Itau CorpBanca

Ladies and gentlemen, thank you for standing by. And welcome to the Tau Corp Banka first quarter 2021 financial results conference call. At this time, all attendees are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, simply press star then the number one on your telephone keypad. If you require any further assistance, please press star zero. Thank you. Now, I would like to welcome Ms. Claudia Labille. Ma'am, the floor is yours.

Thank you. Good morning. Thank you for joining our conference call for our first quarter 2021 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 comment as a result of macroeconomic conditions, market risk, 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 non-recovering 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 are Mr. Gabriel Mora, CEO, and Mr. Rodrigo Couto, CFO. Mr. Mora will comment on 2021 first quarter results and our strategic evolution as well as recent events. Afterwards, we will be available for a question and answer session. We have included a Q&A box on the console where you can type in your questions if you are not connected by phone. We will take questions from both the phone and the console. For the latter, we will read and answer your questions verbally. It is now my pleasure to turn the call over to Gabriel.

Thank you, Claudia. Hello everyone, and thank you for joining us for our 2021 first quarter earnings call. Today's presentation has three parts, an update on COVID-19, our first quarter 2021 results, and an update on our transformation plan and business strategy. So moving straight into slide three. While Chile gained international attention from the speed of its vaccination process during the first quarter of 2021, new infections surged to record levels. As a result, mobility restrictions were reintroduced and international borders were closed. These strict quarantine measures, which for a while affected almost 90% of the population, are now being rolled back. Chile's vaccination process has been one of the fastest in the world, outpacing both the U.S. and the U.K. in terms of the doses administered per 100 inhabitants. As of April 30, 8.1 million people in Chile had received at least one dose of the vaccine, and 83% of the people over 60 years old had received both. we expected this speedy vaccination effort to pave the way for a significant economic reopening in the coming months. So let's move to slide four. The Chilean authorities continue to act swiftly as well as on the economic recovery funds. The government announced an expansion to the two-year COVID fund by over 6 billion U.S. dollars. That's 2% of the Chilean GDP. The central bank Of Chile also has launched the third stretch of its credit facility conditional on increasing lending, the FCIC-3, amounting to $10 billion over six months. Congress has also approved the expansion of the uses and the benefits of the Guarantee Fund for SMEs, the FOGAPI. Legislators also approved a third 10% pension withdrawal. We once more demonstrated our commitment to being part of the solution through our participation in the Forgapio reactivation program. We granted almost 268 billion pesos of Forgapio reactiva, guaranteed loans, achieving a participation of 11.3%, which is higher than our overall market share. Collectively, the Chilean authorities have acted decisively in responding to the pandemic crisis, both on the sanitary and economic fronts, with positive impact both in economic activity and on the credit cycle. Nevertheless, there are medium to long-term consequences of the economic measures that are difficult to assess and may turn out to be significant in the future. If we can please move to slide five. Prior to the latest lockdown in Chile, activity was building strong momentum. In the short term, the latest quarantine measures temporarily hindered economic activity, but the sustained progress of the vaccination, a strong external impulse for better terms of trade, support from macro policies and the carryover effect are consistent with a significant growth rebound this year. We continue to see GDP expanding 6.5% in 2021, following the 5.8% decline last year. Moreover, risks remain tilted to the upside. We still see inflation close to the 3% target over our forecast horizon, as the output gap is still wide. Lastly, we expect the first rate hike of the cycle to come in the last quarter of 2021 from the first quarter of 2022 previously. While we see only one 25 basis points rate hike this year in the last meeting of 2021, a faster reopening of the economy than we currently expect in an environment of high terms of trade would probably lead the central bank to increase rates by more before the year ends. In Colombia, we expect the economy to bounce back with growth of 5% this year after shrinking by 6.8% in 2020, We also expect a broadly stable current account deficit this year at a wide 3.4% of GDP compared with 3.3% of GDP last year. Inflation is on track to close this year at 2.8%. We believe that the still large output gap, along with well-behaved inflation and inflation expectations, support rates remain stable at a low 1.75% for the remainder of this year. However, the risks tilt toward early rate hikes if global financial conditions keep tightening. Now, moving forward, let's talk about how the bank performed for these three months of 2021. On slide seven, we share some of the highlights for the first quarter of 2021. Our consolidated net income was 95.1 billion Chilean pesos and 84 billion Chilean pesos in Chile, which is the highest quarterly net income in our history. Consolidated return on tangible equity was 21.5%, and return on tangible equity for our Chilean operation was 25.4%. Our revenues in Chile were boosted by financial margins with the market. Expense growth remained subdued, with costs declining 0.4% quarter-on-quarter. Cost of credit was quite benign across all our portfolios, resulting in an 89.3% reduction relative to last quarter when we reinforced provisions for corporate and SME clients. While we do not believe that the levels of profitability achieved in the first quarter will be maintained going forward, we do believe that this strong first quarter sets up for a significant rebound in profitability this year. Moving on to slide eight, we show that our loan portfolio grew by 1.4% in the first quarter, which is broadly in line with our guidance of mid-signal digit loan growth for 2021. Our portfolio grew 2.3% in retail and 1% in wholesale, also in line with our strategy and guidance of focusing on retail growth while being selective in terms of the returns for wholesale lending. Our strategy for wholesale has enabled us to significantly improve margins and therefore to achieve higher returns on capital. On slide 9, we see that our financial margins with clients in Chile decreased 1.6% in the first quarter, mainly due to seasonal effect of the sale of the student loan portfolio in the fourth quarter of 2020. On the graphic below, which explains the change in our first quarter 21 margins with clients versus the fourth quarter of 20, we see the effect of higher margins on commercial loans as well as on deposits. Those positive contributions were upset by a change in credit portfolio mix, mainly due to the contraction of the consumer portfolio as a result of the pandemic, as well as by a reduction in average loan volume. Moving on to slide 10, we show that our financial margins with the market was 60.5 billion pesos in the first quarter, about 21 billion pesos higher than that of the fourth quarter of 2020, despite a lower exposure to the U.S., a decrease in 500 billion pesos, and a lower inflation. Revenues were high across our trading and banking businesses, despite a 45% reduction in inflation exposure since the third quarter of last year. Here on slide 11, we can see our main credit risk indicators in Chile. Cost of credit in the first quarter was $24.8 billion, which corresponds to 0.5% of our average loan portfolio. we are seeing a quite benign credit risk across our portfolios. In retail, the NPLs of the retail and consumer credits that did not receive any payment relief are below mid-2019 levels. That is, pre-pandemic and pre-social unrest. The credits that did receive payment relief are in all repayment now and performing better than expected. In wholesale, we did have one corporate case rolling to NPL, but it was already adequately provisioned, so it did not have any significant impact on P&L. The movements that you see in commercial NPLs, total NPLs, and NPL coverage are mostly explained by that one case and therefore do not reflect overall portfolio trends. As a result of the provisions we established in 2020, our NPL coverage ratio remains very high in historical terms, despite the decrease shown in this quarter. Our coverage evolution quarter over quarter is consistent with our expected loss provisioning model, which allows us to be ahead of the NPL cycle while maintaining high levels of protection through the cycle. As for our perspective for the year, we are training towards the low end of the range we provided as guidance for cost of credit, which was between 1% and 1.3%. On slide 12, we show non-interest expenses for the quarter, which have remained very much under control. decreasing 0.4% quarter over quarter, while the efficiency ratio improved by five percentage points, despite the above inflation increasing costs year over year, which resulted mainly from the fact that on the first quarter 2020 was positively affected by reversal of variable compensation provisions. We maintain our guidance of a cost growth below inflation for 2021. Now, moving on to slide 13, we show that our liquidity provisions remain very strong, with both LCR and NSFR at historically high levels since 2020, boosted in part by government liquidity support measures. In slide 14, we can see that Colombia as well had a positive impact on the quarter, reaching at 8.2% managerial return over tangible equities. Operating trends were positive as well, with 3% quarter-on-quarter loan growth, a rebound in operation revenues, and a normalization of cost of credit at significantly lower costs. On slide 15, we see our fully loaded SEP1 capital ratio increased by 50 basis points year-over-year and 20 basis points quarter-over-quarter. We expect our capital ratios to improve steadily going forward as our profitability recovers and we continue to advance in our capital efficiency efforts. As I mentioned in the last call, we are discussing internally at the highest levels how best to address our capitalization ratios going forward, considering our upcoming acquisition of additional interest in Itaú-Cortanca-Colombia, as well as the rolling of Basel III. we will make the relevant disclosures of information as it becomes available. Let's move on to the next part of the presentation. On slide 17, I will recap our evolution in the last 12-month period, and on the following slides, I will share the progress that we have made so far. When facing a crisis scenario of a scenario never seen before in March 2020, our adaptation and management capabilities were tested. Our robust governance and solid risk management allow us to continue to run the bank for under those challenging circumstances. As you know, we promptly organized our operations and prepared the bank for the crisis. We acted quickly to ensure our customers had appropriate remote access to the bank, while at the same time developing solutions needed for that period. It was a time of taking care of our people, our customers, and the bank, and we fully focused on that. From September 2020 onwards, we began to shift our focus to building the bank of the future, leveraging what we learned and developed during the crisis. In the months that follow, we develop our transformation plan based on the pillars of a strategic focus on disruption, customer centricity, simplicity in digitization, in an agile working model, in a disciplined approach to achieving sustainable results. If we can please move to slide 18. Before sharing some of the advances in this strategy, I would like to first introduce our new organizational structure. We made important changes to our executive committee to ensure that we have the right structure and the right talent with the necessary skill set to lead this transformation process. The most relevant structural changes are, one, we created a digital business development management division, which is in charge of our transformation overall, as well as the most innovative elements of our plan. And two, the decentralization of our operations, which was key to reinforce customer centricity and agility. In addition to structure changes, we also brought over new heads of technology for the wholesale bank. On July 19, we introduced Eduardo Neves as the new head of IT, who has been working with us since April, and Sebastião Romero as head of the wholesale banking, replacing Christian Tauber, who will leave us in September. Both Eduardo and Sebastian are top executives with experience in the industry and strong track records, as you can see in their mini bios on this page. On July 20, I would like to reintroduce Jorge Novis as the head of our new digital business development division. Jorge has been with us for a few years now. Lastly, as head of operations. Previously, he led several business transformation programs at Itaú Unibanco, which gave him relevant experience in meeting the best person to lead the transformation office we have created to implement our new strategy. The transformation office will coordinate and oversee the transformation process, supported by dedicated IT, finance, and HR sales, and working closely with each of the workstream leaders and teams. It is worth mentioning that this structure and the overall methodology we are following to implement the transformation has been successfully deployed in Itaú Unibanco as well as in other banks and companies in different regions. After describing how we are setting ourselves up to deliver the transformation plan, I will now comment on the progress we have already made over the last few months, starting on slide 21. We recently announced a strategic alliance with HAPI, a leading digital player in Latin America, through which we seek to bring innovative and disruptive ways of providing financial services to both individuals and companies in Chile. Through this partnership, we are integrating financial services into a large ecosystem, which enables us to assess a large customer base to boost our growth while adding value to the ecosystem. We expect to launch the first products of our partnerships on the third quarter of this year. In our journey of customer experience transformation, we have made significant progress over the last year, as you can see on the left-hand side of slide 22. Having said that, we are not at all satisfied as we regard the low NPS of the banking industry in general Chile as a clear opportunity for us to disrupt the market. On the digital front, we have made huge progress with our new app, which is now ranked number one in Chile in the three major app stores. As you might recall, in the fourth quarter 2020, we launched a digital wallet that allows payments in smartphones and smartwatches, making them easier and safer, as well as offering both Visa and MasterCard options for our clients. Three months later, we have seen an increasing adoption of this functionality. A few weeks ago, we launched the Iverte Mass checking account, which enables quick and easy access to our open investment platform through a 100% digital platform with a hassle-free onboarding. On July 23, we present our innovative organization model at a glance. We are moving towards an agile working model at scale with full integration across our areas. The first step on this journey is integrating business and technology in joint teams, pursuing business objectives broken down into three-month sprints. This migration towards an agile operation model allows us to simplify the organization structure and therefore accelerate decision-making through empowered multidisciplinary teams. This year, we also have been recognized for our excellence in key areas. For example, the Best Trade Finance Provider by Global Finance and Banking, Best Asset Management in Fixed Income by Morningstar, and the Deal of the Year by IFR Awards for our role in the mission of the Peruvian government. Wrapping up, we started 2021 strong, which is just the first step on the journey to achieving the sustainable results. We are fully conscious that much remains to be done, and that is why we are in full transformation mode to achieve our medium to long-term performance aspirations. With this, we conclude the presentation part we have for you today, and we would gladly take any questions that you might have.