Banco Itaú Chile (ITAUCL) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Itau Corpbanca 2020 Impairment Test Conference Call. [Operator Instructions] I'd now like to turn the call over to head of Investor Relations of Itau Corpbanca, Claudia Labbé.

Good morning, and welcome to Itau Corpbanca conference call and webcast to provide you an update on our latest impairment test for 2020. As a reminder, Itau Corpbanca's second quarter 2020 conference call to discuss the company's financial results in detail is scheduled for Monday, August 3, 2020. Now let's continue with the presentation. First, Mr. de Moura, Itau Corpbanca's Chief Executive Officer will update you on the impact on capital and earnings driven from the impairment test for 2020. And then we will have a Q&A session. It is now my pleasure to turn the call over to Gabriel.

Thank you so much, Claudia. Good morning, everyone. As you know, yesterday we issued a material event in Chile regarding the impairment test of the business combinations goodwill and intangible assets that we have in Chile. On the process we go through all the times that we publish an issuing statement here. So the idea here is to go through a quick presentation. We have just a few slides for you, in order to explain what are the effects for the company, the kind that we have for this impairment. And beginning I think with a little bit of history as well in order that you understand the nature of the goodwill and intangibles that we have. Perhaps it's a little bit different from what you see in other business combinations in the market. So if we can please start on Slide 2. Here we have a quick history of the goodwill and intangibles that we have from the bank. You have to remember that, legally, when we combined the business of Itau Chile and Corpbanca, we applied a, in accordance to the IFRS 3, a business combination acquisition map. And it was a reverse acquisition. Meaning that however, Corpbanca was the surviving entity for the business combination the balance sheet that acquires the business was that of Itau Chile. So that means that we had to value at market prices the assets and liabilities of Corpbanca at that time. So if you take a look at the graph, when we looked at Corpbanca issuing statements at the time, the net assets of the company accounted for $2.4 billion. However, when we took a look at market prices and considering that the stock price of Corpbanca at that time was CLP 5.8, the market value was $4.2 billion. And that became the new asset value for the company of $4.2 billion. And the difference between the $4.2 billion and the $2.4 billion, which is the net assets, were recognized as goodwill of $1.5 billion in other intangibles from business combinations. The goodwill, as you know, for IFRS regulations, it's not amortized through time. It is something that we test through impairment. And however, the intangibles from the business combinations, such as trademark, consumer relationships, core deposits, they are amortized every month according to the life that we have estimated for that asset. It's important to note this, that this constitution of those assets of goodwill and intangibles didn't generate any benefit from the company in terms of taxes, in terms of capital. And so that's -- at the conclusion of this process that we're going to talk on a few slides ahead is that with the same process, in the same way, when we're doing the impairment of those assets, they also do not generate any operational impact for the company. But if we move along to the second slide, we can see that since the constitution of the goodwill and the business -- the intangible business from the combination of Itau Chile and Corpbanca, we do see that the price-to-book value that we have was quite stable -- and take a look at the orange line here, was quite stable until the end of last year when we have the social unrest in Chile. And of course, when we take a look since the beginning of the year, the COVID impacts on economic activity put more pressure into our stock price. And now we are trading close to 0.35x our book value. That's an indication of an impairment. By no means that is the main reason for an impairment. The company has its valuations and the assessment of the recovery value of the assets. And if we move along to the second slide, we can see how the projections that we have are recorded, the change throughout time. And the main reason is when we take a look at the projections that we have prior to the COVID crisis and now with the COVID crisis, for instance with our business in Chile, we estimate that this year we will have a contraction of GDP around 7% compared to a positive GDP of 4.5%. And the years after that, especially 2023 and 2024, we're going to see a convergence to the same levels that we have the expectations before. However, if we take a look at the cumulative ratio of change of the expectations of GDP before the COVID and after the COVID we're going to see a decrease of 5.3%, economy's size, on those 5 years. In the same way, we've applied the same view in Colombia. We arrived to a larger number of 8%. On the other hand, if we take a look at monetary policy rates, they are lower than we expected as all the institutes -- the Central Bank is putting on a more dovish public position all over the world, especially in Chile and Colombia. So we also have a lower interest market. Moreover, when we take a look at the impacts for, specifically, the banking industry of a lower GDP growth that affects, of course, our ability to grow the portfolio, to grow the business according to the expectations we had before for our recovery value and also lower fee growth. If we take a look at Slide #5. We're going to see that for instance, for Chile, if you take a look at the line of assets, we had $1.26 billion from goodwill and business intangibles in our business on Chile, on the stand alone. When you take a look at Colombia, we had more $430 million. That totaled $1.7 billion on a consolidated basis for our business in Chile and Colombia. In the same way, if you take a look at the impairment, as our calculations, taking a look at the scenario that we described before, we have an impairment of $545 million from our business in Chile, $433 million from our business in Colombia, adding up to something around $979 billion -- $979 million, I'm sorry, for the impairment. The impact of earnings is very close to the impairment. There is a difference of around $50 million, especially because of some deferred assets -- deferred tax liabilities that we have in Colombia. But I think that the most important part that we want to stress with you is that all this impairment, as we mentioned, when we constituted the assets, have no impact on our liquidity, have no impact on our market risk. It's a noncash expense for the bank, given that the nature of the constitution of this goodwill was through a mark-to-market mechanism that we described in Slide #2. So moreover, there is no impact on our capital ratios under Basel III. So if we move along to the next slide, Slide #6, where we have the main conclusion is that we recognize this accounting adjustment to goodwill intangible assets to reflect the new economic outlook, especially against the constitution of those assets in 2016 when we had different expectations for our business, both in Chile and Colombia. This is a nonrecurring and no cash impact for the company that does not impact our liquidity nor our risk profile in terms of market, credit and liquidity risks. It does not also affect our capital ratios under Basel III standards. And moreover, and I think this is very important since this is a discussion of just an accounting mechanism, that does not impact our strategy and operations, neither our capacity of paying dividends from 2021 onwards. As you always know, we -- every month, we also take a look at our results and then on managerial basis, and we publish our managerial discussion and analysis for you every quarter. When -- we always have excluded the goodwill from our calculations in order to provide a better operational view for the company. And we're doing the same thing, just to give you a sense of what would be the return of the company during the month of June. If we weren't doing this impairment, we would have a positive return of $14.5 billion. I think that, as we can see, we do not foresee any operational impact for the company doing this accounting adjustment. I think it's a good way of showing our corporate governance and our view on risk and how we change our balance sheet to adjust it to our views of future. And we do that for credit provisioning, for instance, we do that for goodwill. I think it's a good way of showing how strong is our risk profile in terms of taking a look at things the way they are. It also, by any means, is that we think that the value of the company is up on par with what the market is right now, our valuations. And if you take a look at the reverse engineering of the values that we are talking about here has a significant premium over the market prices. Right now, we remain very confident with the path that we have for our business in Chile, for our business in Colombia. We've been applying in our strategy in growing more our business in retail. However, we have to recognize that since 2016, the expectations we had to what we were going to have in 2020 are a little bit different and recognize that with the crisis that we're living with, the COVID impact on profitability in both 2020 and 2021 are different from the expectations we had at the beginning of the year. That pretty much concludes the presentation that I had for you, but more importantly, I would love to have your questions if you have any.

[Operator Instructions] And our first question comes from the line of Adriana De Lozada with Scotiabank.

This is Adriana. Just where to [ Audio Gap ] regulatory consequences in Chile and Colombia? And a second question would be, if you can just give us -- just some comments on the pension fund reform.

Adriana, thank you for your question. We do not foresee any regulatory consequences from this on Chile and Colombia. Remember that regulators in both countries, the -- according to their rule, they already exclude goodwill from the calculations of ratios. And so we do not foresee any impact on this. As I mentioned before, the company didn't have any benefit from constituting the goodwill, it's just an accounting mechanism. And by the consequence of that, we also do not expect any negative impact from this impairment. As per your second question, I would rather on this conference call focus the discussion on the impairment. We are going to have a second conference call at the end of the month when we publish our financial statements, and we can go to a more broader view. But if you don't mind, I would rather focus here on the subject that we're discussing right now.

Yes, no problem.