Banco Itau Chile

SGO:ITAUCL

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Itau CorpBanca Fourth Quarter 2020 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to turn the call over to Claudia Labbé. Thank you. Please go ahead.

[Claudia Montevecchi, executive]

Thank you. Good morning. Thank you for joining our conference call for our fourth quarter 2020 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, in which we adjust for nonrecurring events, and we apply managerial criteria to disclose our income statement. This managerial financial model reflects how we measure, analyze and discuss financial results by segregating commercial performance, financial risk management, credit risk management and cost efficiency. We believe this form of communicating our results will give you a clearer and better view of our performance through these different perspectives. Please refer to pages 9 to 12 of our report for further details.

With us today in this conference call in Santiago are Mr. Gabriel Moura, CEO; and Mr. Rodrigo Couto, CFO. First, Mr. Moura will comment on 2020 results, both fourth quarter and full year, our strategic evolution as well as our most recent results. Afterwards, we will be available for a question-and-answer session.

It is now my pleasure to turn the call over to Gabriel.

[Gabriel De Moura, executive]

Thank you, Claudia. Good morning, everyone, and thank you for attending our 2020 fourth quarter earnings call. Today's presentation has 3 parts. Our fourth quarter 2020 results, our early release results as of the end of January 2021, and an update on our strategic agenda.

So can we please move straight to our financial highlights on Slide 3? In the fourth quarter, we start to make the necessary adjustments to ensure that all of the possible impacts from the event of 2020 were reflected in 2020 results, enabling us to enter 2021 with a strong balance sheet and no lingering effect yet to be recognized. As a result, our consolidated cost of credit was CLP 388 billion in the fourth quarter, which led to a negative lever in net income of CLP 124 billion. On the positive side, we are recovering in our financial margin with clients, which rose 4.6% in the consolidated and 6.6% in Chile. There was also a recovery in commissions, which rose 7.1% in the consolidated and 4.5% in Chile.

Our loan portfolio contracted 3.5% in the consolidated and 3.8% in Chile. That reduction was concentrated in the wholesale loans and resulted from risk demand due to the high level of liquidity in the market as well as from our focus on shareholder value creation. That focus led us to be selective not only in terms of risk, but also in terms of the minimum return we're requiring for declining our capital in range. We maintain a strong focus on cost control. And as a result, our consolidated noninterest expense rose only 0.5% in the quarter, well below [indiscernible]. In Chile, our fourth quarter expenses were 1.2% lower quarter-on-quarter and 1% lower year-on-year.

We now move on to review our results for the full year of 2020. On Page 5 now, we can see how the macroeconomic indicators evolved in 2020 and how they compare to our initial expectations for the year. As you might recall, every quarter, we have updated our expectations for 2020 and macroeconomic outlook for both Chile and Colombia. When compared to our forecast at the beginning of the year, we observed the magnitude of the macroeconomic shock caused by COVID, which led to a GDP growth gap of over 7% in Chile and almost 10% in Colombia. Interest rates were also much lower than our initial forecast as central banks both in Chile and Colombia aggressively lowered the rates to counter the effect of the pandemic on the macroeconomic activity.

And now talking about the full year 2020 results on Slide 6. On this slide, we share some of the main highlights for the year 2020. Our consolidated net income was negative CLP 79.4 billion in the consolidated and negative CLP 50.3 billion Chile. Our revenues decreased due to the economic contraction caused by the pandemic. In Chile, our revenue decreased 5.2% compared to 2019. The decrease was concentrated in the financial margin with the market and commissions. Financial margins with the market was heavily impacted in the first quarter due to the market shock resulting from the initial outbreak of the pandemic.

In [indiscernible], the decrease was concentrated in credit-related commission. For example, financial advisory and credit-related insurance fees due to lower credit origination as a result of the pandemic. On the cost management front, we managed to reduce our consolidated noninterest expense by 0.7% in 2020 relative to 2019. As you might recall from our last conference call, we made the biggest head count reduction in Chile since the merger, which is a clear sign of our progress in the efficiency and certification [products], which we will discuss more in the last part of the presentation. That resulted in a 7% reduction of our head count in Chile. Cost of credit was obviously impacted by the pandemic. We took a cautious forward-looking approach to the credit cycle, which led us to establish CLP 136.3 billion in additional provisions in the consolidated balance sheet.

Now moving to Slide 7. We see how our portfolio mix evolved in 2020 in Chile. Consistent with our strategy, we increased the share of mortgage and consumer loans in our portfolio from 34.8% to 33.5%. We experienced our market share in markets and consumer loans, while seeing some ground in commercial loans, especially in our wholesale business, where we were focusing on improving results.

On Slide 8, we see that our financial margins with clients recovered 6.6% in the fourth quarter in Chile. That was mainly due to higher spreads as well as the sale of the student loan portfolio. The chart on the top right demonstrates that our net interest rate has been resilient despite the fall in the monetary policy year-over-year. On the waterfall below, which explains the change in our full year 2020 margin decline versus 2019. We see that both loan and deposit volumes had strong positive contribution to increasing our financial margin decline. These positive contributions were offset by a change in credit portfolio mix mainly due to the contraction of the consumer portfolio as a result of the pandemic. In fact, a reduction in interest from deposits resulting from the fall of the interest rates.

Here on Slide 9, we can see our main credit risk in Chile. Cost of credit in the fourth quarter was CLP 221.4 billion, which corresponds to 5% of our average loan portfolio. The NPL ratio fell 60 basis points year-over-year, and is almost stable quarter-over-quarter driven by the fall in NPLs of mortgage loans and commercial loans year-over-year. Consumer NPLs, which have fallen 140 basis points in the third quarter, increased 70 basis points in the fourth quarter as the effect of the credit release measures begin to wear off. As a result of the provisions we established throughout the year, our NPL coverage ratio reached 218%, which is the highest level in our history and compares to the 113% in December 2019. The increase in coverage clearly shows that we are ahead of the NPL cycle and have already made significant provisions anticipating that NPLs might increase in the future according to our expected loss trend. Therefore, as we announced at last quarter earnings call, we believe that our cost of credit will be at normal levels going forward at between 1% and 1.3% for 2021. Ultimately, we are confident that we have put 2020 behind us and prepare our balance sheet for a new cycle of growth and sustained improvement in profitability as the economy recovers and we move forward with our transformation plan.

On Slide 10, we show our noninterest expenses for the quarter and for the 12-month period, which have remained very much under control, decreasing 1.2% in the quarter and increasing only 0.5% for 2020. The main highlight is the head count reduction of 7% this year, which was the biggest adjustment since the merger. As we have mentioned, we simplified our organization structure, which proportionally bigger reductions at the top of the period. We also did get in a way that took care of our employees who were let go by providing extended health insurance as well as outplacement in training benefits. We also have 11 branch closures in the last 12 months, which represents a 5.7% reduction.

On Slide 11, we can see that our fully loaded CET1 capital ratio decreased only 30 basis points year-over-year, despite the effect of the pandemic and the 100% dividend payout of the 2019 earnings. In fact, the decrease in the ratio is almost fully explained by the excess payout over the 30% . We expect our capital ratios to improve steadily going forward as our profitability recovers and we continue to advance in our capital efficiency efforts.

Now moving to Slide 12, we show that our liquidity position remains very strong with both LCR and SFR at historically high levels in 2020.

Let's move to Slide 13. Here we can see the evolution of net income of the Colombian operation, which was negative CLP 85.4 billion mainly due to the credit provisions established in the fourth quarter. Consistent with our current focus in Colombia, our credit risk management and cost efficiency, we highlight the 12.6% reduction in our branch network as well as a 6.9% reduction in our head count year-over-year in Colombia.

Moving forward to Slide 15. We will update you on our January 2021 results. We had a strong start to the year, posting a net income of CLP 27.5 billion in Chile for January, an increase of 154% year-over-year. To put it in perspective, our January 2021 net income corresponds to almost 20% of the net income for the full year of 2019. These positive results were driven by higher financial margins with the market, lower cost of credit and a 1.8% decrease in our noninterest expense. It's important to mention that we do not consume in January any of the reserves that we built in 2020 to withstand a potential deterioration of credit quality. While we recognize the January results were boosted by an especially strong month in financial margins at the market in very benign cost of credit, we do expect a significant and sustained improvement in profitability. Despite of the challenges ahead, we are confident that our strategy, cost discipline and a strong balance sheet will enable us to deliver sustainable increase in results.

Let's move on the next part of the presentation. On Slide 17, we recap the key building blocks of our transformation plan: client centricity, digital experience, simplification, talent development, all leading to sustainable results. Having left 2020 behind us, we are now with 100% focused on implementing our plan to build the bank of the future. On the next few pages, we will share with you some of the progress that we've made so far.

On Slide 18, we see that our client centricity efforts have resulted in significant improvement of our Net Promoter Score, or NPS, across all segments, which reflects directly in consumer engagement and retention. On the investment side, we experienced 19% growth in assets under management, boosted by the open investment platform, which contributed to 40% of that growth. We have increased our product offering, not only of our own investment products, but also through the open investment plan. As I mentioned last quarter, our open investment platform offers our clients freedom of choice with the best investment options available in the market as well as independent advice.

The strong trend towards digital channels and transformation continues as we see share of transfers and payments through the app more than double in 2020. That is why we have been investing in our digital channel. In the third quarter, we launched the whole new app as well as a new and more convenient personal banking website. As you might recall from our last conference call, as a result, we have experienced an increase in the Servitest ranking of position with the new app, and we have ranked first in the new site among companies in the same survey. Our new app ranks #2 among our peers in both Android and Apple stores.

In addition, in the fourth quarter, we launched a digital wallet that allows payments in smartphones and smart watches, making them easier and safer as well as offering both Visa and Mastercard options for our clients. In July '20, we see that sustainable results in responsible banking are in the core of what we do. We believe that having good governance, taking care of the environment and being positively engaged with our employees, the society and, in general, at the community that we are parked is essential.

Let me highlight that, in 2020, our management and corporate decisions were once again recognized by the market. We continue to be listed in relevant ESG indices and ratings. And for the third consecutive year, the Institutional Investor magazine has distinguished us among the most honored company for the transparency and communication with the market. And for the first time, S&P Global ESG included in the 2021 addition of the sustainability yearbook, and our sustainability performance is within the top 15% of our industry.

On the environment front, our asset management has been recognized for the second year as a leader in responsible investment corporate governance and sustainability research. This is a good example of how ESG aspects are integrated into our business, and these awards confirm that we are on the right track. We have continued to move forward by launching 2 new 100% ESG mutual funds in alliance with 2 world-class asset managers, Nordea and Robeco assets. None of this would be possible without our team of more than 5,000 people with different challenges, expertise and experience. In a challenging year, they showed exceptional adaptability resilience. We also discovered that working remotely, or remote first as we call the new normal, is not only feasible, but a major opportunity to offer flexibility and convenience to our employees in satisfaction and positivity.

Now let's talk about 2021. On Slide 22, we present our expectations for the macroeconomic scenario for Chile in 2021. First of all, we know that of bases were still navigated on charter bots, and before pace conceivable uncertainties above

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which will bring us back in 2019 real GDP levels, the evening of the second wave of COVID-19 mobility restriction measures, along with the implementation of significant multi-monetary stimulus, high copper prices and swift inoculation process will support a recovery in this year. This bounce back in GDP is boosted by strong statistical carryover at the close of 2020. The political risk related to the revising of the constitutional and President election is, of course, a downside risk. We still see inflation close to the 3% target over our forecast horizon, but risk due to higher inflation in the short term. On top of food and other good inflations, the latter boosted by the stimulus measures, a swift reopening of the economy could foster a reacceleration of services inflation, which is currently close to historical means.

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At 0.5% during this year, while a gradual normalization will likely start next year.

On Slide 23, we

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[Operator]

Ladies and gentlemen, please stand by while we connect the speakers.

[Gabriel De Moura, executive]

Okay. Fantastic. I'm very sorry, I just got disconnected, and I am back. So as I was explaining in the guidance that we have on Slide 23, for our credit portfolio, we expect mid-single-digit growth in Chile with higher growth in consumer, mortgages and SMEs and lower growth in larger corporates as we seek to improve our net interest margin. Consistent with our strategy, our growth focus with will continue to be on the retail segment, which provide a broad range of products and services to individuals and SMEs. As we announced in our third quarter earnings call, we expect our cost of credit to normalize to be between 1% and 1.3%. Still a little bit higher than our loan run target, but with potential to a positive surprise. We will also maintain our focus on efficiency and expect to once more deliver a cost below growth for the year.

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

[Operator]

[Operator Instructions] Your first question comes from Jason Mollin with Scotiabank.

[Jason Mollin, analyst]

My question has to do with operating efficiency and you showed over the year in both Chile and Colombia, you closed some branches and reduced some headcount. If you can talk to us about the opportunity there to be as efficient as possible, and what that means in terms of those specific numbers in 2021, 2022?

[Gabriel De Moura, executive]

Sure. Thank you for your question, Jason. I think that efficiency is something that we've been pursuing strongly since the merger. When you take a look at the synergies that we had prior to the merger, we achieved as it was expected for cost synergies. The problem with the efficiency ratio for us is that, although we've been very disciplined with the cost side of the equation, on revenues for different reasons of the social unrest in Chile in 2029 (sic) [ 2019 ] and the pandemic in 2020, we were affected in our revenues, especially on the revenues as I mentioned due to the interest rates or our financial margins with clients, especially on the liability side with the lower interest rates and also the credit concession fees that we have. Nevertheless, I believe there is still significant room for improvement on the cost side without the digitalization efforts and investments that we've been doing so far. We were able to reduce headcount to reduce our footprint on branches. And I think there are still things for us to do.

In Colombia, I think that there is an opportunity for us to be even more aggressive on the cost side, taking a look at businesses that we have, products that we have and focus on profitability there. So I think there is an opportunity for us to be even more aggressive on costs in Colombia. The conjunction of all this will entail lower-than-inflation cost increase. I think that's something that we can do for more couple of years, even growing our portfolio. As a consequence, as we resume our goal to revenues and still are very disciplined on costs, we believe this is possible for us to converge to an efficiency ratio that is more akin to our peers in Chile. I don't know if I answer your question, Jason.

[Jason Mollin, analyst]

No. That's very helpful. How does that at cost base in corporate growing less than inflation in corporate investments and continuing to show the improvements in the digital experience and the customer experience, et cetera? Does that include a large increase in investments for 2021?

[Gabriel De Moura, executive]

We have investment only in technology, if I take a look at investments in technology, something around between CLP 40 billion and CLP 50 billion in the last few years. And I think that by maintaining those levels of investments, we can do the digital transformation that we are aiming for. As I mentioned in the supporting slides, we are getting good results for divestments that we did in the past. And I think that the level that we now have is adequate for what we see in the future. Having said that, the cost increase that I mentioned takes into consideration the depreciation of our -- and amortization of those investments. As we fund the increase in depreciation and amortization with the reduction of other costs from our robotics, automatization process, for instance, that enable us to take manuality out of some processes, automatize the bank in some new ways. And by that, making us more efficient.

[Operator]

[Operator Instructions] Your next question comes from Jorg Friedemann with Citi Bank.

[Jorg Friedemann, analyst]

So I have 2 questions, just ask the first. Let me show the numbers for January in the presentation. It's definitely robust the improvement. But I noted as well that on the pretax results, approximately 75% of it is coming from the results with the market, the financial margin in the market. And I remember that you told us some time ago that depending on the evolution of rates and inflation you could start to recognize stronger results on the financial margin with the market. So just wondering if the time has come for us to start deserving these trends to be unleashed or if it could be recognized as nonrecurring, the strong levels of financial margin in the market in January. And then I come to my second question.

[Gabriel De Moura, executive]

Sure. I think that we had a strong January because of our treasury results. I would say that, of course, the high inflation that we have observed at the end of the year helps us on that sales. We are happy with the results that we have in treasury, especially because I think they are mixed with 2 things. We talked a lot about the effects of inflation on the banking book. But I think it's also important for us to remember that our activity with clients is very strong. For instance, we are the largest bank in FX with clients in Chile. We are a top bank in terms of derivatives with clients. So all the client activity with the treasury is also strong for us and an important and recurring results for us on the long term. The January effect that we had has 2 components but, of course, the component of the seasonality that we have for inflation is larger. The same effect we should expect in the first trimester as we see inflation higher than expected in Chile. So I think that the good part is that we are having strong results operationally for the business of wholesale in retail. We are still lagging a little bit due to client activity.

If I take a look at credit concession, it's a little bit shy due to economic activity. We think that on the second trimester, it should resume. In the first trimester, I think -- the story of the first trimester, our credit will be driving for the second forgotten program that the government has announced, and that we are working with our clients in SMEs to help them through this process and taking the guarantees that the government has for those kinds of credit. That enable us to go at a longer terms of credit for our clients. So I think that will be the dynamic on the first quarter. I think that operationally, we're going to see better results from the second quarter on.

[Jorg Friedemann, analyst]

No. That's perfect. Very clear.

[Gabriel De Moura, executive]

You had us...

[Jorg Friedemann, analyst]

Sorry. Go ahead. Sorry.

[Gabriel De Moura, executive]

No. No, no. I was just going to ask for your second question. I'm sorry, Jorg.

[Jorg Friedemann, analyst]

No problem. Yes. My second question is related to capital. It was really impressive, as you pointed out, the conservation of cash flow amidst such a challenging environment during 2020. But just wondering what you believe is going to be the path for capital over the coming quarters. Because we know, on the one hand that you are limiting the dividend payout. But on the other hand, we also know that, sometimes in some quarters, Basel III will pick up as well as your main partner in the bank is leveraged and you have to do a buyback next year in Colombia. Not sure if there is any kind of possibility of you anticipating these buybacks, provide some liquidity to this partner, or this has not been discussed, yet.

[Gabriel De Moura, executive]

Sure. As you mentioned, I think it turned operationally when you look at capital, when you see everything that went through 2020 and the numbers of capital that we posted, I think that we were very resilient in terms of our capital management, especially taking consideration all the provisions that we did. Of course, when we -- when you take a look at the convergence to Basel III, the plans that we had -- that we initially had for the convergence of our capital base, I think that all that happened in 2019 and in 2020. In terms of the credit cycle, in terms of the revenue growth, I think that makes us change a little bit of the plan that we initially have to only converge retaining our own capital. I think that one of the main catalysts for this discussion, and we are just starting this discussion with our Board, is the acquisition of Colombia. Though, through to the contracts that we have, we will buy the participation that CorpGroup had in Colombia at the beginning of next year, and that will generate a negative impact in capital of around 100 basis points. That's the estimates that we have as of now.

Given that and the convergence that we need to do Basel III, I think we need to have a conversation with our Board and come up with a different plan in terms of convergence. That may probably lead to a capital increase for the bank. We do have -- we still are having the discussions. But given the path that we have forwards, given the acquisition of Colombia and the impact that we have in 2019 and 2020, probably, we will be discussing a capital increase on the next few years.

[Operator]

[Operator Instructions] There are no further questions at this time. I will now turn the call back over to Mr. Moura for closing remarks.

[Gabriel De Moura, executive]

Fantastic. Thank you so much for your questions. As I mentioned, we are very optimistic with 2021. I think that we are entering a new period in the bank that we have -- that we are very well positioned, that our investment in management, our investments in risk, our investment in digital are -- we're taking good results for that. So we are optimistic with 2021, and we look forward to discussing with you the results for the next quarters. Take care, and see you then.

[Operator]

This concludes today's conference call. You may now disconnect.