Banco de Chile Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 2, 2024

There are 9 speakers on the call.

Operator

afternoon, everyone, and welcome to Banco DO Chile's 4th Quarter 2023 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 Mr. Pablo Mihia, Head of Investor Relations Daniel Gararse, Head of Financial Control and Capital and Natalia Vileja, Investor Relations.

Operator

Before we begin, I would like to remind you that this call is being recorded and that the 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'll now turn over to Mr. Rodrigo Aravena.

Operator

Please go ahead, sir.

Speaker 1

Good afternoon, everyone. Thank you very much for attending this conference call today, where we will present financial results and the main achievements for the Q4 and consequently the full year 2023. Similar to previous presentations, we will share our analysis of the competitive landscape of the period followed by the progress in our main Etrada initiatives, and we will finally present financial results. But before moving to this slide, I'd like to highlight the most important achievements of our bank during the year. Please go to Slide number 2.

Speaker 1

We are very proud of our successful year. We left the industry and results in several aspects of the business, confirming our proven capacity to continuously add economic value to our shareholders. On this slide, we present a summary of some of the main achievements of the bank during the year. On the financial front, we led the industry once again with a net income of MXN 1,200,000,000,000 equivalent to an ROE of 25.1 percent, allowing us to increase the gap with our main peers. In fact, in 2023, we represented 27.2% of the total net income posted by the industry.

Speaker 1

It's worth mentioning that these impressive results were achieved despite the existence of headwinds faced in 2023, such as the recession for most of the year, the downward trend in inflation, higher unemployment and increased delinquency among others. We also led the industry in capital adequacy by holding strong indicators and positive gaps in relation to internal and regulatory thresholds that enable us to be confident to face business as usual growth, while dealing with potential stress situations attributable either to the economic cycles or idiosyncratic exposures. Likewise, our capital base enable us to address increased regulatory requirements established as part of the implementation of Basel III regulation in Chile. In addition, we posted the best asset quality indicators while maintaining the best quota ratio of the industry of 2.7 times when taking additional provisions into consideration. Similarly, we lead the industry in terms of efficiency and maintain the best customer service in the country.

Speaker 1

On ESG, we achieved further improvements in external ratings, attaining the best evaluation according to Sustainalytics, and we issued social bonds under the Sustainability Financing Framework. In the rest of this presentation, we will present the basis behind these achievements. Let me start with the macroeconomic environment where we operated. Please move to Slide number 4. The Chilean economy began to show signs of improvement after 3 quarters of negative year on year growth rate.

Speaker 1

As you can see in the chart on the left, the GDP rose by 0.6% year on year in the 3rd quarter and our value information from the 4th quarter suggests a modest recovery of 0.2% year on year. Given this result, the economy probably didn't grow in 2023. From a demand perspective, 2 opposite forces explain this result. A negative contribution from the domestic demand given the fall in private consumption and gross investment. In contrast, the rise in net export due to the sharp decline in import contributed to the opposite direction.

Speaker 1

Nevertheless, there are some important factors to consider behind this outcome. First, the recession between late 2022mid-twenty 23 resulted from a normalization of the economy after the substantial rise of local spending in the previous year, specifically the absence of measures implemented during the pandemic such as pension fund withdrawal, the adjustment of the fiscal spending in 20222023 and the contractionary monetary policy led to an important adjustment, especially in domestic consumption. The chart on the other right shows the decline in commerce where services have gradually been off setting this decline. Secondly, it's important to be aware that this adjustment apart from being temporary has also contributed to reducing the macroeconomic imbalances. Notably, the current account deficit measured as the accumulated figures of the last 12 months declined from a peak of 10% of the GDP in 2022 to 3.5% in the 3rd quarter, which is the last available figure.

Speaker 1

As we will see in the next slide, the narrowing in the external deficit and output gap has been reflected in a normalization of several economic figures. Please turn to Slide 5. As mentioned, the substantial decline in domestic spending was a key driver for the downward trend in local inflation as the chart on the upper left displays. In 2023, the annual inflation rate went down to 3.9% after posting a yearly rise of 12.7% 1 year ago and a peak of 14% in August of 2022. Returning to the tolerance range set by the Central Bank, which is 3% plus or minus 1% for the first time since 2021.

Speaker 1

All the core measures have been declining, reflecting lower pressures in the economy. Apart from its impact on local inflation, the sluggish activity has also affected the evolution of the labor market. At the chart in the other right shows, the unemployment rate has slightly been increasing. In the 4th quarter, it rose to 8.5%, which is 60 basis points higher than the figure posted 1 year ago, while in 2023, it was 8 7% being 80 basis points higher than the unemployment rate of 2022. Even though higher unemployment is consistent with a weaker environment, it is worth mentioning that this trend has mainly been explained by the acceleration of the labor force rather than a full unemployment.

Speaker 1

In fact, as seen in the chart on the bottom right, labor participation has been recovering the lost ground during the pandemic, suggesting that the higher unemployment is a consequence of the greater labor supply rather than weaker employment. In this scenario, marked by lower growth and more normalized inflation, the Central Bank began an easing cycle in the monetary policy in July of last year when it reduced the rate by 100 basis points to 10.25%. This decision was followed by further reduction during the 4 quarters that led to the reference rate to 8.25 percent at the end of the last year with a clear expansionary bias anticipating further cuts during this year. I'd like to share our base scenario for this year. Please go to the next slide, number 6.

Speaker 1

We have a more constructive view of the economy for this year. We expect the economy to retake positive growth rate probably towards 1.5% after the new expansion in 2023. As seen in the table, we foresee a recovery in domestic demand, mainly in consumption on the grounds of both lower inflation and decreasing interest rates. Nevertheless, we expect an expansion still below the long term capacity of the economy, which is estimated at nearly 2% due to the lack of investment. On prices, the CPI should continue falling from 3.9% in 2023 to 3% this year.

Speaker 1

In fact, the year on year inflation will likely reach the Central Bank target of 3% before mid year. Based on this trend and in line with the guidance provided by the Central Bank in its December Monetary Policy Report, we see room for further rate cuts to 4.5% by the end of this year. The chart on the right shows our quarterly rate and CV expectations for the following periods. We acknowledge the existing of risk that could potentially affect the macro scenario. From the center front, the evolution of its main partners of Chile such as China in the United States are worth paying attention to.

Speaker 1

Internally, some aspects related to the discussion of some reforms, including taxes, the pension system and the health care system that could affect the economy or the financial condition of certain sectors. As we mentioned in previous conference call, banks are a good reflection of the economy. Having said that, I'd like to move to the next Slide number 7 to analyze how the economy impacted results in the financial industry in the 4th quarter and the overall year 2023. Last year, the local banking business was marked by declining loan growth due to weakened economic environment. As you can see in the chart on the other right, commercial and consumer loans suffered the largest declines, while mortgage loans decreased partially due to lower inflation as this product is indexed to CBI.

Speaker 1

As a result, the industry total loans grew by 3.2% nominal terms, but contracted by 1.5% in real terms on an annual basis as of December 2023. In this context, the industry reported a net income for the 4th quarter of MXN 1,200,000,000,000 and MXN 4,600,000,000,000 for the full year in 2023, equal to an ROE of 15.9 percent and 15.4 percent respectively. When compared to the prior year, full year net income fell by 16.9%. This decrease was primarily attributed to lower NII as inflation came down, higher operating expenses and temporary behavior of effective credit losses that was a combination of an important rise in corporate charges that was offset by decreasing the establishment of additional provisions. Looking ahead to 2024, we anticipate several key developments.

Speaker 1

We expect more dynamism in terms of loan growth, driven by improved economic conditions, particularly due to increased consumption that would be partially counterbalanced by a slight contraction in private investment. Accordingly, we forecast real growth for the industry loan portfolio within the range of 2% to 2.5%, led by consumer and residential mortgage loans. From a funding perspective, we anticipate a more normalized behavior of demand deposits in 2024 where we are an expansion aligned with the GDP growth. At the same time, due to decrease in interest rate and lower inflation compensation for customers, we foresee a potential bias towards long term funding that should increase in line with loan growth rather than short term time deposit, resulting in marginal declines in the latter. In terms of net income, we can see a set of factors influencing net interest margin with expectation of NIM falling within the range of 3.2% to 3.5% for the industry in 2024 depending on the balance sheet structure of each bank.

Speaker 1

Credit risk management will remain in the spotlight with an improved but still constrained economic outlook and implementation of standardized provisioning methodology for consumer loans. Now, I'd like to pass the call to Pablo, who will go into more detail about Banco de Chile's strategy and financial performance.

Speaker 2

Thank you, Rodrigo. I would like to begin with advances in our main strategic focus. Please go to Slide 9. The solid track record of results that we have consistently achieved has resulted from our permanent focus on 3 strategic pillars: customer centricity, productivity and sustainability. By focusing on these areas and implementing our core initiatives, we have exceeded our midterm targets as shown on the right of this slide.

Speaker 2

On the next page, we'll look closer at our main accomplishments in digital transformation, productivity and sustainability. Let me start with digital banking. Please move to the next slide number 10. To be the best bank for our customers, during 2023, we continued focusing on developing innovative solutions and creating a comprehensive digital ecosystem to provide the best experience to our customers. Some of our initiatives were launching a digital onboarding current account in U.

Speaker 2

S. Dollars for individuals and companies and integrating the contactless mobile payment functionality through Apple Pay Wallet as soon as it was available in Chile. In addition, we have offered digital accounts for diverse segments, including SMEs and teenagers that registered 1,400,000 accounts. Our initiatives were recognized by Praxis Experience Index, which awarded us the bank with the best customer experience in the country. On the efficiency and productivity front, we continued implementing diverse initiatives to build a fast, timely, secure and digital bank.

Speaker 2

A significant achievement has been the comprehensive review of our physical infrastructure, identifying areas for space rationalization and unlocking potential savings while ensuring our infrastructure remains efficient. Additionally, we enhanced our investment planning process to ensure that our strategic initiatives were in line with our long term goals and introduced a new corporate procurement model to optimize resource allocation. Furthermore, we conducted a reengineering of our branch service processes, resulting in an improved service time and customer experience. At the same time, we continue to strengthen our ESG initiatives. Among many actions we have implemented towards sustainability, we'd like to highlight the issuance of our social bonds under the ESG framework to finance enterprises led by women, driving economic empowerment and gender equality.

Speaker 2

In line with our commitment to promote entrepreneurship, we continued implementing diverse national contests aimed at SMEs and students as well as several volunteering initiatives. Our actions on sustainability led us to be the top performer in the local industry and Sustain Analytics ESG risk ratings and to be recognized by several institutions both locally and abroad. Please turn to Slide 12 to go into detail about Banco de Chile's financial performance. 2023 has proven to be another year of productivity for us as evidenced on the chart to the left. Every quarter this year, we surpassed our long term sustainable ROE estimates, and we posted an outstanding 30.2% return on average equity in the 4th quarter.

Speaker 2

When compared to our peers, our bottom line almost doubled that of our closest competitor. In terms of return on average equity, we posted a strong 25.1 percent level for the full year. Our competitive advantages, consistent long term strategy and solid governance practices have enabled us to achieve this positive outcome. We acted consistently during the pandemic by maintaining a long term view on business decisions that were focused on our core fundamentals. In the end, the strategy translated into the outstanding results that we're seeing today despite the environment of normalization and the economic factors such as inflation, interest rates and liquidity.

Speaker 2

Let's move on to Slide 13 on operating revenues, where we'll dig deeper into our figures. Operating revenues increased 7% when we look at the Q4 of 2023 versus the same quarter of the prior year, thanks to improved income from loans, enhanced results from financial instruments and higher margins from deposits. For the full year, operating income decreased by 4% year on year, which was mainly due to the normalization of economic factors. Specifically, the drop was due to non customer income driven by a sharp reduction of inflation that went from 13.3% in 2022 to 4.8% in 2023 as measured by the variation of the U. S.

Speaker 2

This was to great extent offset by customer income that grew strongly by 11% year on year, boosted by a higher contribution of demand deposits and time deposits as well as a greater income from loans driven both by growth and improved lending spreads in most of our lending products. Additionally, fee income also contributed to compensating this drop in revenues. The annual expansion in fees was supported by rising insurance brokerage premiums and transactional services, primarily associated to greater credit card transactions and increased fees related to loans. When compared to our peers, we outperformed them in the main financial indicators such as net interest margin, fee margin and total operating margin as shown on the charts to the right. On the next slide, we'll take a closer look at how our assets and liabilities have advanced.

Speaker 2

Please turn to Slide 14. Total loans grew by 2.5% year on year and 2.3% on a sequential basis. Like what occurred at the industry level, this modest growth has been the result of 4 years of subdued economic activity in an environment still marked by uncertainty and higher levels of interest rates and particularly in 2023. Delinquency indicators are returning to normal levels as expected. All these factors have affected supply and demand for loans in Chile.

Speaker 2

Mortgage loans and consumer loans have posted positive growth, but expanding at slower pace than in pre pandemic years. Residential mortgage loans grew 7.8% year on year in nominal terms. It's important to highlight that mortgages are primarily indexed inflation. So in real terms, growth was around 3% in 2023. As for consumer loans, we have seen slightly lower dynamism versus 2,002 as some economic factors that benefited consumer lending, such as the reduction in liquidity levels from the pension fund withdrawals and the end of the COVID lockdowns in Chile have ended.

Speaker 2

In 2023, demand for consumer loans was more in line with long term levels, especially when taking into consideration a weak labor market, consumer confidence and sluggish economy. Nevertheless, we managed to grow faster than the market, gaining 70 basis points in market share by deploying targeted campaigns based on both business and risk intelligent models that pursue to accurately promote installment loans among targeted personal banking segments and the expansion of the use of credit cards by reinforcing promotions and loyalty programs tailored to our middle and upper segments of the retail customer banking area. As for commercial loans, these continued weakening, dropping 1.5% year on year, but recovering 1.9% on a sequential basis. Still higher than normal interest rates, reduced private investment and business uncertainty have significantly reduced the demand from the Wholesale Banking segment. Additionally, SMEs during the pandemic were heavily supported through the government guarantee program, which reduced the room continue penetrating the segment with new originations in 2023.

Speaker 2

In 2024, we expect that demand for loans to pick up in line with improved environment. Total loans for us should grow in the range of 5% to 6% in nominal terms, in line with expectations for the long term of loan growth to GDP elasticity of around 1.3x plus inflation. In this baseline scenario, we are anticipating a recovery of commercial loans from negative territory to around 5% and retail loans should expand around 6%. This should permit us to pick up market share in their key strategic areas. Please turn to Slide 15.

Speaker 2

Over the last 4 years, there have been significant changes in our asset and liability structure. Financial instruments have grown substantially, now accounting for almost 20% of our total assets when compared to just 9% in 2019. This increase can be attributed to the significant surge in liquidity within the Chilean economy that resulted in abnormal inflow of demand deposits as evident in the demand deposit to total loan ratio shown on the table to the right of this slide. Additionally, the Chilean Central Bank introduced the FCIC program as a finance facility for banks to promote lending during the pandemic, which expires between March 30 July 1, 2024. Both these factors contributed to high levels of liquidity Due to the important amount of available financing, specifically from total deposits together with a weak lending activity, we increased the volume of financial instruments on our balance sheet.

Speaker 2

The rise in current account deposits reached 68% in 2021 as shown on the chart to the right. This growth in demand deposits allowed us to promptly benefit from the hikes in interest rates given the contribution of non interest bearing deposits to the funding cost. However, as rates and inflation rose, demand deposits gradually normalized as customers pursued to generate income from these funds. Today, demand deposits as a percentage of total deposits and as a percentage of total loans have returned to levels similar to those we had before these events unfolded. Consequently, the reductions in the monetary policy rate have reverted to the norm, and our cost of funds is decreasing swiftly on the grounds of the repricing of time deposits that became the main source of funding on the balance sheet.

Speaker 2

The downward evolution in our core funding cost is expected to continue in 2024 as long as interest rates decline, which in conjunction with improved lending spreads and the more positively sloped yield curve will allow us to partially offset the decline in net interest income coming from the reduction in financial instruments. This is due to the fact that our excess liquidity will begin to gradually decrease in 2024, and we will have to move our funds from financial instruments to fund our loan portfolio. Despite this lower liquidity level, we will remain well above the regulatory limits, ensuring financial stability and the soundness of our bank as shown on the charts on the bottom left. Regarding our exposure to inflation, our net asset exposure stands at MXN8 1,000,000,000,000 as of December 2023. The increase in the U.

Speaker 2

S. GAAP has been mainly driven by our assessment of inflationary pressures in the short term, all the while maintaining a balanced risk return profile. It's worth noting that approximately MXN 5,000,000,000,000 of this UF GAAP is structural as it is linked to long term assets in which we invest our shareholders' equity to keep it hedged from inflation while earning interest rates. The remaining part of the U. S.

Speaker 2

GAAP is related to the directional positions taken by Treasury area to capitalize on short term shifts in market expectations related to funding rates and inflation. Based on this view, our structural U. S. GAAP has a strong business fundamental that has permitted us to profit from long term asset exposures and reinforce our capital base. Please turn to Slide 16 to discuss our strong capital.

Speaker 2

We ended the year with a Basel ratio of 17.5%. Our capital path of our CET1 over the past few years has also clearly outperformed both of our main competitors as displayed on the chart on the bottom left. This has positioned us as the leading bank to meet and adapt to new regulatory requirements. As shown throughout this presentation, we have a unique position of high returns, high net income and high CET1. We have achieved this by focusing on customers' needs and finding the right balance between risk and return.

Speaker 2

This has enabled us to grow our portfolio and bottom line in a sustainable way. Moreover, we have been able to keep offering a compelling dividend without compromising this leadership position, while keeping the largest margin of capital above the regulatory limits to comply with Basel III regulations. It's also worth mentioning that in January 2023, the Chilean regulator released a reference rate for additional capital associated with Pillar 2 for 9 local banks, including us. The reference charges imposed to us was 0.5% of our risk weighted assets, which should gradually be fulfilled over a period of 4 years at a 25% rate per year beginning to June 30, 2024. This charge is derived from our exposure to long term interest rate risk in the banking book as measured with the CMF standard model.

Speaker 2

It is important to note that our long term interest rate risk in the banking book is primarily driven by a structural UF GAAP, as mentioned earlier, has a robust business fundamental in the long run and has allowed us to benefit from economic dynamics. I would like to highlight that we currently have a significant gap over the internal and regulatory thresholds to meet this additional requirement. The countercyclical buffer set by the Central Bank in May 2023 and the increasing limits scheduled as part of the implementation of Basel III. The current limits and the evolution over the next years are presented in the table on the right. Also, it's important to take into consideration that as part of the guidelines set by our Board on capital matters, we managed internal buffers that reasonably overcome both countercyclical buffer and the Pillar 2 charge.

Speaker 2

So we feel very confident this doesn't represent a significant issue that could restrict our organic growth in the coming years. Please turn to Slide 17. Core expected credit losses are in the process of normalization. This quarter, credit losses reached MXN 128,000,000,000,000, 5,000,000,000 above 1 year ago without establishing additional provisions in the Q4 of 2023. For the full year, we posted MXN361 1,000,000,000 of credit expenses, down 17% from a year ago.

Speaker 2

However, when we exclude additional provisions, the normalization of our portfolio is very clear when compared to the low levels of core provisions in 2022 attributable to a period of high liquidity that maintain risk indicators unsustainably low. Specifically, this rise has mostly been related to the lower payment capacity among retail banking customers and some specific wholesale banking clients for which we have seen a worsened financial condition. Nevertheless, the increase in credit risk expenses was significantly lower than those posted by our main peers, thanks to our superior credit risk management and the higher quality portfolio. The charts on this slide show how our portfolio and our risk management culture stands out from their peers. We have the best portfolio quality, the highest coverage ratio of 2.7 times when taking into account additional provisions that totaled MXN700 billion as the charts to the right show.

Speaker 2

This puts us in a better position than our peers if the economy does not keep improving. Finally, we need to emphasize how important our risk management practices are for our profitability. This is a crucial area where we have outperformed our competitors in the past, as you can see in the chart from the bottom right, and we expect to continue doing so in the future. We have increased our leadership over our peers since 2021, even though we have a much higher coverage ratio, showing our outstanding ability to run our business. Also, I would like to stress that in noncredit related risks, we are very consistent with no material exposures or volatile behavior in managing exposures to derivatives or debt securities in the trading or in the banking book.

Speaker 2

Likewise, we are one of the soundest banks in terms of liquidity management. Please turn to Slide 18. Our expenses increased 12% year on year. This increase is mainly due to the high inflation that we experienced in 2022 of 13% and still high inflation of 4.8% in 2023, affecting our cost base. It's important to highlight that most of this expense line items, including salaries, are tied to CPI.

Speaker 2

We also incurred greater severance payments and higher costs related to the acceleration of deferred costs associated with the former collective bargaining agreements due to the negotiation of a new agreement before the expiration of the prior one. As for the rest, the greater expenses are mainly tied to a rise in IT expenses related to software licensing, data processing services and amortization of intangible assets. In addition, we incurred higher expenses resulting from the relocation of part of our ATM network as we entered into a new alliance with a local retailer, which coupled with higher expenses that stemmed up from the implementation of VAT and services starting January 23 according to the last tax reform. In terms of efficiencies, we reached a cost to income ratio of 37% in the 4th quarter when compared to our peers. We continue to lead and have widened the gap in efficiency, as shown on the chart to the right.

Speaker 2

Our strong emphasis on enhancing cost controls, increasing productivity and applying technology to improve our business management should keep enabling us to achieve excellent results in terms of efficiency. However, we acknowledge that our present level of efficiency has largely been influenced by the impact of market factors that temporarily boosted our top line. Nonetheless, we're confident that we will maintain sustainable levels below 42% in the medium term. And for 2024, we expect a cost to income ratio of around 40%. Please turn to Slide 19.

Speaker 2

The Chilean economy is poised for a rebound in 2024, moving out of a period of stagnation into one of growth. With an expected growth rate of 1.5% alongside a projected stabilization of the CPI and interest rates at 3% and 4.5% respectively. In this context, the Chilean financial sector has a promising outlook if business and consumer confidence rebound, thanks to lower risks. With respect to Banco de Chile, we have successfully addressed these challenging times, not just maintaining their leadership position, but by also excelling across key metrics such as profitability, operating revenues, asset quality, efficiency and capitalization. Our robust risk management and our commitment to ESG have also distinguished us in the Latin American banking landscape.

Speaker 2

Looking ahead to 2024 and beyond, Banco Beach Chile is well positioned to capitalize on the economic upturn, especially with our superior capital position. We aim to further enhance our operational efficiencies and to seize new opportunities that align with our strategic goals. With a focus on sustainable growth, we are aiming for a long term ROE of approximately 18%, reflecting the confidence in our continued success and leadership in the industry. Thank you for listening. And if you have any questions, we would be happy to answer them.

Operator

Thank you very much for the presentation. I will now be moving to the Q and A part of the call. Okay. Our first question comes from Mr. Tito Labarda from Goldman Sachs.

Operator

Please go ahead, sir.

Speaker 3

Hi. Thank you. Hi, good morning, Pablo, Rodrigo. Thank My question, I guess, on the long term ROE of 18%. Just given the capital that you have, does that assume that the capital ratio will remain around the current levels?

Speaker 3

Do you see room to pay additional dividends from here? Just what's the right level of capital to consider with that 18% ROE? Thank you.

Speaker 2

Thanks, Tido. Well, the ROE as we've mentioned in the past, we think is around in the baseline scenario for the economy of 3% inflation rates at the long term level of around 3.75% as the Central Bank and Chile growing at around the 1.5%, 2% level in the long term should generate a good level or a decent level of growth of loans. And this should all translate into a bottom line of around 18%, we believe. Some years it could be a little bit higher, others it could be lower depending on market factors in the economy. But we think with this level of capital, we're comfortable and we can have achieved this level of 18% ROE.

Speaker 3

Okay, great. Thank you, Pavel.

Speaker 4

You're welcome. Okay.

Operator

Thank you very much. Our next question comes from Mr. Ernesto Gabilondo from Bank of America. Please go ahead, sir. Your line is open.

Speaker 4

Thank you. Hi, good morning, Rodrigo and Pablo. Thanks for the opportunity. My first question is on loan growth. So given that the economy is gradually recovering and we're starting to see the possibility for the consumer So just wondering if there could be upside risks for loan growth and especially for the consumer segment.

Speaker 4

My second question is on your dividend payout ratio. So we saw that you are proposing a dividend payout ratio of 66%. So we continue to see that Banco de Chile has a very strong capital ratio. So just wondering why you didn't pay again the 80% as of last year. I don't know if you want to be conservative because of the new capital buffer.

Speaker 4

Any insight will be very helpful. And for my last question is on the payment of the FDIC credit line. How should we think about the impact after paying the credit line? I think this could imply a lower investment yield by the reduction of the securities. And also how should we think about this impact taking place?

Speaker 4

Should it be on net interest income or in financial results? Any insight also will be very helpful. Thank you.

Speaker 2

Thanks, Ignacio. In terms of your first question, in 2023, as you know, we grew around 2.5% year on year, and this was driven mainly by the retail sectors, right, our retail segments. Consumer loans growing a little bit above 7%, mortgage loans almost 8%, but the commercial loan area growing below minus 1.5 around there. So it really depends for the next 2 years or the next year, the confidence from consumers and businesses on how this level of growth will be. What we've seen is a weak demand today from our customers, and that's translated into this weaker loan growth, especially in commercial loans.

Speaker 2

If we look at what we're expecting in our baseline scenario, we see Chile growing around the 1 point 5% for next year sorry, for this year, 2024. And in terms of growth, it's around the 5%, 6% level for us in nominal terms. And what's driving that loan growth? We're seeing the areas of, again, the retail segments, which are growing close to that 6% level, while the commercial loan segment is growing probably below the 5% level with the recovery in SME lending, which has been very penetrated in the recent periods because of all these government guaranteed loans. So if there's an upside risk that this could improve, it will really depend on the cycle, the economic situation, if there's any surprises in terms of better job creation, economic activity, investment, FDI, that could be a possibility.

Speaker 2

But those are our numbers and our baseline scenario. For the FCIC and basically NIM, What we see is that the NIMs, there's different positive and negative pressures for us. For 2023, we ended the year at 4.almost4.5%. What drove that was obviously a higher level of liquidity, especially from different types of funding deposits, this FCIC funding. And because we have this higher level of liquidity that we couldn't lend out because what I mentioned about the demand, the extra deposits that we had on hand was invested in financial instruments.

Speaker 2

So in 2024, when this comes due, the lending from the Central Bank, we have to figure out a way on how to pay that and that way will be with the reduction of our financial instruments to pay or to fund the loans that the FCIC was funding. So this will have a negative impact in terms of this is a negative factor in terms of NIM, but this is it's more important to mention the positive factors that are occurring in 2024, which is an improvement in the lending spreads of the bank, as well as an improvement in the reduction of the cost of funds of time deposits as well as a continued good activity in terms of demand deposits, which are funding our loans. So net net, what we're seeing for the net interest margin for 2024 is something around 10 basis point drop year on year because we have all these other positive factors. And not to mention that we also have the positive factors that financial instruments are coming due and these are being repriced at a higher level as well. And for the capital, I'll hand it over to Daniel Galarte.

Speaker 5

Yes. Regarding dividend payout ratios, the effective dividend payout that is proposed to the shareholders meeting or to your shareholders in March is actually 66%. We have to consider that Basel III is still being implemented. There are some room or depth regarding how the models for measuring diverse risk will be implemented and will be accepted by the CMF. So basically, it's a kind of buffer that we can have in the future in order to continue bolstering our capital base.

Speaker 4

Okay. Perfect. Understood. Thank you very much guys.

Speaker 6

Thank you.

Operator

Okay. Thank you very much. Our next question comes from Mr. Yuri Fernandes from JPMorgan. Please go ahead sir.

Operator

Your line is open.

Speaker 7

Hey guys, thank you very much. I had a question regarding operating expenses. It was a little bit high this quarter, right, up 20% year over year. And you mentioned like some collective agreements, some severance packages. Can you provide more color on these and how this will track?

Speaker 7

Because the impression I had is that you are potentially, I don't know, prone to loading some expenses in 'twenty three. So this maybe is a tailwind for 2024. So just would like to hear more details on expenses.

Speaker 2

Thank you. Thanks. So in terms of expenses for 2023, what we've seen is an expense growth, which grew in the full year around 12%, a little bit higher than 12%. And this was largely due to some key factors, which was inflation and IT expenses. In the Q4, there were some additional expenses like the agreement with the unions to agree before the end of this contract.

Speaker 2

So what was left had the pass through income because this is accrued on a monthly basis for the length of the contract. So this was an additional expense. We had some additional bonuses and some other items there. But if we look more so on the medium term, what's happening in our view is inflation, which is very important for our cost base, The high inflation of 2022, the still high level of 2023 affected 2023, but this is normalized in 2024. So this shouldn't be such an important factor for next year.

Speaker 2

As well, we have many different projects in the pipeline, which we're improving in terms of productivity efficiency. So the incremental improvements of all these projects should continue to bear fruit and maintain our cost base under control. And what we're seeing is for 2024 an efficiency ratio of 40%, costs growing more or less in line with inflation. And in the long term, what we expect with normalized operating income and normalized level of cost, an efficiency ratio that should be less than 42%.

Speaker 7

Thank you, Pablo. So basically cost in 24 inflation like? And just the 4Q, coming back to this, because I think you mentioned ARS22 billion on one offs kind of like one time event. Isn't this like anticipating expenses for 'twenty three sorry, 'twenty four in 'twenty three?

Speaker 2

Well, for example, the expenses for the contract, the bonus for the unions, it's accrued on a monthly basis. So if we sign off on earlier, we have to pass that through income all the months have to come due. So it's for example, that would be something that's not accrued. It would be a double accrual.

Speaker 7

Perfect. Thank you very much, Paolo.

Speaker 2

You're welcome.

Operator

Okay. Thank you very much. Next question comes from Ms. Neha Agarwala from HSBC. Please go ahead, ma'am.

Operator

Your line is open.

Speaker 8

Hi, thank you so much for the question. Congratulations on the results. Quick question on the impact from the interchange cap for 2024 and 2025. I'm not sure if you mentioned that and apologies if I missed it. So if you could reiterate that.

Speaker 8

And my second question would be on we recently had one of the Chilean banks 1181 issuance. Is that something on the radar for Bancondechary? Could we see that in the coming months? And lastly, on asset quality, is there any trends that you would like to highlight in terms of asset quality performance for 2024? Thank you so much.

Speaker 2

Thanks for the questions. In terms of the fee growth, in 2000 well, the interchange, but related to the fees growth. In 2023, we had fees if we were to adjust for reclassifications on the balance sheet, these grew around 6% year on year. And in terms of the drivers of these, we have insurance, transactional services, including credit cards, which grew substantially. We had a strong improvement in credit cards despite a slight reduction in the interchange fee at the end of the year because of a rise in transactions of 14% because of individuals changing their preferences to paying with cash to use more digital and non cash payment methods.

Speaker 2

So this is very important when looking at the interchange because not only is there there is a reduction in the fees coming up, already implemented and 1 more at the

Speaker 6

end of the year.

Speaker 2

But at the same time, what we're seeing is a strong growth in terms of transactions, which that will partially offset the reduction in the fees. So an update on the fees, debit cards go from 0.6. Percent. In October, they went down to 0.5 percent interchange fees. In October of 2024, they dropped to 0.35 percent.

Speaker 2

In credit cards, it goes from 1.48 percent to 1.14% in October 2023 and in October 2024 to 0.8%. So this has an impact in terms of fees, but what is important to mention that these are partially offset by an improvement or a growth in the number of transactions and at the same time adjustments on another expenses related to loyalty programs, etcetera, that reduces the net cost of this change. The other question in terms of asset quality is what we're seeing in terms of asset quality is a normalization from the very low rates that we've had in the past few years. So if we look at this 2023 versus 2022 and we exclude additional provisions, we see a normalization reaching a cost of risk of almost 1% and NPLs of 1 point 4%, which is very good considering the cycle and the high inflation that we've had during the period, which has affected the purchasing power of consumers and also of businesses. Areas that we're looking at and we're monitoring is obviously the typical ones that's occurring in Chile.

Speaker 2

We have the construction area, the real estate, not really the construction, more the real estate. We have also SMEs, which is always an area that's a little bit more cyclical and individuals, especially those in the middle and the more susceptible to inflation. What we've seen is nothing that we're too concerned of. We think that we're in the level more or less this level of 1.4 is reasonable, move up or down a little bit in the next months. We have to see how the economy evolves.

Speaker 2

And in terms of the guidance for this year of around reaching at most around 1.2%. It could be lower depending on the evolution of the economy of the baseline scenario, unemployment, how this year evolves. And in the long term, with a similar mix of loan portfolio that we had prior to the pandemic, a level of around 1.2 percentage reasonable. And the third question, I don't remember what it was.

Speaker 3

AT1. AT1.

Speaker 2

I'll pass that to Daniel Gilletts.

Speaker 5

Yes, hi. Well, we haven't issued any 81 instruments yet. Basically, we are seeing some possibilities here in Chile and also abroad. But to be honest, given our very strong CD1, we don't believe it's necessary yet. And in addition, we have a lot of room with respect to regulatory limits.

Speaker 5

So we are not yet considering on specific issues even in Chile or overseas.

Speaker 8

Thank you. Thank you so much.

Speaker 2

Thank you.

Operator

Thank you very much. Our final question comes from Mr. Andres So to from Santander. Please go ahead sir. Your line is open.

Speaker 2

Good morning to all and thank you

Speaker 6

for the presentation. My question is related to the consumer lending outlook. When we look at Chile over the past few years, this has been an area where we have seen continued weakness in terms of loan growth. And now with lower interest rates, lower inflation, you will have imagined this should have translated into a pickup in consumer loans, but your guidance is still relatively timid. So I would like to understand what prevents you from having a more aggressive guidance in terms of consumer lending?

Speaker 2

Thanks. Well, in terms of consumer lending or retail lending as a whole, still we have a variety of areas that is affecting loan growth. So we have unemployment level, which still is relatively high. We don't think that there is a job destruction, but the creation is weak. We see also investment in Chile is weaker, so that's affecting retail lending as well because of the job creation.

Speaker 2

And we have more normalized normalized level of inflation, which is also obviously had an impact in the prior years, especially in terms of mortgage loans, which made those products more costly. So in general, those holds have less room to continue getting into debt and that's affected the demand for growth plus the weak environment and confidence from the consumers affecting the demand. So it's more of a demand issue than a supply issue, I would say. And what could be a driver for the future to see an improvement there, an improved level of the economy, reductions of the interest rate as well is very important, which that's affected loan growth as a whole. And I would say, more or less overall better outlook in the economy will drive the consumer loan growth.

Speaker 1

Hi, Andres. This is Florio Baradena. Just let me add just a couple of things. It's very important to be aware that this recession in Chile in 2023 was a bit different compared to other crisis that we have in the country because in this time, we have a very strong decline in domestic demand, particularly in the global consumption and other consumption areas. For this year, particularly in this quarter, we are expecting like a turning point in the economic cycle.

Speaker 1

Since as I said before in the presentation, today we have a more constructive view, much more positive view in the economy since we're expecting different positive factors affecting the private consumption, including, of course, the positive impact and the potential positive impact in consumer loans. It's very important to remember, for example, that we're expecting a positive growth for GDP for this year and also low inflation rate and important decline in the ordinary rate, higher growth and then probably station as well in terms of the labor market. Because when we analyze today, during the last quarters, for example, the Chilean economy had an inflation rate above the long term level, still contractionary interest rate, below trend economic growth. So that's why the main reason behind the turning point in the economy is related with consumption, especially with the private consumption. We are not very optimistic about private investment.

Speaker 1

So I think that it's very important to highlight that one of the key driver for the potential cyclical recovery in Chile this year is related with the total consumption, the price consumption. So that's why or this is one of our main basis of that's why we are more positive for this year in terms of consumer loans as well.

Speaker 6

Thank you, Rodrigo. That's very helpful. And an additional question that I had was related to the additional reserves that you guys still have in the balance sheet. How should investors think about those at some point that are going to become part of your capital? Or are you still considering the possibility that they could be returned to shareholders and under which circumstances that will be the possibility for those reserves to be an extraordinary dividend?

Speaker 2

Thanks. Well, we have, as you know, during the pandemic, we accumulated up to MXN700 1,000,000,000 in additional provisions, so with a coverage ratio of about 2.7 times. Today, we still have these additional provisions on the balance sheet. We didn't implement any of the we didn't provision any more additional provisions in 2023. Now there's no direct timeline or trigger that we can mention of releasing these provisions, but what's been mentioned in the past and is true today is that if we don't need these additional provisions, a portion of these may be reversed and may be used for different purposes.

Speaker 2

But there's no clear guideline on when this would occur or the factors that would

Speaker 1

important to be aware of the still existence of source of uncertainty that we have in Chile today. We have different uncertainties from the rest of the world. We will know that China, for example, is our main threat partner. There are some uncertainties related to the economic growth for this country for this next year. Internally, we have different discussions in Chile.

Speaker 1

Probably, there's going to be discussions about taxes, pension funds. This year also there will be elections for municipal elections as well. So even though the improvement in the economic cycle, in the private consumption, in the GDP, still we have some uncertainty. So it's very important to have more visibility on that uncertainty, the potential impact in the long term of the key long term figures that affect the banking system in order to have a more specific time line for the potential decision to reverse some additional provisions. So they would have a lot of uncertainty that we have to pay attention to.

Speaker 1

The main thing where we have more visibility today is that there's going to be an important improvement on the economic cycle for this year, but still with important uncertainties.

Speaker 6

Absolutely. Understood. Thank you guys and congratulations on the results.

Operator

Okay. Thank you very much. We see no further questions at this point. I'll pass the line back to Banco de Chile team to conclude the call.

Speaker 2

Well, thank you for joining our conference call and we're looking forward to speaking with you for the Q1 results of 2024. Bye.

Operator

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you and goodbye.

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Key Takeaways

  • Net income of MXN 1.2 trillion and an ROE of 25.1% in 2023, representing 27.2% of industry profits despite recessionary headwinds.
  • Maintained a robust capital position with a Basel III CET1 ratio of 17.5%, comfortably above regulatory and internal buffers including a 0.5% Pillar 2 charge.
  • Best-in-class asset quality with a 2.7× NPL coverage ratio, core credit costs normalizing around 1.0%, and strong risk management practices.
  • Operational efficiency led peers with a 37% cost-to-income ratio in Q4 2023 and a target of ~40% for 2024 through productivity and digital initiatives.
  • Forecasts 2024 GDP growth of ~1.5%, loan growth of 5–6% and a long-term ROE target of ~18%, while noting potential risks from macro reforms and global uncertainties.
AI Generated. May Contain Errors.
Earnings Conference Call
Banco de Chile Q4 2023
00:00 / 00:00