By Emily Frost – emily.frost@internationalbanker.com
Chile is clearly one of Latin America’s success stories, with a strong, robust and open economy. Although high world copper prices did contribute to the swelling of its state coffers, avoidance of Dutch disease and the economy’s move towards a greatly diversified basket of exports is a glowing example of how a heavily export-dependent economy can remain resilient against external shocks. Diversification of its products—such as wine, wood, cellulose and agricultural—has helped it quickly rebound from the financial crisis that plagued much of the world.
Nevertheless, there have been growing concerns on various fronts. The debt-to-GDP (gross domestic product) ratio, which was a healthy 3.9 percent in 2007, has been steadily creeping up. It stood at 18.1 percent in 2015 and is scheduled to cross the 20-percent mark this year. This is against the backdrop of 2014, when the economy grew by only 1.9 percent. Furthermore, there have been concerns recently of inflationary pressures building up, with inflation almost touching the 5-percent mark. This comes at a time when the depreciation of the peso against the dollar is putting strain on domestic demand.
Despite subdued national economic growth, Banco de Chile has thrived under the leadership of CEO Arturo Tagle. The bank has maintained its solid trend in core revenue growth, remaining well above its competitors—earning a ROAE (return on average equity) of 21 percent in fiscal year (FY)2015. It achieved this feat by implementing broad, overarching policy reforms that have enabled it to keep a productive edge over its peers. For one, the bank enriched its value offerings and increased its proximity to client demands by launching a flexible and customer-friendly mobile app, unprecedented in the Chilean banking industry. Moreover, the spiraling, out-of-control credit card interest rates that have been of particular concern to the Chilean banking industry have been reined in by innovative out-of-the box strategies to increase customer satisfaction through non-pecuniary frills.
“We materialized alliances with global and local airlines that will benefit all of our credit card holders,” explains CEO Arturo Tagle. This is the first major alliance a leading Chilean bank has made with international airliners, and is expected to be a win-win situation for both credit card companies as well as Banco de Chile’s clients.
Increase in productivity through heightened innovation has been the clear target of the bank. This is accomplished by the bank aggressively organizing workshops for entrepreneurs, with particular focus on SMEs (small-to-medium enterprises) and startups. It is accompanied by broader organizational innovations in the form of new sales models specifically geared towards clientele, maintaining a competitive pricing policy, while at the same time ensuring overall exposure to risky assets and liabilities remains limited. With impressive ROAE continuing year after year, it seems that Banco de Chile has maintained all this together with enhanced risk-assessment and management techniques to keep the bank liquid and profitable.
Banco de Chile has a long and rich history. Born through a merger between Valparasio Bank, National Bank of Chile and Agriculturist Bank in 1893, it soon commanded a dominant position in the budding Chilean financial industry. Even in 1922, the bank was fully consolidated and regarded as the most important commercial bank in the country, showing large returns on assets and profitably for its shareholders, and recording impressive market capitalizations among Chilean enterprises.
In terms of financial metrics, Banco de Chile can be comfortably ranked among the top three banks over the past century. Recently it has consolidated its position, particularly during the term of CEO Arturo Tagle, with the market share of the bank almost touching 30 percent. This year the bank earned a hefty net-profit margin of 28.37 percent, but its greater strength lies in its strong financial fundamentals that have consistently created value for its shareholders. Dividend yields have averaged 4.64 percent over the past five years, whereas the year-on-year dividend growth rate this year has been an impressive 1.75 percent in real terms.
This is not to say that the bank did not have to overcome substantial financial setbacks. Its share prices began to fall precipitously in the middle of 2011, reaching a low of around 55 pesos per share in the summer of 2011, as a result of both inflationary pressures and a sudden increase in non-performing loans (NPLs). However, timely adjustments by leadership, particularly primed towards installing appropriate risk controls in its lending operations while simultaneously extending credit to profitable businesses, enabled it to weather a potentially catastrophic storm. Again at this point CEO Arturo Table deserves special mention for acting in a timely and effective manner. As soon as these policies went into effect, share prices rebounded, and they now stand at approximately 75 pesos per share, a five-year high.
Similarly, retail banking posed its own set of challenges. There was a need to cut costs, particularly when the macroeconomic outlook took a turn for the worse in 2014. Although the revenue stream remained largely constant, Banco de Chile registered a net income of around CLP 60 billion in the uncertain year of 2014, when the economy was at the brink of recession. This “miracle” was largely achieved through innovative policies and great gains made in productivity. The particular focus was reform in the retail-banking industry, which the bank tackled head-on using a technology-led approach. Mobile-app development was coupled with digital applications with customer interfacing, building up of new communication channels in social media and beyond, and greatly enhancing the client-bank relationship, which forms the core upon which Banco de Chile secures its dominant market share in the Chilean retail-banking industry.
This is not to say that more traditional methods were neglected by Banco de Chile. Specifically, the bank has strived to maintain a controlled cost base and engender a culture of operating efficiency across the whole company, with a keen focus on gaining in productivity through exploiting economies of scale and scope. This is why cost-to-income ratios when adjusted to inflation actually fell to only 43.7 percent (in complete contrast to the rest of the banking industry) last year.
As of today, Banco de Chile employs more than 14,800 employees. The success of the bank can also be attributed to its focus on worker skills through its large investments in human capital. A broad range of education and training programs are provided to employees that include but are not limited to workshops, conferences, team-building exercises and courses. This has clearly been a cost-effective strategy, as evidenced by recent cost-savings and efficiency gains registered by the bank.
Last but certainly not least is the bank’s focus on not only creating but also maintaining client relationships by its firm commitment to meeting customer needs that demand reliability and trust, even when financial conditions and the overall economy takes a turn for the worse. In the words of CEO Arturo Tagle, the man who made it all possible, “Our achievements demonstrate the ability to deal with complex scenarios, based on a comprehensive business strategy that is on the right path. On the whole, we completed a great year, and we are ready for 2016”.