Yahoo Finance Banco de Chile (NYSE:BCH) Q1 2024 Earnings Call Transcript
Banco de Chile (NYSE:BCH) Q1 2024 Earnings Call Transcript May 3, 2024
Banco de Chile isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, everyone. Welcome to Banco de Chile's First Quarter 2024 Results Conference Call. If you need a copy of the management financial review, it is available on the Company's website. With us today, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer; Pablo Mejia, Head of Investor Relations; 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 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 for attending this webcast today, where we will present the financial results and achievements of Banco de Chile during the first quarter of this year. We are proud of our overall performance during the quarter. Once again, we led the industry in net income and profitability, capitalization and risk, among other figures, demonstrating our capacity to generate consistent and solid results overtime. Following the thorough view of the previous quarterly call, we will begin our presentation with a brief analysis of the macroeconomic conditions and competitive landscape we faced. Then, we will present the most relevant achievements in our strategic initiatives and finalize with a deeper analysis of financial results.
Please go to Slide number 3 to begin the macro environment discussion. The Chilean economy is growing again. The activity posted a significant cyclical recovery at the beginning of this year, after the chart macroeconomic adjustment mainly in 2023, when the economy grew only 0.2%, one of the lowest figures in the region. Nevertheless, it's important to be aware of two main aspects related to the recession seen last year. First, the subdued growth resulted from the tightening monetary fiscal policy especially between 2022 and 2023. This adjustment was necessary to correct the macroeconomic imbalances that occurred during the pandemic, such as increases in inflation, domestic demand and external savings among others. Second, the CPI in 2023 returned to their policy rents.
The current account deficit declined to pre-pandemic levels and fiscal debt remained below 40% of the GDP. The normalization of these figures provides further reasons to expect a more sustainable recovery for the country. Undoubtedly, the macro scenario looks better today. According to the monthly GDP figures, the economy went up by 2.5% year-on-year in the first quarter, posting the highest expansion since the same period of 2022. This figure followed the 0.6% and 0.4% year-on-year growth in the third quarter and fourth quarter 2023, respectively. As a consequence of this recovery, the GDP surpassed the level of activity posted in 2021, which was the previous peak of the chart on the left clearly shows. The breakdown shows that activity was driven by a positive dynamism in mining.
It went up by 6.9% year-on-year and services, which expanded by 2% year-on-year. The trend of these sectors can be seen in the chart on the top right. On a sequential basis, the recovery has also been evident. In the first quarter, the seasonally adjusted GDP posted a 2% quarter-on-quarter rise or 8.2% on an annualized term. This was due to a substantial monthly rise of 2% in January, a number that was followed by a solid 0.8% increase in February. This better-than-expected expansion has been one of the, if not the most important reasons behind the other revisions in GDP forecast for this year. In this environment, the Central Bank raised its official GDP estimate from the range centered at 1.75% in the Monetary Policy Report released in December to 2.5% in the report released in March.
Before finalizing this slide, I'd like to highlight the improvement in external accounts. As you can see in the chart on the bottom right, the current account deficit fell from 8.7% of the GDP in 2022 to 3.6% at the end of last year, which is sustainable and consistent with the fundamentals of the Chilean economy. As we will see in the next slide, the normalization in overall activity has impacted prices and interest rate. Please go to Slide number 4. As we've discussed, the substantial decline in domestic spending has been a critical driver for the downward trend in logo inflation, as the chart on the upper right shows. In 2023, the headline inflation dropped to 3.9% after posting a yearly rise of 12.7% one year ago, returning to the tolerance range set by the Central Bank for the first time in almost two years.
However, there have been high than expected monthly figures at the beginning of this year, as the CPI accumulated a 1.6% rise in the first quarter of this year. In the fourth quarter 2023, the CPI rose only by 0.6%. Some of the main drivers explained in this trend include the weakening of the Chilean peso, the persistence of a high inflation rate in trade partners and the acceleration of the economy as discussed in the previous slide. Nevertheless, it's essential to be aware of the high volatility of local inflation, which has been exacerbated by implementing a new methodology, which includes the introduction of a new reference basket. In this environment, the labor market has remained stable. In the first quarter, the unemployment rate was 8.7%, in line with the 8.8% posted one year ago.
It's worth mentioning that the still high unemployment compared to the pre-pandemic figures has been explained by a greater dynamism in the labor force, which expanded by 3.2% year-on-year in the first quarter, in line with expansion observed in total employment, which went up by 3.4% year-on-year in the same period. As a result of this, the participation rate rose to 62.4%, in-line with the levels observed before the beginning of the COVID-19 crisis. In this scenario, the Central Bank continues reducing the interest rate, following the easing cycle that began in July last year, when the rate was 11.25%. Specifically, the Board reduced the interest rate by 100 basis points in January and 75 basis points in April to 6.5% and has maintained an expansionary bias anticipating further cuts during the rest of the year.
This policy has been one of the main drivers of the multilateral weakening of the Chilean peso at the chart on the bottom right shows. I'd like to share our baseline scenario for this year with you. Please go to next Slide number 5. We have implemented several changes in our baseline scenario. Specifically, we have raised our GDP forecast for this year from 1.5% in the previous earning call held in February to 2.4% now. As seen in the table of this slide, we foresee a recovery in domestic demand, mainly consumption, due to lower inflation and interest rates. Nevertheless, we still expect subdued growth in total investment due to the high interest rate and the persistence of uncertainties related to potential factors. Regarding prices, we increased our CPI forecast for this year from 3% to 3.7%, mainly due to the depreciation of the Chilean peso and the higher-than-expected growth in the first quarter of this year.
Based on this trend and considering the probable trend in external rates, mainly in the United States, it's likely that the peso will continue to be weak. And consequently, the CPI will reach the policy target only by 2025. On monetary policy, we now expect an overnight rate at 5% by the end of this year from the 4.5% we forecasted last quarter. We acknowledge the existing of risk that could affect the macro scenario. From the external front, the growth in main trade partners of Chile and the evolution of several geopolitical conflicts are worth paying attention to. Internally, apart from the evolution related to the discussion of some reforms, such as taxes and pensions, it will be important to analyze the results of municipal elections, since they have historically been a solid leading indicator of the Brazilian Congress elections.
The table on the right summarizes the key dates and political events to monitor. As we mentioned in previous conference calls, banks are a perfect reflection of the economy. Having said that, I'd like to move to the next Slide number 5, to analyze how the economy impacted results in the financial industry in the first quarter of 2024. Total loan volumes remain subdued, as they are still posting below trend figures. Loans expanded by 4.1% year-on-year in nominal terms, which is only slightly above inflation due to overseas forces. On the weak side, consumer loans posted a 2.5% year-on-year expansion in nominal terms, remaining in negative territory in real terms. A similar situation is observed in commercial loans, as they expanded only 3.2% year-on-year nominal, consistent with the fall observed in total investment during the last quarters.
Conversely, mortgage loans continue supporting the expansion, increasing by 6.9% year-on-year nominal. Despite these figures, it's essential to be aware the negative trend in the nominal loan growth, as seen in the chart on the bottom right has been influenced by the normalization in the annual inflation, which declined from 11.1% in the first quarter 2023 to 3.7% in the first quarter of this year. Overall, the still low dynamism in loans is consistent with the result from the first quarter loan survey conducted by the Central Bank, which showed a weaker demand across most sectors, mainly in personal banking without changes in supply from banks. Considering this scenario, we expect loans to increase by nearly 6% by the end of this year, as long as the economy continue showing a rather recovery during the next quarters.
In this context, the industry reported a net income for the first quarter of CLP1,172 billion equals to an ROE of 14.5%. When compared to the prior year, quarterly net income grew by 12%. This was attribute to a 15% increase in operating income and a decrease of 8% in expected credit losses. This was partially offset by an 18% rise in operating expenses. In terms of delinquencies, the weak economic environment has affected NPLs and this continues to rise. The industry reached 2.4% this quarter, up from 1.9% in the same period last year and 2.2% from fourth quarter 2023. We expect that credit risk will remain as the main concern for the banking industry in the short-term until we see further improvement in the economy and the job market. Now, I'd like to pass the call to Pablo, who will go into more detail about Banco de Chile advances and the financial performance.
Pablo Mejia: Thank you, Rodrigo. I would like to begin with our strategic advances. Please go to Slide number 8. The strong results that we are consistently posting are fruit of a sound strategic pillars based on customer centricity, productivity and sustainability, which we deployed through six core priorities as listed in the middle of this slide. Through these priorities, we are sure that we can meet our midterm goals as shown on the right of this slide. First, we have a Net Promoter Score of 76.4% at March 2024, which is 340 basis points above our goal and our corporate reputation is amongst the top three in Chile. These metrics are assessed by reputable external firms that are independent from us. In terms of market share, we aim to be the leader in both commercial and consumer loans as well as demand deposits denominated in local currency.
In cost to income, we have performed much better than our target, although this has been partly fostered by our solid top line, we should be able to keep on improving our efficiency through the productivity initiatives that we will explain later in the presentation. Lastly, we are confident that we'll keep leading the industry in terms of return on average capital and reserves in the long-term. In the next slide, we'll review some of our main accomplishments and their key strategic areas, digital banking, efficiency and ESG. Let me start with digital banking. Please move to the next slide. In our commitment to being the best bank for our customers, we continue to make significant strides in digital innovation. This quarter, we launched the new digital savings account, FAN Ahorro that allows customers to make profits from their cash balances, widening the investment alternatives for current and new customers.
Furthermore, we have implemented digital tools to improve customer experience at branches, ensuring faster and more efficient service, and we have renewed our mobile app, Mi Pass for easier and more secure financial transactions. In addition, we have made significant progress in digitalizing key sales processes in retail banking that enhance the sales experience and will at the same time foster higher efficiency and productivity levels. The percentage of digital process variance and their adoption has importantly increased in the recent year. Today, more than 80% of digital consumer credit applications and more than 30% in digital current account applications are processed through digital channels, reducing wait time, process application costs, and as a result has increased originations.
In terms of efficiency and productivity, we continued to implement several initiatives to optimize our operations. This quarter, thanks to the increased digital adoption, we worked on simplifying functions and roles at our branches and other distribution channels. We also have initiated the implementation of a new system that will automate and centralize procure to pay activities. Moreover, we introduced a new process to streamline infrastructure investment flow, ensuring a more efficient use of resources. Also, through the structural optimization, we have improved our synergies with some of our subsidiaries. On the ESG front, our commitment to sustainability and social responsibility remains unwavering. This quarter, we published our 2023 annual report, which covers our financial and sustainability performance and makes significant advances to accomplish local and international standards, such as SASB and GRI.
Furthermore, to better integrate ESG risks and opportunities into our business, we initiated the measurement of our loan portfolio carbon footprint, the results of which are expected to be released early next year. Additionally, as part of our commitment to Chile, we have held several corporate volunteering activities such as the solidarity campaign in response to the wildfires, waste collection days, financial education courses, scholarships to develop tech talent and contests to promote entrepreneurship. Please turn to Slide 11 to begin our discussion on our results. Net income once again soared this quarter posting CLP298 billion equal to return on average equity of 22.6% as shown on the chart on the left. When compared to our peers, we outranked all of them with a huge gap in both net income and return on average equity, as illustrated in the charts to the right.
Our strong financial results reflect our effective customer-focused strategy over the long-term and our commitment to building a sustainable bank as evidenced by steady growth in customer income. Our long-term ROE target is about 18%, but we foresee that ROE will stay higher than this level in the near-term around 19% in 2024. Please turn to Slide 12. Operating revenues grew 11% year-on-year, which is inline with the economic and business recovery that we have been witnessing. More importantly, this expansion was driven by customer income, which rose 14% year-on-year, while non-customer income remained relatively flat by expanding 3% year-on-year. Please turn to Slide 12. Operating revenues grew 11% year on year which is in-line with economic and business recovery that we have been witnessing.
More importantly, this expansion was driven by customer income, which rose 14% year-on-year, while noncustomer income remained relatively flat by expanding 3% year-on-year. Customer income growth was driven by a strong increase in loan margins, higher commercial margins from deposits, given our solid position in core demand deposits and active pricing management in time deposits. Concerning income from loans, consumer loans were the main driver of this rise, thanks to an expansion in spreads and a 5% increment in average loan volumes. Mortgage loans also improved customer income, primarily thanks to an annual increase of over 7% in average loans. On the other hand, commercial loans were a drag on income expansion as average balances decreased year-on-year due to external factors mainly related to the still high interest rates and economic environment.
The charts on the right show how we have performed relative to our competitors. We achieved 4.7% net interest margin this quarter, much higher than any of our peers. We also had a comparable advantage in net fee margins and in our total operating income as shown on the chart on this slide. Our outstanding performance reflects a consistent business strategy and how we have been able to provide our premium customer base with improved value offerings over time in lending and nonlending products, which has resulted in a solid track record in customer income regardless of the economic backdrop. Concerning noncustomer income, which was a revenue generating driver last year, the tempered year-on-year growth had primarily to do with the decrease in inflation in the first quarter of 2024 when compared to a year earlier, effect that was to also some extent by the positive impact of lower short-term interest rates on both our funding through time deposits and revenues from trading activities.
Please turn to Slide number 13. As the chart on the left shows, total loans increased by 2.8% year-on-year and 1.3% quarter-on-quarter. The main driver of this year-on-year growth was retail loans. Mortgage loans went up by 7.8% in the 12-month period, mainly due to inflation, but also some sustained demand. Consumer loan expanded slowly by rising 4.5% in the same period. We should mention that we are noticing a slight improvement from previous quarters in commercial loan activity and we anticipate this to persist as the economy improves and interest rates come down. It's important to highlight that one of the strengths of Banco de Chile is its highly diversified loan book as shown in the breakdown of the chart on the top right by product and in the chart on the bottom right details our commercial loan portfolio by economic sector.
Generally, what we have seen in the past is that when one part of the economy is weaker, we can partially offset this negative impact by growing another part of our portfolio. Today, 64% of loans are concentrated in the retail segment, including SMEs and the remaining 36% in the wholesale segment. This distribution has not changed much in recent quarters, but during the pandemic, our growth was focused on low risk and low margin loans and securities, leading to a significant change in asset mix affecting our NIMs. However, we expect their growth in the next periods will continue advancing as we have seen in the first quarter of 2024, from which we should return to the composition seen before the pandemic that should enable us to achieve similar levels of NIMs as well.
From the perspective of concentration, it's important to mention that our commercial loan portfolio is spread out in a broad range of economic sectors, as shown in the chart on the bottom right. As such, we do not have a high reliance or concentration risk in any industry, which allows us to reduce the possible impacts from economic downturns in certain sectors such as real estate, construction or the current situation affecting the private health industry among others. For 2024, we expect total loans to grow slightly above the industry average. As mentioned earlier, the main year one year change refers a lick in commercial loans to grow slightly above inflation and we expect that consumer loans and mortgage loans will be driving total loan growth.
Please turn to Slide number 14 to discuss our superior balance sheet structure. As shown on the charts on the top left, our asset and liability, structure is robust. Our business strategy is concentrated on commercial banking and our main revenue stream comes from loans, which accounted for 67% of our total assets as of March 2024. However, it's important to note that, starting from April, the density of loans will increase, as we will use part of our debt securities portfolio to repay two-thirds of the FCIC obligation. Specifically, our portfolio in financial instruments has changed since December 2023, as we have reinvested proceeds from the scheduled maturity of PDBC and CDs issued by local banks and longer-term bonds issued by both the Chilean Central Bank and the Chilean Government in the Liquidity Deposit Program or PDL, provided by the Central Bank to facilitate the repayment of the FCIC.
The PDL are booked as financial instruments that measure the amortized cost and earn the monetary policy rate, while held in the portfolio. By using these funds, we paid the first tranche of the FCIC on April 1st, 2024. The rest of FCIC is coming due on July 1st, 2024. This will lead to a reduction of our balance sheet and financial instruments. On the liabilities side, deposits are the main source of funding, representing approximately 51% of our assets. Within deposits, time deposits are the most relevant financing source on our balance sheet, as you can see on the chart to the right. During the pandemic, demand deposits took a more important role in funding, but this has returned to normal in-line with long-term levels. This is especially important because we are recording lower cost of funds due to the sharp drop in the monetary policy rate.
Bonds is the next most important liability representing 17%. We use these to mainly finance our mortgage loan portfolio, which reduces both liquidity risk and repricing and they are more similar from the perspective of term and currency gapping. We expect that bond issuances will rise, when mortgage loan growth resumes to long-term growth rates. Currently, new bond offerings are mostly used to repay scheduled amortizations. As you can see on the table on the bottom left. We keep a high level of liquidity that largely exceeds the limits set by the regulator. Our liquidity coverage ratio reached 237% as of March 2024, 137 basis points higher than the regulatory limit and the net stable funding ratio attained a level of 125%, 45 basis points higher than the limit during the same period.
This is the consequence of both proactive management of asset and liability term mismatches and also a sound liquidity buffer that remained above CLP6.5 trillion in the first quarter of 2024. More importantly, these figures already reflect the repayment of the FCIC tranche, the first tranche. As we have mentioned before, our liquidity position will not be significantly affected by the maturity of this funding source. Finally, our UF GAP for the period was CLP8 trillion meaning their sensitivity to inflation is about CLP80 billion for a 1% change in inflation. Please turn to Slide 15. Banco de Chile is the best capitalized bank amongst peers in the industry. As of March 2024, our Basel III ratio was 16.9%, well above the fully loaded limit of 12.75% that applies to us, as shown in the table on the right.
Regarding CET1, we reached 13.3% this quarter, 40 basis points lower than December 2023. This decrease is mainly explained by a dividend distribution that was higher than the dividend provision in equity as our shareholders agreed to distribute 80% of net distributable earnings for the full year 2023 instead of the 60% already provisioned. Nonetheless, our CET1 trend over the last few years has significantly outperformed both our main competitors as shown in the chart on the bottom left and well above the limit established by the regulator. With these levels of capital, we are easily complying with both phase-in and fully loaded Basel III requirements, while feeling confident to address the pending steps in the implementation of Basel III. Please turn to Slide 16.
In the first quarter of this year, expected credit losses reached CLP113 billion, 7% higher than the same period last year and 12% lower when compared to the fourth quarter of 2023. Cost of risk for the period was the same level as our long-term rate of 1.2%, mostly generated as you can see on the chart on the bottom left by the wholesale banking segment. As we mentioned in prior calls, delinquencies have been gradually increasing since 2021 from a low level of 0.9% to 1.5% in this quarter, but significantly below the levels of our main peers as shown on the chart on the top right. This increment is mainly due to the normalization of the abnormally low levels recorded during the pandemic. Also, most of our rise has been due to some specific wholesale customers that have defaulted, although exposures to them are collateralized.
This has translated into a rise in NPLs, but only a slight rise in cost of risk, as you can see on the chart in the middle right. However, we expect the NPLs will gradually decrease with the expected improvement in the economy and job market this year. It's also important to note that consumer loan NPLs are at similar levels we recorded prior to the pandemic. Finally, the chart on the bottom right indicates that we have the best loan portfolio and the highest coverage ratio at 2.6x, including additional provisions of CLP700 billion compared to our peers. This puts us in a favorable position for handling unexpected risk deterioration. In line with this, I should also mention that the CMF standard model for provisioning consumer loans must be implemented by January 2025.
As a reminder, this model establishes a new methodology to calculate the probability of default and loss given default. Likewise, we've decided to use part of our additional provisions to address the impact, which is expected to be in the range of CLP60 billion to CLP65 billion. Please turn to Slide 17. This quarter, expenses amounted to CLP284 billion which is 8% more than the same period last year and 11% less than for the fourth quarter of 2023. The main reason for the yearly increase is inflation that reached 4.3% year-on-year, which affects most expense items such as salaries, rent, external services, among others. It is also worth noting that the significant improvements in efficiency that we have made recently have enabled us to cover the most important increases in operating expenses aimed at implementing the progress in digitalization, IT infrastructure and cybersecurity that are required to deal with the deep transformation process that the banking business is facing.
On the chart on the top right is a more detailed breakdown of expense growth. Personnel costs increased 5.5% year-on-year, because of a rise in salaries, mainly due to inflation adjustments on wages, employees have their salaries indexed to inflation at least twice a year and to a lesser degree, a rise in wages and benefits as a result of the collective bargaining process carried out during the fourth quarter of 2023 with the Bank's unions. In addition, administrative expenses rose by 10% during the same period, driven by an increase in IT expenses, related to software licenses, updates and technological infrastructure services, as well as higher expenses in maintenance of fixed assets, primarily related to improvements, focused on facing the challenges of self-service and digitalization in branches.
Depreciation, amortization and other expenses also rose during the period, primarily as a result of higher operational risk write-offs related to external fraud and payment channels. Regarding the efficiency ratio calculated as total operating expenses to total operating income achieved 36.4% in the first quarter of 2024. When compared to our competitors, we continue to lead with a wide gap in efficiency, as shown in the chart on the bottom right. We believe by controlling our costs, improving our productivity and employing technology that we will maintain a strong efficiency levels in 2024 of a level close to 40% and in the long-term under 42%. Please turn to Slide number 18. Before we go into the Q&A session, I want to briefly recap the main points.
We have raised our GDP and CPI forecast for 2024 to 2.4% and 3.7%, respectively, based on actual information for the start of the year. We also think that the Central Bank will slow down the pace of rate cuts to 5% by the end of the year. Our outstanding long-term strategy together with a strong management of market and credit risk a basis of our success. This has enabled us to be the leaders in the industry consistently in profitability, operational income, asset quality, productivity and capital adequacy. We are confident that we'll continue to provide the best performance amongst our peers in Chile, with a long-term ROE of 18%. Thanks for listening. If you have any questions, we'd be happy to answer them.
Operator: Thank you very much for the presentation. We'll now be moving to the Q&A part of the call. [Operator Instructions]. Our first question comes from Mr. Ernesto Gabilondo from Bank of America. Please go ahead, sir. Your line is open.
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