Hello, everyone, and welcome to Banco de Chile's Fourth Quarter 2019 Financial Results Conference Call. If you need a copy of the press release, it is available on the company's website. Today, with us, we have Mr. Rodrigo Aravena, Chief Economist and Senior Vice President of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations, Daniel Galarce, Head of Financial Control; and Natlia Villela, Investor Relations Specialist. Before we begin, I would like to remind you that this call is being recorded, and our information discussed today may include forward-looking statements regarding the company's financial and operating performance. Our projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements. I'd now like to turn the call over to Mr. Rodrigo Aravena. You may proceed.

Good afternoon, everyone, and thank you for participating in this Conference Call. Today, I would like to share with you our view about the evolution of the Chilean economy with a special emphasis in the new macro perspective. After that, Pablo Mejia, our Head of Investor Relations, will analyze the financial results achieved by Banco de Chile during the last quarter and our guidance for this year. As usual, we will finalize this conference call with a Q&A section. I would like to start with an overview of the Chilean economy, this leads to Slide 3. As you probably know, the last quarter of 2019 was market by product, as a consequence of the social unrest that started in October, effecting economic growth. As a result, GDP fell 3.4% and 3.3% year-on-year in October and November, after an expansion of 3.3% in the third quarter. In the chart on the left, you can see how the economy was affected by the social crisis. This weakening can be explained by both, supply and demand factors. Process were accompanied by damage to private and public infrastructure with reducing the capacity growth, or in other words the aggregate supply of the economy. According to official estimate, the damage was equivalent to nearly $3 billion or 1% of the GDP, affecting the salary service as well as retail and transportation sectors, reducing the average working hours. However, these supply shops should be temporary as the government announced an ambitious reconstruction. Again, that would probably be implemented this year. In fact, there was a strong recovery in the December monthly GDP figure, which posted an impressive 3.5% monthly change or 1.1% year-on-year over passing private expectations. This reinforces our expectations about a temporary slowdown. There have also been important impact on domestic demand, which have…

Thank you, Rodrigo. The fourth quarter was challenging, as Rodrigo mentioned, we went from a scenario expecting strong growth in 2020 to subdued GDP with an expected rise in unemployment levels. This undoubtedly will impact growth perspectives for the banking industry in 2020. In turn, October and November were coupled with high credit costs, damage to infrastructure and a drop in confidence levels. Despite this environment, we were able to demonstrate the effectiveness and consistency of our business strategy and the value of our competitive advantages. In the fourth quarter 2019, we posted a bottom line of CLP147 billion, only 3% below the prior quarter and 9% below the same period last year. On a full year basis, we recorded CLP593 billion, basically in line with the results in 2018. This is especially noteworthy when we compare results to our peers, as you can see on the bottom part of this slide. We clearly outperformed all of the banks in our quarterly and yearly results as well as our ROE. This leading result is not by chance for is consistent throughout our history. We systematically post more predictable results throughout the economic cycles, clearly setting us apart from our peers and generating greater value for our shareholders. Please turn to Slide 10. The fourth quarter operating revenues increased 5% when compared to the same period last year and 8% when compared to the full year period. The quarterly and full year rise was generated by solid customer income expansion that rose 13% in the quarter and 12% for the year, while noncustomer income dropped 18% in the quarter and 7% for the year. Customer income was driven by a 9% year-on-year rise in average interest-earning assets, that sustained net interest income growth for both the quarter and the full year.…

[Operator Instructions]. And our first question will come from Ernesto Gabilondo of Bank of America.

My first question is related to loan growth and asset quality. Given a softer economic growth, the protests that are likely to resume in March as they were in holidays, expected higher unemployment, higher than in Chile. And the challenge is to reach constitutional agreements considering Pinera's approval of 6%, and the Congress approval of 3%. How do you see the downside risk for loan growth and the upside risk for the cost of risk for the year? And then my second question is in the line of expenses. OpEx growth was 9% in 2019. So where do you see this -- the growth for this line in this year? And finally, considering your guidance, should we expect mid-single digit net earnings growth this year?

Thank you very much for your question. This is Rodrigo Aravena. For the first part related to the loan growth before moving to that answer from Pablo. I think that it's very important to understand the trend that we are expecting for the same economy this year. We're expecting an economic growth of around 1% for 2020. However, it's very important to keep in mind that in the fourth quarter of 2019, the economy contracted by almost 2%. What I'm trying to say is that, we are expecting that economy to move from very weak fourth quarter towards a more positive activity during this year, in part because the government announced an important countercyclical plan, because the Central Bank has been maintained at a very low level of interest rates. And additionally, it's very important to mention that, that Chilean economy has been very resilient. So this is shock. Particularly, if you take a look to the latest figure -- the -- you must take the monthly GDP growth in December was a positive surprise because the economy recorded most part of the previous contraction that we saw between October-November. So having said that, even though the weak, maybe low strain activity growth that we expect for this year. As a whole, I would like to put on the table that we are taking a recovery from the very weak activity in the fourth quarter, towards a more positive growth in the fourth quarter. So that idea only just to put in context, our scenario. Pablo, for the loan growth.

So in line with the slower GDP and the potential increase in employment. We're expecting, obviously, a slowdown in the growth levels. So as Rodrigo mentioned, we're expecting somewhere around 1% for GDP for 2020, with inflation hovering around 3.2%, and we're estimating that the growth should be around 6% nominal for the industry. Historically, elasticity of loans is about -- GDP is about 2x. And we think that the retail products should be driving the growth for the industry, and the wholesale should be slightly below that 6% level. It should be below that 6% level. In terms of Banco de Chile, in line with what I just mentioned, we are focusing to continue to grow responsibly and taking care of our risk-return relationship. And we are aiming at focusing to grow in high-quality SME customers, consumer loans, basically, the retail segment. So we should be growing in line with that 6%, but with the special emphasis in the retail segment. And always taking care of our spreads and growing responsibly. In terms of OpEx growth, we should be growing -- we're -- as we mentioned in the presentation, we've been implementing a strategy that continues to focus and improving, how we operate the bank in the administration expenses, especially, and in line with our new service models. This should all assist us, including the digitalization of the bank and automation of back-office processes, to continue improving our cost. So we're expecting for 2020 at a level of growth that should be below inflation for us. And in terms of the net income, we should expect to continue in the medium term, a level of around 18% ROE. And we could consider that we should have low to medium single-digit growth.

Our next question will come from Jason Mollin of Scotiabank.

Just some continued further questions on the profitability outlook. You mentioned most of the line items were paying attention to 2, that I'd like some further details. One is fees, you mentioned very strong fee income growth in the fourth quarter on the back of insurance brokerage, due to the joint venture and increase in premiums as well as an increase in fees from credit cards and ATM as well as mutual funds. If you can talk to us a little bit about the drivers there. And what we should expect going forward? And secondly, in the construct of this outlook for 18% ROE in the medium term, what are you considering for taxes. Do you think that tax rates will go up, given the need to finance expenditures by the government? Rolando Arias Sánchez: In terms of fees evolution for Banco de Chile, most of our fees are generated by the retail segment. So the growth will be determined in that side. One of the areas that we saw a strong growth in 2019, and that should continue in 2020, is this agreement, this joint venture with this insurance company, where we'll be recognizing important revenues, in terms of fees of around -- above 2019 is something around the levels of CLP30 billion to CLP40 billion. On top of that, we've been having very good growth in written premiums in the insurance business. In terms of other business in the subsidiaries, for asset management and stock brokerage, that will depend a lot on the evolution of the economy. And how those will be driven in 2020. And then transactional products, we should also think, that we should be growing in line slightly higher in terms of customer growth. In customers, we grow about 6% year-on-year. And we should be at least growing at levels similar to that. And also, obviously, this will -- like an upside, this could be -- that the economy improves above our baseline scenario.

I would like to reinforce when [indiscernible] our long term assumption. So basically, what we are taking like the key assumptions that the economy will be able to maintain the potential growth rate, which is around 3%. So basically, in our scenario, the slowdown will be only temporary, which in fact was confirmed by the improvement in activity in December. It's very important to consider as well, that we are taking a higher inflation rate for this year in comparison to the previous year, which is a positive driver as well for the net income for the bank, mainly because the same rate today is weaker than before. In Chile, the inflation rate is very sensitive to the change in the FX, in the currency. So the key assumption here is that the slowdown is mainly temporary and that the economy will be able to come there towards more healthier long-term agreement in the long term.

I think it's also important to mention in relation to income is, the risk will play a very important part in 2020. So in terms of the evolution of the economy and how risk develops. It will be important for the bottom line of the bank. So the bottom line can grow faster, obviously, if risk is in lower levels. And then in terms of -- and I'm finishing off going back on fees for 1 second. We should be expecting double-digit growth in terms of fees.

And so on the expected tax -- effective tax rate? Are you making any changes?

This is Daniel Galarce. We are not expecting nothing different from this year. I mean effective tax rate should be in the range of 23% to 24%, considering an inflation of around 3%. We don't have any piece of information, signaling that this should change in the future.

Our next question will come from Tito Labarta of Goldman Sachs.

My question is in terms of GDP growth, and in terms of potential sensitivities to the upside and downside. I mean for the recovery that you expect in 2021, what do you need to see for that to happen or possibly be better? And conversely, what could make it worse? So what are you looking at in terms of to drive GDP growth, just given the political uncertainty and the constitutional vote expected. What would you like to see, and what could be upside and downside risk to that?

Okay. This is Rodrigo Aravena. Thank you very much for the question. Basically, what we have today, in Chile, in this scenario, is a combination between supply and demand factors from the supply side, as we mentioned in the presentation, there was damage in some areas in terms of infrastructure, which was equivalent to nearly 1% of the GDP, which, obviously, affects negatively the capacity of growth, capacity of production in the economy. However, the government announced an important plan of the construction in this infrastructure. So it's very important to pay attention when the government will be able to begin this, the construction in critical areas, for example, in the subway and other areas. In terms of the impact on demand, as you mentioned, there will be a very important discussion this year, in critical, in key areas, constitution, pensions, et cetera. And therefore, the evolution of the discussion is very important, mainly because the impact in terms of business confidence and investment, et cetera. But we don't have enough information today because this type of discussion will be held mainly between April and May of this year. So all in all, what we expect today is an economic growth of around 1%, with a neutral bias. We don't have a negative bias in this estimate, mainly because we have a positive surprise in the economy in December. And because, as I mentioned before, both fiscal and monetary policies will be supportive for growth this year. We also have to pay special attention to the copper price and the Chinese economic growth because China represents nearly 50% of total exports of Chile. So the recent negative news from coronavirus, et cetera. It's also important for the China economy. But more importantly is that, we expect to recover for 2021 because we -- basically, we think that of the measures announced by the government and the Central Bank will be positive for the economy. In terms of the breakdown, we expect a negative growth for investments this year, minus 3% nearly. For total consumption, we expect an increase of around 1%. In terms of export, around 2%. So -- but more importantly, we think that the bottom part of this negative cycle was in the previous quarter.

Our next question will come from Emilio Acevedo.

I'm just wondering about the excess capital that you can have because of Basel III. Do you have any particular number in mind? And if with this excess of capital, you can have a potential higher dividend for 2021?

Daniel Galarce. What we know so far are some regulations that have been published by the CMF for common. Chile, we have a draft of regulation for risk-weighted assets for operational risk and also credit risk. And in addition, some rules regarding buffers, countercyclical buffer, conservation buffer and also the systemic buffer. Although, we believe that probably the -- this regulation is very in line with Basel III guidelines, which is very positive, of course. We are still evaluating the final effect that this will have in our capital adequacy. First of all, we have some preliminary estimates. And in our view, the regulation that has been published so far, it's barely in line with our preliminary estimates. As long as that we have more details and a detailed analysis of all of these regulations, probably we will have a more specific estimate. However -- and due to this regulation, it's more focused on the characteristic of the counterparty rather than on accounting methodology. We believe that we should be benefiting or less because of this Basel III approach. Nevertheless, as I told you, we are still awaiting what's going to be the final step, Today, probably we have a kink positive gap, with respect to a fully loaded limit, for instance, common equity Tier 1 ratio. However, we believe that this positive gap is going to afford or is going to be the basis for future growth, in terms of total loans, as long as the economy retakes the economic growth. So we are not thinking that we have an excess of capital today. And according to that, we don't see any extraordinary dividend for 2020 or 2021. We feel comfortable with the levels of capital that we have today. We believe that probably the Basel III approach will benefit us as compared to our peers, for instance, since we have a premium loan portfolio on a premium customer base, for instance. But however, we can rule out that we are going to use or we are going to utilize this -- our capital base in order to support future growth of our balance sheet.

And our next question will come from Yuri Fernandes with JPMorgan.

I have a question regarding your additional coverage. It's pretty high. You mentioned in the presentation. And my question is, if you have like a level, like a number, that you don't feel comfortable in going lower? And what's your plan to use that coverage in the current credit cycle?

Well, Yuri, we have a good level of coverage, including additional provisions in Banco de Chile. And we've been generating additional coverage of through the use of additional provisions during the last decade. When we've realized these additional provisions, therefore, periods of more stressful periods, not for any particular customer segment. And we don't have -- we've never actually released these provisions in the past for an economic cycle, but there was an event that affected us significantly and the banking industry or the banking industry end up. That would be a reason on to release these provisions. We don't have a specific number, in terms of coverage, but we expect that we should continue hovering around the same levels that we have historically had, based on our credit risk model. So our credit risk models don't have a target for coverage. It's the result of our credit risk models. They are based on overdue loans, beginning from day one.

But on my second follow-up, like, do you plan to use those reserves now? Like can you use a little bit, I got like the message, but can we see like some more volatility on the additional provisions?

So the -- in terms of our baseline scenario, our baseline scenarios that Chile is relatively the level, but we're expecting in a baseline scenario for cost of risk is something slightly above what we had in 2019 between maybe 1.3%, 1.4% and a more cost of risk percentage of cost of risk in a more negative bias. However, it's not clear that we'll actually reach these levels. And at these levels, it's more difficult to justify releasing provisions when the banking industry and us haven't been -- wouldn't be significantly impacted with that level of cost of risk. This is more -- for example, in 2009, when there was a crisis in the South of Chile in a certain sector that the banks had a very large effect of this, where, for example, we could use these additional provisions. But there's no -- there's nothing today that would suggest that we could use this, it's not our baseline scenario.

And our next question will come from Neha Agarwala of HSBC.

My first question is on our loan growth. I understand that you expect the economy to grow around 5%, 6%. But is it fair to say that, you're taking a more cautious stand on loan growth. Because wholesale will remain weak. And I believe the competition in retail will be high because everybody will be focusing on retail. And you would like to focus more on the risk reward perspective. So not compromising on margins, I believe. So would that translate into slightly lower growth than the system? And the second question is on expenses. I believe you mentioned that you expect to grow expenses in line or slightly below inflation. Do you expect any drawn recurring expenses for 2020? Could you elaborate on how many branches were impacted from the riots? And if everything was insured? Or could we see some impact in this year?

Neha, In terms of our loan growth expectations, like Rodrigo mentioned, we're expecting 2020 to have a GDP growth of around 1%. And generally, the elasticity of loans to GDP is 2x. So that include inflation. We're expecting somewhere close to 6% for loan growth, where we're focusing more in the retail segment. We have a very good retail segment of customers, that is focus in upper income individuals, and we have what we consider the best SME portfolio in Chile. So we're expecting to continuing leveraging this customer base to continue growing in 2020, which is something similar that we've done in prior years. That's where we've seen stronger growth in our retail segment. Thanks to our customer base, which also provides us with attractive returns and generally lower cost of risk because of the segment that they're in. In terms of expenses, could you repeat the question?

How many branches were affected last year? And if everything is insured. Do you expect any nonrecurring expenses in 2020?

So last year, we had nine branches, which were closed because of the events. But all these branches were insured. So we're not expecting any significant impact in terms of this -- material impact in terms of this -- of these events. The rest of the branch network, there is minor damage, but it wasn't something significant.

And our next question will come from Sebastián Gallego of Credicorp Capital. Sebastián Gallego: I have a couple of questions. The first one, if you can -- if you could elaborate a bit more on the NIMs and rates for this year. You mentioned that you expect stability around 4.1%. Can you talk about the sources, that may drive business stability. And then the second question is regarding cost of risk. And I know you show on the presentation on Slide 12, a bit of the evolution of overdue loans. I know it's a bit too early, but could you maybe share what are you seeing so far this year in 2020, and how that trend do you expect to evolve over 2020? And maybe one last question. You mentioned during the call, that probably the contribution from Chubb this year would be more like CLP30 million to CLP40 billion. I understand previous guidance was around CLP60 million for this year. Can you elaborate if that changed or if maybe I understood wrong?

Sebastián, in terms of your first question, there's a variety effect net interest margin for 2020 for us in the banking industry. Like we mentioned, we are expecting somewhere around the level of 4.1% for net interest margin. And so I would say, there is 3 effects that would be more negative, and there's a few positive effects. So you have the lower overnight rates we've been experiencing, which impact pricing. Initially, the drop of the rates are positive in repricing of our liabilities. Now we're repricing at lower levels. But there's also a higher risk. So that also helps and adjust -- in offsetting this impact. The second thing that is important is that -- to take into consideration in terms of NIM, is that the long-term rates in 2019 were very low before the events that occurred. And this triggered customers to refinance their mortgage loans. So this had a -- this will have a negative effect on our net interest margin. And the third negative effect would be the new regulation that was put in place in January of this year, which obligates bank to offer customers to choose to automatically pay their overdraft lines with funds in their current account. So we have about 2% of loans are -- in overdraft lines. Obviously, not all of that would disappear. But a portion of that would disappear in terms of the loan and also in terms of deposits because what's being used as the deposits in the current accounts to repay these loans. So this new regulation will have an impact as well in terms of our net interest margin. Nevertheless, it's important to take into consideration, that in terms of our baseline scenario, we're looking to continue to grow our retail book. We think that, in…

In terms of Chubb. So Chubb is an agreement that we have entered into this agreement a couple of years ago. And we recognized the revenues beginning July 2019, more or less. We recognize about based on the model. It's about CLP5 billion per month in Chubb, which basically means for 2020 versus 2019, which was closer to CLP3.5 billion. So we should have about CLP30 billion more in recognitions in Chubb fees in 2020 than in 2019.

This concludes the question-and-answer section. At this time, I would like to turn the floor back to Banco de Chile for any closing remarks. Please go ahead.

Thanks, and thanks for your questions, and joining us on this call. We look forward to speaking with you for our next quarterly results.

Thank you. This concludes today's presentation. You may now disconnect your line at this time, and have a nice day.