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spk00: Good morning and welcome to the ETO Corp Bank of Second Quarter 2022 Financial Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question, press star 1 on your telephone keypad. To withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to the CFO, Rodrigo.
spk04: You may begin.
spk05: Hello, everyone.
spk03: This is Gabriel Moura, the CEO for the company. I don't think that Rodrigo is on the call. I think that we're having some problems connecting, so I will start here. So thank you for joining us on our conference call for the second quarter of 2022. We would like to remind you that our remarks may include forward-looking information, and our actual results could differ naturally from what is discussed in this presentation. You would like also 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-recurring events and apply managerial criteria to disclose our income statements. Please remind that since the first quarter of 2019, we are presenting our income statement in the same manner as we do internally. This financial model reflects how we measure, analyze, and discuss financial results by segregating our commercial performance, our financial risk management, our credit risk management, and also our cost efficiencies. We believe that this form of presenting results will give you a clearer and better view on how our performance is from these different perspectives. And you can please refer to the pages 9 to 12 of our report for further details. With that, we start our presentation today, and thank you for joining us on this second quarter 22 conference call. I would like to the highlights of our second quarter results. So if we can start on our slide four, as part of our marketplace strategy, we are now partnering with TokTok, complementing our housing ecosystem. This alliance will allow us to integrate our mortgage-landing products into customers' housing acquisition terms. TokTok is a marketplace that publishes properties for sale and rent that currently offers more than 130,000 properties and 1,500 real estate projects in Chile. The TokTok marketplace had more than 3 million visits during 2021. It provides online appraisal services, market research information, as well as advertising spaces that will help us cross-sell our financial products. We have an initial value offering in which we have a total of 7,000 pre-approved bank clients with mortgage credit who will have access to a more agile process and a better experience. Over time, we will add functionalities to create the best integrated housing marketplace in Chile. On slide six, as part of our strategy for the wealth management business, We have acquired MCC, a financial boutique with more than 40 years of experience, enhancing our capabilities as well as our scale by effectively tripling our assets in the management for private banking clients. Along with the integration of MCC, we have launched Itaú Private Bank, backed by the largest private bank in Latin America. Through our private banking platform, our customers will have access to a broad range of investment services, locally and internationally, including the possibility of opening accounts and invest in our banks in Miami and also in Switzerland. The value proposition for our clients is to offer a comprehensive advisory service to a multidisciplinary team of bankers and investment specialists supported by the Itaú International Network to deliver the best investment alternatives, advice, and also our experience. Moving on to slide eight, we present the values of our new YouTubers culture, which build upon long-lasting elements of our culture, such as ethics and result orientation, while emphasizing new areas of focus, such as diversity and external orientation. Customer centricity and collaboration complete the six core values for our culture. We believe that with this new culture that we were launching simultaneously with Itaúni Banco, we will have to accelerate the transformation of the mindset in behaviors that we need to continue building the bank of the future. If we can move to slide 10, we now present the growth rankings for the Chilean market which demonstrates that we continue to make progress towards becoming the fastest growing bank in Chile. Over the last 12 months, we were the fastest growing bank in mortgages, consumer stolen loans, and comics on export loans, and the second fastest growing in factoring, credit cards, and levies. Over the coming quarters, we'll continue to strive to be the fastest-growing bank in Chile by building upon our competitive advantages in product differentiation and customer experience while remaining very selective on growth opportunities in terms of pricing as well as risk cases. On slide 11, our ESG commitment, including managing environmental impacts of our operations, managing the social environmental risks of our portfolio, and supporting our clients in their ESG efforts. At the operational level, the increasing digitalization of our operations has allowed us to reduce our carbon footprint by 16% between 2019 and 2021, with significant reductions in energy, water, and paper waste. We have also become supporters of the Task Force for Climate-Related Financial Disclosure. In this semester, we will start the implementation of their 11 recommendations. For us, climate change is an opportunity as well as a challenge. We have been actively supporting our clients' transition towards sustainable growth, granting them either green loans or sustainability-linked loans, which at the same time allow us to pursue our own climate-related ambitions. Finally, I would like to mention that we have asked Claudia Labé, our long-time Investor Relations Officer, to lead these efforts, reflecting the dimension and importance of the ESG agenda for our bank. Investor Relations will become part of our financial planning and analysis function under the leadership of Liliana Gonzaga. I thank Claudia for all the contributions over the years and wish all the best on her new role leading our ESG efforts. Now moving forward to slide 12, where we present our financial highlights for the second quarter of 2022. Our consolidated net income reached 145.4 billion TMPs growing more than 105% year over year. Net income in Chile grew even more by almost 122% to 151.6 billion Chilean pesos. Consolidated return on tangible equity was up 22.1%, while return on tangible equity in Chile reached 29.1% in this quarter. When we look to our profitability in the first semester, we had a 29, I'm sorry, a 19.4% return on tangible equity on a consolidated basis and 24.8% in Chile, which is the highest in our history. Consolidated financial margin with clients grew by 36.8%, boosted by higher volumes, especially of presence in Chile and Colombia, as well as high interest rates. consolidated fee income grew by 18.3%, primarily due to high results in financial advisory commissions, both in Chile and Colombia, as well as higher results in insurance brokerage, in current account services and overdraft fees, especially in Chile. Consolidated non-interest expenses increased by 13.1% year over year, is strongly impacted by inflation as well as by volume growth that we experienced over this period. Nonetheless, the consolidated efficiency ratio improved by 13 basis points, reaching 45.3%. The consolidated cost of credit increased year over year from a very low base, which had been positively impacted by the pension funding withdrawals and other pandemic-related support measures. We obviously had a very strong second quarter to close a very strong first half of the year. In that period, we benefited, like most major banks in Chile, from some macroeconomic tailwinds. However, let not that distract you from the underlying performance of our business. In addition to our financial performance, our position in growth rankings, our improvement in NPS clearly reflect the progress that we have made as a bank. While we do not expect to maintain the same level of return on tangible equity over the coming quarters, which are likely to be more difficult from a market perspective, we have clearly succeeded in closing most of the profitability gap against our peers. Moving to slide 13. we see that our financial margins with clients in Chile grew by 34.5% year-over-year and 8.7% in the quarter. As we can see on the graph on the bottom of the page, the main drivers of this improvement are relative to the first quarter of the credit portfolio growth, as well as improvements in the liability spread in capital financial margins due to higher interest rates. On slide 14, we see that our financial margins with the market was 66.9 billion chinan pesos in the second quarter, way above the one-year moving average and very positively impacted by the inflation on the period. We expect financial margins with the market to fall back to levels more in line with the historical average as inflation declines at some point over the coming quarter. On slide 15, our focus is on fees, which grew 13.5% year over year. We have seen good growth in most of our fee-based business lines, especially insurance brokerage and cash management. As we highlight on the graph on the right-hand side of the The one exception has been asset management, which has been negatively impacted by volatile markets, as well as by product substitution. Here on slide 16, we see our main credit risk indicators in Chile. Cost of credit in the second quarter was 57.7 billion Chilean pesos. which corresponds to 1.1% of our average loan portfolio, impacted by also a $15 billion in additional provisions that we make. Looking at our NPLs, mortgage credit remains stable, and consumer credit shows a 30 basis point increase in the quarter. The movements that we see in the commercial NPLs and total NPLs are mostly explained by a few specific cases and therefore do not reflect overall portfolio trends. Overall, we are seeing NPLs going back to more normal levels as the effect of the ESP withdrawals and other liquidity measures were off within the economy. Our provisioning model had anticipated that the effect And that is why NPL coverage ratio has come down as NPLs went up. Nonetheless, considering the high level of uncertainty of our current macroeconomic environment, we increased our additional provisions by 15 billion pesos in this quarter, and we continue to do so as needed in the future. On slide 17, we show non-interest expense for the quarter. which show a 5.9% increase quarter over quarter as a result of an increase in personal expense, mainly due to seasonal effects of the first quarter associated with provision for employees' vacation and variable compensation established in the spot. The graph on the right side of the page shows that our headcount has remained basically flat even as we increase our technology staff by almost 17% over the last 12 months. As we continue to invest in technology, internalize personnel for key IT roles. In terms of overall efficiency trends, as we can see in the two graphs at the bottom of the page, our costs continue to grow much less than inflation, and our efficiency ratio continues to improve. Let's move to slide 18 on Colombia. As well, you know, we are implementing a transformation program in Colombia that has a major efficiency component, which you can see in the significant reductions that we have made in branches and headcount over the last 12 months, as well as the improvement in the efficiency ratio. Credit cap quality also has been positive and declining NPLs and cost of credit over the last 12 months. we expect to see a more significant impact of the transformation on the bottom line over the coming quarters, and especially when the current environment of high inflation, fast increasing interest rates, and market volatility subsides. On slide 19, we show our capital ratio that has remained resilient despite the market volatility in the period, in which we have major current devaluation as well as rising interest rates. More importantly, on slide 20, I think that we can recap the key messages that we have for you on this presentation. First, we had a strong first half of the year with a consolidated return on tangible equity of 19.4% and 24.8% return on tangible equity in CHIL. While we do not think that our return on tangible equity will remain on that level over the coming quarters, we have closed the gap against most of our competitors. We continue to focus proactively on managing the potential effects of the current cycle of high inflation and high interest rates on our business going forward, as demonstrated by the decision to increase additional provisions in this quarter. The third point is that we continue to advance towards becoming the fastest growing bank in Chile, while remaining selective on growth opportunity in terms of risks and also in returns. And finally, we are making progress in our transformation in Colombia by improving our efficiency. With that, we conclude the presentation that we had for you today, and we would gladly take any questions that you might have.
spk00: Thank you. At this time, I would like to remind everyone, in order to ask a question over the phone, please press star 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And we do have a question over the phone coming from Jason Mullen from Scotiabank. Please go ahead.
spk01: Hello, Gabrielle. Congratulations on the strong quarter. I wanted to follow up on your comments on the efficiency transformation in Colombia. Looks pretty impressive when you're showing the reduction in headcount in branches over the last year. Maybe you could talk about how that can in the future impact long-term profitability and what we should be expecting there in particular relative to what you're looking for in Chile.
spk03: Sure. Thank you for your question, Jason. As you well know, Colombia has always been challenging for us. We have changed the strategy that we had for Colombia last year and started this new plan, mainly based on the analysis that we have for profitability on the bank. If I divide the bank in Colombia in three major businesses, we can see that they have very different dynamics in things that we can expect. For instance, we have a treasury trading business in Colombia that is, very profitable against our cost of equity. I think that we are active. I think that we've been managing that well through different cycles. So we have high hopes of doing, staying that way, increasing our penetration in Colombia. There are many things that we can do regionally and also leveraging Itaú and Ivanko's positions in other countries for multinationals and institutional investors with the position that we have. in Colombia. The second strong business that we have in Colombia in which nowadays we receive more than our cost of equity in Colombia is our wholesale business. It comes from the businesses that Santander used to have, that Helm used to have, and also the business that we had from Itaú BBA in Colombia. So in terms of corporate investment banking and also middle market, I think that we are well positioned. Most of the views in Colombia, we are into the flow of the clients, having discussions and structuring positions. We are strong in project finance. So I think that we have a good wholesale operation in Colombia. I think that the main challenge that we always had was our retail business in Colombia, in which, at the end of the day, we lose money on that. And the compounds of everything so far have led us to a return between three and four percent in return on equity in Colombia, with two businesses that are going very well and one business that has a way to go in terms of being profitable. So the analysis that we had for Colombia was based on the footprint that we had, based on the business that we saw in the Colombian market. We had a decision of either leveraging the current capabilities that we have in Colombia, growing the bank with the branch network, so on and so forth. And we tried to do that for a couple of years. And as the market changes, as the digitalization process changes, it became clear for us that we need to change that strategy. And that's the footprint in all the structure we've been in Colombia to the client base that we currently have and develop new capabilities for the bank in Colombia in order to grow. What that means is that the future growth in Colombia is not based on current capabilities and the distribution network that we have from the branches, but from everything that we've been developing in Chile in terms of digitalization now and also leveraging from Brazil. That's why we focus the strategy in being very efficient in Colombia towards the cost base that we now have. We expect to be at break-even in our retail business in Colombia by this year end. So this is the ambition that we have. And we think, as we have been discussing with you so far, that we are able to converge to our cost of equity in Colombia. We started this last year, so in the next two years, we will be able to converge to... to our cost of equity. That was always the ambition that we had. I think that it's feasible for the assets that we have, but we do change the strategy by increasing the business volume that we have on wholesale and also in treasury and re-adequating, I would say, the footprint that we have on retail and developing in the future. It seems a more feasible strategy. It seems with a shorter term in terms of the latency of doing everything that we need to do and obtaining the results, and that's why we are on this right now. And if you take a look at the numbers, I think that we've been very disciplined in delivering the results that we have mentioned.
spk01: That's super helpful. Maybe a second question on the outlook for regulatory change and perhaps the perspective that Itaú Corpancas has given your controlling shareholders experience in Brazil. So it sounds like we're seeing potential open banking rules and regulations as well as a new fintech law. Do you have any comments on how that could impact the market and Itaú Corbanca's future opportunities?
spk03: I think that's great, especially because I'm not an incumbent on the markets in Chile, in Colombia, so everything that happens that helps increase competitivity generates more more changes on the market for us is positive. And moreover than that, I think it's positive for the market and for consumers to have more choices, to be a more fluid market. I mean, at the end of the day, markets in Brazil, Chile, Colombia, they are efficient markets in terms of banking. Markets in Chile are very efficient. So I don't think that the changes will completely turn around in the market in the same way we saw that in other markets. But I think it helps. And for us, the way that we have positioned ourselves of being a leading bank in NPS, and we take a look at the numbers, the increase that we have in how we position ourselves in the market, the lead that we have in satisfaction for our clients within our applications, if you take a look at iOS Store or Android Store, The customer chooses, and I think that's great. So we are part of the discussions within the Association of Banks in Chile. We are participating with that. If you take a look at the associations that we did with Happy and TalkTalk and other discussions that we had, I think that we are part of this change. We are embracing it. I think it's a great opportunity for everyone. But you do need to adapt. You need to adapt to business models. You need to adapt to culture. You do need to adapt the way that you're doing things. So that's what we've been doing the last two years. It's adapting the bank to that. On the flip side to that, if you're a traditional bank that don't want to adapt in terms of culture, how you do things, I think it'll become harder.
spk01: Gabriel, any comments on the timing of implementation of open banking rules or this passing of the fintech law?
spk03: No, I don't have a specific timeline for that. I know that regulators have a strong agenda for that. I think that the banks have been very, very responsive in terms of working together with fintechs. But specifically, I don't have a timeline for that.
spk01: Thank you very much for your comments.
spk05: Sure.
spk00: We have a question coming from the webcast from Abraham Martien saying, hi, and thank you for the presentation. Please, can you give more color about the bank exposition and regulated health sector and also in real estate? Thank you.
spk03: Sure. Hi, Abraham. In the Health business, I think that your question is specific to the business in Chile. We have a very low participation on this. So I don't think that it's significant to make any major comment about our exposure on the market. On real estate, yes, we have a larger portfolio within real estate. We are more on the commercial side of real estate in terms of development. And when we take a look at the guarantees in how we structure some deals, we are comfortable with the cycle. I mean, what we have been seeing on the market is increasing costs. for developers that made some products more challenging to obtain the levels of profitability that they expected. And we've been managing through the cycle. But that's true for the impact of interest rates and also prices that we see in many other sectors. But in terms of how we set up the businesses that we have, the guarantees that we have, on our real estate business, and also on the mortgage side, how we operate in our loan to value levels. I mean, I think that we are comfortable with the way that we have provisioned those portfolios in the way that we are managing the cycle. But there is a lot of activity in terms of Talking to clients, taking a look at the exposures, reframing guarantees, following up on projects. I mean, that's part of what we do. And we've been quite successful in the past few years. But it's a more challenging cycle for sure. But I think that's the part of managing the bank like we did during the pandemic, the beginning of the pandemic. And now with all the after effects of prices and interest rates, it's managing through risk cycles.
spk00: And we have another question coming from the webcast, coming from Santiago Alba, saying, hi, seeing a challenging scenario coming ahead, especially in Chile. How do you think loan growth behavior will be for the end of the year and 2023? And which will be the more affected segments? Thank you.
spk05: Hi, thank you.
spk03: I think that, as I mentioned during the presentation, we are focused on growing the bank. At the same time, we are very aware of risk and return ratios in management within the cycle. So if you take a look in how we were able to grow our consumer business In the past, I would say four years, in how we manage our NPLs and provisions, I think that we did very well. And we continue to grow that business, but we are more aware of all the impacts that we are seeing. We want to grow, but we will be very specific in which factors that we have, where we are doing our business, and also the returns that we are getting. I can give you an example on the other side. If you take a look at the commercial credit, I think that we've been, in the last 12 months, probably the fourth largest bank compared to others. And the reason for that is that in terms of risk and also in terms of returns, there are things that don't make much sense for us. So in the same way of the question of Abraham about sectors and also exposures that we have, in terms of growth, it's the same thing. I think there are lots of opportunities for us to grow, and we are pursuing that. But through a value proposition, of service, digital, that had enabled us to grow our portfolio with a well-behaved risk management. I think that's a key part of the process. If you do not have a strong value proposition in terms of credit, then it becomes a process of adverse selection, right? If it is credit only per credit, I mean, at the end of the day, it's difficult to manage relationships and also credit portfolio within the cycle. So what we want to make sure is that on the commercial side, we have a very strong offering of cash management, of COMEC, that enable us to grow within clients of factoring that we've been growing on guarantees that we have in structuring deals with clients in a more ongoing relationship than just making sure that we have available credit. In consumer, in mortgages, it's the same discussion. It's making sure that we have principality, that the clients are coming and we are growing not only because of our credit offering, but because not the value proposition that we have i think that's how we've been managing that but then again we are not on the market to see no we are going to grow everything and that's more important of the bank no we are very sustainable in the way that we do business we are very active as you know in risk management and we are very deep in the analysis that we do and if you take a look at the numbers i think it shows But it is a more challenging cycle, as we have predicted from the discussions that we've been having with you since last year.
spk00: Thank you. We have another question over the webcast coming from George Moro saying, NPL formation in Chile was very high this quarter, around 160 billion CLP. Can you give us more color on what happened here and what to expect in the upcoming quarters? Thank you.
spk03: Sure. I think that what you need to separate from this discussion, Jorge, is what is the NPL formation from different segments, right? What is the discussion in consumer, mortgages, and also commercial? So if you take a look at our businesses in commercial, let's first talk about mortgages. It's been quite stable, the NPLs that we have on mortgages. If you take a look at consumer, I think it is growing in much more aligned with our view of them going back to the levels that we saw previously to the pandemic in those labs. The formation of NPLs that we have here on this quarter, they are very specific to the commercial portfolio to some cases that we have been discussing in the past portfolio of the bank and things that we have guarantees, that we have well provisions, that we did additional provisions for that. So I don't think that the levels of NPLs that we have on the quarter, they represent a trend in the portfolio, something to expect. I think they have to do with how the portfolio is set up for the bank with the concentrations that we have on the wholesale part. And if you take a look at a little bit of our history, you have more volatility on this given how uh our portfolio uh is is uh going forward we do not have any specific guidance for mpl specifically because of the volatility but we do have a guidance on On cost of credit, if you take a look at the numbers, I think that we've been consistent with the guidance that we have. We are a little bit more on the upside of the guidance, specifically because of all the additional provisions that we've been making. And that we will continue to do so as we see opportunity to strengthen our balance sheet moving forward. But I wouldn't, I think that if you take a look at the MD&A and deepen a little bit of your view, you see that it's very concentrated and volatile in some specific portfolios that we had. in which we do provisions well before the NPLs, right? So there is this distinction between what is the consumer in mortgages in a diversified portfolio in which NPLs drive the provision process. And in the wholesale, the NPLs at the end of the day, they are the end of the process of all the ratings, downgrades that you did way before in our portfolio of in our model It's the way that we manage it.
spk00: Thank you. We now have a question over the phone coming from Yuri Fernandez from JP Morgan. Please go ahead.
spk02: Hi, Gabrielle. Thank you very much. I have a follow-up on asset quality. I guess you already explored the real estate and now this question on the formation. But two quick things. One, what are – which sectors are – wholesale exposure mission like uh the the the the few corporate case you had like can you if you can comment on the segment per set which one drove those worsening and looking to 2023 um what should we expect because i i guess the concern we have here is that rates are super high in chile um above you know like the maybe the neutral rate and and and and we are seeing acceleration in the economy so What should we see going forward? I understood your guidance for this year on the cost of risk, but first of all, how concerned is the bank on this kind of environment? Are you concerned at all or not really? Thank you.
spk03: No, I think first I'm talking about sectors exposure. And it is an interesting thing that you can do with all the new regulations from the CMS in the way that we report information for them and all the banks in Chile in what they call the Nuevo Compendio de Normas. There are a lot of information for you about sector exposures within the banks. That's public information. We take a look at it, and I think that you also can. In terms of sector exposure, when you take a look at our bank and other banks, in the industry based on that, they're not that different. I can tell we have a lower exposure in, I would say, in the agribusiness compared to our peers. We have a higher exposure in, I would say, in commerce, in infrastructure. But there are not major differences on that. At the end of the day, of course, everyone is limited,
spk05: Hello, Gabriel? I guess I lost you on the second part of your answer here.
spk04: Yeah, his line was disconnected. I'm sorry about that. Okay, so this is all the time we have for today. Thank you all for connecting today.
spk00: This concludes today's conference call, and you may now disconnect. Thanks.
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