Banco Itau Chile ADR

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Banco Etautele fourth quarter 2023 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 would like to ask a question over the phone during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw that question, again, press star 1. You may also submit questions via the Q&A tool on the webcast. Thank you. Claudia LeBay, Head of Investor Relations. You may begin your conference.

Thank you. Good morning. Thank you for joining our conference call for our fourth quarter of 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 we are presenting our income statement in the same manner as we do internally, 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 215 of our report for further details. Now, Mr. Gabriel Moura, CEO of Back Without Chile, will continue with the presentation.

Thank you, Claudia. Good morning, everyone. Thank you for joining us for this fourth quarter 2023 conference call. As usual, we will update you with our progress in implementing our strategy, as well as present the highlights of our fourth quarter results. My first message is that the process of transformation that we began in 2020 has reached a point where we can say that the transformation has happened. As I will show in the next slide, for instance, the slide number three. As we have said all along, one of the main components of our strategy was to improve returns by changing the mix both on the asset and the liability side of the bank. For the purpose of our analysis, we consider as our peers the four largest banks in Chile. As the chart on the top left side shows, our loan mix is now much more similar to that of our peers, which allowed us to narrow the gap in asset yields. The chart on the bottom left side shows the evolution of our risk-procedure ratio, which has improved over time as a result of our efforts towards enhancing our results. What was a 17-point gap relative to our peers in 2019 has narrowed to 8 points, making our cost of funding more competitive than it was. We have also had a 10.5 percentage point increase in our efficiency ratio, product of multiple years of containing cost growth below revenue growth and below inflation as well. As a result of the implementation of our strategy, we were able to achieve a return on tangible equity close to or above the average of our peers over the last three years. We did so over a much larger capital base after our 2021 capital increase. When comparing our return on tangible equity between 2019 and 2023, the increase of our capital base over that period represents a drag of about 8 percentage points that we had to overcome to achieve our current level of return on tangible equity. Now, moving on to slide four, we can see that although we've been successful in narrowing the gap on the main return drivers relative to our peers, such as demand deposits and fees, we still have higher market share in loans than we have in transactional products, such as credit cards, deposits. In other words, many of our clients still use other banks for their day-to-day transactions. While we will continue to grow our client base, we truly believe that our biggest opportunity is in achieving the principality of our existing customers. Principality is a recurring theme, both when we analyze the performance of our leading peers in terms of returns and when we look at value creation at a client level. Therefore, principality is the key driver for us to achieve the next step in creating value for our shareholders. Principality is not new to us, as a matter of fact, for everyone. But it's the one goal that we will pursue with a single-minded focus going forward. In the next slide, we will present the capabilities we have built for pursuing this principality, as well as in some areas where we will intensify our efforts, such as our brands. We now turn to slide five. One of the main pillars of our principality strategy is, of course, delivering a best-in-class experience to our clients. Since 2021, we have worked on different initiatives that all together led to a broad-based improvement in customer journey and functionalities, leading us to become the leader in net promoting score for retail and corporations, as well as the second in SMEs and companies. While we were proud with our position in NPS rankings, I believe that our biggest achievement was integrating customer centricity as part of our culture. That is the main capability that we will use to distance ourselves from our competitors and further expand our competitive advantage in customer experience. On slide six, we show some of the progress we made in digital, both internally and in our interaction with customers. Over the last two years, we grew from 6 to 13 digital branches and nearly tripled the share of customers in digital branches, from 6.7% to 18% of our total retail clients. We have also added a wide range of products and services to our digital channels, which we have achieved widespread acceptance and penetration among our clients. For example, the share of customer loans transactions through digital channel has reached 98%. The satisfaction of our customers with our digital channel is also demonstrated by our placement among the top banks in industry in customer satisfaction with digital channels and the rating of our app as number one by users review in the main app stores. We now turn to slide seven. We know that the transformation needs to be part of the DNA of our company. We have created a unique E-Tubers culture that challenges and stimulates our employees to excel. We have also created an agile and open working environment that is very attractive and has enabled us to be very competitive for talent. Our framework for talent management also includes the association with top-ranked universities in Chile for talent attraction, the development of learning ecosystems, and the support of several diversity and inclusion initiatives as well as flexible work initiatives. The net results of all these efforts in high level employee satisfaction show that our employee net promoting score, as well as the recognition by Great Place to Work as one of the 10 best companies to work in Chile, and one of the top 10 companies over 1,000 employees for women to work in Chile. On slide eight, we turn to an area where we have significant intensify our efforts lately. Our brands. We begin this stage of our brand in Chile by launching the new Itaú brand simultaneously with Itaú Brazil. The new brand represents the transformation journey of Itaú over the years. While Itaú has been in Chile for less than 20 years, it is approaching 100 years since its foundation in Brazil. Over its long journey, Itaú has been a leader in the evolution of financial services, fulfilling its long-standing vision of leadership and customer satisfaction. That evolution has had at its core the incorporation of new technologies at the ever-increasing speed Therefore, the current obsessive focus on customer centricity and technology is the intensification of things that we have historically experienced and excel at. That is why we say that Itaú is made of future. Another element of our new branding strategy is the sponsorship of the most important sport tournament in Chile, the National Football Championship. Football is close to the heart of Chileans and also to ours as a bank of Brazilian origin. We believe that this sponsorship will help us to connect with Chileans in a stronger way, which is important as we try to bring customers closer to us. On slide 9, we show a little bit about our product capabilities. As a large regional bank in South America, we can serve regional clients in unique ways. we have leveraged our regional footprint to serve our customers across borders, benefiting from our presence in Peru and Colombia with our product offering in Brazil and Chile. Examples of this include deals such as Soprole, Gloria, and Fonterra involving Chile and Peru, Klabin and Arauco involving Chile and Brazil, among others. We have significantly expanded our product capabilities in insurance through our partnership with Cardiz. We are complementing our offering in life, travel, home, and fast insurance products. What used to be a gap for us is now a strength which will significantly enhance our ability to cross-sell. In investments, we gained a lot of traction in the second half of 2023. We have long been recognized for the quality of our asset management, and that remains strong, as recognized by Morningstar Awards as the best asset manager for fixed income, Premio Salmon as number one in mutual funds fixed income, and El Mercurio Inversiones as the best asset manager for retail investors in 2023. The big news is that we were able to translate our product excellence in asset management by growing at nearly twice the market pace over the last 12 months until December 2023. Let's go next to slide 10, where we can see that our efforts to improve efficiency have led us to achieve better efficiency than the average of our peers and reach the third place among that group. We have had a long track record in containing expenses growth below inflation, enabling us to improve efficiency, and we narrowed the revenue gaps in terms of asset yield, cost of funding, and fees. We have redoubled our efforts in cost management, as you will see in further in the presentation, which will continue to be an important driver in our strategy. We now turn to slide 11. On our sustainable path, as part of Itaú Group, we are committed to be a net zero carbon emission bank by 2050. For such a challenge, we worked in two fronts. On the portfolio front, we have succeeded in measuring our finance carbon emissions in 2023 for our whole wholesale portfolio, and it's where we will set our reduction targets for carbon-intensive sectors in 2024. Also, we have developed a new sustainable asset rating system which will help us in our financing decisions as well as support of our clients in their green transformation through sustainable financing linked to environmental commitments. Our next new agenda is about encouraging clients to incorporate practices that contribute to environmental sustainability through new investments and technology. The other front is reducing our own carbon emissions, as a matter of practicing what we preach, even though our carbon emissions are not very significant. To achieve our goal of reducing operational carbon emissions by 50%, we're implementing an ambitious roadmap that includes reducing our energy and water consumption, as well as reducing waste generation. As part of our social responsibilities, we seek to support Chile's development and reduction of inequalities. Therefore, we are promoting employability, education, financial empowerment, and disaster support. Through the Itaú Foundation, we focus on expanding access for children and young people for vulnerable sectors. Reading activities in kindergarten, workshops for young people in schools, and internships for young graduates of technical schools have allowed us to change lives. Finally, we have contributed with donations to respond to the fire and flood emergencies that have affected Chile in 2023, as well as recently. Our resources have been directed to local wildlife protection and the telethon institution that contributes to rehabilitation of people with disabilities. The track record has enabled us to be, for the fifth consecutive year, an index component of the Dow Jones Miller Pacific Alliance, as well as, once again, member of the S&P Sustainability Yearbook, where we rank top 15 of our industry, based on the results of the S&P Corporate Sustainability Assessment. Lastly, in 2023, Alla20 ranked us among the top 10 companies that are positively perceived in Chile in terms of sustainability and investor relations, being sixth on the overall ranking and second on the banking group. Let's move now to slide 12. During the last three years, we have made several adjustments in our capital base to ensure a solid capitalization to support the deployment of our strategy. We executed a $1 billion capital increase in 2021 and have consistently been enhancing our capital generation. Along with strengthening our solvency ratios well above regulatory minima and aligned with international benchmarks, we have consistently delivered a result above the cost of capital and core capital generation, being among the top players in the industry. Our efforts led us to evolve from previous set one of 7% in 2019 to close to 2023 with a full loaded set one ratio of 10.4%. the second highest in the market in comparison to our peers, as you can see in the chart at the bottom of this page. On slide 13, we show a little bit of the macroeconomic background in the last quarter, which needs to be considered when analyzing the bank industry's performance at that period. Interest rates declined, but remained at high level, while inflation rebounded a little bit, but remained far below the levels observed in 2022. In the quarterly exchange rate against the U.S. dollar, fell slightly against this backdrop loan growth is low to 3.4 percent time deposits grow growth is low to 4.7 percent and the decline independent deposit also showed to minus 2.4 percent now moving forward to slide 14 we will present the financial highlights for the fourth quarter of 2023 our consolidated net income reached 87.4 billion Chilean pesos, an increase of 4.6% year over year, mainly because of the combination of high customer financial margin and stable cost of credit and expenses. While the net income in Chile was 95 billion Chilean pesos, return on tangible equity was 15.1% in Chile and 11.1% consolidated with Colombia. Consolidated financial margin with clients grew by 8.6%, boosted by higher volumes as well as higher spreads in both Chile and Colombia, which positively impacted financial margin on assets and the capital margin, respectively. Consolidated fee income has reduced by 0.4% due to lower credit cards and ATM fees in Chile. Consolidated net income expenses increased by 0.4% year over year because of lower personal expenses in Chile, offset by an increase of expenses in Colombia. The consolidated efficiency ratio for the third quarter was 51.9%. Consolidated cost of credit increased by 0.6% over the high base recorded in the fourth quarter of 2022, negatively impacted by higher provisions in Colombia, partially offset by higher recoveries in Chile. When we look at our credit portfolio, it grew by 0.9% in Chile and minus 8.3% in Colombia in constant currency, compared to that of the quarter of 2022, with consumer and mortgage loans in Chile as the biggest contributors that partly offset lower consumer growth in Colombia. We now move to slide 15, where we show that our financial margin with clients in Chile increased by 9.2% during the quarter and 6.9% over the previous year, supported by the average growth observed mainly during the first half of the year and better margins in retail portfolios. The increase compared to the third quarter is primarily driven by higher commercial spreads on assets at the wholesale bank and liabilities in pesos chilenos demand deposits, as well as higher capital margins. The graph on the right shows that our average financial margins with clients remains stable as interest rates have fallen, as we had indicated both in our guidance for 2023 as well as I have mentioned in previous quarters. On July 16, we can see that our financial margin with markets was 18.1 billion Chilean pesos in the fourth quarter, which is higher compared to the previous quarter, but much lower than the same quarter of 2022. Our financial margins with the markets has been under pressure due to higher real interest rates, which are covering back to normal levels as monetary policy rate declines. It is also worth noting that inflation negatively impacts not only financial margins with the market, but also the affected income tax rates, as the devaluation of the firm's equity due to inflation is a tax deductible expense for firms in Chile. Let's go to slide 17, where we have an overview of our commissions and fees. where we highlight the growth in asset management fees by 10.3% compared to the previous quarter, and 32.2% over the previous year, which is a positive outcome of our sustained focus on the investment business. Moving to slide 18, we see our main credit indicators in Chile. In the fourth quarter, the cost of credit reached 83 billion Chilean pesos, a 37.2% increase relative to the last quarter to reach a similar level to that of the fourth quarter of 2022, despite the pressure on consumer loans and NPLs that has remained at the system level. Our guidance for cost of credit as a percentage of the credit portfolio for this year was between 1.1 and 1.5%. And as you can see, we closed at 1.2%, despite the increase in cost of credit in the fourth quarter. NPLs increased relative to the last quarter, which was expected as we maintain our heightened focus on collections. With the latest positive signs in activity in the labor market, we believe that conditions might improve in the second half of 2024, allowing us to be selective, accelerate the origination. On slide 19, we show non-interest expenses for the quarter. which, while higher than the previous quarter, decreased 2.8% year over year. The quarter-over-quarter increase was driven both by higher personal and administrative expenses. Non-interest expenses growth remained below inflation, in line with our guidance for 2023. We were also able to maintain our efficiency ratio at a very good level we had achieved the year before. As I mentioned before, we made an additional effort last year to adjust our cost base, as you can nearly see the 10% reduction in headcount during 2023. After a period of expansion into new activities, we thought it was the right time to consolidate and capture the efficiency gains from digitization, agility, and process optimization. On slide 20, we highlight our outperformance over the last 12 months in three key products for our strategy. Consumer loans, current account deposits, and investment assets under management. Our total loan grew 1.5% in the last 12 months to December 31st, whereas consumer growth loans grew 5.2% during the same period. more than double the banking system's growth of just 2.4%. Therefore, even though consumer credit growth is low due to tighter credit conditions, we continue to grow twice as fast as the market. Itaú also grew more than the system in current accounting balances of companies and individuals, having shown a positive trend in this product while the system delivered negative growth in the period, during a period of extremely high interest rates for Chilean standards. In the investment business, our assets under management also grew nearly twice as fast as the system during 2023, positioning Itaú Chile as the bank with the highest growth among peer banks as well as number three bank overall when other fund managers are included. These figures show that we've been able once more to grow faster in the market in the products that matter most for our strategy. Let's move to slide 21 for a summary of Colombia. Despite the macroeconomic downturn in the country, we have maintained a resilient operation and we have navigated a challenging scenario by 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 break-even in an environment where even some of the big banks have suffered losses and the profitability of our peers fell sharply. On the right-hand side of the page, we outline our strategy for improving returns in Colombia. In wholesale, the main drivers of our strategy are levering Itaú's strong regional presence and enhancing our value proposition in transactional and non-credit products. In retail, we have a much more focused strategy on affluent segments through investments on transactional products while digitizing and improving customer experience in the low-cost-to-serve segments. Our strategy also includes relevant efficiency plans based on cost control and strong simplification of products, structures, and subsidiaries, as well as the reinforcement of strategic talent and cultural transformation. Even though much remains to be done, we have made concrete progress in our transformation in Colombia, even though we had to do it while managing through a stressed macroeconomic scenario. The progress is already visible in the improvement of our relative performance versus our peers, and we expected it to translate into even better results when economic conditions improve. On the next page, slide 22, we once again show that we are among the best capitalized and most literate banks in Chile. Itaú Chile closed 2023 position as top three among peers in solvency levels and had the highest organic increase in capital ratios last year. When taking into account differences in capital requirements among banks, we have the second biggest capital buffer in the industry. The main reason for that is that Itaú was not required additional capital by the Chilean regulator in its evaluation of our capital adequacy and risk management. Our liquidity ratios are also well positioned among our peers and significantly above regulatory limits. The improvement of our financial strength over the last few years demonstrate our commitment to resilience and prudent management, which is an essential part of Itaú's management model. On slide 23, we present our macroeconomic outlook for 2024 in Chile and Colombia. Based on less restricted global financial conditions, rates in Chile are expected to end the year at around 4.5%. The central bank is expected to reduce the policy rate more quickly to neutral, given that the output gap is virtually closed, and inflation expectations are anchored. We expect inflation to end the year in Chile at 2.8%. This is supported by the faster reduction process observed at the end of 2023 and the changes in the CPI basket that reduce to some extent the indexation effects. With activity performing better than expected over the past years, coupled with higher growth forecasts for China and lower rates, GBP growth is expected to be 1.7% in 2024. In Colombia, GDC growth is expected to be 1.2% in 2024, while inflation is expected to be 4.8% this year. However, inflation risks remain due to the uncertainties surrounding the impact of El Nino on food and energy prices, the reduction of diesel subsidies, and the increase in the minimum wage to materialize in 2024. Despite the current economic slowdown, inflation remains in double digits and inflation expectations are still above target. As a result, we expect interest rates to fall to 8% by the end of 2024, which would be still at a contracted rate level. On slide 24, we outline our 2024 guidance for the Chilean operation, which is actually very similar to last year's guidance. We anticipate our average rate of financial margin with clients to remain stable with the interest rates. We expect loan growth to be around mid-single digits in line with market expectations. And for cost of credit, our plan is to maintain a range between 1.1% and 1.5%. Finally, we expect cost to grow below inflation levels in line with our efficiency commitments. Finally, on slide 25, we recapped what I think is the key messages for this presentation. Over the last three years, we transformed our operations across key dimensions of consumer centricity, technology, organization, and culture, improving returns and financial strength, as well achieving leadership in NPS. The next step in our journey is becoming the main bank of our customers, which is where we will concentrate our focus going forward. With that, we conclude the presentation that we have for you today, and we will gladly take any questions that you might have.