Itaú Corpbanca (NYSE:ITCB) Q2 2022 Earnings Conference Call August 2, 2022 11:00 AM ET
Company Participants
Gabriel Amado de Moura – CEO
Conference Call Participants
Jason Mollin – Scotiabank
Yuri Fernandes – JPMorgan
Operator
Good morning. And welcome to the Itaú Corpbanca Second Quarter 2022 Financial Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
I will now like to turn the call over to the CFO. You may begin.
Gabriel Amado de Moura
Hello, everyone, this is Gabriel Moura, the CEO for the company. I don’t think that Rodrigo is on the call. I think that we are having some problems connecting. So we’ll start here. So thank you for joining us on our conference call for the second quarter 2022.
We’d like to remind you that that our remarks may include forward-looking information, and our actual results could differ materially from what is discussed in this presentation. We would like also to draw your attention to the financial information included in this management discussion and analysis presentation, which is based in our managerial model which we adjust for nonrecurring events, and apply in managerial criteria to disclose our income statement.
Please remind that in the first quarter 2019, we are presenting our income statement in the same manner as we do internally. This financial model reflects how we measure, analyze and discuss financial results by segregating our commercial performance, our financial risk management, our credit risk management, and cost efficiency. We believe this form of presenting results will give you a clearer and better view on how our performance meets to these different perspectives. And you can please refer to pages one to 12 of our report for further details.
With that, we start our presentation today. And thank you for joining us on the second quarter ’22 conference call. I would like to update you on our progress into mainly our strategy, as well as present the highlights over our second quarter results.
So if we can start on our slide four. As part of our marketplace strategy, we are now partnering with TocToc complementing our Housing Ecosystem. This alliance will allow us to integrate or moderate more interrelated rent products into customers housing acquisitions, tucked up in the marketplace that publishes properties for sale in rent that currently offers more than 130,000 properties in 1500 real estate projects in Chile.
The TocToc marketplace had more than 3 million visits during 2021. It provides online appraisal services, market research information, as well as advertising spaces that will help us cross sell our financial products.
We have an initial value offering in which we have a total of 7000 pre-approved bank clients with mortgage credit. We will have access to a mortgage giant process in a better experience. Over time we will add functionalities to create the best integrated housing marketplace each year.
On slide six, as part of our strategy for the Wealth Management business, we have acquired MCC financial boutique with more than 40 years of experience, enhancing our capabilities, as well as our scale by effectively tripling our assets under management for private banking clients.
Along with the integration of MCC, we have launched Itaú Private Bank, backed by the largest private bank in LatAm America. Through our private banking platform, our customers will have access to a broad range of investment services locally, internationally, including the possibility of opening accounts, invest in our banks in Miami and also in Switzerland.
The value proposition for our clients is to offer a comprehensive advisory service through a multidisciplinary team of bankers and investment specialists, supported by the Itaú international network to deliver the best investments via alternatives, advice, and also our experience.
Moving on to slide eight, we present the values of our new Y itubers culture, which build upon long lasting elements of our culture, such as ethics and result orientation, while emphasizing new areas of focus, such as diversity, and external orientation.
Customer centricity in collaboration complete the six core values for our culture. We believe that with this new culture we – that we were launching in the past simultaneously with the Itaú CorpBanca, we will have just celebrate the transformation of the mindsets and behaviors that we need to continue building the bank of the future.
If we can move to slide10. We now present the growth rankings for the Chilean market, which demonstrate that we continue to make progress towards becoming the fastest growing bank and share.
With over the last 12 months, we were the fastest growing bank in mortgages, consumers instalment loans and Comex on export loans and the second fastest growing factory credit cards and leasing. Over the coming quarters we will continue to strive to be the fastest growing bank in Chile by building upon our competitive advantages in product differentiation, in customer experience, while remaining very selective on both growth opportunities in terms of pricing, as well, as the state.
On slide 11, our ESG commitment including managing environmental impacts of our operations, managing the socio-environmental risk area [ph] total and supporting our clients in their ESG efforts. At the operational level that – e increasing digitalization of our operations has allowed us to reduce our carbon footprint by 16% between 2019 and 2021, with significant reductions in energy, water and paper waste.
We have also become supporters of the task force for climate related financial disclosure. In this semester, we will start the implementation of their 11 recommendations. For us climate change is an opportunity, as well as a challenge. We have been actively supporting our clients transition towards sustainable growth, granting them either green loans or sustainability linkage loans, which at the same time allow us to pursue our own climate related ambitions.
Finally, I would like to mention that we have asked Claudia Labbé, our long time Investor Relations Officer to lead these efforts, reflecting the dimension in importance of the ESG agenda for our bank. Investment Relations will become part of our financial planning and analysis function under the leadership of Juan González [ph] I thank Claudia for all the contributions over the years and wish all the best on her new role, leading our ESG efforts.
Now moving forward to slide 12, where we present our financial highlights for the second quarter of 2022. Our consolidated net income reached at Ch$ 145.4 billion growing more than 105% year over year.
Net income in Chile grew even more by almost 122% to Ch$ 151.6 billion. Consolidated result and return on tangible equity was up 22.1%, while return on tangible equity in Chile reached at 29.1% in this book.
When we look to our profitability in the first semister, We have a 29 – I’m sorry 19.4 return on tangible equity on a consolidated basis and 24.8% in Chile, which is the highest in our history. Consolidated financial margin with clients grew by 36.8%, boosted by higher volumes, especially on currency [ph] Chile and Colombia, as well as high interest rates.
Consolidated fee income grew by 18.3%, primarily due to higher resulting financial advisory conditions, both in Chile in Columbia, as well as higher results, insurance brokerage in current account services and overdraft fees, especially in Chile.
Consolidated no- interest expenses increased by 13.1% year-over-year, it’s all impacted by inflation, as well as by volume growth that we experienced over this period. Nonetheless, the consolidated efficiency ratio improved by 13 basis points, reaching 45.3%.
The consolidated cost of credit increased year-over-year from a very low base, which have been positively impacted by the pension funding withdraws, in order pandemic related support measures. We obviously had a very strong second quarter to close up very strong in first half of the year. In that period, we benefit like most major banks in Chile from some macroeconomic tables. However, in lead – not that distraction from the underlying performance of our business.
In addition to our financial performance, our positioning growth rankings, our improvements in NPS clearly reflected progress that we have made as a bank. While we do not expect to maintain the same level of return on tangible equity over the coming quarters, which are likely to be more difficult from a market perspective, we have clearly succeeded in closing most of the profitability debt against our peers.
Moving to is slide 13. We see that our financial margins with clients in Chile grew by 34.5% year-over-year and 8.7% in the quarter. As we can see on the graph on the bottom of the page, the main drivers of this improvement are relative to the first quarter of the credit portfolio growth, as well as improvements in the liability spread in capital financial margins due to higher interest rates.
On slide 14, we see that our financial margins with the market was Ch$ 66.9 billion in the second quarter, way above the one year moving average and very positively impacted by inflation and the period. We expect financial margins with the market to fall back to where it was more in line with the high – historical average, as inflation declines at some point over the coming quarters.
On slide 15, our focus is on fees, which grew 13.5% year-over-year. We have seen good growth, most of our fee based – based business lines, especially insurance, brokerage and cash management. As we highlight on the graphs in the right hand side of the page. The one exception has been asset management, which has been negatively impacted by volatile markets, as well as by product substitution.
Here on slide 16, we see our main credit risk indicators in Chile. Cost of credit in the second quarter was Ch$ 57.7 billion, which corresponds to 1.1% of our average loan portfolio, impacted by also a Ch$15 billion in additional provisions that relate.
Looking at our NPLs market – mortgage credits remain stable and consumer credit shows a 30 basis point increase in the quarter. The movement that we see in the commercial NPLs and total NPLs are mostly explained by a few specific cases in the form do not reflect overall portfolio trends.
Overall, we are seeing NPLs going back to more normal levels as the effect of the ASP withdraws in other liquidity measures were off within the economy. Our provisioning model had anticipated effect, and that is why NPL COVID ratio has come down as NPLs went up. Nonetheless, considering the high level of uncertainty of our current macroeconomic environment, we increase our additional provisions by Ch$ 15 billion in this quarter, and we continue to be so as needed in the future.
On slide 17, we show non-interest expense for the quarter, which show a 5.9% increase quarter-over-quarter, as a result of an increase in personal expense, mainly due to seasonal effects of the first quarter associated with provision for employees vacation in variable compensation if that was in spot.
The graph on the right side of the page shows that our headcount has remained basically flat, even as we increase our technology step by almost 17% over the last 12 months, as we continue to invest in technology, internalize personnel for key IT roles. In terms of overall efficiency trends, as we can see the two graphs at the bottom of the page, our costs continue to grow much less than inflation and our efficiency ratio continues to improve.
Let’s move to slide 18 on Colombia. As long as you know, we are implementing a transformation program in Colombia that has a major efficiency component, which you can see in the significant reductions that we have made in branches and headcount over the last 12 months, as well as the improvements in the efficiency ratio.
Credit quality also has been positive and declining NPLs and cost of credit over the last 12 months. We expect to see a more significant impact of the transformation on bottom line over the coming quarters, and especially when the currently environment of high inflation, increasing interest rates in markets volatility subside.
On slide 19, we show our capital ratio that has remained resilient despite the market volatility in the period, in which we have major currency devaluation, as well as rising interest rates.
More importantly, on slide 20, I think that we can recap the key messages that we have for you on this presentation. First, we had a strong first half of the year, and with a consolidated return on tangible equity of 19.4% and 24.8% return on tangible equity Chile. While we do not think that our return on tangible equity will remain at the level – on that level over the coming quarters, we have closed the gap against most of our competitors.
We continue to focus proactively on managing the potential effects of the current cycle high inflation in high interest rates on our business going forward, as demonstrated by the decision to increase additional provisions in this quarter.
The third point is that we continue to advance towards becoming the fastest growing bank in Chile, while remain selective on growth opportunity in terms of risks, and also in returns. And finally, we are making progress in our transformation Colombia by improving our efficiency.
With that, we conclude the presentation that we had for you today and we will gladly take any questions that you might have.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And we do have a question over the phone coming from Jason Mollin from Scotiabank. Please go ahead.
Jason Mollin
Hello, Gabriel. Congratulations on the strong quarter. I wanted to follow up on your comments on the efficiency transformation in Colombia, looks pretty impressive when you’re showing the reduction in headcount and branches over the last year.
Maybe you could talk about how that can in the future impact long term profitability. And what would we should be expecting there in particular relative to what you’re looking for in Chile.
Gabriel Amado de Moura
Sure, thank you for your question, Jason. As you well know, Colombia has always been a challenging for us. We have changed the strategy that we have for Colombia last year and started this new plan, mainly based on the analysis that we have for profitability on the bank.
If I divide the bank in Colombia in three major businesses, we can see that they have very different dynamics in things that we can expect. For instance, we have a treasury and trading business in Colombia that is – its very profitable against our cost of equity. I think that we are active. I think that we’ll be managing that well through different cycles. So we have high hopes of doing a – staying that way, increasing our penetration in Colombia, there are many things that we can do regionally. And also leveraging Itaú Corpbanca [ph] positions in other countries, for multinationals and institutional investors with the position that we have in Colombia.
The second strong business that we have in Colombia in which nowadays, we received more than our cost of equity in Colombia is our wholesale business. It comes from the businesses, that’s something that it used to have [indiscernible] is to have and also, the business that we had from the ODBA [ph] in Colombia.
So in terms of corporate investment banking, and also middle market, I think that we are well positioned. Most of the views in Colombia, we are used to the flow of the clients, having discussions in structuring positions. We’re strong in project finance. So I think that we have a good wholesale operation in Colombia.
I think that the main challenge that we always had was our retail business in Colombia, in which at the end of the day, we lose money on that, and the compound of everything so far has led us to a return between 3% and 4%, in return on equity in Colombia, with two business that are going very well, in one business that has a way to go in terms of being profitable.
So the analysis that we had for Colombia was based on the footprint that we have, based on the business that we saw in the Colombian market. We had a decision of either leveraging the current capabilities that we have in Colombia and growing the bank with the branch network, so on so forth. And we tried to do that for a couple of years.
And as the market changes, as the digitalization process changes, it became clear for us that we would need to change that strategy. And that the footprints in all the structure in retail in Colombia, to the client base that we currently have, and develop new capabilities for the bank in Colombia in order to grow.
What that means, that the future growth in Colombia is not based on current capabilities in the distribution network that we have from the branches – the branches, but from everything that we’ve been developing into in terms of digitalization now, and also leveraging from Brazil. That’s why we focus the strategy and to be very efficient patient in Colombia towards the cost base that we now have.
We expect to be at breakeven in our retail business in Colombia by this year. And so this is the ambitions that we have. And we think, as we have been discussing with you so far, that we are able to converge to our cost of equity in Colombia. We started this next – last year. So in the next few years, we will be able to converge to cost of equity. That was always in vision that we had, I think that it’s feasible for the assets that we have.
But we do change the strategy by increasing the business volume that we have on wholesale and also in treasury and we are equating, I would say the footprint that we have on retail in developing the digital capabilities to grow in the future. It seems a more feasible strategy into some more – more with a shorter term in terms of the latency of doing everything that we need to do, and obtaining the results. And that’s why we are on this right now. And if you take a look at the numbers, I think that we’ve been very disciplined in delivering the results that we have mentioned.
Jason Mollin
That’s super helpful. Maybe a second question on the outlook for regulatory change and perhaps the perspective that Itaú Corpbanca [ph] has given your controlling shareholders experience in Brazil. So it sounds like we’re seeing potential open banking rules and regulations, as well as a new FinTech law. Do you have any comments on how that could impact the market on Itaú core bankers, future opportunities. Thanks.
Gabriel Amado de Moura
I think that’s great. Especially because I’m not an incumbent on the market in Chile, in Colombia. So everything that happened, that helps increase competitivity, generates more change and on the market for us is positive and moreover than that, I think it’s positive for the market and for consumers to have more choices, to be a more fluid market.
I mean, at the end of the day markets, Brazil, Chile, Colombia, they are efficient markets, in terms of banking, markets in Chile are very efficient. So I don’t think that the changes will do a completely turn around in the market in the same way we saw that in other markets.
But I think it helps. And for us the way that we have positioned ourselves of being the leading bank in NPS and we take a look at the numbers, the increase that we have in how we position ourselves in the market, the lead that we have, satisfactions for our clients within our applications, if you take a look iOS store or Android store, a customer chooses. And I think that’s great.
So we are part of the discussions within the association of banks in Chile. We are participating with that. If you take a look at the associations that we did, we have been talking or other discussions that we have, I think that we are part of this change there. We are embracing it, I think it’s a great opportunity for everyone.
But in doing each one that is new – the new nature of that the business models, nature of adaptive culture, you do need to adapt the way that its doing things. So that’s what we’ve been doing in the last two years. It’s adapting the bank to that.
On the flip side to that, if you’re a traditional bank that don’t want to adapt in terms of culture, or how you do things, I think it’d become harder.
Jason Mollin
Gabriel, any comments on the timing of implementation of open banking rules or the passing of the FinTech law?
Gabriel Amado de Moura
No, I don’t have any specific timeline for that. I know that regulators have a strong agenda for that. I think that the banks have been very, very responsive in terms of working together with FinTech. But specifically, I don’t have a timeline for that.
Jason Mollin
Thank you very much for your comments.
Gabriel Amado de Moura
Sure.
Operator
We have a question coming from the webcast from Abra Martinez [ph]
Unidentified Analyst
Hi, and thank you for the presentation. Please, can you give more color about the bank exposition and regulated health sector, and also in real estate? Thank you.
Gabriel Amado de Moura
Sure. Hi, Abra. In the health business, I think that your question is specific – specifically to the Czapes [ph] business in Chile. We have a very low participation on this. And so I don’t think that that its significant to make any major comment about our exposition or exposure on the Czapes market.
On real estate, yes, we have a larger portfolio within real estate. We are more on the commercial side of real estate in terms of developments. And when we take a look at the guarantee in how we structure some deals, we are comfortable with the cycle. I mean, what we have been seeing on the market is increasing costs for developers that made some progress with some products more challenging to obtain the levels of profitability they expected.
And we’ve been managing through the cycle. But that’s true for the impact of interest rates and also prices that we see in many other sectors. But in terms of how we set up the businesses that we have, the guarantees that we have on our real estate business, and also on the mortgage side, how we operate in our loan to value levels. I mean, I think that we are comfortable with the way that we have provisioned those portfolios in the way that we’re managing the cycle.
But there’s a lot of activity in terms of talking to clients, they can look at the exposures, refraining guarantees from your own projects. I mean, that’s part of what we do. And we’ve been quite successful over the past few years.
But it’s a more challenging cycle, for sure. But I think that’s the part of managing the bank like we did during the pandemic, the beginning of the pandemic. And now with all the after effects of prices and interest rates, so it’s managing through risk cycles.
Operator
And we have another question coming from the webcast coming from San Diego Albos [ph]
Unidentified Analyst
Hi, seeing the challenging scenario coming ahead, especially in Chile, how do you think loan growth behavior will be for the end of the year and 2023 and which will be the more affected segments? Thank you.
Gabriel Amado de Moura
Hi, thank you. I think that – as I mentioned during the presentation, we are focused on growing the bank. At the same time, we are very aware of the risk intern ratios in management with the cycle. So if you take a look in how we were able to grow our consumer business in the past, I would say, in 4 years, in how we manage our NPLs and provisions, I think that we did very well.
And we continue to grow that business. But we are more aware of holding that, that we are seeing. We want to grow, but we will be very specific in risk factors that we have, where we are doing our business and also the returns that we are getting there.
I can give you an example, on the other side, if you take a look at the commercial credit. I think that we’ve been in the last 12 months, probably the fourth largest bank compared to others. And the reason for that is that in terms of risk and also in terms of returns, there are things that don’t make much sense for us.
So in the same way of the question of Abram about factors and also exposures that we have. In terms of growth, it’s the same thing. I think there are lots of opportunities for us to grow, and we are pursuing that, but through a value proposition of service, digital that has enabled us to grow our portfolio with a well-behaved risk management. I think that’s a key part of the process.
If you don’t – do not have a strong value proposition in terms of credit, then it becomes a process of universal [ph] action, right? If it is credit only, further credit. I mean, at the end of the day, it is difficult to manage relationships and also credit portfolio within the cycle.
So what we want to make sure is that on the commercial side, we have a very strong offering of cash management of Comex comments that enable us to grow within clients of factoring that we’ve been growing. Guarantees that we have in structuring deals with clients a more ongoing relationship than just making sure that we have available credit.
In consumer, in mortgages is the same discussion, is making sure that we have a principality that the clients are coming and we are growing not only because of our credit offering. But because not the value proposition that we have. I think that’s how we’ve been managing in that.
But then again, we are not on the market to see, we are going to grow everything and that’s more important of the bank. No, we are very sustainable in the way that we do business. We are very active, as you know, in risk management and we are very deep in the analysis that we do. And if you take look at the numbers, I think it shows. But it is a more challenging cycle as we have predicted from the discussions that we’ll be having with you since last year.
Operator
Thank you. We have another question over the webcast coming from George Morrow [ph]
Unidentified Analyst
NPL formation in Chile was very high this quarter around Ch$ 160 billion CLP. Can you give us more color on what happened here and what to expect in the upcoming quarters? Thank you.
Gabriel Amado de Moura
Sure. I think that what you need to separate from this discussions, George is what is the NPL formation from different segments, right? What is the discussion in consumer mortgages and also commercial.
So if you take a look at our businesses in commercial and let’s first talk about mortgages. It’s been quite stable, the NPLs that we have on mortgages. If you take a look at the consumer, I think it will – it is growing and much more aligned with our view of them going back to the levels that we saw previously to the pandemic those levels.
The formation of the NPLs that we have here on this quarter, they are very specific to the commercial portfolio, to some cases that we have been discussing in the past portfolio of the bank and things that we have guarantees that we have well provisions that we need additional provisions for that. So I don’t think that the levels of NPLs that we have quarter [indiscernible] are trending in the portfolio, some things you expect.
I think that you have to know how the portfolio is set up for the bank with the concentration that we have on the wholesale part. And if you take look at a little bit of our history, you have more volatility on this given how our portfolio is.
Going forward, we do not have any specific guidance for NPL list specifically because of the volatility. But we do have a guidance on cost of credit. If you take a look at the numbers, I think that we’ve been consistent with the guidance that we have.
We are a little bit more on the upside of the guidance, specifically because of all the additional provisions that we’ve been making. And that we will continue to do so as we see the opportunity to strength our balance sheet moving forward. But I wouldn’t – I think that if you take a look at the MD&A in a little bit your view, you see that it’s very concentrated and volatile in some specific portfolios that we have in which we do provisions well before the NPLs, right?
So there is this distinction between what is the consumer in mortgage in a diversified portfolio which NPLs drive the provision process. And in the wholesale, the NPLs at the end of the day, they are at the end of the process of all the rating, downgrades that you did way before in our portfolio – in our model of expected losses. I think that’s the way that we manage it.
Operator
Thank you. We now have the question over the phone coming from Yuri Fernandes from JPMorgan. Please go ahead.
Yuri Fernandes
Hi, Gabriel. Thank you very much. I have a follow-up on asset quality. I guess you had explored the real estate and now this question on the formation. But two quick things. One, what are – which sectors are the wholesale explosion and if an like the few corporate cases you had, like, if you can comment on the segment versus which one drove those sourcing?
And looking to 2023, what should we expect? Because I guess the concern we here is [indiscernible] Chile, above you know, like, maybe the neutral rate. And we are seeing acceleration in the economy. So what should we see going forward? I understood your guidance for this year on the cost of risk. But first off, how concerned is the bank on this kind of environment? Are you concerned at all or not really? Thank you.
Gabriel Amado de Moura
No. I think first, I’m talking about sectors exposure, and it is an interesting theme unit that you can do without the new regulations from the Cinemaz [ph] in the way that we report information for them and all the banks in Chile in what they call the repo campaign note [indiscernible]
There are a lot of information for you about sector exposures within the bank, that’s public information. We take a look at it, and I think that you also can. In terms of sector exposure. And when you take a look at our bank and other banks, either are industry based on that, they are not that different, I can tell you, we have a lower exposure I would say in the agro business compared to our peers. We have a higher expose in, I would say, e-commerce infrastructure, but they are not major differences on that. At the end of the day, of course, everyone is limited by [Technical Difficulty]
Yuri Fernandes
Hello, Gabriel. I guess, I lost you on the second part of your answer here.
Operator
Yes, the line was disconnected. I’m sorry about that. Okay. So this is all of the time we have for today. Thank you all for connecting today. This concludes today’s conference call, and you may now disconnect. Thank you.
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