Good afternoon, everyone, and welcome to Banco de Chile's Fourth 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, the Chief Economist and Institutional Relations Officer; Mr. Pablo Mejia, Head of Investor Relations; and Daniel Galarce, Head of Financial Control and Capital; and Natalia Dele Investor Relations Specialist. 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 the 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. The floor is yours.

Good afternoon. Thank you very much for attending this conference call. Well, we will review the main accomplishments achieved by our bank during the fourth quarter and the full year of 2022. In this call, we will also share our business analysis and guidance for 2023. Before reviewing the economic environment, I'd like to share with you some of our main achievements during the last year. Please go to Slide number 2. 2022 was an outstanding year for Banco de Chile when we undoubtedly reaffirm our leadership in the Chilean banking industry, not only financial performance but also in many other key strategic aspects when compared to our competitors. Even though we will go over our main accomplishments otitis presentation, I'd like to briefly highlight some of them. On the financial side, we see a historical bottom line of MXN1,409 billion, equivalent to an ROE of 51.4%, well above the industry average. As targeting the bottom line by the transitory and nonrecurring effect of higher inflation rate in the equity value, ROE would have been 19%, well above the rest of the period, but more in line with our historical figures. Our growth in operating income was accompanied by a historical efficiency ratio of 52% and robust as equality figures also positioning us better than our payers. 2022 was also a year where we strengthened our capital position even more by reaching a base ratio of 18% well above both the regulatory threshold and our main competitors. Moreover, we increased our additional provisions to an unprecedented amount of MXN700 billion, achieving a coverage ratio of 3.7x our nonperforming loans, allowing us to be even more prepared to face negative cycles. Additionally, we took important steps in our sustainability pillars. Apart from permanent activity supporting the community, we made numerous environmental,…

Thanks, Rodrigo. Please go to Slide number 9. The strong results that we have consistently achieved have been the product of our sound strategic pillars based on customer centricity, productivity and sustainability. To reach our midterm targets, we have established 6 core priorities. In the next slide, we will review some of these advances that we have been making. Please move to Slide number 10, where I'll highlight some of our digital banking initiatives. Our strategic ambition at Banco de Chile is to deliver the best customer experience and to provide the best digital banking platform to clients in Chile. During 2022, we strengthened existing platforms and continued implementing innovative digital solutions. We are proud to highlight that Quanta fan account has reached over 1 million clients as of December 31, 2022, by adding approximately 350,000 customers in this period. Another relevant aspect is that despite the quick growth of this product, we grew our customers by almost 50% this year without affecting our customer satisfaction levels. Among our other advances in 2022, we launched 3 new digital products to promote customer onboarding and financial inclusion, digital current account, fund plan and banana. The new digital current account was launched in the first half of the year and there's a full bank account with the possibility to open other products such as lines of credit and credit cards. Funan is a free digital account for teenagers between 14 and 17 years old with the purpose to build strong relationships early in the customers' life cycle. And FanPrint is a digital account for SMEs that has no entrance or maintenance fees and gives access to exclusive benefits for small businesses. All of these products are in line with our aspirations of growing our clients and also promoting financial inclusion. Furthermore, among…

Thank you very much for the presentation. We will now be moving to the Q&A part of the call. [Operator Instructions] Our first question comes from Mr. Tito Labarta from Goldman Sachs.

Pablo, a couple of questions. I guess just on your expense outlook, I know efficiency deteriorating a bit as margins kind of normalize. But how do you think about expense growth from here? I know inflation has been high as inflation comes down, but you're still growing a bit above inflation. Is that what we should expect slightly above inflation? Or is there other room where you can improve efficiency on the cost side? And then a second question on your capital ratio, very strong at 13.7%. Just help us at what do you think is the right level of capital where you feel comfortable operating? And what could that mean for your dividend payout?

Yes. So in terms of efficiency, what we're seeing is that the strong growth of 2022 inflation has an important effect in terms of the variation of costs in 2023. So it will probably start to see a level of around a couple of points above inflation in terms of cost because most of our costs are indexed to inflation, right? So we have some things that we've been doing throughout the year and prior years, like digital transformation. We've been improving everything related to our digital products, the services and tools that we provide online, the onboarding that we're giving customers. We had a reduction in a branch level. We optimized the branches across Chile. Today, we have 266 branches. Half of those branches are located in Chile, half of those, the other half is -- sorry, half of those branches are located in Santiago and the other half are located in regions outside of Santiago. In regions outside of Santiago, there's only 1 or 2 branches in those cities and towns, so there's not much room for improvement there or improvement in the footprint. In Santiago all depend on the evolution in terms of growth and how many customers use the branches. But today, the level that we have of the branch network is -- we feel is optimal as of today. And we've also been implementing improvements in efficiency through our efficiency program, where we've seen different improvements across the company in terms of how we purchase goods within the bank, implementing new tools and to option of purchases to get better deals and also on how we're doing training within the branches in order to improve productivity and increase the originations per account manager. So basically, in summary, for 2023, One of the main drivers for us is the effect of inflation through 2022, which is affecting the comparison base. So in the medium term, we should think that Banco decile will grow in line or slightly below inflation but for 2023, the main driver is 2022 inflation. For capital, Daniel Galarce will respond to your questions.

Hi, everybody. Well, regarding capital ratios, in fact, we're still really confident with and pretty comfortable with the levels we have today, particularly in terms of CET1. And in terms of the dividend payout, as you probably know, the Board decided to propose 100%, 100% payout ratio for 2023 over the net distributable income, which, in fact, is an effective payout ratio of 68% approximately. It's important to consider that we -- as every year, we retain the effect of inflation on the shareholders' equity, of course. So we normally distribute the -- over the rest of the earnings. In this case, there is due to double earnings. So basically, we will continue to reinforce our capital base. And in the future, we will probably come back to the same pre-aeration that we normally have every year, which is approximately 60% of the net distributable income.

That's very helpful. Just in terms of the...

Just a correction, the effective payout ratio is 62% of our net distributable over the total net income. The last year 2022 was 68%.

Great. And just in terms of like what the optimal level of capital is where we think you should be operating?

Yes. It will depend on the balance sheet growth, of course, but we feel pretty comfortable with the level we have today. Probably we will use some capital in the -- over the next 3 years, but basically, will depend on how that will expand in the midterm. Today, we have room to grow in terms of the balance sheet, of course, and probably levels of CET1 of 12%, 12.5% is something that is reasonable for us.

Thank you very much.

Our next question comes from Mr. Andres Soto from Santander.

To everyone, my question is related to your NIM sensitivity and you all look for Chile's inflation and interest rates. Can you please remind us what is the sensitivity that you have bought to mean to interest rate and inflation. And this is that I would like to understand what changed in your expectations when I compare this guidance that you're providing with the one you provided 3 months ago, I see that both for NIM you are guiding now to the upper end of that range that you guided before and lower end, sorry, and for cost of as you are guiding for the upper end. So I would like to understand what changed in your view of Chile over the past few months to provide these more caution guidance.

Sorry, it's very low -- the volume. Could you repeat the question again?

Sure, Pablo. Basically, I would like to understand your updated sensitivity to interest rates and margins.

Okay. So the -- in terms of our net interest margin, you can hear me, right?

Yes.

Okay. So in terms of net interest margins, what we're seeing today, is a level that goes somewhere around 4.3% for 2023. And the main driver there is really for us the evolution of inflation. So depending on the evolution of inflation will be the main driver in the short term for where that level finishes for the end of the year. What we're seeing some other drivers, but less of an impact is how we're growing the retail base loans. So the evolution of the growth in loans that we're seeing, we see that retailers are a little bit healthier than the wholesale, but still it's not significant as inflation. So for every 100 basis point change of inflation, it's about the PLN60 billion change in net interest income or more or less and then around 13 basis points with the gap that we have on the balance sheet today. And if we look at the sensitivity to the overnight rate, once everything reprices after 3 years, 100 basis point change in the overnight rate is about a 30 basis point change in net interest margins. So that would be the main driver for 2023 for net interest margin is inflation. And there's some positive effects on growth in terms of loans, but what we're seeing is what it is relatively flat in total with slightly higher growth in terms of retail loans above inflation.

Thank you, Pablo. And regarding your additional provisions this correcting this with the updated model for the standardized model for provisioning in consumer loans. Do you have any updated estimates of how much of your excess provisions are going to be used for this updated model? And if I assume it's not a full amount, will you consider to release some of those provisions in case the cost of risk this year at some point, exceed the 1.2% that you are forecasting now.

Well, today, we have the highest level of additional provisions, which is $700 billion. It gives us a very strong coverage ratio of 3.7x. And the last -- if you look to the -- if you see in the presentation, in the last quarters, we've been provisioning -- the provisions that have been flowing through the income statement is more based on models and additional provisions. So we only set MXN15 billion of additional provisions in the last quarter. Now with respect to why we place these preparations or why we have these additional provisions, therefore, the evolution of the economy and how that can affect their portfolio, but not for model changes. What we're expecting is somewhere around 1.2% for cost of risk for the next year, and that's in line with our base scenario. Now we haven't mentioned the effect of the new provisioning model. But for us, it's not so material, but there's not a clear guidelines on how this will be implemented or also the rule of the provisioning model will end up at then because it just finished in the consultation period, and we still need to find the final draft.

So, let me add -- this is Rodrigo here well.

Sorry. Yes.

So, it's very important to keep in mind that there are some sources of uncertainty that they still remain for the country, for Chile. It's not clear. For example, what will be the long-term impact from the different measures that were adopted during the last year, for example, the long-term impact from the withdrawal from pension funds, the lower saving rate, et cetera. So there are some doubts related to the long-term GDP growth for Chile is not clear how it will be, for example, the long-term level of the monetary policy rate as well. So at the end of the day, it's very important, especially this year, to be aware of different source of uncertainty, especially considering some discussions that we're going to have 2023, including, for example, different discussions from the taxes, the pension reform, the constitutional process that it will be held this year as well. So the evolution of the sources of risk are very important in terms of the provisions in the future. And also, it's extremely important to pay attention to the evolution of the exchange rate in Chile because it has a critical impact in terms of inflation. You have to have an IA 10% change in the same rate. It changed the overall inflation in 1 year of around 150 basis points. So that's why there are some sources of uncertainty that is very important to pay special attention to this year.

Thank you so much for your answers.

Our next question comes from [indiscernible] from Scotiabank.

Pablo, Rodrigo, congratulations on the strong results. My question is related to the guidance. And I wanted to understand what are the -- what's the upside risk that you see what are the main sources for upside risk to your guidance? And what would be the main ones for the downside risks as well?

I think the main upside risk that we're seeing today is in recent economic figures is better-than-expected results of the economy and maybe how that will transfer into 2023 with a stronger GDP growth. That would be positive also the evolution of the unemployment rate is also a positive factor that can continue benefiting different line items in the balance sheet, for example, stronger growth in the portfolio and more higher-margin products. We also have the benefits of lower cost of risk than could be expected if the economies are stronger, and we continue to see a very good payment behavior from our customers. I think those are the main upside. But the main downside also probably in the same line, I would say. As well if the economy grows slower, there's more uncertainty, the business confidence levels are weaker. That can have an effect in the balance sheet in terms of growth of the portfolio and also in the evolution of risk, but it's important also to mention that we have a huge amount of additional provisions. So if something escapes, it's a little bit more higher NPLs in our baseline scenario or it gets very difficult in 2023. We still have a large amount of additional provisions which the Board takes into consideration on a monthly basis on the evolution of those provisions and how they should be used. Rodrigo?

Yes. Yes. So in a word, the key sources of potential changes in our bottom line are related with macro drivers. So we're not especially concerned for, for example, any figures or special factor related to the industry sector or especially for Banco de Chile. So at the end of the day, the upside rise or downward risk related to the bottom line, mainly related with economic growth, with the evolution of interest rate, CPI, as Pablo mentioned, the unemployment rate, especially considering the material impact and risk -- so the potential gap between our guidance today and final results for the next -- for the end of this year will be closely related with the evolution of macro factors rather than specific aspects of our bank of the financial industry.

Understood. So the changes in interest rates wouldn't have a direct impact on your guidance, you will be more indirect through economic growth expectations and inflation. Would that be correct?

Our baseline scenario for interest rates is that they're relatively on average, similar 2022 and 2023. If the evolution of that changes or the evolution of inflation changes, that would have an effect on our net interest margins.

So at the end of the day, the key figures to monitor this year is the inflation, the evaluation of CDI because that is the variable where we have more uncertainty. In fact, we knowledge some downward risk today in the evolution of the CDI. Just to have an EVA, for instance, our forecast of inflation for this year is consistent with rate of around 800, 850 [ph]. So if the churn rate continues, for example, covering in the current level, there would be a potential downward risk in terms of the inflation and consequently in the bottom line. So at the end of the day, the most relevant figure for this year in terms of the evolution of the bottom line will be inflation.

Got it. Thank you for the comment, Rodrigo.

Thank you very much. Our next question comes from Mr. Yuri Fernandes from JPMorgan.

Pablo, congrats on this incredible year. I have a question regarding fees. If you can provide some outlook. I guess this year was growing like 9%, 10%. And with lower inflation of that line should be slightly weaker in 2023? Or if all those new initiatives, we should see more supportive fee growth for 2023. And also regarding the NPLs, you have in the guidance, 1.2%, 1.3%. That is some 20 bps increase versus 2022. But in the release, you mentioned that maybe during the year, you could see some peak on like higher NPLs during the year. What do you mean by that? Like are you waiting for some kind of corporate cases? Is it just like a more cautious macro environment by half of the year? And as you charge off, or NPL comes down. So basically trying to understand the curve of EPL, right? Like should we start to see the peak in June 30 and then gradually improving the 4Q? What is the message here? Thank you.

So, thanks for the question. So in terms of our expectations for fees, fees grow historically similar to -- well, the main driver of this is customer growth. So if we look at the last 10, last 5 years, customers, depending on how you calculate it, if you look at current account customers, we're growing on average over those periods, similar around 6%, 7% in the last period that we look in a short time frame, it slightly above that because of all these new products that we've been implementing, where we've been growing very strongly in terms of new current account openings, all these digital onboarding platforms. So one of the main drivers is the -- is customer growth, the sustainable drivers. Obviously, inflation has an effect of -- on fees because most fees are indexed in inflation. But in the long term, expecting a level of 3%, 3.5% for inflation. We should think that plus customer growth in current accounts, 7% somewhere around there, maybe hovering around there. That's the average more or less the average in the past, we should get to the high single-digit level of growth. There's cross-sell in there and for 2023, the main drivers that we're seeing is we have a very good ATM business place in very good locations that have a very high usage rates. That's a good driver, credit cards, mutual fund, the mutual fund business as well, current account administration fees. All those are the main drivers for 2023. In terms of the question of NPLs -- and I think I mentioned it should have around 9% or high single digits for fees for 2023 and beyond, it's a reasonable level to expect. Most fees are generated from the retail segment and transactions. In terms of NPLs, the NPLs should be around these levels. But if we look at by segment, we see NPLs in the corporate book, relatively similar to what we've had in the past. But if we look in terms of the mortgage or more retail NPLs from the retail book, there's still a little bit of change that can occur there. We're still seeing very good payment behavior, a very high-quality book, and we think that this should continue normalizing in line with the normalizing of liquidity. So during the evolution of that really will be more macro. So how the evolution of unemployment and how that passes through into the retail book could occur and also the activity in terms of the wholesale. We don't see -- today, we have a very high-quality book in all sectors. If we look at the real estate companies, they're strong. We haven't had material problems there. If we look at the retail sector, we're a bank that's focused on more upper-income individuals. So we've had a good payment behavior across the board, but it's still normalizing. The levels that we have today overall are still lower than a normal level. So changes is more macro.

No, perfect Pablo. That was very clear. And just crap myself. I guess you grew like 14%, 15% in it's not like 90. It was more mid-single -- mid-teens?

Yes. So that -- those fees is customer growth, but one of the important factor there is inflation.

Thank you very much. Our final question today comes from Mr. Carlos Gomez from HSBC.

I have a question also on fees, and you referred to the placement of regulation. You don't refer to competition. Do you think that with the new open banking environment and more competition from digital banks you might have present in the future? Or do you think it will not momentary change the structure of the market? And then going forward, in terms of the group and within you still see yourself strictly a constraint to Chile? Or would you consider international opportunities or perhaps going into the pension fund business if that opens up.

So I think in Chile, in general, the banking industry is a highly competitive environment. We have 18 banks in Chile that operates here in local banks and international banks. And there's a lot of regulations that have been set, which maintain fees low. So for example, no current account, if you pay anything for your current account as a customer, includes all the fees regarding transactions, for example, all transfers, electronic transfers are -- have no fees. You can transfer $0.50 equivalent or $100 equivalent. There's no fee associated to that. If we look at the ATMs, customers don't get charged to use other banking -- other bank ATMs. So there's less customer loyalty to your ATMs. The banks charge each other. So there's -- a lot of fees are very low already. There's areas like -- what we've seen through competition have been decreasing. For example, the mutual fund administration fees, those have come down over the years. But significant changes in the fee structure, we don't see a relative change to what we've seen in the past, the fee structure is relatively -- well, we see a lot of competition from all of these banks and I've mentioned there local international banks. In terms of the second question on the internationalization of Banco Chile. So for Banco de Chile, we're a bank that's focused in Chile. Obviously, any new deals or business opportunities are all evaluated. But today, the focus has been to be in Chile and to continue to operate in Chile and grow with our customers and help Chile grow. There's no news today of any changes of that. But obviously, if there's any opportunities that appear it would be something that we would evaluate at that time.

And the pension funds, if that opens up?

It's also something that would be evaluated. If any deals occur, pension funds and anything related to the financial institution that we can operate in. It would be something that would be evaluated at that point in time and if it's an interesting and appropriate business and the cost structure makes sense. It would be evaluated at the Board level to see how we would enter or not into that opportunity, taking a good, always taking care of having a good relationship between risk and return.

Thank you very much. Looks like we have any further questions. I'll pass the line back to Banco de Chile team for concluding remarks.

Thank you for listening, and we look forward to speaking with you on our first quarter results for 2023.

Thank you very much. This concludes today's call. We'll now be closing all the night. Thank you very much. Goodbye.