Banco De Chile Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2024

Key Takeaways

  • Our bank delivered net income of COP 288bn with a ROAE of 21.3% in Q3, outpacing peers in NIM, fees, and operating margins.
  • Loans grew 3.9% YoY, exceeding the industry’s 1.7% growth, with market share gains across consumer, mortgage, and commercial segments.
  • Efficiency remained strong with a cost-to-income ratio of 36.5% YTD, outperforming peers and our long-term target.
  • Asset quality held up with NPLs at 1.5%, a coverage ratio of 2.6×, and expected credit losses easing to 0.84% in Q3, supported by MXN 700bn of additional provisions.
  • The macro outlook shows 2.3% GDP growth, inflation raised to 4.5%, and ongoing risks from subdued investment and global uncertainties.
AI Generated. May Contain Errors.
Earnings Conference Call
Banco De Chile Q3 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good afternoon, and welcome to Banco de Chile's 3rd Quarter 2024 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 Arena, 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 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 pass the call over to Mr. Rodrigo Aravena.

Operator

Please go ahead, sir.

Speaker 1

Good afternoon, everyone. Thanks for joining this conference call today. We are pleased to present the performance of Banco de Chile during the Q3 of this year. Once again, our bank demonstrated its unquestionable leadership and consistency over the time. Some of the main achievements of this period include, we continue leading the industry in profitability after posting a net income of COP 288,000,000,000 equivalent to 21.3 percent return on average equity in the quarter and 22.8% year to date.

Speaker 1

We also outperformed our peers in terms of NIM, fees and operating margins. In addition, our customer income continues to grow on an annual basis, primarily a stir by income from loans on the ground of improved lending spread. Despite the low industry business growth environment, we grew faster than the market in loans, gaining market share in all the segments in line with our main long term strategic goals. We also had positive advances on efficiency posting a cost to income ratio of 36.5 percent year to date, outperforming our main peers and our long term target. On the non financial side, we were distinguished by external entities due to our excellent service quality and corporate reputation and also we also continue carrying out several initiatives aligned with our 3 pillars, which will be presented later in this presentation.

Speaker 1

As usual, we will begin this webcast with a brief analysis of the macro environment. Please go to Slide 3. The Chilean economy continues posting signs of recovery and you can see the chart on the left of this slide. In the Q2, the GDP increased by 1.6% year on year following the 2.5% year on year expansion seen in the previous quarter. It's important to mention that in 2023, the economy grew only 0.2% as a consequence of the normalization after the several imbalance that we had during the pandemic.

Speaker 1

The local recovery has mostly been attributable to the greater contribution in net exports as the chart on the top right displays. As of June 2024, the trade balance posted in the last 12 months a surplus of $17,000,000,000 a figure 43% higher when compared to the balance seen a year ago. This trend continued in the 3rd quarter as the last 12 months trade balance surplus improved even more to $20,000,000,000 increasing 31% year on year. In a breakdown of domestic demand, consumption continues showing a slight recovery. In the Q2, it expanded by 0.8% year on year after posting 1.5% growth in the previous 3 months.

Speaker 1

This trend has been consistent with the behavior seen in the labor market where the unemployment rate has been hovering around 8.7% with higher real wages as you can see in the chart on the bottom right. Nevertheless, gross investment remains subdued as it has contracted by 6.1% and 4.1% year on year in the Q1 and Q2 2024 respectively. Available information from the Q3 suggests that the recovery is underway. The GDP expanded by 2.2% year on year and 2.1% year to date. However, the breakdown from the domestic demand still reflects mixed trends, while several consumption related figures such as retail sales and services continue improving.

Speaker 1

The main investment indicators, for example, capital goods imports and real estate indicators continue suggesting a weak investment at least in the short term. I'd like to move to our analysis of prices and rates. Please go to Slide number 4. The headline inflation rate in Chile continues hovering around the upper bound of the Central Bank target as seen on the left chart. The annual inflation rate September was 4.1% in line with the 4.2% year on year posted in June.

Speaker 1

The persistence of the CBI has mostly been attributable to energy, which increased by 9.6% year on year in September due to the adjustment in electricity bills, which according to the Central Bank estimates could rise the CPI by 150 basis points between mid-twenty 24 mid-twenty 25. Services have also contributed to higher inflation as they rose by 4.9% year on year in September. On a sequential basis, the CPI increased by 1.1% in the 3rd quarter after rising by 0.7% in the previous quarter. The downward trend in inflation has allowed the Central Bank to continue reducing the interest rate. In latest monetary policy meeting held in October, the Board decided to cut the interest rate by 25 basis points to 5.25 percent, accumulating a total reduction of 600 basis points since the beginning of the current easing cycle in July of 2023 as seen in the chart on the other right.

Speaker 1

Chile has been one of the countries with the most aggressive reduction in the interest rate during the last year. In fact, the spread with the upper bound of the Fed funds in the United States has narrowed from 5.75 basis points 1 year ago to only 25 basis points today. This situation has driven a weakening in the Chilean peso in multilateral terms as can be seen in the chart on the bottom right. Now I'd like to present our baseline scenario for this year. Please go to the next slide number 5.

Speaker 1

We expect the economy to continue posting signs of recovery. In this environment, we foresee an increase in GDP growth from 0.2% in 2023 to 2.3% this year. This expansion will be driven by an increase of around 6% in export that should positively be influenced by external factors such as copper prices and the improved dynamism of our trade partners. Consumption is also expected to perform better relative to 2023. As a consequence of lower interest rate and the partial recovery in the employment.

Speaker 1

On the opposite, we expect investment to continue in negative territory this year as uncertainties surrounding the track of reforms in diverse economic fields has continued to drive and delay investment decision, which has coupled with lengthy approval processes in the case of large scale projects. Inflation expectations have increased this year, mainly due to the unexpected rise in energy bills, as I mentioned earlier in this presentation. Due to this, we expect the CPI to post a 4.5% increase this year in an environment where the Central Bank will likely maintain a contractionary monetary policy stance since the interest rate would end the year at 5%. In the table of this slide, you can the summary of our estimates, while the chart on the right clearly shows the upward trend in consensus forecast for both interest rate and inflation. It is worth mentioning that these forecasts are subject to several risks.

Speaker 1

As we mentioned in previous call, the evolution of the global environment is extremely important for Chile given its deep integration into the rest of the world. Factors such as the GDP growth of China and the U. S. And the potential escalation of armed conflict in the Middle East and Eastern Europe and uncertainty related to the change of government in the United States are worth to paying attention to. On the local side, it's important to analyze the evolution of inflation, especially considering potential second run effects after the rise in electricity bills, as well as the leading indicators of gross investment, since it is the main concern on local growth.

Speaker 1

Finally, monitoring the discussion in the political agenda is also relevant considering there are discussions related to pensions and taxes in an environment marked by several elections. Before moving to the bank, I'd like to refer to some trends in the banking sector briefly. Please go to Slide number 6. The banking industry profitability remains strong even though we are in a slow economic environment. As you can see in the chart on the top left, return on average equity reached 15.8% this quarter, above the 12.7% posted the same period last year.

Speaker 1

This rise was due to greater operating income and lower cost of risk related to the release of additional provisions as well as greater recoveries of loan write offs. This was partially offset by a rise in operating expenses related to personnel and administrative expenses. In terms of volumes, as you can see in the chart on the right, the weak economic environment has maintained loan growth at low levels for the industry, expanding only 2% year on year. Of this, mortgage have been the main driver of growth, up 6.7% year on year and consumer loans have increased 3% in the same period. However, commercial loans are taking a hit, dropping 1.2% year on year.

Speaker 1

This has resulted in a change of mix in the portfolio, as you can see on the chart on the bottom left, where today mortgage represents 56% of total loans up from 54% 1 year ago. Commercial loans have dropped from representing 54% to 52% of the total in the same period, while the consumer portfolio has remained relatively stable. Consequently, due to both the weak economy and the normalization due to the more normal levels of liquidity from customers, NPLs have consistently increased to 2.5 percent and COBRA has decreased to 1.5 times. Despite these weaker business results, we should begin to see greater activity in line with the expected improvement in GDP and the reduction of interest rates. Now I'd like to pass the call to Paolo, who will go into more detail about Banco de Chile advances and the financial performance.

Speaker 2

Thank you, Rodrigo. Let's begin by reviewing our strategic progress. Please go to Slide number 8. We are steadily achieving strong results in executing our strategy, which emphasizes customer satisfaction, efficiency and long term sustainability. This strategy is driven by 6 main priorities illustrated at the center of this slide.

Speaker 2

On the right, our mid term targets. Our primary goal is to lead as the most profitable bank among our peers. In summary, this translates into a long term return on average equity of around 18%, assuming a positively sloped yield curve in the Central Bank inflation rate the targets are met. Regarding cost to income, our performance continues to exceed our long term targets. While this is partly due to a robust top line growth that has stemmed up from both increased revenue and extraordinary effects that have temporarily remained after the pandemic, we are confident that our productivity levels will continue to improve through current and upcoming efficiency initiatives, which we'll discuss later in the presentation.

Speaker 2

For market share, our goal is to lead in commercial and consumer loans as well as demand deposits in local currency. In this regard, over the year, we have gained market share in high margin lending products such as consumer loans by maintaining an adequate risk return relationship on the grounds of responsible credit risk management practices. In addition, we have retaken the leadership in local currency demand deposits, which has been a traditional competitive advantage for us that provide us not only with a competitive funding, but also with a very stable funding source. Lastly, we remain committed to delivering exceptional customer experience and positively impacting society. This commitment is reflected in our high Net Promoter Scores and the corporate reputation that ranks among top 3 in Chile.

Speaker 2

These accomplishments are achieved by evaluations from reputable independent firms. In the next slide, we will go over some advances in digital banking, efficiency and ESG. In order to keep our leading position, we continue implementing new innovations in digital banking. This quarter, we added new functionalities in our main banking app, including notifications about benefits, transaction blocking and profile updates providing users a greater control and real time information about their accounts and transactions. We also introduced a mortgage loan credit simulator on their website to simplify the home loan process and launched a digital account with a credit card option tailored for university students.

Speaker 2

Finally, we implemented tools to enhance the digital experience for companies, ensuring that they can seamlessly manage their finances through our apps and web pages. Our constant efforts in digital banking have contributed to a substantial increase in our digital client base that grew 36% year on year, reflecting the positive impact of our strategy. Regarding efficiency and productivity, we continue the efforts to optimize our branch footprint, closing 5 locations this quarter, reducing 10% of the total network in the last 12 months. Also, the higher adoption of digital processes allowed us to reach important efficiencies in investment and commercial support functions. It's important to note that the gradual approach is a key element to ensuring that efficiency actions do not impact customer satisfaction.

Speaker 2

We have also made significant progress in transforming our retail service models, increasing technology adoption at branches. Additionally, during the quarter, support areas have streamlined layers and dependencies, enabling synergies and agility, including optimizations at subsidiaries. By executing these initiatives and leveraging IT CapEx, we are confident that we are well positioned to to help preserve to help preserve the environment. Aligned with our commitment to the entrepreneurship, we continued supporting SMEs, maintaining our market leading position in the FOGAPE Chile Polla program. We also launched the 9th edition of the Entrepreneur Challenge to encourage businesses that create positive and innovative impact on society.

Speaker 2

Finally, thanks to our dedicated team, strong reputation and best practices in talent management, we were recognized by Merco as the best bank in attracting and retaining talent for the 11th consecutive year. Please turn to Slide 11, so we can begin discussing the key highlights of our financial results for the quarter. I am pleased to report that we delivered another quarter of solid results, thus continuing our strong performance track record. Our net income reached an impressive Ps. 288,000,000,000, up 11% when compared to the same period last year.

Speaker 2

This translates into a return on average equity of 21.3 percent, a clear indicator of our efficient use of capital. Moreover, when we benchmark our results against our peers, we continue to outperform across the board. As demonstrated in the charts to the right, we have not only maintained a wide margin year to date in net income, but we have also sustained a superior return on average equity, further reinforcing our competitive advantage in the market. These metrics illustrate our ongoing leadership in the sector and the consistent execution of our strategic initiatives. Please turn to Slide 12.

Speaker 2

In terms of operating revenues, we continue posting excellent results growing 6% year on year, fueled by an 8% rise in customer income. This was partially offset by a 3% reduction in non customer income, which was mostly driven by the end of the FCIC program at the industry level that represented a low cost funding source. In turn, improved income from trading investment portfolio due to favorable shifts in interest rates allowed us to partly mitigate this impact. The annual rise in customer income is explained by an expansion in revenues from loans equal to Ps. 20,000,000,000 on an annual basis, a rise in the contribution of deposits by Ps.

Speaker 2

11,000,000,000 as well as an increase in fees by MXN13 1,000,000,000. In terms of income from loans, the consumer portfolio was a main driver of growth. Specifically, our focus on profitable growth has gradually allowed us to increase average lending spreads during the period by 13 basis points overall and 128 basis points in consumer loans, due to both the maturity of former full GAAP operations and improved consumer originations. This was further boosted by a rise of 4.3% year on year in average consumer loan volumes. And in terms of funding, we have also seen a higher contribution for deposits due to an expansion in margins from time deposits, thanks to a proactive and targeted pricing strategy, as well as a moderate increase in demand deposit volumes.

Speaker 2

Finally, the yearly rise of 10% in net fees was mainly driven by 2 business areas. First, revenues from mutual funds and investment funds, management grew by 23% year on year. This was driven by a significant expansion in assets under management that rose 37% year on year. 2nd, fees from transactional services posted an annual rise of 15%. This was primarily due to a positive effect in depreciation of Chilean peso against the dollar on their credit card loyalty program and to a lesser extent, a rise in usage rates from both credit and debit cards, thanks to campaigns and attractive benefits that incentivize customers to actively use our cards.

Speaker 2

This allowed us to reduce the impact of the effect of lower interchange fees that the industry experienced due to new regulations. Finally, fees from cash management services were also positive influence for us due to revised fares associated with commissions for interbank transfers carried out at the industry level. The charts to the right show how we perform compared to our competitors. This quarter, we continued outperforming all of our peers in the main profitability ratios. Net interest margin reached a notable 4.6% in the Q3 of 2024.

Speaker 2

Fee margins posted 1.3 percent and total operating margin also remained ahead of the pack with a level of 6.4% for the quarter. This performance is a result of our well executed business strategy and our commitment to offering an enhanced value proposition to customers across lending and non lending products and services. This has proven effective, allowing us to adapt to changing market dynamics. Please turn to Slide 13. The breakdown of our loan portfolio is strategically balanced across economic sectors, giving us stability in our revenue generating capacity.

Speaker 2

Our total retail loan portfolio represents 65% of the total loan book, while wholesale commercial loans reached 35% of the total loan portfolio. Also, as you can see on the chart on the bottom right, total commercial loans by economic sector are well diversified. The weak dynamism in the Chilean economy has affected loan growth for the industry as a whole. Lack of investment as well as low business and consumer confidence has impacted growth. As a result, we see a moderate improvement in total loan growth with an expansion of 3.9% year on year and 1.6% quarter on quarter.

Speaker 2

As you can see on the chart on the bottom left, we compare well against the figure posted by the industry of 1.7%. Most of this growth has come from the mortgage loan book and more recently from consumer lending. However, it's also noteworthy to take into consideration the recovery of the commercial loan portfolio, which 1 year ago posted a yearly contraction of minus 3%. If we go into greater detail, consumer loans have been growing 4.1% during the last 12 months, gaining 20 basis points in market share. This expansion continued to be mainly steered by growth in the credit card loans, up 7% when compared to September 2023.

Speaker 2

To a lesser degree, installment loans grew 2% on an annual basis. The good news, however, is that originations of installment loans have grown 9% year on year as of September 2024. Based on value offerings, we have continued to personalize in order to meet customers' needs through their life cycle, as well as lower the disposable income among individuals when compared to last year. On the other hand, notwithstanding the robust year on year growth, credit card loans have seamlessly reached a plateau of around Ps. 1,800,000,000,000, which is reasonable after a nonrecurrent, very strong rise between 20 21 and 2023 when this product grew about 60%, in line with trends of non cash payments.

Speaker 2

As for residential mortgage loans, these grew 7.4% year on year in the Q3. Even though it's important to note that a large part of this growth is due to inflation, as these loans are primarily denominated in UF, Winidad Defimento, and inflation index currency in real terms, mortgage loans managed to grow around 3%. The weaker growth of this product for us and the industry compared to the past decade is due to the low demand from customers that is mainly explained by the increase in both home prices and the prevailing scenario of high long term interest rates. This together with lower levels of liquidity among individuals has reduced the universe of target segments with appropriate risk return equation across the board. Commercial loans are dragging down growth, posting a rise of only 1.8% year on year.

Speaker 2

Nevertheless, this is significantly higher than the figure of minus 1.2% that was posted by the industry. Both business activities from the SME and the Wholesale Banking segments have remained subdued, growing below historical levels. Although our commercial loan balances have, to some degree, been positively affected by the Chilean peso depreciation, specifically the Wholesale Banking segment, We are also evidencing that SME Banking, which have certain scheduled maturities of FOGAPA related loans, is actually growing steadily in non FOGAPA loans on a year on year basis. Likewise, our Corporate Banking unit has completed 2 quarters in a row with positive annual growth, which on top of the exchange rate effect has been possible on the grounds of specific lending operations in the concessions and the infrastructure industries as well as improved value offering for trade finance and factoring loans. All these trends in Wholesale Banking have allowed us to partially offset the lower dynamism in the real estate and construction sector.

Speaker 2

For the rest of 2024 2025, we expect loan growth to gain momentum, mainly in consumer and commercial loans. This trend should be driven by both lower cost of borrowing due to an environment of easing policy undertaken by the Central Bank and better perspectives for the local economy in terms of household consumption and private investment. In this environment, we expect to grow faster than the industry during the rest of 2024 2025. Let's move to Slide 14 to review the structure of our balance sheet. As shown on this slide, we are shifting back to pre pandemic balance sheet composition.

Speaker 2

On the asset side, government backed low interest loans extended to SMEs during the pandemic have mostly matured. Also, the ratio of total loans to total assets has returned to levels above 70%, in line with the reduction of financial securities that were used to fully repay the Central Bank FCIC funding in April July of this year. The reduction in the FCIC becomes clear in the item Financial Institutions and Central Bank in the chart on the top left. In the table on the bottom left, you'll notice that despite repaying the Central Bank debt primarily with financial instruments, our liquidity stands at very strong levels and well above regulatory requirements. As of September 2024, our liquidity coverage ratio reached 201%, surpassing the regulatory minimum by 101 basis points, while our net stable funding ratio stood at 121%, exceeding the required level by 41 basis points.

Speaker 2

It's also worth discussing the evolution of our deposits, which as mentioned in prior calls, remain as a primary funding source by representing 52% of total assets. As shown in the chart on the top right and in the table in the middle of the slide, demand deposits have returned to their pre pandemic levels by currently representing 47.5% of total deposits and 35% of total loans, both in line with our historic average. We've also recently begun to see a slight decrease in the portion of time deposits as a percentage of both total deposits and total loans, which is consistent with our experience in the past as well. Normally inflows and outflows of time deposits follow the overnight rate and inflation. Consequently, the substantial decrease experienced by the overnight rate over the last year has led deposits to seek higher returns elsewhere, such as mutual funds, where we have seen a significant rise in AUM that has benefited our fee income.

Speaker 2

Finally, on the bottom right, we can see the progression of our UF GAAP relative to inflation. This position reflects our proactive management of assets and liability mismatches, but primarily a strategic UF position that protects the real value of shareholders' equity. Through careful management, we've been able to capitalize on fluctuations in the inflation effectively over the last years. Currently, our position amounts to MXN8.5 trillion, indicating that as of September 2024, our sensitivity to a 1% change in inflation is approximately Ps. 85,000,000,000.

Speaker 2

Please turn to Slide 15. We remain a leader in capitalization among our peers. As illustrated in the chart on the top left, our CET1 ratio reached 14.3% in September 2024. This has consistently outperformed all of our peers. A similar situation occurs when we compare total capital adequacy ratio as shown on the chart on the bottom left.

Speaker 2

These levels position us positively for the last stages of the Basel III implementation. It should be also noted that the CMS has proposed modifications to the current Basel III regulations in Chile, with particular emphasis on changes related to the capital requirements regarding Pillar II risks, but particularly associated with interest rate risk in the banking book and the definition of outlier banks. The proposed ruling is available for public comment until November 8. Please turn to the next Slide 16. Expected credit losses reached Ps.

Speaker 2

80,000,000,000 in the 3rd quarter, up 32% from a year earlier as the Q3 2023 was a low comparison base. Nevertheless, this is the 4th consecutive quarter of lower levels of cost of risk. This evolution reflects our prudent risk management approach that seeks an adequate level of risk and return. Through this approach, despite the less of a dynamic economy, we have been able to control an even lower expected credit losses, posting a 0.84% for the Q3. As of September 2024, our total NPLs reached 1.5%, remaining relatively stable when compared to prior quarters as illustrated on the top right chart.

Speaker 2

Our delinquency in consumer loans has returned to pre pandemic levels of 1.9% as shown in the chart on the bottom right. We have also observed a slight uptick in NPLs for both commercial and mortgage loans during this period, which aligns with broader industry trends and the weaker economy. However, we anticipate that with the gradual economic improvement that is expected, NPLs should stabilize and potentially begin to show improvements at some point in the coming quarters. As shown on the chart on the bottom left, we hold the highest quality loan portfolio and lead the industry with a coverage ratio of 2.6 times, supported by additional provisions totaling MXN700 1,000,000,000 as of September 2024. This is substantially above all of our peers.

Speaker 2

This strong position enables us to effectively manage potential risk deterioration or face regulatory changes in risk provisioning models, such as the CMF new standard model for consumer loan provisioning, which will go into effect in January 2025. As reported earlier this year, we plan to utilize a portion of our additional provisions to deal with the impact of this model. We estimate that the implementation of this new regulation will cost around 60,000,000,000 vessels. Please turn to slide number 17. Regarding operating expenses, this quarter, they totaled MXN273 1,000,000,000, reflecting a year on year increase of only 1.3%.

Speaker 2

This rise was mainly due to inflation, which grew 4.7% in the last 12 months, affecting most expense items. In turn, this reflects our firm cost control policies for the rest of the line items, which posted real contractions over the last 12 months. As shown in the chart on the top right, the slight growth was mainly driven by higher personnel expenses, resulting from inflation adjustments and changes introduced in the collective agreements by the end of 2023. This rise was partially offset by a reduction in headcount achieved through our ongoing efficiency and productivity initiatives as well as the development of digital banking commented a few minutes ago in this call. Furthermore, depreciation and amortization expenses increased due to the amortization of software licenses, while admin expenses remained almost flat.

Speaker 2

The latter is mainly explained by a rise in IT related costs due to enhancements in digital infrastructure, partially offset by a reduction in marketing expenses. In terms of efficiency, we reached a ratio of 36.5% year to date below our peers as shown on the chart on the bottom of the slide. We are confident that the progress we have made will help us ensure that our long term efficiency levels continue to be below 42% once non customer income stabilizes. Please turn to Slide 18. Before opening the floor for questions, I'd like to highlight a few key points from this presentation.

Speaker 2

First, expectations for GDP and the overnight rate in 2024 have decreased to 2.3% and 5% respectively, while the inflation forecast has increased to 4.5% due to the significant impact of the rise in energy prices in Chile. Considering these economic factors, we are confident that our consistent long term strategy and strong risk culture will continue to allow us to lead the industry in all major profitability and asset quality indicators. We also believe that we should be able to post the highest sustainable long term return on average equity of around 18%, which could even be higher if market factors such as inflation and the overnight rate remain above historical levels. Finally, we are in a unique position in which we consistently outpace our peers in profitability and net income with lower risk as you can see on the chart on the left. Thanks for taking the time to listen to our presentation.

Speaker 2

If you have any questions, we'd be glad to answer them.

Operator

Thank you very much for the presentation. We'll now be moving to the Q and A part of the call. 1st question comes from Mr. Tito Labarga from Goldman Sachs. Please go ahead sir.

Operator

Your line is open.

Speaker 3

Hi, good morning Rodrigo and Pablo. Thanks for the call for taking my question. My question is on your capital ratio. You show you're above 14%. You showed the implementation of Basel III.

Speaker 3

You're well above that. Profitability remains above expectations. How do you think about that capital ratio? Is there room for additional dividend payments? And just given how well capitalized you are?

Speaker 3

Thank you.

Operator

Pablo, we don't hear you. If you can just please unmute yourself if you're muted.

Speaker 2

Sorry, the speaker malfunction. So thanks for your question, Tito, regarding capital. So we're well capitalized as you mentioned and we've been maintaining a good level of buffer between the current regulations. There's still some uncertainties in terms of Pillar 2, which is coming into effect and there's changes in that regard. So there's some uncertainties in terms for the future on where the levels of capital could be and the requirements for the banking industry in Chile.

Speaker 2

Currently, there's been moves towards higher capital requirements, such as different buffers in Chile increasing and also these discussions on Pollo II. So we're comfortable with the level that we have today. We can't rule out changes in the future in terms of our growth of how much capital we need in order to fund that growth and how much we need to use our capital efficiently like we've done in the past. We've adjusted our dividend policies that have gone from 60% of the policy of the distributable net income all the way to 100% of distributable net income. But this is something that is taken into consideration at the Board level depending on the capital needs that the bank needs in order to fund growth and to comply with regulations.

Speaker 2

So this is something that's reviewed, in particular, the payout ratio in January of each year, but we're aware that we need to use the capital efficiency for the future. So this is something that the Board takes into consideration every year.

Speaker 3

Okay. Thanks, Pablo. So there's no level of capital that you think is where the bank would like to be? I don't know if it's the 12% or how do you think in terms of what the right capital ratio should be? Any thoughts on that?

Speaker 2

I'll pass the call to Daniel Galarte, but I think one of the important things I didn't mention is the Pillar 2 offer is still being discussed and Danny will be able to give you more information with regards to that and the capital requirements that we could use.

Speaker 4

Hi, this is Daniel D'Alarcin. In general, I would say that in the long run, basically, we want to flow above regulatory limits and all of our internal limits as well around 2%, 2.5% in the long, long run. Today, we have some internal buffers, internal a positive gap in terms of capital ratio. And as Pablo said, there are still some room in terms of the implementation of Basel III. So we are not expecting anything particular regarding the new regulation.

Speaker 4

However, we want to hold this kind of buffer above the regulatory limits in order to be prepared for coming or potential requirements. Okay.

Speaker 3

Thank you.

Speaker 2

Okay. Thanks.

Operator

Perfect. Thank you very much. We'll be moving on to the next question. Our next question comes from Ms. Neha Agarwala from HSBC Global Research.

Operator

Please go ahead. Your line is open.

Speaker 5

Thank you for taking

Speaker 1

my question. Just quickly on the

Speaker 5

loan growth expectations for the coming Just quickly on the loan growth expectations for the coming quarters and for the next year. What kind of loan growth should we expect? Any sort of soft guidance? And which segments do you expect to outperform and underperform? And also in terms of the profitability, what kind of ARR should we expect for next year and the trend over the quarter?

Speaker 5

Thank you so much.

Speaker 1

Hi, Neha. Thank you very much for your question. Even though we don't have official guidance yet because we are discussing the guidance for the next year, It's reasonable to anticipate some trends for the next year. I think that the key word to keep in mind is normalization. The economy, during the next year, is going to have a normalization in terms of economic growth.

Speaker 1

In fact, we are expecting an economic growth of 2%, which is in line with the potential growth. And also in terms of inflation, in fact, this morning, we knew that inflation the monthly inflation rate was 1%, well above the number expected by the market. So we can rule out that in this year, the CPI will end the year above the 4.5 percent that we are expecting now. But while for 2025, it's reasonable to stay at an inflation rate of around 3.5%, which of course, it should have an impact in terms of over the recent revenues, ROE, etcetera. So having that environment marked by slight reduction in in economic growth, lower inflation rate.

Speaker 1

The Central Bank will likely continue reducing the interest rate. Today, the rate is at 5.25 percent for the next year. We expect an interest rate of around 4.25%, 2 point 5%, something like that. So all this factors are expected to are expected to have an impact on the growth of the next year. But on the other hand, it's reasonable as well to stay higher dynamics in terms of loans after the very weak performance that the overall loan activity has during this year.

Speaker 1

So even though today we don't have a specific guidance for the next year, it's reasonable to state a convergence toward a more sustainable level of ROE for the next year.

Speaker 2

Yes. I think it's important to take into consideration that the ROE is influenced by many factors in the normalization in terms of interest rates, inflation, repricing of different assets and liabilities will be affecting our balance sheet structure and the bottom line. So in the medium term or the long term, as we've mentioned in the past, 18% is what we think is reasonable. We think also is reasonable or part of our targets is to be the most profitable bank in the industry. So that's something very important to take into consideration.

Speaker 2

And there's some things that should be taken into consideration as well as where the final level of interest rates and where inflation will hover in the long term, which will also affect those numbers and could influence those either way up or down.

Speaker 1

So let me just reinforce one key idea. It's very important to keep in mind that important changes or deviation in terms of ROE profitability next year will be attributable to the evolution of macro drivers, macro factors rather than some specific changes in terms of the bank. So that's why for the next year, it's very important to pay special attention to perspective for inflation, economic growth, loan growth. I mean, market factors are much more important and relevant today than ever. These are the main sources of uncertainty rather than specificity after we got into the bank.

Speaker 5

If I can squeeze another one. In terms of digital offerings, you show very good uptake, good transaction levels with your clients. Are there any parts of your digital franchise where you think there are gaps versus your peers? And what would be any key area of focus, if any, for 2025 in that regard? Thank you so much.

Speaker 2

I think all banks in Chile have been working very diligently and improving the digital offerings and accelerating digital growth in Chile having and especially at Banco de Chile, we've been continually improving our customer experience from the branch level, from interactions in face, personal interactions and especially online products. So as we mentioned in the call and as we continually are doing, we're always enhancing all of our digital offerings and services that we provide customers. So today, we're proud to mention that we had a very strong growth in our digital accounts. We have almost $2,000,000 which is very good $1,800,000 And we continually are improving, implementing new changes to enhance those features. So I think the banking industry in Chile is very well prepared for all these new challenges with new entrance players into the market and especially at Pampa and Chile, we've been accelerating all of our digital offerings and making sure that the customer experience in these products are doing very well.

Speaker 2

So we think that we're quite advanced in this area.

Operator

Next question comes from Mr. Yuri Fernandes from JPMorgan. Please go ahead.

Speaker 6

Hi, guys. Good morning, good afternoon. Just some color on loan growth for 2020, 2025. I remember in the previous call you mentioned that politics could be affecting some wholesale demand. I know you still have elections next year for President, but at least the regional elections, I guess, it's a little bit more clear now.

Speaker 6

So just asking if you want, you are seeing an uptick in volumes? And 2, if you can provide any color on the outlook for the next year for loan growth? Thank you.

Speaker 3

Hi,

Speaker 1

Yuri. Thank you very much for the question. This is Rodrigo Yes, our forecast for loan growth for the industry for the next year is around 5% in

Speaker 2

nominal terms.

Speaker 1

There are different aspects to consider in that forecast. First of all, we're expecting a normalization from the current level of activity towards more sustainable elasticity with the loans in GBV. In the past, we used to see a loan growth of around 2x the growth of GBV. Today, we're seeing that given the pace of development of Chile, the banking penetration in the economy, etcetera. So we think that it's more reasonable to stay electricity or multiplier around 1.5x in the very long term.

Speaker 1

For the next year, we're expecting a normalization with positive growth in different segments in real terms and with when we consider the inflation cessation for the next year, which is 3% 5%, given that number is way too much to stay at non annual growth of around 5% and relate that for the next year. Looking forward, we have different forces. As you mentioned, policy will be an important priority to monitor. The election still 2 weeks ago showed an important shift in the support of different political coalition in the country. When we compare to the election scale 2 years ago, there was a greater support to parties from the center rights and rights coalition with a major important change in terms of the political support to the country.

Speaker 1

Historically, the municipality elections have been a very important leading indicator to the conference election. It's important to remember that next year, in Chile, there will be election for president the time period for the Senate and the half of the lower half as well. So given the results of the municipal election, it's reasonable to expect some shifts in terms of the composition of the government for the next year. Nevertheless, we have to remember as well that Chile is a very open economy. In fact, Chile is the most integrated country into the rest of the world.

Speaker 1

So that's why the evolution of the global economy, especially considering the perspective for China, United States, corporate price and long term interest rate, especially in the United States as well, are very important. Today, there is a consensus in terms that the probability to have higher interest rate overseas in the next year. That probability is increasing. We could reduce the external contribution from our main requirement for the country, which could reduce the engine of growth for the country. So we are we can pull out for the next year on the local environment.

Speaker 1

We can pull out a potential improvement in business confidence next year in the future, but we have to be especially in Q1 with perspective for the global economy, even the openness of the Chilean economy. All in all, we expect a normalization of results in 2025 with greater dynamism in activity in loans, but at the same time, a lower contribution from inflation and interest rates.

Speaker 6

No, super clear, Rodrigo. If I may, just a follow-up on this lower contribution for inflation.

Speaker 4

Can you tell us like

Speaker 6

a bookcase for inflation also, like higher global tariffs, like a stronger dollar? And then I don't know, maybe installations more resilient than we think and you make more money on the U. S. Gap?

Operator

Well, in terms of

Speaker 1

inflation today, we're of the upside risk for inflation, considering some sticky prices and persistence of inflation in Chile. We have several prices denominated in U. S. So that's why in the case of our country, the fast inflation is important in terms of inflation expectations. We'll have to pay special attention to the evolution of the 10 way.

Speaker 1

We'll have to remember that the pass through wells, which has been Chile, it is in 10% to 15%, which means that 10% of weakening of Chilean peso could drive inflation of around 100 basis points. That hundreds of that it's not very likely that the inflation next year will be higher compared to the inflation that we have now. It's very likely that inflation by the end of this year will be a number, considering the number that was released this morning. It's likely that inflation rate this year will be 4.6% or 4.7%. But also considering the upside risk inflation for the next year, it's not likely that inflation 2025 will be higher compared to inflation that we're going to have this year.

Speaker 1

We're aware of the asset risk, but even considering these potential factors, we still continue expecting an inflation rate next year lower compared to the prices in 2034.

Operator

Our next question comes from Mr. Andres So to from Santander. Please go ahead.

Speaker 7

Good morning, Rodrigo, Pablo. Thank you for the presentation. My question is regarding your coverage level. You have 2 62% NPL coverage. This is not only significantly above your peers, but also above your own historical levels.

Speaker 7

What do you see as a normalized coverage level given that some of the negative events that you were expecting to happen actually didn't materialize and you are sharing now a kind of more optimistic outlook for the economy?

Speaker 2

Yes. So today we have a very good level of coverage as you mentioned, higher than we've had in the past. In the past, this level has hovered well below this figure, closer to 200, slightly below that. And the result maybe to mention a little bit for everyone, the result of these additional provisions was the permanent implementation of our prudent policies in order to take into consideration what was happening over the last 4 or 5 years. So because of different events, different inconsistencies in terms of the historically low levels of non performing loans that occurred during the pandemic, the uncertainty generated by the recession in Chile, as well as the institutional and political uncertainty in Chile began increasing the levels of coverage through the use of additional provisions, which is something at the Board level have to implement or they implement.

Speaker 2

So taking all these into consideration, we can't roll out that the level that we have today based on these uncertainties is less than it was before. And this could result in a release of a portion of these additional provisions in the future, but the triggers of these timing haven't been defined. So it's important to take into consideration we have to still look cautiously at what's occurring. In Chile, we don't have the triggers yet defined on when or how these would be released. But it's something that it's taken into consideration at the Board level when evaluating the levels of additional provisions or coverage that we have in the bank to cover the risks that we are assuming in

Speaker 1

Q2.

Speaker 7

Thank you, Paolo. And when you look at that possibility of releasing some of those provisions, will you imagine that being in a gradual process and therefore we shall assume Banco de Chile to deliver very low levels of cost of risk over the next few years Or will be that sort

Speaker 2

of a

Speaker 7

one off process and at some point we can expect an extraordinary dividend to be paid out of that?

Speaker 2

As I mentioned, the triggers and the definition on how this would evolve and when and what would have to occur hasn't been discussed and implemented. So it's something that the Board level is evaluating and taking into consideration for the future.

Speaker 7

Understood. And talking about asset quality and cost of risk, do you believe that for the system as a whole, we are reaching an inflection point and we should see finally improvement? Or what are the trends that you are forecasting for asset quality for the system? I know that you guys have a good very good level, but for the system as a whole, what will be the trigger for us quality to improve?

Speaker 2

I think there's many challenges that Chile is facing and at certain points, things are getting better. The levels of inflation today is obviously a negative factor because if we look at different times in the history when inflation has been higher around 2007 period during the pandemic, It's a special case, but normally with higher inflation, this affects the purchasing power of individuals and this can affect the economy and the payment behavior. So it's something to take into consideration and see how this evolves in the future. So it's true that we've seen more of a plateauing and probably in the medium term as the economy improves and we return back to normal, we should see an improvement. But there's uncertainties based on the level of inflation today and how this will continue in the future affecting households.

Speaker 7

Got it. Thank you, Paolo.

Speaker 2

Thank you.

Operator

Thank you very much. It looks like we have no further questions at this point. I'll be passing the line back to the management team for their concluding remarks.

Speaker 2

Thanks everyone for joining the call and we look forward to speaking with you for our year end results.

Operator

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

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