Hello, everyone, and welcome to Banco de Chile's 2Q '20 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 VP of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations; and Mr. Daniel Galarce, Head of Financial Control. Before we begin, I would like to remind you that this call is being recorded and that the information discussed today may include forward-looking statements regarding the Company's financial and operating performance. All 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 will now turn the call over to Mr. Rodrigo Aravena. You may please proceed.

Good afternoon, everyone. Thank you very much for joining us on this conference call. Today, we'd like to present our analysis of three main areas. First, the evolution of the macro environment with a special emphasis on the role of economic policies and excellent fundamentals, as key factors in the potential recovery in the future. Then, we will present the main advances in critical strategic areas of our bank. Finally, before moving to the Q&A section, we will go over our financial results for the second quarter of 2020. I'd like to start with an overview of recent developments on the macro side. Please move to Slide 3. Chile has been experiencing an ongoing contraction since March, in line with the trend observed in most countries. This downturn has mostly been explained by the strict social distancing measures which aim to reduce the spread of COVID-19. This has led to a sharp drop of 14% in the GDP during the second quarter as seen in the chart on the left. The breakdown shows a significant deterioration in sectors more intensive in social activities, such as hotels, restaurants and transportation. On the other hand, the positive growth posted by mining production has offset the sharp decline in the rate of the economy. The overall CPI has also been falling. As seen on the other right chart, CPI went down to 2.6% in June, from 3.9% in February before pandemic. This trend has been driven by the slight growth reflected in the lower non-tradable operation and the stability in the Chilean peso which has reduced tradable prices. The labor market has also been affected by subdued growth. The bottom left chart shows the increase in the unemployment rate to 12.2% in June, led by the annual decline of 20% in total employment…

Thanks Rodrigo. Please move to Slide 10, where we will highlight some of our initiatives in digital banking. The pandemic, we are facing is changing the way we live, especially in terms of using technology to fulfill our needs. In this sense, digital initiatives that we have implemented in the last years have allowed us to understand our customers' behavior further and has build a solid basis to provide 100% online solutions for most of the requirement during the sanitary crisis. Even though we already had robust platforms, we recognize that the pandemic challenged us to accelerate our digital transformation as we provided an essential service and the role is critical to support our clients' financial activities. As you can see in the timeline, we have innovated in our digital experience for our customers in several fields, focusing on delivering the best customer experience through the incorporation of business intelligence, data mining, analytics, digitalization of our processing branches. In order to continue to provide the best customer service for our customers, we're working on launching a new digital onboarding platform that will give us significant improvement with the possibility of opening a new account 100% online at a very low cost for us. This will also allow us to gain a greater number of customers, particularly within the younger segments as we will promote financial inclusion as far as we will promote financial inclusion. Another recent advancement in our front office digital platforms is our new web page that offers improved customer experience and incorporate analytic tool, it's more modern, secure and intuitive and has inclusive features for the visually impaired. We also included a heat map that will provide us with valuable information to understand even better customers' preferences. Those add effort contributed to establish the best digital bank…

Pardon me ladies and gentlemen, it appears we have lost connection to our speaker line. Please standby while we reconnect. Thank you for your patience.

Sorry about the technical difficulties. If you please turn to Slide 24, before moving on the questions, I would like to highlight the favorable comparison of our stock versus our main peers in Latin America. As you can clearly see, where the stock price has been the most resilient in this crisis. We have recovered part of the drop from pre- COVID level, this is clearly a result of the market, understanding that we're not only the most profitable bank in Latin America as shown on the chart in the bottom left, but this is accomplished in a dependable manner through all of the cycles. So, it is also important to mention that we may have recovered the post or near post COVID level, but we still have multiples, where we are very well below the levels that we've had in the past. Despite the current economic environment, we are confident that the better prospectus for the economy coupled with our strong fundamentals and strengthening of the key aspects of our long-term strategy will allow us to continue to be in the best long-term alternative for investors. Thanks for listening and if you have any questions, we'd be happy to answer them.

[Operator Instructions] Our first question will come from Ernesto Gabilondo with Bank of America. Please go ahead.

Hi, Rodrigo and Pablo. Thanks for taking questions. My first question is on the reprogramming portfolio and the FOGAPE program. Can you give us some maybe how much both the reprogramming and FOGAPE represented of your total loan portfolio and while you're seeing the percentage of reprogram portfolio, seems significantly lower when compared to Santander Chile? And then my second question is on credit provisions considering that you have created additional provisions of CLP70 billion during the quarter, do you think this was a peak in provisions or do you continue to see higher provisions by year end once you start to see NPL showing up after ending the relief programs or from the exposure to high-risk economic sectors. Thank you.

Thanks. Well, if we look at the participation in the most recent information, we have similar levels of COVID loans as our competition. Where bank approved a significant amount of the loans today in dollars, we have as of July 24th, about $1.9 billion, issued to companies, a large proportion of those to SME customers and represents somewhere close to 30,000 customers today. You want to add?

In terms of that I think, our levels are very similar to what - what our main peers have issued. If we move to the - the levels of provisions, it's difficult to have a clear understanding of how the economy will recover and the current position of our customers. We can see today is that the portfolio is - in relatively good shape. But we have a limited amount of information, but we do know and we've seen good payment behavior in the recent information. But we can't rule out that in the future months, there could be levels of provisions, similar to what we've seen in the past months, quarters. So it's something that we have to continue to see [technical difficulty]

Okay, thank you, Pablo. And then just a follow-up on the reprogram portfolio. When looking to Santander Chile, you mentioned that close to 30% of the loan book was reprogram, including the FOGAPE loans do you see the same proportion to your loan book?

Ladies and gentlemen, it appears we have lost connection to our main speaker line again. So please standby, while we reconnect.

Sorry about that again. So, again just finished nothing in terms of the provision. One of the important things, is Ernesto you there?

Yes, I'm here.

Okay. So I think one other important things to mention as well as the - what we've seen in the month of July is the payment behavior of the customer, take on these reprogramming of loans. So a large of portion of the customers to reprogramming in April and what we've seen on the payment behavior is a positive result, but we can confirm that this will continue in the future. So we do need more information, I understand and that will allow - lower, we will have the same level or changes in what we've seen in the prior quarter.

And I would like to add one thing here. This is [indiscernible] and it's important to keep in mind from factors that they will likely affect - for example, the impact at the end of the - for example, the potential increase in the unemployment rate, so basically, we have seen an increase of unemployment rate from 7% to 12% in that month. So we can rule out that it will increase in a more - but more important is that we have a very important uncertainty in terms of the final impact of this crisis in the economy., we don't know how - what the recession and more important is that we don't know about the length of the recession. We don't know when the economy will - economy grow, and that's why we are not providing more guidance in terms of the cost of freight for the future. It is important to keep in mind, this driver, but unfortunately we don't have enough information as to provide a more strategic guidance for the future.

And maybe a follow-up on the first question. So the market share and loans, we have 18.4%, but the information as of - this information as of July, worth to mention that this level of grown market share is actually higher than market share in commercial loans. So it makes sense this level of market share for our customer base.

And I was looking through your presentation on Slide 18 and I was looking to the volume of loans reprogrammed and as of July, and you mentioned you have around 35%, right. And I'm looking that Santander has around 41%. So what do you think will be the difference of your competition having a higher market share than yours?

No, the market share in terms of the loans reprogram, it's important to mention one very particular thing - that's banking industry. The reprogramming of these loans isn't a lead indicator of the cost of risk. Some of these loans obviously have - could be more problematic, we've seen this positive results in this first month. But it's not the lead indicator, because there are certain characteristics which customers had to comply in order to be able to have these loans reprogrammed at Banco de Chile and many banks of similar. But one of the requirements wasn't a requirement, when you had the loss of income. You are a good customer you're paying on time and due to that reason, it's not a good lead to the cost of risk. So what it is, I would say indicator is how well is each bank, if there is a very large difference, is the back of 20%. The book - reprogram is how - how we provided this to their customer base and how easy was it to do it online. With the larger banks, it was a simple process that we spent online and in the case of our bank, you can see which loans were reprogammed, which bank has a little bit different composition, of those reprogramming and we included the credit card option to reprogram those in two installments. So it just depends - it's not a lead indicator, that's what I wanted to say, it doesn't show automatically if you have a 35% or 20% level of reprogram is a lead indicator for the future, it's how the banks implemented this.

Okay, understood. Perfect. And then considering the additional provisions that you created in this quarter, it seems that it was the quarter with highest provisions. Do you think this was the peak of provisions, including these additional provisions or do you think we should continue to potentially have another one like this one by year-end or - in the next year, once we finish the reprogramming of the portfolios,

It really depends on the evolution of the economy and how the economy begins to open and the impacts in the overall economy. So in companies and individuals and employment, so that will be a key area that we have to see today what we're seeing is a lot - starting to get better information regarding the virus in Chile. That could be positive. But we made [indiscernible] above in order to have a clear understanding, this is worst month, if it's the next month, it really depends on the evolution of the virus and then back in the economy.

So basically we can't allow more provisions for example, if - in the case if the economy get worse, so it's very important to keep in mind that this crisis is different to any other crisis that we saw in the back. So that's why it's very important to highlight our very robust position in terms of the coverage ratio. So, as we mentioned in the call, we are the first bank to sell mode of cycles. So we tend to allow more provisions if the economy remains weak.

Your next question comes from Claudia Benavente with Santander. Please go ahead.

I have two questions. The first is, how much should we expect to be provisioned for the COVID loans deductibles. Have you started to provision this or if not, when should we expect this impact? And the second question is maybe a little bit of a follow-up - a follow is what you were saying. Within the clients that have reprogrammed loans, can you provide some color and how much actually reprogram belongs a necessity versus close to get us an opportunity. Probably you have many of those customers that have the current accounts with Banco de Chile, so probably you can have a better idea of maybe you who were the most trouble one versus those who to give us an opportunity. Thank you.

Mainly testing phase, [indiscernible] so the provisions for the COVID loans basically, what happened is that the regular products loans that were - FOGAPE guarantees, the regulator indicated detailed in terms of the constitution of provisions related to the deductibles of the COVID guaranteed loans. So specifically, according to the current regulation, customers provision in deductible loans that were originated opposed to when the guarantee is exercised. And so specifically what the regulator says when the expected loss excluding the FOGAPE guaranteed loan is lower or equal to the deductibles, the provisions should be determined without guarantee. When the expected loss - excluding the FOGAPE guarantee is greater than deductibles that provision should be determined based on the aggregate of the deductible plans, the expected losses in the FOGAPE guarantee. So therefore, we're expecting that there should be more provisions in the banking sector, beginning in September. We're currently calculating the impact of this change and will be recorded in our books from September, 2020. So that's what I can say regarding that. And in terms of the installments of the reprogram, like I mentioned most banks what they did was provide late-sitting guidelines which customers could have part of this reprogramming, undertake this grace period and so you could have very good customers, or customers that need this grace period, so they could have lead indicator and how the loan - the quality of the loan book is. Also since it wasn't a requirement that we would request customers to show us information regarding they had a impact in the salaries, it's not clear, what percentage of the customers need -- needed these grace periods [indiscernible]. And I think it's very important to mention that the level of deposits in Banco de Chile had grown by over between 30% - around 35% for individuals. So our individuals have more deposits in their account, there are different reasons for that. But that's something very important to mention, that customers are high-income individuals. So they're not - they are little bit less susceptible to these volatility in the economic cycle and what we've seen today of customer instead we've had a very good payment behavior in the first month of paying - of installments that you. So that's very positive from what we've seen so far.

Yes. Is it possible to have an idea of maybe within the reprogram loans, how many of the customers have taken account with Banco de Chile.

Basically, when the customer enters Banco de Chile they have a package across most of our customers use Banco de Chile as their primary account. So most of these customers have a current account, so it's not, it's very uncommon customer will have a product that is in the current account customers so most of the customers should be current account holders.

But basically for the consumer group then you can identify those that have seen their salaries at least reduced. So therefore that there you can see maybe the proportion of those that may could have a higher probability of having it hold.

Again not necessarily since you can add more than one bank account. So not necessarily you have the savings in one versus another. So it's information that we have. It's not public but what we do have and what I can say is that the first month is the most important month of reprogram that we did was in April and that was due in July, we had very good levels of payment behavior.

The next question comes from Sebastián Gallego with CrediCorp Capital. Please go ahead. Sebastián Gallego: Hi, thank you for the presentation. I have three questions, the first one a follow-up on more of the same in terms of asset quality. I just want to get a sense on, when should the benefits provided to customer start to fade and actually if you are providing more extensions to those benefits that will be the first question. The second question is regarding the pension fund withdrawal in Chile. I would like to know if you can comment on the behavior of clients on whether you can comment if those clients are repaying debt or not. How are you seeing those clients so far with the information we have us as of now? And third, considering that also Rodriguez is in the call, I just want to have his perspective on the upcoming both for the new constitution in Chile and how this should play out going forward. Should we expect more - I mean some more of the same that we saw in October last year or do we - should we expect more account and stable outlook in terms of the social crisis. Thank you.

In terms of asset closure for the consumable, most of that is coming in July. April is the most important month for the consumer but [indiscernible] what we have seen is in the overall of these customers that took on this grace period a very good level of payment behavior. It's was a very positive information that we've seen so far. In terms of there is more benefits there was, we announced for the mortgage loan book, three additional months that customers could postpone. Again the reprogramming of loans, customers can take these benefits if they need them or if they see it as an attractive rate. So it's – there is certain characteristics that the customer must comply, which is being on time for the loan et cetera, and then they can take from these loans. So that's a lead indicator in terms of the book and this is for instance, as mentioned, there is two ways to analyze this. The one way is to be publicly available and we can analyze all the banks which is the total volume of the loans that had some relation of an installment reprogram, which is available on the website of the CMS, or what we shown on Slide I think it is 18, which is only the installment of these three programs. So, three months installment represents today, CLP490 billion, which is 1.6% of total loans. So it's not a very significant amount for installment that has a new loan associated with it. In terms of the 10% of the pension funds, I guess that would be the main new benefit. And so right now, we have three more months, six months as of April, SMEs have six months since they take on the SME COVID loans. So we should see a gradual payment as of now and – the end of this year and the beginning next year amongst first volume of consumer loans, mortgage loans and then commercial loans for SME companies. And for the 10% of ASP, it's something that's been discussed all with the group. But the funds haven't been issued. So it's very hard to know to identify where those funds will end and which customers will take on those funds. I think it's important to mention is that one of the things that Banco de Chile has been very strong in the past is getting customers to use that as their primary bank accounts. So, generally the customers work with us Banco de Chile as their primary bank accounts. So, that should be something positive as well if there is funds that flow into Banco de Chile. Daniel?

Yes, I’d like to add one idea to that Pablo that it is 10% of the withdrawal from pension funds will likely contribute to increase in the short-term, private consumption. So that's why we are taking at a bigger role in loans as well by the end of this year because the Cincinnati tax increase in private consumption as a result of this, the withdrawal of the 10% from the pension fund. So what basically we are highlighted here is that this is one additional factor supporting better outlook for the future especially impact the consumption in the short-term. With respect to your third question, it's too early as to provide more accurate estimate in terms of the potential changes in constitution and what would be the impact in economy further. And at same we because are aware that the main challenge in the short-term for the economy is to recover the economic growth. So that's why now there is an important discussion in Chile in terms of the main policy. The government has been for example is very active in terms of implementing a strong stimulus, it will make a comparison with Chile related to other countries would be more aggressive in terms of increase in the future stimulus in order to recover the economic growth. So that's why in part when you compare the GDP estimate for 2021 in Latin America, Chile should have one of the best economic growth in there for next year. After the recovery where we expect it to be by the end of this year, there will be several discussions on the political side. We know that we will likely have a discussion for the constitution we will likely have fresh elections for the next year. So we are aware about the potential impact on the economic growth. But all in all, we are positive for the future in Chile. We are confident that the second quarter was the bottom of this made cycle. We are facing a positive growth on a sequential basis for the fourth quarter of this year and all in all with an economic growth of nearly 4% for the next year.

Our next question comes from Neha Agarwala with HSBC. Please go ahead.

Following up on Claudia's previous question on the deductibles for the FOGAPE loans, I understand that you will start making these provisions in September, but could you give us a sense of the magnitude of these provisions that might be needed CLP30 billion to CLP40 billion does that sound reasonable or should be more or less? And related to that is, there was a change in the treatment of FOGAPE loan guarantees for the capital calculation. What would be the impact on your Tier 1 ratio from that? Is it already included in the numbers that is presented or would that change in fact your 3Q capital levels? I'll ask my other questions later?

And so in terms of Claudia's question, what we can say is that how the FOGAPE is basically – when expected loss excluding that FOGAPE guarantee is lower or equal to the deductible, the provisions should be determined without the guarantee. And when the expected loss excluding the FOGAPE guarantee is greater than the last quarter, the provisions should be the seven days from the aggregate of the deductible and expected loss, using the FOGAPE guarantee. So what we can say is – this is being calculated. And there is something that will be attributed to this, beginning in September, but we don't have a number that we can give you at this time. And can you repeat the second question, please?

And my second question is on the accounting treatment of FOGAPE loan guarantees. There was a change in the treatment of these guarantees, which would positively impact capital ratio. So is that change already been accounted for in your numbers for 2Q or would that impact the 3Q numbers?

Hi this is Daniel Galarce actually the impact for us is not relevant. Actually, we don't have any impact due to this new treatment for that amount. This is just a change from the risk weighted assets due to – from capital weighted assets. So it's not a big change for us, it is not further down at all.

Perfect. Then the next question is on the trend that we can expect in terms of NPL ratio and cost of risk. I believe you – and today we don't have very aggressive charge-offs policy. So should we expect the NPL ratio once it starts increasing to remain at relatively high levels for a few quarters and gradual write-off or will you be more aggressive in writing of loans as you learn about the quality of the portfolio? And in terms of cost of risk, should we expect bulk of it to be in 2020 or more evenly distributed between 2020 and 2021 and any particular quarter in which you think the cost of risk should peak? My second question is on additional provisions. You showed that you have very high level of additional provisions versus your peers. But you mentioned in the previous calls that you will probably not be using it in the current crisis. So haven’t you changed and do you think that you would probably trigger the use of these provisions if required in the coming quarter or would you like to just maintain them at these levels? Thank you so much.

In terms of a write-off, there is regulations that determines when loan should to be written off - when there are certain characteristics, such as a consumer loans it lasted six months, mortgage loans very much longer period, timeframes the period. And there are certain conditions that you can write-off loans before that. Probably what we should see today is something in the normal write-off period, there could be a decision, we can't rule it out because - there is a closer write-off, but it's not something that we could give guidance at this time. In terms of cost of risk, the cost of risk should be same, it is something that in this year, obviously - the peak of the pandemic, should be effective the banking industry and for next year it's difficult to determine a number because it's not clear the economic outlook of the pandemic. We don't know as for when vaccine or medicine will made or a second come back of the pandemic and I think that's the biggest uncertainty and the reason why we can't give guidance for 2021.

That’s right. Neha in the case that the economy for 6% this year for example in the economy to grow by 4% for example, next year it should be consistent with an unemployment rate and that would it until 2022 for example. So that's why, very, very hard to make any comparison with base prices because this time is really, really defensive, that’s why we don't know the length of this crisis we will know what is the actual impact in terms of the output that the economic cycle. So that's why we don't have a more accurate guidance in terms of cost of risk and that's why as well we can rule out more additional provision. For example because there is a big, big uncertainty in terms of the future evolution of the economy and we are aware of course that we can compare this crisis from any other crisis in the back.

Also, I think it's important to mention that we can’t rollout additional constitution of additional provisions or releasing provisions because it's not clear the outlook. So, we have to see how this evolves. So it's not clear on how, when these provisions can be used.

The next question comes from Alonso Garcia with Credit Suisse. Please go ahead.

My first question is actually just a follow-up as to the requirement for clients to adhere to reprogramming and I guess quite right of you asked for documentation for that sort of claims demonstrate that they had an impact on the income from the pandemic, or if you did not ask for such documentation. And my second question is on Basel III implementation recently in Chile, the regulator put for consultation details for the risk weighting factors for market risk? So I just wanted to hear your thoughts, if based on that new information, what's your new expectation for Basel III impact on your capital ratios? Thank you.

So I think it's important to give more clear understanding of reprogramming of loans. So basically in Chile, what happened, different from other countries, and there has been many different ways how different countries and banks upgrade and even in Chile, that most of the large banks in Chile. What do they do and what did we do specifically in the second half of this year is that we offered this reprogramming of loan without taking into consideration or requesting that customer send us information regarding if they have a significant impact. There was an opportunity to build stronger relationships with customers, we use a digital estimates to offer these products quickly online, and 100% digitally, then don't have to come to the branches. And customers regardless, if they have more income than last year, less income than last year through which they need this benefit, have an opportunity, everyone have the same opportunity to receive a reprogram of their loans. So this is the reason why it's not a very good lead indicator of risk. What is positive is what we're seeing today, in terms of the payment behavior. So the payment behavior has been very positive, in the July figures which is the bulk of the consumer loan book which has been repaid, which is beginning the repayments today. Those customers taking advantage, some that need it, some that - doesn't need it.

Okay and just could you please repeat the figures of payment figures in July to get a sense on how much of your reprogram portfolio is back and in time with their payments?

The consumer loan book is the one that has three months repayment, which is being paid today. So most of the consumer loans that have been reprogrammed was done in April. So, most of that has been prepaid today in the month of July, we are in the second month now. And then the other question was Basel III - I didn't quite, could you repeat the question please?

Yes, I mean there was one of the uncertainties regarding Basel III implementation in Chile had to do with risk weighting factor for market risk and I believe the CMS for consultation details on that recently one or two weeks ago. So I wanted to hear your thoughts on what was put for presentation and based on that, but your expectation for the impact of Basel III implementation on your capital ratios. I believe last time you're talking about, I mean but probably negative 50 basis points from implementation regarding Basel III so I want to know and if that's still the case or if that's changed?

Hi Alonso, Pablo Garcia again. I think Basel III accelerated the new methodology on market risk-weighted assets from this later. We are actually analyzing now this new methodology and as far we have estimated I think that the impact is similar to the rest of the rules some of in there, some but I would say that - they are - [indiscernible]. So basically, we believe that we will had an impact on our capital ratios due to Basel III the transition to Basel III of course, but this is not different than we haven't disclosed in previous calls. So basically the impact, I would say will be in the range of 80 basis points to 100 basis points in the capital ratio. And this is including this new methodology for market risk-weighted assets.

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

Okay, thank you for [technical difficulty]

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