Banco Itau Chile

SGO:ITAUCL

Earnings Call Transcript 2017-Q4

[Operator]

Thank you for standing by, ladies and gentlemen, and welcome to the Itaú CorpBanca Conference Call on the Fourth Quarter 2017 Financial Results. We have with us Mr. Milton Maluhy, Itaú CorpBanca's Chief Executive Officer; Mr. Gabriel Moura, Itaú CorpBanca's Chief Financial Officer; and Ms. Claudia Labbé, Itaú CorpBanca's Head of Investor Relations. [Operator Instructions] I must advise you that this conference is being recorded today. We now pass the floor to one of your speakers today, Ms. Labbé. Please go ahead.

[Claudia Labbé, executive]

Good morning. Thank you for joining our conference call for our fourth quarter 2017 financial results. 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 in our managerial model that we adjust for nonrecurring events, for the amortization of intangibles arising from business combination and for the tax effects of the hedge of our investment in Colombia. At the same time, we adjust the managerial income statement with additional reclassifications of the P&L lines in order to provide a better clarity of our performance. Please refer to Pages 9 and 10 of our report for further details. Now, Mr. Maluhy will continue with the presentation.

[Milton Filho, executive]

Thank you, Claudia. Good morning or good afternoon to everyone. Thank you for joining us for this fourth quarter conference call.

First of all, I'd like to go through the agenda on the Slide 2. We will give an update, first of all, on our business strategy. Then, I'll be going through our results for the full year and fourth quarter of 2017. And finally, talking about the next steps of the bank.

To start, let's move to Slide 3, where I'll be briefly discussing our merging process timeline. In 2016, we were concentrated in the integration of operations, brand risk management framework and other policies, which we aligned with the practices and policies of Itaú Bank. As a result, we strengthened our balance sheet and liquidity levels but higher extraordinary expenses were associated with this merger period. To achieve our goals, team building, senior, middle management was a key factor on that. Although in 2017 the main challenge was to comply with the terms of the merger by minimizing the effect of the quality of service, our focus has always been on customers because at the end of the day, they are the center of our work and constitute a fundamental pillar for our growth.

In this transition year, we completed retail migration and client segmentation in Chile. We know that we still have a lot of room to improve. This is why the quality of service is among our top priorities. In this direction, we've created a new operations structure whose objective is to focus with greater emphasis on the technology area and to enhance digital banking, adapting to the changes in demand from customers.

Moving to the Slide 4. According to our integration process, in the fourth quarter of 2016, we started the branch network migration, we've had pilot test of 2 offices. As expected, 58 branches were migrated by the end of 2017. Additionally, as part of our enhanced branch network strategy meant to create additional savings. 104 branches were overhauled, and 23 branches were closed since Legal Day One, which was on April 1, 2016, which is equivalent to 10.3% of our branch network.

As a result, our brand composition has changed. By the end of the fourth quarter of 2017, we operated in Chile with 145 branches offices under the brand Itaú and Itaú Personal Bank and also 56 branches under the Banco Condell brand, which is our consumer finance division.

Now moving on to next subject on the Slide 5. I would like to comment a bit on our digital banking transformation. As you well know, our digital banking strategy is one of our pillars to boost, not only our retail banking, but also to further improve in efficiency. In our journey for being digital, we started to progressively accomplish first steps. Our digital strategy is not only focused on improvements in our mobile offer, but mainly focused on transforming our process to become a digital bank from back office to the front office. It's an end-to-end strategy. To accomplish that, we have nowadays over 20 multidisciplinary teams, which are fully dedicated and looking into opportunities to digitalize product and process with a disciplined and focused approach. One example of that is the implementation of preapproved credit offers in mobile and internet spectrum and increasing credit limits.

Next slide on Page 6. On the chart from the bottom, we can see that over the last 12 months sales of retail credit installment loans through digital channels have picked up from 9% in the second quarter of 2016 to an 81% by the end of January 2018. We know we still have a lot room to improve the uses of digital channel, especially on the mobile front. We are optimistic because [indiscernible] positively evolved in short period of time. You can see that we have client adoptions over 50% more clients throughout 2017.

Going to Slide 7, talking about our retail portfolio in Chile. We have experienced a positive evolution. We've increased 14.1% and 8.2% on consumer loans and mortgage loans on a 12-month basis, respectively, versus a 6% and a 9.9% for the average of banking industry. This trend reflects increase in our retail market share, particularly in consumer loans in line with our strategy that seeks to balance our loan portfolio as well as strengthen our retail operations. If you have a look to the chart at top line -- top of this slide, our installment loans market share jumped 70 basis points from 7% in the first quarter of 2017 to 7.7% by the end of 2017, driven by a 15.8% growth in a 12-month period versus 6.8% of the average of the banking industry. You can see that we have a top pick in market share throughout this period.

Going to Slide 8. As part of our integration process, in the second quarter of 2017, we've introduced the Itaú brand in the Colombian retail market, completing the rebranding of the Helm's branch network in May 2017. Additionally, in the third quarter of 2017, we started the branch network migration with a pilot test. The process continued with 77% of the branches migrated by the fourth quarter of 2017. The branch migration was completed in January 2018 earlier than expected. In fact, as we speak, we migrated 100% of the branches in Colombia to the Itaú brand, and also, we migrated all the retail client base into Itaú new core system under Itaú brand. We still have left 2 or 3 migrations of corporate clients, which are more focused on cash management, but we've been doing quite well, and we do believe in the next 1 or 2 months, we're going to be completing this whole process.

Now we can move to the Slide 9. Just to tell that are going to go a little bit on the results and the main drivers not only the fourth quarter of 2017 but also 2017.

On this Slide 10, talking about the macroeconomic backdrop. When we look back at 2017, we see that economy activity was lower than what we initially expected, especially in Chile. While it accelerated towards the end of the year, 2017 will probably show the lowest growth since 2009. This translated into the lowest loan growth rates in the country for over 7 years. Investment showed a fourth consecutive year of contraction and commercial loans grew only 1.2% year-over-year. Due to our current portfolio mix, this has noticeable effects in our revenue growth as we will discuss in more details further on.

On the other hand, inflation and interest rate went down, especially in Colombia, where the 275 basis point reductions in the year positively affect our banking book as we'll also discuss later on.

For 2018, in Chile, a stronger global growth outlook, higher copper price, recovering private sentiment and expansionary monetary policy should also boost recovery in activity as we are expecting a pickup in GDP growth to 3.3%.

For Colombia, we're more [ careful ] this year because a recover -- if the labor market continues to loosen and private sentiment is nearing recent lows. We are expecting growth of around 2.5% to come amid an improvement in real wages, an expansionary monetary policies and more favorable external conditions, especially oil prices. The main risk to this scenario remains the uncertainty around political cycle, which could limit a recover of investment.

Moving to Slide 11. We see the evolution of our return on tangible equity where we can see the magnitude of the decreases in performances on quarters that concentrated important risk adjustments in our portfolio such as the first and fourth quarter of 2016 and the last 2 quarters of 2017, with which we ended a cycle of major adjustments in our credit risk exposures on our wholesale portfolio. We ended 2017 with 3.4% consolidated return on tangible equity and 5.8% return on our Chilean operations on a standalone basis. We expect this returns to gradually converge to more competitive levels throughout the next few years.

Now with that, we can move to Slide 12, and we're going to talk a little bit more about our interest rate margins.

In this chart, when we look at our net interest margin, looking at Chile first, we see stable 2.8% rate when compared to 2016, still lower than 3.1% pro forma rate for 2015. This is driven by 2 factors: a lower inflations rates, which we partially compensate by adjusting our exposure in the banking book and higher ex-inflation margins, which reflects improvement in marginal funding costs for the merger. Further improvements in our mean should now come from changing our loan mix towards a more balanced distribution between wholesale and retail. In Colombia, we saw very important recovery in our net interest margin as the consecutive currency and interest rates positively affected our banking book, as previously mentioned in our past calls. We expect this trend to continue further this year, as the monetary easing in cycle continue.

Now we can move to the Slide 13. We will discuss the loan growth and credit quality. Looking at the portfolio growth, 2017 was another challenging year, both in Chile and Colombia, as low economic environment and a more conservative approach to credit risk resulted in a contraction of our commercial loans in both countries. On top of that, we have reassessed our exposure to payroll loans in Colombia based on risk adjustment return perspective. On other hand, as I previously mentioned, our consumer loan business showed a satisfactory trend in Chile throughout 2017, expanding 14.1% in the year.

Talking about 2018, we expect our loan book in Chile to grow between 6% and 8%, in line with the overall market. And in Colombia, we're expecting about a 10% system growth rate, and we will likely grow lower than that as we further liquid portfolio to improve our profitability going forward.

Looking at the provisions, here, we've made important charges to particular exposure in our wholesale portfolio, both in Chile and Colombia. And I believe that, combined with what we've done in 2016, defends an important cycle of adjustments to our main credit risk exposures, although our mix probably keeps us little more cyclical than our peers.

We can now move now to Slide 14. I'd just like to give you an update on our estimated cost synergies in Chile coming from the merger. Looking at our adjusted total expenses evolutions, we finished 2017 with another better-than-market performance. As we detailed in our previous call, we estimate our cost synergies as the accumulated gap between our expenses growth rate and the comparable overall system growth, as historically. Both Itaú Chile and CorpBanca expended costs in line or higher than overall market. With that we estimate, we've already captured around $37 million in cost synergies in the last 11 months since the Legal Day One. We still have a strong focus on managing costs, and we expect us to capture additional synergies as we finish our system integration this year.

Now we can move on Slide 15. You can see here a combined P&L for the year of 2017. We have our detailed explanations, line-by-line performance in our MD&A report. But here, I'd like to illustrate the level of impact that our 4 single events in the year had in our bottom line. See the adjustments for derivatives with 1 client in Chile and together with loan loss provisions adjusted for these and 2 other clients amounted to CLP 125 million. This is in pre-tax impacts in our results for the year. These credit events are specific and not directly related to the economic cycle and show the efforts that we took to bring our risk exposure to a level we feel more [ equated ] to Itaú CorpBanca's risk appetite. This was an important and costly, I have to mention that, step we took to achieve the goal of having what we consider will be a less volatile result in the upcoming years. And I also would like to point out that looking to these figures, 71% of [ that, loan also on the CVA ] and also on the result of loan losses were explained by 1 single name.

Although we're still pending on important definitions on the final implementation of Basel III, by the Chilean regulators, that displays for in the schedule trending for the next slide. I'd like to update you a little bit on the regulatory capital metrics. Since Legal Day One, we've increased our regulatory capital ratio by 106 (sic) p basis points, after December coming from 13.1% to 14.7%, especially by managing our risk-weighted assets as well as accumulating capital. This is above 120% of regulatory minimum or 12 in this case, and the average of the 3 largest private banks in Chile, in this case 13.8% as November of last year. Starting with our current 10.1% looking on Basel III Tier 1 ratio, we're deducting tangible assets and net deferred assets, ending up by 7.6% fully-loaded Tier 1 ratio. This is under the assumption that the incorporation of operation and market risk requirements are offset by changes in the credit risk weightings. Similar to current regulation, the most recent version of this proposal changes of the General Banking Act limits the use of Tier II instruments and regulatory capital to 50% of the core equity Tier I capital. Under these assumptions, our current limit of Tier II instruments would be settled at 3.8% in the exercise, adding up to an expected totally -- total fully-loaded capital ratios as 14 -- 11.4% as you can see. We're engaged and monitoring the developments in these regulation, and we'll keep you briefed on all important advances on that.

And I also believe that sustaining corporate bond -- regulatory capital levels will come with focus and discipline of both seeking a risk adjusted returns and managing dividend policies as sustainable effort.

If we move now to the Slide 17. We would like to share you a little bit more about our main goals for 2018. On the next slide, you can see that in Chile, we have 4 main objectives for this year. Keep moving from a transactional bank to a relationship bank to our clients by fully focusing on client satisfaction. And this will translate to increasing cross revenues and products and services penetration. We have a clear focus here on increasing sustainable results. Another one is completing our technology integration, a cycle that began almost 2 years ago, and we are on the third phase of that as I previously mentioned, and also, advance with our digital agenda, which will lead to more efficiency, better offer and time to market of our product.

We also keep working on the strengthening the Itaú culture throughout the organization. When we move to Colombia, we expect to finish the client migration as I previously mentioned, which should be done by the end of this quarter and to complete the remainder of the technology integration. We'll be working also on implementing the business strategies for the wholesale and retail and as well as advancing our corporate culture agenda. I believe that after this important transition period, 2018 will be the first year of the construction of the bank we want to all clients and shareholders. This will reflect in gradual and consistent improvements in client relationships and results.

So with this, I am -- the flow of the presentation, and then, I'll be glad to answer questions from you. Thank you very much.

[Operator]

[Operator Instructions] And we have one question and this comes from the line of Nicolas Riva.

[Nicolas Riva, analyst]

My first question is going to be on your outlook for profitability. I remember you saying many times in the past, that in the long term, you aspire to have an RoTE in line with the largest private sector banks in Chile. However, given all the challenges that you had in 2017, and we understand it was a transition year, do you have any guidance for net income for this year, for 2018? And then I'm going to ask my second question.

[Milton Filho, executive]

Look, in terms of guidance for this year, we don't give guidance on net income. But what I can tell you that we've been going through a, I would say, cycle that we previously imagined that we would have to go through would be the 3 years of the merge. This has [ bottomed out ]. I can tell you that we should have a full clean year by 2019 where we should have this whole integration process complete. But having said that, I believe in terms of adjusting the balance sheet, the 2 years that we had, this one and last year were very, very important to do especially all the risk adjustments that we had to do in our portfolio. So we do believe, and we still have the expectations that starts moving in the direction of a much more sustainable profitability and results. Of course, we are constructing a long-time and a long-term profitability bank. We are very happy with all the goals that we had in the last 2 years. And we believe in the long term, we should be working between 14% and 16% of profitability. This is our goal here. We know that we have top 2 banks in the large Chilean market that have nowadays a return on equity above 18%, 19%, but we still have a lot of gaps in terms of mix, especially on mix, that we have to improve a lot on the retail side and on the assets and liabilities sides, always concentrated on the retail business. And this is a mid- to long-term strategy. I think we've been doing quite of good on that, but we still have a long run ahead of us. But I do believe that 14% and 16% should be our goal for the coming years.

[Nicolas Riva, analyst]

One follow-up there. The 14% to 16% target, is that a target for the return on tangible equity in Chile? And then I would assume that the return on equity in Colombia would be below that, is that correct?

[Milton Filho, executive]

Yes. This is Chile. But we do believe that on a consolidated basis, we can work looking more for the 16%. When we look at and because Colombia -- and we're talking about tangible equity, so, yes, as for your question. In Colombia, of course, we'll be working below that for a few years. This is a transformation process that we're doing in Colombia. I think we're doing quite fine. Of course, we have some challenges on the macroeconomic environment. On the other hand, the interest rate cuts helped us to fix the mismatch that we have in our banking books, so this helped us to bring the profitability of the bank more close, I would say, to breakeven. That's where we are focusing now. But Colombia, we still think that we're going to be performing below market in terms of return on equity. So on a consolidated basis, we're talking about tangible equity.

[Nicolas Riva, analyst]

And then my second question is it looks like you anticipated loan loss provisions in the fourth quarter. I mean, in the slides, you did specify some provisions for some specific corporates. Now if I look into credit costs for last year, clearly you were above your historical levels, especially given your loan mix. So my question is what's your outlook for credit cost this year and how far you think this metric can go back to the more normalized level of around 1% of average loans?

[Milton Filho, executive]

Perfect. Look, 2016 was the first year of the merge, and we could access the portfolio. You can remember that a few of the credit losses that we have in that year was then -- a few of them in the first quarter of 2016 before the merge of the banks. So we highlighted that on the managerial information, although part -- an important part of the credit losses was through the net worth of the banks, through capital and not through the P&L. In 2017, we had a full year of a consolidated bank. And we worked a lot trying to understand what were the main tasks or the main goals that we had in terms of the credit portfolio we had. So we did a single name assessment, name by name. We don't, of course, give any information about single names of corporate clients. But we highlighted that only 3 names explain that amount that I mentioned, CLP 125 billion, that I mentioned before. And if you look on the December of '17, we were able to do important provisions in 1 single name that we are very concentrated and that didn't have the improvement that we thought could have along the year. So I would say that in terms of credit adjustments, we did a very strong movement in 2017. So my expectations is that from 2018 on, we should be working at the lower levels than we had towards the level of cost of credit that you mentioned before. So I think we're going to be having a more sustainable credit behavior from now on. We hope so, but although we have to highlight that we are corporate -- very focused on corporate clients, we are very susceptible to events that may happen. But we do believe that we have the correct level provisions to our portfolio nowadays.

[Operator]

There are currently no further questions. Please continue. And your next question comes from the line of Sebastián Gallego.

[Sebastian Gallego, analyst]

I actually have 2 questions. The first one is regarding Colombia. If you could explain or provide more color on how are you going to achieve a better performance in Colombia? I'm particularly concerned about the market share you guys have on the deposit, demand deposit market, with around 4%. How to compete with the big banks in Colombia, particularly? And then, I will ask my second question.

[Milton Filho, executive]

Look, in Colombia, we have to, first of all, point out that we are not top 3 banks in the system. It's a very, very competitive market. So, of course, we're always looking to our peer group more than the top 3 banks in the market. So we don't have the size of the 3 banks. We don't have the scale, and also, we don't have the mix that they have. So our biggest focus in Colombia is first of all, to work organized the bank in many fronts. First of all, I think we did a very good governance work in Colombia, trying to align to best class governance policies, risk appetite, market risk framework, having a Board of Directors with changes that we made and also we have a changing the CEO, Álvaro, that just completed one year in Colombia. So this was the first movement we made. Then we were trying to understand what were the tasks that we have on the balance sheet. And as we highlighted before on the previous calls, we did have mismatch, important mismatch in interest rate in the banking book that came prior the merge. So what we did was trying to take this into a more reasonable level of market risk and also to follow this moment of the decreasing on interest rate in the Colombian market. And I think we did quite well in our strategy. This year, our focus to 2017 was to migrate the branches, because, although the acquisitions of Santander and Helm were 4 years ago, we still were working under 2 brands, CorpBanca and Helm, so the decision we made that we had to be very focused on the integration on the operational side and the migration of the branches. I believe we did quite well. We had a very close segment of this project, and I think we did quite well, and we achieved our goals. So now, basically, we are working under Itaú's brand. Then, we did a very deep assessment last year of our competitive environment, our landscape, our footprint, the way and the service model that we were going to be providing to our clients in Colombia. And we found out a lot of tasks and changes that we had to do on that. So we worked by the year of 2017 to organize the agenda, to prioritize the important projects that we had. And now in 2018, as I mentioned before, the main focus is to implement this new model of assessing the market, not only on the corporate side, but it's also on the retail side. We've been working a lot on our liquidity. So, although we don't have the demand deposit from the retail clients, this is one of the goals that we have that is increase our penetration with retail clients, and of course, enhance the cross-sell that we have not only with the retail clients, but also with the wholesale. This is not a short-term strategy. We don't believe we're going to be changing the bank, although we still have some structural changes that have been made. And we do believe that we're going to have some pickups on that. We do believe this is a long-term strategy. And we are organizing the bank to be a competitive bank in the environment. Of course, always compared to the peer group, so this is very important to align the expectation. We're not looking with the size we have now in the footprint to compete with the big banks in Colombia. Of course, we're going to be competing with them on the corporate side, where we have a different expertise. But on the retail side, as our footprint and the amount, the quantity of our branches we have is quite lower than they have, our biggest strategy in Colombia will be growing on the digital market and this is some of the agenda that we're going to be implementing in Colombia, not only bringing in good practice that we have in Brazil, but also things that we've been developing in Chile, and we've been quite successful in the past 12 months. So the idea here is to organize the bank, focus on the implementation of the new model of assessing the market and implementing our digital strategy. And we do believe with that we're going to achieve much more efficiency in achieving the client and also bringing the bank to a level of profitability and costs more adequated to the mix that the bank has nowadays. And in the long-term, increase, of course, the reciprocity of the clients with cross-selling, cash management. And so I don't if I answered your question, but this is quite much the strategy that we have.

[Sebastian Gallego, analyst]

Yes. It was a very good answer. Just to follow up on that and my second question, the follow-up on that question on Colombia is, can we expect breakeven for the bank in Colombia this year or should we expect further losses again -- in 2018? And the second question is regarding capital. You mentioned in the presentation and you showed slides with the Tier 1 calculation and you commented on that. My question is, is that Tier 1 enough for the Basel III standards and whether or not that Tier 1 contemplates the actual common equity you want that Basel III implements, including the -- all the buffers that comes with Basel III?

[Milton Filho, executive]

Well, look for Colombia, we have 2 deals of Colombia. Just to make it clear, we have the local balance sheet where the local management is focused and they have their tasks and their goals on that. And we also look on a consolidated basis because on the managerial side, we transferred some effects that we have on the balance sheet -- in balance sheet to have a more managerial view of what is the Colombian investment. Just an example of that is the hedge of the investment that we do here that we transfer the cost for the Colombian operation. So talking on the Colombian perspective on the single balance sheet that we have in Columbia, our goal this year is to achieve around breakeven okay? So this is a big effort coming from the key losses that we have in the previous 3 years. We do believe that we'll achieve breakeven this year, we're going to be quite successful, so this is the main focus that the local team has. This is not an easy task. But I think we are working towards this effort. So this is from one side. Now talking about the capitalization. So when you look at Tier 1 we have, you can see on Basel III, we're talking here just from what is -- we're not talking about phase-in of Basel III, we just took the actual capital that we have and we did what would be the full Basel III capital requirement coming from today. So as you can see, we came from Tier 1 from 10.1% and we came up to 7.6% in the fully-loaded Basel III. That means that we do have a capital challenge by the end of the phase-out -- phase-in, sorry. And that means that we do have and we're not considering here any projection of profitability and any payout policy. So the idea of the bank is to be very disciplined on that, and to of course, with the profitability we expect to have in the coming years to have capital generation, pure capital generations, to achieve the goals that we have. This is how we are working on that. We don't anticipate any need of capital now other than the capital generation that we may have with the profitability that we expect to have in the coming years. So but we are very disciplined on that. The shareholders -- they have a guidance on that as well in the transaction agreement. So we're going to be very disciplined on how to achieve the capital metrics for the coming years.

[Operator]

There are currently no further questions. Please continue.

[Milton Filho, executive]

With that, I thank everybody for the call. I hope we could achieve your expectation in terms of the information. And thank you, very much for your time. Bye-bye.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect.