Good afternoon, everyone, and welcome to Banco de Chile's First Quarter 2023 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; and Daniel Galarce, Head of Financial Control and Capital. 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. Please go ahead, sir.

Good afternoon, everyone. Thank you very much for attending this call, where we will review the main accomplishment of Banco de Chile during the first quarter of this year. We are very proud of the overall performance of our bank during the first quarter of the year. Once again, Banco de Chile led the industry in terms of profitability by posting a solid 22% ROE, thanks to its bottom line of MXN266 billion. The bank also maintained its sound capital position reflected in 17% and 12.8% in Basel and CET1 ratio, respectively, while asset quality indicators remain healthy. This figure, coupled with our permanent leadership in customer service only confirmed unquestionable leadership of Banco de Chile in the country. As we made in previous earnings release, we have divided this call into four main sections. In the first part, we will analyze the macroeconomic and financial environment we faced and our forecast for this year. Second, we will refer to our key strategic advances and accomplishments. After this, we will present a detailed analysis of our financial performance. And finally, we will move to a Q&A section. Let me start with the macroeconomic analysis. Please go to slide number three. Despite the recession that we have faced as the upper left chart shows, the economy began the year in a better shape, particularly the lower-than-expected decline of the local activity, together with improvement in some key drivers for Chile such as cover prices allow us to expect a better than forecasted performance of the economy for this year. In the last quarter of 2022, the GDP declined by 2.3% year-on-year, mainly attributable to the substantial adjustment in domestic demand, which dropped by 7.6% year-on-year, principally driven by the 4.7% decline in private consumption. Even though it was the first negative…

Thank you, Rodrigo. I'd like to begin with our main accomplishments in our key strategic projects. Please go to Slide number 8. The strong results that we continue to post has been a product of our sound strategic pillars based on customer centricity, productivity and sustainability which we deploy through 6 core priorities. Through these initiatives, we have been able to surpass all of our midterm targets as shown on the right. In the next slide, we'll review the advances we have been making in digital transformation, productivity and sustainability. Let me start with the analysis of digital transformation. Please move to the next slide, number 9. As part of our commitment to being the digital benchmark in the Chilean banking industry. We've implemented a range of initiatives this quarter for our personnel, corporate and SME segments. In Personal Banking, we are proud to have successfully launched the digital onboarding platform for US dollar checking accounts, making it possible for customers to apply for credit cards online. Additionally, we introduced a new feature for over 8,000 customers who attended the Lollapalooza music festival in Chile, allowing them to top up credit for purchases at the event using our mobile app and avoiding long queues. For our corporate and SME segments, we also enabled 100% online account opening for the US dollar checking accounts, provides greater convenience. Furthermore, we launched the online origination of the new Fogape government guarantee loans called Para apoyar and introduced virtual factory for prequalified prices, enabling them to manage their accounts receivables online. As a result, we're proud to be the leader among private banks in terms of total operations and total volume of loans granted to the Chile Para apoyar program, granting over MXN270 billion to support SMEs. Lastly, we're pleased to mention that we…

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. Juan Recalde from Scotiabank. Please go ahead, sir. Your line is open.

Hi. First, congratulations on the strong results and thank you for taking my question. My question is related to the NIM. So I see that you increased the NIM guidance for 2023 to around 4.6%, which would imply an improvement versus the first quarter levels. So, can you talk about what can drive the improvement in NIM? And second, looking into 2024, how much margin pressure do you think that we can expect? If you can comment on those two things, that would be great. Thank you.

Can you hear me, well?

Yes, go ahead.

Okay. So in terms of the margin, I think it's important to mention that we have a benefit from the rise in the interest rate estimations for this year. So the average monetary policy rate versus expectations earlier from the year is a little bit higher. So I think that's very important. We're around -- expecting around 9.7% for this year versus what we were expecting earlier in the year that was about -- around the 8% to 8.5% level, which was relatively flat versus year-on-year. So our expectation today is a little bit higher average monetary policy rate and that's a benefit. Also the inflation is a little bit higher, around 5% for this year, which is also positively impacting us. And that's one of the reasons why our expectations for the overnight rate has increased -- our NIM expectations have increased since the last call from 4.3% to 4.6%. And in the medium-term, we expect that things should return more or less to the same levels that we had prior to the pandemic considering a similar mix, portfolio mix, which is very important. The mix on how long it will grow in the future.

Okay. That's helpful. Thank you.

Thank you very much. Our next question comes from Mr. Andres Soto - Santander. Please go ahead sir. Your line is open.

Good morning, Rodrigo, Pablo. Thank you for the presentation. I have two questions. The first one is related to expenses. You laid out a very interesting plan on how you can improve your efficiency over the medium-term. I remember in the past, actually, from your last call, you said that your medium-term efficiency target was 45%, which I find actually quite high. Do you have any specific target for efficiency over the medium-term based on the plan that you are presenting now? My numbers suggest that 40% is an attainable number. But I would like to confirm that?

So through all the productivity improvements that we've been implementing, Banco de Chile has been controlling expenses. So it's important to mention that the higher inflation has a very important impact across all the line items on the bank. So salaries are index inflation at least twice a year, administrative expenses are also index twice years, our administrative expenses are basically indexed to inflation. The results that we've had is quite positive, the 37.6% efficiency ratio, which is basically zero real expense growth. And then in the medium-term, I think it will be very important to mention like the growth in terms of where we're going and how digital banking and the digitalization of Banco de Chile will continue being implemented within the bank. And it's reasonable to expect that the target that we showed on the slide in the presentation is to be below 45%. So, obviously, levels close to the 40% are reasonable, depending on competition, obviously, and the implementation of all these digital initiatives, which will continue streamlining processes, automating back-office processes and improving the bank's overall operations. So it's reasonable to assume a better level of efficiency considering that once everything is normalized in terms of the economy of the portfolio, et cetera, it's reasonable. Today, we have 37.6%, it's reasonable to expect a slightly higher than that and slightly lower than the 45% in the presentation.

Thank you, Pablo. My second question is regarding the additional provisions that you guys still have on the balance sheet. As you presented, this is much higher than any other bank in Chile and this even considering that Banco de Chile is having better asset quality trends compared to most of your peers. You have almost $900 million in these additional provisions, so my question is, what are your thoughts around it? Is it possible that you guys consider distributing this as an extraordinary dividend to shareholders.

This is Rodrigo Aravena. Thank you very much for the question. It's very important to keep in mind that additional provision has a very important contract till, so that's why the state of the economy is very important in terms of the evolution of the unemployment rate in terms of the source of uncertainty. So that's why it's very important to be aware that still, we have important sources of uncertainty for the Chilean economy, including, for example, the ongoing process of a new constitution. In fact, during this weekend, there will be elections for the members of the new constitutional assembly that we're going to have during this year. There also will be a next referendum by the end of this year. And also, the government already announced the intention of to have a new conversation for tax reform after the election. So basically, we're going to have important sources of uncertainty during this year. We can roll out a further slowdown in the economy in the short run. So that's why today we can rule out to have new provisions. Nevertheless, it's very important to mention that we feel very comfortable with the level that we have today of the total stock of additional provision. And also, what is even more important is to highlight that we have the high core ratio today in the industry. In order to have a better really in terms of the evolution of the exact timing where we're going to release or not additional provision, we're going to need -- in order to have more visibility on that it will be very important to have more certainty in terms of the key sources of uncertainty, the evolution of political situation, employment, et cetera, in Chile. But beyond that, discussion about the timing or the potential timing of release or not additional provision. I think that today, the most important part of the discussion is to be clear that today, we have the highest we ratio in the industry and also that today, we feel very comfortable with the level that we have today.

Understood. Thank you very much, Rodrigo.

Thank you.

Thank you very much. Our next question comes from Mr. Ernesto Gabilondo from Bank of America.

Thank you. Hi, good morning, Rogrigo and Carlo. Thanks for the opportunity to ask questions. The first one is a follow-up on NIMs. So before you were guiding a NIM pressure of 120 basis points, but now it seems to be only 90 basis points. But again, now to the first question, can you repeat how much could be a pressure next year? And then my second question is a follow-up on this research coverage ratio. As you pointed out, you have excess provisions of MXN 700 million for any potential uncertainty. But what is your historical research coverage ratio talking about pre-pandemic levels and considering that you are going more into a riskier loan mix into retail what would be the new normalized end of research coverage ratio? And then my last question is on your effective tax rate. It has been down because of the inflation, but now considering that at some point, inflation will be starting to go down? And how should we think about the effective tax rate over the next years. Thank you.

Thanks, Ernesto. So for NIM, as I mentioned, the overnight rate has a very important effect and also the inflation. So the sensitivity for Banco de Chile is something very near around 14, 15 basis points of NIM for every 100 basis point change in inflation in the overnight rate, -- after everything re-prices after three years, it's around 30 basis points, so around a-third per year. So for 2024 is periods of normalization from the very high levels that we had in 2022. So for this year, we're expecting because of the higher overnight rate slightly stronger expectations for 2023 than we had earlier in the year. And for 2024, this should continue to go down slightly until we normalize the portfolio. I think it's important to mention, but you mentioned the risk that we're entering more risky loans. We're not really entering more risky loans. If we look at where we were in the past and where we are today. We have a portfolio that's grown mainly during the pandemic in low-risk, low-margin products. So the mix in the portfolio is much less risky than it was prior to the pandemic. And what we're saying is that in the medium term, we should return to a similar level that we had prior to the pandemic in terms of mix in terms of risk levels. So a reasonable level of risk for us of NPLs of cost of risk is around the 1.1%, 1.2%. If we look at where we are today, we're near that level in the NPLs. But in the impaired loan portfolio, we're still below that level. Why? Because customers have had a high level of liquidity over the years, and there's very little renegotiations versus the path of impaired loan portfolio is less affected than in the past and there's still room to continue normalizing. But in the future, the coverage ratio or the NPLs should be something similar. In terms of the coverage ratio, it's reasonable to expect that most banks should return to level similar that they had prior to the pandemic. It's a reasonable assumption. Now as Rodrigo mentioned, the exact point in time when asked sort of the industry reverses these provisions is something that's not set as of yet. And in terms of the effective tax rate, the effective tax rate is affected by the price level restatement in Chile. So the tax authorities use inflation accounting calculate the net income -- net taxable or taxable income for banks. So there's important effective inflation that affects that income before taxes. So as inflation is higher, you have a higher cost due to price level restatement and as the inflation decreases that cost decreases as well. So it's reasonable to expect within effective tax rate of what we've had in prior years with normalized levels of inflation of around 23%.

Excellent. Thank you very much Pablo.

You're welcome.

Thank you very much. The next question is from Ms. Neha Agarwala from HSBC Global Research. Please go ahead Ma'am. Your line is open.

Thank you so much. A quick question on, what is a normalized level of NIM that we should expect, say, by 2025? Would it be around 3.5% to 3.7%, is that a good range? And my second question is what kind of ROE should we expect for this year closer to 20% or maybe slightly lower than that for 2023. Thank you so much.

Hi Neha. So for NIM, a normalized level of NIM, it should be, as I mentioned, around the levels that we had pre-pandemic, which is the 4.5% level around that level. So, why around that level, well, and why we're at this level today is because of what I mentioned is the loan mix and there's still a lot of impacts, effects have occurred during the pandemic that have adjusted the level of revenues for banks and this should continue to normalize in the medium term as we return to those segments that we weren't in the past. We have the FOGAPE loans, which are very low-interest rates. We have different products, which are lower margin, lower risk which that should normalize. If we look at where we will be in 2025, 2024, probably higher overnight rates than we had in the past. That's also positive. And in terms of ROE for this year, what we've mentioned is that the expectation for ROE is somewhere around 20%. In the medium-term, somewhere around 18%, we think is reasonable, considering the levels of capital and the levels of competition that exists.

Thank you very much.

Thanks Neha.

Thank you very much. It looks like we have no further questions at this point. I'll perhaps pass the line back to Banco de Chile team, for the concluding remarks.

Thank you for listening. And we look forward to speaking with you for our next quarter results. Bye.

This concludes today's conference call. We'll now be closing all lines. Thank you very much. Goodbye. Have a good weekend.