Itaú Corpbanca
Q2 2017 Earnings Call Transcript

Published: 5 Aug 2017

[Operator:]

Thank you for standing by, ladies and gentlemen, and welcome to the Itaú CorpBanca Conference Call on the Second Quarter 2017 Financial Results. We have with us Mr. Milton Maluhy, Itaú CorpBanca’s Chief Executive Officer; Mr. Gabriel Moura, Itaú CorpBanca’s Chief Financial Officer; and Ms. Claudia Labbé, Itaú CorpBanca’s Head of Investor Relations. At this time all participants are in a listen-only-mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today. We now pass the floor to one of your speakers today, Ms. Labbé. Please go ahead.

[Claudia Labbé:]

Thank you. Good morning. Thank you for joining our conference call for our second quarter 2017 financial results. I would like to remind you that all figures are presented in Chilean pesos unless otherwise stated, and that our remarks may include forward-looking information and our actual results could differ materially from what is discussed. In order to allow for comparison with previous periods, historical pro forma data of the consolidated combined results of Itaú Chile and CorpBanca and excluding non-recurring events is presented in the management discussion and analysis presentation. The pro forma income statement for the periods prior to the second quarter of 2016 have been calculated as if the merger occurred on January 1, 2015. The pro forma information presented here is based on

[Gabriel Moura:]

Good morning, everyone. Thank you for joining us for this Second Quarter Conference Call. Today, we will be going through our results for the second quarter of the year, then I’ll comment on the bill proposal sent to Congress marking the first half of the adoption of Basel III in Chile. And finally, at last I will go through our latest developments and integration process. So if we can continue to Slide 4, we can briefly discuss our macro environment and how that affects our results and risks. So in Slide 4, as you can see, the economic activity is still growing at a slow pace both in Chile and Colombia with an adversely tightened labor markets, consumption and investments. As a result, we observed a lower credit growth rate in our balance sheet, especially in the corporate sector which is traditionally more cyclical. On the other hand, inflation has been weakened in both countries, allowing for interest rate cuts that have added 100 basis points in Chile and 175 basis points in Colombia, where we expect an additional 50 basis cut until the end of this year. And is particularly relevant in Colombia as it allows us to recompose our needs as we will discuss in further slides. In terms of currency rates, we saw a 5.3% devaluation of the Colombian pesos against the Chilean pesos in the quarter, which leads to a lower total loan growth on the balance sheet because of transaction, translation effects. So going to the next slide, we show the reconciliation between our accounting and managerial results. The main nonrecurring event in the quarter was the reversal of the provision for the fine imposed by the SBIF, after a favorable ruling of the last appeal for the case at the Supreme Court regarding the non-recurring events on a managerial net income, which amounted to CLP49.5 billion as you can see. A more detailed discussion on these events is found on our MD&A report published on our Investor Relations website. Moving to slide 6. We can see the main features of our results in the second quarter for this year, both on the consolidated basis and as per our Chilean operation. Here we highlight, generally improving trend in net revenues, as we benefit from decreasing interest rates in Colombia as previously mentioned. And the improved financial results influenced by our effort to enhance guarantees and collaterals for our derivative exposure requirements, which directly affect our credit value adjustments with CVA provisions. We have also presented better results for loan losses as we critically reassessed all our corporate exposure in the second half of last year and improved on recovery this quarter. Operating expenses also showed improvement in the quarter. Although at a higher level as it is still incurred in occupation ranged expenses related to centralizing our administrative personnel in fewer deals. As a result, we imposed a managerial return on tangible equity of 10.8% for our consolidated and 13.9% for our operation in Chile in the quarter. In the next slide, I will go through some of the details of our tangible equity, as we believe it translates to a better comparison to our peers. So in slide 7, here we illustrate our balance sheet and the main components affected by the business combination. With the merger we’ve generated a goodwill of CLP1.19 trillion, and other intangibles such as relationship with clients for deposits et cetera of CLP347 billion. Moreover, the purchasing price allocation process also generated net deferred tax liabilities of CLP105 billion. These components net of the effect from minority interest added up to our shareholders’ equity. Because these intangible were generated in a non-cash transaction, that is mark-to-market of CorpBanca assets and liabilities as per the business combination under IFRS III, we generally deduct them from our capital base to calculate the return ratio that is fairly comparable to that of our peers. In slide 8, you can see the evolution of the recurring return on tangible equity for our, both for our consolidated and Chilean standalone results under the criteria we just went over. On slide 9 of this presentation, you can see the income statement of our operation in Chile, where the main highlights for the quarter was an important improvement on total financial transactions, due to the positive effect on some of the areas I’ve commented before as well as the interest rates and other hedge positions we need to manage the balance sheet risk for this. We also highlight on improving the results from loan losses for the semester compared to the first half of last year. Especially, due to fewer credit events and improved recovery in the commercial segment during the period. On Slide 10, you can see our loan portfolio growth in Chile, which add up to 0.7% in the quarter, as we show the stabilization of our market share in the period. In 12 months, we still run a negative 2% growth rate that reflects the challenges we face at expanding our commercial portfolio due to the mix level we want under the current economic environment. We observe fewer projects and investments from corporates. At times we are cautiously optimistic that it will reverse in the medium-term, as we expect investments to start to gradually resume in the country to a more normalized level. On Slide 11, we can see the evolution of the net interest margin, which remained relatively stable in the quarter. Compared to previous years, we can see a much narrower inflation spread on margins, as we’ve been actually reducing and managing inflation exposure in the balance sheet to our current macroeconomic scenario view. We can also see a gradual improvement of the net inflation as a result of better debt spread seen legal day 1. We expect gradual improvements of these along the next few years, as a result of the business needs that tend to gravitate more towards a better balance between retail and wholesale. On Slide 12, we present the evolution of the results from our loan losses, which improved marginally on the quarter but it is still higher than its historical average, reflecting the current macroeconomic environment. We expect to gradually convert to historical levels. However, we have a more concentrated and cyclical portfolio than our peers, and therefore we see the expected volatility along the way. Moving to Slide 13. We continue to see a comfortably-provisioned portfolio with all the information we have to date and with some marginal improvements over our ratios for the cartera deteriorada, which comprises the riskier part of our portfolio, and a stable overall number come in all ratios. In terms of Greenfield operation which is detailed in our MD&A, we saw an improvement in all three parts of our core portfolio, in line with the overall market in Chile. Going to the next slide, we take a look at the results in Colombia. Our operations in Colombia, projected an improvement in the results in the quarter reflecting the better needs, a modest loan expansion and better results from loan losses. Particularly on the covered sectors we reached better recoveries. Overall for the year, we expect a meaningful contribution of the Colombian business to our consolidated results, as we discussed in previous calls. In Slide 16, you could see that in terms of loan expansions we see quite a fewer claims and challenges in Colombia, as we see in Chile. However, in Colombia, we are currently more focused in integrating systems and branch network as well as redefining the business model and value proposition for expanding. On the other hand, as we expected, we continue to see a recovery on net interest margins as interest rates does reflect on our cost of funding. We probably will see some marginal improvement in the rates converged to what we forecasted by the end of the year. But most of the expected recovery has already materialized. So moving on to the next subject. I’d like to comment a bit on the recent development through the adoption of Basel III rules in Chile with the proposals of changes to the General Banking Act sent to the Congress in June. So as probably you now, the proposal changes sent to Congress laid down the main guidelines for the implementation of Basel III in Chile, indicating a full implementation by December 2024, with a minimal total capital of 10.5% without considering contrast typical buffer and seeking requirements to be specifically defined by the regulator. It is important to point out that there are still several key definitions aiming for the whole impact that these permutations could be known, so that capital deductions could be taken from regulatory capital with specific buffer sizes, possible changes in credit risk weighted assets density as well as the extensive model for market and operational risk and the general [indiscernible] rule for implementation. For the first year on implementation phase, taking on some important assumptions, we estimate a 7.5% Tier 1 ratio deriving from the current 9.9% as of June this year from the deduction of all other intangible assets apart from goodwill, which is already currently deducted from our capital base, and the net deferred taxes. We also expect the implementation of a 3.5% cap to 2 each currently in the maximum of 50% of Basel capital, which will reduce further to 150 basis to a limit of 2% of the total capital with the full implementation of Basel III. This is the first picture based on all the information available, and we continue to monitor and analyze the developments of this subject and move [indiscernible] along. Going to the last slide, we obviously knew the agenda in the next steps that we have for our project here in Chile and Colombia. So as we mentioned before, we are in the process of completing the branch migration and client segmentation in Chile, the expected date that we have for that is December of this year. We are aligned with all the major milestones for that. We have continuous focus on the top-line and client satisfaction. And also focusing on the digital strategy that is the key part of our strategy and business model in Chile. Furthermore, we have a focus on implementing all the synergies. According to our population, we have already implemented roughly one-third of the expected synergies, and for the next few years, we expect to implement the other part. As for Colombian business, we have introduced the Itaú brand in the market changing all the branches from Helm to that of Itaú on May this year. We acquired the assets and liabilities of the Itaú Corporación Financiera, which was the Itaú BBA brand in Colombia. We are in the process of completing the systems integration of Helm and CorpBanca branches. And we expect that to happen on mid next year. And also we are in the process of discussing and redefining the business model and value propositions that we have for Colombia in wholesale and retail. So this is the project that we have, and we’re open to take any questions you might have.

[Operator:]

[Operator Instructions] Your first question comes from the line of Carlos Macedo from Goldman Sachs. Your line is now open.

[Carlos Macedo:]

Thank, Claudia. We all thank you for taking questions. Earnings were pretty strong in the quarter. Getting a good quarter out of derivatives was a big factor that, in Chile specifically if you exclude that, the progression is pretty clear. With more synergies coming online, I just wanted to get an idea what you’re looking for in terms of ROE for this year and then going into next year? Second question, it’s a more market share related. It stabilized, which is a good thing. Do you think you can recover the market share that you lost particularly the commercial book over the next few quarters. And do you think you can gain any market share in the consumer and maybe the mortgage book going forward as the Itaú brand gains more strength with distribution that CorpBanca forwards it? Thanks.

[Gabriel Moura:]

Hi, Carlos. I mean, in terms of ROE, what we have been discussing is the market and it is also all along the main objective for the purposes we did the merger between the two banks plus converging the operation that we have in Chile to the standards of the market in terms of ROE. So that’s the main objective that they have. And I think that the market as a whole might see an ROE of 18% on the longer-term. And I think that the assets that we have, for the next 3 years, I think, it’s reasonable to expect something around 16% in ROE. In ROE, on tangible equity, as per the calculations we showed before in the presentation.

[Carlos Macedo:]

In Chile, right?

[Gabriel Moura:]

We are reaching it on a standalone basis. In Colombia what we are seeing for the next 3 years is an ROE along 10% for the asset, as it has a lower scale than what we have here in Colombia. And we are also in the process of changing the business model. So I think that will leave us 18% in Chile, 10% in Colombia, just something around 16% on tangible equity. I think, that’s our long-term objective that we have. I think that will happen gradually, I don’t think that we’re going to see any change within the process. We adjusted pretty much the balance sheet last year with all the credit events that we have, and also with the new look and the policies that we have applied. And I think, the constriction is quite linear between what we had, which was the result close to zero in 2016, and to the objectives that we have 3 years along the road. I think that’s a little bit of the plan that we have. As for market share, if you take a look at what we have, we lost market share mainly on the commercial side. And when you take a look, we have a lot of information from the regulator in Chile with clients and the competition. You see that we’re winning the deals -- main deals on the top 100 clients that we have on credit. The thing is, since the market is low and we don’t see any investments from those clients. So the loss in market share happened in other parts of the marketing which we still have a lower participation share of the mid-market clients and low markets. So I think, in order for us to gain market share, we need to see, because we have a higher cyclical performance in our portfolio we need to see a more strong economy, which we are cautiously optimistic, especially for next year. So I think there will be a constriction of market share. Now a days, I think, that the main concern that they have in the bank and main focus is integrating, and also taking a look at the top-line. So in terms of being focused on profitability and market share, I think, there will be a short term focus of that is on profitability.

[Operator:]

[Operator Instructions]. Next on the line is Nicolas Riva from Citi.

[Nicolas Riva:]

My question is going to be on capital. So you provided a very useful slide, looking on what would be your capital ratios under Basel III. The number you’re giving is 7.5%. I want to confirm that this number is for the common equity Tier 1, it seems to be. And what’s your view on your capital position really as Chile moves into Basel III, because 7.5%, the first impression would be, maybe a low number. I mean, right now the minimum is going to be 4.5%, you are going to have the conservation buffer of 2.5%, that takes to 7%. And on top of that you are going to have 2 other buffers, the countercyclical buffer and the systemic buffer. At the same time you’re going to have some years to build capital, so maybe you can give us your view of how you feel about your capital position? And what will be the priorities, will it to build capital or carry on the dividend payout, growing less or doing a capital increase? Thanks.

[Gabriel Moura:]

Hi, Nicolas. I think that the main discussion in capital and I do see many reports in the market about the capital positions in Chile so on and so far. But the fact is there is too much to be defined. So one of the aspects and let’s discuss, I think, that the biggest one because, in terms of the capital requirements, I think, there is clear [indiscernible]. But some of the buffers that you mentioned, they are defining ranges, they are not defining such as the counter cyclical or [indiscernible] but they are not defining that. So there is this question. But the other new traction for me is the risk weighted asset. If you think about the risk weighted assets density, I think Chile is one of the highest that I know off. And especially for us, because we are more concentrated on the corporate side, my risk weighted assets density for creditors, is higher than 80%. So when I take a look at other countries and what is the benchmark, probably, I will gather least from risk weighted assets and credits. And also we incorporate other risk weighted assets as I mentioned for market and operational risk. But the main answer is that I don’t have all the questions, the answers right now. Nevertheless, I can say that I do expect from what I see on the market and especially for us because I have to deduct an important part of Q1 in terms of the other intangibles that we have on the balance sheet. And also [indiscernible]. I do see us doing more capital accumulation through the next few years. So as I mentioned before, I don’t think that we are going to see a payout ratio that is on par with what the industry in Chile the last few years, we are hunting around between 50% and 70%. I believe we are going to pay out more on the lower side of the distribution that is close to 30%, perhaps 50%, but perhaps closer to 30%, as we move to accumulate capital through the six-year period. But then again, I think that I need more information to -- especially the scheduling because the first year is not clear, what impacts are, I know what the impact will be in 2024. But I need more information. And I think that it mainly constitute the consent in the Corporación Financiera which we regulated, we need more information on the subject. But as I mentioned to Carlos, I think that capital is an important subject for us, and that’s why we are more focused on this moment on profitability and capital returns than what we earn on market share.

[Nicolas Riva:]

Okay. Thanks, Gabriel. Just one follow-up. If I look at the -- in your earnings release, you said that the Tier 1 ratio excluding the goodwill was 9% as of June, but then on reviewing the slides is much lower, 7.5%, what are the differences between those two?

[Gabriel Moura:]

The differences between what we’re talking about the current linking of de Bancos, we have only excluded the goodwill. So the goodwill is really not on both of them. On the new Basel III law of Chile, and it’s not regulated, but I think it’s a meaningful assumption, we exclude also the other intangibles from the balance sheet. So if you take a look at the balance sheet picture that I have here when I discussed return on tangible equity, you can see that I have the goodwill that is already marked by the difference but even the CPL128 billion of other intangibles plus the net deferred tax asset is going to see that we end up with a lower number, 7.5%. So the deduction of 2.4% is the other intangibles.

[Operator:]

[Operator Instructions]. We have got no further question. I will now hand back to your speaker for any closing remarks.

[Gabriel Moura:]

Fantastic. Thank you so much for your questions and as always we are available if you have any follow-up questions for us. Have a nice day.

[Operator:]

And that does conclude your conference for today. Thank you for participating. You may now all disconnect.