Banco De Chile ADS

Hello everyone and welcome to Banco de Chile's 3Q19 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 Vice President of Institutional Relations, Mr. Pablo Mejia, Head of Investor Relations, and Daniel Galarse, Head of Financial Control. 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.

Good afternoon, everyone, and thank you for attending this conference call. Today, I'll begin with an overview of recent trends observed in both the Chilean economy and banking industry, and then Pablo Rijia, our Head of Investor Relations, will provide a deeper analysis of the performance of Banco de Chile during the last quarter. Please turn to slide number three. The annual GDP growth rate had a positive evolution this year, increasing from a weak 1.6% in the first quarter to 3.3% in the last quarter. This reflected an important resilience relative to the rest of the world, where the GDP growth decreased in most countries. The softer performance of Chile relative to other OECD countries can be seen in the top-left chart. On a sequential basis, the economy grew 2.9% annualized in the last quarter, even though the lower-than-expected growth in September. Additionally, this rise has been boosted by the weak comparison base from 2018, causing a positive statistical effect. As Chile is the most open Latin American country to the global economy, It's worth to understand how this decoupling took place. The answer to this question is simply the result of our policy framework. Thanks to the low and stable inflation, the Chilean central bank has been able to reduce the monetary policy rate this year from 3% to 1.75%, which is one of the lowest rates in the world. In the bottom left chart, you can see how expansionary the monetary policy rate in Chile is as compared to other countries in the region. It's interesting to see that Chile is the only country with negative interest rates in the region. The headline inflation has remained below the target of 3% since late 2016 as a consequence of the below-trend GDP growth the recovery in the last quarter, and the stable growth in real wages. As is a public knowledge, since mid-October in Chile, we've seen a social unrest that's leading damage in infrastructure and lower activity in different sectors, mainly those related to consumption and services. In this context, We think it's important to analyze the potential impact in both the overall economy and in the banking sector. On the macroeconomic side, undoubtedly, there will be a drop in economic growth and confidence measures. GDP growth for October, which will be released on December 2nd, will probably be negative, anticipating a lower expansion for the whole year. In response to this, the government has announced several measures, such as an increase in minimum pensions and labor income, among others. Additionally, the government implemented several changes in its cabinet in order to address the new agenda. Additionally, there has been a preliminary agreement to introduce changes to the current tax system by increasing taxes to high-income individuals, removing the integration of the income tax regime, and implementing tax benefits to SMEs. This tax proposal aims to finance the rise in structural spending in order to mitigate the impact in the fiscal deficit. Nevertheless, it's important to mention the existence of sovereign wealth funds and other fiscal savings equivalent to almost $30 billion dollars allowing the possibility of financing fiscal measures. As a result of this event, Banco de Chile had a direct impact in its infrastructure, resulting in nine branches and 89 ATMs with severe damage, which represents a minor part of our distribution network. We don't expect a material impact to our results attributable to this damage. Additionally, we are aware about the existence of other indirect impacts that may temporarily affect our figures associated to lower activity and origination and collection as a consequence of several constraints for the development of normal activity in the country. Beyond the final impact, I would like to highlight the absence of major impacts in customer service. Thanks to the commitment of our employees and the effectiveness of our digital panels, our customers were able to undertake most of their transactions. In this environment, we have modified our baseline scenario for this and the next year. Please move to slide number four. In relation to economic growth, we have reduced Our forecast for this year from 2.5% to 2% as a consequence of the expected short-term negative growth. For the next year, we'll reduce it from 3% to 2.5%. We also expect inflation to remain below the target of the Chilean central bank with each 3%, at least until 2021. Specifically, we expect the CPI to end at 2%. 2.6% in 2019, and the following year. In this environment, we expect the Chilean central bank to continue reducing the interest rate. In the last meeting, the board cut the interest rate to 1.75% in line with market expectations. According to the press release that accompanied the decision, the Chilean central bank sees room for further red cuts. Therefore, we expect the interest rate to be at 1.5% at the end of this year. Now, I would like to discuss briefly the evolution of the Chilean banking industry. Please turn to slide number 6. As you can see on the chart on the left, loans in the Chilean banking system have grown almost 10% over the last 12 months and accelerated to 3.1% quarter-and-quarter. or 12% annualized. On a sequential basis, loan growth was driven by an acceleration in commercial loans that rose almost 15% quarter on quarter, annualized, followed by mortgage loans that expanded just over 11% quarter on quarter, also annualized. In terms of results, the Chilean banking industry posted net income of 624 billion pesos in the third quarter, well above the level recorded last year. The higher level of growth was partially due to the incorporation of some portfolios into the banking industry from retailers. In terms of return on assets, the industry maintained its profitability level stable at 1%. This shows that resilience, and prudent capabilities of the Chilean banking industry to adapt strategies efficiently in order to cope with a less dynamic economic cycle. Now, I would like to pass the call to Pablo, who will go into more detail about our financial results. Please turn to slide eight.

Thanks, Rodrigo. Once again, we were able to lead the quarter in terms of net income with 152 billion pesos. It's also important to highlight the large gap in profitability in terms of net operating income as a percentage of interest-earning assets, as you can see on the chart on the right. Our consistent strategy and customer focus have allowed us to deliver sustainable and superior profitability for our shareholders. As shown on the – please turn to slide nine. As shown on the prior slide, net income reached $152 billion vessels equal to a return on average equity of 17.8% this quarter and year-to-date $446 billion with a similar ROE of 17.7%. As you can see on the chart, on the bottom of the slide, the 19% increase achieved in the third quarter Net income versus the same period last year was due to strong operating income growth together with lower loan loss provision expenses, which more than offset a moderate rise in operating expenses and taxes. On the following slides, I will go into greater detail how our shift towards retail segment together with higher productivity, cost control and stable risk levels are contributing to these positive numbers. Please turn to slide 10. Operating revenues increased 8% year-on-year as a consequence of an expansion of our customer income that rose 13% year-on-year, while non-customer income dropped 11% year-on-year. In turn, the rise in customer income was due to higher net interest income, thanks to effective commercial strategies that leverage business intelligence tools to concentrate growth in key market segments and products that provide more attractive returns with adequate levels of risk. Customer income was also driven by an important increase in fees that rose 31 billion pesos as a result of, first, insurance brokerage that was up 18 billion pesos related to fees received from joint venture we made recently and the year-on-year growth of 18.7% in written premiums, and second, transactional fees from services that grew 10 billion pesos from credit cards and ATMs. Mutual fund management fees also advanced 3 billion pesos, equal to a rise of 15% per year. This also permitted us to partially offset lower non-customer income revenues owed mainly to the lower effect of inflation on our U.S. structural gap position, as you can see on the reduction of our net interest margin on the chart on the top right. Lower inflation took place in conjunction with higher counterparty value adjustments for derivatives, which more than offset an improved performance over trading and AFS that benefited the sharp decrease in nominal and real interest rates. Please turn to slide 11. Total loans grew 9.3% year-on-year in the third quarter, as seen on the chart on the left. led by an increase of 12% in both SME and consumer loans, which are target markets. Additionally, wholesale loans rose 5.6% year-on-year and 4% quarter-on-quarter, thanks to the higher dynamism of the multinational infrastructure banking unit in the last quarter. It's also important to highlight the benefits of having a well-diversified loan book. When one segment has Less dynamic demand or when there's not an adequate balance between risk and return, other segments usually offset that weak performance, as has been the case in recent years. Regarding SMEs, we continued our focus of building a strong and solid customer base in this unit. It's important to note that we consider that we have the best SME portfolio in the industry with the lowest NPLs. This has allowed us to consistently record throughout all the cycles low loan loss provision levels, which ultimately contributes to maintain a high and sustainable profitability for our bank. We are confident that by providing the best experience to our customers based on deeper use of business intelligence with top physical and online channels coupled with prudent risk policies will permit us to continue growing with favorable risk return equation that Banco de Tila has become known for. As this slide shows, we've been able to grow by maintaining the best funding structure in the industry. Specifically, we continue leading the sector with the lowest financing costs that you can see on the chart on the top right, thanks to our wide and stable demand deposit base from both retail and wholesale customers that choose to bank with us over our competition. This is not a coincidence. We're perceived as the safest bank in the industry, situation that has confirmed our superior corporate risk ratings of A from Standard & Poor's and A1 from Moody's, reflected in lower risk premiums reached when we issue bonds. This allowed us to place bonds in the local market and overseas in favorable conditions. In the local market, we issued approximately 716 billion pesos, with tenures ranging from 4 to 12 years, while we placed $120 billion abroad with maturities between 12 and 20 years in markets such as Hong Kong, Australia, and Peru. It's also important to mention that all of these placements in foreign currencies are hedged to neutralize the impact of foreign exchange and interest rate changes. Additionally, we also issued this quarter subordinated bonds for over 200 billion pesos in Chile with maturities of around 20 years, allowing us to improve our capital ratios. It's worth mentioning that the subordinated bonds that we place in the local market with spreads of only 10 to 15 basis points above senior bonds makes it clear of the low risk premium that we have and how this translates into a competitive cost of funding. Responsible growth and prudent risk management are fundamental pillars of our success and are a central part of our long-term strategy.