Itaú Corpbanca
Q3 2018 Earnings Call Transcript

Published: 5 Nov 2018

[Operator:]

Thank you for standing by ladies and gentlemen, and welcome to the Itaú CorpBanca Conference Call on the Third Quarter 2018 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. [Operator Instructions]. I must advise you, the conference is being recorded today. We now pass the floor to one of your speakers today Ms. Labbé. Please go ahead.

[Claudia Labbé:]

Good morning. Thank you for joining our conference call for our third quarter financial results. We have closed lines for any inconvenience in the starting time of our conference call. Due to change in Daylight Saving Time in New York on November 3, there was a confusion regarding the starting time of the conference call start [ph] in Santiago. 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 nonrecurring events, for the amortization of intangibles arising from business combination and for the tax effects of the hedge of our investments in Colombia. At the same time, we adjust the managerial income statement with additional reclassifications of P&L lines in order to provide a better understanding of our performance. Please refer to Pages 9 and 10 of our reports for further details. Now Mr. Moura will continue with the presentation.

[Gabriel Moura:]

Thank you, Claudia. Good morning to everyone. Thank you for joining us for the third quarter conference call. Today, we'll be going through our results for the quarter, then I'll be giving you an update on our estimated synergies capture up-to-date and finally we'll be reviewing once again the steps we have planned for the year and what we have delivered so far. To start letting - to Slide 3, where we'll be briefly discussing our view on the macro scenario for both countries. In Chile activity end at the third quarter of the year with what we've estimated should be 3% to 3.2% GDP growth rate. Marking a continue recovery in the economy as we have been expecting three plus year. Our current forecast is to end 2018 with a 3.8% GDP growth. This recovery led the Central Bank just to begin gradually remove monetary stimulus by placing an initial hike of 25 basis points in interest rates to 2.75% in October. This normalization process comes at amid times that activity recovery is not [indiscernible] risk following wages is lowering the employment growth reduce confidence in an under controlled core inflation are signs that in the other hand, the economy is not too close to the point of over thinking. And so, we currently expect 2019 we have 3.5% GDP growth and monetary policy normalization to gradually continue throughout the year with far more rate hikes and few reaching 3.75%. When you look at Colombia despite showing some moderation activity likely to stay elevated during the third quarter. We've retail sales in production on the rise. With the inflation stabilizing slight above the 3% target which diminishes the few traditional monetary easing. We believe that the Central Bank will likely maintain a slightly expansion our interest rates for the time being as it continuously evaluates at cheaper recovery and inflation outlook. Although the appreciation of the Colombian pesos add pressure to inflation expectations at the future. The recovering in the labor market on the other hand has accelerated during the third quarter and that faired with the improvement in business confidence has led us to improve our estimates for GDP expansion for 2018 from 2.5% to 2.7%. However it's important to know this, that consumer confidence has returned successfully to territory, probably hampered by the tax reform proposal that [indiscernible] Congress in the coming days. Going to the next slide, we show the reconciliation between our accounting and managerial results. We entered this third quarter with CLP 42.8 billion accounting net income and with CLP 143.5 billion for the nine months of 2018. Adjusted for nonrecurring events our managerial recovering net income reached CLP 50.7 billion in the quarter, a reduction from the CLP 64.9 billion reported in the second quarter. And October CLP 165.8 billion in the period which represents 109% increase when compared to last year which we'll review in more detail ahead. It's important to mention that a more detailed discussion on these managerial adjustments that we've made to present better a more comparable information is found on our MD&A report published on our Investor Relations website. Moving to Page 5, we can see the evolution of our managerial recovery return on tangible equity. Under this view, we ended the third quarter of 2018 with a 10.5% consolidated return in the 13.1% return from our Chilean operations on a standalone basis. There's a small decrease when compared to our second quarter return that we'll discuss in more detail throughout this presentation. Here I'd like to call your attention to the evolution of our year-to-date accumulated results. For our Chilean operations alone we have reached 14.6% return on the first nine months of the year. 1.75 times what we posted for the same period for last year. In a results of two things that we've been pointing out throughout this year. A stabilization of our cost of credit and the first results of our successful implementation of our retail business model. Now let's move onto review our results in more detail. On Page 6, we have the P&L for our Chilean operation. When we look at our performance in the quarter, revenues remain flat quarter-on-quarter with a better fee income in the wholesale segment despite of our lower inflation linked revenues for the bank. Net provisions for credit and counterparty risks increased slightly but still in a statutory level of 0.7% of total loans. The main driver for the decreasing results when compared to the previous quarter was higher operating expenses due to missed [ph] payments on our salesforce that takes places at the beginning of each semester and came a bit higher due to our good performance in retail banking. Looking at the first nine months, we see good operational trends throughout the P&L and the two linked points at high revenues at a wholesale, we start to stabilize in our retail business keeps it positive trends both in credit and commissions. And the second, a market decrease enough credit reflecting the convergence from more normalized levels at the strong but necessary adjustments made to the balance sheet in the first few years. And a continued views on control of our operating expenses drove on which we'll talk about little bit more later. Moving to Slide 7, we see the evolution of our credit portfolio here in Chile. Seamless to what we have seen in the past few quarters, we're still lagging behind the overall market, but building a positive trend on the margin. On retail, we continue to see a good performance on consumer credit especially in instalment loans, where we grow two times the rate of the Chilean market on a 12 months basis. And as a positive feedback for the strategy and credit performance we have been using in our retail businesses. On the wholesale side, although we see lagging competitors we begin to see growth rate at margin, at our efforts to improve diversification and review certain exposures come closer to an end. To give you little bit more insight on this effort please let's move on to the next slide. On Slide 8, we separate our commercial loans into two categories. Our core portfolio and our run-off portfolio. The second one is comprised of and represents the exposures we determine back in 2016 to being misaligned with the risk appetite we set both in terms of risk return and portfolio diversification. We have decreased this portfolio for about 8% since Legal Day One and therefore which amounts to CLP 1.5 trillion or about $2.3 billion. Both actively through sales or passively through a natural run-off meanwhile we've been growing our core commercial portfolio at an average 2.9% per year since Legal Day One, a pace that have been increasing intends to converge to the overall market growth. We selected the leverage that we have been commencing on previous call, was another of our balance sheet and risk management efforts we have been taking on this past couple of years to provide that for a more solid and sustainable pace of growth. Now moving onto Slide 9, we see some detailed on our performance on provisions for credit and counterparty risks. Here as I mentioned before, we continue to see what is a more normalized credit risk behavior. With the level of credit risk that is within 0.7% to 0.9% that I've mentioned on our previous conference calls and that I believe to be our medium to long expected range although some volatility on this line could still come given both the nature of our portfolio and the adoptions of changes in regulatory refinance. Going to Slide 10, when we see the trends on our mini credit, power indicators. We continue to see a comfortable provision for portfolio with a marginal improvement in the delinquency rates both in our commercial and our mortgage portfolios and a small increase in our consumer portfolio due to seasonal effects. If you take a look at NPL operation metrics, which better isolates the effect of portfolio growth we also presented an important improvement for another consecutive quarter and reaching our lowest levels since Legal Day One as detailed in our MD&A report. Moving to Slide 11, we will now discuss our results to bank in Colombia. Results in Colombia in the year continue to be neutral to our consolidated net income as we expected and have been mentioning in our previous calls. In Colombia, we're still turning portfolio mix to reduce concentration and improved profitability while this low economic activity presents further challenges. Our reflection is low dynamic on client revenues. This is compensated by strong results on the banking book as lower interest rates reverse net [technical difficultly] of the losses we reported during the past monetary cycle as well as by lower credit costs. I'd like to remind you that in Colombia just as in Chile we've taken important effort to reflect through the P&L to adjust credit risk exposures. Lastly, we have been incurring lower hedging costs that are also product of low interest rates narrowing the gap with the Chilean policy rate. Based on our current policy rate scenario we expect this trend to continue into next year. Moving to Slide 12, let's briefly discuss our capital adequacy ratios. At the end of the quarter, our regulatory capital reached 14.4% above both 120% of our regulatory minimum and the average of our main peers. This ratio is basically flat when compared to the second quarter as the effect of the increase in the risk weighted assets due to growth in our loan book was compensated by better core capital generation. Looking at Basel III equivalence in order to keep you up-to-date with our views on the subject, our main assumptions for the impacts of the coming regulation have not changed from what we've been communicating to you over the past quarters. We are divesting intangible assets and net deferred tax assets from our Tier 1 ratio and work with the assumption that the incorporation of operational and market risk requirements are offset by changes in credit risk ratings. Under this scenario, we estimated a fully loaded 7.4% Basel III Tier 1 capital ratio, which leads to a maximum usage of Tier 2 instruments of 3.7%, and estimated 11.1% fully loaded capital ratio. We will continue to keep you posted on future developments on this topic and how we assess their impacts in our capital plan. Now, moving on with the presentation, I'd like to give you an update on estimated synergies. What we've captured so far in our P&L through our expenses. Starting with Slide 14, we compared the evolution of our non-financial expenses with that of the Chilean financial system. Here as reviewed in previous calls. We first adjust our baseline by explaining the expenses reported from Colombia and synergies from this merger come from consolidated operations in Chile. Then we exclude provision expenses related to credit risk and non-recurring expenses in line with the reclassifications we do on our MD&A report. Lastly, we've removed depreciation amortization as these are more related to long-term income generation. If we apply the same methodology to the financial system as a whole with data provided by our regulatory in our new peers. We can compare the evolution of our cost base before and after the margin. As we see in the chart below we have been growing expense at an average rate of almost half of what the overall market since the merger compared to the pro forma of both banks in 2015 that used to grow is likely above the market. Now moving to Slide 15, let's assume that we and the market we maintain this current annual growth for the remainder of 2018. Under this scenario, if we compare it with our total expense growth which we see on top of charts to what they would grow in average, the market rate we can measure a gap and [indiscernible] synergies captured compared with how the cost for both banks should have been growing if the merger haven't occurred which is shown at the bottom of the chart. On this basis, we calculate a total of CLP 35 billion of synergies for the first three years since the merger or above $50 million. As we finalize this integration throughout the upcoming months and continue to raise the [indiscernible] cost until controlling our culture, we expect to continue to see synergies generation further ahead. Now moving to the last part of our agenda before our Q&A. let's go through once again the steps we set out for the year. So here on Slide 17, we list the main objectives we set for 2018 and our fourth quarter last year conference call at the beginning of the year. In Chile, we continue to advance our second integration and digital agenda which has been consistently showing good results on our retail business as well keeping continuous focus on cost control and sustainable results generation. We have satisfactory see a consistently expansion of our retail business and have likely reached an inflection in our wholesale portfolio. As risk and consideration adjustments we set out to do come closer to fulfilment. In Colombia, we focus on implementing business strategy for wholesale and retail as well as advancing our corporate culture agenda. And we expect this quarter represent another step of heading the direction of consistent and sustainable results we've set out forth. Finishing the presentation, I'd like now to open for any questions that you might have.

[Operator:]

[Operator Instructions] thank you. We'll now take our first question please go ahead. Your line is now open.

[Jason Mollin:]

This is Jason Mollin from Scotiabank. Can you hear me?

[Gabriel Moura:]

Hi Jason, yes I can hear you.

[Jason Mollin:]

Okay, great. So my first question is on the evolution of the profitability the Chilean subsidiary. You talked about next steps in your presentation that you have been mentioning and you showed the growth in the consumer business and the profitability reached in the last several quarters in the Chilean subsidiary. My question is, it looks the like wholesale business there is still lagging as you show in terms of loan growth perhaps profitability if you are able to normalize that business where do you see the return on equity, what would that take and where do you see the return on equity in the upcoming year or two? And then my second question is similar in terms of the Colombian operations if you can talk about what needs to done. You talked about righting the strategy or correct or implementing the strategy for the consumer and wholesale businesses there where we're beyond breakeven now in Colombia what will it take to get to the long-term ROE targets that you've talked about I would say in the 8% to 10% ROE range in Colombia. Thank you.

[Gabriel Moura:]

Sure, thank you for your question. Jason. First on the evolution of the profitability here in Chile. When we did the merger we mentioned that we saw potential for the operation in Chile to have return between 16% and 18% return on tangible equity. If you take a look at the second quarter 2018 we've reached the target of 17%, 16.9% to be more precise during the second quarter. I think this return is consistent to what we have seen on the Chilean operations before the merger and especially after the all the changes that we did in the portfolio and the constructing the capabilities to growth. I think that we have the potential to achieve that in the future, nevertheless I think we just still need a little bit more time. I think the returns that we saw in the first quarter and the third quarter of 2018 of between 13% and 14% they are more alike to what is the potential of the Chilean bank on the short-term. So we're still building capability I think that all the investments that we did in technology on digital, on people they have built the operational leverage for the bank to grow its portfolio with a small impact on our cost base, that's why it's important for the bank to converge to the targets that we have in return on tangible equity to grow with wholesale portfolio. In terms of the retail, I think that we have an operation that is already aligned with the expectations of growth of course, we have not achieved the mix that we think it's appropriate for this business, for that to happen the retail bank needs to go on those rates for a few years in order to create a better balance between retail and wholesale. Nevertheless in order to receive the operational leverage deemed, but we've been building on the bank it's important for us to converge on the wholesale side of the bank. After the adjustments that we showed you on the portfolio I think that we're ready to start growing this portfolio this is I think that the ambition that we have for the next couple of years is to grow this portfolio more aligned with the market and then having the benefit of gains of scale in Chile. In Colombia as we mentioned before, I think that we are at least one year behind Chile in terms of the consolidation of the business model. We're still adjusting portfolio in Colombia either through the wholesale portfolio and also in the payable loan portfolio that we have in Colombia. We're beginning to see a recovery on the retail bank, we have already implemented something of the strategies that we have also start in Chile, in Colombia but in terms of its natural review I think that we need a year or so to start to see better results. For Colombia to achieve a return on tangible equity of around 10%, I think it will - I think that will rejuvenate couple years down the road in order to see those levels of return. The macro scenario definitely helps on that, as we see the liquid free ratios stable and decreasing in Colombia in the near future. So that will help us to stabilize the cost of credit in the level below what we've seen in the last couple of years. So Colombia a little bit behind, few years on the row to see return on tangible equity around 10%.

[Jason Mollin:]

That's great, that's very helpful. Thank you.

[Unidentified Analyst:]

This is George [ph] Friedman [ph] can you hear me?

[Gabriel Moura:]

Hi George [ph] yes can hear you.

[Unidentified Analyst:]

Okay, thank you very much for the opportunity to ask questions. And I have two questions. The first one, one of your competitors provided some guidance about what they expect to have in terms of impacts from the group basis requirement for provisions next year. So just wondering if you would have any kind of indications also for us. And my second question, we noted your evaluation about the potential impacts of the new regulatory capital in their [indiscernible] and you're fully loaded with the - is likely below 8%. So just wondering if you perceive this number as a number that potentially would limit your expected growth ahead and what would the ideal number for core capital that you would like to target in the future. Thank you very much.

[Gabriel Moura:]

Thank you for your question. Regarding group provisions I think that's an important regulatory change here in Chile that will impact all the system. We don't have specific guidance yet for the market but based on what you have seen the industry we've been hearing regulators and also the major banks here in Chile saying that the total impact for the industry would be something $300 million and $400 million. We have roughly 12% of this market share. So I think it will be appropriate to expect an impact for us between $36 million and $48 million in provision and more provisions for credit next year based on this regulatory change. So this is probably the range that we're going to see the impact. As for capital, the new banking law it seems the process of being approved here in Chile and within the max 18 months probably the CMS [ph] which is the new regulatory body for banking regulations in Chile. We issue more detailed on the adoption of BASEL III requirements here in the local market. As I mentioned in the call, doing the adjustments we will end something around 7.4% in Core Tier 1. I think the meaning regulatory at the end of 2022, 2024 will be something around 8% for us and I think it will be appropriate for us to have a buffer of 20%. So probably you're talking about having a target of capitalization of something between 9% and 10%. For us to achieve that the plan that we have is to converge the profitability of the bank and retain and important part of the core capital generation that we have, that's why in terms of the guidance we have for the market for dividend payout. We estimate something between 30% and 40% dividend payout probably 40% on the short-term and the medium long-term until the convergence of capital to having something around 30% in different payout. But according to the plan that we have it should be sufficient to our Q8 [ph] something around 9.5% in Set 1 [ph] by the end of 2024 which is for the adoption process that banks will go through in Chile.

[Unidentified Analyst:]

That's very clear. Thank you for the comprehensive question. And just one follow-up on the first point that you mentioned about the additional provision requirement. We also know that you constituted the significant provisions for the Alto Maipo project that you restructured some of these exposure I think you sold a small part of it couple months. Could you just update us about where you are in terms of provisions for that project Alto Maipo project, did you reverse anything already or are you still holding up where you know you see the construction efforts evolving? Thank you very much.

[Gabriel Moura:]

Sure regarding, we don't actually discuss in technical provision levels, but to give you some background information about the provisions that we have, we didn't reverse any provision specifically for the project that you mentioned, as the credit restructured. Any reversal of provisions or either further provisions will be made as we see construction coming along. So in 2019 we do not foresee any impact from individual clients. As we go through 2019 as construction go through the project probably you can have better news but then again we do see a provisions especially on the [indiscernible] portfolio as a portfolio as a whole in specific case-by-case names. I don't think they have a major impact on our provision strategy.

[Unidentified Analyst:]

That's perfect. Very clear. Thank you very much.

[Operator:]

Thank you. [Operator Instructions] we'll now take our next question. Please go ahead your line is now open.

[Alonso Aramburú:]

Good morning, Alonso Aramburú from BTG. Gabriel I wanted to ask you about margins, we saw declining margins both in Chile and in Colombia sequentially and given the change in mix we're seeing in Chile. I would have expected at least to be a flat given the interest rate hikes also in Chile. I mean how do you see margins evolved over the next few quarters?

[Gabriel Moura:]

Hi, Alonso thank you for your question. We did have some volatility in margins between the last two quarters. More it was related to specific assets that we have within our inflation. Nevertheless I think that probably for next year we're going to see stable margins in Chile. We have two different effect in different [indiscernible] directions is that we have higher inflation and that will help us in terms of margins especially because of our position in inflation index assets. On the other hand, you have higher interest rates that compile rebalance the portfolio with some marginal negative effect for us. Having said that, I think that both effects tend to neutral and probably what we'll see throughout in terms of margins is solely based on mix. As I said we're growing more on the consumer side probably we're going to see changes in margins through that, but I do not expect expanding margins that are not driven only by mix. In Colombia I think it's quite the same we have stabilized our banking booking in, I think we're interest rate neutral and at the moment especially because I think that we're at the end of the cycle of monetary policy in Colombia. I think that the biggest impact then again for us in margins ability to re-price the wholesale portfolio at a more competitive levels. I think there are priced opportunities for us and also the same impact what we saw in Chile, in Colombia as we focus more into the retail market and change the mix throughout the bank [indiscernible].

[Alonso Aramburú:]

Great, thank you. Got it.

[Operator:]

Thank you. There are no further questions at this time sir, please continue.

[Gabriel Moura:]

Fantastic. Thank you so much for participating in our third quarter conference call. We'll see you next month. Take care.

[Operator:]

Thank you ladies and gentlemen that does conclude our conference for today. Thank you all for participating. You may now disconnect.