Itaú Corpbanca (NYSE:ITCB) Q3 2022 Earnings Conference Call November 2, 2022 10:00 AM ET
Company Participants
Gabriel Moura – CEO
Rodrigo Couto – CFO
Conference Call Participants
Jason Mollin – Scotiabank
Daniel Mora – Creditcorp
Operator
Good morning, and welcome to the Itaú Corpbanca Third Quarter 2022 Financial Results Conference Call and Webcast. [Operator Instructions] Thank you. I would now like to turn the call over to Rodrigo Couto, CFO, you may begin your conference.
Rodrigo Couto
Good morning, and welcome to the Itaú Corpbanca Third Quarter 2022 Financial Results Conference Call and Webcast. I would like to remind you that our remarks maintain 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 on our managerial model in which we adjust for non-recurring events and the apply managerial criteria to disclose our income statements.
Please remember that since the first quarter of 2019, we are presenting our income statement in the same manner as you do in service. This managerial financial model reflects how we measure, analyze and discuss our financial results by segregating commercial performance, financial risk management, credit risk management and cost efficiency. We believe this sale presenting our results give you a clear view of our performance from the existing perspective. Please refer to page of 9 to 12 of our report for further details. Now Mr. Moura will continue with this presentation.
Gabriel Moura
Thank you, Rodrigo. Good morning, everyone. Thank you for joining us for this Third Quarter 2022 Conference Call. Today, we will update you on our progress in implementing our strategy as well as presenting the highlights of our Third Quarter results. Turning on Slide 4. As part of our marketplace strategy, I’m glad to announce an exclusive partnership with BNP Pariba Cardif to sell insurance products through our distribution channels. As you know, Cardif is a major global player in insurance products, highly specialized in the field for savings and protection.
We’ll be combining their product expertise with our strength in distribution and customer experience to create the best insurance value proposition in the market. Our teams are already working hard to put it together, so we can go to market early next year. On another form, we have also announced our partnership with Principal to further strengthen our investment platform to offer the best investment platform for our clients in Chile.
On Slide 6, we shared that we ranked number 1 in customer recommendations in the last service as independent management for individuals. This was one of our key objectives for this year after finishing runner up last year. So we are all extremely happy to have reached this milestone. While we are proud of our achievements, our ambition is much bigger. There are still enormous business opportunities to be captured by providing the best customer experience. It’s surely not by chance that our turnaround in financial performance coincided with progress in customer satisfaction over the years. That is why…
Operator
Ladies and gentlemen, this is the operator. We’re currently experience technical difficulties, please standby.
Gabriel Moura
I think that we dropped from the call. I will start again in the Slide 7, where we see the relevant dimensions that we obtained in the customer recommendation pool for [inaudible]. That we run our recommendation for account — we ranked number one in recommendation for executives, contact center by Portland Products as well as the second position for our branches and benefits. Those rankings in multiple dimensions speak for themselves, and it’s clear customer centricity has been integrated in our culture because that is the only way for sustaining the kind of bank-wide multiyear effort required to achieve such progress.
On Slide 9, we’d like to share you the results for our — great Place to Work survey. It is our first time participating in the survey, and we have achieved a total score of 90 points. That result poses among the very best companies to work in Chile. By comparison last year, the top 5 companies in Chile are core 89 points in average. During this quarter, we also won first place among the banks in the best inter ship experiences conducted by first job. These results demonstrate our delivery against another pillar of our strategy that is developing an innovative organization and culture capable of attracting and retaining the best talent as we are creating the best environment for collaborative working.
On Slide 10, we want to share with you the changes that we make on our leadership team in Colombia. As we have mentioned before, we are putting a more focused strategy in Colombia and now we are backing it with a significant investment in talent around our CEO, [inaudible]. Victor Tavares is joining our team to oversee our digital transformation. He has more than 20 years of experience in digital solutions, UX in banks such as Citibanamex and Santander. Frederico Buril is the new Head of IT. He has over 20 years of experience and has been in key position in Itaú such as the retail bank CIO in Chile as well as the CIO for Rede in Brazil. Jorge Max will be responsible for our retail business in Colombia, bringing a lot of knowledge and experience from leading Itaú Chile retail network. Camila Vásquez will join Itaú Colombia’s Executive Committee as Head of Treasury, succeeding Daniel Brasil, who will transition back to Chile. She was previously the Head of Treasury Banking at Itau Colombia and has 22 years of experience, 10 of them in Itau.
Operator
Ladies and gentlemen, this is the operator. We’re currently experiencing technical difficulties. Please stand by. You are now back in the main conference. If you just want to restart from the beginning, we can do that, too.
Gabriel Moura
No, that’s okay. We will follow on. I’m sorry, we were having problems with connections for some reasons. So let’s move to Slide 12, where we present our return on tangible equity performance relative to our peers over the last 7 quarters. Just to recap, the reason why we focus on return on tangible equity as well as on price to tangible book metrics is that we have goodwill in our balance sheet in Chile that resulted from market valuations prevailing at the time of the merger as opposed to goodwill paid in cash by shareholders. It is important to take that into account when comparing returns across Chilean banks. As this slide shows for the last 7 quarters, our results have been consistent within the range of those our main competitors in way above any reasonable measure of our cost of capital. Therefore, I think that we can say that we have achieved our long-standing goal of return convergence with our main peers.
On Slide 13, we present the growth ranking of the Chile market. Where you can see we continue to progress towards becoming the fastest-growing bank in Chile. Over the last 12 months, we were the fastest-growing bank in consumer solvent loans, credit cards and Comex export. Over the coming quarters, we will continue to strive to be the fastest-growing base in Chile by building upon our competitive advantages in product differentiation and customer experience, while remaining very selective growth opportunities in terms of pricing and credit risk. Our sixth-place position in overdraft lines reflects that selectivity as we decided to slow down growth in that product in favor of lower risk alternatives.
On Slide 14, we show our initiatives across all ESG fronts. We rely on independent assessments to track our progress in a new [inaudible] way. For example, we were the first bank in Latin America to receive an ESG evaluation from standards and pools. We have also been measuring our progress in SAP’s corporate sustainability assessment since 2019. In the latest assessment, we have made even more progress than last year, achieving a score of 69%. As an organization, we feel very strongly about sustainability. Our ESG initiatives have brought support at all levels across the bank. This too has become a part of our culture, and therefore, I’m confident that we will continue to deliver against this pillar of our strategy. Now moving forward to Slide 15, where we present the financial highlights for the Third Quarter of 2022. Our consolidated net income reached…
Operator
Ladies and gentlemen, this is the operator. We’re currently experiencing technical difficulties. Please stand by.
Gabriel Moura
Everyone thinks that we got disconnected, again, we’re going to try a different connection. But I was talking about the Slide 15, I will start back again on the slide, where we can see that our consolidated net income reached COP 117 billion, growing almost 99% year-over-year. The net income in Chile grew by 94.5% to COP 114 billion. Consolidated return on capable equity was 17.6%, while return on tanker in Chile reached 21.2% in this quarter. When we look at our profitability in the 9-month period, we had an 18.8% return on equity on a consolidated basis and 23.6% in share.
Consolidated financial margin reclines grew by 47.1%, boosted by higher revenues, especially of credits in Chile and Colombia as well as higher interest rates in both countries. Consolidated fee income grew by 6.8%, primarily due to higher results in financial adviser recognitions as well as higher results in insurance brokerage in Chile. Consolidated non-interest expense grew 9.7% year-over-year, while the efficiency ratio improved 11 basis points, reaching 7.8% in — that consolidated — the consolidated cost of credit increased 68.7% year-over-year from a very low base that we observed in the Third Quarter of 2021, which was positively impacted by the pension funds with Ross in Chile.
Moving to Slide 16. We see that our financial margins with fines grew by 48% year-over-year and 11.5% in the quarter. The graph below explains the change in our third quarter 2022 margin with mines compared to the Second Quarter, driven by loan portfolio growth, greater activity in derivatives and FX transactions with clients as well as an improvement in capital and liability margins due to higher interest rates.
On Slide 17, we see that our financial margin with the market was COP 3.5 billion in the third quarter, falling back to more typical levels after a strong second quarter. The main drivers were a decrease in inflation related income and lower trading mix. On Slide 18, our focus on fees, which grew almost 12% in the quarter. We have seen good growth in most of our fee business lines, especially higher financial advisory commissions observed in the third quarter of 2022. On the right-hand side of the page, we highlight our growth of insurance brokerage fees.
[inaudible] in the Third Quarter was COP 38.3 billion, including COP 20 billion in additional provisions established in the Third Quarter. Looking at our NPLs, we see a slowdown in growth of non-performing loans as well as stable NPL coverage. Nevertheless, considering with the level certain of the current macroeconomic environment, we decided to increase additional provisions in order to be well prepared in case of a harder-than-expected lending for the current credit cycle. All in all, excluding additional provisions, our cost of credit over credit portfolio rate was 0.8% year-to-date, well within the guidance that we have between 0.7% and 1%.
Operator
Ladies and gentlemen, this is the operator. We’re currently experiencing technical difficulties. Please stand by.
Gabriel Moura
Hi, everyone. I’m sorry, it seems that we are having a problem with the provider that we have for the conference services. So we’ve been dropping a little bit of the call. I will continue on Slide 19. And then after that, we open for the Q&A. But we can see the main credit indicators. And as I mentioned before, we were within the guidance between 0.7% and 1%.
On Slide 20, we show the non-interest expenses for the quarter, as we can see to maintain cost growth below [inaudible] and much improved efficiency ratio of 42.3%. We have selectively added staff mainly as a result of internalization of key IT rooms, which not only improve effectiveness but also reduce costs. In [inaudible], let’s talk a little bit about Colombia where profitability recovered somewhat in the Third Quarter, but we still have a lot of work to do. We continue to implement 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 in headcount over the last 12 months. Overall, we expect to see more significant impact of those transformation in the bottom line in 2023. Taking a meaningful step towards our medium-term goal of 12% returns in Colombia.
On Slide 22, we report our progress in the rating front. Our strong capital base and improved profitability yielded rates with by S&P and Hungary as well as improving Moody’s baseline credit assessment and outlook for our rating. As a result, we have narrowed the rating gap against our main competitors, which helps our cost of funding and overall competitiveness. On 23, we show that our capital ratio has remained resilient despite the market volatility in the period in which we had a significant currency devaluation as well as rapidly rising interest rates. Our core capital generation in the first 9 months of 2022 was in us to withstand these shops while financing double-digit growth of our credit portfolio as we have maintained our CET1 ratio stable since the beginning of the year.
On Slide 24, we can recap the key messages that we have for you in this Quarter. First, we had a strong first 9 months of the year with return on tangible equities of 23.6% for Chile and 18.8% consolidated. While we don’t think that our returns will remain as high in the coming Quarters as economic conditions become more difficult, we have clearly achieved convergence in returns relative to our main competitor. Even more importantly, we turn around our performance for our customers, our employees and our shareholders. We have reached number 1…
Operator
Ladies and gentlemen, this is the operator. We’re currently experiencing technical difficulties. Please stand by.
Gabriel Moura
Hi, everyone. As I mentioned, we are having some connection problems with our provider. I think it will be better. I was just at that conclusion. And I think the numbers help by themselves. I think that we had a fantastic last Quarter. And more importantly, I would love to answer some questions that you might have perhaps been more productive then continue the presentation given the cuts that we have. So we’ll open for the Q&A.
Question-and-Answer Session
Operator
[Operator Instructions]
Your first question comes from Jason Mollin from Scotiabank.
Jason Mollin
Hello Gabriel, [inaudible] you highlighted the improving profitability in the Colombian operations and mentioned the focus on improving efficiency. Can you recap the strategic initiatives? You also mentioned the management team or management changes there. If you can talk about the strategic objectives there, particularly ending with when you think you can reach a cost of returns close to or above your cost of equity? And secondly, very interesting the comments on the insurance business opportunity. Can you share with us why the partnership with BNP Paribas Cardif for this business, perhaps give us some color on the addressable market for this business that [inaudible] can go after. Thank you.
Gabriel Moura
Fantastic. Thank you so much, Jason, for your question. First, about Colombia. I think that the main strategic objective that we have is getting to the level of results that we have just discussed. If we take a look at the bank that we have in Colombia, it is the combined banks of the operations Santander used to have [inaudible] to have and also our Itau offices that we have in Colombia. Those combined businesses in 2014, in 2015, they had managed to have results higher than the ones that it’s our goal right now. So the main objective for us is to achieve our cost of equity in Colombia in 2024. And how we are going to do that? We have 3 different businesses in Colombia. We have a wholesale business that I think it’s very competitive.
As I mentioned to you, it is — it comes from the efforts that the other banks have but as well as the operation that we had for BDA in Colombia. I think in terms of franchise, penetration, products and management team were well aligned, and we have now a base a return over our cost of equity in Colombia. We have a business of treasury where we are active on the market. Then again, in terms of management team, management model, risk management, we are well aligned with the things that we do in Chile and as well as Brazil, and we have returned more than our cost of equity. And we have our business in retail, which is subscale in where we have negative returns.
So the main focus that we have is to increase the participation that we have in our business in wholesale and also in treasury. I think there are still many things that we can do as well as being more efficient on the side of retail. That’s why we reduced the footprint that we have by 30% and also reduced headcount by 20% in the last 12 to 18 months. So we are focusing our efforts in Colombia on retail in a more, let’s say, focus on affluent markets, which are the customer participation that we already have within the bank, there’s much principality within the client base that we have that we can explore, which means that we want to grow against the market, but we see many opportunities inside the bank as we lost some principality of the clients since 2015.
But to do that, we thought that it was important and we saw the effects of it in Chile by changing the management team, bringing new people in with different capacities, different experiences. That’s why you can see the roster of people that we brought into the operation. I think they will help us to rethink the business model that we have retained in a much more focused way. That’s why we brought people also from Chile where we did the turnaround in our business in retail in the last 4 years. So that’s pretty much the strategy that we have in Colombia.
We do see things moving along. Of course, the macro side in Colombia doesn’t help very much within the cycle that we are seeing in the country. Nevertheless, there are many things that we can do inside the bank to do the convergence that we talked about. In insurance, we’ve been searching for different strategies in Chile of doing marketplaces for distributing our products or working with other companies to strengthen our product offering. So if you think about happy as well as stock talk, there are initiatives that we are exploring other marketplaces to bring digital products that we have.
But there is the other way around where I have a distribution model where I benefit from third-party products based on specialization based on coverage. So we do that on investments in an open architecture investment where we work with the best asset managers in the region. And now also the insurance model where we are working with Cardif. We used to work with Cardif as well. They were the provider of insurance products for us.
And now we are expanding that partnership for a 10-year exclusivity in which we will develop our digital offering for insurance that now a base is more concentrated in credit related products into open market products such as life, housing, automobiles, there are many things that we can do. We saw everything that insurance stack did in Brazil in terms of facilitating how customers have access to the product and how easy is the onboarding process. And when we compare to what we have seen in other markets, I think that Chile has a great opportunity for digital product development. That’s the — all the investments that we together in Cardif are doing for that. We are going to start operating in early next year, and we will keep you updated.
Operator
We have questions coming from over the web. The first one is from Daniel Mora.
Daniel Mora
Are the key drivers to improve the operations in Colombia, considering the political situations, the economy deceleration and the impact of high inflation, higher interest rates. What is the cost of equity that you’re estimating that will become your target in 2024?
Gabriel Moura
Fantastic. I think that as — when I take a look at the bank, there are opportunities that we have already met in terms of costs that we have discussed with you, especially in operations that we are subscale. So we are exiting some businesses as we did, for instance, in securities custody in Colombia, it’s services in Colombia. And there are other businesses that we don’t have the scale that we are divesting to focus more where we have better capabilities. And when we take a look at [inaudible] in terms of the penetration of products that we have, pricing that we have for some products that, again, there are much that we can do in order to convert the operation for better profitability models.
As we mentioned, I think there is a high growing Colombia, both for credit and market volatility that is a little bit of headwinds for us in our convergence. But then again, most of the challenges that we have for the bank. They are more internal than external at this moment. At some point, of course, we are going to be as well as affected for the macro environment. But when I take a look at the digitalization process that we have, credit models, pricing models that we are implementing, I think there are many opportunities for us to increase the profitability that we have for the bank.
In terms of cost of equity, we are thinking about the cost of equity around 12% in late 2023, early 2024. I think that’s a fair convergence of interest rates back to a more normalized levels that we see in our days. I think as right now in probably the next few months, cost in Colombia is above 12%, but we think that it’s going to be a convergence for those levels between 18 months and 2 years.
Operator
We have another question coming from the web from George Mora.
Unidentified Analyst
What is driving the financial margin with the market being negative in Colombia for the last 3 quarters? Are you taking bets on interest rates that have backfired. Should we expect more losses going forward?
Gabriel Moura
When we take look at the markets in Colombia, the dynamics, they are different from what we see in markets in Chile. Markets in Chile are moved by real interest rates. So the level of inflation, especially short-term inflation matters in the dynamics of our balance sheet here as well as for the other banks, and that’s why you see the gains in financial margins with the market. In Colombia, markets are more nominal. And as we see rise in interest rates, of course, we have moments with negative margins, especially on the banking book, not so much on trading but on the banking book of our operation in Colombia.
So we are very — we have very low exposure to long-term extra interest rates in Colombia. But because of the impact in short-term cost of funding, we see a negative impact on financial margins with the market that according to our calculations, will stabilize in the next few Quarters. I think probably we’re going to see a next Quarter that is still negative, given the rising interest rates in Colombia. But at some point, during next year that will stabilize into positive margins once again.
Operator
Thank you. We have another question coming from Daniel Mora.
Daniel Mora
The pace of growth of the consumer segment has been strong in recent Quarters in Chile, but we’re now entering in a period of economic deceleration. Do you see pressures on the loan portfolio, given the context going forward? Are you planning to change or moderate the strategy regarding the retail segment. What is the impact in terms of provisions coming from the new regulation of the provisioning models in the Consumer segment.
Gabriel Moura
Fantastic. Yes, we see lower growth in the portfolios. We’ve been outpacing the market in consumer for the last 5 years, I think. But then again, we see headwinds in credit concession in Chile to give you a number, for instance, in mortgages, we are having half of the volume nowadays of new credit than we had at the beginning of the year. That’s because of credit policies that are more conservative for this moment that we see lower economic activity. So we adapt our strategy throughout time. That’s why, for instance, you see that the level that we have for credit lines in the balance sheet, we are — I think the bank with the lowest growth in credit, retail credit lines overdraft lines in the next 12 months because we’ve been mixing our portfolio for a better cost of risk.
Of course, that impacts margins because of overdrafts, you have a higher margin than other parts, but also is a product that has higher risk. So we’ve been de-risking the portfolio that we have in consumer, while growing in other areas where we see that we can better manage the credit cycle. For instance, the renegotiations that we have within our portfolio in consumer are now at their lowest point since 2019. So we are entering our credit cycle that is tighter than we saw in the last 2 years. But with the mix of risk that enable us to be more competitive, I think, and also to manage better the cycle that we have. In terms of the provisioning, the normative that the regulations that CMS is putting for provisions is still under evaluation. I think until the end of December, they are receiving comments from the market. So things are still changing. But according to our calculations, with the current version of the regulations, we have consumer provisions, additional provisions that will enable us to –.
Operator
Ladies and gentlemen, this is the operator. We’re currently experiencing technical difficulties. Please hold the moment. Thank you.
Gabriel Moura
We got disconnected. The main point of the additional — is that the additional provisions that we completely offset the new regulations according to the calculations and the regulations that are still a moving target until the end of the year.
Operator
We have another question coming from Abdal Faruki.
Unidentified Analyst
Does the agreement with the BNP Paribas includes some form of upfront payments? Or what growth should we expect in commissions and fees?
Gabriel Moura
Yes, if the retail payment from payment from the exclusivity that we have, we are going to recognize that on the first Quarter of next year. And as we have more news about it, we are going to share with you. For next year, we have — we expect the growth in our insurance business, in our wholesale business, of fees. In retail business, I think that we are going to have a negative impact from our exiting of an ATM business that we used to have with the supermarket chain in Chile. So we are exiting the business of ATMs, on third-party businesses, especially to be more focused on our own distribution and, of course, on the digitalization process. So that’s going to be a negative impact on fees. But overall, we think that we are continuing to grow fees as they are an important part for our value creation.
Operator
We have another question coming from Sebastian Ramirez.
Unidentified Analyst
Can you further elaborate on the evolution on risk on Chile? Where are you seeing the largest pressure in terms of deterioration. And if you can share with us issues that you’re doing to deal with the deterioration of the commercial portfolio. Finally, in the consumer side with the rapid growth observed in the last 2 years, gaining share with respect to your competitors. Can you elaborate how much of this has been pricing or dip has been mostly on the back of a different approach?
Gabriel Moura
Okay. I will start with the second effect. I think that we have an offering in a management model in retail and a commercial incentive model that has enabled us to be more active, especially in consumer installment compared to our main peers. Of course, we are also growing from a lower base, which helps us to achieve higher growth rates. But I think that making the process easy for the client. We have a larger than 80% digital sales for consumer installment loans. So all the digitalization process.
And also, if you take a look at the NPS that I mentioned during the presentation, where we are number 1, it helps with all the advisory that we do for clients with all the discussions that we have for clients and how they perceive value in the relationship. I don’t think there is a silver loan one thing that we do that created this. There are a lot of different levers that we changed in order to achieve this. And I think they are sustainable for the next few years.
In terms of NPLs, I think that markets — let’s talk about consumer markets were more resilient than we thought. We thought this year, we’re going to have a higher convergence of NPLs, we didn’t see that. And that’s why we continue to increase the additional provisioning for this market. I think next year, we’re going to see further convergence of NPLs to historic levels, perhaps still below what we saw between 2018, 2019, but higher than current levels. So we do not expect something disruptive or major impact, especially on the segments that we have.
But we do foresee for the year as a whole NPL that is higher than we saw this year on average. On the commercial part, I think that what you see is that we are growing more aggressively in transactional products. That’s why when you take a look at factoring when you take a look at Comex, we are more active than only commercial credit. We are in the shorter term of the spectrum. If you take a look at the public data that you have from CMF, we are the bank that has the most decreased the duration of —
Operator
Ladies and gentlemen, this is the operator. We’re currently experiencing technical difficulties. Please stand by.
Gabriel Moura
I’m very sorry for the disconnection. It’s very disruptive for us. We’re going to try to figure out what’s happening later. But as I mentioned, we were in that most increased credit ratio in commercial this year. And we are focused more on transactional products, lower terms for credit. That’s the focus that we have right now. I think that we are well provisioned. When you take a look at the most cases that we saw, for instance, on the construction businesses in Chile, we didn’t have a participation on the companies that announced the restructuring.
I think that’s part of the good job that we have on our real estate team in terms of how they assess risk and also how they manage the down cycle in the product and the portfolio that we have. So that’s how we’ve been managing risk. And I think next year will be more of the same. I don’t think that we’re going to shift strategy. We already adapted the bank for this downturn. And based on all the information that we see in the economic cycle for next year, we are comfortable with the current strategy.
Operator
And we have one more question from Daniel Mora.
Daniel Mora
What is your guidance of ROAE and ROATE for 2022 and 2023, what are the expectation in Chile and in Colombia.
Gabriel Moura
Fantastic. It’s just because you asked a return on average equity and return on tangible equity. We always in the bank, as I mentioned, we discussed return on tangible equity because of the goodwill that we have in order to compare it to the other banks. As this goodwill was a mark-to-market of the net asset value of Corpbanca when we acquired the bank. So it’s not a cash base, it’s goodwill but a mark-to-market. In fact, that’s why we are always discussing return on tangible equity. We do not have short-term guidance for returns. As we mentioned, we do see returns in Colombia achieving 12% in 2024. And we have a guidance of Chile for around 14% on medium term.
We think that on a more normalized level of return that we see for our operation in Chile is to have 14%, 15% in return. On the last 7 trimesters quarters, we were higher — significantly higher than that. I think that we are going to continue to see returns higher than the target that we have, but we are going to converge in the near future to something around 14%.
Operator
And there are no further questions at this time, you may proceed.
Gabriel Moura
Fantastic. Thank you so much for your patience with all the technical issues that we have with this call. As always, Rodrigo, the team and I are always available for any other questions that you might have. Take care, we want to see you next quarter.
Operator
This concludes today’s conference call. You may now disconnect.
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