Good afternoon everyone, and welcome to Banco de Chile’s Fourth 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; Daniel Galarce, Head of Financial Control and Capital; and Natalia Villela, Investor Relations. 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. Thank you very much for attending this conference call today, where we will present financial results and the main achievements for the fourth quarter and, consequently, the full year 2023. Similar to previous presentations, we will share our analysis of the competitive landscape of the period, followed by the progress in our main strategic initiatives, and we will finally present financial results. But before moving to these slides, I’d like to highlight the most important achievements of our bank during the year. Please go to Slide number 2. We are very proud of our successful year. We led the industry in results and several aspects of the business, confirming our proven capacity to continuously add economic value to our shareholders. On this slide, we present a summary of some of the main achievements of the bank during the year. On the financial front, we led the industry once again with a net income of CLP1.2 trillion, equivalent to an ROE of 25.1%, allowing us to increase the gap with our main peers. In fact, in 2023, we represented 27.2% of the total net income posted by the industry. It is worth mentioning that these impressive results were achieved despite the existence of headwinds faced in 2023, such as the recession for most of the year, the downward trend in inflation, higher unemployment, and increased delinquency, among others. We also led the industry in capital adequacy, by holding strong indicators and positive gaps in relation to internal and regulatory thresholds that enable us to be confident to face business-as-usual growth while dealing with potential stressing situations attributable either to the economic cycles or idiosyncratic exposures. Likewise, our capital base enables us to address increased regulatory requirements established as part of the implementation of Basel 3 regulation in Chile.…

Thank you Rodrigo. I would like to begin with the advances in our main strategic focus. Please go to slide number 9. The solid track record of results that we have consistently achieved have resulted from our permanent focus on three strategic pillars, customer centricity, productivity, and sustainability. By focusing on these areas and implementing our core initiatives, we have exceeded our mid- term targets, as shown on the right of this slide. On the next page, we'll look closer at our main accomplishments in digital transformation, productivity, and sustainability. Let me start with digital banking. Please move to the next slide, number 10. To be the best bank for our customers, during 2023, we continued focusing on developing innovative solutions and creating a comprehensive digital ecosystem to provide the best experience to our customers. Some of our initiatives were launching a digital onboarding current account in US dollars for individuals and companies and integrating the contactless mobile payment functionality through Apple Pay wallet as soon as it was available in Chile. In addition, we have offered digital accounts for diverse segments, including SMEs and teenagers that register 1.4 million accounts. Our initiatives were recognized by Praxis Xperience Index, which awarded us the bank with the best customer experience in the country. On the efficiency and productivity front, we continued implementing diverse initiatives to build a fast, timely, secure, and digital bank. A significant achievement has been the comprehensive review of our physical infrastructure, identifying areas for space rationalization and unlocking potential savings while ensuring our infrastructure remains efficient. Additionally, we enhanced our investment planning process to ensure that our strategic initiatives are aligned with our long-term goals and introduced a new corporate procurement model to optimize resource allocation. Furthermore, we conducted a reengineering our branch service processes, resulting in…

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. Please go ahead, sir.

Hi, thank you. Hi, good morning, Pablo, Rodrigo, thank you for taking the question. My question I guess, on the long-term ROE of 18%, just given the capital that you have, does that assume that the capital ratio will remain around the current levels? Do you see room to pay additional dividends from here? Just what's the right level of capital to consider with that 18% ROE? Thank you.

Thanks, Tito. Well, the ROE, as we've mentioned in the past, we think is around -- in the baseline scenario for the economy of 3% inflation rates at the long-term level of around 3.75%. So it's the Central Bank and Chile growing at around the 1.5% to 2% level. In the long term should generate a good level or a decent level of growth of loans. And this should all translate into a bottom line of around 18% we believe. Some years, it could be a little bit higher, others it could be lower depending on market factors in the economy, but we think with this level of capital, we're comfortable and we can have achieved this level of 18% ROE.

Okay. Great. Thank you Pablo.

You’re welcome.

Okay. Thank you very much. Next question comes from Mr. Ernesto Gabilondo from Bank of America. Please go ahead sir. Your line is open.

Thank you. Hi, good morning, Rodrigo and Pablo. Thanks for the opportunity. My first question is on loan growth. So given that the economy is gradually recovering, and we are starting to see the possibility for the consumer lending activity to start picking up, we're seeing lower rates, lower inflation, no longer having excess of liquidity. So just wondering if there could be upside risk for loan growth and especially for the consumer segment? My second question is on your dividend payout ratio. So we saw that you are proposing a dividend payout ratio of 66%. So we continue to see that Banco de Chile has a very strong capital ratio. So just wondering why you didn't pay again the 80% as of last year? I don't know if it was to be conservative because of the new capital buffer. Any insight will be very helpful. And for my last question is on the payment of the FDIC credit line. How should we think about the impact after paying the credit line? I think this could imply a lower investment yield by the reduction of the securities. And also, how should we think about this impact taking place? Should it be on net interest income or in financial results? Any insight also will be very helpful. Thank you.

Thanks, Ernesto. In terms of your first question, in 2023, as you know, we grew around 2.5% year-on-year, and this was driven mainly by the retail sector, right? Our retail segments, consumer loans growing a little bit above 7%, mortgage loans, almost 8%. But the commercial loan area growing below minus 1.5% around there. So it really depends for the next two years or the next year, the confidence from consumers and businesses on how this level of growth will be. What we've seen is a weak demand today from our customers, and that's translated into this weaker loan growth, especially in commercial loans. If we look at what we're expecting in our baseline scenario, we see Chile growing around the 1.5% for next year -- sorry, for this year, 2024. And in terms of growth, it's around the 5%, 6% level for us in nominal terms. And what's driving that loan growth, we're seeing the areas of, again, the retail segments, which are growing closer to that 6% level, while the commercial loan segment is growing probably below the 5% level, with the recovery in SME lending, which has been very penetrated in the recent period because of all of these government guaranteed loans. So there's an upside risk that this could improve. It will really depend on the cycle of economic situation, if there's any surprises in terms of better job creation, economic activity, investment, FDI, that could be a possibility. But those are our numbers in their baseline scenario. For the FCIC and basically NIM, what we see is that the NIM, there's different positive and negative pressures for us. For 2023, we ended the year at almost 4.5%. What drove that was obviously a higher level of liquidity, especially from different types of funding deposits, this…

Yeah. Regarding dividend payout ratios, the effective dividend payout that is proposed to the shareholders' meeting or to ordinary shareholders in March, is actually 66%. We have to consider that Basel III is still being implemented. There are some room or gap regarding how the models for measuring diverse risk will be implemented and will be accepted by the CMF. So basically, it is a kind of buffer that we can have in the future in order to continue bolstering our capital base.

Okay. Perfect. Understood. Thank you very much guys.

Thank you.

Okay. Thank you very much. Our next question comes from Mr. Yuri Fernandes from JPMorgan. Please go ahead sir. Your line is open.

Hey guys. Thank you very much. I had a question regarding operating expenses. It was a little bit high this quarter, right? Up 20% year-over-over. And you mentioned like some collective agreements, some severance package. Can you provide more color on this and how this should track? Because the impression I had is that you are potentially, I don't know, front-loading some expenses in '23. So this may -- these are tailwind for '24. So just would like to hear more details on expenses. Thank you.

Thanks. So in terms of expenses for 2023, what we've seen is an expense growth which grew in the full year around 12%, a little bit higher than 12%, and this was largely due to some key factors, which was inflation and IT expenses. In the fourth quarter, there were some additional expenses like the agreement with the unions to agree before the end of this contract. So what was left had the pass-through income because this is accrued on a monthly basis with the length of the contract. So this was an additional expense. We had some additional bonuses and some other items there. But if we look more so on the medium term, what's happening in our view is inflation, which is very important for our cost base. The high inflation of 2022, the still high level of 2023 affected 2023, but this is normalized in 2024. So this shouldn't be such an important impact for next year as well. We have many different projects in the pipeline, which we're improving in terms of productivity efficiency. So the incremental improvement of all these projects should continue to bear fruit and maintain our cost base under control. And what we're seeing is for 2024, an efficiency ratio of 40%, costs growing more or less in line with inflation. And in the long term, what we expect with a normalized operating income and normalized level of cost, an efficiency ratio that should be less than 42%.

Thank you, Pablo. So basically cost in '24 inflation like? And just the first Q, coming back to this, because I think you mentioned CLP22 billion on one-off kind of like onetime events. Isn't this like anticipating expenses for '23? Sorry, '24 and '23?

Well, for example, the expenses for the contract, the bonus for the unions, it's accrued on a monthly basis. So if we sign off on earlier, we have to pass that through income, all the months have to come due. So it's -- for example, that would be something that's not accrued. It would be a double accrual.

Perfect. Thank you very much, Pablo.

You’re welcome.

Thank you very much. Our next question comes from Ms. Neha Agarwala from HSBC. Please go ahead ma’am, your line is open.

Hi, thank you so much for the questions. Congratulations on the results. A quick question on the impact from the interchange cap for '24 and '25. I'm not sure if you mentioned that and apologies if I missed it. So if you could reiterate that. And my second question would be on -- we recently had one of the Chilean banks, the AT1 issuance, is that something on the radar for the Banco de Chile? Could we see that in the coming months? And lastly, on asset quality, is there any trend that you would like to highlight in terms of asset quality performance for 2024? Thank you so much.

Thanks for the question. In terms of the fee growth -- and the interchange but related to the fee growth. In 2023, we had fees, if we were to adjust for reclassifications on the balance sheet, fees grew around 6% year-on-year. In terms of the drivers of this, we have insurance, transactional product services, including credit cards, which grew substantially. We had a strong improvement in credit cards despite a slight reduction in the interchange fee at the end of the year, because of a rise in transactions of 14% because of individuals changing their preferences to paying with cash to use more digital and noncash payment methods. So this is very important when looking at the interchange, because not only is there is a reduction in the fees coming up or already implemented one more at the end of the year. But at the same time, what we're seeing is a strong growth in terms of transactions, which that will partially offset the reduction in the fees. So an update on the fees. Debit cards go from 0.6%. In October, they went down to 0.5% interchange fees, and in October of 2024, they dropped to 0.35%. In credit cards, it grows from 1.48% to 1.14% in October 2023, and in October 2024 to 0.8%. So this has an impact in terms of fees. But what is important to mention that these are partially offset by an improvement of our growth in the number of transactions. And at the same time, adjustments on another expenses related to loyalty programs, et cetera, that reduces the net cost of this change. The other question in terms of asset quality is -- what we're seeing in terms of asset quality is a normalization from the very low rates that we've had in the…

AT1.

AT1. I'll pass that to Daniel Galarce.

Yeah. Hi, well, we haven't issued any AT1 instrument yet. Basically, we are seeing some possibilities here in Chile and also abroad but, to be honest, given our very strong CET1, we don't believe it's necessary yet. And in addition, we have a lot of room with respect to regulatory limits. So we are not yet considering an specific issuance even in Chile or overseas.

Thank you. Thank you so much.

Thank you.

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

Good morning to all and thank you for the presentation. My question is related to the consumer lending outlook. When we look at Chile, over the past few years, this has been an area where we have seen continued weakness in terms of loan growth. And now with lower interest rates, lower inflation, you will have imagined, this issue have translated into a pickup in consumer loans, but your guidance is still relatively timid. So I would like to understand what prevents you from having a more aggressive guidance in terms of consumer lending?

Thanks. Well, in terms of consumer lending, our retail lending as a whole, still we have a variety of areas that is affecting loan growth. So we have unemployment level, which still is relatively high. We don't think that there is a drop destruction, but the creation is weak. We see also investment in Chile is weaker, so that's affecting retail lending as well because of the job creation. And we have a more normalized -- a normalized level of inflation, which has also obviously had an impact in the prior years, especially in terms of mortgage loans, which made those products more costly. So in general, households have less room to continue getting into that, and that's affected the demand for growth, plus the weak environment and confidence from the consumer is affecting the demand. So it's more of a demand issue than a supply issue, I would say. And what could be a driver for the future to see an improvement there and improved level of the economy, reductions of the interest rate as well, is very important, which has affected loan growth as a whole. And I would say, more or less an overall better outlook in the economy will drive the consumer loan growth.

Hi, Andres. This is Rodrigo Aravena. Just let me add just a couple of things. It's very important to be aware that this recession in Chile in 2023 was a bit different compared to other crisis that we have in the country. Because this time, we had a very strong decline in domestic demand, particularly in durable consumption and other consumption areas. For this year, particularly in this quarter, we are expecting like a turning point in the economic cycle, since, as I said before in the presentation, today, we have a more constructive view, a much more positive view on the economy. Since we're expecting different positive factors affecting the private consumption, including, of course, the positive impact and the potential positive impact in consumer loans. It's very important to remember, for example, that we are expecting a positive growth for GDP for this year and also low inflation rates, an important decline in the automate rate, higher growth and then probably a normalization as well in terms of the labor market. Because when we analyze today, during the last quarters, for example, the Chilean economy had an inflation rate above the long-term level, still contractionary interest rates below trend economic growth. So that's why the main reason behind the turning point of the economics related with consumption, especially with the private consumption, we are not very optimistic about private investment. So I think that it's very important to highlight that one of the key drivers for the potential, the cyclical recovery in Chile this year is related with the total consumption, the private consumption. So that's why or where this is one of our main basis of that's why we are more positive for the year in terms of consumer loans as well.

Rodrigo, that's very helpful. And an additional question that I had was related to the additional reserves that you guys still have in the balance sheet. How should investors think about those at some point they are going to become part of your capital? Or are you still considering the possibility that they could be returned to shareholders? And under which circumstances that will be the possibility for those reserves to be an extraordinary dividend?

Thanks. Well, we have -- as you know, during the pandemic, we accumulated up to CLP700 billion in additional provisions. So with a coverage ratio of about 2.7 times. Today, we still have these additional provisions on the balance sheet. We didn’t implement any of dividend provision, any more additional provisions in 2023. Now there's no direct time line or trigger that we can mention of releasing these provisions, but what's been mentioned in the past, and it's true today is that if we don't need to do traditional provisions, a portion of these may be reversed and may be used for different purposes, but there's no clear guideline on when this will occur or the factors that would have to be occurred? Rodrigo?

Yeah. So important to be aware of the still existence of source -- of uncertainty that we have in Chile today. We have different uncertainties from the rest of the world. We will know that China, for example, is our major partner, there are some uncertainties related to the economic growth for this country for this next year. Internally, we have different discussions in Chile. Probably, there's going to be discussions about taxes, pension funds. This year also there will be elections for municipal elections as well. So even though the improvement in the economic cycle, in the private consumption, in the GDP, still we have some uncertainty. So it's very important to have more visibility on that uncertainty, the potential impact in the long term of the key long-term figures that affect the banking system, in order to have a more specific time line for the potential decision to reverse some additional provisions. So today, we have a lot of uncertainty that we have to pay attention to. The main thing where we have more visibility today is that there's going to be an important improvement in the economic cycle for this year, but it’s filled with important uncertainties.

Understood. Thank you guys and congratulations on the results.

Okay. Thank you very much. We see no further questions at this point. I'll pass the line back to Banco de Chile team to conclude the call.

Well, thank you for joining our conference call, and we're looking forward to speaking with you for the first quarter results of 2024. Bye.

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