Good day everyone, and welcome to Banco de Chile’s Third Quarter 2020 results conference call. If you need a copy of the press release issued yesterday, 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 Daniel Galarce, Head of Financial Control. Before we begin, [Operator Instructions] And that 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. Mr. Aravena, the floor is your sir.

Good afternoon, everyone. Thank you very much for attending this conference call today. In the first part of this webcast, I’ll present our view of recent developments in the business environment. Then, Pablo Mejia, our Head of Investor Relations, will go over strategic advances and financial results achieved by our bank during the third quarter. Let me start with our view of the economy. Please move to Slide number 3. Several signs, I get the bottom of the negative cycle was seen in the second quarter of this year. Chile’s activity is also improving when compared to most countries in the region, which is highly attributable to our sound fundamentals, and strong policy responses, and the improvement in COVID-19 evolution. I’ll go into greater detail regarding factors later on this presentation. The chart on the top left, shows the magnitude of this recovery. After the 43% annualized drop in the second quarter, GDP increased 21% in the third quarter. Consequently, the activity reduced its annual decline rate from 14% to 9% in that period. This rebound has been explained by higher dynamism in several sectors related to domestic consumption, which have also been influenced by the withdrawal of personnel savings from pension funds, as well as the implementation of other government support programs. This potential turning point in the economic cycle has increased domestic prices. The CPI went up by 0.6% in September, which was well above the market consensus and from levels observed in previous months. Consequently, the annual inflation rate went up to 3.1% in September, rising 60 basis points from August, as the chart on the upper right clearly shows. As seen in most countries, the labor market has suffered the main negative consequences from this pandemic, as shown on the chart on the bottom left. As…

Thank you, Rodrigo. Please turn to Slide 12. The successful implementation of our strategy has provided our customers with the best experience in the industry. Even during this challenging time, we have continued to innovate and strengthen our brand and lead in many different indicators as you can see on this Slide. For example, we continued to lead the industry in customer satisfaction, with a wide gap to our closest competitors. This solid track record of customer experience has been provided through our proven ability to not only have best customer service, but also to offer the best products through the channels our customers demand. I should mention that the surveys shown on this Slide for customer satisfaction is a fairer representation of banking customers opinion as a whole. These surveys use a more representative sample of banking customers and not predominantly use our own customers. It’s also important to highlight that for a third year in a row, we were distinguished with the national award for customer satisfaction in 2020, as you can see on the right. Another relevant point, I want to mention is the strength of our brand. In many surveys we rank first. For example, we have posted once again the highest brand recognition in the Chilean industry. And we led with a very wide gap to our competitors in the survey where customers are asked if they were to switch to another bank, which bank they would choose, as shown on the charts on the left. We are also considered to be the safest bank in terms of Security and Solvency, as shown on the chart on the bottom. This leading position in both customer experience and brand is extremely valuable in light of new regulations, where it will be much easier for customers to…

Thank you, sir. [Operator Instructions] And the first question we have will come from Tito Labarta of Goldman Sachs. Please go ahead.

Hi, Rodrigo and Pablo. Thank you for the call. A couple of questions. I guess, first in terms of your margin, just understand how we should think about the margins going forward? Or maybe to start, like how much of your margin is impacted by the FOGAPE loans? And how long you thinking that will continue to impact your margins? How should we thing about margins for next year? Do you think that you can get some improvement in the margin or increase in the margin? And then second question in terms of your provisioning and your cost of risk. Do you feel that – and I think you’ve mentioned provision now for everything. Do you think your cost of risk next year can really begin to come down, or even in the fourth quarter? How do you feel about your provisioning versus kind of your expectations for asset quality going forward given that the real impacts on appeals, how long we have been going forward? Thanks.

Hi, Tito. Okay. Well, in terms of NIM, we recorded this quarter, a level of 2019, I think it’s important to go over a little bit where we’re coming from. So in 2019, NIM was around 4.2%. And year-to-date in 2020, we recorded 3.5%. And in the quarter 3.1%. It’s important to note that, if we look at the 2019 numbers, we have to take into consideration certain things that occurred. For example, there’s 20 basis points, we have to reduce from the level from last year, the CLP 4.2 million because of the huge level of renegotiations of mortgage loans, because the interest rates were very low, and that took place mid-2019 when customers began renegotiating. So this, together with the implementation of a new regulation that obligates banks to pay off overdraft lines of credit when customers have funds in their accounts effects our NIM by about 20 basis points. So in summary, for the 4.2% level that we recorded last year, reality based on the new market conditions and regulations, it’s closer to 4%. So it’s also important to mention some things that happened this year. So we have – due to the huge amount of demand deposits that we receive, this affects our net interest margins as well because, we have to price those fines – portion of those funds in high liquid assets. So that’s about 10 basis points. So for the 3.5% that we recorded this year, if we adjust – if we look at on adjusted basis, it should be close to around 3.6%. So we’re comparing 4% and 3.6%. So if we look going forward, there’s some things that we should take into consideration. First, inflation should return to the levels of 3% at some point in the future. For every 100…

Okay. Thanks Pablo, that was pretty clear. But just I guess, on the cost of risk, and I know it’s uncertain, but how normalized in 2021, do you think maybe in the first half of the year, cost of risk needs to remain somewhat elevated in second half, you can get back to normalized levels? I mean I know it’s difficult to predict, but just to help a little bit in the modeling. Is that the right way to think about it, maybe higher in the first half and lower in the second half, getting back to normalized levels in the second half?

I think it’s difficult to estimate for how this will evolve, especially that there’s a lot of government aid and different things have occurred in Chile, for example, the withdrawal of pension fund money, which has helped customers pay their loans. There’s still payment holidays for the SME loan book, which comes due later on this year or beginning of next year. So there’s still a lot of uncertainty, which could happen, especially if we look at what’s happening in Europe and other areas. A second lockdown makes it difficult. So, probably before seeing an improvement, there will be still some uncertainty in the medium term before we get to normalized levels.

Yes. So, I would like to add – we are not providing more guidance for the next year because a very high uncertainty. So it’s not clear, for example, how will be the relation between the employment recovery relative to the GDP growth. So what we’ve seen is a positive sign in the clean economy. So, green shoots, as we mentioned in the presentation, that since we have a very high uncertainty, we think that the most responsible here is to not provide more guidance for the next year.

And the next question we have will come from Neha Agarwala of HSBC.

Hi thank you for taking my question. My first question is regarding the repayment behavior. Could you give us some concern, what percentage of the loans that you had reprogrammed actually came due? And what is the payment behavior of those loans? And I’m still not quite sure what was the reason for releasing the – some of the additional provisions given that you feel that there’s a lot of uncertainty in the environment. So what maybe take a step like that? And then I’ll ask my second question.

In terms of the additional provisions, I think it’s important to mention those provisions are used for uncertain times. And what we did is we updated the model to take into consideration more of these market aspects that were occurring today and the actual provisioning models. So we could use – so we’ve basically reclassified from one part of the book to another, but it really doesn’t have the net effect this quarter was higher provisions, higher coverage ratio. So it was just something that was evaluated on how we could implement this methodology. And this was how it was considered the best method to record allowances for the bank.

It’s important to mention as well that we have a new macro scenario; perhaps we have a new normal with different parameters. So, it’s very hard to imagine, for example, that the probability of delinquency rate in the future is the same today related to the previous scenario. So what we are trying to do is to reflect on a better way, the current economic situation, the current probability of default, for example, in the current economic model. So basically, the – real sphere is to adapt our models to the new normal in the economy. That’s aim we have.

Understood. And on the repayment behavior?

In terms of the repayment behavior, we’ve had very good repayment behavior from the customers that have had their loans being postponed. Today, most of the customers for the consumer loan book have already repaid. A portion of the mortgage loan book is repaid. And then we have that SME loans, which still have a little while to go for us and the industry because that program of FOGAPE, but it entailed is the customer that took a FOGAPE loan would have all the other loans at that bank would get a six-month grace period. So since this happened during the second quarter of the year, probably the end of this year, beginning of next year, we’ll have more information on how that evolves. But what we’re seeing today is our postponed book is performing embedded in the level of our total overdue loans of our average retail loan book prior to the COVID crisis.

It’s very important to analyze how the economy will evolve in the future, given the uncertainty. So far, it’s been better-than-expected at that we have to be cautioned related to the evolution of the economy in the future.

Okay. My next questions are – first capital and payout. What is your expected impact on capital ratio from Basel III implementation next year? And do you expect any delays in implementation or it should happen early 2021? And what do you think about the payout ratio that you can maintain, given that you have the strongest level of capital? And my second question is more on the economy. We have the referendum recently. What impacts do you see from the constitution? Or how do you think this will – it’s a two-year process, but how do you think it will impact – the final impact would be on Chile? Thank you so much.

Hi. This is Daniel Galarce. As you know, we don’t have the old regulatory framework yet. I mean the clean regulator has published most of the specific regulations regarding Basel III but we just know the final norms for more than five or six of them. So far, as we have mentioned in previous calls, the regulations are quite similar to our first estimate. So, we don’t see any significant deterioration regarding what we estimated in the past for the impact of Basel III on our capital ratios. Yet the regulator has imposed or have phased in the implementation of Basel III starting in December 2021 until December 2025. So we have some time in order to commend any need of reinforcing capital, if we believe that it’s not enough. However, we are quite confident because we have taken steps in the past in order to bolster our capital base. As you know, in 2019, we issued subordinated bonds. And also, we need to know, how the new regulation will evolve and how the market evolve in terms of additional Tier 1 capital. So we still have a lot of room in order to prepare our capital base and us in order to address the new regulation. We don’t see significant deterioration in our capital ratios due to Basel III as long as the implementation is gradual, okay.

Neha, this is Rodrigo Aravena again. In terms of the impact of the potential new constitution, I think that –it’s very important to say that is too early. I just want to see potential changes in the constitution, as well as in the economy scenes. It has to be discussed in the new body, and each article has to be approved by 2/3 of members of the elected body. Even though the uncertainty in the process, we are aware of the importance of preserving those critical assets that had been important in the development of Chile, but it has to be discussed in the next – during the next year. It’s important to keep in mind here that the ability of conducting this process with discussion based on a long-term view. That takes into consideration in physical events and also learns from international experience will be possibly factor in the discussion and of course, in the future development of select. For now, we think that the most prudent thing is to wait for the discussions to be held in the process during the next year. So, it’s more prudent to wait for the discussion. How do you say that? I think, that it’s very important to keep in mind that Chile has had a very positive recovery in the economy during this year relative to other countries. In fact, according to the IMF estimates, as well as the blue market consensus, consensus forecast, etcetera, activity, Chile is expected to have the best performance on average during this and the next year after. We sold off the solid fundamentals that we have, as well as the very active response from the central bank and the central governments as well. So we are aware of the potential increase of uncertainty, that is too early as to anticipate any specific impacts coming from this discussion.

Very helpful. Anything on the payout ratio?

We should maintain that. We’re giving them more lifts over over the years has been very, very consistent over overtime.

I think it’s important to mention, however, that this is something that’s taken the side of the level, and we don’t have information until January of this year on how this will evolve. So depend on many different market factors, but in the long-term, as Daniel mentioned, it should be similar to that level. But in the shorter term, we have to take into consideration what will happen in the short term and how our Board of Directors will decide to capitalize.

Thank you. So the net could be lower than 60%. That’s not decided yet.

No, no. There’s no decision today for the dividend that will pay in March 2021. It’s still something that’s being analyzed, under discussion, and it’s something that the Board of Directors will review. Q – Neha Agarwala: Perfect. Thank you so much for your answer. Very helpful.

[Operator Instructions] The next question we have will come Claudia Benavente of Sandando. Please go ahead.

Hi. I have a question. Is it possible or fair to compare the changes that you made to the provisioning model to IFRS 9 that eventually Chilean banks will have to comply with? Do you believe that increased, important increase that you made on the consumer book reserves and would be enough to comply with IFRS 9? Thank you.

The important increase in provisions, I think you have to take into consideration. It depends on the cycle and how this evolves and what point you’re in. And the models in Chile don’t only use non-performing loans. So, generally there is different accounting, different reconciliations for the 20-F, for example. It is so large an impact like, it is in other countries. So it’s reasonable to expect that this would bring us closer to those levels if we’ve had to apply IFRS 9 in Chile today. But the model is different. That is actually model on IFRS 9.

Okay. No I just wanted to make sure – because at the end, like you mentioned before that the change could translate into an expected loss base. So it could – it should be kind of more similar to IFRS 9. So it probably can help you to at least comply with the new regulation in a way.

Yes. So it’s – for IFRS 9 and the 20-F, for example, it’s around it’s around a similar level of the CLP 70 billion that we recorded. It’s a similar level. Now exact, but it’s similar. So in terms – if we had to apply and the reconciliation, it would be the impact wouldn’t be so significant anymore.

Perfect. Thank you,

You’re welcome.

And next, we have Domingos Falavina of JPMorgan.

Hello. Good morning everyone. Thanks for taking my question. Just want a quick recap. Everyone – I know it changes based on your balance sheet in the quarter, but like looking at your balance sheet today, 100 basis points of higher U.S. inflation, what impact would it have on either NIMs as well as on tax rate? And ballpark estimates – I’m sorry if you mentioned that before, I couldn’t join the phone call.

In terms of the GAAP on the balance sheet, we have about CLP 5.8 trillion GAAP on the balance sheet. It runs between CLP 5 million and CLP 6 trillion. So for a 100 basis point change, that changes net interest income between CLP 50 billion and CLP 60 billion, which is around 15 basis points in net interest margin and how we cap rate it. So when you look at the effective tax rate, you have to look at two things. One is the offering because we have more assets in EURs than liabilities. We have a positive impact of higher inflation, but at the same time, the tax authorities use inflation accounting to calculate the practical rest. So you have to take the net non-monetary asset position. So we have more liabilities linked the U.S. Then our assets linked to U.S., they are non-monetary. So our assets are fixed – our equipment, properties, et cetera, and our liabilities are equity. So you take basically acquisition, multiplied by the inflation for the period and as your price level restatement loss. So the calculation, generally, when it’s running around 3%, inflation generally, Banco de Chile should be around an effective tax rate of 23%, 24%, its bit closer.

That’s very helpful. Thank you very much.

Well, so no further questions at this time. We will conclude the question-and-answer section. I would now like to turn the floor back to Banco de Chile’s management team for closing remarks, Gentlemen?

Thank you for participating in this conference call. We look forward to speaking with you for our year-end results. Thanks.

Thank you, gentlemen. This concludes today’s presentation. At this time, you may disconnect your lines. Thank you, again, everyone. Take care have a great day.