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Ita? CorpBanca (ITCB)
Q2 2021 Earnings Call
Aug 2, 2021, 11:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day. Thank you for standing by and welcome to Itau Corpbanca Q2 2021 Financial Results Conference Call and Webcast. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Ms. Claudia Labbe. The floor is yours.

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Claudia Labbe -- Head of Investor Relations

Thank you. Good morning. Thank you for joining our conference call for our second quarter 2021 financial results. Before proceeding, let me mention that our remarks 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 applied 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 this form of communicating our results will give you a clearer and better view of our performance through these different processes. Please refer to pages 9 to 12 of our report for further details.

With us today this conference call are Mr. Gabriel Moura, CEO; and Mr. Rodrigo Couto. CFO, Mr. Moura will comment on our strategy and 2021 second quarter results. Afterwards, we will be available to a question-and-answer session. We have included a Q&A box on the console where you can type in your questions if you are not connected by phone. We will take questions from both the phone and the console. For the latter, we will read and answer your questions verbally.

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

Gabriel Amado de Moura -- Chief Executive Officer

Fantastic. Thank you so much, Claudia. Good morning, everyone. Thank you for joining us for the second quarter 2021 conference call. Today we'll be going through the key points of our transformation program, as well as the highlights of our second quarter results. Starting on slide number 3, the first point that I would like to make is that our transformation is happening now. After a thorough analysis and planning of our operations, we have launched the initiatives that are transforming [Indecipherable] to a bank that is more customer-obsessed, more agile, digitally simple, data-driven, that takes risks and experiments and that learns on the way.

This is all that is happening with the bank right now. In the following slides, I will go through what this transformation means for us. Moving to slide 4, we show that the number one reason why we're changing is that our customers are changing. During the past 18 months, our customers have become much more digital, seeking convenience in simplicity in fulfilling their needs for financial services. For instance, app logins have increased 41% in the first semester of 2021 compared to 2020. And app transfers have increased by more than 95% in the same period. Not only [Indecipherable] but also companies have become much more digital as we've seen the 40% increase in transfers, as well as 30% increase in investment from our wholesale clients through digital channels.

Moving to slide 5, in line with this trend set by our clients, we're implementing a mobile-first strategy to provide digital alternatives for every product and transaction offer by our branches and contact center. All of these digital alternatives that also include the new WhatsApp channel that will be available during the second half of 2021 will add to personal communication channels, such as call center, remote assistant managers to deliver a digital bank ecosystem. This ecosystem as well as other aspects of our value proposition will allow us to reach a larger client base, boosting our growth. On slide 6, we recap the five pillars of our transformation program.

The first pillar is about disrupting the market by creating new strategies and products. The second pillar is about putting our clients in the center of everything we do. The third pillar is to be simple in digital, not only the way we interact with our clients, but also in our internal processes. The fourth pillar is about building an innovative organization in culture that is fit for the direction and challenges ahead of us. And lastly, the fifth pillar is sustainability of our results. We will fill each of these pillars in the following slides.

On slide 7, we show a little bit of the methodology that we are following to ensure a disciplined execution of our transformation program, which we call ItauGo! leveraging the experience of Itau in Brazil. The methodology is based on a structured process of defining a high level strategic direction and then developing the bottom up initiatives that will take us there. We already have mapped over 240 initiatives designed by a multidisciplinary teams that are working in agile communities to implement those initiatives. The most disruptive initiatives have been channeled as speedboats, meaning that they will receive high prioritization by all teams involved, so they can advance as fast as possible.

As our transformation office is in charge of oversee, the implementation of these initiatives, which are monitored through an application that is constantly updated by the initiative owners. In addition to the executive discipline, there is as well as a high level of financial discipline from the development of the business cases, for each of the cases that we have discussed, to the monitoring of the value that we are capturing. Moving to slide 8, we show two examples of disruptive products and channels that we're developing as speedboats. The first is our alliance with Rappi, which will give us access to a large and highly complementary client base, which will serve through fully digital products.

We are also launching our independent financial advisory strategy that has proven successful in other markets, including Brazil. We believe that this strategy complements our current value proposition for wealth management clients, as well as clients' interest in different investment alternatives. Here on slide 8, we can see that as part of our investment value proposition, we have opened our investment platform to include funds from well-known names in investment community. We have also managed to increase our assets under management by $440 million through our open product platform. Our mutual funds, deposits and brokerage products are integrated in one place, delivering an easy and simple journey for our customers.

We are also preparing to integrate and relaunch our private banking franchise with the complete product offering through the acquisition of MCC, which is an investment platform previously owned by Itau Unibanco, allowing our clients to access internal investment opportunities. I would also like to highlight that our asset management has been recognized by the investment community with several awards from well-known institutions, such as Morningstar, Rankia, ALAS and Premio Salmon during 2021. Moving on slide 10, along with our mobile-first strategy, we have been expanding our digital branch structure. Our mindset is to offer best-in-class service and functionalities through each channel and giving customers freedom to decide how they want to interact with the bank.

Digital branches provide convenience to customers through extended hours, as well as faster and more specialized service than physical branches. Digital branches therefore have higher NPS and for example in our Itau Sucursales segment, the NPS of digital branches is two times that of our physical branches. The result is a higher level of customer engagement compared to traditional branches. On average, we have a higher percentage of clients with credit operations, especially in consumer and mortgage as well wealth and investments. In addition, consumer attrition in our digital branch is four times lower compared to our physical branches.

Last but not least, digital branches are about 30% more cost-efficient than our physical branches. Now moving to slide 11, to complement our digital offering retail bank, we have also been working on expanding our digital payment solutions. Following the same rationale of providing innovative and digital options to our customers, we have already implemented our digital wallet application and now we are working to deliver additional functionalities such as QR payments, and P2P, as well as digital and virtual credit cards. Our payment solutions should help us deliver distinctive digital experience.

When fully implemented, we aim to become the main payment partner of our clients, which in turn should enhance our principality as a bank. Furthermore, this interaction with different payment options, especially the use of our application should help us to deliver a complete and enlarged cross-selling within our product base. Moving on to slide 12, we showed the digital transformation of our wholesale bank, where we have been creating digital products that are very user-friendly. For example, the trade finance and credit guarantees, our apps' web solution for a wholesale segment has increased the number of clients using trade finance portal by more than 130% in the last 12 months.

During the same period, we have been seeing our market share increase 119 basis points moving from 13.1% to 14.3%, enabling us to become the second fastest growing bank in trade finance. Our trade finance offering has been no more than with the Global Finance Best Trade Finance Provider for 2021 and we were leveraging this expertise to develop other products such as our financial guarantees product, where we have seen a 73% in customer using a digital solution and achieved an NPS of 88%. We are the fastest growing bank in this market, have increase our market share by 173 basis points in the last six months.

We will continue to roll out digital solutions for wholesale products in the coming months. Going to slide 13, as a result of the implementations different initiatives, which always keep the client at the center of everything we do, we have reached the highest levels of NPS in our history with 24 percentage point increase in the overall rate in the last 12 months. That increase is a result of improvement in both our retail and wholesale segments. We have also improved significantly when compared to our peers. According to a benchmark survey made by Ipsos at our request, Itau is the bank with the highest NPS improvement among its peers in the period analyzed.

Now let's jump to slide 13 and go over the third pillar of our strategy based on the offering of simple and digital solutions to our clients. A clear sign of our progress is that we have the highest rated app, in our platforms. We also have the best banking website for SMEs according to Servitest. During the fourth quarter of 2021, we'll be launching additional features for a website in-line with our digital strategy. In addition to provide simple in digital channels, we are also engaging customers through social media. During the pandemic, we launched our [Indecipherable] YouTube channel, in which we have hosted top speakers, such as Steve Wozniak and Christopher Gardner.

With our social media content and presence, we are strengthening our position as a modern and innovative bank. As shown on slide 15 as part of our third pillar, we are also transforming our technological architecture to improve customer experience, time to market and efficiency. As a result, we have been able to reduce the number of systems running simultaneously and to develop more than 200 API's. In addition, we have implemented new processes to monitor customer fail interactions and to improve customer experience and reduce operational risk. Also related to our third pillar, we have been increasing the usage of robots to automatizing internal processes.

Those robots in average have a six-month payback confirming to the positive impact in terms of efficiency. On the commercial side, we have been applying advanced analytics modeling to enhance our capacity to make better commercial offers of our clients and to develop new value propositions. With that digital-centric technology, we have developed 360% more models than in previous years, which have a positive impact of CLP10 billion over the next three years. Now on slide 16, our fourth pillar is related to organization and cultural changes that we have implemented to reinforce our transformation process.

We're moving on from a traditional hierarchical structure to a new and modern organization in which we will restructure our teams in multidisciplinary working communities to generate a more agile and efficient working model. These communities are based on continuous interaction with our clients in order to create an ongoing feedback process that results on a better offering, capturing value in the short term, and adjusting products and functionalities to meet the evolving needs of our customers. We have already implemented the first nine communities with more than 200 people working in this new organization model.

By 2022, we expect to have more than 2,000 people working in this model, completely transforming the way our teams work together, especially in our commercial products and IT departments. Moving on to page 17, we show the work we have been doing on the human capital front. On talent attraction, we have partnered with Universidad Catolica to develop the finance laboratory to be a magnet for students interested in finance. In additional, we have also launched the ItauTech talent initiative, where we promote challenges to attract and select the best talents. We are also promoting diversity and gender equality.

We have taken concrete steps such as making sure that at least one female candidate is considered for every manager level position, as well as ensuring that employees on maternity leave are paid full bonuses. Finally, we have launched our campaign Itau is Orange and also [Indecipherable] colors to promote LGBTIQ+ inclusion. On the training side, we have partnered with Udemy and launched an internal training platform called IOX, which provides over 15,000 training courses for our employees. Finally, our remote first working model in flexible dress codes provides flexibility and less formal working environment that is very well liked by our staff.

Moving on to slide 18, the fifth pillar of the transformation is sustainable performance. We embrace the ESG criteria in our different operations and businesses responding to the needs of our society in order to have a green post-pandemic recovery. Our commitment to ESG is recognized by the ALAS award earned by our asset management, by our presence in the Dow Jones Sustainability Index, as well by our certification of a member of the FTSE4GOOD. To reinforce our asset management and ESG focus, in the beginning of July, we launched the first ESG ETF as part of our diversified offer for our clients. On the credit side, 16.3% of our wholesale portfolio is composed of credits that comply with sustainability criteria defined by the United Nations.

As shown on slide 19, we're embracing efficiency as a key factor for the sustainability of our results. Therefore, efficiency is a key work stream for our transformation program. Building upon the track record of cost control, as well as leveraging the experience from Itau Brazil, we are accelerating the pace for efficiency gains, following the same methodology and governance of our overall transformation program. We have already met more than 50 efficiency initiatives with digitization, automatization and agile organization as key leavers for this transformation. With our transformation program, our goal is to reach the average efficiency ratio of our previous groups in the short to medium term.

Moving to slide 20, regarding our operation in Colombia, we're putting in place a turnaround program following the same digital transformation methodology as in Chile, while also benefiting from the experience of Itau Brazil. We will reposition our retail bank to focus on a fluent and emerging affluence segments which have a better fit with our offering and optimize our channels to support this new position. We will ramp up digital to improve sales and customer experience and the commercial bank will also be transformed with key initiatives around segmentation, value proposition, and salesforce effectiveness.

Same as in Chile, efficiency will be an integral part of the transformation through a thought process, digitization and automatization, as well as middle office and back office automatization to fit this new strategy. Our goal in Colombia is to achieve a return on tangible equity of 10% to 12% in the short to medium term. On slide 21, we show that we expect to be in the short to medium term as a result of our transformation program. We will have a fully implemented Agile@Scale throughout the bank, which will enable us to take a step in changing our operational dynamics and our time to market. As a result, we will be able to pursue the leadership in customer satisfaction in the industry in order to become the fastest growing bank in Chile and create value for our shareholders.

The complete implementation about this strategy is that we have discussed in this call would lead us to achieve our goal of a consolidated return on tangible equity between 13% and 14% in the short to medium term after the capitalization process that we will discuss in our next slide. Moving on to slide 22, we're taking another major step by addressing our capitalization. We are pursuing a capital increase of CLP130 billion, around $1.1 billion to support our future growth in digital transformation, as well as increase our investment in Colombia while achieve industry standard capital ratios.

The shareholder meeting approved the placement procedure which will consider two pre-emptive rights periods delving into the board the determination of the number of shares should be placed, the price of the applicable final placement procedures. The capital increase and its placement are subject to obtaining all applicable regulatory approvals. Further details of the capital increase will be provided as it becomes publicly available. Let's move on to the next part of the presentation and on slide 23 we can jump straight into our highlights for the quarter. Our consolidated net income reached at CLP70.8 billion and CLP68.3 billion in Chile.

Consolidated return on tangible equity was 16% and return on tangible equity of our Chilean operation was 19.8% this quarter. When we look to our profitability in the first semester, we have an 18.7% return on tangible equity on a consolidated basis in 22.6% in Chile, which is the highest in our history. Financial margins with clients grew 3.2% quarter-on-quarter due to higher asset spreads and income from FX and derivatives as our net interest margin grew to 2.6%. This reflects our strategy especially on the wholesale bank, where we've been very selective when deploying in our capital only at acceptable return levels. Fees grew 4.9% while non-interest expenses declined 5.1% relative to the first quarter.

Cost of credit was down 33.9% in the quarter, reflecting the benign credit conditions that we have experienced. When we look at our credit portfolios we grew 0.7% in Chile and 1.4% in Colombia in constant currency in this quarter with mortgage portfolios in Chile and retail loans in Colombia as the biggest contributors, in line with this strategy. In line also with our goal of becoming the fast growing bank in Chile, we're monitoring our position in rankings in terms of new current accounts and credit growth. Over the last 12 months, we have been the number two in new accounts for companies and number three in new accounts for individuals.

We also ranked number two in customer -- in consumer and mortgage credit growth again consistent with our strategy of increasing the share of retail in our business mix. Moving on to slide 24, financial margin with clients in Chile grew 5.7% in the quarter, mainly driven by higher spreads, resulting in higher net interest margin in the quarter. On the chart below, which explains the change in our Q2 '21 margins with clients compared to the first quarter, we see the effect of an increase in the commercial portfolio spreads and spreads on derivatives and FX transactions, as well as higher capital financial margin.

Here on slide 25, we can see our main credit risk indicators in Chile. Cost of credit in the second quarter was CLP9.4 billion, which corresponds to 0.2% of our average loan portfolio. The cost of credit has been quite low as a result of the very favorable market conditions we have experienced due to all economic support measurements that have been put in place. In the second quarter, cost of credit was also positively impacted by the sale of two wholesale credits. Looking at our NPLs, mortgage, and consumer credits continued to perform better than expected, showing a decline in NPL ratios in the quarter.

In wholesale, we did have one corporate case roll into NPL. The movement that you're seeing commercial in NPLs and total or NPLs are mostly explained by that one case and therefore do not reflect overall portfolio trends. As for our perspective, going forward, we expect cost of credit to remain low in historical terms for the rest of the year, although not quite as low as the second quarter. Therefore, we are revising our guidance for the full year of 2021 for the cost of credit to be between 0.5% and 0.8%.

Wrapping up, the last six months were the best in our history and we are confident that this positive trend should continue. We are fully conscious that much remains to be done and that's why we are in full transformation mode to achieve our ambition of becoming the fastest growing bank in Chile. We are currently in the second or third place as well as turning around the performance of our business in Colombia. Finally, our upcoming capital increase is expected to provide us with the necessary capital strength to grow and compete effectively on this market.

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

Questions and Answers:


[Operator Instructions] Your first question comes from the line of Sebastian Gallego from CrediCorp Capital. Your line is now open.

Sebastian Gallego -- CrediCorp Capital -- Analyst

Yeah, thank you. Good morning, Gabriel and thank you for the presentation. I have several questions. The first one, if you could discuss on the efficiency front. You have been doing a great job in terms of opex control, but a big part of that has been driven by lower headcount, lower branches and lower ATMs. Can you probably discuss the outlook on this three specific topics on how you expect this going forward and how much room for opex reduction do you guys currently have at the bank?

Second question, I wanted to ask you about asset quality. You just mentioned that on the corporate segment, there wasn't a specific client. I'm just wondering if you currently feel comfortable with a lower coverage ratio, particularly in Chile? We have seen that this dropped to 136 from a recent high, over 200 and we are pretty much at pre-COVID levels or even social unrest.

So, I'm just wondering if you need or if the bank needs probably additional provisions in the upcoming quarters, maybe going into 2022 probably. And lastly, I just wanted to ask you about this strategy on loan growth. We have seen a very strong loan growth particularly on the mortgage portfolio and just maybe the timing when you see a recovery mostly focused on consumer that was a priority before the pandemic. Thank you very much.

Gabriel Amado de Moura -- Chief Executive Officer

Fantastic. Thank you for your questions, Sebastian. First, your first question was about efficiency. And, as you mentioned, I think that since the merger, we were able to capture the synergies that we set for the deal. As you can see in the slide that we've shown, we have grown our cost base less than our competitors, I mean if you take a look at the financial system as an aggregate. And taking all the synergies that were with the operation of Itau and Corpbanca, I think that there are still many levels of synergies that we can achieve on the operational level.

As you mentioned, headcount is always a measure when we take a look at all the digitization process that we went forward and the program of robotization that we have that was quite strong in making sure that we are making more efficient, all the eventual minimalities that we have in different processes. As well as taking a look at the footprint that we have for our branches as customers become more digital. I think in terms of the main impacts of our executions, we will continue to see those factors. Of course, at a certain point, we need to start thinking about efficiency as a function of the efficiency ratio, right?

Because we also intend to grow, the bank can be the fastest grow bank in Chile in growing, increase your cost as you increase the amount of transaction with the bank. But at the same time you increase your revenues, right? And that's why one of the goals that we have is to converge to the efficiency ratio average that our peers have on the short to medium term. But having said that, when we take a look at all the initiatives that were implemented successfully in Brazil, all the things that we have mapped here in Chile, we think that we have costs well under control and we will continue to work for the goal that I just mentioned.

In the second point that you had, is about asset quality. I think it has to do, especially on the commercial side of the discussion, Sebastian. You tend to do provisions well before you have NPL, right? It's just one of the characteristics of commercial loans when compared to consumer and mortgages that work more on a statistical base given that they are well-diversified within the portfolio. So, what happens in the credit cycle is that you front-load the provisions in commercial as you see a deterioration in ratings and as they become NPLs, you have already the provision based on your internal rating process. So, I think that we are comfortable with the level of provisions that we have with the coverage that we have.

You have to remember that for instance, for the cases that we have mentioned that affect the NPL aside from the provisions that we have, we also have guarantees, vary from real estate to other guarantees. So, in terms of the loss given before, we are well-covered. And in terms of additional provisions, we have to take a look at the market and incorporate new information as the economy goes through the second semester to see what we intend to do. But giving all the information that we have right now, I think that we are very comfortable with the level of provisions that we have.

And that's why we are revising the guidance that we have for full year cost of credit to be between 0.5% to 0.8%, which is lower than the initial guidance that we had for the beginning of the year. In terms of total coverage, I think it's also important when you compare us to the industry, remember that the mix that we have is quite different from the industry. We are more concentrated on corporate, in large corporate loans than on SMEs in the market compared to other banks. And I think that for the credit cycle, we are well-provisioned giving the mix that we have and that's why I don't think that we are directly comparable to some of the players.

Your last point was about loan growth. In here, I think that -- the way of putting it, I think that the market has grew less than the expectations we all had. The focus that we had was being very cautious around the segments that we are operating and the type of growth that we are having. That's why we have prioritized mortgages with all the guarantees and we were a little bit more cautious on consumer growth. Having said that, when you would take a look at the rankings for growth within the industry, we are the second largest growth for consumer and also for mortgages in the last 12 months.

So, I think that we did a good job in there and as consumption rekindles within the market, I think it's feasible for us to continue to have a leadership position in consumer growth and resume our processes. But then again, if you're financing consumption, you need to see consumption in the market. And I think that we are on the tipping point of the pandemic in which we will start to see higher consumption and stabilized employment, which will give us more confidence to grow more that portfolio. As I mentioned, the main strategic goal that we have is to be the bank that has the highest growth within the system. I think that we are well-positioned in the last 12 months, but there's still work to be done.

Sebastian Gallego -- CrediCorp Capital -- Analyst

Just, if I may Gabriel, can we clarify the guidance on cost of risk. Is that at the consolidated level or is that just for Chile that you mentioned?

Gabriel Amado de Moura -- Chief Executive Officer

That's just for Chile, what I mentioned.

Sebastian Gallego -- CrediCorp Capital -- Analyst

Perfect, perfect. Thank you very much.

Gabriel Amado de Moura -- Chief Executive Officer

Thank you.


[Operator Instructions] No questions at this time. Sir, you may continue.

Gabriel Amado de Moura -- Chief Executive Officer

Fantastic. Thank you so much for your presence here for the second quarter results. As you have seen, we have transformation going on, we have solid results for the bank, we are part of a transformation that we are doing, and we hope to see on the third quarter with a continuous trend of the transformation that we are implementing. So, see you there. Take care.


[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Claudia Labbe -- Head of Investor Relations

Gabriel Amado de Moura -- Chief Executive Officer

Sebastian Gallego -- CrediCorp Capital -- Analyst

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