Good afternoon, everyone, and welcome to Banco de Chile's Second Quarter 2022 results conference call. If you need a copy of the Management Financial Review, it is available on the company's website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer; Mr. Pablo Mejia, Head of Investor Relations; Daniel Galarce, Head of Financial Control and Capital; and Natalia Villela, Investor Relations Specialist. Before we begin, I would like to remind you that this call is being recorded, 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. Please go ahead, sir.

Good afternoon everyone and thank you for joining this call. Today, we will present the overall performance of Banco de Chile during the last quarter, as well as our analysis of the main macroeconomic trends, including our guidance for the near future. Before going to the presentation, I'd like to say that we're very proud of the several achievements of our bank during the quarter, demonstrating our unquestionable leadership in different areas. On the financial side, for instance, we posted a historical bottom line of [ CLP 452 billion ], widening the gap, even more, with our main peers. This characteristic, which has differentiated our bank over time, was also accompanied by superior levels of capital and strong risk indicators. In this quarter, we also had important advances in ESG, mainly in terms of further improvements in ESG ratings and the development of an ambitious and comprehensive bond framework. All of these topics will be deeply discussed through this presentation. When looking at the performance of our main peers, our recent achievements are even more significant, given the economic and business environment. I'd like to begin with a discussion on the macro side. Please go to Slide #3. The Chilean economy continues posting positive annual growth rates, as seen in the upper left chart. In the first quarter, the GDP went up by 7.2%, while in second quarter, the activity increased by 5.7% year-on-year. On a broad sense, the year-on-year expansion has been driven by consumption and services, and on the other hand, mining has remained in negative territory. On a sequential basis, however, the story looks different. The chart on the upper right shows that the overall activity level has remained relatively stable since the end of the last year. In fact, in June, the IMACEC was 0.1% below…

Thanks, Rodrigo. I'd like to begin with the advances in our key strategic projects. Please go to Slide #8. As we have reviewed in the past, our strategy focuses on 3 main areas. First, the digital transformation of the bank, as this is key to continue competing effectively in the future. Second, a strong focus on driving efficiency and productivity. And third, continuing our commitment to create the most sustainable bank. We will go over this on the next few slides. Please move to Slide #9, where we will highlight some of our initiatives in digital banking and how they benefit financial inclusion. Cuenta FAN, our main digital debit account, continues to have a positive trend and we originated over 926, 000 accounts since its launch, and added approximately 82,000 new accounts during the second quarter of 2022. Of the total accounts, we have cross-sold 24% to other products and services including current accounts, insurance products, investments, credit cards, consumer loans, and mortgages. We are also launching a new checking account with digital onboarding for SMEs, that makes it easier for entrepreneurs to take the next step and separate their personal and business accounts. This product does not require minimum sales or period of time of operation and charges no entrance or maintenance fees. These digital initiatives along with the improvements introduced to our comprehensive investment app and the payment solution Paga2, has led us to be recognized by The European, as the most Innovative Digital Bank in Chile. Please turn to Slide 10. We have continued to drive productivity across all areas of the bank by implementing incremental improvements. This progress in operational efficiency together with all the technological advances that we have implemented and through the streamlining of our branch network, has allowed us to become one of…

[Operator Instructions] Our first question comes from Sir Jason Mollin from Scotiabank.

I just wanted to address -- I mean you were very clear in the presentation about the high level of capitalization, the additional provisions that were created this -- so far this year and in the past. I mean what -- and you're still -- Banco de Chile is still generating this very high ROE. What about returning more capital to shareholders either in the form of dividends, and I think you've addressed buybacks in the past may not be so likely, but if you can just talk about the dynamic going forward in terms of capital -- additional provisions and dividends?

Well, as you know, we have a very high capital ratio, the highest and the industry, strong level, and we're quite comfortable with that level to implement Basel III in Chile. If we look at the past in Chile and take into consideration what's occurred, we can't rule out that there's changes in the dividend and the dividends that we pay out in line, for example, how we paid out this year versus in the prior crisis, when we paid out 100% of distributable net income. So it's something that we can't rule out for the future. It is something that we have to take into consideration as well in terms of everything as the future growth, the future prosperity, or the permanent impacts of Chile in the long term after the pandemic, with other permanent impacts of the pandemic, of the crisis, and how that affects the growth of Banco de Chile. So we have to take into consideration everything in terms of where that dividend policy will be. But, obviously, we need to use our capital efficiently and if we don't see growth, obviously, that capital has to be used efficiently, so we can't rule out something somebody similar like we've done in the past and future dividend. And in terms of additional provisions, we've said it again this quarter important amount of additional provisions. The stock today is CLP 650 billion, well above all of our peers. This decision was taken, again, in an environment that had several signs of recovery since late 2020 but there's still many areas of the economy -- economic and political scenario that still is generating uncertainties. So I would say, today, it's -- we don't see these uncertainties still dissipating. So we need to see something more permanent that we can do something related to the additional provisions. So we can't rule out that a portion of these additional provisions in the future could be reversed but that has to be taken by the Board of Directors and we still feel that we need to see a permanent improvement in the economy and in the whole local scenario. I think that answers the questions.

Let me -- this is Rodrigo Aravena. I'd like just to highlight the very high level of uncertainty that we have in Chile. So basically there are important sources of uncertainty from the rest of the world. You know how sensitive is the Chilean economy to the Chinese economy's growth. For example, they had a recent evolution of the copper price as well. But at the local level, we have to keep in mind that there will be a next referendum for the new constitution, which is a very important source of uncertainty for the future. Additionally, the government has mentioned the intention to implement the reforms. So now, the government announced, for example, some guidelines for potential tax reform, the same for pension. So basically, to see how will be the economy in the long-term, even though in the past, Chile used to accounted with 3% economic growth, 3% inflation, a low-interest rate. It's mostly how will be the parameters for Chile in the long-term. So according to that, given the important uncertainty that we face, we think that it's best to have a stronger batter in terms of additional provisions, but that's why we feel comfortable in terms that we have the strongest bank as to face potential negative scenario for the future. And, in fact, we are just beginning probably a recession in Chile, negative annual growth between the third quarter of this year probably until the second quarter of the next year. So in this environment, we have been taking a more conservative approach given the uncertainty of the economy and the political situation in Chile as well.

Our next question comes from Mr. Tito Labarta from Goldman Sachs.

Rodrigo and Pablo, my question -- and thanks for some of the guidance you gave, Pablo, that was very helpful, but I mean if you can help us think a little bit of the evolution of the ROE from here. I know you gave the guidance for the year in long-term but just to think about -- you mentioned inflation to be similar to the first half of the year, renewal rates continue to go up now. So how should that impact your margin from here? If you help us remind us on the sensitivity for both inflation and for higher rates, and how long does it take to get back to that 18% ROE? Like in the short-term, it looks like you'll probably remain elevated, not at the level of 2Q I imagine, so there should be some kind of gradual decline in ROE but if you can help us maybe just kind of quantify it given the moving parts between inflation and rates and the impact on margins?

Tito, thanks for your question. So in terms of ROE, yes, we've had a strong ROE level due to the factors that we mentioned in the presentation, the high inflation, the high levels -- the higher levels of the overnight rate, which is benefiting us because of our strong funding base. If we look at -- in the short-term in the second half of the year, we should be seeing slightly lower net interest margins due to a lower overnight -- sorry, a lower level of inflation that should begin to decrease. We should see signs of decrease at the end of the year. If we look at other signals, then we have to see as well take into consideration for that bottom line of ROE as risk. We have seen a little bit of a rise in NPLs in the last couple of months, probably due to obviously the using up of all this -- of all of this liquidity that we've had in Chile, high inflation, that's going to be having an impact on the payment behavior of individuals and SME's. But in terms of the bottom line, we should see still a very positive bottom line in the short term around 28%, 30%. We're expecting something around that and if we look in the next couple of years, it will take a little bit time for ROEs to come back to that long-term level of around the 18% level, 16% to 18%, mainly due to the persistent high inflation that we've seen. We still believe that next year, we will have an inflation above the regulatory -- the 3% level, which is in the range around 6% and the overnight rate will still be high. So that will still be benefiting our net interest margins and we really do have to see how the growth in the loan portfolio will continue to evolve and NPLs in Chile but we should still probably see in the short-term higher levels of ROEs, of profitability, than the long-term. So depending on risk, obviously, probably next year it will still be a positive year in terms of the bottom line because of the very high inflation that we've seen in Chile. But we have to see what happens in terms of risk in terms of inflation, but we think as mentioned, as long as this continues to come down, our cost of risk and at least in the medium term should return to more normal levels of around 1.1%, 1.2%.

Pablo, that's very helpful. Maybe just one quick follow-up on that cost of risk NPLs and particularly going into a recession as you guys expect, what do you think that means for NPLs from here? You mentioned a bit of a rise in NPLs but how much can they increase, is it a huge risk or is it more sort of a normalization kind of those pre-COVID levels? If you can help us think about how the NPLs move from here.

So it's a slight rise but it's a normalization, so [Technical Difficulty]

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Hello. Am I...

Pablo, please go ahead. You are live.

Okay. I'm not sure where it got cut off. Sorry for that.

No, if you can hear me. I think there was, you said, kind of a normalization of NPLs, was the last thing I remember hearing.

Well, what we're seeing is a normalization in terms of NPLs. It's not a -- the rise that we've seen is more of a normalization, where we've seen across the portfolios, but it's not something that we have an area that we're very concerned of as of today. Obviously, we're doing all the follow-up, monitoring procedures for the more cyclical portfolios. What we've seen is a more of a normalization in terms of the portfolio and we expect that that normalization should continue in the coming months. So it's not an area of particular concern. Obviously, it's something that we have to monitor. In terms of the levels related to the economy, this is very important on how the economy evolves obviously, and I think Rodrigo can give some insight in terms the...

Yes.

Economic factors that could be a driver in terms of where the NPL levels go.

Yes. So basically it's important to keep in mind that the key driver of this slow-down of the -- of this potential recession Chile will be rated with a lower investment growth, but we are not quite pessimistic, for example, for concessions for unemployment scenes. Probably, there will be an active professional quality in the future so that's why the adjustment will be more related with investment normalization in terms of the activity level. But we're expecting a temporary recession and normalization of the economic growth between the third quarter of this year until the third quarter -- sorry, second quarter of the next year but again, it's extremely important to analyze how the constitutional discussion will evolve in Chile, how will we implement the reforms but, all in all, we are expecting just temporary recession in Chile with a limited impact in terms of consumption with a greater impact on investment without having important changes in that a labor market as we had, for example, in 2020.

Maybe I'm not sure if this kind of cut off one of the things I mentioned as well is that it's only a slight deterioration. So the figures are still well below the historical levels and what's happening is mainly due to the liquidity drying up in Chile and the slightly higher inflation levels that could be affecting certain customers' payment behaviors.

[Operator Instructions] Our next question is from Mr. Alonso Garcia from Credit Suisse.

My question is on the deposit side. You mentioned that DDAs should continue decreasing but so far, as you mentioned also, I mean we have seen more of our shift towards time deposits than the use of overall deposits. So considering your total deposit base is slightly up compared to December, just wanted to ask how do you -- what do you expect going forward? I mean you mentioned DDAs should continue to decrease, but what do you expect for time deposits during the remainder of the year and for your total deposit base? Do you think it should continue growing slightly or do you think for the second half, we should see an overall decline in the deposit base and also what do you expect on this regard for next year with lower rates and the contract move?

Thanks for your questions. So for -- in terms of the DDAs, the evolution has been in line what we are expecting with the rise of the overnight rate and there's extremely high levels of liquidity into it. What we've seen is customers either moving these funds to time deposits because of the opportunity costs or spending this or this being used in some sort of fashion going into mutual funds going somewhere. So it's completely in line. We still think that there is still room for it to continue decreasing the DDAs. They are well above historical levels. If you look at different indicators, it's well above those levels. And for the second half of the year, we should probably still continue to see a rise in time deposits. The levels of interest rate is still very attractive levels. Probably for next year, it'll still remain higher levels. And it's something that will transition slowly to normalization similar to risk but the levels of funding that banks have in general and the industry in Chile.

Perfect. And if I may, a second question. You -- I mean your cost of risk guidance basically implies a very similar level in second half compared to the first half of the year. So just wanted to check if this assumption for second half of the year consider the creation of further additional reserves or that would be something additional to the level implied in your guidance? And if you have a guidance for cost of risk next year.

So in terms of cost of risk. Cost of risk is very difficult, very uncertain times today. So there's a lot of things going on as Rodrigo mentioned, but what we're seeing is cost of risk in the short-term being around that 1.2% level, 1.1%, 1.2% level for this year and the next. This should also be including the additional provisions. Now, how this continues evolving in the future and what the mixes will really depend on the evolution of the economy. If there's any new uncertainties that occur, that could have an impact in terms of the mix but we expect to be around these levels for this year and the next year as long as the economy evolves in line with our baseline scenario -- economic baseline scenario.

Thank you very much. It looks like we have no further questions at this point, I'll pass the line back to Pablo and the team for concluding remarks. Please go ahead. I'm sorry, you just have one more...

Well, thank you...

I'm sorry, Pablo. We just have one more question from Banco Santander, Mr. Henderson.

Just very quickly I have 2 questions. You mentioned in the presentation that your ROE adjusted by inflation was 20% as of this quarter versus 16% in 2018. Do you see this number as possible for the following 3 years and what will be the main rates from your expectations? And my second question is regarding the capitalization subject. What we have on -- what is the CET1 ratio levels that in which you make -- in which you feel comfortable? That's it.

In terms of the profitability-adjusted ROE, one of the things that takes into consideration that calculation is adjusting net income for the effective inflation on capital. So because inflation has been so high and we have to see the effect of inflation on capital because similar to what occurred prior to IFRS, we did this adjustment. So we have an ROE as you saw in the 20% levels. Obviously, as inflation comes down, the impact of additional inflation adjustments on net income will be less relevant -- will be less material because we should move to a more normal level with inflation. If you break this down, the net income, which is based on inflation and based on the core business and not inflation, you can see that our core business has been growing quite strongly. So this is a very positive note looking forward. So we should probably in the medium-term still be around 20% -- sorry about 18% that we were mentioning earlier and adjusted for inflation. And in the adjustment for inflation becomes less of a change when inflation is much lower. Today, the impact of the high levels of inflation is very significant because we're running at extremely high levels of inflation today. So the second question, Daniel Galarce?

Hi, everyone. Regarding the CET1 ratio, we have today a level of around 15% -- in the range of 12% to 15%. This is a level that with which we feel comfortable today. Actually, we are in the process of implementation of Basel III now and, of course, there could be some requirements. We don't know how this is going to evolve with a lot uncertainty, so for the next challenges in terms capital, this is a level that -- with which we feel comfortable, and also this will permit us to grow in the next 3 or 4 years with some gap regarding the regulatory limit.

Thank you very much. There are no further questions.

Okay. Well, thanks for listening to the call and we look forward to speaking with you on the next quarterly conference call.

Thank you very much for this -- today's call. We'll now be closing all the lines. Good-bye.