Business Context and Reporting Period
Company: Banco de Chile (Foreign Private Issuer)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter 2018 (Ended March 31, 2018)
Filing Date: May 2, 2018
Context: The Bank reported financial results for 1Q18 against a backdrop of a recovering Chilean economy, with GDP growth projections revised upward to 3-4% for 2018. The Bank highlighted a moderate recovery in loan demand, particularly in the wholesale segment, and improved contributions from wealth management subsidiaries.
Key Financial Metrics
| Metric | 1Q18 (Ch$ Bn) | 1Q17 (Ch$ Bn) | YoY Change |
|---|---|---|---|
| Net Income | 142.7 | 140.0 | +1.9% |
| Operating Revenues | 444.9 | 422.7 | +5.3% |
| Net Interest Income | 316.5 | 303.5 | +4.3% |
| Operating Expenses | 204.2 | 192.2 | +6.3% |
| Loan Loss Provisions | 70.9 | 63.1 | +12.4% |
| Total Assets | 33,243.7 | 31,806.4 | +4.5% |
| Total Loans | 25,860.0 | 25,408.1 | +1.8% |
| Total Equity | 3,103.0 | 2,896.3 | +7.1% |
Key Ratios:
- Return on Average Equity (ROAE): 18.22% (1Q18) vs 19.14% (1Q17)
- Return on Average Assets (ROAA): 1.72% (1Q18) vs 1.78% (1Q17)
- Efficiency Ratio: 45.9% (1Q18) vs 45.5% (1Q17)
- Net Interest Margin: 4.28% (1Q18) vs 4.25% (1Q17)
- Past Due Ratio: 1.17% (1Q18) vs 1.22% (1Q17)
- Capital Adequacy (BIS Ratio): 14.23% (1Q18) vs 13.85% (1Q17)
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 5.3% YoY, driven by higher inflation impacting net UF asset exposure (+Ch$13.2 Bn), increased income from loans (+Ch$4.5 Bn), and higher fees from subsidiaries (+Ch$1.9 Bn). This was partially offset by a decrease in funding & gapping revenues (-Ch$5.8 Bn).
- Expense Increase: Operating expenses rose 6.3% YoY. A significant portion was a non-recurrent Ch$5.4 Bn special bonus for staff following a collective bargaining agreement. Excluding this, expenses grew 3.6%.
- Loan Loss Provisions: Provisions increased 12.4% YoY. Management attributes this largely to a normalization effect, as 1Q17 benefited from extraordinary credit risk releases in the wholesale segment. The provisions-to-average-loans ratio rose 12 basis points to 1.12%.
- Segment Performance:
- Retail Banking: Income before tax increased slightly (0.6%) due to loan growth and better credit quality, offset by higher personnel costs.
- Wholesale Banking: Income before tax decreased 7.8% due to higher provisions, though revenues improved from fees and structuring deals.
- Subsidiaries: Income before tax surged 28.7%, driven by a 96.8% increase in stock trading turnover and growth in mutual funds and insurance brokerage.
- Loan Portfolio: Total loans grew 1.8% YoY. Retail loans (mortgage and consumer) drove growth, while wholesale loans declined 5.5% YoY due to foreign currency appreciation and a strategic avoidance of low-margin deals.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
CEO Eduardo Ebensperger characterized 1Q18 as a "very positive quarter," noting that adjusted net income (excluding the Ch$5.4 Bn bonus and comparing against normalized prior periods) would have considerably outperformed 1Q17 and 4Q17. The Bank remains optimistic about the future, citing a 26% YoY increase in installment loan sales and a 43% YoY increase in new checking accounts. The Central Bank has maintained the interest rate at 2.5%, expecting inflation to converge to the 3.0% target by 2019.
Risks and Contingencies:
- Economic Conditions: Risks include changes in general economic, business, or political conditions in Chile and Latin America.
- Market Conditions: Fluctuations in capital markets, foreign exchange rates, and interest rates could impact performance.
- Operational Risks: Increased costs, unanticipated financing costs, or inability to obtain debt/equity financing on attractive terms.
- Legal: Unexpected developments in existing litigation.
Unusual Items:
- 1Q18: Ch$5.4 Bn special staff bonus (non-recurrent expense).
- 1Q17: Extraordinary credit risk releases in wholesale segment and a Ch$8 Bn temporary increase in net commissions due to a loyalty program revision.
Investor Verification Checklist
- Adjusted Earnings: Verify the calculation of "adjusted" net income (Ch$147 Bn) excluding the Ch$5.4 Bn union bonus to assess true operational performance.
- Credit Quality Normalization: Confirm the trend in wholesale loan loss provisions to ensure the 1Q17 "extraordinary release" was a one-time event and not a recurring pattern of under-provisioning.
- Wholesale Loan Decline: Investigate the 5.5% YoY decline in wholesale loans to determine if the strategic shift away from low-margin deals impacts long-term revenue growth.
- Subsidiary Volatility: Review the sustainability of the 28.7% income surge in subsidiaries, which was heavily influenced by specific stock auctions totaling nearly USD 400 million.
- Capitalization: Verify the status of the 1.57 billion new shares authorized for issuance following the capitalization of 2017 earnings.