Itaú Corpbanca (NYSE:ITCB) Q1 2022 Earnings Conference Call May 3, 2022 11:00 AM ET
Claudia Labbé - Head of Investor Relations
Gabriel Amado de Moura - Chief Executive Officer
Conference Call Participants
Juan Recalde - Scotiabank
Yuri Fernandes - JPMorgan
Daniel Mora - Credicorp Capital
Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Itaú Corpbanca First Quarter 2022 Financial Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.
Claudia Labbé, Head of Investor Relations, you may begin.
Thank you. Good morning. Thank you for joining our conference call for our first quarter 2022. 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, and we apply managerial criteria to disclose our income statement.
Please remind that beginning of first quarter 2019, we are disclosing our income statement in the same manner as we do internally, incorporating additional P&L reclassification. This managerial financial model reflects how we measure, analyze and discuss financial results by segregating commercial performance, financial risk management, credit risk management, and cost efficiency. We believe this form of communicating our results will give you a clearer and better view of how we fare under these different perspectives. Please refer to pages 11 to 14 of our report for further details.
Now, I will pass the floor to Gabriel. He will continue with the presentation.
Gabriel Amado de Moura
Thank you very much, Claudia. Good morning everyone. Thank you for joining us on this first quarter of 2022 conference call. Today, we will update you on our progress in implementing our strategy as well as present the highlights of our first quarter results.
Starting on Slide 4. As a result of the implementation of customer centric initiatives, we have reached the highest levels of NPS for the bank, moving from 20% in June 2020 to 68% in March 2022, a 48 percentage point increase. Both our wholesale and retail segments have had similarly large improvements in NPS. In addition, as a result of our improved digital offering for our wholesale customers, we have reached the number one position for medium-priced companies in Chile and the second place for corporate clients according to the latest [indiscernible] poll, surveyed by IPSOS. We remain committed to providing a distinctive customer experience, pursuing NPS levels comparable to those of the leading players of the industry, not only banking but of any industry.
On Slide 6, we show our progress in our mobile first strategy, through which we have achieved a 30% increase in app users in the last 12 months, and at 140% increase in transactions in the same period. This has been achieved through continuously enhancing our market-leading app with new features and improving customer experience. While we have decided to center our strategy in our app, we have also rolled out new features for our website, leveraging state-of-the-art technology used by leading companies. We have not only modernized the look and feel of our website, but we have also implemented a content manager that will enable us to operate it much better to keep it always fresh and add new functionality for our clients.
Moving on to Slide 8. We would like to provide an update on our digital branches. One of the key aspects of our service model. I would like to remind you that the main strength of our digital branches model, which provides more convenience to customers through extended hours, more personalized service and exclusive benefits. As a result, digital branches have a higher NPS than our digital branches. Digital branches are also, more efficient. Our experience during the past three years have shown us that the cost of serving our clients is 60% lower in this model compared to a physical branch. Therefore, we are rapidly scaling our digital branch model, expecting the end to yield with 25% of our customers in digital branches, up from 12% in December 2021.
On Slide 9, we show that in addition to provide simple in digital channels, we are also engaging customers through social media. Our video delivery, which is live stream, is now entering its third year with Steve Chen, the cofounder of YouTube as our guest speaker. With our social media presence, we are strengthening our position as a modern and innovative bank, creating content that interests our current and potential customers in different platforms such as LinkedIn, Instagram, YouTube and TikTok. As a result, we've now rank first or second among Chilean banks in the number of followers in each of these four platforms.
On Slide 11, we are happy to be recognized by LinkedIn as the second best company to work for in Chile, which shows that we are in a leading position in the competition for talent in Chile. On the last few quarters, we have managed to attract top talent at all levels, beginning with the first and second line executives, as I mentioned in our last call, and expanding to less senior roles. We have now attracted fresh talent to about 30% of our acquisitions reporting to our executive committee members, bringing the required skill and energy to accelerate our transformation into being the fastest-growing bank in Chile.
On Slide 13, we show that we've been moving closer to this goal of becoming the fast-growing bank in Chile. On this slide, we see growth ratings on a 12-month basis as of March 2022. During this period, we were the fastest-growing bank in mortgages in consumer installment loans and the second in spectrum in credit cards. We have also, achieved the number three position in current account for businesses, and has been improving our position in the ranking for commercial loans, achieving the fourth position over the last 12 months.
On the ESG front, on Slide 14, we have taken an important step by representing that S&P do an ESG evaluation for the bank, which was announced yesterday by Itaú. This step demonstrates our long-term commitment to the ESG agenda as well to transparency regarding our progress. We were the first bank in Latin America to disclose our ESG evaluation by S&P, joining a group of over 125 companies globally, most of them large caps. Our score 70 over 100 was above the global average and the average for financial institutions as well as significantly above the LATAM average. While these results reflect positive on our progress so far, we understand how important it is to advance even more rapidly in the environmental, social and governance agenda, and we are committing to doing so.
Now, moving forward to Slide 15. Let's talk about the bank's financial performance in the first three months of 2022. Our consolidated net income reached 110.8 billion Chilean pesos, growing 16.5% year-over-year. Net income in Chile grew even more by 33.2% to 111.9 billion pesos, the highest figure in our history. Consolidated return on tangible equity was 16.9%, while return on interest in Chile reached 20.9% in this quarter. Both of those figures incorporate the impact of a $1 billion capital increase finalized last December. Consolidated financial margin in the clients grew 27%, boosted by higher volumes, especially on credit in Chile as well as higher interest rates, which positively impact the margins in liabilities and capital.
Consolidated fee income grew by 15.5% due to higher results in insurance brokerage and current account services and overdraft teams, especially in Chile. Consolidated noninterest expenses decreased 1.4% year-over-year as a result of efficiency initiatives in line with the digital transformation and our strategy in Colombia, resulting in a consolidated efficiency ratio of 49%. Consolidated cost of credit increased by 10.7% year-over-year, broadly in line with consolidated credit portfolio growth on a comparable basis.
In constant currency, our credit portfolio grew by 8.9% in Chile and 4.4% in Colombia, with retail loans in Chile and consumer loans in Colombia as the biggest contributors. These first quarter results represent a strong start to the year with consolidated returns and no equity above our target of 13%, 14%. While recognizing that our bottom line has been positively impacted by the current macroeconomic environment, we see our growth in credit volumes and commissions as well as a decline in expense as a clear positive operating trends.
On Slide 16, we see how our loan portfolio needs evolved in the last quarter in June. The overall portfolio grew by almost 9% year-over-year, with mortgages loans growing by 19.1% and consumer lending growing by 17.5%, consistent with our strategy and in line with our guidance on high single-digit loan growth for 2022. The share of retail loans in our portfolio increased by 317 basis points from 35.2% to 38.3% year-over-year. Since the merger in 2016, the share of our retail in our loan portfolio increased by almost 10 percentage points.
We have been persistent in our strategy of pursuing faster than market growth in retail, knowing all along that will take time for our share in retail loans in our portfolio to change significantly, and we believe we have made meaningful progress. We still see more attractive returns for growing in retail. So, we expect our share of retail of our portfolio to continue to expand. Nevertheless, we are confident that our wholesale banking strategy and leadership team will enable us to grow in wholesale with attractive returns.
Moving to Slide 17. We see that our financial margins with clients grew by 30.8% year-over-year, while remaining nearly stable on absolute value in analyzed average returns relative to the last part. Slight 2.4% decline is explained by lower number of calendar days of the first quarter as well as by the seasonal positive effect of the sale of student loans that happened in the fourth quarter of last year.
On Slide 18, we see that our financial margins with the market was 33 billion pesos in the first quarter, in line with last year average of $33.6 million. Compared to the fourth quarter, financial margins with the market was 27% lower, largely explained by the 20% lower inflation variation in the period.
On Slide 19, we see that our total commissions and fees grew by 17.3% year-over-year, with double-digit growth in ROIs. The graph on the right-hand side of the page shows the growth in some key business lines. Year-over-year growth in insurance brokerage was 18%. In cash management, it was 27.5%, and in credit cards it was 27%, which gives you some color about the banks commercial performance.
Here on Slide 20, we can see our main credit risk in period 2Q. In the first quarter, our cost of credit was 31.3 billion Chilean pesos, which corresponds to 0.6% of our average loan portfolio, partly explained by the 6.6 billion in additional provisions. NPL's, in NPL coverage were stable. The 0.6% cost of credit was in line with the first quarter of 2021 and with the full year of 2021 as well as slightly below our guidance of 0.7% to 1% for 2022.
On Slide 21, we show noninterest expenses for the quarter which has remained very much under control, decreasing to 10.5% quarter-over-quarter as a result of decrease in personnel expenses mainly due to higher provision for bonuses established in the previous quarter. In the last two years, we have reduced the bank's total headcount by 7.5%, while we increase technology in digital business headcount by 53.4%. That is in line with our strategy of investing in technology in digital, while capturing efficiency from physical footprint optimization. Consistently with our strategy and long-term commitment to efficiency, our noninterest expenses has grown significantly below inflation over the last 12 months, and our efficiency ratios in Chile has improved to 43.4%.
Let's move to Slide 22, where we can see that in Colombia, we are falling through with our strategy of improving efficiency, while prudently managing risk. Expenses declined in nominal terms by 6.8% year-over-year and 11.2% relative to the last quarter. In the first quarter, we executed an important phase of our footprint optimization program, ending the quarter with 18 fewer branches compared to the first prior quarter and totaling a 21% decrease in our physical footprint year-over-year.
Head counts have decreased 14% year-over-year. Credit quality has continued to improve in the fourth quarter, with NPL ratio decline from 3.21% in the fourth quarter to 2.92% in the last quarter. In addition of NPL coverage ratio continued to rise in the quarter to 173%. We will continue with the implementation of our transformation plan in Colombia, which has efficiency has a very strong driver.
On Slide 23, we report our progress in the capital front, which along with the improvements in profitability and other factors has led to an upgrade of our S&P rating to BBB+. Our segment ratio increased 40 basis points in the first quarter, totaling 291 basis points relative to the first quarter of 2021. As a result of the $1 billion capital increase and the improvement in profitability.
It is worth noting that we completed the acquisition of the additional stake in Colombia during the first quarter. So, the impact of that transaction is incorporated in the March '22 figures as well as in the December '22 pro forma figures that we are presenting for comparability purposes. The rating ask rate signals the success of our capital increase process, which happened according to the plan and expectation we communicated to all stakeholders despite the significant market turbulence of the peak.
On Slide 24, we recap the key messages from this presentation. We had a strong start of the year with a consolidated return on tangible equity of 16.9% and 21.9% returns on tangible equity in Chile, all considering our newly increased capital base. We have made progress in efficiency in Colombia, reducing our fiscal footprint by 21% and our head count by 14% year-over-year. We are in the progress of implementing the transformation there, and we are beginning to see tangible signs of progress. In terms of sustainability, our progress has been recognized not only in the financial front with the rating upgrade, but also in the ESG front with a positive first evaluation.
Finally, we are focused on a proactively managing the potential effects of the current cycle of high inflation and high interest rates on our businesses going forward. While this cycle has positively impacted the earnings of the banking industry, we understand it might generate pressure on credit growth, cost of credit, and expenses going forward. So, we are analyzing scenarios in taking the necessary measures to position our business for the likely next stages of the cycle. While the energy in the cycle is important, what will ultimately determine the success in our -- is our ability to deliver on our strategy and become the fastest growing bank in Chile as well as turnaround our performance in Colombia. That remains our main focus, and we will continue to push forward and keep you posted on our products.
This is pretty much the presentation that we had for you today, and we will gladly take any questions that you might have.
Thank you. [Operator Instructions] Our first question is from Juan Recalde with Scotiabank. Your line is open.
Hi, good morning. Thank you for taking my question. The first question is related to the regulatory front. There were some headlines about the law proposal to raise debt on the 2.5 million pesos in Chile. And supposedly, that was going to be discussed today. So, the question is, do you have any comments on the potential impact and how likely this is to become a law in Chile?
And the second question is related to Colombia and the cost efficiency initiatives. We're wondering whether there is more room for cost cuts there, and how should we think about the noninterest expenses in Colombia going forward? Thank you.
Gabriel Amado de Moura
Sure. Thank you so much for your questions. I mean in your first question about the regulatory environment, and that goes for Chile and many other countries in Latin America and in the world because of the pandemic and its effects on economy. We have seen regulators, especially through Congress, being very active in proposals for changing regulations, not only banking, but affecting other industries. I think that so far, we have seen many kinds of regulations coming forward as proposals.
But I think the discussion process that the government has had so far, the different communities that analyze this with the Congress were very efficient in making sure that any adverse effects are considered in their description process. So, I think that regulations will change throughout time. We are seeing for instance open banking discussions that are very mature in some markets such as Brazil, when we're starting to see that gain traction there in Chile.
But then again, for specific regulations of [indiscernible], we do not have any specific comments about this. But then again, I think that Congress was always very democratic and mature in terms of understanding the impact of those proposals within the system in credit growth for the banking industry to continue to serve its purpose of helping the country to grow. So, I'm confident that they will still do this. In Colombia, about cost efficiency, I think it has to do with the position that we have in retail, right?
When we take a look at the bank in Colombia, I can divide business in three different main groups. The first one is our treasury business, which traditionally we had a profitability much higher than our cost of equity. Our wholesale business we've been around our cost of equity. In our retail business, we are moving in. So, in terms of our retail business, what we wanted to do is to adjust the capability and the assets that we have to all the opportunities that we see on the market, especially now because the marginal growth will be much more digital than with the physical footprint that we have that was clearly oversized for the bank that we have and also, for the possibilities of growth that we see on the future then again considering all the possibilities and what we did in digital, both in Brazil and in Chile.
So, I think that there is still room for improvement in efficiency in Colombia. There are still opportunities in terms of costs in all the effects even from physical branches and what that entails in terms of commercial model, operational model overhead. I think there are opportunities there. But you're right that at certain points, there will be a shift in strategy. And as you know, efficiency ratio is based on our ability to cut costs, but as well as grow your revenues. So, from the moment that we adjust the expense base that we have in Colombia, we already have, but we pursue with more stream revenue opportunities in Colombia. First, in the wholesale business and then advance our agenda in the deal.
Thank you Gabriel for the comments. One follow-up, if I may. Are there any updates related to the JV with Rappi in Chile, and how that process is moving forward?
Gabriel Amado de Moura
We made a wait list for Rappi, and we have tens of thousands of clients already lined up in the waiting list for the launch. We are on a soft launch approach, so, we are already issuing credit cards. We did a benchmark with the major digital players in Latin America, especially in Brazil to take a look at the onboarding process that we had in terms of information, the decline portfolio, how much time declines wait for the credit cards, how much time it takes for the finance to do the application process, and we pretty much end up in the first style in terms of performance. So, we are pretty confident with the offering that we have.
As I mentioned, we were kindly surprised by the wait list that we have. And we are on the soft opening approach of issuing first on the wait list that we have, and then we are going to market those things fully from next month.
Okay, perfect. Thank you very much for the comments Gabriel.
Gabriel Amado de Moura
[Operator Instructions] Our next question is from Yuri with JPMorgan. Your line is open.
Hi, Gabriel. And congratulations on the good results. I have two questions. The first one regarding margins. How do you see the outlook for margins in Chile, like demand deposits evolution, basically trying to understand the high inflation that tends to be good for margins. How you see this being sustainable or not, like, I don't know, your overall view in both assets and liability side?
And I have a second question regarding asset quality for market, sorry. How do you see asset quality moving in a higher inflation environment? Do you see market and mortgages moving up? Like is this a point of concern for you or most of your clients salaries are also, we can see inflation. Like what is our view on inflation and asset quality regarding the mortgage product in Chile? Thank you.
Gabriel Amado de Moura
Thank you for your question. First of all on margins. I think that we mentioned inflation, which I don't think is an important component on this discussion. We remember that we and other banks in Chile, we generate more assets in that inflation being liabilities. Most, if not all, the mortgages are generated and indexed to inflation. Some commercial credits are indexed to inflation. And on the liability side, pretty much only the long-term bonds, they are indexed to inflation. So, our physical balance sheet is pretty much alone on inflation. Of course, we manage this extra exposure through derivatives. But given the sheer size of the balance sheets, it happens as well as the banking book.
The banking book rate naturally is more long in interest rates because the of the way that the market works, right, and the size of the balance sheets. So, when we have a situation of -- the higher interest rates, higher nominal interest rates and even higher inflation, that generates an important impact and positive impact on margins, especially in the market that is as indexed as it is in Chile. I think that at some point, we are going to see the inflation going down as the monetary cycle continues to push forward. In that case, with inflation going down and nominal rates is still higher, you're going to see a negative impact on financial margins with the markets.
The flip side to that is that you're going to continue to see a positive impact on financial margins with liability and capital. That's the case with that even more by more volume from the clients and also, for more interest rates. If you take a look at the numbers of financial margins with liabilities, you see great increase compared to last year. Having said that, when I take a look at the markets going forward, I think that financial margin with markets will suffer a little more, especially on the banking book and the banking book is where we manage interest rate exposure and also, inflation exposure.
On spreads, financial margins with clients specific on the asset side, we don't see much pressure right now. So, we were able to go in the way that you saw before, pretty much maintaining the spreads that we have. So, we don't see much pressure on that side. I think that's natural on a process of higher interest rates as well. Regarding asset quality, I will separate the discussion in 2. The first one, I think that we had a positive surprise in terms of cost of credit this quarter. We increased, as you saw additional provisions because of it, we still see a positive credit cycle due to all the excess income and savings that the clients have from the pension withdrawals that we saw in Chile and also, for the government programs.
As we mentioned, and it's increasing on our guidance for cost of credit, we do see a mean conversion in terms of asset quality to what we saw in 2018 and '19. As we mentioned before, we see that starting at the second semester, probably, but the markets were more resilient than we thought on the first quarter. Then again, I don't think it changes our idea that we should see a convergence to NPL's prior to 2019 and perhaps 2018. I think it's a good benchmark. That's why we constituted all the additional provisions last year and continue to construct this year because we do see the mean conversion rate in that point. It really makes sense to use those provisions as we were constituted for the cycle that we have right now.
In terms of inflation, I think it does create an impact on disposable income, especially when we take a look at some credits, for instance, indexed on inflation, as we mentioned, markets or indexed inflation. So, either by higher rates or by higher inflation, that generates an impact on customers. I think that differently from Brazil from business that already cover income, especially on the segments that we operate in Chile, they also, have the income more indexed to inflation with correction more on the short term. So, maybe three to six months, perhaps you're going to see some inflation on the wage size of that discussion. So, net out something.
But then again, I think it's something that also, points to the direction that we discussed about converting to NPL's ratios prior to those that we saw during the pandemic. I think it makes sense. And the macroeconomic side that we are seeing in which the excess of the income somehow goes through the system, higher interest rates, higher inflation, they point to that direction. I don't have information so, far to make any prediction that will be higher than what we saw prior to the pandemic. We're going to cross that bridge when we get there, but we do see a convergence in the next three months.
That's pretty clear. Just a follow-up on margins, Gabriel. So, basically, the message is the following, like, margin with clients because of the working capital, the spreads on assets, like, they should continue growing healthy, like, those 20%, 30%, like, they’re closer to, like, very high sound year-over-year. But on the other hand, max income may keep decreasing, right, like maybe going to zero, I'm not sure if this can get to a negative point eventually. But basically, the message is that client margin will compensate weaker market margins because the way we recognize our assets and liability management, right? That's kind of the message.
Gabriel Amado de Moura
I think the mechanism is exactly what he mentioned. If going forward marginally, they will compensate each other of it, since they are going to be more positive or more negative. I think it best depends towards into how loan interest rates will remain very high in Chile. We are seeing a cycle of high inflation in high nominal rates. If we take a look at the markets, the markets are implying that you're going to see interest rates going down at the end of the year and throughout next year.
So, if that's the scenario, you might see things easing out or some -- or maybe positive. But if the interest rates we are in to see them higher for a longer time in real interest rates at exceptionally higher than historical levels, then perhaps it's a negative net. But then again, we don't have any projections regarding this. I normally explain the mechanisms so, we don't have a specific line or expectations. We need to incorporate more information as we move along.
That's perfect. And congratulations again, Gabriel. Thank you.
Gabriel Amado de Moura
Sure. Thank you.
We have no further questions over the phone.
We have two questions, Gabriel, on the Q&A box. Both coming from Credicorp Capital, Daniel Mora ask, even though the higher inflation is positive for margins and the NII. how does it impact the loan demand and the call of growing above the industry level, also, considering the current outlook of the interest rate.
And the second question is also from Daniel. He asked, what is behind the increase of the NPL ratio of the consumer segment in Chile? The increase is a sign that the benefits provided to households are fading, and we should return to a more normalized figure. Those are the questions.
Gabriel Amado de Moura
Fantastic. I think some of the main points I have discussed with the questions from Yuri. But going back in terms of growth, I mean, for sure, higher inflation and lower growth that are valued expectations for the second semester and for the next year. I think we will deal with that overall growth. But then again, our main concern in the bank is taking share, right? We have so, many opportunities in client from in digital front that if the market grows less, I think there is still room for us to gain share into historical pockets of profitability in growth based on how the industry is organizing the opportunities that we see.
But you're right. If we are only taking a look at macroeconomic environment, I think it's going to be more restricted either by the credit risk or by growth of debt. On the NPL's that you mentioned, and I also, answered that to Yuri, we are going to see pressure in NPL's. I'm sure that. I don't think that it is the expectations of maintaining the level of NPL's, especially on the consumer side, right? On the corporate, I think it's another discussion in corporation forward information much more ratable on the consumer market.
But we are going to see NPL's going higher. I think the NPL's were artificially low on the next last quarter, especially then again for all the excess income that people had in Chile from the withdraws and government support. I think that will end in some time, and we want to see a mini-conversion. And that's pretty much why we did all the additional provisions in the past, because we are pretty much sure that through this convergence process, we are going to use them in order to remove the cycle of the reversion.
Of course, I think that we have two opposing forces here in this convergence process. One of them is the higher inflation, higher interest rates, pretty much the job market which seems okay. But then again, I think that's a negative impact that we're going to see on cost of credit within this new conversion. And on the other side is that the markets are still very liquid. The amount of excess income that the markets received was quite massive in terms of GDP and the disposable income for the families has created an impact in inflation as we saw, but also, in their ability to serve their debts. So, I think that's two of those forces going through a mini reversion process as well.
So, on the next few quarters, I think that we're going to have a more complete view. I think there are two main moving parts on this discussion that need more information about the size of the monetary policy impact, and we are seeing the timing of the length of it, but I'm pretty sure that the NPL's will be going higher on the next few quarters.
We have no further questions.
Gabriel Amado de Moura
I think Claudia there's -- fantastic. Well, thank you so much for your questions and for attending our conference call. As I mentioned, we do see a very positive evolution of the bank in commercial, operational, in client accounts, and we'll be happy to share with you the evolution on the next quarter. Take care, everyone.
Ladies and gentlemen, this concludes today's conference call and webcast. Thank you for participating. You may now disconnect.