Good afternoon, everyone, and welcome to Banco de Chile's Second Quarter 2023 Results Conference Call. If you need a copy of the management financial review, it is available on the company's website. With us today, 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 for attending this conference call where we will present the main achievements and financial results posted by our bank during the second quarter of this year. We are glad to host this webcast today in a period where Banco de Chile once again showed its unquestionable leadership in the financial industry in the country. Some of the main highlights of this quarter include, first, we posted the highest net income in the industry by achieving a bottom line of CLP352 billion equivalent to an ROE of 28%, therefore we remain as the most profitable bank in Chile. Second, despite the weak economic cycle, we continue delivering sound asset quality figures. In the second quarter, we posted a cost of risk of only 0.7% and NPLs of 1.3%, both well below figures posted by the industry. And third, by achieving a CET1 ratio of 15.5%, we continue to be the bank with the sounded capitalization, confirming we are the best prepared for facing a challenging economic cycle and further regulatory requirements in connection with the implementation of Basel III in Chile. All these results were accomplished in a period when we carry out important advances in our core strategic priorities, including advances in our digital transformation process and in ESG matters. We will present a deep analysis of all these topics through this presentation. But before moving to these topics, I'd like to share our view on the micro-financial environment we have faced in our forecast for these in the following year. Please go to slide number three. The chart on the upper left clearly shows that the overall activity remains weak. In the first quarter, the GDP contracted by 0.6% year-on-year after the 2.3% year-on-year drop in the last quarter of 2022. This recession has…

Thank you, Rodrigo. I'd like to begin with our main accomplishments in our key strategic projects. Please go to slide number eight. Our consistent and outstanding result has been a direct outcome of our effective strategic approach, which places customers, efficiency and ESG at the core. We've implemented this during the approach of six key priorities, allowing us to surpass our mid-term objectives as evidenced on the right. In the upcoming slides, we will explore the advancements we've made in digital transformation, productivity and sustainability, illustrating our commitment to progress and excellence in these crucial areas. Let me start with digital banking. Please move to slide number nine. In recent years, we've dedicated our efforts in constructing a robust front-office digital banking ecosystem aimed at enhancing our customers' journey and overall experience. This slide highlights some key components in advances of this ecosystem. When it comes to digital banking, we cater the various customer segments with tailored options. Cuenta FAN, our pioneering online onboarding service has been exceptionally successful, attracting over 1 million users. Moreover, we provide digital accounts for SMEs, teenagers and offer both digital current accounts in Chilean pesos and in dollars. Additionally, our diverse range of online products enables customers to effortlessly open accounts and manage their finances conveniently at any time without the necessity of visiting the branch. This approach empowers our customers with greater control of their banking experience, putting the power of managing their finances right at their fingertips. We take immense pride in being the pioneers in the Chilean banking industry by establishing a virtual building in the Metaverse, a significant milestone aimed at promoting engagement among young people. Additionally, we have facilitated SME customers to receive payments through QR codes using our app, demonstrating our commitment and enhancing convenience and efficiency and…

Thank you very much. We'll be moving to the Q&A part of the call. The first question comes from Mr. Yuri Fernandes from JPMorgan. Please go ahead, sir.

Hey, guys. So I have a first question here regarding the sensitivity for rates. I guess, Pablo mentioned in the call, the sensitivity for inflation, I think it was CLP60 billion every 100, but just checking the sensitivity for rates here. And also regarding loan growth, when should we see loan growth accelerating because you have some pressure from inflation, you have some pressure from FCIC and we are seeing like very lackluster loan growth in Chile. So just trying to understand what should we expect for 2024. And if I may, a final one, very quickly dividends. What is the expectation for payout this year if Banco de Chile will continue to pay I think 100% of the distributable earnings that last year was around 70% payout on reported earnings? Thank you.

Hi, Yuri. We had an issue. I just cut off. Let me just finish the last page and we'll go into your questions. So if we can turn to slide number 20, as you can see on the slide on the left, high inflation figures continue to impact total expenses. In nominal terms, operating expenses increased by 12% compared to the same period last year and remained flat versus the first quarter of 2023. Considering that the average inflation measured in terms of UF in the last 12 months was 10.7% and our expenses grew 1.6% in real terms. This nominal annual increase is primarily influenced by inflation. Index line items in a lesser extent to IT-related expenses. It's important to note that advances in efficiency across various areas have allowed for significant growth in disbursements allocated to IT-related expenses, as a result of our ongoing digital transformation program which is essential for addressing these transformative changes demanded by digitalization. Regarding the efficiency ratio, we achieved the ratio of 35.4% this quarter, which is well below the industry average, and that of our main peers, as shown in the chart on the bottom right. As mentioned earlier in the presentation, this level of efficiency is a result of several initiatives implemented through our productivity plan and cost control measures. Finally, it's worth mentioning that as previously indicated in our reports, the upward trend of our efficiency ratio towards normalized figures was expected and remains well below the midterm target of 42%. Please go to slide 21. Before I answer the questions now, I just want to recap some of the main points and give some guidance for 2023. So after a period of strong growth and a record levels of inflation, the Chilean economy is undergoing an adjustment. Accordingly, we…

So in that, let me add. Yes, one quick idea. I'm Rodrigo Aravena here. So in that matter, it's very important to analyze the potential implication of different scenarios of economic growth for the future. Important to remember that Chile is still under a recession. We continue posting a negative year-on-year growth rate of activity for the next year. Even though we're expecting an economic growth of 2%, as we said in the presentation, we have a downward bias in that estimate because there are several sources of risk. So that's why we acknowledge possibility of having still weak growth for the next quarter. So obviously, it also impacts the perspective of the growth dividend for the future. Growth is still a matter of uncertainty for the future.

And can you -- Yuri, can you repeat the other questions?

Yeah, sure. It was regarding loan growth and dividends. They are somewhat connected. I'll do another one here. I think it's more important. You mentioned, Pablo, I think 1.2% cost of risk I think for 2023, and you are running below 1%, right? It was 0.7% this quarter and I think the first Q was around 1%. So my question is, are you thinking that cost of risk will accelerate materially in the second half? And how do you see this versus your high coverage ratio because maybe something I was thinking for you is that Banco de Chile could consume the additional -- part of the voluntary provisions in the coming years like basically keeping cost of risk closer to 1% like at lower levels. So I don't get like the 1.2% seems a little bit too high given you have such a high coverage ratio and given the first half was below 1% on cost of risk. So if you can add some color on this would be great. Thank you.

So cost of risk should be around this range of 1%. There's a lot of uncertainty still today in the economy and how this can proceed in the future. But around 1% is -- I mean it could be slightly higher, but around 1% is reasonable, and in the medium term, 1.2% is a long-term level for Banco de Chile under a more normalized scenario with the normalized asset quality book where we have a good relationship between risk and return. Remember that during the pandemic, we had a strong growth in low-margin products, SME loans with government guarantees, loans, upper income segments with lower margins. And this has affected the -- this has positively impacted the cost of risk temporarily and this should be normalized in the future and which should also be noticeable in the NIM. So today, we have NIM in 4.6%, and in the medium term, we should think about levels similarly to this because there are many factors that have to be considered in these unusual scenarios that we've lived in over the last couple of years, which had affected the assets and liabilities in different ways, including the loans as I mentioned.

Hi. Yuri. I'm Rodrigo Aravena, and again sorry. Yeah. Important also to mention the rule of the access of liquidity that we have in previous years, which also was very important in terms of asset quality indicators, et cetera. So basically what we're assuming for the future is that a further normalization in total level of liquidity, but additionally, we're expecting a higher unemployment rate for the future. So basically, we're beginning to see a slight increase in the unemployment rate. Today, we are at a level of 8.5%. However, we have different lean indicators, anticipating a further deterioration in terms of employment growth. So we can't rule out that the unemployment rate over the next quarter will be around 9%. We can't rule out the possibility that total unemployment rate will surpass the level of 9%, which is consistent with a normalization cost of risk as well in the future.

Super clear, Rodrigo and Pablo. I was thinking that 1.2 was the full year, but it is clear. This is kind of a mid-term guidance indication and not that your full year would be around this level. Thank you very much.

Thank you.

Thanks, Yuri.

Thank you very much. The next question comes from Juan Recalde from Scotiabank. Please go ahead, sir. Your line is open.

Hi. Congrats on the strong results, and thank you for the opportunity to ask questions. My first one is related to financial results, which were very strong in the quarter, around CLP120 billion. I think that you mentioned the drivers in your remarks so my question is going forward how sustainable these levels are?

Hi. This is Daniel Galarce. Regarding financial results, of course, we are seeing still some non-long-term ratios, of course, and non-long-term market factors. Treasury income of course has been quiet affected now and probably will be more affected in the future considering the factors estimated for interest rate in the short-term and in the long-term as well and also inflation. So probably we're considering a slide in Treasury revenues, of course, for the next year, but basically approaching to the long-term levels basically, I mean, to a normalized scenario over the next two years I could say.

That's helpful. And then I have a follow-up on NIM. I think that Pablo mentioned -- made a comment on the NIM expectation in the long-term. Can you comment on what level of NIM do you expect for 2024, and please repeat the long-term expectation for NIM? Thank you.

So with the -- NIM really depends on many factors. There's many factors at play. So you have today inflation that's coming down. We're expecting around 4%, and for the next year, inflation is expected to be at around 3%. That's something important to be considered. So for every 100 basis point change in inflation, with the gap that we have today on the balance sheet is about 68 -- is about -- between CLP60 billion and CLP70 billion change in net interest income so something like 15 basis points. So we have that. We also have the different factors and the assets that are coming due, loans are coming due and our insurance coming due, which will be at higher rates. This is a positive impact to growth in terms of more profitable products with a stronger economy should be possible as well. So probably in the ranges of around 4% is reasonable or slightly higher than 4%. And we're expecting for this year, 4.3% so next year, slightly lower than that, 4.2% is reasonable to expect in this scenario. Obviously, this depends on the baseline scenario of what you saw in terms of rates and inflation. This could have a change in also on expectations that Chile returns to grow in next year and -- which should increase the demand for loan growth.

One other important thing to consider here is that, for the future, we're expecting a neutral interest rate that will likely be a bit higher than we used compared to the rate that we used to see in the past. So for example, before the pandemic, the neutral interest rate in Chile used to be around 3.5%. Now we're expecting for the long run an interest rate a little bit higher than 4% in an environment where the potential growth probably will be 2% or slightly lower. So that's important to consider the different opposite forces that there will be in the future.

All right. Pandemic net interest margins on average were around 4.5%. We should be in similar levels.

Got it. Thanks for the comments.

In the medium.

In the medium term, obviously.

I understood. Thank you for the comments.

Okay. Thank you very much. Our next question comes from Mr. Tito Labarta from Goldman Sachs. Please go ahead, sir. Your line is open.

Hi, Rodrigo and Pablo. Thank you for the call and for taking my question. A couple of questions also. Just to think about your profitability going forward, just given all the moving parts. You know, you're coming from a high level of ROE, how quickly does that normalize? As inflation comes down, as interest rates come down and cost of risk kind of gradually going up, just to think about that gradual sort of evolution in ROE and thinking about sustainable levels, I think in the past 18% or so. Is that sort of where should we expect ROE to be next year? Or any color you can give on the ROE trajectory from here. And then my second question, I guess, somewhat following up on the dividend question, but from a different perspective. You have a very high capital ratio as you've highlighted. What is the optimal capital ratio? I mean, I don't think you need to sustain a 13% core Tier 1, or do you think you do? Or what should that optimal capital level be in a normalized environment? Thank you.

Thanks for your question. In terms of ROE, there's a lot of moving parts. So for this year, around 22% is reasonable. For next year, around 18% in this baseline scenario which is our long-term level. There is many moving parts because of the pandemic. So on the assets, we've had lower rates than normal because of different products that were originated during this time period and liabilities as well. There's different moving parts. So this makes it challenging to analyze the banking industry today. However, when we take into consideration all these moving parts that have benefits and negative impacts on the balance sheet, we should expect gradually returning to the 18% today. We have had higher rates for longer than we're expecting and with a little bit lower inflation. But this is meant that we have a very strong net interest margin for the year. For next year, this should begin to normalize and we should have levels of around 18% of ROE which is in line with our long-term level. In terms of the capital, the capital is, today we're very comfortable with the level of capital that we have. So we're very comfortable, but we are aware that we have to use our capital efficiently. And for this reason and in the future we have to analyze how much capital is required for the growth that we're anticipating. Today the growth in Chile is very slow. As Rodrigo mentioned, the term rate GDP growth is around the 2% level with elasticity today being closer to 1%, 1.3% around there versus the higher levels in the past. So this is something that has to be taken into consideration and the Basel III requirements Pillar 2, which is possible to be implemented. We just recently had an increase in the requirements for the counter-cyclical buffer of 0.5%. So all this has to be taken into consideration. But we can't rule out a change in similar to what we've had in the past in terms of how much we pay out.

Okay. Thanks, Pablo. But I guess just to think -- I mean, 13.5% core Tier 1, is there an optimal level? I mean -- because 18% ROE, even loan growth picking up, maybe you grow loans 10% a year, you would still be generating capital over time. And also you're well above the minimums even with the counter-cyclical buffer.

Hi. This is Daniel Galarce. Regarding capital and core capital, of course, we have today 13.5% ratio. We have, of course, some internal buffers, very important there, and also we basically want to see how it's going evolve the implementation of Basel III in Chile. Today, we don't have, for instance, for any of the banking players Pillar 2 charges, you know, so we have to see what's going to happen in the next years. And additionally, in terms of a target ratio, we don't have a specific figure, but of course, we want to hover in the future two or -- at least two percentage points over the regulatory limits and also our internal buffers as well.

Okay. That's helpful. Thank you very much for the color.

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

Hi. Good morning. Rodrigo and Pablo. Thanks for taking my call. My first question is also a follow-up on NIMs. In the past, you have said that NIMs benefited from higher rates. So considering that rates are starting to go down, what should be the impact for NIMs? And can you remind us the sensitivity to rates for every change of 100 basis points? Then my second question is on expenses. We saw them growing at double-digit this quarter. So how should we think about OpEx growth for the full year and next year? And then my last question is on your effective tax rate. Considering lower inflation levels, where do you see the effective tax rate normalizing? Thank you.

Hi. Thanks for the question. So in terms of NIM, at NIM, there's a lot of moving parts. So we have different events that occurred during the last years, which are coming due all at once so it's very difficult to analyze. So we have a negative impact, some positive impact. So we have, for example, today rates coming down and it's lower inflation, but we also have positive impacts of higher rates on loans being originated during this time of higher rates. And they'll stay higher because of different levels of interest rates that we're seeing today, as Rodrigo mentioned. So it's very difficult to isolate one factor from another. So it's true, the lower rates will have a negative effect, but we also have positive effects that are occurring at the same time. And for this reason, this is the reason why we don't expect a large change from the guidance of this year of 2022 of 4.3%, and next year, which should be around similar levels of around 4.2% because we have different factors that are impacting us negatively, but also positively. So the change of -- at end you have to take into consideration that the rates went up very quickly over a very short period of time and we're already seeing reductions. So not the entire loan book is in price setting very high rates. So today we have a lot of loans at are very low rates, so there's -- it makes the calculation more difficult. So for 100 basis point change, if you think of an average rate of the total loan book of 100 basis points, it would be something like 30 basis points over a three-year period and that's about one-third of that impact per year, but it's a calculation that's very complicated to take into consideration because of the quick changes that we've had in the overnight rate. In terms of expenses, if you see the expenses in real terms, our expenses only grew around 1%. So we've been very good at managing our expenses and implementing changes in order to control expenses quickly. Remember that all salaries in Banco de Chile index inflation and adjusted at least twice per year, and basically almost all contracts in Chile are indexed to inflation. So it's reasonable to expect that inflation plays a major role. We have already implemented a large change in the footprint of Banco de Chile, and we already -- we made changes in the past, which we have been -- we already made some large changes that some of the competition is currently doing. If we look at -- for the future, we should think of costs in around inflation and we should think of the efficiency ratio have been as we showed in the press release and the conference call, we mentioned less than 42%. And in terms of taxes, with our baseline scenario of 3% inflation, we should think of around 23%.

Perfect. Thank you very much, Pablo. Just a follow-up in terms of the expenses. Now, you said that cost growth should be in line with inflation next year, but thinking about this year that you mentioned has been pressured of salaries linked to inflation, how should we think about the OpEx growth for this year?

It should be around the [Technical Difficulty]. So, for next year, in line with inflation.

And for this year?

It should be around the high single-digits growth.

Perfect. Thank you very much.

Thank you very much. Our final question for today comes from Neha Agarwala from HSBC Global Research. Please go ahead, ma'am.

Hi. Thank you for taking my question, and congratulation on the solid quarter. For this year, if I'm not wrong, you expect about 22% ROE, which means a meaningful deceleration in the second half of the year. Are you just being conservative, for instance, in your provisioning guidance? Or do you expect a meaningful slowdown in your margins or any other aspect of the business? And my second question is, for next year, the decline in the ROE is mostly coming from the NIM, but we should see an improvement in the other indicators like fee income and provisions should continue to remain stable? Is that right? Thank you.

Thanks. So for the remainder of the year, we have to think that we have a reduction in the interest rates and inflation that will be impacting the bottom line for the remainder of the year. That's the main impact that we see. In terms of the second question, can you repeat?

For next year, the decline in the ROE would be mostly driven by the top line, the NIM. How should -- the OpEx -- and fee income should improve and OpEx should remain under control and provisions should also be stable. Is that the trends that you expect or is there any divergence? Thank you.

Provisions should normalize to levels of around 1.2% versus this year which should be around the 1%. That would the only difference in the lower inflation and lower rates. Yeah.

And a slightly higher tax rate.

Sorry?

And slightly higher rate for next year.

Tax rate, yeah, because of the lower inflation.

Okay. Perfect. Thank you so much.

Thank you.

Okay. Thank you very much. We see no further questions. I would like to apologize once again for the technical issue that interrupted today's presentation. And I'll pass the line back to the management team for the concluding remarks.

Thank you for listening and we will see you again in the next quarter results. Thanks.

Thank you. This concludes today's conference call. We'll now be closing all the lines. Thank you and goodbye.