Itaú Corpbanca
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Thank you for standing by, ladies and gentlemen, and welcome to the Itaú CorpBanca Conference Call on the Third Quarter 2017 Financial Results. We have with us 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 presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today. And 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 third quarter 2017 financial results. 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 in our managerial model that we adjust for non-recurring events for the amortization of intangible arising from the business combination and for the tax effects of the hedge of our investment in Colombia. At the same time, we adjust the managerial income statements with the original reclassification of P&L in order to provide a better clarity of our performance. Please refer to Page 9 of our report for further detail. Now Mr. Moura will continue with the presentation.

[Gabriel Moura:]

Thank you, Claudia. Good morning or good afternoon to everyone. Thank you for joining us for this third quarter conference call. On Slide 3, we have the agenda that we're – I'll going through our results for the third quarter of the year. Then I'll go through our latest on digital banking. I will also give you an update on our synergies capturing process. And finally, as always, we'll be talking a little bit about the next steps. To start, let's move to Slide 4, where I'll briefly discuss with you our market environment and how it affects our results. So as you can see, what we have seen both in Chile and Colombia is a continuous low economic activity, which translates into the lowest loan growth rate in Chile for over 7 years, especially on corporate loans, which are currently growing at 2% on a 12-month basis, in where we have over two-third of our portfolio. On the other hand, inflation continues to yield in both countries. In Chile, we experienced a negative three basis points adjustment in the U.S., the official inflation linked to unit of accounts, compared to a 73 basis point increase in the second quarter of the year. This reduction in inflationary pressures allow us – allow for interest cuts that have added up to 100 basis points in Chile and 200 basis points in Colombia, where we expect an additional 25 basis cut until the end of the year. This is particularly relevant for us in Colombia, as it allows us to recompose our mean as we are going to discuss in some further slides. Going to Slide 5. We see the evolution of our return on tangible assets, where we can see the magnitude of the decreasing performance on quarters that concentrate important risk adjustments in our portfolio, such as the first and fourth quarters of 2016 and this third quarter of 2017, especially in Chile. Moving to Slide 6. We see the main figures of our results in the third quarter of this year in Chile. As highlighted in the waterfall graph below, the vast majority of decrease in the results coming from the second quarter was due to the worsening in the risk profile of some of our corporate clients, reflected in both higher loan loss provisions and provisions for the real estate exposure with clients, and also on lower inflation related to income that reduced our net interest income, as we are going to see in the next slide. Moreover, a deeper analysis on the trend of our operating expenses and synergies will be presented a few slides ahead. On Page 7, we see the evolution of our net interest margin in Chile. In the quarter, our mean deflated by 18 points, mainly due to lower inflation. Thus, when we exclude the effect of inflation taxation on assets and liabilities, we normally see a stable net interest margin in the quarter, but an increasing mean over the last 12 months, as we have experienced lower funding costs and a more disciplined pricing approach. Moving to Slide 8. As we discussed in previous quarter, our overall market share in Chile is mainly driven by our commercial portfolio that represents over two-thirds of our total loans. As I mentioned on Slide 4, a continuous low economic activity has translated into the lowest loan growth rate for over 7 years, especially on corporate loans. In this context as well as a more proactive approach with concentrations, our commercial loans have decreased by 6.4% over 12-month basis. Therefore, our market share in commercial loans has decreased 30 basis points in the quarter, and our overall market share has decreased 20 basis points. On the other hand, our retail portfolio has experienced a positive evolution, with increases of 7% and 10.5% on mortgages loans and consumer loans on a 12-month basis, respectively, reflecting a more stable market share in mortgages and an increase in commencing consumer loan's market share. This is in line with our strategy that seeks to balance our loan portfolio as well as to strengthen our retail operation. Moving to Page 9. As we have mentioned, rating downgrades in some of our corporate clients in this quarter have reflected in higher loan losses that have increased by 64%. As shown in both charts, high sensitivity of our portfolio to credit events, mainly due to weaker economic scenario and concentration on project finance have not only impacted our results for loan losses in the first and the fourth quarters of 2016 and in the third quarter of 2017, but ultimately, our net income for each of these periods. Our corporate credit over average loans reached 1.2% in 2017, compared to an average of 0.6% on previous years. We estimate that under business-as-usual conditions, this process should stabilize in something around 0.8%. Going to Slide 10, where we look at the credit quality and we see an increasing resiliency in the quarter, especially in the cartera deteriorada of our commercial and consumer portfolios, which comprises the riskier part of our portfolio, mainly due to revisions in rating in corporate clients. The trends in delinquency of our mortgage portfolio have stabilized over the last two quarters, have increased in the cartera deteriorada that we have identified as a particular vintage of mortgage loans rated between 2013 and 2015, in that we are targeting with a specific collective – collecting actions. However, we believe we have – we are well covering our provisions, and we are constantly looking for signs of a worsening scenery. Going to the next slide, we will take a look at the results in Colombia. On Slide 12, we see the main figures of our results in the third quarter of this year. As we see on the P&L, the majority of the decrease in results can be explained by net total financial transactions, mainly impacted by lower market opportunities compared to previous quarters as well as a decrease in volume of the services with clients. This was partially offset by a 19% decrease in provisions for loan losses in the quarter, showing the benefits of conservative provisions for our corporate portfolio in the past quarters that had compensated a recent deterioration in our retail portfolio. Overall, for the year, we continue to expect to finish 2017 with a grossly new flow contribution of Colombia to our consolidated results. In the next slide, in terms of loan expansion, we see quite similar trends and the same challenges in Colombia as we see in Chile on the macro front. But we still do expect some residual market share loss, as the focus is turning to advancing the local systems integration and redefining business model and risk appetite. On the other hand, as we expected, we continue to see a recovery on our net interest margins, as interest rates further reflects on our cost of fund. We'll probably see some still marginal improvement if rates convert to what we forecast by the end of the year, but most of the expected recovery has already materialized. Now moving on to the next subject. On slide 14, I'll like to comment a bit on our digital banking transformation. As well as all of you know, our digital bank strategy is one of our main pillars to boost not only our retail banking, but our solution to further improve efficiency. We're now turning to being digital. We have financial progress – progressively accomplished first steps. On the charts – on the chart on the left, we can see, over the last 12 months, sales of retail credit loans through digital channels have pick up from 13% in the third quarter of 2016 to 60% in the third quarter of 2017. When we move to the charts on the right, we can see that we have still room to improve the usage of digital channels, especially on the mobile front. We are optimistic because the trend has positively evolved in short period – in such a short period of time. On the next slide, I'll like to comment a bit on the fact that our digital strategy is not only focused on improvements in our mobile offering but mainly focused on transforming our processes and becoming a digital bank from the back office to the front office. To accomplish that, a number of multidisciplinary teams are fully focused in looking into opportunities to digitalize products and process with a disciplined and focused approach. One example of this, as you see, is the implementation of pre-approved credit offers to our clients in a mobile use spectrum as well as an increase in credit limits. Now let's move the agenda to the next point, when we could take a look at the full base of expenses of the bank, and how we evolve through time compared to the industry. First, we start with the simple pro forma historical series of all non-financial expenses lines on the P&L, and excluding expenses consolidated from the Colombia operation, because the synergy that's generated through the merger between Banco Itau Chile and CorpBanca comes basically from the consolidation of the operations in the Chilean market, where they co-existed. Then, as we told in our MD&A, we reduced provision expenses related to credit risk, that we classify as cost of risk, as well excluding non-recurring expenses detailed on our managerial analysis. Then at last, let's remove depreciation and amortization expenses from the equation, as these are more of initially foreign investment expenses related to long-term income generation. If we apply the same methodology to the financial system as a whole with data provided by the regulator and our peers, we can now compare the evolution of the cost base before and after the merger. So as we see in the chart below, the banks, as they operated technically, have an average double-digit expense growth rate in line or a bit above the average for the Chilean market, and both well above inflation. After the merger and till year-to-date, our expenses are now going well below what the market is doing, including increasing almost half of the inflation rates in 2016. This is an important reference, that increasing expenses at low single-digit is translating to real synergies at the industry level, historically moves at a much higher pace than this. Moving to Slide 18. Let's assume that we and the market will sustain the current annual growth rate through the reminder of the year, which is, in our case, is even conservative, as an important part of 2016 expenses were concentrated in the last quarter, making for a more favorable comparison base. In this scenario, assuming both banks will remain growing at an existing industry pace with the merger within the quarter, as it is historically been, we can identify the amount of synergies already factored by comparing how Itau CorpBanca is doing without the banks have jointly have done without the merger. In this scenario, we can see about $21 million in synergies already been captured in the first years of integration. And especially – I think it's important to mention that when we go deep into this number and compare to what our personnel costs and administrative costs, we can see different situations. In personnel costs, I think, using the same methodology, we have achieved synergies of almost 30% of the cost that Itau Chile had, which was the smaller bank, into the comparison. On administrative cost, I think that we are still have a way to go as we integrate the systems, and are able to close some of the data centers that are now duplicated within our operation. Moving to Slide 19, we can have a look on our – at our main initiatives in place that are helping us achieve and sustain this level of expense control to further capture synergies. As cost is the only variable in which we have effective control, we have a very disciplined approach to its management. With a close following tight controls to detailed monthly review of expenses, dedicated work that is focusing on that and identifying more chances for cost reduction, including sale of fixed assets, as first execution of our integration plan, and the development of tools for maximizing the precision in which we are applying cost throughout – to each of our segments in digital products, hence improving our operating capabilities. If we move to the next slide – now we’re going to the detail of our milestones and next steps. So far we have achieved, within our timeline, the expectations, all the major milestones we have set for our integration process. In Chile, we are about to complete brand integration and client segmentation by the end of this year. And as I have just mentioned, we are making progress in our digital banking strategy. We have also made progress in the implementation of synergies, and we expect to accomplish them in the next few years. Finally, we continue to work on the full branch and network integration in Colombia to be completed by mid-next year. We believe we had a major significant progress, and we are paving the way for a competitive, profitable and sustainable franchise in the region. This concludes the presentation that we have, and I’m happy to take any questions that you might have. Thank you very much.

[Operator:]

[Operator Instructions] Your first question comes from the line of Sebastian Gallego. Please go ahead.

[Sebastian Gallego:]

Hi, good morning. Gabriel and everyone thanks for the presentation. I have actually three questions. The first one, if you could comment on the financial transactions account, and you mentioned that there have been some CVA adjustments. I just want to know, what can we expect from that other operating income line going forward? The second question is related to Colombia. You just mentioned on the next steps there the definition of the business model in Colombia. Can you provide a timeline for that as well definition of the business model in Colombia? And last, the third question is, can you provide your outlook on net earnings for the bank for upcoming years? We are looking at – we are looking at a pro forma model, where in 2014 and 2015, the banks were generating nearly Ch$300 billion. Can you talk about when do you guys expect to return to those levels? Thank you.

[Gabriel Moura:]

Thank you so much for your questions, Sebastian. First, you asked about financial transactions, and as we mentioned, within this line, I think that the most important impact that we have on the quarter, and if you take a look at it, it was quite the same on the last quarter of 2016, we have the CVA lines, or the credit value adjustments, for rating of clients mainly is within this line. So if you take a look at the financials that we have, we have roughly more than $1 billion in mark-to-market portfolio from our clients in – as an asset. So the credit value adjustments change in the model that we did last year. We have also the more conservative model that take into consideration the life time of the credit and also recomposes the spread that we have of the derivative transaction to generate more accrual throughout time. So this is one of the changes. And I think it helps you to think about the third question with how that translates into the numbers from the previous years is, one of the things that we changed is the derivative transactions that we have, now we accrue this spread over full time. If you think about how derivatives are priced within the market, most – if you don’t have a good CV model, most of the earnings from a transaction with the clients on the derivatives, is recognized upfront. In terms of sustainability of the bank and making sure that the risk-adjusted return works for all time, we implemented this CV model to fix this into current consideration, and it differs throughout time, the spread over that we have with clients in derivatives. However, the main impact that we had on this quarter was for some specific client’s reevaluations of credit that affected the CVA. So at the end of day, you can see within this waterfall, we added both of the effects – both the credit provisions, as you know, and the derivative effect on the transaction part, they are added within the waterfall, this 32.4% that you can see on Slide 6. This takes both effects into account, the credits, provisions and the CVA. Of course, here, as you mentioned, on different lines, the credit provisions have a specific line, and the CVA goes into financial transactions because they are part of the mark-to-market of the derivatives. So the second question you asked about the business model changes that we are doing in Colombia and the timeline. I think, then again, going to the third point of the main differences in profitability that the bank have in the past, I think that Colombia explains roughly – Colombia in provision explains roughly 60% of the difference between what we had in the past and what we have right now. In Colombia, I think that there are some effects that are impacting the operation that we have. One is the credit provision that you see for our bank in Colombia, and for most banks in Colombia had deterioration, both in the corporate market and on the retail market. And I think, just practically for us, we have impact of the larger interest rates – the high interest rates in Colombia that affected our banking book as the bank had previously a different approach to market risk. I think on the second part, we have already – with the implementation of the risk management capabilities that we have with Itau CorpBanca, we are managing better the books that we have and the risk, so you can see that on the higher margin and taking advantage of the macroeconomic scenario. On provisions, I think that we were quite conservative on quarterly provisions, but we are still suffering the effects of the retail deterioration in NPLs in Colombia, and we are focusing right now mainly on restructuring the bank. So the bank has, for the past three years, tried to merge the operations of Helm and also CorpBanca. As you know, we changed the strategy to a more singular approach of merging the two systems, and we are pursuing this strategy. We have introduced the Itau brand in Colombia, where we have successfully introduced and changed all the branches from Helm to Itau. And now we are in the process of changing clients, and then we'll – less than two, maybe in the next year. So all the focus that we now have is making sure that we have a scalable, secure and integrated platform for our clients. As we do so, we also start taking a look at the different business models that we have in how to approach business segmentation in Colombia. I think that we are having those discussions, but I think that we are going to implement some of the changes throughout next year. I don't think that at this time we're going to change management models as well as implementing the segmentation. We are doing this step-by-step. So I think that for the business model in Colombia, we are thinking about next year. And the last question about the outlook and also the profitability of the bank, I mean, one important aspect on taking a look at the bank in the past and what the bank is right now, is how cyclical the bank is. So as you saw, 66% of our portfolio, the commercial spread, specifically, on corporate banking is specifically on projects. So if you think about the private projects within the economy, we are on the portfolio that is highly cyclical compared to our peers. So when you take a look at the performance of credit as a whole, so the economic growth, both in Chile and Colombia, we are more affected by our peers. This is on the credit growth side, but also on the provision side. If you take a look at the numbers, the bank used to have something around 0.5% to 0.6% cost of credit over average loans, and now we are running more at 1.2%. As I mentioned, I think that the bank at some point will converge to something around 0.8%, especially as we move to retail and consumer bank with higher provisions. So I don't think that we are going to get back to the 0.6%, but I don't think that we are going to stay for long at the 1.2% that we have right now. I think that those main factors is playing a little bit of how to recompose the results that we have right now to the test. One thing that I think would take a little bit more time is Colombia. Colombia for the Ch$300 billion that we mentioned, Colombia contributed roughly with Ch$66 billion. Now it's roughly 0. So I think in Colombia, it will take a few years for us to get back to this level. So in terms of the return on tangible equity, if you take the Ch$300 billion tangible equity that we have right now, this would roughly indicate an around – in between 14% and 16%, which is consistent to the long-term view that we have for the bank. At this point, we don't have a specific outlook to share with you, but I think it's important to understand the cycle and where we are, I think, and the things that we are doing as a bank. And how different is the Ch$300 billion that we had in the past to what we might have in the future in terms of sustainability.

[Sebastian Gallego:]

Okay, thank you.

[Operator:]

Okay. The next question comes from the line of Jason Mollin. Please go ahead.

[Jason Mollin:]

Hello, thanks for the opportunity. I have some questions. First, on the growth for the loan book that we've been seeing, and strategically looking forward, you were able to post better growth and a little bit of share gain in the consumer segment as opposed to losing share on the corporate side, on the commercial side and relatively stable on mortgages. What are you doing on the consumer side? What kind of clients are you going after? I'm imagining these are all clients of other banks. Are you taking wallet from other banks in terms of getting this growth? How can you describe the expectation for these trends going forward on the loan side? And when we could see some recovery on commercial? And my second question is just a follow-up on the numbers that you show in Colombia, specifically the net fee and commission income looked like it was hit pretty hard. If you can update us on what’s driving that? Or is that just part of the consolidation process and et cetera? Thank you.

[Gabriel Moura:]

Sure. Hi Jason. First, discussing a little bit about the commercial and retail, I think that the behavior that we see – that we saw on the portfolio in the last few months is due to the consolidation of the bank. As I mentioned, all the changes that we did on management, on systems, on portfolio, throughout time they have impacted the operation. And now I think that we are back on track in terms of growing our retail business. I think that we have a more stable retail business right now than we have on the corporate side. Especially, because on the corporate side, as I mentioned before, I think that the market still isn’t there in terms of the investments. So we see a lower pipeline compared to what we saw in 2014 and 2015 and that curtails a little bit our ability to grow. But as far as I think it’s important to take into consideration the concentrations that we have with both banks and in some sectors and in some projects, for instance. So we are more cautious in terms of growing the bank in new project, in new concentrations that we already have. So I think that what you saw in the commercial portfolio is also our take on a more diverse approach in terms of the portfolio that we have. So it will be easier for us to grow and increase the concentrations that we already have. But at the same time, that generates, as you can see in some of the cases of credit losses that we have more impact, at the end of the day, in our value creation. So we are pursuing a more diverse portfolio, even if that means a lower growth at the short term. I think that trick probably would change next year. I think that, based on what we see on the investments throughout time, especially for 2018, I think that we are more confident in terms of our ability to grow. In the retailing side, I think that at the end of the day, and I mentioned this previously, we have the clients within the portfolio, of course, but we still have to grow and take more operational leverage into our operation in retail. Nevertheless, the major problem that I think that we have is the principality. Meaning that, I’m the second, perhaps the third bank of some of the clients. And what we’ve been doing is working in terms of getting more share of wallet for the clients that we have and pursuing other operations to get new clients. But I think that first let’s put not a low hanging fruit, but the first milestone that we have is pursuing a larger share for the banks – for the clients that we already have in our retail operation, and taking back some of the shares that we lost through the merger process. In Colombia I think that mainly the banks in Colombia – the bank in Colombia, I think there it’s quite similar to those challenges that we have in Chile. And I think Colombia has some challenges on its own. In terms of net fee and commissions and also revenues as a whole, the bank is also cyclical, the same concentrations that you see in the same sectors, in project finance, et cetera, you do see in Colombia. So most of the fees that we have can be divided between fees that are through credit restructuring and credit structuring, and as you do see less credit transactions, you affect this line on PS as well. And the other one is for a specific product that we have, which is Libranzas, which is payroll loans in Colombia, in which we have the credit and the insurance part. And we’ve been referring more some of the income that we have on the insurance side to create a more stable portfolio throughout the future. And that creates a little bit of a downturn in terms of the recognizing revenues in the short term for this. I think that as we stabilize the operation and we start to see some growth on the lines, it will pick up, but I don’t think it’s a new churn. I think it’s something gradually that we’re going to see throughout time.

[Jason Mollin:]

Thank you very much.

[Operator:]

[Operator Instructions] There are no further questions. So I’ll now pass the call back to be closed. Thank you.

[Gabriel Moura:]

Fantastic. Thank you so much for participating on our call. Thank you much for your questions. And as always, Claudia and I are readily available for any other questions or follow-ups that you might have. I think that on the next conference call that we’re going to have in the – let’s say, the year, it’s a conference call that [indiscernible] and we’ll be able to talk to you and explain a little bit more deeply our results and also the strategy that we are pursuing in the business. Thank you so much for participating.

[Operator:]

Ladies and gentlemen, that does conclude the session. And you may now disconnect.