Itaú CorpBanca (ITCB) Q4 2020 Earnings Call Transcript

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Itaú CorpBanca (ITCB)
Q4 2020 Earnings Call
Mar 1, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Itau Corpbanca Fourth Quarter 2020 Financial Results Conference Call. [Operator Instructions]

I would now like to turn the call over to Claudia Labbe. Thank you. Please go ahead.

Claudia Labbe -- Head of Investor Relations

Thank you. Good morning. Thank you for joining our conference call for our fourth quarter 2020 financial results.

Before proceeding, let me mention that our remark may include forward-looking information and actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risk, and other factors. 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 we apply managerial criteria to disclose our income statement. This managerial financial model reflects how we measure, analyze and discuss financial results by segregating commercial performance, financial risk management, credit risk management, and cost efficiency. We believe these form of communicating our results will give you a clearer and better view of our performance through these different perspectives. Please refer to Pages 9 to 12 of our report for further details.

With us today in this conference call in Santiago are Mr. Gabriel Moura, CEO; and Mr. Rodrigo Couto, CFO. First, Mr. Moura will comment on 2020 results, both fourth quarter and full year, our strategic evolution, as well as our most recent results. Afterwards, we will be available for a question-and-answer session.

It is now my pleasure to turn the call over to Gabriel.

Gabriel Amado de Moura -- Chief Executive Officer

Thank you, Claudia. Good morning everyone, and thank you for attending our 2020 fourth quarter's earnings call. Today's presentation has three parts. Our fourth quarter 2020 results, our early release results as of the end of January 2021, and an update on our strategic agenda. So can we please move straight to our financial highlights on Slide 3?

In the fourth quarter, we started to make the necessary adjustments to ensure that all of the possible impacts from the events of 2020 were reflected in 2020 results, enabling us to enter 2021 with a strong balance sheet and no lingering effect yet to be recognized. As a result, our consolidated cost of credit was CLP308 billion in the fourth quarter, which led to a negative [Phonetic] net income of CLP124 billion. On the positive side, we saw recovering in our financial margin with clients, which rose 4.6% in the consolidated and 6.6% in Chile. The results are recovering commissions, which rose 7.1% in the consolidated and 4.5% in Chile.

Our loan portfolio contracted 3.5% in the consolidated and 3.8% in Chile. That reduction was concentrated in the wholesale loans and we focused on our with demand into the high level of liquidity in the market as well as from our focus on shareholder value creation. That focus led us to be selective not only in terms of risk, but also in terms of the minimum return we're requiring for deploying our capital privilege [Phonetic].

We maintained a strong focus on cost control and as a result of our consolidated non-interest expense rose only 0.5% in the quarter, well below the assumption. In Chile, our fourth quarter expenses were 1.2% lower quarter-on-quarter and 1% lower year-on-year. We now move on to review our results for the full year of 2020. In Page 5 now, we can see how the macroeconomic indicators evolved in 2020 and how they compare to our initial expectations for the year. As you might recall, every quarter we have updated our expectations for 2020 macroeconomic outlook for both Chile and Colombia. When compared to our forecast at the beginning of the year, we observed the magnitude of the macroeconomic shock caused by COVID, which led to a GDP growth gap of over 7% in Chile and almost 10% in Colombia. Interest rates were also much lower than our initial forecast as central banks both in Chile and Colombia aggressively lowered interest rates to counter the effect of the pandemic on the macroeconomic activity.

And now talking about the full year 2020 results on Slide 6. On this slide, we share some of the main highlights for the year 2020. Our consolidated net income was negative CLP79.4 billion in the consolidated and negative CLP50.3 billion in Chile. Our revenues decreased due to the economic contraction caused by the pandemic. In Chile, where revenue decreased 5.2% compared to 2019, the decrease was concentrated in the financial margin with the market and commissions. Financial margin with the market was heavily impacted in the first quarter owing to the market shock resulting from the initial outbreak of the pandemic.

In commission, the decrease was concentrated in credit-related condition, for example, financial advisory and credit-related insurance fee due to lower credit origination as a result of the pandemic. On the cost management front, we managed to reduce our consolidated non-interest expense by 0.7% in 2020 relative to 2019. As you might recall from our last conference call, we made the biggest headcount reduction in Chile since the merger, which is a clear sign of our progress in the efficiency and simplification fronts which we'll discuss more in the latter part of the presentation. That has resulted in a 7% reduction of our headcount in Chile.

Cost of credit was obviously impacted by the pandemic. We took a cautious forward-looking approach to the credit cycle, which led us to establish CLP136.3 billion in additional provision in the consolidated balance sheet.

Now moving to Slide 7, we see how our portfolio mix evolved in 2020 in Chile. Consistent with our strategy, we increased the share of mortgage in consumer loans in our portfolio from 34.8% to 33.5%. We advanced our market share in mortgage and consumer loans while seeing some ground in commercial loans, especially in our wholesale business where we were focusing on improving results.

On Slide 8, we see that our financial margins with clients recovered 6.6% in the fourth quarter in Chile. That was mainly due to higher spread as well as the sale of the student loan portfolio. The chart on the top right demonstrates that our net interest rate has been resilient despite the fall in the monetary policy year-over-year. On the waterfall below, which explains the change in our full-year 2020 margin with clients versus 2019, we see that both loan and deposit volumes had strong positive contributions to increasing our financial margin with clients. Those positive contributions were offset by a change in credit portfolio mix, mainly due to the contraction of the consumer portfolio as a result of the pandemic and by the reduction in the spread from deposits resulting from the fall of the interest rates.

Here on Slide 9, we can see our main credit risk and coverage ratio. Cost of credit in the fourth quarter was CLP231.4 billion, which corresponds to 5% of our other partnership on portfolio. The NPL ratio fell 60 basis point year-over-year and it's almost stable quarter-over-quarter driven by the fall in NPLs of mortgage loans and commercial loans year-over-year. Consumer NPLs which has fallen 140 basis points in third quarter increased 70 basis points in the fourth quarter as the effect of the credit release measures begin to wear off. As a result of the provisions we established throughout the year, our NPL coverage ratio reached 218%, which is the highest level in our history and compares to the 113% in December 2019. The increase in coverage clearly shows that we are ahead of the NPL cycle and have already made significant provision and displayed that NPLs might increase in the future according to our expected loss range. Therefore, as we announced at last quarter earnings call, we believe that our cost of credit will be at normal levels going forward at between 1% and 1.3% for 2021. Ultimately, we are confident that we have put 2020 point and prepared our balance sheet for a new cycle of growth and sustained improvement in profitability as the economy recovers and we move forward with our transformation plan.

On Slide 10, we show our non-interest expenses for the quarter and for the 12-month period which had remained very much under control, decreasing 1.2% in the quarter and increasing only 0.5% for 2020. The main highlight is the headcount reduction of 7% this year which was the biggest adjustment since the merger. As we have mentioned, we've simplified our organizational structure with proportionately bigger reductions at the start of the period. We also did get in a way that took care of our employees who were let go by providing extended health insurance as well as outplacement and training benefits. We also had 11 branch closures in the last 12 months, which represents a 5.7% reduction.

On Slide 11, we can see that our fully loaded CET1 capital ratio decreased only 30 basis points year-over-year year despite the effect of the pandemic and the 100% dividend payout of the 2019 earning. In fact, the decrease in the ratio is almost fully explained by the excess payout over the 30% [Indecipherable]. We expect our capital ratios to improve steadily going forward and our profitability recovers and it continues to advance in our capital efficiency efforts.

Now moving to be Slide 12, we show that our liquidity position remains very strong with both LCR and NSFR at historically high levels in 2020.

Let's move to Slide 13. Here we can see the evolution of the net income of the Colombian operation, which was negative CLP85.4 billion mainly due to the credit provision established in the fourth quarter. Consistent with our current focus in Colombia, our credit risk management, and cost efficiency, we highlight the 12.6% reduction in our branch network as well as 6.9% reduction in our headcount year-over-year in Colombia.

Moving forward to Slide 15, we will update you on our January 2021 results. We had a strong start to the year, posting a net income of CLP27.5 billion in Chile for January, an increase of 154% year-over-year. To put this in perspective, our January 2021 net income corresponds to almost 20% of the net income for the full year of 2019. These positive results were driven by higher financial margins with the market, lower cost of credit, and a 1.8% decrease in our non-interest expense. It's important to mention that we did not consumer in January any of the reserves that we built in 2020 to withstand a potential deterioration of credit quality. While we recognize the January results were boosted by an especially strong month in financial margins with the market in very benign cost of credit, we do expect a significant and sustaining improvement in profitability. Despite the challenges ahead, we are confident that our strategy, cost discipline, and a strong balance sheet, will enable us to deliver sustainable increase in results.

Let's move on the next part of the presentation. On Slide 17, we'll recap the key building blocks of our transformation plan, client centricity, digital experience, simplification, talent development, all leading to sustainable results. Having left 2020 behind us, we are now 100% focused on implementing our plan to build the bank of the future. On the next few pages, we will share with you some of the progress that we've made so far. On Slide 18, we see that our client centricity efforts have resulted in significant improvement of our Net Promoter Score, or NPS, across all segments, which reflects directly in consumer engagement and retention.

On the investment side, we experienced 19% growth in assets under management, boosted by the open investment platform, which contributed to 40% of that growth. We have increased our product offering, not only of our own investment products, but also through the open investment platform. As I mentioned in last quarter, our open investment platform offers our clients freedom of choice with the best investment options available in the market as well as independent from past.

The strong trend toward digital channels and transformation continues as we see share of transfers in payments through mid -- through their [Indecipherable] in 2020. That is why we have had been investing in our digital channel. In the third quarter, we launched a whole new app as well as a new and more convenient personal banking website. As you might recall from our last conference call, as a result, we have experienced an increase in the Servitest ranking of [Indecipherable] our position with the new app and we have ranked that first is the new site among companies in the same survey. Our new app ranked Number 2 among our peers in both Android in Apple stores. In addition, in the fourth quarter, we mentioned a digital wallet that allows payment in smartphones and smartwatches, making them easier and safer as well as offering both Visa and Mastercard options for our clients.

In Slide 20, we see that sustainable results in responsible banking are in the core of what we do. We believe that having good governance, taking care of the environment and being positively engaged with our employees, the society and in general at the community that we are a part is essential. Let me highlight that. In 2020, our management and corporate decisions were once again recognized by the market. We continue to be listed in relevant ESG indices and ratings. And for third consecutive year, the Institutional Investor magazine has distinguished among the most honored company for the transparency and communication with the market. And for the first time, S&P Global ESG included in the 2021 addition of the Sustainability Yearbook. And our sustainability performance is within the Top 15% of our industry.

On the environmental front, our asset management has been recognized for the second year as a leader in responsible investment, corporate governance and sustainability research. This is a good example of how ESG aspects are integrated into our business and these awards confirm that we are on that right path. We have continued to move forward by launching two new 100% ESG mutual funds in alliance with two world-class asset managers, Nordea and Robeco asset. None of this would be possible without our team of more than 5,000 people with different talents, expertise and experience. In a challenging year, they showed exceptional adaptability and resilience. We also discovered that working remotely or remote for us as we call the new normal is not only feasible but a meaningful opportunity to offer flexibility and convenience to our employees -- satisfaction and productivity.

Now let's talk about 2021. On Slide 22, we present our expectations for the macroeconomic scenario for Chile in 2021. [Technical Issues] considerable uncertainty [Technical Issues] which will bring us back in 2019 real GDP levels. The easing of the second wave of COVID-19 mobility restriction measures along with the implementation of significant [Technical Issues] stimulus, high copper prices, and swift inoculation process, moves [Phonetic] to the quarter recovering this year. This bounce back in GDP is boosted by strong statistical carryover at the close of 2020. The political risk related to revising of the constitutional and President election is of course a downside risk. We still see inflation close to the 3% target over our forecast provides, but risk speaks to higher inflation in the short term. On top of food and another good inflations, the latter boosted by the stimulus measure, a swift reopening of the economy could foster a reacceleration of Servitest inflation which is currently close to historical meetings. This stimulus aided [Technical Issues] 0.5% during this year while a gradual normalization will likely start next year.

On Slide 23 [Technical Issues].

Operator

Ladies and gentleman, please standby. We'll reconnect the speaker. [Technical Issues] Hey, Mr. Moura, you're back in the main conference.

Gabriel Amado de Moura -- Chief Executive Officer

Okay, fantastic. I'm very sorry. I just got disconnected and I am back. So, as I was explaining the guidance that we have on Slide 23, for credit portfolio, we expect mid-single-digit growth in Chile with higher growth in consumer, mortgages, in SMEs and lower growth in larger corporates as we seek to improve our net interest margin. Consistent with our strategy, our growth focus will continue to be on the retail segment, which provide a broad range of products and services to individuals and SMEs. As we announced in our third quarter earnings call, we expect our cost of credit to normalize to be between 1% and 1.3%, still a little bit higher than our long-run target, but with potential to a positive surprise. We will also maintain our focus on efficiency and expect to once more deliver a cost below growth for the year.

With this, we conclude the presentation we have for you today and we would gladly take any questions that you might have.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Jason Mollin with Scotiabank. Your line is open.

Jason Mollin -- Scotiabank -- Analyst

Thank you very much. My question has to do with operating efficiency. And you showed over the year in both Chile and Colombia that you closed some branches and reduced some headcount. Can you talk to us about the opportunity there to be as efficient as possible and what that means in terms of those specific numbers in 2021 and 2022? Thank you.

Gabriel Amado de Moura -- Chief Executive Officer

Sure. Thank you for your question, Jason. I think that efficiency is something that we've been pursuing strongly since the merger. When you take a look that, the synergies that we had prior to the merger, we achieved that as it was expected for cost synergies. The problem with the efficiency ratio for us is that although we've been very disciplined with the cost side of the equation, on revenues for different reasons of the social unrest in Chile 2019 [Phonetic] and the pandemic in 2020, we were affected in our revenues. Especially on the revenues, as I mentioned, due to the interest rate, so our financial margins with clients especially on the liability side with the lower interest rates and also the credit concessions too that we have. Nevertheless, I believe there are still significant room for improvement on the cost side without the digitalization efforts and investments that we've been doing so far. We were able to reduce our headcount to reduce our footprint on branches. And I think there is still things for us to do.

In Colombia, I think that there is an opportunity for us to be even more aggressive on the cost side taking a look at businesses that we have, products that we have in focus on profitability there. So I think there are certain opportunities for us to be even more aggressive on costs in Colombia. The conjunction of all of this will entail lower than inflation cost increase. I think that's something that we can do for more a couple of years, even growing our portfolio. And as a consequence, as we resume our growth in revenues and still are very disciplined on costs, we believe it is possible for us to converge to an efficiency ratio that is more attractive to our peers in Chile. I don't know if I answered your question, Jason.

Jason Mollin -- Scotiabank -- Analyst

No, that's very helpful. How does that affect costs based on corporate growing less than inflation, in corporate investments and continuing to show the improvements in the digital experience and the customer experience, etc.? Does that include a large increase in investment for 2021?

Gabriel Amado de Moura -- Chief Executive Officer

We have investment only in technology, particularly the investments in technology, something around between CLP40 billion and CLP50 billion in the last few years. And I think that by maintaining those levels of investments, we can do this digital transformation, but only we are aiming for, as I mentioned in the proposal slides, we are getting good results from the investments that we did in the past. And I think that the level that we now have is adequate for what we see in the future. Having said that, the cost increase that I mentioned takes into consideration the precision of our -- and amortization of those investments. As we fund the increase in the precision amortization with the reduction of other costs from our robotics optimization process for instance, that enable us to take many reality out of some processes, [Indecipherable] provides the bank in some new ways and by that making us more efficient.

Jason Mollin -- Scotiabank -- Analyst

Thank you very much.

Gabriel Amado de Moura -- Chief Executive Officer

Thank you, Jason.

Operator

[Operator Instructions] Your next question comes from Jorg Friedemann with Citibank. Your line is now open.

Jorg Friedemann -- Citibank -- Analyst

Thank you very much for the opportunity. Good morning and thank you for the explanations about trends, Gabriel. So I had two question. Just starting with first, can you show the numbers for January in the presentation. It -- definitely robust [Phonetic] improvement. But I noted as well that in the pre-tax results, approximately 75% of it is coming from the results with the market, the financial margin with the market. And I remember that you told us some time ago, that depending on the iteration of rates and inflations, you could start to recognize stronger results on the financial margin with the market. So just wondering if the time has come for us to start observing these trends to be unleashed or if it couldn't be recognized as non-recurring the strong levels of financial margin with the market in January? And then I come to my second question. Thank you very much.

Gabriel Amado de Moura -- Chief Executive Officer

Sure. I think we had a strong January because of observation results. I would say that, of course there's high inflation that we have observed and we -- helps us on that phase. We are happy with the results that we have with treasury, especially because I think they're mixed with two things which we talk a lot about the effects of inflation on the banking. But I think it's also important for us to remember that our [Indecipherable] with finance is very strong for instance. We are the largest bank in FX with clients in Chile. We are a top bank in terms of the rebuttals with clients. So all the timed activity with the treasury is also strong for us and important in recurring results for us on the long term. The January effectively had -- has the two components. But of course, the component of the seasonality that we have for inflation is larger. The same effect we should expect in the first semester as we see inflation higher than expected in Chile. So, I think that the good part is that we have -- we are having strong results operationally for the business also in retail. We're still lagging a little bit due to client activity. A particular credit concession is a little bit shy due to economic activity. We think that on the second semester, it should resume. In the first semester, I think that the -- the story of the first semester for credit may be driving for the second for government program that the government has announced and that we are working with our clients and SMEs to help them through this process, and taking the guarantees that the government has for those clients of credit, that enable us to go at a longer terms of credit for our clients. So I think that will be the dynamic on the first quarter. I think that operationally, we're going to see better results from the second quarter on.

Jorg Friedemann -- Citibank -- Analyst

No, that's perfect, very clear.

Gabriel Amado de Moura -- Chief Executive Officer

You had...

Jorg Friedemann -- Citibank -- Analyst

Sorry. Go ahead, sorry.

Gabriel Amado de Moura -- Chief Executive Officer

No, no, no, I was just going to ask for your second question. I'm sorry. Go ahead.

Jorg Friedemann -- Citibank -- Analyst

No problem. Thank you very much. Yes. My second question is related to capital, it was really impressive as you pointed out the conservation of [Technical Issues] such as challenging environments during 2020. Plus just wondering, what to believe is going to be best for capital over the coming markets? Because we know on the one hand that you're limiting the dividend payout. But on the other hand, we also know that in sometimes, in some quarters, Basel III will pick up as well as your main partner in the bank is leveraged and you have to do a buyback next year in Colombia. Not sure if there is any kind of possibility of you anticipating these write-backs, provide some liquidity with this partner or it has not been discussed yet. Thank you.

Gabriel Amado de Moura -- Chief Executive Officer

Sure. As you mentioned, I think in terms of operations, we went into go look at capital. When you see everything that went through 2020 and the numbers of capital that we posted, I think that we were very resilient in terms of our capital management, especially taking consideration all the provisions that we did. Of course, when we take a look at the convergence to Basel III, the clients that we have -- that we initially had for the convergence of our capital base, I think that all that happened in 2019 and 2020, in terms of the credit cycle, in terms of the revenue growth, I think that makes us change a little bit of the client that we initially have to only converge retaining our own capital. I think that's one of the main catalysts for this discussion and we are just starting this discussion with our Board is the acquisition of Colombia go through the contracts that we have. We will buy the participation [Indecipherable] in Colombia at the beginning of next year, and that will generate a negative impacts in capital of around 100 basis points. That's the estimates what we have as of now. Giving that and the convergence that we need to do for Basel III, I think we have -- we need to have a conversation with our Board and come up with a different plan in terms of convergence. That may probably lead to a capital increase for the bank. We still have -- we still are having this discussion but believing the best that we have forwards, giving the acquisition of Colombia and the impact that we have in 2019 and in 2020, probably we will be discussing a capital increase on the next few years.

Jorg Friedemann -- Citibank -- Analyst

All right, perfect. Thank you very much, Gabriel.

Operator

[Operator Instructions] And there are no further questions at this time. I will now turn the call back over to Mr. Moura for closing remarks.

Jason Mollin -- Scotiabank -- Analyst

Fantastic. Thank you so much for your questions. As I mentioned, we are very optimistic with 2021. I think that we are entering a new period in the bank that we have -- that we are very well provisioned, that our investments in management, our investments in risk, our investments in digital are -- we're taking good results for that. So we are optimistic with 2021. And we look forward to discussing with you the results for the next quarters. Take care, we you see you then.

Operator

[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Claudia Labbe -- Head of Investor Relations

Gabriel Amado de Moura -- Chief Executive Officer

Jason Mollin -- Scotiabank -- Analyst

Jorg Friedemann -- Citibank -- Analyst

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