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spk00: Ladies and gentlemen, thank you for standing by. My name is Parvesh and I will be your conference operator today. At this time, I would like to welcome everyone to the Banco Itaewon Chile third quarter 2023 financial results conference call and webcast. At this time, 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 any teleconference participant would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, Simply press the star followed by the one once again. We will also have the ability to submit questions via the Q&A tool on the webcast. Thank you. I would now like to turn the call over to Claudia Lovin, Head of Investor Relations. You may begin your conference.
spk03: Thank you. Good morning. Thank you for joining our conference call of our third quarter 2023. I would like to remind you that our remarks may include forward-looking information and our actual results could differ materially from what is discussed in this presentation. 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-recurring events and apply managerial criteria to disclose our income statement. Please remind that since the second quarter 2019, we are presenting our income statement in the same manner as we do internally. 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 presenting our results will give you a clearer and better view of our performance from these different perspectives. Please refer to pages 13 to 16 of our report for further details. Now, Mr. Mora will continue with the presentation.
spk02: Thank you, Claudia. Good morning, everyone. Thank you for joining us for this third quarter 2023 conference call. As usual, we will update you on the progress in implementing our strategy, as well as present the highlights of our third quarter results. We start on slide three, where we can recap the five pillars of our ongoing strategy. Disruption, customer centricity, thinking digital, innovative organization and culture, and finally, sustainable results. On slide four, we present our new investment center, which we created to receive customers who come to us seeking tailored investment advisory and other content that they find interesting. At the investment center, customers will have available not only our own investment professionals, but also independent financial advisors that are part of our ecosystem. These advisors are specialized in local international investments, benefiting from commercial agreements with the main booking centers for private banking in the United States and Switzerland. The early returns from this service model have been positive, and our investment advisors, both internal and external, have already been able to attract over $220 million from new customers. In slide 5, in addition, as part of our strategy to offer new investment products, we have just launched a pioneer fund in the local industry called APV Win-Win. Our five APV Win-Win funds are voluntary patient savings funds that only charge fees on the days when the funds have a positive return, thus aligning the incentives of fund managers with those of our customers in an intuitive way. On slide six, We see that we have strengthened our leadership position in customer satisfaction as for the second consecutive year, we were the most recommended bank for both individuals and companies according to the independent NPS service test pool by Ipsos. Customer centricity is the cornerstone of our strategy as it provides the main source of differentiation from our competitors which enable both our growth and principalities strategies. While we are proud to be number one for the second year in a row, we know that we need to keep pushing forward, not only to stay ahead of the other banks, but also to close the gap within the leading players from other industries. Moving to slide seven, we are glad to share that we've been recognized by Great Place to Work as one of the 10 best companies to work in Chile, as well as at the top 10 companies with over 1,000 employees for women to work in Chile. I will quickly move to slide 8, where we continue to talk about people. In slide 8, we present additions of our innovative organization and culture, from employers for youth as the seventh best company for young professionals, as well as from top employers' institutes. The recognition that we have received as a result of our organization, culture, and working environment demonstrates that we are also leading an all-important competition for talent. Now let's move to slide nine. As part of our broad offering of financial services and in line with our key pillar of sustainable results, we will join book runners for two new sovereign sustainability-linked bonds issued by the Republic of Chile. These bonds will also promote the reduction of greenhouse gases, as well as promote gender equality in high-level positions. As I mentioned last quarter, we are strengthening our capability in this field, aiming to become the number one provider of sustainable finance solutions. Let's now move to slide 10. As you might be aware, last Monday, October 30th, we announced the initiation of the process to terminate the program of our American Depository Shares, ADSs, registered in the United States of America, cancel the registration of our ADS with the Securities Exchange Commission, and release our ADS from the New York Stock Exchange. The process is expected to be completed during the first half of 2024. Our decision was taken mainly considering that our ADS program was no longer relevant, as it represents less than 1% of the bank shares and about 2% of the daily traded volume. Therefore, we decided to take the opportunity to simplify our processes and make the bank more efficient by terminating our ADS program. The decision will not affect our corporate governance, risk management, and transparency standards for investors, regulators, and market. The bank will continue in compliance with SOC standards as part of the Unibanco Group, as well as listed in two stock exchanges in Santiago. On slide 11, we show our track record in generating returns in Chile since the beginning of 2021. Over the period spanning 11 quarters, Our return on tangible equity was above 14% and top three among peers in seven quarters. On the two quarters when our return on tangible equity in Chile was below 14%, including this quarter, it was still top three among peers. That means that in quarters that we had lower returns, our peers also did, showing that those were periods of low returns for the sector and not just only for us. In the two quarters where our returns were not top three, they were above 14%, showing that those were periods of high returns for the sector. Our track record over these last 11 quarters clearly demonstrates the convergence of our returns in Chile with those of our main peers, as well as the sustainability of our results. On slide 12, We show a little bit of the macroeconomic backdrop in this last quarter, which needs to be considered while analyzing bank performance in that period. Real interest rates were at extremely high level, with an average monetary policy rate above 10% versus a variation of the U.S. of only 0.3%, which would correspond to an analyzed inflation of roughly 1.2%. Despite the high real interest rates, the Chilean pesos suffered a devaluation of 11% against the US dollar, leading lending growth out of the low to 2.8% over the last 12 months. Now, moving forward to slide 13, where we present the financial highlights for the third quarter of 2023. our consolidated net income reached 70.9 billion Chilean pesos, decreasing 39.4 years. Net income in Chile was 80 billion Chilean pesos, also decreasing year over year, mainly due to high income taxes as a result of lower inflation. In fact, pre-tax net income in the third quarter of 2023 was nearly flat relative to that of the second quarter Return on tangible equity was 12.8% in Chile and 9.2% in the consolidated. Consolidated financial margins with clients grew 9.6%, boosted by high volumes as well as high interest rates in both Chile and Colombia, which positively impacted financial margin on assets and capital. Consolidated fee income reduced by 11%, negatively impacted by lower financial advisory in Chile. Consolidated non-interest expenses decreased by 1.6% year-over-year as a result of lower personal and administrative expenses in Chile and Colombia, driven by the progress of the efficiency plan implemented in both countries. the consolidated efficiency ratio for the third quarter was 46.2%. Consolidated cost of equity decreased by 10.2% over the high base recorded in the third quarter of 2022, which was negatively impacted by 20 billion pesos of additional provisions established in that quarter. When we look at our credit portfolio, it grew at 0.8% in Chile and minus 6.2 in Colombia. in constant currency compared to September 2022, with customer and mortgage loans in Chile as the biggest contributor that partly offset lower retail growth in Colombia. Overall, it was a quarter of low returns in the industry, both in Chile and Colombia. In that context, we managed to have the second best return among our peers, as well as stay above break-even in Colombia, where several banks are sustaining losses. We now move to slide 14, where we show that our financial margin with clients in Chile increased by 0.9% during the quarter and 5.9% over the previous year. The increase compared to the second quarter is primarily driven by high commercial spreads on assets and liabilities, as well as high capital margin due to high interest rates. The graph on the right-hand side demonstrates that our average rate of financial margin with clients has been stable over the last three quarters, just as we predicted in our guidance for this year. On slide 15, we can see that in the third quarter of 2023, our initial margins with the market was 3.1 billion Chilean pesos, which is a lot lower compared both to the second quarter and the one-year moving average. Our financial margin with markets have been under pressure due to high interest rates combined with very low inflation this quarter. The reality is that it is a lot harder to make money in Treasury when interest rates are so high, so we expect returns to improve as rates normalize. It is also worth noting that inflation negatively impacts not only our financial margins with the market, but also the effective income tax rate, as the devaluation of the firm's equity due to inflation is a tax-deductible expense for firms in Chile. On slide 16, our attention is on fees, which grew by 4.7% in the third quarter, driven by financial advisory and asset management fees. This valuation excludes the one-time effect of the upfront income related to the insurance alliance, which previously impacted the previous quarter. We are seeing both good progress in our investment business, both in terms of assets under management and performance, and we believe it will do even better as interest rates fall and investors search for yields. Here on slide 17, we see our main credit risk indicators in Chile. In the third quarter, the cost of credit reached $16.5 billion, a 5.5% increase during the quarter. Our guidance for cost of credit as a percentage of the credit portfolio for this year was between 1.1% and 1.5%. And we closed the first nine months of the year at the bottom of the range at 1.1%. We have been actively managed the credit cycle for all of our portfolios through a wide range of measures, encompassing both whole process for admissions to late stage collections and recoveries. While results so far being on the better side of the range we expected, we will continue to be vigilant throughout the later part of the credit cycle. Here on slide 18, we show non-interest expenses for the quarter. which decreased 1.6% compared to the last quarter and increased 0.1% year over year. Quarter over quarter decrease was driven both by low personnel and low administrative expenses. After a period of expansion in which we started several new business and activities, we believe it has come the time to consolidate and concentrate resources where we see the best prospects for success. As you continue to see in the shaded box in the slide, even during this period of expansion, we continue to grow costs below inflation and improve our efficiency ratio as we adjusted both our physical structures and headcount. Going forward, as we redouble our efforts in the efficiency front, we expect even better cost management performance as suggested by last quarter numbers. On July 19, we highlighted our outperformance over the last 12 months in three key products for our strategy, consumer loans, demand deposits, and investment assets and investment. In consumer loans, although growth has slowed because of tighter credit conditions, we continue to grow more than twice as fast as the market. Our demand deposits also held up better than those of our competition during a period of extremely high interest rates by Chilean standards. Finally, our assets under management grew about 50% faster than the market. What these numbers show is that our long-time strategy of changing the mix of our portfolio towards consumer lending continues to work and that our principality strategy is beginning to produce results. all within the context of the opportunities that exist at this point of the economic cycle. Let's move to slide 20 for a summary on Colombia, where we are navigating a challenging scenario while maintaining strong capital and liquidity ratios. Despite the inevitable cost of those additional capital and liquidity buffers, we have been able to sustain results just above breakeven in the environment where even some of the major banks have suffered losses and the profitability of our peers fell sharply. Even though much remains to be done, we have made concrete progress in our transformation in Colombia, even though we have to do it while managing through a stressed macroeconomic scenario. We believe that the progress we made will become more visible in the numbers when the economy normalized to some extent. On the next page, slide 21, we once again show that we are among the best capitalized and most liquid banks in Chile. The improvement of our financial strength over the last two and a half years, both organically and through a $1 billion following stock offering, demonstrates our commitment to resilience and prudent management. which is the essence of the ITAO management model. Finally, on slide 22, we recap the key messages from this presentation. First, we continue to build on our track record of returns in Chile in a quarter by posting the second best return among our peers. Second, we are also beginning to see progress in our principality strategy as we have outperformed market growth in key areas such as demand deposits and assets under management. Third, we decided to delist our shares from the New York Stock Exchange, which will bring efficiency and simplification while maintaining our governance, control, and transparency standards. Finally, we will continue to prudently manage capital, liquidity, and credit in this later part of the cycle, especially in Colombia. 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 our teleconference participants, in order to ask a teleconference question, please press the star followed by the number one on your telephone keypad. You can also submit questions via the Q&A tool on the webcast. We'll pause for just a moment whilst we gather your questions. Our first question comes from the line of Yuri Fernandez from JP Morgan. Please go ahead with your question.
spk01: Thank you. Hi, Gabriel. I have just a follow-up on asset quality. Just your outlook, how you are seeing, is the worst behind in Chile? What should be the level of cost of risk? Just some more color on the asset quality and provisioning for the company. Thank you.
spk02: Thank you for your question, Yuri. We continue to see pressure on the margin for non-performing loans. I think that we are on the part of the cycle that we need to separate on the consumer side the NPLs from the cost of credit. And why is that? Us, and you can see the same effect on the industry, did some renegotiations of credits uh beginning in the end of the year to this year so the negotiation of credits normally they have a a good impact on npls but because of the high uh expected loss that you have on the those credits you increase the level of provisions so at this cycle some of the credits that we have the regular renegotiated they are becoming, the clients may not pay them. So we can see on the margin, especially for that part of the portfolio, some pressure in terms of delinquencies. On the other hand, because of the higher provisions for those credits, we see a decoupling between NPLs and cost of credit. So I think that what we are going to see is MPLs. Still a little bit of pressure. I think that we're becoming, we're seeing on a margin some pressure, but less pressure than we saw in the past. I'm not ready to call the end of the cycle, but we do see some good news on that front. And the better news for me is in terms of the cost of credit because of the higher delinquency rates for the part of the portfolio that was renegotiated and had higher provisions, we might see lower impacts in cost of credit for the portfolio as a whole. So in terms of guidance for cost of credit, we're not changing the guidance that we gave. We are maintaining the guidance for this year, but because so far we are at the bottom of the cost of credit distribution, I think it's unlikely that we are going to see much changes in that cost of credit on an aggregate level of the portfolio. I think that the market is still taking a look at it, especially I think that we need to see lower interest rates in order to be more optimistic to the credit cycle that we were leaving. Perhaps we are going to see that stretching for the first semester of 2024. We are a little bit more optimistic to the second semester of 2024. But now the main focus that we have is the efficiency of our collection process. the offering that we have for clients that want to restructure their credit, while being very cautious, visioning according to risks. I think that's the main take for the project.
spk01: Perfect. On this a little bit tougher first half in 2024, do you believe in the aggregate year of 2024 Should we expect cost of risk to be lower versus 2023, or working with some stable cost of risk, do you believe makes more sense?
spk02: I think that perhaps we can see a change in mix, Yuri. My feeling right now is that we shouldn't see a much lower cost of risk, especially because when you take a look at the guidance, we are in the lower part of the credit costs. So I think I would be cautious to say something of being even lower that year. I think that if we can maintain the levels that we've now given, the continuous pressure that we see, I think that would be a good news. I think that perhaps what we can see is that the cost of credit within the industry may change a little bit from the consumer side for some of the companies, especially SMEs companies, if interest rates are still higher. I think that the good part for us is that the mix that we have for business and credit on SMEs is very low. So that change, that possible change in mix wouldn't affect us that greatly. But I think that cost of credit should somehow be in nominal terms something for next year similar to what we saw dc but we're still doing our calculations i mean we're still incorporating a lot of uh information in our models uh the truth is that we are in a very challenging macroeconomic scenario for the whole world which uh you see the challenge that the central banks all have in terms of of managing monetary policy in this sector not giving no specific guidance for 2024 But I'm cautiously optimistic that we should be able to hold levels similar to those that we have nowadays.
spk01: Makes a lot of sense. Basically, retail improving a little bit, but you still don't know what's going to happen with SME. And if SME deteriorates, maybe, you know, like a more challenging outlook for cost of risk. If I may, Gabriel, just a second one on your hedge for effects, especially in Colombia. You have a cost on that hedge. Usually it's the rate differential between US and Chile. How do you see this evolving? Because in previous calls you mentioned that this could be a savings opportunity for the bank.
spk02: How big can be this lower cost of hedge for you? I think that we are going to see a much lower cost of hedging for us next year. especially when we do see the differentiation, the difference between rates in the United States and rates in Chile become lower. The flip side to that discussion, I think that we are going to see two things. I think that the result in Colombia might be better at some point that hedge costs us something around $40 million per year. So it's very expensive. given the size of the investment and given the rate difference between the US and Chile. So I think that's a positive for Colombia next year. I think that the negative, and you can see this in this quarter, as inflation goes lower in Chile, you see a high tax rate for us in Chile. So in the consolidated, I'm not sure, I need to take a look at the numbers. But probably you're going to see a positive in Colombia as this drag becomes much lower. But you do see some pressure in the effective tax rate that you see for us in Chile. As the result, as I mentioned, the pre-tax return that we have this year It's similar to that that we had on the previous year. The main difference is on tax rate. Of course, we do not expect inflation to be at 1.2% in Chile, what happened this quarter specifically on an analyzed base. But I think that the effort that the central bank is doing in increasing rates will show the results of a much more controlled inflation next year.
spk01: So basically what you're saying is that you may have some, some efficiency. I don't know how much, maybe you said 40 million is the cost, $40 million. Do you believe it can be half of that, the cost? But basically this call could be upset by higher tax rates in Chile, right? So maybe we will see.
spk02: I need to deepen my understanding of how is the fact on, on, on, on Chile. We're just updating those numbers to, to the inflation that we are seeing within the market. probably the effect that we might see in Colombia is more than half, but I'm not sure of what is the impact in Chile. I'll get back to you on this. Well, super clear. Thank you very much, Gabriel. Sure.
spk00: There are no further questions at this time. Mr. Gabriel Mora, Chief Executive Officer, I'll turn the call back over to you.
spk02: Fantastic. Thank you so much for the questions and for being here for this presentation. I think that the main key takeaway that I have is the performance that we are having, especially in our operation in Chile compared to our peers and to the target returns that we have always said that it would be possible for us to get in Chile. So in terms of making sure that we deliver the results that we have discussed, I think that we are doing that. And even on a relative basis, I think that we are having very good results for the next last 11 quarters. We have all the commitments for our teams to continue to have a performance like this. It is a more challenging macroeconomic environment. But having said that, even on a relative basis, we are confident with the bank that we have, with the teams that we have, and we will strive our best to continue to deliver those results. We see you on the next conference call. Thank you for participating.
spk00: Thank you, ladies and gentlemen. This does conclude today's conference call. Thank you for participating. You may now disconnect.
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