Banco Itau Chile ADR

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.

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.

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.