Business Context and Reporting Period
Company: Banco de Chile (Foreign Private Issuer)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter 2018 (Ended September 30, 2018)
Filing Date: October 30, 2018
Context: The Bank reported financial results for 3Q18, highlighting a 15.0% year-over-year (YoY) increase in operating revenues despite a 4.3% YoY decrease in net income. The results were influenced by non-recurrent effects in loan loss provisions and operating expenses, alongside a strong Chilean economic recovery.
Key Financial Metrics
| Metric | 3Q18 (Ch$ Bn) | 3Q17 (Ch$ Bn) | YoY Change |
|---|---|---|---|
| Operating Revenues | 464.8 | 404.1 | +15.0% |
| Net Income (Attributable to Owners) | 128.1 | 133.8 | -4.3% |
| Loan Loss Provisions | 95.3 | 50.4 | +88.9% |
| Operating Expenses | 211.5 | 197.1 | +7.3% |
| Total Assets | 35,084.9 | 31,914.6 | +9.9% |
| Total Loans to Customers | 27,047.7 | 25,449.8 | +6.3% |
| Total Equity | 3,223.5 | 3,037.4 | +6.1% |
Key Ratios (3Q18):
- Efficiency Ratio (Op. Exp / Op. Rev): 45.5% (Improved from 48.8% in 3Q17)
- Return on Average Equity (ROAE): 16.02%
- Return on Average Assets (ROAA): 1.48%
- Cost of Risk (Provisions / Avg. Loans): 1.43% (Includes non-recurrent effects)
- BIS Capital Ratio: 14.11%
- Tier 1 Capital Ratio: 11.25%
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues surged 15.0% YoY, driven by a Ch$39.3 Bn. positive inflation impact on UF net asset exposure, Ch$7.8 Bn. growth from demand deposits, and Ch$6.0 Bn. increase in fees.
- Net Income Decline: Net income fell 4.3% YoY primarily due to a Ch$38.7 Bn. one-time charge in loan loss provisions resulting from the implementation of new group-based risk models (PD and LGD updates).
- Loan Loss Provisions: Provisions increased 88.9% YoY. Excluding the one-time Ch$38.7 Bn. model change, recurrent provisions grew only 10.6%.
- Operating Expenses: Expenses rose 7.3% YoY, largely due to Ch$14.1 Bn. in higher personnel expenses (including Ch$6.9 Bn. one-time bonus effects from collective bargaining).
- Segment Performance:
- Wholesale Banking: Pre-tax income increased 33.9% YoY.
- Retail Banking: Pre-tax income decreased 30.8% YoY due to the new risk model provisions and higher personnel costs.
- Subsidiaries: Pre-tax income rose 29.6% YoY, driven by Investment Banking and Stock Brokerage.
Guidance, Outlook, and Risks
Management Commentary: CEO Eduardo Ebensperger described the quarter as "exceptional" commercially, citing record consumer loan sales (Ch$570 Bn.) and strong mortgage origination. Management expects to benefit from a more positive business environment in coming quarters as the Chilean economy recovers.
Economic Outlook:
- Chilean GDP expanded 4.4% in 2018.
- Inflation (CPI) reached 3.1% YoY, hitting the Central Bank's target.
- The Central Bank initiated a tightening cycle in October, raising rates by 25 bps to 2.75%, with further hikes expected.
Risks and Contingencies:
- Model Implementation: The new risk models caused a significant one-time provision charge, though management views this as a strategic improvement for future risk tracking.
- FX Exposure: Depreciation of the Chilean Peso impacted USD-denominated loan loss allowances and hedging positions.
- Derivatives: Negative Credit Value Adjustment (CVA) of Ch$6.9 Bn. impacted revenues due to unfavorable changes in default probabilities and FX trends.
- ADR Split: The Bank announced a 3-for-1 ADR split (effective Nov 23, 2018) to enhance liquidity.
Investor Verification Checklist
- Recurrent vs. Non-Recurrent Costs: Verify the sustainability of the 10.6% recurrent loan loss provision growth versus the reported 88.9% total increase.
- Personnel Expense Run-Rate: Assess the impact of the Ch$6.9 Bn. one-time bonus charge on future operating expense baselines.
- UF Exposure Sensitivity: Monitor the impact of inflation and UF index changes on the Ch$39.3 Bn. revenue contribution.
- Capital Ratios: Confirm that the slight decrease in BIS (14.11%) and Tier 1 (11.25%) ratios remains well above regulatory minimums despite asset growth.
- ADR Liquidity: Observe the market reaction to the 3-for-1 ADR split effective November 2018.