Itaú CorpBanca ADR's (ITCB) CEO Milton Maluhy on Q4 2017 Results - Earnings Call Transcript

Start Time: 09:00 January 1, 0000 9:39 AM ET

Itaú Corpbanca (ADR) (NYSE:ITCB)

Q4 2017 Earnings Conference Call

March 01, 2018 09:00 AM ET

Executives

Claudia Labbé - Head of Investor Relations

Milton Maluhy - Chief Executive Officer

Gabriel Moura - Chief Financial Officer

Analysts

Sebastian Gallego - CrediCorp Capital

Nicolas Riva - Citi

Operator

Thank you for standing by, ladies and gentlemen. And welcome to the Itaú CorpBanca Conference Call on the Fourth 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 question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today. We’ll 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 fourth 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 intangibles arising from business combination and for the tax effects of the hedge of our investment in Colombia.

At the same time, we adjust the managerial income statement with additional reclassifications of the P&L line in order to provide a better clarity of our performance. Please refer to Pages 9 and 10 of our report for further details.

Now, Mr. Maluhy will continue with the presentation.

Milton Maluhy

Thank you, Claudia. Good morning or good afternoon to everyone. Thank you for joining us for this fourth quarter conference call.

First of all, I would like to go through the agenda on the Slide 2. We'll give an update first of all on our business strategy. Then I will be going through our results for the full year and fourth quarter 2017, and finally, talking about the next steps of the bank.

To start, let's move to Slide 3, where I’ll be briefly discussing our merging process timeline. In 2016, we were concentrated in the integration of operations, brand risk management framework and other policies, which we aligned with the practices and policies of Itaú Unibanco. As a result, we strengthened our balance sheet and liquidity levels with higher extraordinary expenses were associated with this merger period versus our goals in building senior middle management was a key factor on that.

Although in 2017, the main challenge was to comply with the terms of the merger by minimizing the effects of the quality of service. Our focus has always been on customers because at the end of the day they are the center of our work and constitute a fundamental pillar for our growth. In this position here, we completed retail migration and client segmentations in Chile.

We know that we still have a lot of room to improve. This is why the quality of service is amongst our top priorities. In this direction, we’ve created new operations structure whose objective is to focus with greater emphasis on the technology area, and so we enhance digital banking adapting to the changes and demand from our customers.

Moving to the Slide 4. According to our integration process, in the first quarter of 2016, we started a branch network migration with a pilot test of two offices. As expected, with 58 branches we're migrated by the end of 2017. Additionally as part of our enhanced branch network strategy meant to create additional savings. 24 branches were overhauled and 23 branches were closed since legal big one, which was on April 1st of 2016, which is equivalent to 10.3 of our branch network.

As a result, our brand composition has changed. By the end of the first quarter of 2017, we operated in Chile with 145 branches offices under the branch with one Itaú personal bank and also 56 branches under the Banco Condell brand, which is our consumer finance division.

Now moving on to next subject, on the Slide 5, I would like to comment a bit on our digital banking transformation. As you all know, our digital banking strategy is one of our pillars to boost not only our retail banking, but also to further improving efficiency. In our journey for being digital, we started to progress with our accomplished prospects.

Our digital strategy is not only focused on improvements in our mobile offer, but mainly focused on transforming our process to become a digital bank from back office to the front offices, it's an excellent strategy. To accomplish that, we have now a base over 20 multi-disciplinary teams, which are fully dedicated in looking into opportunities to digitalize product and process with a disciplined and focused approach. One example of that is the implementation of preapproved credit offers in a mobile and internet spectrum and increasing credit limits.

Next slide on Page 6, on the chart from the bottom, we can see that over the last 12 months sales of retail credit installment loans through digital channels have picked up from 9% in the second quarter of 2016 to an 81% by the end of January 2018. We know that was to have a lot of room to improve, the uses of digital channel, especially on the mobile front. We are optimistic because trend has positively evolved in a short period of time. You can see that we have client adoptions over 50% more clients throughout 2017.

Going to Slide 7, talking about our retail portfolio in Chile, we have experienced some positive evolution with increase of 14.1 and 8.21 consumer loans and mortgage loans on a 12 months basis, respectively, versus a 6 and 9.9 for the average of banking industry. This credit reflects increase in our repay of market share, particularly in consumer loans in line with our strategy that fix to balance our loan portfolio as well as strengthen our retail operations.

If you have a look to the chart at the top line, top of this slide, our installment loans market share jumped at 70 basis points from 7% in the first quarter of 2017 to 7.7% by the end of 2017, driven by a 15.8% growth in our 12 months period versus a 6.8% of the average of the banking interest. You can see that we have that fixed market share throughout this period.

Going to Slide 8, as part of our integration process, in the second quarter of 2017, we’ve introduced the Itaú Brand in the Colombian retail market, completing the rebranding of the Helm’s branch network in May of 2017.

Additionally, in the first quarter of 2017, we started a branch network migration with a pilot test. The process continued with 77% of the branches migrated by the first quarter of 2017. The branch migration was completed in January 2018 earlier than expected. In fact, as we speak, we’ve migrated a 100% of the branches in Colombia through Itaú Brand and also we’ve migrated all the retail client base into Itaú new core system under Itaú Brand. We still have left two or three migrations of corporate clients, which are more focused on the cash management. So we’ve been doing quite well and we do believe in the next one or two months we're going to be completing this whole process.

Now, we can move to the Slide 9, just to tell you that we’re going to go a little bit on the results and the main drivers, not only the first quarter of 2017, but also 2017.

On the Slide 10, talking about the macroeconomic backdrop, when we look back at 2017, we see that economic activity was slower than what we did initially expected, especially in Chile. Why Itaú accelerated towards the end of the year, 2017 will probably show the lowest growth since 2009. This translated into the lowest loan growth rates in the country for over seven years. Investments showed a fourth consecutive year of construction and commercial loans read only 1.2% year-over-year. Due to our current portfolio mix, this has noticed more affects in our revenue growth as we’ll discuss in more details further. On the other hand, inflation and interest rate went down, especially in Colombia, where the 275 basis point reductions in the year positively affect our banking book as we also discuss later on.

For 2018, in Chile, our stronger global growth outlook, high corporate price, recovering private sentiment and expansionary monitory policy should also boos recovering activity as we are expecting a pickup in EBITDA growth to 3.3. For Colombia, we’re more calculus here, because a recover at the labor market continues to loosen, and private sentiment is nearing recent lows. We are expecting growth of around 2.5% to come amid and improve it in real ways and expansionary monetary policies and more favorable external condition, especially oil prices. The main risk to this scenario remains uncertainty around political cycle, which could limit a recover of investment.

Moving to Slide 11, we see the evolution of our return on tangible equity where we can see the magnitude of the degreases in performance is on quarters that concentrated important risk adjustments in our portfolio, so just the first and first quarter of 2016 and the last two quarters of 2017, with which we ended our cycle of major adjustment in our credit risk exposures on our wholesale portfolio. We ended 2017 with 3.4 consolidated recurring return on tangible equity and 5.8 return on our Chilean operations on a standalone basis. We expect these returns to gradually convert to more competitive levels throughout the next few years.

Now, with that, we can move to Slide 12, and we’re going to talk a little bit more about our interest rate margins. In this chart, when we look at our net interest margin, looking at Chile first, we see a stable 2.8% rate when compared to 2016, still lower than 3.1% pro forma rate for 2015. This is driven by two factors; a lower inflation rate, which we partially compensate by adjusting our exposure in the banking book, and higher ex-inflation margins, which reflect the improvement in marginal funding costs for the merger.

Further improvements in our NIM should now come from changing our loan mix towards a more balanced distribution between wholesale and retail. In Colombia, we saw a very important recovery in our net interest margin as the constant currency interest rates positively affected our banking book, as previously mentioned in our previous calls costs. We expect this trend to continue further this year as the monitory leading cycle continue.

Now we can move to the Slide 13, and we will discuss the loan growth and crediting quality. Looking at the portfolio growth, 2017 was another challenging year both in Chile and Colombia as lower economic environment and a more conservative approach to credit risk resulted in a compression of our commercial loans in both countries.

On top of that we have reassessed our exposure to payroll loans in Colombia based on risk adjustment return perspective. On the other hand, as I previously mentioned, our consumer loan business hold a satisfactory trend in Chile throughout 2017, expanding 14.1% in the year.

Talking about 2018, we expect our loan book in Chile to grow between 6% and 8% inline with the overall market. And in Colombia we are expecting about a 10% system growth rate and we will likely grow lower than that, as we further adequate our portfolio to improve our profitability going forward.

Looking at the provisions here, we’ve made important charges to particular exposure in our wholesale portfolio both in Chile and Colombia. And I believe that combined with what we’ve done in 2016, defends an important cycle of adjustments to our main credit risk exposures, although our mix probably keeps us a few more cyclical than our peers.

We can move now to the Slide 14. I just would like to give you an update on our estimated cost synergies in Chile coming from the merger. Looking at our adjusted total expenses evolutions, we finished 2017 with another better than market performance. As we detailed in our previous call, we estimate our cost synergies as the accumulated gap between our expenses growth rate and the comparable overall system growth. That’s historically both Itaú Chile and CorpBanca expended costs in line or higher than overall market.

With that we estimate that we have already captured around $37 million in cost synergies in the last 11 months since the Legal Day One. We still have a strong focus on managing costs and we expect this to capture additional synergies as we finished our system integration this year.

Now, we can move on Slide 15. You can see here a condensed P&L for the year 2017. We have all detailed explanations, line-by-line performance in our MD&A report. But here I would like to illustrate the level of impact that our four single events in the year had in our bottom line. See the adjustments for the relatives with one client in Chile and together with loan loss provisions adjusted for these and two other clients amounted to CLP 125 billion. This is includes tax impacts in our results for the year. These credit events are specific and not directly related to the economic cycle and show the efforts that we took to bring our risk exposure to a level we see more adequate to Itaú CorpBanca's risk appetite. This was an important and costly, I have to mention that, despite we took to achieve the growth of having what we consider will be our last volatile result in the upcoming years. And I also would like to point out that look into these figures, 71% of that on the CGA and also the result of loan losses, we explain by one single name.

Although we’re still pending on important definitions on the final implementation of Basel III, by the Chilean regulators stood as Phase in the schedule changing for the next slide, I would like to update you a little bit on the regulatory capital metrics. Since Legal Day One, we’ve increased our regulatory capital ratio by 106 basis points up to December coming from 13.1 to 14.7, especially by managing our risk weighted assets as well as accumulating capital. This is above 120% of regulatory minimum, or 12 in this case, and the average of the three largest private banks in Chile, in this case 13.8, as November of last year. Starting with our current 10.1 looking on Basel III Tier-1 ratio, we did that tangible assets and method for assets, ending up by 7.6 fully loaded Tier-1 ratio. This is under investment from that the incorporation of operation and market risk requirements offset by changes in the credit risk ratings.

Similar to current regulation, the most recent version of these proposal changes of the general banking act mainly to the use of Tier-3 instruments as well in regulatory capital to 50% of the core active Q1 capital. Under these assumptions, our current limit of their two instruments with the 3.8% in the exercise, adding up to unexpected total fully loaded capital ratio as 11.4, as you can see.

We are engaging and monitoring the developments in these regulation and we will keep you update on our all important advances on that. And I also believe that sustaining and comfort both regulatory levels will come with focus and discipline of both speaking adequated risk adjustment returns and managing dividend policies at sustainable level.

If we move now to the Slide 17, we would like to show you a little bit more about our main goals for 2018. On the next slide, you can see that in Chile we have four main objectives for this year. Keep moving from a transactional bank for relationship bank to our clients by fully focusing on client satisfaction. And this will translate to increasing cross revenues and product and services penetration.

We have our clear focus here on increasing sustainable results. And now one is completing our technology integration, a cycle that began almost two years ago and we are in the third phase of that, as I previously mentioned, and also advance with our digital agenda, which will lead to more efficiency, better offer and tangible market of our product. We also keep working on strengthening it with our culture throughout the organization. When we move to Colombia, we expect to finish the client immigration as I previously mentioned, we should be then - by the end of this quarter and to complete the remainder of the technology integration. We’ll be working also when implementing the business strategies for the wholesale and retail and as well as advancing our corporate growth agenda. I believe that after this important transaction period, 2018 will be the first year of the construction of the bank we wanted to our clients and shareholders. This will reflect in gradual and consistent improvements in client relationship and results.

So with this, I end the flow of the presentation. And then I will be glad to answer questions from you. Thank you very much.

Question-and-Answer Session

Operator

[Operator Instructions] And we have one question and this comes from the line of Nicolas Riva. Please go ahead and ask your question.

Nicolas Riva

Yeah. Thanks Milton for the presentation and transact questions. My first question is going to be on your outlook for profitability. I remember you said many times in the past that in the long-term you aspire to have an RoTE in line with the largest growth of other banks in Chile. However, given all the challenges that you had in 2017, and we understand it was a transition year, do you have any guidance for net income for this year for 2018? And then I'm going to ask my second question. Thanks.

Milton Maluhy Filho

Thank you for the question. Look, in terms of guidance for this year, we don’t give guidance on net income. But what I can tell you that, we’ve been going through out phase cycle that pre-released, imagine that we would have to go through would be the three years after merge. This should be end up. I can tell you that we should have a full premier by 2019 where we should have this all integration process complete. But having said that, I believe, in terms of adjusting the balance sheet, the two years that we had, this one and last year were very, very important to do especially all the risk adjustments that we had to do in our portfolio.

So we do believe and we still have the expectations that it starts moving in the direction of much more sustainable profitability and results, of course, we are constructing a long time in a long-term profitability bank. We are very happy with all the growth that we had in the last two years. And we believe in the long-term we should be working between 14% and 16% of profitability. This is our growth year. We know that we have talked to banks in the Chilean market that have nowadays return on equity above 18%, 19%, but we still have a lot of gaps in terms of mix, especially on mix, that we have to improve a lot on the retail side and on the assets and liability sides, always concentrated on the retail business. And this is some mid-to-long term strategy. I think we've been doing quite a good on that, but we still have a long run ahead of us. But I do believe that 14% and 16% should be our goal for the coming years.

Nicolas Riva

Right. Thanks, Milton. One follow-up there, the 14% to 15% target, is that the target for bringing return on tangible equity in Chile? I mean, I would assume that the profitability in Colombia would be below that. Is that correct?

Milton Maluhy

Yes. This is Chile, but we do believe that on a consolidated basis, we can work -- looking more for the 16. When we look that -- and because Colombia -- and we are talking about tangible equity, so yes, answer for your question. In Colombia, of course, we will be working below that for a few years. This is a transformation process that we are doing in Colombia. I think we are doing quite fine. Of course, we have some challenges on the macroeconomic environment; on the other hand, the interest rate cuts helped us to fix the mismatch that we have in our banking group. So this helped us to bring the profitability of the bank more close, I would say to breakeven. That’s where we are focusing now. But Colombia, we still think that we are going to be performing below market in terms of return on equity. So on a consolidated basis, we are talking about tangible equity.

Nicolas Riva

Thanks, Milton. And then my second question is, it looks like you anticipated loan loss provisions in the fourth quarter, I mean, the slides you did specify some provisions for some specific corporate. Now if I look into credit cost for last year, clearly, you were above your historical levels, especially given your loan mix. So my question is what’s your outlook for credit growth this year and how far you think this metric can go back to the more normalized level of around 1% of average loans? Thanks.

Milton Maluhy

Perfect. Look, 2016 was the first year of the merge and we could access the portfolio. You can remember that a few of the credit losses that we have in that year was then -- a few of them in the first quarter of 2016 before the merger of the banks. So we’ve highlighted that and we want to give you information although part -- important part of the credit losses was through the net worth of the banks through capital and not through the P&L.

In 2017, we’ve had a full year of our consolidated bank. And we worked a lot trying to understand what were the main tests or the main goals that we had in terms of the credit portfolio we had. So we did a single name assessment name-by-name. We don’t, of course, give any information about single names of corporate clients. But we highlighted that only three names explained that amount that I mentioned CLP 125 billion that I mentioned before. And if you look on the December of ‘17, we were able to do important provisions in one single name that we’re very concentrated and that didn’t have the improvement that we thought could have along the year. So I would say that in terms of credit adjustments, we did a very strong movement in 2017. So my expectation is that from 2018 on, we should be working at the lower levels than we had, towards the level of cost of credit that you mentioned before.

So I think we’re going to be having a more sustainable credit indicator from now on. We hope so, but although we have to highlight that we are very focused on corporate clients. We are very susceptible to events that may happen, but we do believe that we have correct new level of provisions to our portfolio on our base.

Nicolas Riva

Thanks very much.

Operator

There are currently no further questions, please continue. And our next question comes from the line of Sebastian Gallego. Please go ahead and ask your question.

Sebastian Gallego

Hi, good morning. Thanks for the presentation. I actually have two questions. The first one is regarding Columbia. If you could explain and provide more color on how are you going to achieve a better performance in Columbia? I'm particularly concerned about the market share you guys have on the deposit -- demand deposit market with around 4%? How to compete with the big banks in Columbia, particularly? And then, I will ask my second question.

Milton Maluhy

Perfect. Thank you very much for your questions. Look, in Columbia, we have to first of all point out that we are not top three banks in the system. It’s a very, very competitive market. So, of course, we are always looking to our peer group more than the top three banks in the markets. So we don’t have the size of the three banks, we don’t have the scale and also we don’t have the mix that they have. So our deepest focus in Columbia is first of all to organize the bank in many fronts. First of all, I think, we did a very good governance work in Columbia, trying to align to best class governance policies, risk appetite, market risk framework, having the Board of Directors with changes that we made, and also we have a change in the CEO. Maluhy has just completed one year in Columbia. So this was the first movement we made.

Then we were trying to understand what were the tasks that we had on the balance sheet, and as we highlighted before in the any previous calls, we did have mismatch, important mismatch in interest rates in the banking book that came prior the merge, so what we did was trying to take this to a more reasonable level of market risk, and also to follow these movement of decreasing on interest rate in the Columbian market. And I think we did quite well in our risk strategy. This year, our focus for 2017 was to migrate the branches because although the acquisitions of Santander and Helm were four years ago, we still were working under two brands, Corpbanca and Helm. So the decision we made that we had to be very focused on the integration on operational side and the migration of the branches, I believe, we did quite well. We had a very close segment of this project. And I think, we did quite well and we achieved our goals.So nowadays we're working under Itaú’s Brand.

Then we did a very deep assessment last year of our competitive environment, our landscape, our footprint, the way and the service model that we're going to be providing to our clients in Colombia, and we finally found out a lot of tasks and changes that we had to do on that. So we worked by the year 2017, to organize the agenda, to prioritize the important projects that we had. And now in 2018, as I mentioned before, the main focus is to implement this new model of assessing the market, not only on the corporate side, but also on the retail side. We've been working a lot on our liquidity. So although we don't have the demand deposit from the retail clients, this is one of goals that we have that has increased our penetration of the retail clients, and of course, in hands the cross-sell that we had, not only with the retail clients, but also with the wholesale. This is not a short-term strategy. We don't believe we're going to be changing the bank, although we still have some structural changes that have been made, and we do believe that we're going to have some pickups on that. We do believe this is a long term strategy. And we are organizing the bank to their competitive bank in the environment, of course, always compared to the peer group. So this is very important to aligned expectation. We're not looking with the size we have now in the footprint to compete with the big banks in Colombia. Of course, we're going to be competing with them on the corporateside where we have a different expertise, but on the retail side, as our footprint and the amount - the quantity of our branches we have is quite lower than they have. Our biggest strategy in Colombia will be growing on the digital market. And this is some of the agenda that we’re going to be implementing in Colombia, not only bringing good practice that we have in Brazil, but also things that we've been developing in Chile and we’ve been quite successful in the past12 months.

So the idea here is to organize the bank, focus on the implementation of the new model of assessing the market and implementing our digital strategy. And we do believe, with that, we’re going to achieve much more efficiency in attributing the client and also bringing the bank for a level of profitability and costs more adequated to the mix of the banks have nowadays. And in the long-term increase, of course, there’s a possibility of declines with cross sell in cash management. So I don’t know if I answer your question, but this is quite much the strategy that we have.

Sebastian Gallego

Yes, thank you. It was a very good answer. Just a follow-up on that, and my second question, that the follow-up on that question in Colombia is, can we expect a breakeven for the bank in Colombia this year or should we expect further losses again in 2018? And the second question is regarding capital, you mentioned in the presentation and you showed a slide with the Tier 1 calculation and you commented on that. My question is, is that Tier 1 enough for the Basel III standards? And whether or not that Tier 1 contemplates the actual common equity Tier 1 that Basel III implements, including all the offers that comes with Basel III? Thank you.

Milton Maluhy

Well, for Colombia, we have two deals on Colombia just to make it clear. We had the local balance sheet where the local management is focused and they have their tasks and their goals on that. And we also look on a consolidated basis because on the deal side, we transfer some effects that we have on the balance -- the Chilean balance sheet to have a more managerial view of what is the Colombian investment. Just an example of that is to hedge up investment that we do here, that we transfer the cost for the Colombian operations. So talking on the Colombian perspective, on the single balance sheet that we have in Colombia, our goal this year is to achieve our own breakeven, okay. So this is a big effort coming from the few losses that we have in previous three years. We do believe that we achieve breakeven this year. We are going to be quite successful. So this is the main focus that the local team has. This is not an easy task, but I think we are working towards this effort, okay. So this is from one side.

Now talking about the capitalization, so when you look at Tier I we have, you can see that on Basel III, we are talking here just from what is -- we are not talking about the phasing of Basel III, we just talk the actual capital that we have, and we believe what would be the full Basel III capital requirement coming from today. So as you can see, we came from Tier I from 10.1 and we came up to 7.6 in the fully loaded Basel III. That means that we do have a capital challenge by the end of the phase out -- of the phase in, sorry. And that means that we do have -- and we are not considering here any projection of profitability and any payout policy. So the idea of the bank is to be very discipline on that into, of course, with the profitability we expect to have in the coming years, to have capital generation -- few capital generations to achieve the goals that we have.

This is how we were working on that. We don’t anticipate any need of capital now other than the capital generation that we may have with the profitability that we expect to have in the coming years.

So, but we are very disciplined on that. The shareholders have -- they have our guidance on that as well in the transaction agreement. So we are going to be very disciplined on how to achieve the capital metrics for the coming years.

Sebastian Gallego

Right. Thank you so much for your answers.

Milton Maluhy

Thank you.

Operator

There are currently no further questions. Please continue.

Milton Maluhy

Well, so, with that, I thank you everybody for the call. I hope we could achieve your expectation in terms of the information. And thank you very much for your time. Bye, bye.

Operator

This concludes our conference today. Thank you for participating. You may all disconnect.