Itaú Corpbanca (NYSE:ITCB) Q4 2022 Earnings Call Transcript

Itaú Corpbanca (NYSE:ITCB) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Itaú Corpbanca Fourth Quarter 2022 Financial Results Conference Call. Thank you. And I will now turn the conference over to Rodrigo Couto, Chief Financial Officer. You may begin.

Rodrigo Couto: Good morning. Thank you for joining our conference call for the fourth quarter of 2022. 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; one, commercial performance; two, financial risk management; three, credit risk management; and fourth, cost efficiency.

We believe that this form of presenting our results will give you a clear and better view of how our performance from these different perspectives. Please refer to Pages 9 to 12 of our MD&A reports for further analysis. Now Mr. Gabriel Moura, our CEO, will continue with the presentation.

Gabriel Moura: Thank you, Rodrigo. Good morning, everyone. Thank you for joining us for this fourth quarter 2022 conference call. Today, we will update you on our progress in implementing our strategy, as well as present the highlights of our fourth quarter results. Starting on Slide 3, we are introducing our Itaú advisers model to support our growth ambitions in the investment business. Our Itaú Advisors locations will provide a setting where we can work with our customers to understand their profile, increase personalized financial plans that will help them reach their goals with appropriate levels of risk. On Slide 4, we see that we have strengthened our leadership position in customer satisfaction for SMEs by improving our NPS by 12 percentage points and increasing the business to our competitors according to the most recent Servitest service both by Ipsos.

Our NPS for SMEs is now 20 percentage points better than the industry average. On the next page, number 5, we see that we have — we were considered by SMEs as the best bank in all dimensions of the services poll. This clearly demonstrates that we have a competitive advantage in terms of customer experience in the segment and our SME business is rising as a result. We will continue moving forward with the same guiding philosophy because client orientation has been ingrained in our culture as seen by the strong positive progression in all areas. Moving on to Slide 6. We show that we have become the biggest player in foreign exchange loans in Chile. One key element of our trade finance value proposition is our trade finance portal, which has been chosen by Global Finance Magazine as the best trade finance solution for the third consecutive year.

The fact that we were also selected by the best supply chain finance application for 2022 by the same publication confirms that we are on the right track when it comes to creating products and services that make life simpler for our clients. On Slide 7, we present the progress we have made in the investment banking lately. In 2022, we reached the second position in Latin America in SG transactions and the third in liability management. We also reached fourth positions in local debt capital markets. Investment banking is a key area of focus for us as we continue to develop a regional franchise together with Itaú Corpbanca, leveraging our combined presence in Latin America, which will enable us to continue rising on the lead tables. Moving on to Slide 8.

We highlight our progress in cash management. Over the last 12 months, we’ve seen a growth of 20.2% in supplier payments, and 18.1% in transactional cash. That increase in transactions resulted from our efforts to digitize our value proposition, introduce transactional solutions and closer operational integration with key wholesale clients. On the next page, on Page 9, we demonstrate how we are positioning ourselves as digital leaders through the content we create on multiple platforms. Following the visits of , our Vision de Lideres, YouTube Livestream, it is still going strong and now features a conversation with Martina Navratilova, Wimbledon single champion with the most victories. By creating content for a variety of platforms that is appealing to both our current and potential customers, we are boosting our reputation as an innovative bank through our social media presence.

As a result, we currently have more colors on listing in YouTube than any other bank in Chile, and we have reached 300,000 forward mark only in Linkedin. On Slide 10, we shared with you that our asset management farm was chosen as the leader in sustainable investment in 2022 addition of ALAS20. This was the fifth time we received that recognition as we achieved the first place in responsible investing in sustainability research as well as the second place in corporate governance investment. As asset managers and lenders, we understand we have a role in promoting sustainability investing, and we are committing to fulfilling that role as part of generating sustainability results. Now let’s move to Slide 11, where we are showing the performance of our return on average tangible equity during the last eight quarters.

As a reminder, we focus on return on equity and price to tangible book metrics because they better reflect our operating performance and valuation as they are not distorted by noncash goodwill generated by the merger of Itaú Corpbanca. When comparing results in multiple across Chilean banks, it’s critical to keep that in mind. Our return equity has been above 17% for the last eight quarters in Chile and has been comparable with that of our peers. As you can clearly see from where we were ranked in each quarter versus our main competitors. Therefore, it’s quite clear that we have achieved the convergence of results that we expected. We are now creating value for our shareholders, which is our number one goal. On Slide 12, you can see how we can continue to advance towards achieving our goal of becoming Chile’s fast-growing bank.

Over the last 12 months, we have met that objective across multiple products, such as consumer installment loans, trade finance, leasing and factoring. We continue to grow by leveraging our competitive advantages in customer experience and product differentiation, while remaining very selective in terms that selectivity can be seen in our conscious decision to slow down growth of overdraft credit lines, which are relatively recent products. On Slide 13, we display our ESG-related projects. We have been tracking our development in S&P’s corporate sustainability assessment since 2019. Itaú Corpbanca received an S&P Global ESG score of 70 or above in the 2022 evaluation, an increase of 7.7% year-over-year. As a result, for our multiple web for sustainability space, we have achieved the second highest score among Chilean banks.

We achieved a 82nd percentile across the 44 banks that are part of one or more Dow Jones Sustainability Indices, in our family indices. And then 94th percentile in the universe of 736 banks globally assessed by SAP’s CSA. Finally, we achieved 70 score on the Mercado Integrado Latinoamericano score. This time, the improvement in our CSA score puts us well above the required score of 66 to be included in the MILE index. I am optimistic that we will continue to deliver on this pillar of our strategy because of responsibility and sustainability are part of our culture, and we are truly passionate about our initiatives on those fronts. Now moving forward to Slide 14, where we present the financial highlights for the fourth quarter of 2022. Our consolidated net income reached Ch$3.5 billion, in our net income in Chile reached Ch$103.8 billion.

When we look at our full year, we reached a consolidated net income of Ch$456.9 billion, while net income in Chile was Ch$881.2 billion. Consolidated return on tangible equity was 12.4%, while return on tangible equity in Chile reached 17.7% in this quarter. When we look at our profitability for our full year, we had a 17.2% return on tangible equity on a consolidated basis and 22.2% in Chile. Consolidated financial margin with clients grew by 31.1%, boosted by higher revenue of high volumes, especially of asset and liability portfolios as well as high interest rates in both countries. Consolidated fee income grew by 15.6%, primarily due to higher results in the financial advisory and other commissions in both countries as well as high resulting insurance brokerage in Chile.

Consolidated noninterest expenses increased 15% year-over-year as a result of higher inflation, while the efficiency ratio remained basically stable at 54%.Consolidated cost of credit increased by 24.8% over the low base of 2021, which was positively impacted by the economic support granted in the Pandemic, mostly in Chile. When we look at our credit portfolios, we grew 13.4% in Chile, and we decreased 0.6% in Colombia in constant currency compared to December of 2021, with customer in mortgage loans in Chile as the biggest contributors. On Slide 15, we can observe how Chile’s loan portfolio mix changed during the last 12 months. In line with our strategy in overperforming our 2022 guidance, the total portfolio increased by 13.4% with consumer mainly increasing 26.1% in mortgage loans increasing by 16%.

The share of retail in our portfolio climbed by 169 basis points, reaching 38.6%. Since we began pursuing the debt strategy in 2016. The retail loans in our portfolio has increased by over 10 percentage points. Moving to Slide 16. We can notice that our financial margin with clients in Chile increased by 8.2% during the quarter and 27.9% over the previous year. The improvement compared to the third quarter is primarily driven by an improvement in capital and liabilities margin due to high interest rates as seen on the graph at the bottom of the page. The graph on the right side hand demonstrates that our average rate of financial margin with clients increased by 20 basis points in the fourth quarter, continuing the rising trends that we signaled in our guidance for 2022.

Nonetheless, we expect the rate to remain stable when interest rates begin to fall as a result of the changing mix of our assets towards retail as well as improving spreads in some of the business lines. On Slide 17, we can see in the fourth quarter of 2022, our financial margin with the market was Ch$47.1 billion, which is a 54% increase from the third quarter. The increase was driven by high trading volume which offset the effects of declining inflation. As we can see, our one year moving average of financial market with — financial margins with the market has been quite consistent over the last three quarters. Nevertheless, we do not expect to maintain those levels of financial margins with the market as inflation declines as we expected over the coming quarters.

On Slide 18, our change is on fees, which grows 19.7% year-over-year, even though we fell relative to the last quarter. When compared to the fourth quarter of 2021, commissioning fees grew by 19.7% because of credit — high credit card fees driven by marketing campaigns undertaken during the year as well as the integration of NCC, our private banking business into the bank since June 2022. Insurance brokerage fees also contributed by increasing 17.8% year-over-year. Here on Slide 19, we observed our major credit risk indicators each other. In the fourth quarter, the cost of credit was Ch$86.6 billion, which included the Ch$5 billion in additional provisions established during that period. Total NPLs remained stable as a decrease in commercial lending NPLs offset an increase in consumer loans NPLs. NPL coverage remained largely stable, reaching 164%.

Excluding additional provisions, our credit cost to loan portfolio ratio was 1% in the year, in line with our guidance from 0.7% to 1%, anticipating a more difficult credit conditions going forward with as well as further increase our focus on collections. Here on Slide 20, we see that our noninterest expenses for the full year of 2022 increased by 11.4%, 190 basis points less than inflation. We had a seasonally high quarter in expenses in the fourth quarter compared to a relatively low base in the third quarter. The increase in expenses in the fourth quarter was caused by the effects of greater inflation in Chile and the Chilean business devaluation observed in 2022 as well as by rising interest IT expenses. These cost increases must be seen in the context of a double-digit growth in loans and transactions and an overall revenue growth of 31.8%.

As a result, the bank efficiency ratio decreased to 45.5% in the fourth quarter when compared to the fourth quarter of 2021.Now let’s move to Slide 21 on Colombia. While we continue to run at more profit while we restructure our operations and cope with the difficult economic scenario. Progress is mostly visible in the cost side for now, where we closed 2022 with fewer branches as well as a reduction of 11% in head count. Our strengthened leadership team continue to move forward with the transformation program in Colombia. We believe that we are headed in the right direction, even though results might take longer to materialize due to the adverse economic conditions that the country faces. On Slide 22, we highlight that our settlement ratio improved by 20 basis points in the fourth quarter as a result of the retained earnings and the appreciation of the Chilean sales, which positively impacts our capital ratios.

On Slide 23, where we kept how we fare against our 2022 guidance. Our financial margins with clients increased as anticipated as interest rates rose. Loan growth was stronger than expected as it gained momentum in the second quarter. Cost of cost of credit was 1% of our loan portfolio was in line with our guidance, reaching 1.2% as the result of additional provisions of Ch$46.7 billion established during 2022. Noninterest expenses increased by 190 basis points less than inflation and rose by amount 1/3 of the increase in revenues. Overall, we met or exceeded expectations in every dimension, while achieving a return on tangible equity in Chile of 22.2%. On Slide 24, we present our macroeconomic scenario for 2023 in Chile and in Colombia. We expect a slight contraction of the Chilean economy, along with significant declines in inflation and interest rates.

The trend is similar in Colombia, while GDP growth is slowing down to 0.8%, while inflation interest rates fall, although not as rapidly as we’re going to see in Chile. On Slide 25, we outline our estimates for 2023. First, we anticipate our average rate of financial margin with clients to remain largely stable as improvements in loan mix and spreads offsetting the impact of falling interest rates. We expect loan growth to be rated due to economic slowdown and more challenging credit conditions than last year. As a result of those credit conditions and the expected implementation of new provisioning rules for consumer credit, we expect the cost of credit to be between 1.1 and 1.5%.Finally, we expect costs to grow in line with inflation as it declines rapidly, and we manage through the pressure of high investments in IT and talent.

While we do not expect our returns as well as those in the banking industry to remain as high as last year, it’s clear that we have achieved convergence of returns with our peers. More importantly, we are creating value to our shareholders, which, again, is our number one goal. With this, we conclude the presentation I have for you today, and we will gladly take any questions that you might have.

Q&A Session

Operator: Thank you. We will take our first question from Juan Recalde with Scotiabank. Your line is open.

Juan Recalde: Hi, good morning, Gabriel and Rodrigo . Congratulations on the strong annual results. And thank you for the opportunity to ask questions. I have two questions. The first one is related to fees. So we saw a good performance in 2022. And I was wondering, how do you see the commission and fees performing in 2023? And related to this, can you talk about the potential impact of the cap on interchange fees in Chile?

Gabriel Moura: Hi Juan, just to understand, you mentioned two questions. The first one is on season. The second one is interchange. Is that correct?

Juan Recalde: Yes. That’s correct. And then I will do a follow-up related to…

Gabriel Moura: Okay, fantastic. Okay, I’ll mention those two. First, in terms of fees, I think that we had a great year, as you saw. Of course, we always have to remember that fees in our portfolio, they are still very much credit-driven. So one of the things that we’ve been doing in the bank is diversifying our fee income to be more service-driven than we are. So especially on the insurance side, and as you know, we did an exclusivity deal with Cardif for insurance business. Now this is still much more driven on credit insurance due to concession than on services. What we expect is this year to have this acceleration in terms of the fees on credit while we are able to grow the other part of the business. So we don’t expect to have as much an impact that we have seen in 2022 and 2023 on fees.

Nevertheless, remember that we are still fulfilling part of the contract that we have with Cardif in order to recognize the fee income that we have from the sale of our insurance business that might happen at the end of this quarter or the beginning of the second quarter, according to our ability to move forward with the implementation. So that will have a large — a larger impact than what we saw in 2022. In terms of the interchange fees, I mean we are just incorporating all the information in the market. We expected to have some impact on this. If you take a look at the numbers, they show something different that it was initially proposed and something that is worse than we see on the market in Brazil, and the markets in the U.S. as well.

I think that the prices that we’re determined, they fail to see some other costs that are associated with the acquiring business, such as our financing of the clients’ issuers because we pay the commerce in 48 hours and receiving from clients in an average of 20 to 30 days. So because we have to finance the clients, I think that they say you to see this cost as well. As well as all the fraud that are in the industry of credit cards, why that they acquire fee helps the banks to finance some of the pressures on credit card fraud. So I think there is still questioning the practices that were set. I think that different banks are studying different ways of questioning this as well as credit card brands such as MasterCard, Visa, so on and so forth.

So I don’t think that this is a main deal. I think this is an open discussion, but I think that we are moving in the right direction. In terms of the impact for us, I think there’s good news and bad news, and they are quite the same, is that our portfolio of credit cards is still relatively small to our ambition and certainly to what we have in Brazil. So I don’t see material impacts on short term in our results due to that. But as we grow the credit card business, we are going to need to have a discussion of other sources of profitability for the business because that surely for the industry creates an impact — and at the end of the day, bad impact will generate differences in prices for customers, for commerce, for interest rates for fees.

I mean, at the end of the day, you have to remunerate the capital that is invested on the credit card business. So for us, right now, the impact is not material. But we expect as the credit card business grow to be something that we need to somehow develop a new business model in order to be more profitable.

Juan Recalde: That’s clear. Thank you, Gabriel. And the second question would be related to loan growth, particularly in Chile. So I see that you are expecting mid-single-digit loan growth in Chile. And can you talk about the expectation broken down by wholesale lending and retail lending? And how do you expect that to perform in 2023?

Gabriel Moura: I think there are two variables for 2023 that we need more information because there are variables that we still need to see how the economic cycle is moving, how income is moving. To give you an example, we saw the economic numbers this morning in Chile and then again, being surprised on the upside. So that generate effects in terms of the expectations we have throughout the year. But the two new variables that we — that I think that we need to incorporate more information are loan growth and cost of credit. I mean we need to see more data in order to have different opinions on this. What we see is that on the consumer side, in markets, we are — we have a larger carry because of interest rates on those portfolio.

Concessions at the endpoint, they are — on that case, they are less than half of what they were in the first quarter of last year. So you’re going to see pressure on that, especially because credit quality will become an issue in the market. So I think that everyone will be more cautious in credit concessions. And in commercial side, I think it has to do with the investment cycle of the companies. As we stabilize economic growth, I think that we are going to see a little bit less investment this year. And as a result, you’re going to see less growth. We do not have expectations broken down, but I don’t think there will be materially different based on the information that we have right now. But having said that, I think that loan growth is one of the barriers that is most difficult to say this year.

And at the end of the day, it has to do with cost of credit, right? If the cost — especially on the consumer side, mostly because I think they are well behaved. But then again, you’re going to see less concessions because of the level of interest rates and impact on income because of the inflation. If you see NPOs, stabilizing in going down faster than expected, then we are going to see loan growth higher in consumer than we are seeing and that averaging here. If it is somehow what the industry expects and less, you’re going to see a negative impact on that. So I think both variables, they are somehow very correlated this year.

Juan Recalde: That’s helpful. Thank you for the comment.

Gabriel Moura: Sure. Thank you, so much Juan.

Operator: And we do have a question from Daniel Mora on the web. The question is, what is the consolidated ROAE ROA guidance for 2023, considering the challenging year in Chile and Colombia? Can you break down this guidance by country, ROATE in Chile and ROATE in Colombia? And what would the next steps for improving the operations in Colombia, given the improvement achieved in the expenses front?

Gabriel Moura: Thank you so much for your question, Daniel. First, we do not have a short-term guidance on return on tangible equity. Then again, because of all our efforts in being sustainable in generating shareholder return, I mean, it’s difficult to make short-term predictions as we are improving the operations and we hit major milestones as you saw during the presentation. What we have always discussed with the market is our plan to have a return on tangible equity that we see for — especially after the capital increase that we have in Chile is to be something around 14%. So that’s what we think is our medium-term return for Chile. And in Colombia, all implementations that we are doing within the bank is to bring to our cost of equity, the operation in the next couple of years.

So that’s the guidance that we have. That’s what we will be moving forward. And I think it’s pretty consistent because when we were having returned in Chile around 10%, I used to say that the return on tangible equity with the capital increase will be something around 14%. And then we — when we were with a quarter with 29% return on tangible equity, I still said that we are going to see the bank at something around 14% and return on tangible equity. In Colombia, I think that you have to remember the business mix that we have in Colombia. So for instance, our treasury and trading sales and trading business, we always remunerated our capital well. Of course, last year, with rising interest rates, we have no pressure in the banking book, but it’s a business that I see remunerating our capital in excess of our cost of equity.

When I take a look at our wholesale business, I think it’s already remunerating our capital in excess of our cost of equity. I think that we are comfortable with the business. We are growing our business. And the flip side to that discussion is our retail business in Colombia because of this scale, because of its legal digitalization, which is something that we’ve been proving that there is a long way to pursue the levels of NPS that we have. We’re still working with the same methodology that we have in Chile. I think we are generating a loss in our retail business in Colombia, and we expect to achieve a even this year or next year, and that will contribute to our goal of going to our cost of equity. That’s the guidance that we have for return on tangible equity for the bank.

Operator: And we have another question from the web, ask — pardon me, first of all, congratulations for the orderly and clear presentation, also for the good and strong results of the year 2022. I would like to ask what is your position regarding the future of financial infrastructure, more specifically about the integration of APIs in the banking system?

Juan Recalde: Hi , thank you for your question. I mean I think that the trends that we see in Chile is not different from what we did in Brazil and what we see in other countries. I think that there is inconsistent from new companies, new distribution channels, new products and we are open to that. We are open to an open finance model. We think that any innovation that we can bring to our clients is something that we already did and we will continue to do so. So if you take a look, we have an open architecture in terms of our products for investments, meaning that we work with our own products, and we work with third-party products that we distribute. We have partnerships with also in the distribution of our products for mortgages and we are always looking for partnerships in order to create distribution for our products.

And on the insurance side, we have partnerships with insurance businesses to bring products to our clients. And with FinTechs, we have list some of them and integrated services with some of them. And we’ve been developing APIs through that distribution and also with our clients. For instance, on cash management. We have host-to-host and APIs with some of the clients to facilitate the implementation of banking products and services with their operations. So this is something that we do that we are open to that we think is how banks should and are working within Chile and in other countries. I think what is important is to be something that is desirable for the clients that make the clients like easier and there is a business model that is sustainable.

If we can achieve all those things, it’s certainly something that we are open to.

Operator: And I show no further questions at this time. So I will now turn the call back to Gabriel Moura for closing remarks.

Gabriel Moura: Fantastic. Thank you so much. I think that we had a fantastic 2022. I think that we are moving along 2023 with the same determination with the same focus. You saw the milestones that we hit this year. I think that the bank that we are in in 2022 is much different from the bank that we have in 2021 that we have in 2020. And this is the expectation that we have for 2023 is moving along with this agenda. As always, Rodrigo, and I are available for you if you have any questions. And we’re going to see you in our next conference call. Take care, everyone.

Operator: Ladies and gentlemen, this concludes today’s call, and we thank you for your participation. You may now disconnect.