Good morning and good afternoon, ladies and gentlemen. And welcome to Banco de Chile Fourth Quarter 2021 Results Conference Call on the 4th of February, 2022. At this time, all participant lines are in listen-only mode. The format of today's recorded call will be a presentation by Banco de Chile team, followed by a question-and-answer session. So without further ado, I would now like to pass the line to Banco de Chile team. Please go ahead.

Good afternoon, everyone. Thank you very much for attending this conference call. It's a great honor for us to host this call today, where we will analyze and discuss financial results and main achievements of Banco de Chile during the fourth quarter 2021 and consequently, the full year 2021. We are proud to say that, once again, our bank shows its unquestionable leadership in the local banking industry. Apart from having the highest net income, we all supported the strongest capitalization, the more solid coverage ratio, and we ranked first in demand deposits, among other accomplishments. In simple words, we can say that 2021 we affirmed that Banco de Chile has a unique capacity to generate attractive and consistent profitability, as well as the best fundamentals to face the challenges in the long run. We will review these in other aspects through this presentation. As usual, we will start this call with an overview of the Chilean economy and business environment. And then Pablo Mejia, will go into the analysis of the bank. Let me start with the macro section. Please go to slide number 3. Generally, 2021 was a successful year for the Chilean economy. GDP grew about 12%, surpassing any expectations held at the beginning of the year, when the consensus pointed to an expansion of around half of the actual growth. The positive trend of activity can be seen in the chart on the upper left of this slide. As we mentioned in previous call, the improved growth is mainly attributable to the UN contribution of three factors. First, a very expansionary fiscal policy implemented since 2020, which aim to mitigate the adverse effects caused by the pandemic. The government deployed several measures, including direct transfers of nearly 10% of the GDP, which increase the total spending…

Thank you, Rodrigo. The unprecedented change that COVID-19 has had on the global economy is astonishing. This is probably permanently adjusted how we live our lives and use technology. This pandemic accelerated the development of digital banking at Banco de Chile and we have continued to innovate creating new products and solutions to improve the digital experience for our customers in several fields. For example, in 2021, we created new smart payment platforms that use watches and mobile phones to pay for goods. We also reinforce our QR payment platform and launch new apps and foreign payment functionalities. We were also very active in growing our digital onboarding debit account called FAN and made available several new tools for these customers that aided in strengthening ties with them, such as cross-selling insurance, credit and investment products. In fact, as you can see on the chart in the bottom left over 20% of our FAN customer base has been cross sold to other products, demonstrating its potential. Our goal is to provide the best customer journey in order to offer a great experience. By doing this, we can stand out from the competition and continue growing strongly with customers that use our products actively. Thanks to the successful rollout of this product, its benefits and new digital functionalities, we have grown to almost 730,000 customers in just five quarters. This achievement is very positive for us especially when you consider that this will expand our retail customer base significantly. Please turn to slide 12. We believe that by providing the best customer experience, we can outperform our peers. This focus is proven by our excellent net promoter score rating of 68% and our record low level of attrition of only 2.2%. It's also worth noting that these excellent indicators have taken…

Thank you very much for the presentation. We will now be moving to the Q&A part of the call. [Operator Instructions] Thank you very much. Our first question comes from Mr. Tito Labarta from Goldman Sachs. Please go ahead, sir. Your line is open.

Hi Pablo, good morning. Thanks for the call. My question in terms of your outlook for inflation and interest rates, and remind us, how that impacts your margin, also thinking if inflation remains elevated in the first half of the year at around 7% level or so, should that imply ROE can remain at the similar levels that we saw in 4Q? How do you think maybe inflation evolves throughout the year impact on margin and I guess also profitability and also the sensitivity to higher interest rates? Does that offset some of the higher inflation that we're seeing or how should it impact you? Thank you.

Thanks, Tito. So, inflation is an important factor for results. And one of the reasons why we had -- it’s part of one of the reasons why we had a very strong net interest margin in 2021. And what's expected is the first half of 2022 should continue with higher than normal levels of inflation. Today, for every 100 basis point change in annual inflation, it affects us around 20 basis points net. We have a gap on the balance sheet of about CHF8 trillion. So for every 100 basis points, it's about CHF80 billion. If we look at the effects of the rise in the monetary policy rate, we have for every 100 basis point change in the short-term. It's around five, 10 basis point change in terms of net interest margins being after one year. And when everything is fully priced in, we're seeing something close to the 25, 30 basis points for every 100 basis points. So if we put all this together, what we see is that, 2022 should be a positive year because we've seen strong rise in interest rates. And thanks for this; we should see slightly better NIM in 2022 versus 2021, but being partially offset by the lower level of inflation. But we can't rule out that there will still be higher rises in interest rates and inflation depending on the economic cycle and what's to come. Rodrigo, do you want to add anything to that?

Yeah, thanks, Pablo. Thanks Tito for the question. No, I just want to highlight what I said in the beginning of the conference call is that, our bias in different math of both interest rates and inflation rates. Even though our baseline scenario consider an inflation rate of 4.5% by the end of this year, the annual inflation rate will be hovering around 6%, 6.5% at least until August or September of this year, which means that there are risks of some second round effects and other prices are not certainly good, et cetera. So my point here is that we can go out higher than expected inflation rate at the end of the year, as well same for the interest rates. So now we'll have different scenario, we have an overnight rate of 6.5% back once again. We can rule out that number is slightly higher than this. So basically, in our baseline scenario, even though we have downward bias in our forecast for GDP, we have an upward bias in terms of interest rate and inflation as well. So we'll be basically redundant on the revolution of the civil rights and some political factors in the future. So they advertise and the price to interest rate is an important aspect to monitor in this year. Thanks. Pablo?

Maybe – maybe one thing to add as well, the fourth quarter had very high inflation. It has 3% level of inflation. So if you annualize that that's close to 12%. So we're not expected that the quarters will have such a high level of inflation in the next coming period. But for the full year, we're expecting net interest margins to be more positive than 2021.

Also in our base line – sorry. In our base line scenario of fourth quarter of the last year was peak in terms of quarterly inflation. So we are assuming [indiscernible] normalization of inflation rates in the future, even though we are now lessen our bias in in that sector. Thanks.

Okay. Yes, thank you, Pablo and Rodrigo. That's helpful. Just to – I guess one thing to clarify on the policy rate increase you mentioned a 5 bps change in margin after one year. And I assume I think that was a positive change. But in the short term is there a negative impact as your – like the lease re-priced?

It's a 5 to 10 basis points improvement in net interest margins. And in the short term, since there has been a strong structural change in the funding mix of Banco de Chile, where we have a huge amount of non-interest bearing deposits, we're not seeing a impact in the short term. We're seeing smaller improvements, but it's possible.

Okay. So that's clear. So no impact from the rising rates in the short-term and after year 5 to 10?

No. No. In the past it was different funding through [indiscernible]

Got you. Understood. That's clear. Thanks, Pablo. And then, so as the inflation normalizes throughout the year, and I guess also your tax rate was a bit lower in the quarter, just thinking about the ROE? And then you mentioned, you should normalize back to pre-pandemic levels, but can you remain above 20%, I guess in the short term as inflation is still a little bit elevated before kind of getting back to maybe closer to 17%, 18% that you had pre-pandemic, is that reasonable?

We're still like in transitional year so everything's very different. There's still a high level of liquidity. We still have high levels of inflation. We have rising interest rates, low cost of risk, very good payment behavior. So, when we combine all of this, it provides us with probably in the short term, higher level of profitability then our long term levels, the levels that we're seeing today 2021 and 2022 will possibly based on this – in this scenario be about those 16% to 18% levels that we say for the medium term, which are more sustainable, thinking of a cost of risk closer to 1.1% inflation back down to 3%. So in the short term, yes, it is possible to have better a higher level of ROE than what we should expect in a more normal scenario.

Okay. That's clear. And sorry just – Rodrigo go ahead.

Okay. Sorry. So let me add just so basically, it's important to keep in mind that our inflationary pressures will be remain in the first half of the year. So that's why these transition, the normalization that Pablo already mentioned will be from the high level in the first half of the year because we will have a higher inflation and therefore the normalization will be probably from the second half of the year. And thereafter, in the long run, we will likely have more normalize. However, we see Santander, as we said in previous conference calls with everything in equilibrium, which would be a number between 16% and 18%. But this year, given the above the high inflation and high interest rate as well, probably we will have our first half with a higher level of sustainability, whether it's through the second half of the year.

Okay. Yes. That makes sense. That's clear. Thanks, Pablo and Rodrigo. Sorry. And just one final point to clarify. On the tax rate, because it was only around 15%, I think also benefited from the higher inflation, should that get back to the 20%, 22% level?

Yeah. So in taxes -- for the tax authorities use price level restatements to calculate taxable income, so higher levels of inflation reduces the effective tax rate. So with a more normalized level of inflation, we should see an effective tax rate closer to the 23% level win rate 3%. But for 2022, it will depend on inflation that we see. So probably below the 23%, but above what we've seen in 2021, depending on where that inflation number goes. Rodrigo, did you want to say some…

No, no, no. Sorry, sorry. That was fine. Sorry.

Okay. Great. Thanks for taking all my questions.

Thank you very much. Our next question comes from Mr. Jason Mollin from Scotiabank. Please go ahead, sir. Your line is open.

Thank you. Actually, maybe first just to follow-up on the effective tax rate. And you mentioned the impact of inflation and we know that. We've seen some discussions that the government will need to raise tax revenue and raise effective tax rates. How are you thinking about that? And is that potential change in your long-term ROE expectation that banks could pay higher taxes going forward? And secondly, maybe given the news about Citigroup's exit [ph] from retail banking, if you can provide an update on Citi's partnership with Banco de Chile. In the past, the bank has talked about the Citi supporting international business opportunities, maybe you can speak to us about Citi's involvement in other BCH activities, particularly if there's where Citi supports Banco de Chile as a 50% owner of the entity that controls 51% Banco de Chile? Thank you.

Rodrigo, maybe I'll take the Citigroup question. I'll start and then you take the taxes question. In terms of the relationship with Citigroup, we have a strong relationship with Citigroup and we have a commercial agreement that sets the guidelines on how we work together with Citigroup in Chile and abroad. Citigroup provides us support in terms of more international business, especially custody, multi-national companies. So, they're very much involved in that, like placed bonds outside the stock brokerage, et cetera. In terms of the retail side of the business, without the strength with Citigroup within Banco de Chile is more focused on commercial -- on the corporate side of the loan book. Going forward, they continue to have the same level of participation in Banco de Chile. We don't have any additional information whether there's something going to change in that front, but they've been happy with the relationship that we've had up to this point. So, maybe Rodrigo, do you want to add anything to that or go straight into the tax changes?

Thanks Pablo. So, I guess that in terms of the second question, yes, I mean this time I have answer. In terms of the first question about the tax rate, I think that it's important to keep in mind seven things. First, we are aware of the increase in growth fiscal debt in Chile across retail figures. Last year the gross debt was 26% of the GDP. The fiscal deficit was 7.6% of GDP. Of course, these are higher than expected number when we compare with previous year, so that's why we will likely be discussing the campaign some tax rate, tax reform, et cetera, et cetera. Other than that, it’s very important to mention that any decisions related to taxes or spending have to be defined by the central government. I mean, the next President of Chile will have to define any potential changes or proposal in terms of changes any facts or the fiscal spending in the future, et cetera. According to some interviews and other statements that can make people appointed by the next President of Chile, Gabriel Boric probably the tax potential changes will be more focused on personal tax rate rather than corporate tax rate. So, that's why in our baseline scenario, we're not considering important changes in that area. But it's very important to follow the discussion. Any proposal has to be made by the central government, which will kick off from March 11 that according to available information, probably there will be more changes on the personal tax rate rather than the corporate tax rate. But again, there is not an official draft. There is not an official proposal. It will have to be announced by the next President of Chile by the next government actually. But -- so we don't have information as to assume important changes in terms of the tax rate so far.

Thank you very much for your comments.

You're welcome.

Thank you very much. [Operator Instructions] Our next question comes from Mr. Daniel Mora from Credicor Capital. Please go ahead, sir. Your line is open.

Hi. Good morning, everyone. Can you hear me?

Yes. Please go ahead.

Yes. Hi.

Thank you. Sorry, that I have some communication problems. Thank you, Pablo, for the presentation of the Banco de Chile team. I have a couple of questions. The first one, I would like to understand the current trend of the cost of risk considering the pickup in the fourth quarter and the recording of additional provisions. The coverage ratio right now, it's above 400% are more than healthy indicator, and with asset quality indicators under control, what are the expectations or what are you expecting ahead that made you keep these conservative approach or should we there consider the normal cost of risk in 2022. And my second question is regarding the CET1 ratio is 30%, well above that of peers and also the fully-loaded regulatory minimal. Do you expect to use part of this capital to boost loan growth or do any other investment or we could consider these indicators, these figures as the normal long-term CET1 foreground for the Chile.

Okay. So, maybe the first question about risk and additional provisions, I'll take that question and Daniel Galarce can update in terms of the Basel ratio question. In terms of cost of risk for 2021 and what we saw in 2020, you’re correct that in 2021 we had -- we established CLP220 billion in additional provisions. And we had a very strong level of coverage of over 4 times. So, what we're expecting for 2022 and what we've seen from 2021 as well, is that customers are having a very good payment behavior because of high liquidity levels, because it's more of a transitional period. 2021, 2022, we expect to be continue being transitional period, with probably lower levels of cost of risk than what we would imagine for our long-term level of cost of risk, which would be closer to 1.1% in 2020. 2022, we're expecting a level, still in a transitional period, below that 1.1% probably around a level closer to 1.0%. So, what we've seen is very good payment behavior from all customers. We have good NPLs. What we've seen as well is our loan portfolio, the SME loans, the Fogape loan portfolio. They're all operating very smoothly. But we still think that this is -- this depends on the evolution of the economy and it’s transitional. Going on to your -- so in 2022, still a transitional year, close to the 1% cost of risk. Beyond that, we should probably trend to what we have always said, is closer to our long-term level of 1.1% cost of risk, around that level. In terms of additional provisions, it’s correct. We've had -- we've implemented CLP220 billion of additional provisions in 2021. In fact, in the fourth quarter, we had CLP80 billion of additional provisions. So, these provisions are still related to uncertainties relative to the long-term economy. But uncertainties of the economy still remain. So, due to this economic scenario, political scenario, we've been implementing these provisions. But nevertheless, what we think is that, there’s a recovery continues in the future and it's a clear recovery and the uncertainties tend to fall. We can't rule out, as we've mentioned in the past, the portion of the additional provisions that we implemented in the past, we can reverse it and that's a decision that will have to be taken by the Board. We don't have an exact trigger on how that would work. But it's something that the bank is -- and the Board has mentioned that would be a possibility in the future when the uncertainties -- when there's less uncertainties. Now, Daniel, would you like to go into the next question?

Yes. Hi. This is Daniel Galarce.

Yeah. That's perfect. Thank you, Daniel.

Well, regarding CET1 ratio, actually we have 15% CET1 ratio as of December 2021. Of course, this is an important gap regarding the regulatory thresholds. We feel very confident with our capital structure today and capital position. This is not intended to finance any particular investment actually is basically the room we have to grow in our normal course of business over the future given the scenario, some economic scenarios that Rodrigo already analyzed. Our capital position basically relies on our income generating capacity. Of course, we have a very successful year in 2021. And also, it's important to know that this is same thing in implementation process. Of course, this -- Basel III landing in Chile is still in progress. It will be -- there will be a facing period of four years from now. And of course, we believe that we have -- we need positive gaps and important gaps in order to address this implementation process in the future. And, however, we feel very confident with our current position in terms of capital and due to that, of course, we -- that allow us to increase our dividend payout ratio from 60% in the last -- 60% or 70% in the last years to 100% of our proposal for our shareholders meeting that will be in next March. So net-net, again, we feel very confident. We don't think that we need more capital in the in the near future. But we are also aware that we need to face the transitional processes of possible of Basel III in Chile yet.

Perfect. Thank you so much.

Thank you very much. I'm seeing no further questions at this point. I'll pass the line back to Pablo for the concluding remarks.

Well, thanks for joining us in this conference call. And we look forward to joining again in the next conference for the first quarter 2022 results. Thank you.

Thank you very much. This concludes today's conference call. We’ll now be closing the call. Have a great day and a great weekend. Thank you.