Banco De Chile ADS

Hello, everyone, and welcome to Banco de Chile's fourth quarter 2019 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 Oravina, Chief Economist and Senior Vice President of Institutional Relations. Mr. Pablo Mijai, Head of Investor Relations. Daniel Golarce, Head of Financial Control in Italia. Viala 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 risk 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 would now like to turn the call over to Mr. Rodrigo Oravina. You may proceed.

Good afternoon, everyone. and thank you for participating in this conference call. Today, I would like to share with you our view about the evolution of the Chilean economy with a special emphasis in the new macro perspective. After that, Pablo Mejia, our Head of Investor Relations, will analyze the financial results achieved by Banco de Chile during the last quarter and our guidance for this year. As usual, we will finalize this conference call with the Q&A section. I would like to start with an overview of the Chilean economy. Please flip to slide number three. As you probably know, the last quarter of 2019 was marked by protests as a consequence of the social unrest that started in October, affecting economic growth. As a result, GDP fell 3.4% and 3.3% year-on-year in October and November after an expansion of 3.3% in the third quarter. In the chart on the left, you can see how the economy was affected by the social crisis. This weakening can be explained by both supply and demand factors. Projects were accompanied by damage to private and public infrastructure, reducing the capacity of roads, or, in other words, the aggregate supply of the economy. According to official estimates, the damage was equivalent to nearly $3 billion, or 1% of the GDP, affecting the subway service as well as retail and transportation sectors, reducing the average working hours. However, these supply shocks should be temporary, as the government announced an ambitious reconstruction agenda that will probably be implemented this year. In fact, there was a strong recovery in the December monthly GDP figure, which posted an impressive 3.5% monthly change, or 1.1% year-on-year, over passing private expectations. This reinforces our expectations about a temporary slowdown. There have also been important impacts on domestic demand, which have been reflected by different figures, such as business and consumer confidence indicators and retail sales. However, some figures from retail and manufacturing sectors showed an improvement in December, in line with the trends observed in GDP. Although unemployment has remained stable, as seen in the chart on the bottom left, it's probable that there would be a slight deterioration in the near future, since the labor market has a delay following a slower growth. It's important to pay special attention to the evolution of employment, as it has an important impact on the banking sector, especially in terms of asset quality. Despite this environment, the inflation rate, which is a key driver of our net income, has gradually been increasing during the last month. This trend can be seen in the top right part, which clearly shows that tradable inflation, which represents nearly 60% of the CBA budget, has led the pickup in the overall inflation. Consequently, the inflation rate achieved the policy target of 3% set by the central bank, leaving more room for the central bank to have a neutral bias in its monetary policy. The exchange rate has unusual volatility. As seen in the chart on the right, the Chilean currency depreciated to 840 pesos, reaching the lowest value seen in our history. This led the central bank to announce an intervention equivalent to $20 billion to be implemented by weekly sales of USD in the open market until May of this year. After this measure, the effect strengthened to $750, reducing the gap between the effect value and its long-term fundamentals. Nevertheless, the currency has weakened during the last weeks as a result of the lower copper prices giving fears on the impact of coronavirus on China's growth. Beyond the short-term volatility, it's worth mentioning the positive impact that the weaker pesos should have on net exports, offsetting, at least partially, the sluggish growth stated in both consumption and investment. Now, I would like to discuss our baseline scenario for this and the next year. Please go to slide number four. The weaker activity observed in the fourth quarter, 19, was likely the bottom of the negative cycle. Particularly, we expect the economy to improve gradually this year, resulting in an overall expansion of around 1% this year. For 2021, we forecast an expansion of 2.2%, which is consistent with a steady convergence towards the potential growth. Our view is based on four main factors. First, demonstrations and disruptions have come in relation to October and November. This has made possible a gradual normalization of activities across all economic sectors. The improvement observed in several December indicators is consistent with this diagnosis. Next, the government announced a robust countercyclical fiscal plan in order to address social demands and reconstruction of public infrastructure. Specifically, the Finance Ministry increased the fiscal spending growth in the 2020 budget to 10% from the 3% set formerly. This change is mostly explained by additional spending of $5.5 billion on infrastructure, which has a positive fiscal multiplier. Third, the multilateral weakening in the Chilean peso generates better conditions for tradable sectors, especially mining. Lastly, we expect the central bank to lift the interest rate and change this year at 1.75%. This interest rate is negative in real terms, around minus 1.25%, confirming the existence of easing conditions in the monetary sector. Even though all these factors should contribute to improving the activity in the future, uncertainty will potentially affect investment this year, as seen in the chart on the top right. Our scenario considers an inflation rate hovering in the range between 3.3% and 3.5% during this year, as a result of two opposite forces, a weaker currency and, on the other hand, subdued GDP growth. Finally, as I mentioned before, we do not expect changes in the monetary policy rate this year, since the CPI is within the range of the central bank's Taking into consideration the important uncertainty, the central bank has more reasons to accumulate better information before changing the interest rate. Please move to slide 6 to analyze the evolution of the banking industry. Over the last 12 months, loans in the Chilean banking system have grown 10% and increased 3% quarter-on-quarter. the slowdown of the Chilean economy hasn't affected significantly loan growth. In fact, the 3% quarter-on-quarter growth is the same growth that we saw in the third quarter of 2019. Nevertheless, we say that loan growth will gradually fall due to the below-trend growth as I mentioned earlier. According to the Central Bank survey, for instance, the banking industry has become more restrictive for granting loans and demand has weakened over the last quarter of 2019. The survey indicates that 50% of banks reported more restrictive terms for consumer loans. The survey also indicated that there was less dynamism in the demand side. In this context, 42% of banks saw a reduction in demand for consumer loans, as well as an 18% decrease for mortgage loans. In terms of results, The Chilean machine industry posted net income of 127 billion pesos in the fourth quarter. The decrease was mainly due to significantly higher loan loss provisions in line with the events seen during the fourth quarter 19 and, to a lesser extent, greater operating expenses. As I mentioned before, we will likely have a challenging year with a below-trend growth and a potential deterioration in the labor market. In this environment, it's reasonable to expect that total loan growth for the industry will reach around 6% in nominal terms this year. Please turn to slide A to begin our discussion on Banco de Chile. We are very proud to present our main achievements in 2019. We ended the year as the leader of the industry in many aspects, especially in financial results. We were ranked, once again, first in net income, net operating income, as well as in net sales. We also recorded a very strong year in terms of SME and residential loans origination, with an 11.3% and 14.4% year-on-year rise, respectively. These results have been achieved through our superior and consistent commercial and risk management strategy that focuses to grow with an adequate risk-return relation in key market segments. As a result of our constant efforts and improvements to give the best service to our clients, we were recognized as having the highest net promoter score and best customer service by ProGalidad, a prestigious Chilean non-profit organization. In addition, the banker and brand finance honored our brand as the most valuable in the Chilean banking industry and we also were recognized as the bank with the best corporate reputation in the last decade by Merco. As a result of our continued concern to take care and develop our employees, we were chosen as the best bank to work in Chile according to University Student Service by MERCO. Moreover, showing our commitment with the environment, during 2019 we issued our first green bonds. It was the first green bond from a Chilean financial institution and it was issued to finance renewable energy for our operations. DEVA awarded us as having the best annual report of the banking sector, reflecting our focus on improving our reporting process and opening valuable information to our stakeholders. Now, I would like to pass the call to Pablo, who will go into more detail about financial results. Please turn to slide number nine.

Thank you, Rodrigo. The fourth quarter was challenging. As Rodrigo mentioned, we went through from a scenario expecting strong growth in 2020 to subdued GDP with an expected rise in unemployment levels. This undoubtedly will impact growth perspectives for the banking industry in 2020. In turn, October and November were coupled with high credit costs, damage to infrastructure and a drop in confidence levels. Despite this environment, we were able to demonstrate the effectiveness and consistency of our business strategy and the value of our competitive advantages. In the fourth quarter of 2019, we posted a bottom line of 147 billion pesos, only 3% below the prior quarter and 9% below the same period last year. On a full year basis, we recorded 593 billion pesos, basically in line with the results in 2018. This is especially noteworthy when we compare results to our peers, as you can see on the bottom part of this slide. We clearly outperformed all of the banks in our quarterly and yearly results as well as our ROE. This leading result is not by chance but is consistent throughout our history. We systematically post more predictable results throughout the economic cycles, clearly setting us apart from our peers and generating greater value for our shareholders. Please turn to slide number 10. The fourth quarter operating revenues increased 5% when compared to the same period last year and 8% when compared to the full year period. The quarterly and full year rise was generated by solid customer income expansion that rose 13% in the quarter and 12% for the year while non-customer income dropped 18% in the quarter and 7% for the year. Customer income was driven by a 9% year on year rise in average interest earning assets that sustained net interest income growth for both the quarter and the full year. Specifically, our net interest income excluding inflation revenues grew 7% during the fourth quarter of 2019 and 6% for the full year when compared to the same periods last year. These figures were partially offset by the lower overall spread due to a change in mix as a consequence of greater growth in mortgage and commercial loans together with the negative effect of the lower overnight rate that went from 2.8% on average in 2018 to 1.8% on average in 2019. Fees continue to deliver solid results, growing 34% in the fourth quarter of 2019 and 27% for the full year when compared to the same periods last year. This was due to good dynamism of our transactional revenues principally from the retail products. Services such as higher usage rates derived from our larger ATM network as well as our more intensive use of cards. In addition, we recorded a strong increment in insurance brokerage fees associated with the income coming from the joint venture signed with an international insurer and an increase in 10% in gross written premiums. We also had solid revenues from mutual fund management in line with the rise in AUM. The strong results in customer income permitted us to offset lower non-customer income revenues owed mainly to higher revenues recognized in the fourth quarter of 2018 as a result of the adoption of debit value adjustments. To a lesser degree, we also had lower revenues from the position that hedges FX fluctuations in loyalty program fees as well as credit risk allowances for dollar denominated loans, which coupled with a cumulative negative effect of flattened yield curves over the last 18 months on results term gapping in ALM. These drivers are partially offset by higher contribution of our UF structural gap position in both the fourth quarter of 2019 and the full year 2019. This had to do with higher inflation in the fourth quarter of 2019 as compared to a year earlier. For the full year, Although inflation has decreased in 2019, the effect of lower nominal rates benefited the funding of the U.S. structural asset position. Our focus at the bank has been to promote responsible growth in every segment we serve. We firmly believe that this is the main pillar of our proven and successful track record. We have advanced towards growing our bottom line by selectively expanding in key market segments that provide adequate returns for the risks we take. In the next slides, we will show you in which segments we have grown in the evolution of our asset quality. Please turn to slide 11. Total loans grew by 7.5% year-on-year and on a sequential quarterly basis slowed to 1.5%. This trend is in line with both the weaker activity and the results showed by the central bank survey which concluded that banks have become stricter in terms of risk and that demand for loans has dropped. Nevertheless, on an annual perspective, According to our strategy, our retail segment was the principal source of growth. Loans to individuals rose by 11.4% year-on-year and SMEs increased just over 10% during the same period. The main drivers for retail loan growth were mortgages and commercial loans to SMEs. Mortgages grew 14.5% year-on-year and also had a similar level in the quarter when annualized. We didn't see a drop in the quarter in mortgage loan growth because loans were in the pipeline before the events occurred. However, we observed a reduction in about 20% of applications during October, November and December versus the running rate. SMEs also performed well, boasting double-digit loan growth of 10% year-on-year and 1.6% on a sequential basis. In fact, origination in this segment remained strong, growing 9% over the last year and at similar levels when compared to the immediate prior quarter. It's clear that this was a demanding quarter for the segment and in line with our approach to build solid long-term relationships with our customers, we assisted those clients which had difficulties during this period by providing them with flexible financing options at special rates to get their businesses back in order. On the other hand, Wholesale lending which was accelerating last quarter slowed and grew only 1.7% year-on-year and on a sequential basis grew 1.2%. It's important to emphasize that we continually focus on maintaining an adequate relationship of risk and return as well as rational use of our capital and because of the current environment we have taken conservative steps to ensure responsible growth in this segment. Regarding liabilities, without a doubt, we are the financial institution with the best funding structure in Chile, which remains as one of the most important competitive advantages. We have the highest market share in demand deposits, and these represent 38% of total assets. In fact, customer deposits accelerated significantly year on year to 18.2%. The high level of growth during this quarter is associated to our strong credit risk rating and their superior brand positioning that results in flight to quality in times of higher uncertainty. This is proven in the chart on the right where we are clearly the bank with the greatest inflows of deposits in the industry during the fourth quarter of 2019 with 24% market share of the flow of deposits. In 2019, we also continued placing bonds at very good rates, including subordinate bonds with spreads that were below average of the banking industry. We issued bonds not only in Chile, but also in Norway, Hong Kong, Japan, Australia and Peru. As a result, as shown on the chart on the bottom right, our cost of funding was once again the lowest in the industry, reaching 2.6% on an annual basis. Please turn to slide 12. This quarter, we posted a cost of risk of 101 billion pesos. As you can see on the lower left chart, we incurred a net credit deterioration of 32%, which was mainly originated in the retail segment as a result of particular circumstances that occurred in October and November. Nevertheless, we posted improvement in December as a result of better payment behavior and more normal development in the collection process. Also, volume growth increased in our loan loss provisions by 10 billion pesos. Lastly, the lower depreciation of the Chilean peso to the US dollar in the fourth quarter of 2019 when compared to the same period of 2018 had a positive effect on our allowances for loan losses denominated in foreign currencies by about $2 billion, partly offsetting the aforementioned impacts. As you can see on the chart on the top right, total overdue loans remain similar to the same period beginning this year, although during the crisis the mix changed. Specifically, we saw an increase in above 30 days past due loan book. We reached the cost of risk of 1.37 this quarter and 1.21% for the full year which we think are reasonable and levels considering the events occurred during the fourth quarter of 2019. Please turn to the next slide, number 13. We dedicate important resources to credit risk at Banco de Chile. Thanks to that, we have built a bank with the best fundamentals as to face the weaker economic cycle in Chile. Over the last decade, we have been conservative and created the largest buffer in additional provisions amongst private banks, as you can see on the chart on the left. As of December, we have 213 billion pesos of additional provisions, substantially higher than our peers, which is even more important when we consider the implementation of Basel III. Our coverage ratio, including additional allowances, reached 220% as you can see on the chart on the right. This level of coverage is also substantially higher than all of our peers. As a consequence of the prudent and consistent risk policies, we've had a stable and low cost of risk and MPL ratios when compared to our peers. We're confident that our commitment to managing risk prudently and growing responsibly throughout the cycles will permit us to continue outranking our competition not only in credit risk but also in the bottom line. Please turn to slide 14 on operating expenses. Total operating expenses increased 7.5% this quarter and the same level year on year. Personnel expenses were the main driver of this increase for both periods as a result of extraordinary bonuses granted to our employees due to their commitment during the events that occurred in the fourth quarter, an increase in severance payments, and a rise in salaries driven by the effect of inflation. Administrative and depreciation expenses decreased $1.3 billion quarter on quarter and $31 billion year on year. In the fourth quarter of 2019, we incurred non-recurring expenses of $8 billion in fixed asset related expenses as a result of charge-offs and repairs undertaken on branches and APMs that were affected during the events that took place. We also grew IT and communication expenses due to software licensing and development of new IT projects to strengthen the digital platforms and cyber security infrastructure. These increases were offset by lower marketing expenses and a reduction in outsourced services and lower expenses related to assets received in lieu of payment. It's important to mention that we are focused on improving our efficiency in the medium term from the 45% levels posted in recent past, as you can see on the chart on the bottom left. In this context, I'd like to mention some important advances of our strategic priorities that we have made during the last year that not only will support a reduction in the medium term expenses, but also improvement in operating revenues and customer experience. Please turn to slide 15. We are proud of our robust and consistent results that we have had over time. However, we are aware about several challenges that we face in different areas such as economic environment, social changes, more banking and non-banking competition and new regulations. In order to address this, we have defined four main strategic focuses as you can see in this slide. The first of these is to implement further steps in our digital transformation process that the bank has carried out in recent years. As we mentioned in previous conference calls, we have innovated in several fields including the creation of new websites for companies and individuals, the launching of successful mobile apps for banking, investment products and insurance which contributed to improving the speed and security of transactions made by our customers We have also made advances in business intelligence, allowing us to accompany and understand even more the needs of our customers throughout their life cycle. Additionally, we are working on several improvements in our CRM during the last years, in order to better provide information to our customers and our account managers. Thanks to this, today we have even a more comprehensive understanding of our customers, improving our service even more. Nevertheless, we are ambitious and we want to go further. Based on our agile work methodology, which is centered on simple, fast processes with strong interconnections between different areas, we are continuously improving our roadmap that aims to strengthen our value offering. Specifically, we are identifying improvements in our processes with the goal of addressing more efficiently the needs of our customers and developing more and better products. We are very convinced by doing so we are building the foundation for a stronger growth in customer base and importantly to continue being the bank with the best customer experience in the Chilean industry. The second focus is related to reduce and manage operation risks in an environment of increasing use of technology in the banking sector. In particular, we have been working on strengthening our cybersecurity, not only in reinforcing the permits and transactions, but also on raising the awareness of our employees. We are conscious that the main way of reducing the number of threats is by promoting safe conduct of our workforce. In this context, during 2019, more than 80% of our Banco de Chile staff participated in training programs on issues related to information security with an impressive increase in actions that mitigate potential attacks. Furthermore, we have continued implementing several improvements in the service model of our branches, a project that began in late 2018, which basically aims to move towards a more intensive use of digital technologies. In particular, we have ended a successful transformation of more than 100 branches by the incorporation of new self-service terminals which promote even more the use of digital tools by our customers. In addition to that, we have automated several back office activities allowing a reduction in several manual processes which allow account managers to have more time to service better the needs of our customers. For this year, we plan to continue to deepen this initiative to complete the remaining branches. Another area that has received special attention in our strategy is productivity. In order to improve our efficiency, we have carried out a series of actions that aim to increase our income without raising our recurring costs. Some of these areas was being to reduce expenses including external advisor activities, a new roadmap for internal processes, more efficient supplier options and optimization of physical space among others. It's important to mention that we've been implementing these measures gradually in order to maintain a superior quality of service we deliver to our customers. We aspire to have a gradual improvement in efficiency ratios in the long term. Finally, our strategy pays special attention to the main basis of our long-term sustainability, mainly through actions in the environmental, social, and corporate governance areas. We're proud to have issued the first grain bond in our history, as well as to have carried out a series of actions to support our SME clients who were affected by the events in October and November. We also held a national entrepreneurial challenge contest in which more than 50,000 micro entrepreneurs participated and we also trained more than 7,000 people in financial education. In this context, I would like to also highlight that we are the bank with the greatest improvement in ESG disclosure in Chile according to the index released by Bloomberg. We are convinced that these focuses together with our strong competitive advantages will allow us to maintain our leadership in the industry. Please turn to slide number 16. Summing up, we believe that our results are positive when compared to our peers and with our own performance in previous years when taking into consideration the economic environment and the impact of the events that occurred in the fourth quarter. Our higher level of loans coverage ratio and additional provisions provide us with excellent capability to cope with the slowdown in our business activity. Additionally, we are confident their sound risk policies support a profitable business model and that this is focused on maintaining an adequate risk-return relationship. Finally, before moving on to questions, I would like to mention some key takeaways. In terms of GDP growth, we expect activity to grow around 1% in 2020, which should translate into banking industry loan growth of approximately 6% nominal. Loan growth will most likely be concentrated in the retail segment while larger companies will probably delay their investment decisions. However, as we mentioned in the first part of this presentation, we expect a recovery in both GDP and loan growth for 2021. In this environment, we expect a net interest margin to remain at a level of around 4.1% this year. Due to the below trend growth this year and the potential Increase in unemployment, we believe cost of risk for us in the industry could increase. We can't rule out this ratio would reach a level of around 1.3 to 1.4%. Given our prudent and conservative approach to credit risk, we believe risk expenses may increase but below that of our peers. Since we expect the economy to improve in 2021, a lower cost of risk in 2021 is likely. We expect that top line growth should slow, but given our emphasis on cost of control, this should still translate into site improvements and efficiency ratio. We expect a level of around 44% for 2020. With inflation hovering around 3.2%, this should imply an effective tax rate of around 23% for this year. Our solid fundamentals, superior risk management, and sound strategies should permit us to maintain a sustainable ROE of around 18% in the medium term, In line with our baseline scenario, ROEs should be slightly below this level in 2020. Thank you, and if you have any questions, we'd be happy to answer them.