Banco De Chile ADS

Hello everyone, and welcome to Banco de Chile's 2Q19 Financial Results Conference Call. If you need a copy of the press release, it is available on the company's website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations, Mr. Pablo Mejia, Head of Investor Relations, Daniel Galarse, Head of Financial Control, and Cecil Diaz, Investor Relations Specialist. Before we begin, I would like to remind you that this call is being recorded and that information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements. I will now turn the call over to Mr. Rodrigo Aravena. Please, you may proceed.

Thank you. Good afternoon, everyone, and thanks for participating in this conference call today. It's a pleasure for me to have the opportunity to talk about the main highlights of this quarter for Banco de Chile, key trends observed in the Chilean economy, and the recent performance of the local banking industry. After my presentation, Pablo Mejia, our Head of Investor Relations, will provide a a deep analysis of the financial results posted by our bank during the second quarter. Please go to slide number two on Banco de Chile highlights for the second quarter 19. The second quarter for Banco de Chile being impressive in terms of results. We posted an ROE of almost 23%, well above the levels recorded last year in the first quarter 19. Our bottom line was also the highest in our history, raising 192 billion pesos. These achievements have been a result of both solid customer income generation as well as higher non-customer income given favorable shifts in interest rate and inflation. Due to our strong operating income revenues, we were able to show a remarkable efficiency ratio of 43%. Additionally, it's important to highlight that we have continued to implement new commercial strategies and digital solutions for customers, and we are proud to say that this has resulted in 90% of our customers using online banking at Banco de Chile, and we continue to see important increases in usage rates in mobile banking, where nearly 60% of customers are using these digital channels. Finally, we increased our free float this quarter by 60%, reaching a level of 44%. Please go to slide number four. Since the second half of 2018, the global economy has had a clear deterioration. As Chile is the country with the highest integration into the global economy, Not only in Latin, but also among emerging countries, the evolution of external conditions has a critical impact on our economy. In the last World Economic Outlook, the IMF downgraded the estimates for 2019 and 2020 global GDP growth, arguing that the increasing world tensions have been raising the uncertainty. affecting investment and international trade. As you can see in the upper left chart, there's been a generalized drop in the global industry, where several PMI indexes have fallen even below the threshold of 50 basis points. This evidence suggests that the negative cycle will last for a longer period. In this environment, Most central banks have been moving towards a more expansionary bias in their recent monetary policy meetings, since most of them have opened the door for rate cuts before the end of this year. However, it's important to highlight that the Central Bank of Chile has been the only one able to drop the interest rate in Latin America. after reducing the rate by 50 basis points to 25% in June. Consequently, Chile achieved the lowest policy rate in both nominal and real terms in Latin America, as can be observed in the other rate charts. This decision confirms the strong ability of the central bank to implement counter-cyclical policies, which is extremely important in negative cycles, like we have had this year. Undoubtedly, this earlier-than-expected shift in monetary policy will contribute to offset the worst global conditions. This change in monetary policy was supported by both the worsening global conditions and the weather-than-expected local growth. As the bottom-left chart shows, the Australian economy had a sluggish growth in the first quarter, in line with the trend observed in most countries. Although part of this disappointing GDP was attributable to temporary factors, such as the heavy rains in several mining zones that reduced the copper production in the first quarter, we also observed a weak expansion in the rest of the economy. The good news, however, has been the slight recovery observed in recent months. Between April and May, for instance, the GDP was up 1%. 2.4% year-on-year, which is better than the 1.6% posted in the first quarter. On a sequential basis, by isolating seasonal factors, the economy expanded at an annualized rate of 3.1% in May after the now expansion recorded in the previous quarter. Therefore, the Chilean economy is performing better than most of its peers. This marginal recovery has been explained, in part, by the improvement in the labor market. At the bottom right, the chart shows both nominal and real wages are growing slightly faster, while the job creation has been supported by wage employment rather than self-employment. These factors suggest that the labor market is providing more support for domestic demand compensating the negative spillover from the world economy and decline in domestic confidence. We think that strong fundamentals and other critical factors, such as the more expansionary monetary policy, the better dynamism in the labor market, and the weaker currency will lead to better conditions for the future. Having said that, I would like to talk about our baseline scenario for 2020. Please turn to slide number five. We think the first quarter was the bottom of this negative cycle. As I mentioned before, the economy has shown signs of recovery, which expect to continue in the future. Specifically, we estimate an average economic growth of 3.3% in the second half of this year which is consistent with an expansion of 2.8% over the whole year. In 2020, we expect GDP to go up by 3.2%, as shown in the upper left chart. There are several factors behind our positive view. First, the lagged effect of the interest rate cut applied by the Chilean central bank this year. Second, the positive trend observed in private investments. Third, the economy has increased its potential capacity for growth as a consequence of the material increase of immigration to Chile. In fact, the Central Bank of Chile raised the forecast for potential growth from 3.2% to 3.5%. The inflation rate has remained in the lower part of the Central Bank range, which is between 2% and 4%. In June, the CPI posted a year-on-year increase of 2.5% as a consequence of the 1.2% quarterly change observed in the second quarter. As we have mentioned in previous conference calls, the lower inflation from the below-trend growth has been offset by the weaker Chilean peso. As the bottom-left chart shows, we expect the CPI to convert to the 3% target in 2020. Finally, on monetary policy, we state the rate cuts to continue in the future. Since inflation expectations have been anchored to the long-term policy target of 3% and the economy will likely remain growing as to lower than the long-term rate, the central bank has room to continue decreasing the monetary policy rate. Specifically, we see two 25 basis point rate cuts in the remaining of this year and the beginning of an urbanization process late in 2020, if the economy shows convincing signs of recovery. Our interest rate forecast is shown in the bottom right chart in this slide. Now, I would like to briefly discuss the evolution of the Chilean banking industry. Please turn to slide number seven. Despite the below-trend economic growth observed since the last year, the banking industry has maintained solid financial results and high profitability levels. In the second quarter, the Logan banking industry posted a net income of 812 billion, which is 42% higher than the same figure of second quarter last year. Therefore, as of June 2019, the total net income was 1,383 billion Chilean pesos, representing an 8% increase in comparison to the first semester of 2018, equal to an ROE of 14%. The positive quarterly results posted by the industry were supported by several factors, including increased total revenues due to the effect of higher inflation on the structural US gap held by most of the Chilean banks, loan growth of 10% year-on-year as of June, and risk expenses remaining in low levels. The chart located in the lower part of the slide shows a strong correlation between GDP and loan growth. On average, the elasticity of loan is close to two times the GDP growth. As we expect the economy to increase its growth rate in the future, it's reasonable to forecast an acceleration in the loan expansion in the coming quarters. to levels of almost 9% in nominal terms. The positive result of the industry was in part explained by the outstanding bottom line posted by Bank of Chile this quarter. Pablo Mejia, our head of investor relations, will analyze our performance in the second quarter, as well as our main strategic initiatives.

Thank you, Rodrigo. Please turn to slide number nine. We're proud to present our second quarter 2019 financial results. This quarter, we recorded the highest quarterly net income figure in our history of 192 billion pesos, well above the level recorded in the first quarter of 2019 in the same period last year. As you can see on the chart on the bottom left, we rank first in terms of net income generation with a wide difference when compared to our peers. This strong result was explained by robust customer and non-customer income growth, which more than offset higher provisions for loan losses, operating expenses, and taxes. In the next slides, we'll go into a deeper review of each one of these concepts. Please turn to slide number 10. As you can clearly see, operating income this quarter grew strongly at 17.7% over the same period last year, reaching 538 billion pesos, thanks to our superior business strategy that's focused on continuing to penetrate the retail segment and growing selectively the wholesale segment. On the chart on the left is a breakdown of operating income. Revenues were up due to a large increase in customer income that grew 11.5% year-on-year, or 41 billion pesos. This was driven by an expansion in loan volumes as well as higher contribution of demand deposits that benefited our funding costs. Additionally, we recorded a strong increase in fee income of 24.6% over the same period last year. We'll go into greater detail regarding this further on in the presentation. In terms of non-customer income, we also had important results thanks to a spike in inflation that reached 1.22% this quarter and drove this source of revenue up 40.2% or 39 billion pesos. Similarly, the decrease in nominal and real interest rates following the 50 basis point cut in the reference rate by the central bank also benefited our positions in fixed income securities held for trading and AFS securities. On the chart to the right, you can observe the impact of inflation on NIM. Last quarter, we recorded a NIM of 3.79% with 0% inflation. This quarter, our NIM rose by 75 basis points, mainly as a result of higher inflation amounting to 1.2%. Throughout our history, Bank of the Chios' focus has been to promote a strategy of responsible growth in every segment we serve. We believe that this has been a core of our solid track record. As a result, today we have a larger percentage of our portfolio concentrated in low-risk segments, such as high net worth individuals, high-quality SME customers, and blue-chip wholesale book customers. all of which allow us to lead the industry in operating revenues, net of provisions as a percentage of interest-earning assets with a 5.5% level. This figure denotes the wide gap with all of our peers. It's important to mention that every 10 basis points of operating margin translates for us into almost 3 billion pesos of additional revenues on an annual basis. Please turn to slide 11. Fees this quarter grew strongly. posting 112 billion pesos, up from 90 billion the same period last year. Fees were mainly driven from the retail segment, products and services. Insurance fees grew significantly, up 9.2 billion pesos, or 33%, due to a 19% increase in annual written premiums and the first-time recognition of income related to the 15-year joint venture agreement with the prestigious international insurer. Transactional products also had a superb growth during the quarter, with card fees growing 5.3 billion pesos, in line with the changes we have made in our loyalty program, as well as royalty payments and ATM fees that were up 3.4 billion pesos, thanks to the expansion of our ATM network, given a commercial partnership achieved with an important retail company at the end of 2018. Finally, mutual fund management fees have also grown substantially, up $2.6 billion due to revisions on management fees of certain funds, changes in mix, and expansion in assets under management. Consequently, we have been able to enlarge our leading position in terms of net fees amongst our peers. We consistently rank first with an overall market share of 20.3% as a percentage of operating revenues, we reached 21.9%, well above our peers, as shown on the bottom charts of this slide. This level of results of our premium customer base reflected in our market share and personal banking current account deposits that normally ranges from 25% to 30%, as well as our excellent market share in AUM. Please turn to slide 12. Without a doubt, we are the financial institution with the best funding structure in Chile, which remains as one of our most important competitive advantages. The sharp reduction in the overnight rate by the Chilean Central Bank in June caught everyone by surprise, and the consensus today is expecting more rate cuts in the coming months. We expect that this will benefit us during the next three months as a result of repricing of short-term liabilities, and in the medium term should gradually see an impact in NIA. The bank's sensitivity to a reduction of 100 basis points over a 12-month period is negligible, However, in the medium term, more than three years, the impact is around 30 basis points in NIM. As you can see on the chart, demand deposits are a very important source of funding for Banco de Chile, and they represent 26% of total liabilities, where more than half of these liabilities come from the retail segment of these deposits. In terms of market share, thanks to our effective commercial strategies, service quality, and our ability to cross-sell and maintain customers that use our bank as their primary bank account, we have maintained our leading position with a stake that hovers around 23%. This market leading position together with solid credit risk ratings has permitted us to post once again the lowest cost of funds in the industry with an average level of 2.3% in the local currency. Please turn to slide 13. Total loans this quarter grew by 8.7% year on year. The retail segment continues to be the driving force behind these figures, rising 11.1% year on year, while wholesale loans only grew by 4.9% during the same period. More importantly, on a quarter-on-quarter basis, our loan portfolio grew 2.3%, which denotes a 9.5% annualized growth rate. Both the retail and wholesale banking segments posted strong growth 2.3% this quarter versus the immediate prior quarter. The chart on the right shows a breakdown of loans by segment. In loans to individuals, the main driver for growth was mortgage loans and commercial loans to SME customers that led growth. Both are increasing more than 12% year-on-year. The strong level of mortgage loan growth is due to strong demand of properties together with very attractive rates that have recently become even more appealing to customers due to the prevailing scenario of low long-term interest rates. On the chart on the bottom left, you can see how originations have sharply increased by 45% over the same period last year in residential mortgage loans. Our excellent performance in SME commercial loans was thanks to effective commercial strategies that focus on bringing customers closer to the bank as well as new pre-approved loan model for these customers. As you can see on the chart on the bottom left, SME commercial loan originations also grew sharply at 12.2% year-on-year. Since SME penetration in Chile is still very low, we expect that the SME book will continue posting attractive growth rates in the medium term. In terms of our wholesale segment, growth was driven by loans to the middle market companies, which increased 8.6% year-on-year. The corporate area grew more slowly at 3.6% year-on-year, but when compared to the first quarter of 2019, accelerated to 3.6% or 10.8% annualized. Also worth noting is that during the second quarter of 2019, our corporate division managed to close important long-term lending deals that contributed to the quarter-on-quarter growth posted by the segments. Similarly, we expect loan growth in this segment to also show a recovery in the coming quarters as soon as investment regains dynamism. It's indisputable that a key part of our success in growing the retail loan book has been our focus of continually improving customer experience by providing them with superior products and service channels that they demand. Please turn to slide number 14. The investments we have made in recent years are primarily in us to implement significant transformation in our retail banking service model. Since 2015, we have been developing many IT projects to create the best customer experience for our customers and to improve commercial activities as well as operating efficiency. In 2017, we began to test a pilot service model in 16 branches. Results were very positive, improving sales, customer experience, and even job satisfaction. Consequently, we have decided to roll out this program across the entire branch network. Three key changes of this model are, first, we are continuing to optimize the branch network by combining some CREDI Chile branches into Banco de Chile locations in order to improve productivity and customer experience. This process is taking advantage of our strong brand and permits us to have better economies of scale. Second, a significant improvement in our personal banking service model which is focused on providing tailored services to all segments that we serve. This involves expanding our account manager responsibilities so that they manage both assets and liabilities of our customers. This has been facilitated through our new CRM platform that permits account officers to have a full 360 degree understanding of our clients, thus enhancing cross-sell opportunities in credit and non-credit products and services. Third, we are improving several activities at the branch level. We're implementing modern self-service equipment across all of our branch networks. These terminals and ATMs will permit our customers to perform essentially all the functions that today require the assistance of a teller or customer service executive. We have also seen important improvements in customer experience through the use of greeters at these new branches. All of this technological investment will allow us to centralize activities achieving simpler processes that will free up time of our account managers to carry out more commercial activities, increasing the productivity of our sales force. Please turn to slide 15. This quarter, we posted a cost of risk of 67.9 billion pesos. As you can see on the chart on the upper right, we incurred a net credit deterioration of 15.6 billion, which was mainly originated in wholesale and the wholesale segment. Nevertheless, this figure was influenced by very good credit behavior in the second quarter of 2018. We also recorded $6.8 billion higher provision expenses due to higher volume and change in mix towards the retail segment. As mentioned earlier, our growth has been concentrated more in personal and SME banking, which have higher risk than wholesale customers but also have much higher spreads. Lastly, depreciation of the Chilean peso to the U.S. dollar when compared to the second quarter of 2018 benefited our allowances for loan losses denominated in foreign currencies by 8.2 billion pesos, partly offsetting the prior impacts. In terms of cost of risk, we reached 0.96% this quarter and 1.12% for the full year, completely in line with our guidance. It's important to highlight that we strive to have the best credit risk policies in the industry and this translates into very stable and low NPL ratios as well as higher coverage ratios. As you can see on the chart on the bottom left, our delinquency ratio compares very favorably to our peers and actually decreased when compared to the first quarter of 2019 and the second quarter of 2018. In terms of coverage, We lead the industry with a level close of two times, while our main competition only has levels of around 1.2 times. Before moving on, I want to remind everyone that in July, we will be implementing the new standard model for provisioning SME loans, which will not have a material effect on our bottom line. Actually, we expect the impact to be much lower than the levels that have been reported by our peers in the industry. Please turn to slide number 16 on operating expenses. Total operating expenses increased 9.5% year on year. This rise was influenced by several strategic projects which should permit us to improve our cost structure in the coming years. Currently, we have three main projects occurring simultaneously at Banco de Chile. First, digital transformation has become one of our main short-term challenges. As a result, we have continued to work diligently to continue implementing new products and service tools and automate processes in order to digitally transform Banco de Chile by means of a comprehensive front-to-back of all processes involved in our operations. Second, as I mentioned, we recently finished a pilot program that tested a new branch model. Throughout the rest of 2019 and 2020, we'll be transforming our branches into this new model. Lastly, we're in the first phases to implement an efficiency program at Banco de Chile. We're currently identifying processes that could be improved and streamlined to allow the bank to maximize returns without affecting customer experience. The chart on the right shows a breakdown of expenses related to these projects. More than 70% of the additional expenses this quarter were related to these initiatives, while only 5.7 billion pesos were related to recurring expenses. It's also important to highlight that recurring expenses grew 0% in real terms. Due to our strong operating revenues, our efficiency ratio improved to 43% this quarter. However, we expect that we should end the year at a level close to 44% to 45% for the full year. In the medium term, when all of our strategic projects have been implemented, we believe that we'll be able to reach a significant improvement in efficiency. As you can see on the chart on the bottom right, which shows a comparison of efficiency ratios and expenses amongst different banks, we believe that we still have an important opportunity to improve our cost structure. Please turn to slide number 17. As is widely known, and thanks to a successful track record, our shareholder sales or our formal shareholder sales with the profits that we generate fully paid off all the debt it owed to the Central Bank of Chile. On April 30th, 2019, this final payment triggered the dissolution of SM Chile and South. Registered shareholders of SM Chile, as of May 31st, 2019, received Banco de Chile shares, increasing their free flow from 27.7% to 44.3%. This impacted positively our index in the Santiago Stock Exchange, and we expect that in August our share will have an important change in the MSCI indexes. Actually, on the local exchange, we are the company with the highest weighting of 11% in the IPSA index. All this is translated into an increase of 27% in daily trading volumes. We also expect that this will improve our visibility in the market. Please turn to slide number 18. Before moving on to the Q&A section, I would like to close by emphasizing some of the points we discussed in the presentation and also providing our guidance for the future. As Rodrigo mentioned at the beginning of the presentation, we believe that the Chilean economy will gradually increase its dynamism. Since we expect GDP growth to increase from 2.8% to 3.2% in 2020, we believe that there is room for recovery in loan growth to levels close to 9% in nominal terms. In addition, potential increase in inflation to 3% will generate an additional boost in Treasury revenues. We strongly believe that there is space for further improvements in efficiency. In addition to the cost of silver we've had, which has been reflected in recurring expenses growing 0% in real terms this quarter, we think that the implementation of the projects we are currently working on, such as digital transformation, the efficiency program, and implementation of the new branch service model will allow us to sustainably improve the efficiency ratio. We estimate that the medium-term efficiency ratio should improve by nearly three percentage points. The cost of risk has remained in line with our guidance, which is between 1 and 1.1%. Given our prudent risk policies, the economic outlook, and our healthy loan portfolio, we expect this ratio to remain at current levels for the foreseeable horizons. In this context, we reaffirm our view that Banco de Chile will be able to maintain a sustainable ROE between 18% and 20% in the midterm. I'd like to end this conference call by highlighting the important increase in the free vote, which I mentioned on the prior slide, which occurred after the payment of the subordinated debt. We believe that this will provide us with much more visibility, and hopefully this will translate into greater trading revenues in the future. Thank you for listening, and if you have any questions, we'd be happy to answer them.