Banco Itau Chile ADR

Good afternoon and welcome to Banco de Chile's first quarter 2025 results conference call. If you need a copy of the financial management review, it is available on the company's website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer, Mr. Pablo Mejia, Head of Investor Relations, and Daniel Valarte, Head of Financial Control and Petro. Before we begin, I would like to remind you that this call is being recorded and the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed notes in the company's press release regarding forward-looking statements. I will now turn the call over to Mr. Rodrigo Aravera. Please go ahead.

Good afternoon, everyone. Thank you very much for joining this conference call. As usual, today we will review the main results and advances in our trade project during the first quarter of this year. Once again, our bank has confirmed its strong position in the trade and banking industry, reaffirming its leadership in different areas. In the quarter, the net income was 329 billion pesos, surpassing our peers. and achieving an ROAE of 23%. As we will see later in this conference call, these outstanding results were explained by the fund margins, improved after quality, and enhanced efficiency levels. This performance becomes particularly important during the increasing uncertainty of the macroeconomic environment. due to the revised foreign trade approach adopted by the US administration, which could likely reduce the global and even local economic growth in the future. Therefore, our solid fundamentals, such as asset quality, large amounts of additional provisions, and a strong capital base are undoubtedly aspects that generate even greater differentiation for us, not only in Chile, but also at the regional level. Before discussing in detail the financial results of our band, I'd like to share with you our analysis of the current microenvironment. Please go to slide number 6. The Canadian economy has shown a recovery in recent quarters. As can be seen in the graph on the left of this slide, it actually posted an important increase in the second half of 2024, with a peak in the fourth quarter. when the economy grew by 4%. As a result, the country achieved an above-expectation expansion of 26% for the year. The breakdown of the figure, as seen in the copyright chart, shows that domestic demand, reflected in the strong rise in the commerce sector, was one of the main drivers of greater dynamism. Different factors contributed to this, such as the lagged effect of interest rate cuts, the recovery of wage employment and the temporary effect of foreign purchases in Chile. In addition to these figures, several lead indicators, such as imports of capital and consumer goods, shown in the bottom right chart, are consistent with the existence of favorable expectations regarding the domestic demand, at least in the first term, if external risks are set aside. Please go to slide 4 to analyze the evolution of inflation and interest rate. Inflation has remained above the central bank target of 3% since late 2020, as shown in the graph on the left. In March, annual inflation was 4.9%, a figure that, although higher than the 4.5% recorded at the end of last year, and the 3.7% seen a year ago, it is important to consider the figure posted this year was affected by some temporary factors. Among them, the rise in energy prices, which posted a 14.2% year-on-year increase, which, according to Central Bank Internet, has contributed almost a hundred-thirty basis points to annual inflation. Inflation of tradable goods went up by 5.2% during the year, inflated by the weakening of the tenant peso in 2024. Sequentially, inflation rose by 2% in the first quarter of the year. However, as shown in the card, the CTI variation is below the change in the headline measure, reflecting the existence of more moderate pressures at the core level. This reaffirms the fact that inflation has been driven by specific factors, particularly over the last quarters. Although the recent evolution of inflation has led the central banks to keep the resonance rate at 5% in the first quarter, it is important to consider that the Canadian overnight rate has dropped the most globally, from the peak of 11.25% in 2003 to the current figure. with, however, remains above neutral levels, between 4 and 4.5%. The path followed by the reference rate has resulted in a steepened yield curve, as shown in the bottom right chart, measured as a difference between the 10-year sovereign rate and the overnight rate in flying pesos. We should have a positive effect on banking results, as banking liabilities typically reprice faster than assets, due to the duration gap. In this regard, the yield curve is expected to become more positively float as the monetary policy grade converts to neutral levels by the end of this year. Notwithstanding the positive trends seen in the trend economy over the last quarter, the recent abrupt change in global trade conditions is something we must take into consideration, especially given the high integration of the trend economies with the wealth of the world. However, despite the external risk, Chile has some differentiating strengths that could partially mitigate the potential impact of constrained global trade. Please go to slide number 5 to analyze them. Although Chile is one of the most open economies in the region, it has a well-diversified export basket in terms of destination. As can be seen in the top right chart, Chile has significant integration with China, a country that represents around 40% of the country's total shipments. If other Asian countries are considered, this region represents, in total, around 60% of Chilean exports. The U.S. economy, in turn, represents 16% of Chile's total exports. It is also important to mention exemptions for some relevant Chilean products, such as copper, as well as lithium and good derivatives, as shown in the right graph. Thus, the effective tariff rate on Chilean exports is lower than the 10% rate recently imposed by the US administration. Another aspect to consider is the room to implement counter-circuit measures in event of a recession. Along with the normalization of inflation, which has allowed interest rate cuts by the central bank, Chile has also greater capacity than other countries in the region to implement fiscal policy measures based on lower debt levels and interest rate burdens, as shown in the bottom right of the chart. Decisions of better fundamentals have been recognized globally. As such, the value of risky financial assets has been less affected in Chile when compared to other comparable countries. Likewise, it's worth highlighting, for instance, that the value of the peso has been less affected than other currencies at the bottom left-hand shows. Now, I'd like to present our best scenario for the year 2025. Let's go to slide 6. We expect GDP to expand by 2% in 2025. This figure has several elements to consider. First, it represents less dynamism than in 2034, partly due to the expected slowdown in the global economy and, further, the acceleration of some of Chile's trading partners. The recovery in domestic demand would be the driver for GDP growth this year, which would offset a slowdown in exports. This situation could result in a slight decline in capital inflation that would end up the year below 4%. However, the FOCA assumed neither a significant rebound in external inflation nor a 10-way depreciation for the rest of the year. Under these circumstances, the central bank would reduce the interest rate to a neutral level of around 4.25%. Finally, it is important to take into consideration the higher uncertainty we face, as well as the downside rate in terms of growth, mainly due to global factors. Locally, a force of attention will be the coming presidential and parliamentary elections in November this year. Before analyzing the bank's results in detail, I'd like to share a brief analysis of trends in the banking industry. Please go to slide 7 to discuss it. This quarter, return on average equities for the Australian banking system was 16.5%. which is slightly higher than both previous quarter and the last year, as described in the top-left graph. This consistent profitability can be attributed to several factors, including specific cost control, diversified income streams, and stabilizing market conditions. Despite global economic hurdles, financial institutions have demonstrated resilience and adaptability in a dynamic landscape. Furthermore, Technological and digital advancements are optimizing operations, cutting costs, and enhancing customer experience, thereby positively impacting overall financial performance. Regarding business volumes, as shown by the chart on the right, Chile's improved economic performance has not resulted in significant loan growth. Loans increased by 26% year-on-year. Mortgages were the primary contributors to this growth, rising by 6.3% during the year, while consumer loans increased by 5.1% during the same period. Commercially, commercial loans did not experience any growth in nominal terms. Weak growth in commercial loans has resulted in a change in the portfolio composition compared to pre-pandemic levels. Currently, a certain chart on the bottom left More risk constitutes 36% of total loans, up from 29% in 2019. During the same period, commercial loans have reduced from 56% to 52% and the commercial consumer portfolio has decreased from 15% to 12%. This shift in mix due to weak demand for consumer and commercial loans led banks to maintain lower risk portfolios, preventing a significant rise in MPLs as shown in the chart on the bottom right. Next, Pablo will share information regarding Bank of Chile development and financial results.

Thank you, Rodrigo. Let's begin by turning to slide number 9, which provides a comprehensive view of our strategic framework and mid-term targets. Together, they define a roadmap for sustainable value creation. On the left side, this slide is a strategy structured around three key components, our strategic plan, our strategic pillar, and our purpose. Our strategic plan is built on six areas aimed at transforming the way we operate and serve our customers. These initiatives are interconnected and designed to make us more agile, competitive, and responsive to the evolving needs of our clients. Supporting this plan are our strategic pillars, which guide us on how we execute our strategy with efficiency and productivity through collaboration and always with a customer-first mindset. These pillars ensure that our operations, culture, and decision-making processes remain aligned with performance and innovation. And finally, at the center of our strategic plan and pillars is our purposes. We aim to support Sheila's growth and its citizens and businesses enhancing their competitive advantages through long-term trust and strong relationships. On the right side of the slide are our mid-term targets. Show our strategic goals and commitment to measurable results. Return on average capital and reserves. We aim to be the leading bank among peers. Cost to income ratio, we're targeting a ratio below 42% and we're currently operating at 36.1% outperforming expectations. This result, not only is from a strong revenue generation, but also disciplined cost management and strong operating income. Market share, our objective is clear, to lead in commercial loans, consumer loans and demand deposits in local currency. Currently, we are the leaders in demand deposits and hold second place in both commercial and consumer lending. I'd like to emphasize that we aim to reach these targets by growing responsibly in terms of credit risk. Net promoter score, we've exceeded our target of 73%, reaching 75.8% in March 2025. This reflects sustained efforts in improving customer experience through employee training, digital enhancement, and better service models. Corporate Reputation According to the 2024 MIRCO ranking, we've reached top two amongst all companies in Chile, including banks, surpassing our goal of being in the top three. This recognition is driven by our broad engagement in social impact initiatives, including education, entrepreneurship, and volunteerism, along with our commitment to ethical and responsible business practices. In summary, we are executing a strategy that is ambitious and disciplined, with a focus on efficiency, customer satisfaction, and sustainability. Our progress is measurable, our foundations are strong, and we are confident in our ability to generate long-term value for our stakeholders. Please move to slide 10 where we will go over our key business advances in the first quarter of 2025. We have continued advancing in initiatives to drive productivity across the entire organization. Functions from our subsidiaries are being centralized to the bank and some organizational structure is being continually refined. Additionally, we have sustained our efforts to streamline technology expenses in areas including data centers, cloud, and telecommunications. These measures are expected not only to optimize costs, but also to enhance our technological capabilities and support our long-term growth objectives. On the digital transformation front, we made many advances this quarter. We're proud to be strategically using AI tools. In fact, we've made available AI co-pilot chat across the entire organization. This important step forward in using AI is making our workspace more productive, secure, and insightful. We also introduce new products and enhance existing ones. To name a few, we launched a new credit card and micro-lending product for FAN customers, as well as making changes to the digital student plan to reach a broader university student audience. These and other advances have driven the expansion of our digital accounts, achieving a 21% year-on-year growth in our FAN customer base. It's also important to note that this has not only expanded our presence in these segments, but it has also been relevant for increasing our financial inclusion in Banco de Chile. In addition to our progress in the fine products, we advance in improving other digital initiatives that are focused on internal processes. These changes have resulted in boosts in our productivity by a staggering 35% year-on-year in current account originations. In line with our commercial initiatives, we launched new accounts for companies of ¥1 and GBP. These accounts offer diverse functionalities including foreign exchange transactions, financing options for customers operating internationally, We also upgraded our personal banking credit products by introducing new pre-approved credit lines and credit card limits, resulting in a 25% increase in the average number of these operations. New installment options were released for credit card balances, providing customers with more flexibility to pay their debts. Our constant innovation and commercial initiative enabled us to offer customers a wider range of product options, strengthening our relationship and enhancing our ability to meet their financial needs. In terms of ESG reporting, this quarter we published our 2024 annual report, which covers our financial and sustainability performance and marked significant advances in meeting local and international standards such as SADC and GREE. All of these initiatives position us to maintain our leadership in the banking industry and prepare us confidently to navigate future opportunities and challenges. Please turn to slide 12 to begin our discussion on our results. We started 2025 with solid results of 329 billion pesos this quarter, equal to a return on average equity of 23.3%, as shown on the chart to the left. When compared to our peers, we outranked all of them in both market share and return on average assets, as shown on the chart to the right. Specifically, in market share, we achieved a 22.8% participation in net income and in return on average assets, we reached 2.5%. Our robust financial performance underscores our enduring customer-centric approach and commitment to establishing a sustainable bank, as evidenced by consistent increases in customer revenue, risk management, and positive advances in cost control. In line with this expansion, our aspiration is to be the industry leader in profitability. Let's take a closer look at our operating income performance on the next slide 13. We continue to demonstrate the strongest operating revenues in the industry thanks to our superior business model and its clear resilience through market cycles. On the chart on the left, we see a consistent operating revenues growth quarter over quarter despite subdued business dynamism by totaling 779 billion pesos in the first quarter of 2025. This was composed of strong customer income amounting to 617 billion pesos, up 4.3% year-on-year, and non-customer income that reached 162 billion pesos below the 188 billion pesos recorded a year earlier. The decrease in non-customer income was mainly caused by the maturity of FCIC funding from the central bank in the first half of 2025, which explains 75 billion pesos in higher revenues in the first quarter of 2024 when compared to the same period of 2025. This was partly offset by higher revenues from directional inflation index positions. This decline was partially offset by an annual rise of $20 billion from the contribution of a structural U.S. index net after the explosion that hedges our equity against inflation due to higher inflation that increased from 0.8% in the first quarter of 2024 to 1.2% in the first quarter of 2025, as well as a larger U.S. gap on the balance sheet. In terms of customer revenue, growth was driven by income from loans and fees that were up 7.2% and 14% year-on-year, respectively. The consumer loan book contributed to the most of the growth in revenue, which increased by adding 9.8 billion pesos due to higher lending spreads and 3.5% annual rise in average loan balances. The remaining increase was fostered by improved lending spreads in both the commercial book and the residential mortgages, which resulted in further income by P4.6 billion and P2.4 billion respectively. It's also worth noting that most of the growth in the commercial loan book was from SME loans and that lending spreads in this business unit are gradually returning to normal as Pogacar's loans continue to mature. Likewise, the SME banking unit managed to grow above 8% year-on-year, in other than for gap year loans. As a result, a net interest margin reached 5% this quarter, significantly outperforming our peers. In turn, the increase in fee income was primarily conducted by transactional services and mutual fund management. Transactional services experienced a rise of 12 billion pesos, partly driven by a favorable exchange rate impact on fee expenses related to her credit card loyalty program due to the Chilean peso appreciating 4% against the U.S. dollar in the first quarter of 2025, compared to a depreciation of 12.3% in the first quarter of 2024. The remaining increase was due to a rise in credit and debit card transactions of 9.7% and 7.8% respectively. Fees from mutual funds and investment funds management grew by 22.8% year-on-year. This growth was driven by an 18.4% increase in average balances of assets under management. And furthermore, stockbrokers and investment banking also posted increases in their year-on-year performance, fueled by a rebound in the local stock market over the last month, and particular M&A transactions carried out in the local markets. In terms of our fee margin over average interest earning assets, we are posting strong levels, as shown on the right side of this slide with a 1.4% ratio as of the first quarter of 2025, also above our peers. A remarkable operating revenue performance is responsible for an impressive operating margin of 6.7% this quarter. This achievement is proof of our consistent business strategy and our ability to deliver enhanced value offerings to our premium customer base over time in both lending and non-lending products. As a result, we have established a solid track record in customer income regardless of economic conditions. Please turn to slide 14 to take a deeper look at our loan portfolio performance for the first quarter of 2025. As shown on the left, total loans reached 39 trillion pesos, marking a 1.1% increase compared to the previous quarter and a 3.2% increase year over year. We expect this pace of growth to transition in the coming quarters to more normalized levels in line with the better economic figures that we are seeing. Generally, there is a lag of a few quarters when we start to see positive figures in the economy to translate into loan growth. In this regard, although loan growth multipliers to GDP will probably remain below average levels seen in the past decade, we believe the rebound foreseen in private investment this year and enhanced household consumption should drive more dynamism in commercial and consumer lending in coming quarters. In terms of composition, personal banking to commercial loan mix continues increasing. The retail portfolio drove loan growth. This book is comprised of individuals and SMEs, representing 65% of total loans, expanded 5.6%, while wholesale lending remained basically flat year-on-year. Specifically, mortgage loans led the rise up 8.1% year-on-year, reaching $13.5 trillion. Despite higher than pre-COVID interest rates, this segment has proven resilient, with originations for new loans rising 12% year-on-year. Industry-wide, residential mortgage loans grew 6.3% year-on-year, allowing us to post market share gains rising from 15.3% to 15.6%. Consumer loans increased by 3.9% year-on-year to 5.5 trillion pesos. Although this growth is below historical levels due to high interest rates and persistent unemployment, a gradual improvement is anticipated if the trade war does not escape and affects the local economy. Commercial loan specimens reached 5.2 trillion pesos, up 3.7% year-on-year. This expansion has been negatively impacted by significant growth in prior periods in Fogate government guaranteed loans that are amortized at a high rate, offset by Fogate loans that have expanded at a rate of 8.2% year-on-year. On the other hand, commercial loans in the wholesale banking segment remain flat year-on-year. Originations in this segment offset the negative impact of exchange rates on foreign trade loans and lower demand for this product. the potential effects of the trade war on both global and the local economy, we expect the segment to grow throughout the years on the grounds of expected reactivation in the private investment, regardless of the lag between economic figures and demand for loans. Slide 15 As depicted in the charts on the top left, our assets and liability structure is solid. Our business strategy is primarily focused on commercial banking, with loans constituting 73% of total assets as of March 2025, while financial instruments represent only 10%. Also, I want to highlight that our health and maturity portfolio represents less than 2% of total assets. This is relevant because during the pandemic, we and most of our peers increased the level of these financial instruments, which generally yield significantly lower than the current market rate, thus affecting net interest margins. On the liability side, deposits are the main source of funding, representing 56% of our assets. Within deposits, time deposits are the most relevant financing source on our balance sheet, followed by demand deposits, one of the most important competitive advantages that we have, as you can see on the chart to the right. Zero interest-bearing demand deposits funded 37% of our loans, significantly higher ratio than our peers, and one of the drivers of our net interest margin advantage. Also, as shown on the table on the bottom, On the bottom left, we have a high level of liquidity that largely exceeds the limits set by the regulator. Our liquidity coverage ratio reached 186% as of March 2025, 86 percentage points higher than the regulatory limit, and the net stabled funding ratio reached a level of 119%, 29 percentage points higher than the limit during the same period. In addition, it's worth noting that our U.S. asset gap was 9.7 trillion pesos by the end of March 2025, meaning that our sensitivity to 1% inflation is about 97 billion pesos in net interest income. It's important to mention that this gap is composed of two parts. First, we have a U.S. position that is structural, which is related to a hedge of capital against inflation. Second, we have a directional U.S. position that are managed by a treasury that to profit from the differential between the trillion peso and U.S. rate in the short term. Given recent inflation trends, which have remained above the central bank's target range and the Treasury's expectations on how inflation will evolve going forward, we have temporarily increased our U.S. position overall. The income obtained from this strategy has clearly offset the risk taken, which is well controlled by the solid corporate governance we have in these matters. Please turn to the next slide 16 to discuss our sound capital base. Bunk of Atila is the best capitalized bank among its peers in the industry. As of March 2025, our Basel III ratio stood at 17.4%, significantly surpassing our fully loaded requirements of 12.4%, as indicated on the accompanying table. Our CET1 ratio shows a decline this quarter due to effective payout In dividends, they exceeded the 60% amount provisioned as of December 31, 2024, following our shareholders' decisions to distribute 100% of their distributable earnings from 2024. Despite this reduction, our CEC1 trend over the past few years has significantly outperformed both our main competitors, as illustrated in the chart on the bottom left, and remains well above the regulatory limit. Based on these strong capital levels, we are comfortably meeting our phase in Basel III requirements, while remaining confident in addressing the final steps in Basel III implementation. More importantly, given this scenario, we possess the necessary capital to pursue growth opportunities should market conditions permit. Please turn to slide 17. In the first quarter of this year, expected credit losses reached $90 billion, 20% lower than the same period last year, and 13% lower when compared to the fourth quarter of 2024. Cost of risk for the period dropped to only 0.93%, below our long-term expectations. As discussed in previous earnings calls, delinquencies have shown signs of stabilization, as illustrated in the accompanying chart. The top right chart demonstrates our performance relative to our peers. Notably, we recorded non-performing loans of only 1.5% this quarter, which is significantly lower than that of our peers. The bottom right chart provides a breakdown of this figure, indicating that NTLs have started to stabilize high-class and have even improved for consumer loans. We believe that if the economy continues to strengthen or continues to decrease, we could observe a moderate improvement in NPLs across products. The card on the bottom left indicates that our loan portfolio has a coverage ratio of 2.6 times, including additional provisions amounting to 631 billion pesos, which is the highest amount in the local banking industry, while positioning us favorably for managing unexpected credit risk deterioration. These additional provisions are particularly valuable in uncertain times as they provide a robust buffer against potential negative economic scenarios that could arise in the global economy. It's also important to note that the CMS standardized provisioning model for consumer loans went into effect in January 2025. To mitigate the 69 billion peso expected impact on risk expenses for 2025, we released additional provisions as anticipated in previous calls. Please turn to slide 18. This quarter, expenses amounted to 281 billion pesos, 1% lower than the same period last year and 7% less than the fourth quarter of 2024. This decrease is even more significant when adjusted for inflation, as most cost items are linked to CPI variation, which reached 4.9% over the past 12 months. These figures reaffirm our commitment to productivity and efficiency, which is supported by a digital strategy that has demonstrated to be effective and strict cost control initiatives. In more detail, as shown in the chart on the top right, the annual contraction was mainly explained by lower admin and personal expenses, the 2.1 billion pesos decrease in admin expenses was primarily driven by reduced fixed assets, maintenance costs, and Regarding personnel expenses, the $494 million decrease was mainly explained by lower total salary, in line with the annual decline of approximately 7% in headcount. This was a result of efficiency initiatives we have deployed over the past years aimed at increasing productivity with a comprehensive approach. These factors were partially offset by an increase in severance payments related to organizational restructuring as prison functions have been centralized and optimized. In terms of our efficiency ratio, during the first quarter of 2025, we achieved a 36.1% level, which is comparable to the ratio recorded in the first quarter of 2024, which is noteworthy as revenues continue to normalize. The chart on the bottom right shows a consistent track record of efficiency and how we've been able to reach lower levels than prior to the pandemic. We are confident that through effective cost management, enhanced productivity, and strategic use of technology, we will sustain our strong efficiency levels, aiming for approximately 39% in 2025 and maintaining below the 42% in the long term. Please turn to slide 19. Before moving to questions, I want to go over some key takeaways. Despite the several risks and significant global inferences affecting our GDP forecast of 2% for this year, Chile's strong economic fundamentals and our ability to implement counter-cyclical measures will be crucial in mitigating potential negative impacts. Banco de Chile is uniquely persistent to address these challenges due to our exceptional customer base, superior asset mix, and quality as well as having the highest coverage ratio amongst years. We remain confident in our ability to sustain our status as Chile's most profitable bank over the long term. Our commitment to innovation, customer satisfaction, and prudent risk management will continue to drive our success and ensure sustainable growth. By adapting to market changes and prioritizing our customer needs, we aim to maintain our industry-leading position for years to come. Thank you, and if you have any questions, we'd be happy to answer them.