Banco de Chile Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2023

There are 7 speakers on the call.

Operator

Good afternoon, everyone, and welcome to Banco de Chile's 3rd Quarter 2023 Results Conference Call. If you need a copy of the management's 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.

Operator

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.

Operator

Please go ahead, sir.

Speaker 1

Good afternoon, everyone. Thank you very much for joining this conference call. We are pleased to present the performance of our bank during the Q3, a bit where once again Banco de Chile demonstrated its unquestionable leadership. Some achievements include a solid net income of ARS 2 60,000,000,000 in the quarter, equivalent to an ROE of 21%, remaining the most profitable bank among peers. We also led the industry regarding capital, asset quality and margins and achieved significant accomplishments in other non financial areas.

Speaker 1

I want to remind you that further details are shown in the management discussion report released this week and available on the bank's web page. Before moving to our presentation, we are very proud to mention that recently Banco de Chile completed 130 years of history offering comprehensive solutions for our customers and promoting the developments of the country and the people. I'd like to begin with an overview of the competitive environment and our forecast for this in the following year. Please go to Slide number 3. Chile is a small and open economy, highly integrated into the rest of the world, which is why it's critical to monitor the evolution of global drivers that could potentially affect our economy.

Speaker 1

As the upper left chart shows, we've seen lower dynamism in the global economy, which has been reflected in the downward adjustment in global GDP forecast. As the IMF mentioned, it's WIO report, this negative trend is attributable to the weaker than expected growth in China, which represents nearly 40% of Chilean exports. In addition to this, at the chart on the upper right display, there's been further slowdown in most countries during this year. These trends have affected Chilean economic activity, which has declined annually since the second half of the last year as seen in the chart on the bottom left. This negative trend is explained by several factors, including the partial normalization of the excess liquidity seen last year, the lag of the 10.75 basis point interest rate hikes between 2021 2022 and the subdued growth in sole credit partners, as I already mentioned.

Speaker 1

This recession, however, has contributed to reducing the macroeconomic imbalances that Chile had during the pandemic. 1 of them is improvement in the current account deficit from 9% in 2022 to 4.2% last 12 months in the Q2 this year due to the trade balance surplus compared to the last year. The adjustment in the local spending has also influenced on the lower inflation and interest rate as we will see in the next slide number 4. The annual inflation fell to 5.1% in September from the peak of 14.1% in 2022, posting the lowest figure in over 2 years. The core CPI, which is a measure that excludes food and energy prices, went down to 5.2%, also the lowest since mid-twenty 21.

Speaker 1

In the same line, the unemployment rate has slightly been increasing as seen in the chart on the other right, reflecting the existence of spare capacity in the economy. In this environment, the Central Bank reduced the interest rate by 225 basis points in the meetings held in July, September October and has signaled further cuts in the near term. It's important to note that in October, the Central Bank dropped the interest rate by 50 basis points when the market was expecting a 75 basis points cut. In addition, the Central Bank put an end on the FX reserve accumulation program and the gradual reduction of its forward position. This led to a strong drop in the value of the CLP against the dollar.

Speaker 1

Nevertheless, the Chilean peso continues weak, driven by lower local rates and a stronger global dollar, as seen in the chart on the bottom right. I'd like to move to our baseline scenario for this and the next year. Please go to the next slide. Despite the expected positive growth in the 4th quarter, the 2023 GDP will likely fall by nearly 0.2%. For 2024, we expect a recovery towards 1.7%, driven by the positive effect of the lower inflation and a more expansionary monetary policy.

Speaker 1

However, the deterioration in global conditions will partially offset the impact of these factors. On prices, the CPI should continue falling from 12.8% last year to 4.2% in 2023 to 3% in 2024. Based on this trend, we see room for further rate cuts. The chart on the right shows our quarterly rate and CVA expectations for the following periods. The evolution of these macro drivers has impacted bank bottom line, as we will see in the next slide.

Speaker 1

The banking industry posted a net income of ARS 9 49,000,000,000, 29 percent lower than the same period last year, reducing ROE to 12.7% from 20.6% in the Q3 2022. This is attributable to a combination of factors such as a significant decrease in inflation leading to a 57.8% reduction in net interest income for the industry. Additionally, a 7.2% increase in the cost of risk resulted from the normalization of asset quality as shown on the chart on the bottom left and a 5.1% rise in operating expenses, slightly surpassing the inflation rate. The ongoing impact of sluggish economic environment is clearly reflected in the chart on the right. Total loan growth decelerated to 2.8 percent in the current quarter, mainly due to subdued demand for commercial loans and to a lesser degree to consumer loans.

Speaker 1

Mortgage loans continued leading loan expansion. Despite these factors, Banco Distillery has been able to post solid figures, surpassing the rest of the industry. Now, Paolo Vahir will present the main achievements of our bank during the period.

Speaker 2

Thank you, Rodrigo. I would like to begin with advances in our main strategic focus. Please go to Slide number 8. Our impressive track record is a result of our consistent long term strategy that places customers, efficiency and sustainability at the center of everything we do. We've put these pillars into action through 6 key goals and we've surpassed all of our midterm targets, as you can see on the right of this slide.

Speaker 2

In the upcoming sections, we'll take a closer look at how we've been thriving in digital transformation, productivity and sustainability and how this has translated into posting remarkable financial results. Let me start with Digital Banking. Please move to Slide 9. In terms of digital banking, our initiatives are focused on offering customers an innovative value proposition, simple and tailored to their needs and providing the best experience. To achieve this, we've developed a comprehensive digital ecosystem that includes virtual accounts for diverse segments such as individuals over 18 years old, SMEs and teenagers.

Speaker 2

This initiative has resulted in over 1,300,000 digital accounts and registers solid growth quarter on quarter as detailed in this slide. One noteworthy advance we have recently undertaken is integration of contactless mobile payment functionality through Apple Pay Wallet. On the productivity and efficiency front, our efforts are centered on building an agile and modern bank through innovative, effective, automated and secured digital front to back processes. This quarter, we have made significant progress in this area, including the enhancement of CapEx budgeting planning process to ensure precise alignment of we also implemented new tools to reduce customer service delivery times and to further maximize returns, implemented a new deposit pricing strategy that resulted in improved margins. In summary, we are continuously seeking new ways to improve revenues and optimize costs.

Speaker 2

We are confident in our ability to maintain our leadership position within the industry. Finally, as part of our commitment to the development of the country and its people, we continue strengthening our ESG initiatives to create long term value for our stakeholders. We are proud that our efforts have been recognized by different institutions, including our 1st place ranking in the National Customer Satisfaction Award. Additionally, we've been honored as a leading bank in attracting and retaining talent according to Merco Talent. Among many actions towards sustainability that education and financial literacy.

Speaker 2

Furthermore, we're glad to announce our sustainability and procurement teams are working together in a project that will promote lower carbon emissions and energy savings and will mark an important step in our journey to contribute to society and the environment. All of these actions have taken place in a setting where we remain as the strongest bank in ESG according to Sustained Analytics. Please turn to Slide 11 to begin our discussion on our results. We achieved another quarter of strong earnings with a notable ROE of 21%. Our net income of COP260,000,000,000 was significantly above all of our peers, as shown on the chart in the middle of this slide.

Speaker 2

These accomplishments are a testament to our dedicated team and a superior long term strategy that emphasizes sustainable growth with a balanced consideration of risk and return, as exemplified by our leading positions in capital adequacy and delinquencies. This has firmly established Banco de Chile as the most profitable and sustainable bank in Chile. Please turn to Slide 12. Despite the weak economic and business environment, our core customer income has continued to steadily recover by growing 8% year on year, supporting operating revenues as you can see on the chart on the bottom left. This growth in core revenues has partially offset the lower revenues from non customer income that fell 50% year on year, primarily due to the normalization of several market factors, especially the sharp decrease in inflation.

Speaker 2

Customer interest income from loans, demand deposits and time deposits rose by 13.4% year on year. This was due to an improvement in loan mix and further enhanced as loans with lower lending spreads from the pandemic have been amortized. In fact, loan spread originations have been rising across the majority of product families. These results translate into a robust net interest margin of 4.2 percent despite the huge drop in inflation during the period. Another relevant component of customer income is net fees, which decreased by 3.9% year on year.

Speaker 2

However, it's important to consider that this was attributable to 2 temporary factors. 1st, the reclassification of income from collection services for overdue loans, which is currently recognized in other income and in addition, the impact of foreign exchange rates on our loyalty program provisions. Nevertheless, the latter effect is hedged through trading positions that are booked as net financial income. Excluding these factors, core fees continued to grow well at 6.4% year on year. This was driven by retail fees, including insurance premiums, which grew 20% year on year checking accounts and overdrafts up 13% in the same period and site accounts and ATM fees rising 8% year on year.

Speaker 2

In the Q3, non customer income decreased 50% year on year, as I mentioned earlier. This was primarily due to the strong reduction in inflation. Specifically, the UF variation dropped from 3.5% in the Q3 of 2020 2 to only 0.3% in the Q3 of 2023 or from 14% to 1.2% if we annualize these numbers. As a reminder, a change of 100 basis points in inflation is roughly Ps. 80,000,000,000 in operating income.

Speaker 2

In fact, when considering our structural U. S. GAAP and directional positions taken by our treasury on U. S. Denominated securities.

Speaker 2

The change in inflation resulted in lower income by approximately COP 250,000,000,000 year on year. This amount was partially offset by other than inflation income from both ALM and their investment in trading portfolios that surged by approximately MXN 110,000,000,000 on an annual basis as a consequence of both the positive impact of higher than normal nominal short term interest rates on short term assets and the comparison based effect related to the sale of AFS Securities in the Q3 that accumulated fair value losses

Speaker 1

by MXN

Speaker 2

58,000,000,000. Please look at the charts on the right as they demonstrate how our performance is compared to our peers. This quarter, our NIM reached 4.2%, significantly higher than our closest competitors. We also outpaced our peers in fees as well as operating margin. This exceptional performance is due to our superior business strategy together with prudent risk management practices, all underpinned by robust corporate governance standards.

Speaker 2

This prudent approach has allowed us to benefit from the changes in market factors better than our peers on the grounds of structural positions that are a consequence of a consistent business model focused on Commercial Banking. Please turn to Slide 13. We offer financial solutions to clients across all segments in the Retail and Commercial Banking. As illustrated in the chart, 64 percent of our loans are focused on the retail segment, while the remaining 36% serve the wholesale sector. In wholesale, we have a diverse portfolio, as you can see in the chart on the bottom left.

Speaker 2

This diversity in our total loan book allows us to continue growing even when there are varying economic cycles or challenges affecting different segments, aiding to mitigate reduced demand or credit risk. During the pandemic, our growth was centered on low risk and low margin products. This resulted in a significant transformation in the structure of both our loan portfolio and our balance sheet. However, this has begun to change and as I mentioned, our spreads are already improving. We anticipate that in the coming period, we will gradually bring the loan portfolio back to the mix that we had prior to the pandemic.

Speaker 2

As you can see in the charts to the right, total loans are growing 1.9% year on year. Loans to individuals is driving growth and consumer loans are rising at 9%, followed by mortgage loans, which are expanding at 7.6%. In the case of consumer loans, growth was primarily fueled by credit cards, followed by installment loans. This has been driven by greater use of electronic payments, a legacy of the pandemic and on an improved segmentation of customers that has been supported by business intelligence tools while enabling us to maintain credit risk at low levels. In turn, mortgage loans expanded by 7.6% during the 12 month period.

Speaker 2

Despite this figure still below pre pandemic levels, loan growth has been driven by both inflation and proactive commercial campaigns focused on specific customer segments that has permitted us to gradually recover market share in this strategic product that allows us to achieve long term relationships with clients. In this regard, it's worth mentioning that origination of residential mortgage loans 2023 when compared to the same period last year, which demonstrates the effectiveness of our campaigns and competitive funding costs. Commercial loans, on the other hand, decreased 3% year on year. High interest rates, together with a weak economy and high uncertainty is taking a toll on this segment. In the case of SMEs, higher debt levels from the quick penetration of these customers in the pandemic has further reduced the possibility of recording stronger expansion levels.

Speaker 2

Currently, originations are only offsetting amortization of these loans. But on a positive note, loan origination is contributing with higher lending spreads than the stock that is being amortized. Thus, we are seeing a gradual normalization in spreads that should continue in the coming quarters. Also, we're confident that as long as some source of uncertainties begin to fade, total commercial loans will continue to return to growth level. Please turn to Slide 14 to discuss our strong balance sheet structure.

Speaker 2

Our asset and liability structure exhibits robust diversification, as illustrated in the upper left chart. Our core focus remains on commercial banking, where loans constitute the primary revenue driver, representing 67% of our total assets as of September 2023. It's also noteworthy that before the pandemic, total loans typically accounted for a range closer to 80% of our total assets. The most likely scenario is that we should return to these figures once the FCIC funding is totally paid off by mid-twenty 24, as our extra liquidity will quickly decrease from the limits. Additionally, we have managed our balance sheet positions appropriately for the economic cycle.

Speaker 2

This has provided stability in our results with lower sensitivity to changes in market interest rates. We've also managed our UF position appropriately to optimize margins as you can see in the chart on the bottom right. Please turn to Slide 15. Banco Beach Chile is by far the most capitalized bank amongst peers. We have a total capital ratio of 17.7 percent, well above all of our peers and fully loaded Basel III requirement.

Speaker 2

CET1 stands at an impressive 13.5% that allows us to easily comply with the requirements of this new regulation. The phase in period is shown on the table to the right. Recently, the regulator defined a countercyclical buffer of 0.5% and is in the process of determining the need to establish Pillar 2 capital charges, if any, depending on each bank's capital position and risk management framework. Our long term strategy and prudent approach to managing market risk and credit risk has played a pivotal role in progressing through this economic cycle, setting us apart from other banks in both revenue generation and the quality of our balance sheet in terms of market and credit risk. Please turn to Slide 16.

Speaker 2

Expected credit losses remained low by posting only COP60 1,000,000,000 this quarter, representing a 43% reduction compared to the same period last year. The decline is mainly due to the MXN35 billion of additional provisions established in the Q3 of 2022 compared to this quarter where we did not set any additional provisions. This coupled with a reduction of credit risk expenses coming from provisioning models, given better than expected credit behavior and improved financial condition of wholesale customers participating in industries that faced uncertainty last year. Specifically, commercial loans posted lower provisions due to slowed loan growth and the release of allowances related to Fugate loans, partially offset by a gradual return to more normal levels of cost of risk in the mortgage rise to more normal levels of delinquencies in the loan portfolio as shown in the chart on the bottom left. We have full confidence that our top tier coverage ratio in combination with the highest level of additional of additional provisions that remains at MXN700 billion offers sufficient protection to deal with a longer than expected economic downturn.

Speaker 2

If the level of these additional provisions proves unnecessary, our intention is to subsequently reverse a portion of them at some point in the future. This accomplishment is in line with our long term expectations and reflects our diligent risk management practices and commitment to a sustainable growth strategy. Through the risk assessment and mitigation, we aim to uphold the strength and resilience of our loan portfolio, resulting in a consistent performance and the continued trust of our stakeholders. These results are shown on the lower right chart on this slide, demonstrating our leadership and widening gap with our competitors in operating margin net of risk, which reached an impressive 5.2% by the end of the Q3 of 2023. Please turn to Slide 17.

Speaker 2

Expenses totaled MXN270 1,000,000,000 in the Q3 of 2023, increasing 4.3% from the previous year. This rise primarily stems from disbursements intended to enhance our digital capabilities, while fortifying our IT infrastructure. It's worth noting that a significant part of our expenses is linked to inflation and the U. S. Dollar, further contributing to this annual increase.

Speaker 2

Furthermore, the implementation of VAT on services this year also contributed to the increase in the cost base. It's also noteworthy that through our Diversa initiatives, we generate efficiency gains that help to fund the necessary investments in digitalization, IT infrastructure and cybersecurity that are crucial to address the transformative changes in the banking industry. In terms of efficiency ratio, we reached 39.6% this quarter, well below our peers as shown in the chart on the bottom. Our strong cost control is thanks to a robust productivity plan and continuous focus on searching for new savings and synergy opportunities. We are confident that the progress we have made will allow us to post long term efficiency levels below 42 percent when inflation stabilizes.

Speaker 2

Please turn to Slide 18. Before we move on to the question and answer session, I'd like to share a summary of other key takeaways and provide some guidance. After a period of strong growth and record levels of inflation in 2022, the Chilean economy is gradually adjusting to normal levels of activity. We expect that GDP will return to positive year on year growth rates in the Q4 of this year, and we also see a slight recovery in 2024. Accordingly, we are estimating of about 0.2% for 2023 and a recovery of around 1.7% for next year.

Speaker 2

However, we recognize the existence of some downward risks in these forecasts. In this environment, we're confident that our bank will distinguish itself from our peers. Our prudent and consistent strategy together with our strong management team has positioned us as a leader in the industry and profitability, capital, risk and efficiency. In terms of the main indicators for 2023, we expect a cost of risk of around 0.9 percent with an efficiency ratio of around 38% and ROE of 23%. Regarding capital levels, we are the best capitalized bank amongst peers with a CET1 of 13 point 5% as of September 2023.

Speaker 2

Towards the long term, we remain strongly convinced of our capabilities Thank you for listening. And if you have any questions, we would be happy to answer them.

Operator

Thank you very much for the presentation. We will now be moving to the Q and A part of the call. Thank you very much. Our first question comes from Mr. Tito Labarda from Goldman Sachs.

Speaker 1

Please go

Operator

ahead sir. Your line is open.

Speaker 3

Hi, Pablo, Rodrigo. Thanks for the call and taking my question. I guess my question is on sort of the evolution of ROE. I know you said 23% for this year and sustained 18%. But just sort of over the next year or so, you have excess capital, you mentioned you also have excess provisions and with more normalized levels of inflation rates coming down, how do you think that ROE sort of evolves from the 23% to 18% over the next year or 2?

Speaker 3

And kind of related to that, with that core Tier 1 at 13.5%, you mentioned you're well above peers, you're well above requirements. Is there room to return capital there? And what is the normalized sort of core Tier 1 that you should operate with? Thank

Speaker 2

you.

Operator

Pablo Rodrigo, just a small reminder that we do not hear you at this point. Just a reminder to unmute your line if it's muted.

Speaker 2

Sorry. So as I was mentioning or I was trying to mention, So there's a lot of factors that work for and against revenues in this moment. Due to the pandemic and situations, we have a loan book, which I mentioned is more focused on lower income, lower margin products, lower risk, but we should start to see a normalization. Plus, we have other things unwinding and both in the assets and the liability side. So we think for the next year and the following years, these areas, these factors should continue unwinding and we should begin to move gradually to a level closer of 18% of ROE.

Speaker 2

We think that 18% is our long term level of ROE and with a normalization and key economic figures, we think that this is very doable in the next couple of years. So it will be a gradual return to that level.

Speaker 1

Hi, Tito. This is Rodrigo Arena. I'd like to add some just a couple of additional ideas. We're expecting a different contribution from the main macro drivers towards the future, because on the one hand, we are aware of the lower potential tobacco growth of Chile. So probably, we are going to see next year an economic growth of around 1.5%, 1.7%, something like that.

Speaker 1

And from beyond that, probably the economic growth would be around 2%, something like that. We are aware that this number is lower than the number of around 3% to 5 percent as we used to see in the past. But on the other hand, probably we're going to have higher levels through trial, higher level of interest rate in Chile. We think that the neutral level of interest rate in Chile is higher than before. In our baseline scenario, in the long term, the interest rate in Chile will be around 4.5% or 5%, which is higher than the level of 3% that we used to see just couple of years ago.

Speaker 1

So that's why we are trying to say that we are going to have opposite forces between the real activity compared to the positive contribution from a higher inflation and higher level of interest rate. So that's why we have maintained our long term guidance of ROE at 18%.

Speaker 3

And just following on the question on core Tier 1 and what the right level should be?

Speaker 2

So in terms of core Tier 1, there's a lot of factors as well that we have to take into consideration. So we have a prudent and consistent strategy in the long term. So our decisions are always based on having a good return risk and return level and preserving the economic value of Banco de Chile. So that's why we've placed in prior to the pandemic a dividend policy that's closer. That's around 60% of distributable net income.

Speaker 2

And in the last few years, because of different factors in the evolution of the economy, we've paid 100% of distributable net income. But the proposal, the dividends reviewed and defined each year by these factors, economic factors, the capital needs to sustain growth in the environment. So in 2022, we saw an economy, a political uncertainty and which reduced the expectations of growth for the following years or the following years. So we had a higher dividend policy than our higher dividend payout than our policy. So if we take into consideration all of this, it's important to mention that there's still a lot of factors that we have to see being implemented, for example, Basel III requirements, including Pillar 2.

Speaker 2

So for today, the policy of our dividend payout is 60%. In the moment that the annual dividend is decided, it's in January of every year and proposed by the Board of Directors. So in this environment of low growth, we can't rule out that future dividends would be different from the historical distributions and that we have to use our capital efficiently for risk and return. But the proposal, as I mentioned, is in January.

Speaker 3

Okay. Thanks, Pablo. I guess I'm not does that mean for now that we should expect the Core Tier 1 to remain around that 13.5%. I'm not clear if there is some target or it depends on several different factors, I guess, as you mentioned.

Speaker 2

It should be around those levels.

Speaker 3

Okay, great. Thank

Operator

you. Okay. Thank you very much. Our next question comes from Mr. Daniel Mora Ardea from Credicorp Capital.

Operator

Please go ahead, sir.

Speaker 4

Hi, good afternoon and thank you for the presentation. I have a couple of questions. The first one is a follow-up on ROE. I would like to understand if 2024 should be considered a transition year for Banco de Chile considering that we continue to observe profitability figures above 20%, but the long term target is around 18%. So do you still believe that ROE could be between 18%, 20% in the next year?

Speaker 4

Or should we see already normal figures close to the 18% for 2024? That will be my first question. And the second question is regarding margins. Considering the new guidance of inflation, interest rates and the fact that Banco DO Brasile is rebuilding the loan mix similar to the one that you have before the pandemic. What will be the path for the performance of margins from this quarter going forward in 2024?

Speaker 4

Thank you so much.

Speaker 2

Thanks. Yes, so in terms of ROE, we should see a normalization. So today we have and today and last year we had very strong ROE figures of well above our long term historical levels. Last year, over 30%, this year, we're over well over 20%. And we should expect for the year end in line with the guidance, as you can see in our press release, is we're expecting around 23% for ROEs.

Speaker 2

For next year, we see a year with lower overnight rate, changes in the assets and liability structures, which some are in favor and some are against have an impact in terms of margins. And this should have a reduction in terms of operating income, which is normal because what we're seeing today is unsustainably high levels of revenue generation that are generating this level of 20 above 20% ROE. So it's reasonable to expect that next year we should be closer already to the 18% level, which is our long term level. In terms of margins, we have what we're expecting is a normalization of the economic figures, which assist in these levels of margins. So this should this is a factor that will push down the net interest margin, but at the same time, we're continuing to see growth in the originations that we're having today are offsetting or the originations are offsetting the amortizations and different family of products.

Speaker 2

And what we're seeing is an improvement in spreads. So we have factors that again it's in favor and against. So today what we're expecting for 20 23 is a net interest margin close to 4.4 percent for this year. For the end of the year, we're estimating with the baseline scenarios you can see in the presentation. And for next year, it's reasonable to expect a slight decrease in those figures, but taking into consideration that there are factors again that are unwinding.

Speaker 2

So we have to take into consideration all these factors that are in favor, higher spreads of different products, normalizations of overnight rates, etcetera, etcetera. And that will allow us to have a net interest margins of maybe 20 basis points lower than what we're expecting this year. So it's a normalization. In the long term, we expect net interest margins obviously take into consideration competition, etcetera, the long term overnight rate expectations, something similar to what we had prior to the pandemic.

Speaker 4

Perfect. Thank you so much. Very clear, Pune.

Operator

Okay. Thank you very much. Next question comes from Yuri Fernandes from JPMorgan. Please go ahead.

Speaker 5

Hey, guys. Thank you very much. I have a first question for Rodrigo. Just his view on the constitution process, if this can be a catalyst or not, if this is not approved, if we will keep discussing a new constitution in Chile for a while or if the story will be over. So just his take on this new constitution process 2.0.

Speaker 5

And I have a question for Pablo, I guess, on loan growth. What is the outlook? The industry is growing very little, Boca de Chile also around the industry 2% year over year. But in the past years, you lost some market share, right? Like Boca de Chile used to have 19%, 20% share 10 years ago, and now the bank is running with 16%, 17% share.

Speaker 5

So my question is why not accelerate more the growth for 2024, regain some market share or no, the scenario is to uncertainty because you have more capital than peers, you have more coverage than peers. So why not getting a little bit more aggressive on loan growth here? Thank you.

Speaker 1

Hi, Yuri. This is Rodrigo Arena. Thank you very much for your question. So we have to consider several things. We are aware about the existence of different source of uncertainty on the political side in Chile.

Speaker 1

One of them is related with the constitution, as you mentioned before. It's too early to anticipate one specific impact from the constitutional process according to different surveys, the different options for or again the proposal are narrowing, but still you know that there are some differences, but we have to see how it will evolve the future. But despite that situation, we have to put also special attention to the evolution of some reforms in Chile. One of them, for example, is related with taxes. This year, there was a proposal from the government, which was rejected on the early stage in the Congress.

Speaker 1

Probably, we're going to have some discussion on taxes in the year. Also, Chile is discussing some changes in the pension system today. What is on the table today is an increase on the mandatory saving rate by 6 additional principal points, but it's not clear how will be the distribution from that saving oriented to the personal saving against more solidarity pillar. And also, we have to identify different discussion related to the political seat in the constitution, etcetera. But when we consider all these aspects, we are aware that the political some sources of political uncertainty are reducing our expectation for investment for the next year.

Speaker 1

So that's why we're expecting 1.7% of economic growth for the next year with a negative contribution for investment. On the other hand, we are more positive for consumption. But all in all, the political uncertainty is one of the reasons that's why we are still expecting a below trend economic growth for the next year. But it's too early to anticipate any more accurate impact from the constitutional process, even though this is one of the 2 or 3 more relevant factor for related with our expectation for the next year.

Speaker 2

And in terms of loan growth, so today we've been growing quite well in terms of the areas where we're focused on growing, but always taking into consideration a good relationship between risk and return. So we want to grow responsibly, so not only in market share. So where we have grown, which is where we are interested in, is in retail loans. And in retail loans, you can see that we've been actually growing market share, picking up market share this year. In consumer loans, for example, we have close to 60 basis points higher market share.

Speaker 2

And this is an area that we're very interested in growing. So if we look at our key focus areas is the retail segment, which includes SMEs. SMEs and consumer loans are the most profitable and the areas that we want to continue growing. In terms of areas that we've had lower dynamism in the past has been corporate loans. It's an area that we would like to continue being in.

Speaker 2

It's an area that will continue growing. The demand today isn't there. So what we've seen is much lower demand in this area, but we think that we can return to growing in this product. If we think of next year expectations of loan growth for the industry and us, the industry we're expecting somewhere around the 6%, 7% nominal. And our intention is to grow above that in terms of market share responsibly.

Speaker 2

And we should continue growing in this key area that we're focused on, which is the retail segment, especially in consumer and SME loans.

Speaker 5

Super curious, Pablo. Anything special you're doing on retail? Like, we see some peers with partnerships with retailers, like we have retail banks in Chile also going in certain areas of retail, right, on credit cards. Are you doing something particular, I don't know, like on SME, you have any special approach? What are you doing to grow on the retail side of things?

Speaker 2

We're implementing different commercial strategies in order to improve the relationships with customers and offer different products and services through the channels that the customers are demanding and having the appropriate marketing campaigns that are directed to each one of the customer segments. And what we've seen by implementing this strategy is stronger growth levels and originations across our the retail product segments. For example, mortgage loans had a very strong growth in terms of originations versus last year, thanks to this approach of these proactive strategies in order to try and grow in certain segments that we're interested in. So it's a lot of internal changes in order to improve the commercial strategies, implement the best practices across all the branches and employees in order to drive growth at the customer level and to use the digital accounts to continue increasing the customers available that we can cross sell to other products and services. So the digital accounts are very important for us as well.

Speaker 2

And we've seen a very high cross sell ratio and growth in terms of other products and services from these customers into the

Speaker 5

bank. Perfect. Thank you very much, Pablo and Rodrigo.

Speaker 2

You're welcome. You're welcome.

Operator

Thank you very much. Our next question comes from Mr. Ernesto Dalibondo. Please go ahead, sir.

Speaker 6

Thank you. Hi, good morning, Rodrigo and Pablo, and thanks for taking my call. My first question is on your reserve coverage ratio. So can you remind us how much additional provisions does Banco DO Chile continue to have? And when do you expect to have a more normalized level in your reserve coverage ratio?

Speaker 6

My second question is on asset quality. So you're guiding a cost of risk of 0.9% for 2023. So how should we think about this ratio for 2024? And my last question is on your effective tax rate. How should we consider it under low inflation levels?

Speaker 6

Thank you.

Speaker 2

Hi. So the coverage ratio that we have today is close to 3 times. Long term levels is closer to 2 times. What's driving this high level or higher than peers coverage ratio is we have a large we have the leading level of additional provisions in the industry. You can see this on Slide 16.

Speaker 2

And this amounts to MXN700 1,000,000,000. So it's reasonable to expect in the long term or the medium term that we should probably return levels similar to what we've had in the past, which is closer to the 2 times. The second question, can you repeat the second question please?

Speaker 6

Yes, of course. The second question was on your cost of risk for this year is 0.9%. How should we think for 2024?

Speaker 2

So cost of risk, we have to continue seeing how the pandemic and customer behaviors affect the long term behaviors in terms of repayment and or payment behaviors and as well as how the evolution of the economy continues. So if we look at the baseline scenario that we're expecting is below trend growth, I would say, below 2%, as you saw in the presentation. And this should translate into a level that should slowly be returning to the long term levels that we've seen in the past, which is around 1.1%, 1.2% for cost of risk. So we're we think that's a reasonable level, but we always have to take into consideration that we have to see the permanent impacts of the pandemic and customer behaviors and the evolution of the economy in that figure.

Speaker 6

Okay, understood. So 1.1, 1.2 and if you release provisions, could it be more at 1 or that

Speaker 2

the 1.1? The 1 I would say the 1.2 percent would be closer to the 1.1 percent than the 1.2 percent. Normalization would be throughout the remainder of throughout next year is reasonable. And in terms of provisions, it's something that's decided at the Board level based on different economic factors, viewpoints. There is MXN 700,000,000,000 there.

Speaker 2

So it could be varied the relationship between cost of risk and release of those provisions if that were to occur some point in time in the future. And the effective tax rate is with inflation of around 3%, the effective tax rate should be around 23% for Banco G.

Speaker 6

G. Okay, excellent. Thank you

Speaker 2

very much, Paolo. You're welcome.

Operator

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

Speaker 2

Thank you for listening and we look forward to having our next conference call with you. Bye.

Operator

Thank you very much. We will now be closing all the lines. Thank you very much and goodbye.

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Earnings Conference Call
Banco de Chile Q3 2023
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