.2% decrease in insurance brokerage fees compared to the previous quarter, which was affected by the lower dynamism of commercial activity observed during the year.

Moving on to Slide 12. In the third quarter of the year, the cost of credit reached CLP 79.8 billion, representing an increase of 1.8% compared to the previous quarter. This change in relation to the previous quarter is influenced by specific recoveries recognized in the second quarter, mainly in the corporate segment, while the recoveries in the third quarter of 2024 are consistent with the trend of previous quarters. The level of cost of credit in the third quarter is in line with the net cost of the previous quarter.

Provisions for loan losses were affected by a negative effect due to our decision to recognize the impairment of an asset related to a specific single name of retail corporate in July based on the analysis of available information. This effect was recognized in July's accounting pro forma information released to the market under operational income and reclassified the cost of credit in the managerial statement according to the methodology explained in our MD&A.

On the other hand, we recognized a reversal of additional provisions from the retail portfolio amounting CLP 53.1 billion, corresponding to provisions constituted in previous years, anticipating the effects of higher post-pandemic delinquency and the application of new standard consumer metrics, which ultimately did not have the estimated impact. Compared to third quarter 2023, the cost of equity showed an increase of 31.9% as a result of higher consumer write-offs recorded in the quarter. The NPL coverage ratio totaled 121.7% in the third quarter, decreasing by 5.4 percentage points compared to the previous quarter due to a decrease in the NPL portfolio of 4.1%, which is bigger than the 1% decrease in the total credit provision, including additional provisions.

Compared to the third quarter of 2023, the coverage ratio decreased 24 percentage points as a consequence of the 13.8% growth in the NPL portfolio, while the stock of provision, including additional provisions totaled an expansion of 5.7%. The NPL ratio showed a decrease of 9 basis points compared to the previous quarter, reaching 2.2%, while the loan balance remained without significant variation, mainly due to a decline in the indices of commercial and consumer portfolio. The NPL ratio for the consumer segment had a decrease of 23 basis points compared to the previous quarter, mainly due to a decrease of 8.2% in the nonperforming portfolio in a context where the level of consumer credit activity is relatively low across the industry, having had a 1.5% decrease in the quarter.

As mentioned in previous presentation, the delinquency of the consumer portfolio due to its intrinsic characteristics has been affected by the existing macroeconomic scenario since the end of the pandemic, showing an upward trend since early 2022. This situation is mainly explained by the fact that part of the portfolio restructured during the pandemic period could not subsequently adjust to the agreed payment requirements due to the persistence of unfavorable macroeconomic conditions. However, it is not seen as a central scenario that the delinquency of this portfolio will continue to deteriorate.

Conversely, the mortgage delinquency index reached -- increased by 12 basis points in the quarter compared to the previous quarter and by 41 basis points compared to the same period last year. We have closely monitored this trend consistent with the banking system as a result of higher interest rates and inflation levels impacting installment payments. However, we do not anticipate significant effects on our credit cost beyond what has been outlined in our guidance. Meanwhile, the NPL ratio for commercial loans amounted 2.42% or 2.14% excluding student loans, lower by 17 basis points than the ratio of the previous quarter and higher by 14 basis points compared to the same date in 2023.

On Slide 13, we show that noninterest expenses in the third quarter of 2024 grew by 2.8% year-on-year and 0.5% quarter-on-quarter, increasing below inflation year-to-date. The main drivers of these results are personnel expenses, which grew by 1.4% compared to the previous quarter and decreased by 0.9% year-on-year as a result of a 5.5% reduction in the bank's headcount. Administrative expenses did not show significant variation when compared to the second quarter of the year, while the line had a 2.4% increase year-on-year, explained by higher expenses for advisory and consultancy services hired to date.

In the third quarter 2024, the efficiency ratio stood at 43.7%, showing a decrease of 5.2 basis points year-on-year and increasing by 2.9 percentage points compared to the ratio of the previous quarter. This quarter-on-quarter increase is mainly due to a 6.1% reduction in operating revenues, while noninterest expenses did not show significant variation compared to the previous quarter.

On Slide 14, we show a recap of volume growth during this period. The loan portfolio grew 1% in the last 12 months, while the industry grew by 2.1%, mainly as a result of slower growth than the market in the consumer portfolio. Consumer activity in the industry achieved a growth of 3% in September. The mortgage portfolio grew by 6.7% in the last 12 months, in line with the industry growth of 6.8% in September. In the demand deposits, we grew by 14.7%, notably faster than the industry 12-month growth of 3.7%, especially due to a growth of 17% in demand deposits from companies compared to the 4.9% growth by the industry.

In terms of time deposits, we continue to have a significantly higher growth of 10.6% when compared to the industry's 2% growth rate for both individuals and companies, in line with our focus on principality. Finally, we had a 56.9% growth in assets under management in the 12 months to September 2024, which is twice as fast as the industry's 36.3% growth, while we continue to grow assets under management faster than the market yet for another quarter.

Moving on to Slide 15. We show that we have increased our common equity Tier 1 ratio in this quarter by 23 basis points, outperforming our peers' growth and achieving 11.2% common equity Tier 1 ratio, maintaining our capital levels within our peer group. Our liquidity ratios are also well positioned among peers and significantly above regulatory limits, in line with our risk appetite and funding strategy.

Let's now move on to Slide 16 for an overview of our operations in Colombia. The economic activity outlook for the third quarter in Colombia is positive. GDP growth is expected to be 2.5% year-on-year by the end of September in a context where the labor markets remain resilient, but investment dynamics remain weak. This inflation process continued in the third quarter. Annual inflation reached 5.81% in September, down from 7.2% in June. Core inflation remains persistent, standing at 6.1% due to the delayed effect of cost inflation on rental prices. In a divided decision, the Board of the Banco de la República continue with the 50 basis point pace of rate cuts, closing September at 10.25%. Cuts of at least another 100 basis points are likely during the fourth quarter.

On Slide 17, we can see that the bank in Colombia continues to maintain a positive ROE and robust capital and liquidity ratios in comparison to its peers despite the challenging environment with a 24.4% increase in recurring net income year-over-year. Itau Colombia also outperformed its peers in the 30-plus days NPL and cost of credit showing consistency in its strategy despite the challenging environment.

On Slide 18, we recap the key messages of this presentation. In the third quarter, the new credit card offering and “the Hablemos” campaign highlight our innovative approach and dedication to addressing our customers' needs. These initiatives align with our commitment to customer centricity and strengthen our product and service offering. Management changes demonstrate our focus on strong corporate governance based on meritocracy and our ability to attract talent.

Results for the quarter are explained by systemic and seasonal effects in line with the industry's performance and considered within our business plan. We remain consistent with the strategy of balancing our loan mix, growing in deposits and assets under management and controlling noninterest expenses despite seasonality and effect in the third quarter 2024. With that, we conclude the presentation that we have for you today.

[Unknown Executive]

Thank you, Claudia and Matias, for the presentation, and thank you, everyone, for participating with us today. Let me take any questions that you may have now.

[Operator]

[Operator Instructions]

As of right now, we don't have any raised hands. My apologies. We have a question from Alonso Aramburú from BTG Pactual.

[Alonso Aramburú, analyst]

I wanted to ask you about some dynamics maybe post quarter, what you're seeing in terms of growth, if you're seeing any reactivation of lending activity, both in Chile and in Colombia? And if you have any lingering concerns about asset quality? Or do you think you've already gone through the worst part of the cycle, especially in Colombia?

[Unknown Executive]

Perfect. So in terms of growth, [indiscernible] picking up on this fourth quarter, and we expect that we'll start to grow our portfolio slowly, both here in Chile and in Colombia. And about the cost of credit, we expect that the cost of credit cycle has improved and that we will go into a positive trend looking forward both in Chile and in Colombia.

[Alonso Aramburú, analyst]

Okay. And so with the cycle improving, do you have any sort of guidance maybe for what ROE can be in Colombia next year?

[Unknown Executive]

We will share that our guidance in the next call after the fourth quarter results.

[Operator]

[Operator Instructions]

As of right now, we don't have any pending questions. I'd now like to hand back to the management for further remarks.

[Unknown Executive]

Well, thanks for the question. We resumed our agenda of holding post earnings release meetings with our investors in the coming quarters. In the meantime, please feel free to reach out for any further questions that you have. Thank you, and have a very good day.

[Operator]

Thank you for attending today's call. You may now disconnect. Have a wonderful day.