Banco de Chile (NYSE:BCH) Q3 2023 Earnings Call Transcript November 3, 2023
Operator: Good afternoon, everyone, and welcome to Banco de Chile's Third Quarter 2023 Results Conference Call. If you need a copy of the management's financial review, it is available on the company's website. With us today, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer; Mr. Pablo Mejia, Head of Investor Relations; and Daniel Galarce, Head of Financial Control and Capital. Before we begin, I would like to remind you that this call is being recorded and that 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 note in the company's press release regarding forward-looking statements. I will now turn the call over to Mr. Rodrigo Aravena. Please go ahead, sir.
Rodrigo Aravena: Good afternoon, everyone. Thank you very much for joining this conference call. We are pleased to present the performance of our bank during the third quarter. A Bidder, once again, Banco de Chile demonstrated its unquestionable leadership. Some achievements include a solid net income of CLP 260 billion in the quarter, equivalent to an ROE of 21%, remaining the most profitable bank among peers. We also led the industry regarding capital, asset quality and margins. And achieved significant accomplishments in other nonfinancial areas. . I want to remind you that further details are shown in the management discussion report released this week and available on the banks were paid. Before moving to our presentation, we are very proud to mention that recently, Banco de Chile completed 130 years of history offering comprehensive solutions for our customers and promoting the development of the country and the people.
An executive in a suit walking into a modern headquarters building of a regional bank.
I'd like to begin with an overview of the competitive environment and our forecast for this in the following year. Please go to Slide #3. Chile is a small and open economy highly integrated into the rest of the world, which is why it's critical to monitor the evolution of global drivers that could potentially affect our economy. As the upper left chart shows, we've seen lower dynamism in the global economy, which has been reflected in the downward adjustment in global TV forecast. As the IMF mentioned it is we report, this negative trend is attributable to the weaker-than-expected growth in China which represents nearly 40% of Chilean export. In addition to this, the chart on the upper right display, there's been further slowdown in most countries during this year.
These trends have affected Teletón economic activity, which has declined annually since the second half of the last year, as seen in the chart on the bottom left. This negative trend is explained by several factors including the partial normalization of the ex liquidity seen last year, the lag effect of the 1,075 basis point interest rate hikes between 2021 and in 2022. And the subdued growth in sort trade partners, as I already mentioned. This recession, however, has contributed to reducing the macroeconomic imbalances that still had during the pandemic. One of them is improvement in the current account deficit from 9% in 2022. To 4.2% last 12 months in the second quarter this year due to the trade balance surplus compared to the last year.
The adjustment in the local spending has also influenced on the lower inflation and interest rates as we will see in the next slide, number four. The annual inflation fell to 5.1% in September from the peak of 14.1% in 2022, posting the lowest figure in over 2 years. The core CPI, which is the measure that excludes food and energy prices, went down to 5.2%, also the lowest since mid-2021. In the same line, the unemployment rate has slightly been increasing as seen in the chart on the other right, reflecting the existence of spare capacity and the economy. In this environment, the Central Bank reduced the interest rate by 225 basis points in the meetings held in July, September and October and have signaled further cuts in the near term. It's important to note that in October, the Central Bank dropped the interest rate by 50 basis points when the market was expecting a 75 basis point cut.
In addition, the Central Bank put an end on the FX reserve accumulation program and the gradual reduction of its forward position. This led to a strong drop in the value of the CLP against the dollar. Nevertheless, the trend peso continues weak, driven by lower local rates and a stronger global dollar as seen in the chart on the bottom right. I'd like to move to our baseline scenario for this and the next year. Please go to the next slide. Despite the expected positive growth in the fourth quarter, the 2023 will likely fall by nearly 0.2%. For 2024, we paid a recovery towards 1.7%, driven by the positive effect of the lower inflation and a more expansionary monetary policy. However, the interrration in global conditions will partially offset the impact of these factors.
On prices, the CPI should continue falling from 12.8% last year to 4.2% in 2023 to 3% in 2024. Based on this trend, we see room for further rate cuts. The chart on the right shows our quarterly rate in CV expectation for the following period. The evolution of these masodrivers has impacted bank bottom line, as we will see in the next slide. The banking industry posted a net income of CLP 949 million, 29% lower than the same period last year, reducing ROE to 12.7% from 20.6% in the third quarter 2022. This is attributable to a combination of factors, such as a significant decrease in inflation, leading to a 37.8% reduction in net interest income for the industry. Additionally, a 7.2% increase in the cost of risk resulted from the normalization of asset quality, as shown on the chart on the bottom left and a 5.1% rise in operating expenses slightly surpassing the inflation rate.
The ongoing impact of slides economic environment is clearly reflected in the chart on the right. Total loan growth decelerated to 2.8% in the current quarter, mainly due to subdued demand for commercial loans and to a lesser degree, to consumer loans Mortgage loans continued leading loan expansion. Despite these factors, Banco de Chile has been able to post solid figures surpassing the rest of the industry. Now Pablo Mejia will present the main achievements of our bank during the period.
Pablo Mejia: Thank you, Rodrigo. I would like to begin with advances in our main strategic focus. Please go to Slide #8. Our impressive track record is the result of our consistent long-term strategy that places customers, efficiency and sustainability at the center of everything we do. We've put these pillars into action through 6 key goals, and we've surpassed all of our midterm targets, as you can see on the right of this slide. In the upcoming sections, we'll take a closer look at how we've been thriving in digital transformation, productivity and sustainability and how this has translated into posting remarkable financial results. Let me start with digital banking. Please move to Slide #9. In terms of digital banking, our initiatives are focused on offering customers an innovative value proposition simple and tailored to their needs and provide the best experience.
To achieve this, we have developed a comprehensive digital ecosystem that includes virtual accounts for diverse segments such as individuals over 18 years old, SMEs and teenagers. This initiative has resulted in over 1.3 million digital accounts and registers solid growth quarter-on-quarter as detailed in this slide. One noteworthy advance we have recently undertaken its integration of contactless mobile payment functionality through Apple Pay wallet. On the productivity and efficiency front, our efforts are centered on building an agile and modern bank through innovative, effective, automated and secure digital front-to-back processes. This quarter, we have made significant progress in this area, including the enhancement of CapEx budgeting planning process to ensure a precise alignment of organizational resources with the strategic objectives while optimizing the returns from all our investment projects.
Concurrently, we also implemented new tools to reduce customer service delivery times. And to further maximize returns, we implemented a new deposit pricing strategy that resulted in improved margins. In summary, we are continuously seeking new ways to improve revenues and optimize costs. we are confident in our ability to maintain our leadership position within the industry. Finally, as part of our commitment to the development of the country and its people, we continue strengthening our ESG initiatives to create long-term value for our stakeholders. We are proud that our efforts have been recognized by different institutions, including our first place ranking in the National Customer Satisfaction Award. Additionally, we've been honored as a leading bank in attracting and retaining talent according to mevical talent.
Among many actions towards sustainability that we have implemented during the quarter, we can highlight that we launched new national entrepreneurship contests and continued volunteering initiatives aimed at reforestation, education and financial literacy. Furthermore, we're glad to announce our sustainability and procurement teams are working together in a project that will promote lower carbon emissions and energy savings and will mark an important step in our journey to contribute to society and the environment. All of these actions have taken place in a setting where we remain as the strongest bank in ESG according to sustained analytics. Please turn to Slide 11 to begin our discussion on our results. We achieved another quarter of strong earnings with a notable ROE of 21%.
Our net income of CLP 260 billion was significantly above all of our peers, as shown on the chart in the middle of this slide. These accomplishments are a testament to our dedicated team and a superior long-term strategy that emphasizes sustainable growth with a balanced consideration of risk and return as exemplified by our leading positions in capital adequacy and delinquencies. This has firmly established Banco de Chile as the most profitable and sustainable bank in Chile. Please turn to Slide 12. Despite the weak economic and business environment, our core customer income has continued to steadily recover by growing 8% year-on-year. support in operating revenues, as you can see on the chart on the bottom left. This growth in core revenues has partially offset the lower revenues from noncustomer income that fell 50% year-on-year, primarily due to the normalization of several market factors especially the sharp decrease in inflation.
Customer interest income from loans, demand deposits and time deposits rose by 13.4% year-on-year. This was due to an improvement in loan mix and further enhanced loans with lower lending spreads from the pandemic have been amortized. In fact, loan spread originations have been rising across the majority of product families. These results translated into a robust net interest margin of 4.2% and despite the huge drop in inflation during the period. Another relevant component of customer income is net fees, which decreased by 3.9% year-on-year. However, it's important to consider that this was attributable to 2 temporary factors: First, the reclassification of income from collection services for overdue loans, which is currently recognized in other income.
And -- in addition, the impact of foreign exchange rates on our loyalty program provisions. Nevertheless, the latter effect is hedged through trading positions that are booked as net financial income. Excluding these factors, core fees continued to grow well at 6.4% year-on-year. This was driven by retail fees, including insurance premiums, which grew 20% year-on-year. checking accounts and overdrafts, up 13% in the same period, and site accounts and ATM fees rising 8% year-on-year. In the third quarter, noncustomer income decreased 50% year-on-year, as I mentioned earlier. This was primarily due to the strong reduction in inflation. Specifically, the U.S. variation dropped from 3.5% in the third quarter of 2022 to only 0.3% in the third quarter of 2023.
Or from 14% to 1.2% if we annualize these numbers. As a reminder, a change of 100 basis points in inflation is roughly CLP 80 billion in operating income. In fact, when considering our structural U.S. GAAP and directional positions taken by treasury on U.S.-denominated securities, the change in inflation resulted in lower income by approximately CLP 250 billion year-on-year. This amount was partially offset by other than inflation income from both ALM and their investment in trading portfolios that surged by proximately CLP 110 billion on an annual basis. as a consequence of both the positive impact of higher than normal nominal short-term interest rates on short-term assets and the comparison base effect related to the sale of AFS securities in the third quarter that accumulated fair value losses by CLP 58 billion.
Please look at the chart on the right as they demonstrate how our performance is compared to our peers. This quarter, our NIM reached 4.2%, significantly higher than our closest competitors. We also outpaced our peers in fees as well as operating margin. This exceptional performance is due to our superior business strategy together with prudent risk management practices, all underpinned by robust corporate governance standards. This prudent approach has allowed us to benefit from the changes in market factors better than our peers. On the grounds of structural positions that are a consequence of a consistent business model focused on commercial banking. Please turn to Slide 13. We offer financial solutions to clients across all segments in the retail and commercial banking.
As illustrated in the chart, 64% of our loans are focused on the retail segment, while the remaining 36% serve the wholesale sector. In wholesale, we have a diverse portfolio, as you can see in the chart on the bottom left. This diversity in our total loan book allows us to continue growing even when there are varying economic cycles or challenges affecting different segments, aiming to mitigate, reduce demand or credit risk. During the pandemic, our growth was centered on low-risk and low-margin products. This resulted in a significant transformation in the structure of both our loan portfolio and our balance sheet However, this has begun to change. And as I mentioned, our spreads are already improving. We anticipate that in the coming periods, we will gradually bring the loan portfolio back to the mix that we had prior to the pandemic.
As you can see in the charts to the right, total loans are growing 1.9% year-on-year. Loans to individuals is driving growth and consumer loans are rising at followed by mortgage loans, which are expanding at 7.6%. In the case of consumer loans, growth was primarily fueled by credit cards, followed by installment loans. This has been driven by greater use of electronic payments and legacy of the pandemic and on an improved segmentation of customers that has been supported by business intelligence tools while enabling us to maintain credit risk at low levels. In turn, mortgage loans expanded by 7.6% during the 12-month period. Despite this figure is still below pre-pandemic levels, loan growth has been driven by both inflation and proactive commercial campaigns focused on specific customer segments that has permitted us to gradually recover market share in the strategic product that allows us to achieve long-term relationships with clients.
In this regard, it's worth mentioning that origination of residential mortgage loans has significantly increased from last year as depicted by a 73% annual growth of September 2023 when compared to the same period last year, which demonstrates the effectiveness of our campaigns and competitive funding cost. Commercial loans, on the other hand, decreased 3% year-on-year. High interest rates, together with a weak economy and high uncertainty has taken a toll on this segment. In the case of SMEs, higher debt levels from the quick penetration of these customers in the pandemic has further reduced the possibility of recording stronger expansion levels. Currently, originations are only offsetting amortization of these loans. But on a positive note, loan origination is contributing with higher lending spreads than the stock that is being amortized.
Thus, we are seeing a gradual normalization in spreads that should continue in the coming quarters. Also, we're confident that as long as some source of uncertainties begin to fade. Total commercial loans will continue to return to a positive growth level. Please turn to Slide 14 to discuss our strong balance sheet structure. Our asset and liability structure exhibits robust diversification as illustrated in the upper left chart. Our core focus remains on commercial banking, where loans constitute the primary revenue driver, representing 67% of our total assets as of September 2023. It's also noteworthy that before the pandemic, total loans typically accounted for a range closer to 80% of our total assets. The most likely scenario is that we should return to these figures once the FCIC funding is totally paid off by mid-2024.
As our extra liquidity will quickly decrease from the extremely high levels we currently have, as shown on the charts to the right. Nevertheless, we will continue to have much higher liquidity ratios than the established limits. Additionally, we have managed our balance sheet positions appropriately for the economic cycle. This has provided stability in our results with the lower sensitivity to changes in market interest rates. We've also managed our U.S. position appropriately to optimize margins, as you can see in the chart on the bottom right. Please turn to Slide 15. Banco de Chile is by far the most capitalized bank amongst peers. We have a total capital ratio of 17.7%, well above all of our peers. And fully loaded Basel III requirement.
CET1 stands at an impressive 13.5%. That allows us to easily comply with the requirements of this new regulation. The phase-in period is shown on the table to the right. Recently, the regulator defined a countercyclical buffer of 0.5% and is in the process of determining the need to establish Pillar 2 capital charges, if any, depending on each bank's capital position and risk management framework. Our long-term strategy and prudent approach to managing market risk and credit risk has played a pivotal role in progressing through this economic cycle, setting us apart from other banks in both revenue generation and the quality of our balance sheet in terms of market and credit risk. Please turn to Slide 16. Expected credit losses remained low by posting only CLP 60 billion this quarter, representing a 43% reduction compared to the same period last year.
The decline is mainly due to the CLP 35 billion of additional provisions established in the third quarter of 2022. Compared to this quarter where we did not set any additional provisions. This, coupled with a reduction of credit risk expenses coming from provisioning models given better-than-expected credit behavior and improved financial condition of wholesale customers participating in industries that faced uncertainty last year. Specifically, Commercial loans posted lower provisions due to slowed loan growth and the release of allowances related to FOGAPE loans, partially offset by a gradual return to more normal levels of cost of risk in the mortgage and consumer loans. The latter is in line with a rise to more normal levels of delinquencies in the loan portfolio, as shown in the chart on the bottom left.
We have full confidence that our top-tier coverage ratio in combination with the highest level of additional provisions that remains at CLP 700 billion offers sufficient protection to deal with a longer-than-expected economic downturn. As the level of these additional provisions proves unnecessary, our intention is to subsequently reverse a portion of them at some point in the future. Furthermore, we are proud to have an exceptionally healthy loan portfolio as depicted in the lower left chart showcasing a low nonperforming loan rate of 1.35%, outperforming our peers. This accomplishment is in line with our long-term expectations and reflects our diligent risk management practices and commitment to a sustainable growth strategy. Through the risk assessment and mitigation.
We aim to uphold the strength and resilience of our loan portfolio, resulting in a consistent performance and the continued trust of our stakeholders. These results are shown on the lower right chart on the slide, demonstrating our leadership and widening gap with the competitors in operating margin net risk. Which reached an impressive 5.2% by the end of the third quarter of 2023. Please turn to Slide #17. Expenses totaled CLP 270 billion in the third quarter of 2023, increasing 4.3% from the previous year. This rise primarily stems from disbursements intended to enhance our digital capabilities while fortifying our IT infrastructure. It's worth noting that a significant part of our expenses is linked to inflation in the U.S. dollar. Further contributing to this annual increase.
Furthermore, the implementation of VAT on services this year also contributed to the increase in the cost base. It's also noteworthy that through our diverse initiatives, we generate efficiency gains that helped to fund the necessary investments in digitalization. IT infrastructure and cybersecurity that are crucial to address the transformative changes in the banking industry. In terms of efficiency ratio, we reached 39.6% this quarter, well below our peers, as shown in the chart on the bottom. Our strong cost control is thanks to our robust productivity plan and continuous focus on searching for new savings and synergy opportunities. We are confident that the progress we have made will allow us to post long-term efficiency levels below 42%.
When inflation stabilizes. Please turn to Slide 18. Before we move on to the question-and-answer session, I'd like to share a summary of other key takeaways and provide some guidance. After a period of strong growth and record levels of inflation in 2022, the Chilean economy is gradually adjusting to more normal levels of activity. We expect that GDP will return to positive year-on-year growth rates in the fourth quarter of this year, and we also see a slight recovery in 2024. We Accordingly, we are estimating a GDP contraction of about 0.2% for 2023. And a recovery of around 1.7% for next year. However, we recognize the existence of some downward risks in these forecasts. In this environment, we are confident that our bank will distinguish itself from our peers.
Our prudent and consistent strategy, together with our strong management team has positioned us as a leader in the industry in profitability capital, risk and efficiency. In terms of the main indicators for 2023, we expect the cost of risk of around 0.9%. With an efficiency ratio of around 38% and ROE of 23%. Regarding capital levels, we're the best capitalized bank amongst peers with a CET1 of 13.5% as of September 2023. We towards a long term. We remain strongly convinced of our capabilities to sustain levels of ROE of around 18%. Thank you for listening. And if you have any questions, we would be happy to answer them.
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