Banco de Chile (NYSE:BCH) Q4 2024 Earnings Call Transcript

Banco de Chile (NYSE:BCH) Q4 2024 Earnings Call Transcript February 13, 2025

Operator: Good afternoon, everyone, and welcome to Banco de Chile’s Fourth Quarter 2024 Results Conference Call. If you need a copy of the management financial review, it is available on the company’s website. With us today, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer; Mr. Pablo Mejia, Head of Investor Relations; and Daniel Galarce, Head of Financial Controller Capital. 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 turn the call over to Mr. Rodrigo Aravena. Please go ahead, sir.

Rodrigo Aravena: Good afternoon. Thank you for attending this conference call. Today, we will present the overall performance of Banco de Chile during the fourth quarter and consequently, the full year 2024. We are proud for the overall performance of Banco de Chile in the last year. The strong financial results and significant advances in several key areas reaffirm the unquestionable leadership that our bank has had over time. As we highlight in slide number 2, in 2024 we managed to outperform our main peers in many dimensions. On the financial side, we led banking industry by posting a net income of CLP 1,207 billion equivalent to a return on average capital of 23.1%, well above the 15.8% active by the local industry. This outstanding result was explained by positive figures for margins asset quality and efficiency.

We also have important accomplishments and results in several non-financial aspects. Some of them include further advances retail banking the creation of a new subsidiary that will compete in the acquiring business, while keeping our leading position in key areas contributing to our strategy, such as service quality and motor funds. Our positive performance was recognized by several institutions as can be seen on the right of this slide. In the rest of the webcast, we will present a deep analysis of the performance of our bank during the last quarter and the full year. Before that, I’d like to share a brief analysis of the macroeconomic business environment. Please go to slide number 4. the Chilean an economic growth continues improving, as can you see in the slide on the left.

According to monthly GDP index, the economy expanded by 2.5% in 2024, after the weak 0.2 expansion posted 1 year ago. The chart shows a sequential improvement in activity during the last year when GDP growth rate went up from 2% year-on-year in the first half to 3% year-on-year in the second half, which was partially attributable to the gradual normalization in deflation and important reduction in the — of interest rate among other factors. In fact, as you can see from the chart, on the other right, faster growth has been led by the acceleration commerce, reflecting the drag improvement in domestic demand. In the fourth quarter, commerce activity according to the monthly GDP breakdown went up by 7.4% year-on-year posting the high expansion in almost three years.

Consequently, commerce expanded by 3.8% in 2024, well above the 3.5% contraction seen in 2023. Mining also had an important recovery as it grew by 7.5% year-on-year in the fourth quarter and 6.2% in the full year. Service growth has been more stable as they have already improved during previous years. The slight recovery in activity has also been seen in the labor market. In the fourth quarter, the employment rate was 8.1%, declining 40 basis points compared to the rate same one year ago, due to the 2.9% year-on-year increase in total employment, while the labor force went up by 3.5%. It is worth highlighting that employment was driven by wage workers, a category that increased by 2.7% year-on-year in the quarter. Because of these figures, the unemployment rate decreased from an average of 8.6% in 2023 to 8.5% in 2024.

Please go to Slide number 5 to analyze the evolution of price rates and the impact in the overall economy. We’ve seen a higher-than-expected persistence in the overall CPI. In December 2024, the CPI posted a 12-month increase of 4.5%, a figure that stood well above the expectations held few months ago. This situation has been a consequence of two main factors. First, the rise in electricity bills, which, according to Central Bank estimates should have a total impact of nearly 150 basis points inflation. Second, the unexpected weakness in the Chilean peso, a factor that is especially relevant for an open country at Chile, where more than half of the CB basket is composed of tradable goods. Given these trends, the Central Bank has acknowledged the existence of other risk inflation.

In this environment, the Board decided to maintain the interest rate at 5% in its last monetary policy meeting, held in January of this year. Nevertheless, it’s important to mention that the Board reduced the rate by 625 basis points between July 2023 and December of 2024, as seen in the upper right chart. Consequently, the Central Bank of Chile has been one of the most active globally in reducing reference interest rate. The Chilean peso weakened significantly in 2024, as seen in the chart on the bottom left, specifically, the exchange rate averaged CLP 944 per dollar in the full year, rising 13% when compared to 2023 and posting the weakest figure historically. Nevertheless, it’s worth mentioning, the depreciation has been explained apart from the easing cycle in local monetary policy by the strengthening in the US dollar globally, which has been reflected in the – our trend shown by the DXY line in the chart.

In this context, it’s important to be aware of the positive influence that the weaker peso has had on the external account since the trade balance reached historical surplus of $22 billion, which helped to narrow the current account deficit. I would like now to share our base and scenario for this year. Please move to next Slide number 6. We expect the economy to expand by 2% this year. This expansion will be driven by a still positive dynamism in export, which took positively influenced by the weak exchange rate and persistent high copper price. Nevertheless, we knowledge the negative bias in our GDP forecast as a consequence of several measures such as import tariffs implemented by the U.S. and other countries. We are expecting domestic demand to improve because of the slight recovery that we would see an investment, driven by better expectations and lower levels of interest rates.

After the temporary rise in inflation, we expect rather normalization this year. This forecast is based on three main factors; first, the absence of adjustment in regulated price comparable to the magnitude of electricity bills last year. Second, the expected appreciation in the Chilean peso should contribute to reduced pressures at the tradable level. Finally, the slight reduction in the GDP growth should also contribute in the margin to reduce inflationary pressures. However, these factors will not be enough to take the CPA variation back to the 3% target midpoint this year. Overall, we expect 3.8% inflate this year with another bias. In this environment, we do not expect changes in the reference interest rate, at least in the first half of this year and reduction by the end of this year towards 4.5% only if inflation expectation declined to 3% in the two years’ policy timeframe without second-run effects.

As we mentioned in previous webcast, these forecasts are subject to risk. The evolution of the global environment is extremely important for Chile given its integration into the rest of the world. In this regard, factors such as the GDP of China and U.S., geopolitical tensions, and the new measures to be implemented by the new authorities such as in the U.S., in crucial respects tariff and migration policies are factored to watch. On another side, it’s important to analyze the evolution of inflation, especially considering potential [indiscernible] effects as well as the leading indicators of gross investment since it is the main concern on loan growth. Finally, monitoring the discussion in the political agenda is also relevant. Considering this year, there will be presidential and Congress election.

Before moving to the bank, I’d like to present briefly the main trends observed in the banking industry. Please move to the next slide, number 7. Despite the slow economy, banking profitability remains strong. The return on average capital was 15.4% this quarter, slightly below the previous quarter and last year, as shown in the top left graph. This stability and profitability can be attributed to diverse factors, including efficient cost management, income diversification, market factors that have been to return to normal levels, and robust risk mitigation and strategies. Financial institutions have managed to maintain their performance despite global economic challenges, demonstrating resilience adaptability in a changing environment. Additionally, technological and digital innovation are playing a crucial role in optimizing operations, reducing costs and improving customer experience, thus positively contributing to overall financial performance.

In terms of business volumes, as illustrated by the chart on the right, the economic environment resulted in modest loan growth for the industry in 2024 with a nominal expansion rate of 4% year-on-year in total loans. Mortgage have been the primary driver of this growth by increasing 6.2% year-on-year, while consumer loans have risen by 4.6% over the same period. Instead, Commercial loans experienced a slower growth, but raising only 2.4% year-on-year year. The persistent weak growth, particularly in commercial loans, has led to a significant shift in portfolio mix when compared to pre-pandemic levels. Currently, despite in the chart on bottom left, mortgage represent 35% of total loans and increased from 29% in 2019. During the same period, commercial loans have decreased from 56% to 52%, and the consumer portfolio has declined from 15% to 12%.

Accordingly, without taking into consideration the effect of higher than normal inflation during this period and higher than neutral of a rate net interest margin would be lower than in 2019 due to portfolio rebalance all things equal. Next, Paolo will provide more details about Banco de Chile progress and financial performance.

Pablo Mejia : Thank you, Rodrigo. Let’s start with an overview of our strategic progress. Please go to Slide number 9. We are successfully executing our strategy that is focused on customer satisfaction, efficiency and sustainability. Our advances are driven by six main priorities shown at the center of the slide and on the right are our midterm targets. Our main priority in this regard to be not only the most profitable, but also the most sustainable bank among our peers. As such, we are aspiring for a long-term return on average capital of around 18%, assuming positively sloped yield curves and inflation returning to the Central Bank target. If yield curves begin to steepened, inflation remains above neutral levels in the short run, and we recover our pre-pandemic mix of loans.

This level could possibly be higher. In line with this, our cost to income performance in recent periods has consistently surpassed our long-term targets. For 2024, in particular, this has been attributable to strong top line growth resulting from increased customer revenue and temporary extraordinary effects post pandemic as well as effective cost control initiatives. We are confident that our long-term productivity levels will continue to improve through ongoing and forthcoming operating improvements, which we’ll discuss later in the presentation. In terms of market share, our aspiration is to be leading bank in commercial and consumer loans as well as demand deposits in local currency. Throughout the year, we have increased our market share in high-margin lending products, such as consumer installment loans, by maintaining an appropriate risk return balance based on responsible credit risk management practices.

Additionally, we have regained leadership in local currency demand deposits, a traditional compared with advantage that has provided us with both competitive funding and a stable source of funds. We are also dedicated in providing high-quality customer experience and contributing positively to society. The result of this is reflected in a remarkable Net Promoter Score and corporate reputation ranking where we’re positioned in second place. We have achieved this by actively investing in resources and comprehensive training programs for our employees to ensure they deliver exceptional service, continuously reviewing customer satisfaction levels making relevant adjustments to improve contact channels, processes and product offerings and actively engaging with the community in diverse areas such as volunteering, education, entrepreneurship, among others.

In the next slide number 10, we’ll cover the highlights of our advances in digital banking, efficiency and ESG. In terms of digital banking, we are pleased to report continued growth in our main digital account fund, achieving 1.7 million customers last year. We have further expanded our customer base with the introduction of new digital accounts such as Panoro and the current account for university students. We have also enhanced our main banking application by adding new features to ensure seamless experience to our customers. A key milestone was the integration of the insurance platform, which allows customers to manage their policies directly within that instead of using a separate application. For companies, we remain committed in innovation, delivering enhanced financial solutions.

In 2024, we launched many initiatives, including Pagoplassi [ph], a tool designed to simplify mass payment services for customers and streamline their financial operations. Additionally, we announced a new subsidiary focused on expanding our role in payment processing, which will be providing businesses, especially SMEs and the middle market clients with a flexible and efficient payment solution. On the efficiency and productivity front, we continued implementing diverse initiatives to position ourselves as a fast, secure and fully digital bank. As part of our optimization plan, we have digitalized our branch sales and service processes, creating a more seamless customer experience that encourages greater adoption of online channels. These enhancements have allowed us to reduce our branch network by 12% year-on-year and headcount declined 5% year-on-year, reflecting our commitment to efficiency, while providing customers with the tools and incentives to manage their banking needs digitally.

On another front, we have worked closely with our subsidiaries to generate corporate level synergies, optimizing resource allocation and space usage. Additionally, we are optimizing technology related expenses by renegotiating key contracts, consolidating IT and some back-office processes and enhancing cloud and data center infrastructure. In marketing, we have prioritized digital strategies, reducing traditional marketing costs and optimizing loyalty program expenses. Importantly, all these initiatives have been accompanied by high customer satisfaction and the outstanding organizational climate, reinforcing our strong relationship with our clients and employees. Our commitment to becoming a more efficient bank has been driven by significant advances, including expenses growing below inflation while maintaining a solid cost-to-income ratio.

While there is still room for improvement, we are confident in our ability to achieve even better long-term goals. Finally, in 2024, we remain committed to being a sustainable and responsible bank. At Banco de Chile, we recognize that entrepreneurs are a key force for the development of the country, which is why we actively support them through diverse programs. For example, we led by far of the market in financing SMEs through the FOGAPE Chile Apoya program. Additionally, we organized various contents such as the entrepreneurial challenge and women who inspire fostering innovation and inclusion in the business landscape. Last year, we also continued boosting our volunteering program, covering areas such as financial education, technical professional education, entrepreneurship, environmental care and inclusion.

And finally, for the 11th year in a row, we were named the best company for attracting and retaining talent in Chile, demonstrating our positive impact on the community and our employees. Please turn to slide 12, so we can begin discussing the key highlights of our financial results for the quarter and the full year. We have once again demonstrated our capabilities of achieving a strong quarterly and annual results despite the challenging environment, sustaining our track record of success. Our net income for the quarter reached CLP 298 billion, representing an increase of 3.5% to the previous quarter. For the full year, our results amounted to CLP 1.2 trillion with a return on average capital of 23.1%. Furthermore, when comparing our results with those of our peers, we consistently achieved the superior performance across all metrics throughout the year.

As illustrated in the accompanying charts, we not only maintained a significant year-to-date lead in net income, but also continue to deliver an exceptional return on average assets that almost doubles our closest competitor. These achievements underscore our competitive edge in the market, demonstrating our sustained leadership in the sector and the effective implementation of our strategic initiatives. Please turn to slide 13. Regarding operating revenues, we posted a 10% decline in quarter-on-quarter growth and an annual increase of 1.9% full year figures. This performance was driven by steady growth in customer income, which showed a quarterly rise of 3% and an annual increase of 9%, given the recovery in certain commercial products. Nevertheless, this was counterbalanced by a quarterly reduction of 38% and an annual decrease of 19% in non-customer income.

This decline was primarily attributable to the maturity of the FCIC program across the industry, which has provided a low-cost funding source and also the effect of lower inflation on our revenues. It’s important to note that main drivers are expanded customer income on a yearly basis were income from loans, up CLP 107 billion, higher contributions from both demand deposits and time deposits growing CLP 70 billion and fees rising CLP 26 billion in 2024 when compared to 2023. The core of our commercial strategy is long-term sustainability. This means avoiding unnecessary short term risk, and focusing on long-term growth by managing all business units responsibly. This emphasis has gradually allowed us to increase average spreads as well as to expand loan volumes in target segments and products.

Consequently, the growth in income from loans was largely due to consumer loans and to a lesser degree, residential mortgages. The consumer loan book balances and spreads grew 4.6% and 164 basis points, accounting for over 90% of the total rise in loan income. Mortgage loans also contributed significantly with an average balances increasing by 7.4% year-on-year. In contrast, commercial loans rose by only 0.6%, with SME segments growing 2.6%, while wholesale business remains flat reflecting the different dynamics affecting the banking segment. In terms of funding, we benefited from higher contribution from total deposits, driven by a 6.8% expansion in DDA average volumes, particularly over the second half of the year and improved margins on time deposits.

The expansion in time deposit contribution has primarily been the result of proactive and targeted pricing strategy, which has been deployed across all business segments. Finally, the yearly 4.8% increase in net fees was concentrated in three income streams. First, revenues from mutual and investment fund management grew by 20% year-on-year. This was driven by a significant expansion in assets under management that rose 38% year-on-year on the grounds of the launch of a new series of funds offered to our customers. Second, fees from credit and contingent loans rose 20% year-on-year. This was supported by both greater fees from layers of credit, guarantees and collaterals which is aligned with the positive trend posted by trade finance loans and the annual increase in loan prepayments, primarily attributable to greater prepayments in consumer loans and to a lesser degree, by commercial loans due to some wholesale banking operations that were repaid in advance or restructured, all in line with the reduction of the interest rates throughout the year.

Finally, cash management services and wire transfer payments orders rose CLP 11 billion due to the renegotiated interbank clearance fees and greater transactions and foreign currency payment orders requested by our customers. The charts on the right show how we perform compared to our competitors. We continued our trend of outpacing our peers and all the main profitability ratios. Net interest margin stood at 4.9% for the year, while fees margin and operating margin posted solid levels of 1.2% and 6.6%, respectively. This positive performance stems from the successful implementation of our business strategy and the dedication to providing an enhanced value proposition to customers through both the lending and non-lending products and services by leveraging both our banking capabilities and specialized services provided by subsidiaries.

Please turn to Slide 14. The breakdown of our loan portfolio is distributed across different business segments providing stability and revenue-generating capacity. Currently, our retail loan portfolio represents 65% of the total loan book, while wholesale commercial loans account for 35% of the overall loan portfolio. Additionally, as illustrated in chart on the bottom right, commercial loans are well diversified across different economic sectors. This distribution is important because during economic cycles, like the ones we have been experiencing in recent years. One sector can outperform another, helping to support our bottom line on average while avoiding results in volatility. The sluggish performance of the local activity during the last years has impacted loan growth across the industry.

A lack of private investment, coupled with low business and consumer confidence has hindered growth. Consequently, total loans grew moderately in nominal terms of 3.4% and decreased 1% in real terms. As mentioned earlier, the main drivers of this growth came from the retail segment as illustrated in the chart on the bottom left. Instead, the Wholesale Banking segment was affected by the market dynamics that led to subdued demand for loans from both corporations and SMEs. For 2025, we anticipate a reversal of this trend with commercial loans gaining momentum versus the low expansion in 2024, primarily driven by lower inflation, reduced political and economic uncertainties and lower short-term interest rates. These factors should also enhance dynamism in retail products.

As a result, we expect the industry to grow by approximately 4.5% in nominal terms with Banco de Chile outperforming this, particularly in our target segments. Please move to slide 15 to review the structure of our balance sheet. As shown on this slide, our balance sheet is returning to the structure of assets and liabilities that we had before the pandemic. On the asset side, government backed low interest loans extended to SMEs during the pandemic have predominately matured. Additionally, the ratio of total loans to total assets have returned to levels of almost 75%, consistent with the important reduction in financial securities that were utilized to fully repay the Central Bank FCIC in April and July of 2024. As shown on the chart on the top left, the effect of FCIC repayment is evident in all the asset line items associated with the fixed income securities and loans and advances to banks, which include overnight deposits in the Central Bank.

Also, on the table on the bottom left indicates despite repaying this large debt to the Central Bank, primarily with financial instruments, liquidity levels have remained strong and well above the regulatory requirements. As of December 2024, the liquidity coverage ratio was 214%, exceeding the regulatory minimum by 114 percentage points, while the net stable funding ratio was 120% surpassing the required level by 40 percentage points. It’s also worth discussing the evolution of our deposits, as shown in the chart on the top right and in table in the middle of this slide. Demand deposits have returned to pre-pandemic trend by currently representing nearly half of total deposits and 31% of total liabilities, which is slightly above our historical average and well-above the average of the industry.

On the other hand, we observed an 8% year-on-year decrease in customer time deposits well-aligned with the Chilean Central Bank rate cut from 8.25% to 5% in 2024, together with inflation rate that has remained above the Central Bank target rates, reducing the real profitability of these savings instruments. Consequently, customers are looking for investments with higher returns. This is one of the key factors behind our strong results in mutual fund management, which saw nearly 40% year-on-year growth in AUM. Before moving to the next slide, I want to share with you our US GAAP progression as shown on the bottom right, reflecting our proactive asset and liability management. Effective management over recent years has allowed us to capitalize on short-term inflation fluctuations, as well as to protect our shareholders’ equity, real value in the long run.

As of December 2024, our position is CLP9 trillion, meaning that a 1% change in inflation, generates a sensitivity and income of approximately CLP90 billion. Please turn to Slide 16. From the capital adequacy perspective, we maintain a leading position in capitalization among our peers. As depicted in the chart on the left, our CET1 ratio attained 14.4% level in December 2024, consistently exceeding that of our peers, while remaining well above the regulatory threshold. A similar trend can be seen in our total capital adequacy ratio as depicted in the chart located on the bottom left. These levels allow us to be well-prepared for both the final stages of Basel III implementation and the expected recovery in the banking business that should translate into balance sheet growth in the medium term.

Along these lines, the CMF has proposed modifications to the current Basel III regulations in Chile, focusing on changes related to capital requirements considering Pillar 2 risks, particularly associated with interest rate risk in the banking book, IRRBB and the definition of outlier banks. The proposed ruling was available for public comment until November 8th, 2024, and the final set of roles has not yet been published. However, it’s important to note that in January 2025, under the current standard, the CMF reduced our Pillar 2 charge from 0.5% to 0.13%. This reduction was possible on the grounds of the important decrease we recorded in the current long-term IRRBB metric or Delta Eva. It’s important to note that this does not account for changes proposed by the CMF regarding Pillar 2, which should be announced in the near future.

Please turn to Slide number 17. The expected credit losses reached CLP103 billion in the fourth quarter of 2024, down 19% from a year earlier. The reduction is due to higher-than-normal provision expenses in the fourth quarter of 2023 as a result of two factors. First, adjustment in provision models in December 2023 focused on personal banking and second, a temporary rise in 30-day NPLs in that period. On a yearly basis, expected credit losses posted an 8.4% increase equal to CLP31 billion. This led to a slight increase in our cost of risk ratio from a low level of 0.98% in 2023 to a still low level of 1.03% in 2024. The rise was the result of opposite forces. First, wholesale banking annual expected credit losses expanded CLP36 billion in 2024, supported by a lower-than-normal comparison base in the prior period and a deterioration in the risk profile of certain customers belonging to the real estate and transportation industries in 2024.

On the other hand, the cost of risk in the Retail Banking segment declined to CLP25 billion when compared to 2023. This decrease was mainly related to the previously mentioned revised parameters for provisioning models in 2023 together with stabilized NPLs during 2024 after a period of steady growth in 2023. As of the December 2024, our total NPLs decreased from the third quarter 2024 from 1.5% to 1.4% as illustrated in the top right chart, and we have performed exceptionally well when compared to our peers. The delinquency ratio in consumer loans has returned to the pre-pandemic levels of 1.9%, as indicated in the chart on the bottom right. We have also observed a slight uptick in mortgage loans during this period, which align with the broader industry trends and the weak economy.

NPLs for commercial loans have decreased 1.4% from the 1.5% posted a year earlier. We expect NPLs to continue stabilizing and to begin to show signs of improvement as the economy gradually recovers in coming quarters. As shown on the chart on the bottom left, our loan portfolio has the highest quality with a coverage ratio of 265%, supported by additional provisions totaling CLP 700 billion as of December 2024, which are by far above that of our peers. This position allows us to manage potential risk deterioration or face regulatory changes in risk provisioning models such as the new CMF standard model for consumer loan provisioning, which took effect in January 2025 and resulted in a one-time impact of CLP 69 billion. As we report in 2024, we used our additional provisions to address the impact of this model.

Please turn to Slide 18. Regarding operating expenses, our cost base totaled CLP 303 billion in the fourth quarter of 2024, down 4.9% from the level posted in the fourth quarter of 2023. The reduction was a result of strict cost control measures implemented throughout 2024, which coupled with a high comparison base, in the fourth quarter of 2023 due to onetime expenses incurred due to the renegotiation of collective bargaining agreements with our staff. This was partially offset by an annual increase in severance payments in the fourth quarter of 2024 related to organizational restructuring. On a yearly basis, operating expenses amounted to CLP 1.2 trillion in 2024, which is only 1.5% above the figure posted in 2023 and well below inflation of the period of 4.4%.

The slight nominal growth was mainly driven by higher admin and other expenses, as shown on the chart at the top right. This was mainly the result of IT-related costs related to updates of software licenses, support services and cloud usage expenses that stems from internal developments aimed at supporting our digital channels. This was also partially mitigated by a CLP 5.7 billion reduction in advertising and marketing expenses, along with various other cost items compared to the previous year. which aligned with our cost control initiatives that pursuit to improve productivity across all operational administrative processes. In terms of efficiency, we recorded a ratio of 39% for the quarter and 37% for the year, better than our peers, as shown on the chart on bottom of this slide.

We are confident that the progress we have made in efficiency and productivity will help us ensure that our long-term efficiency levels continue to be below 42% in the long term and around 40% in 2025. Please turn to Slide 19. Before moving on to questions, I want to highlight key points from this presentation. We expect a 2% GDP growth in 2025 with a recovery in the domestic demand. Inflation and interest rates are expected to remain above their long-term levels. Given the economic factors, we are confident that our long-term strategy and our strong risk culture will keep us leading in profitability and asset quality. We aim for a sustainable long-term return on average capital of around 18%, potentially higher if market conditions like inflation and overnight rates stay high.

We hold the strongest capital base among peers, which makes us well equipped to seize emerging business opportunities and drive future growth. Finally, we continue to consistently outperform our peers in profitability and net income with lower levels of risk, as shown in the chart to left. Thank you for listening. We’re happy to answer any questions you may have.

Q&A Session

Operator: Thank you very much for the presentation. We’ll now be moving to the Q&A part of the call. [Operator Instructions] Our first question comes from Mr. Ernesto Gabilondo from Bank of America. Please go ahead sir. Your line is open. Hi, Ernesto just in case your line — just in case you are muted, please note that your line is open now.

Ernesto Gabilondo: Can you hear me now?

Operator: Yes, we can hear you now. Please go ahead.

Ernesto Gabilondo: Sorry. Thank you. Hi, good morning, Rodrigo, Pablo and Daniel. Thanks for the opportunity to ask questions. My first question will be on the political side. Chile has interim elections last year I believe, presidential polls are pointing for center-right candidates. So whom does management believe could be the leading potential candidates. I’m seeing Matthew, Kaiser or Bachelet. Can you give us some color on the background of these candidates? And what are the chances of having them in the last round? And considering this scenario, how should we think about Congress? Should it be with majority divided? What should be your best case scenario? And what do you think are the two key reforms that Chile needs to return to its growth potential?

So that that will be my first question. And for my second question is on your non-interest income growth expectations for this year given that fees could experience another cap on the merchandise discount rate, how should we think for the non-interest income growth in 2025? Thank you.

Pablo Mejia: Thank you, Ernesto. Rodrigo, we’ll go ahead. This is Pablo Mejia here with the first part of your question.

Rodrigo Aravena: Hi, Ernesto, this is Rodrigo Aravena. Thank you very much for the question. I’m going to take the question related with the political environment and the challenge that we have in Chile. First of all, I think it’s very important to mention that the elections will be held by November of this year. However, we don’t have final candidate yet. So it’s very complicated to have a more accurate estimate in terms of the final results for coalitions with the company, et cetera. However, I think it’s very important as well to mention that that the main balance for the Chilean economy towards the future is to increase the capacity of growth. During the last year, the average growth in Chile has been around 2%, which is consistent with our potential capacity of growth according to the Central Bank and the Finance Ministry on as well.

So I think that it’s reasonable to expect a overall growth of around 2% for at least for the next two years. It is also important to be aware about several high engines from the rest of the world. Today, what we’ve seen is an important increase in geopolitical risk in different countries in the world and also more pressures for global inflation, higher interest rates, et cetera. However, it’s also worth mentioning that Chile has very strong fundamentals as to face more challenging environment. For example, Chile remains as a country with the best sovereign rating in Latin America. And also, we have a very a very strong political system based some counter weight and very strong institutions as well. That’s why we remain very confident about the ability to Chile as to be the best country in terms of the level of risk, in terms of the capacity to have a more stable growth in the future.

With respect to your question about the factors that would increase the capacity to grow in Chile. I think that when there are different casuals related to different initiatives as well with a broken census between different political parties in Chile related to, for example, to reduce the restate, the bureaucracy in the new investment project in Chile. Also important to mention that the country was able to approve a new pension reform was long term would be positive in in the case that Chile could rise the internal saving in order to provide more liquidity and business to the capital market as well. So all in all, we remain confident about both the country and the financial system into the banking system as to face the different challenges because at the end of the day, what we’ve seen is the existence of important long-term fundamentals in the country beyond the short-term political cycle.

Pablo Mejia: Okay. So in terms of fees, I think one of the things to remind everyone is that one of the key points and the drivers of fee growth for Banco de Chile is customer growth. So the proportion of fees are generated from retail customers is quite high at Banco de Chile and very stable. And customer growth is one of the key drivers. So if we look at the last years, Banco de Chile is growing in the mid-single-digit range, around 6% in current account — current accounts for retail. So that’s the main driver. So looking forward for 2025 and the future. The growth in customers should — should be the main item — line item that you be looking at to determine the growth for us. So we’re seeing a level around the mid- high single-digit range for 2025 and beyond.

And what are the drivers that we’re seeing still good growth from mutual fund management, the interest rates have come down. Customers are looking for more attractive rates in their deposits. One of the reasons why we’ve seen our deposits changing recently from time deposits and a strong growth of mutual funds. Also, current accounts and credit cards are important for this growth. You mentioned the merchant fee discount that was delayed or postponed, suspended for now. There are, as you know three reductions that were going to take place in February 2023, October 2023. And now just recently, October 2024, but that was suspended. So the rates that remain today are the ones in October 2023, which are for debit card 0.5%, credit cards 1.14% and prepaid cards at 0.94%.

So there’s no news right now on what will happen with that. So that would be one of the key factors that take into consider if something changes this year to take into account. So I think that answers your question.

Ernesto Gabilondo: Yes. Thank you very much, Origo and Pablo. Just a follow up on the political question. So you were mentioning that it will be key to reduce bureaucracy in Chile to probably have a much higher potential economic growth, but as a base case scenario, you continue to see around 2% GDP growth over the next years. And then I don’t know if you mentioned a little bit about the color on Congress. How can we expect on Congress to support these structural reforms. Could it have majority or still too soon to tell? Or do you think it could be divided given that maybe the left wing still has a lot of boats?

Rodrigo Aravena: Okay. There is a blue consensus in Chile about the main balance to increase investment in the future. In fact, when we take the breakdown, the supply potential GDP growth in Chile, we can see that the highest contribution to the potential growth in Chile has been because of the labor force than capital. But unfortunately, we haven’t had important advances in terms of the aggregate productivity. So that’s why in Chile, we’ve been discussing across different proposals in Spanish, in Chile is called Permisologia. That’s the name of the main proposal which basically aims to review different rates to improve of the mechanism, the system of different environmental licenses approvals, et cetera. So we need to build a country a new deal with political support, but there is — probably it will be discussed in the next government.

In Chile, as you mentioned, we have different coalitions, different parties. But at the same time, we can see that the acceptance of important counterweight from the Congress to the — with respect to the press event, they are the center government, it’s a positive aspects in the long-term because when you have different PPPAs, when you have different have coalitions, the main counterweight from the central government, it is positive in terms of need to build consensus and long-term view as it was the case, for example — and actually, as it’s been the case during in the last government in Chile. So, we think that we have the conditions to improve productivity in the future. This will be likely the main challenges to be addressed in the next government.

But again, we don’t have — so far, information related to the names of the final candidates to run the presidential election in the country. And also it’s not clear how will be the coalition between the left and the right party. So, we need more information. Probably in the next quarter, we are going to have more conformation. But I think that so far, given the current fundamentals, it’s reasonable to suspect a growth between 2% and 2.5%. It could be higher in the future, probably, if we improve the [indiscernible] in Chile. But it will be discussed probably in the next government.

Ernesto Gabilondo: Terrific. Thank you very much Rodrigo.

Rodrigo Aravena: You’re welcome.

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

Tito Labarta: Hi Pablo, Rodrigo, thanks for the call and taking my question. My question is on your ROE guidance of 18%. Do you expect to sort of get to your sustainable level this year? I know you expect lower inflation. But just to understand, it seems a little conservative. I mean, for us to get to that number, you’d probably have to be at the low end of your margin guidance and at the high end of your cost of risk guidance. Is that sort of how we should think about it? And I ask you mentioned your — one of your goals is to be the most profitable bank in Chile. Your main peer is guiding for ROE above 20%. And I know this difference from a capital perspective because your ROE is much higher, but you also have a much higher capital base.

So, I guess my second question related to that is you increased the payout this year above 80%. Could you continue to pay 80% or even more? I mean, as you showed, you have a very strong capital base, very strong ROE. So, what’s the right capital level given that your peers’ capital seems so much lower could you try to reduce that capital to deliver perhaps a higher ROE? Just want to understand how you think about that. Thank you.

Pablo Mejia: Hi Tito. Yes, in terms of our guidance that we’ve been giving in terms of return on average capital, it’s around the 18% level. This takes into consideration the levels of capital that we had at the end of 2024. So, you have to take into consideration at that level. We also paid out higher than whether a dividend policy or what we pay or provision in the balance sheet of 60%. So that would [Technical Difficulty] also, it’s important to take into consideration that the guidance is around and a lot of those figures around the 18% around 1.2 — to 1.0% 1.2% cost of risk. So it’s a conservative level of ROE, which has upside risks. Today, there’s discussions in terms of where the interest rates could be in Chile is inflation returning because of global market factors in terms inflation rates.

So that will all play into effect in ROE going forward. Today, with our current levels of expectations for the economy or how we close the end of the year of capital, it’s 18%. But we have to take into consideration that we paid out higher than the 60%. So that adjusts that number a little bit. Sorry. And Daniel lets take your second question on capital.

Daniel Galarce : Thank you, Pablo. Well, regarding capital, as you said, we have a very strong capital base probably the strongest among the main peers of the Chilean industry. And well, the payout this year has to do basically with the result we have seen over the last year. But also we want to be prepared for the taking of the economy in the future and in order to have enough capital to grow as well and to address the final stages of Basel III implementation. So we want to be prepared for that. And in order to do that, we need to have enough capital in order to cope with that.

Tito Labarta : Okay. But I guess in terms of — to cope with that, I mean, there’s 14% core Tier 1. Do you think — is that the right level? Is that — I mean, it still seems pretty high compared to your peers. So just to understand what do you think is that right level just to deal with potential challenges.

Daniel Galarce : We basically went to be above, of course, the regulatory limits and our internal limit as well. So in the long run, basically, we want to be flowed in 2 or 3 percentage points over the regulatory limits in order to have enough capital to grow as long as the economy continues to grow.

Tito Labarta : Okay. Great. Thanks, Daniel.

Operator: Okay, Thank you very much. Our next question comes from Mr. Yuri Fernandes from JPMorgan. Please go ahead. Sir, your line is open.

Yuri Fernandes: Hi, everybody. Congrats for another good year in 2024. I have just a follow-up on Tito’s question on your ROE. Actually, your return on capital guidance 18%. Can you repeat like what would be divested on the new capital base and a very simple calculation here? You paid 82% payouts, right? And if you assume you are retaining, I don’t know, 18% of your capital your average book — your average equity should increase a little bit, right, like on 2025 versus 2024 on average. For us to have your return on average capital coming from 23% this year to 18% if you don’t do any adjustment here, it implies a big earnings decrease. So just trying to understand if that’s right, like if we should expect an earnings decrease for you in 2025 versus 2024.

And have to hear what will drive the FC or inflation, like what is behind? Or if there something wrong in my calculation because — just with the drop from — again, from 2023 return on average capital to 18%, it seems that, that should be some early special for you. Thank you.

Pablo Mejia : Hi, Yuri. Well, you have to take into consideration as well, but our guidance is based on our expectations for the economy, which may be a little bit different from yours, growth of 2%, CPI inflation, 3.8%. Some peers have higher than those levels and an overnight rate of 4.5%. So that obviously will have an effect in terms of these market factors in terms of our bottom line. Of these levels are being discussed today in the economy, Rodrigo can maybe so over that, what’s occurring in terms of inflation and rate?

Rodrigo Aravena: Yeah. Hi. Yuri, this is Rodrigo Aravena. When we build that base scenario, we consider some part assumptions. One of them was related with the level of an rate, right? We are expecting strengthening of the Chilean peso, which, of course, it has an impact on inflation. And just to have an idea, there is a 10% depreciation of the exchange can rate the expected impact on inflation is between 120 basis points of inflation. So that’s why given the recent development during the last month, we acknowledge that our bias in the — in our forecast of CBI. In fact, if you analyze the recent evolution of the breakdown the breakdown in the financial market today, according to the financial prices, the interest rate, the breakdown, I mean, in the — in interest rates.

Markets today expects an inflation rate place higher than the 4%. And the same in terms of economic growth in the last quarter, the economy has an important surprise because there was an important acceleration in the economy. In fact, we were expecting a 2.2% growth in the last year, but the final number was 2.5%. So what I’m trying to say is that today, we’ve seen a higher-than-expected dynamism in different kit numbers, especially in domestic demand. And the same for inflation. What does this mean that we can rule out of the final average inflation for this year and the same for interest rate would be a bit higher compared to our expectations. So at the end of the day, we knowledge that the — that we would be higher than our — we acknowledge that that bias, sorry.

Pablo?

Pablo Mejia: So maybe to add, in that number, you have to take into consideration as well that last year was the end of the FCIC program from the Central Bank that provided us with a very good source of funding for the banking industry, the low cost that ended all in the first half, basically of last year, we don’t have that. Rates are lower this year than last year, inflation expectations on their budget is lower. Also, in terms of risk, we ended the year at a very good level of just over 1%. And the expectation is a range between 1% and 1.2%, which can also push that number a little bit down. But the most important thing, I think, to take into consideration that there’s some market factors which could change like Rodrigo mentioned.

But the core of the business is also growing. So you look on Slide 13, you can see how the core of the business is growing, where customer income is growing by 9%. Our net interest margins are very strong. We expect the net interest margins because if we look at where the rates were prior to the pandemic, where we see the rates after the pandemic, they should be higher, probably steeper. Maybe there’ll be a little bit more inflation to net interest margins in the medium and long-term. There’s good reasons to believe that net interest margin should be similar to what we’re guiding for this year and the medium-term. So there’s good news in that figure. And also the ROE in the long-term, our idea is to be our return on average capital, which is a level that we discussed internally to be more precise and more consistent with internal documents, but it’s around the same.

Nothing has changed in terms of our long-term view of Banco de Chile’s profitability should be around 18% or could even be higher based on market factors of inflation if rates are higher, the steeper — all these factors are very important for us, digitalization. This is all important to take into consideration the future and to have a capital that grows in line with the level of loan growth. So obviously, you can’t have capital growing forever, reaching very, very high levels. It has to be in the payout will always take this into consideration the growth of the business.

Yuri Fernandes: Clear. I guess, like bottom line is that you have some conservative assumptions here. I was asking this, Pablo, because just in the math here, 23% ROE going to 18%, it was implying, I don’t know, mid-teens earnings decrease for you. This year was at 3%. And when I look to your guidance, as you said, like loan growth above the industry margins, some pressure, but minimal pressure on margins, cost of risk a little bit higher. So I think when I look to the ROE versus the order inputs, I don’t have any impression that your earnings will decrease, I don’t know. 10%, 15% whatever, maybe even our earnings growth. So I guess, correct me if I’m wrong, maybe the guidance was a little bit more conservative on the ROE. That’s the bottom line, right, like.

Pablo Mejia: The ROE as well — or return on average capital ROE. It also takes into consideration the 60% payout. So that will rise. Also, you have to take into consideration that CIC is about 100 – CLP 90 billion, CLP 100 billion, which we don’t have anymore. The 20 basis point rise, if you take in to consideration, 20 basis point rise in cost of risk is also a level that’s very important around those levels as well, around CLP 80 billion. If you also look at the level of inflation that was projected is 4.6% versus – 4.5% versus 3.8%. So you have another there you have around CLP 50 billion or so. So there’s a lot of market factors. But the important part is that the rest of operations are growing, and as Rodrigo mentioned, there’s improvements.

And another area that’s important to mention is efficiency or our costs are relatively flat. We have efficiency ratio guidance of 40%. But, obviously, these other market factors change that will have to adjust as well. So it’s true, it’s on the conservative side as these are around these levels, around 18%. But we have to take into consideration that this is based on a 60% payout, not the 83% payout that we did, 82% or 83%.

Yuri Fernandes: No, super clear. Thank you. And I guess you have the same in 2023, I think the ROEs were also the guidance was lower than the final numbers you had. If I may, just a second one here guys on margins. It has been super resilient and you comment on mix and better loan yields, offsetting some of the pressure you see. When we go back to 2018, 2019, the Chilean banks, they had much lower margins than what you have. Should we think about this 45, 46, 47 the new normal? Or should we see lower margins going forward for you?

Pablo Mejia: So it’s important to mention that if we look at prior to the pandemic in 2010 to 2020, there is a strong mix in the loan portfolio. There is very strong growth and mortgage loans, for instance, and there was a period of globally of very low interest rates and flatter yield curves. So those pressures, continuous pressures in terms of NIMs during that period. But today, what we have is much higher NIMs, no, sorry, much higher interest rates versus prior to the pandemic and probably will stay higher than prior to the pandemic. This should probably be steeper. So that’s why we’re saying that in the medium-term, longer term, it’s reasonable to assume net interest margins in line with our guidance for this year, for the longer term as well.

So with these market factors, it’s much more attractive for the banking industry then prior to the pandemic when rates were very low, which is more challenging to be a more profitable bank. And also very important is that we’re leaders in terms of demand deposits, and this is a very good source of funding. It caused us to give a very good customer service, but our brand, the quality of our service brings customers to Banco de Chile, and we manage a very high level of demand deposits. So that also gives us a lead in terms of other banks, in terms of our net interest margins because of this low-cost – interest low-cost funding base.

Yuri Fernandes: So super clear, Pablo. Thank you. I’m not sure Rodrigo wants to complement. Sorry for interrupting.

Rodrigo Aravena: No, we’re now. So I think that — just let me reinforce one idea that Palo already mentioned. The main source of uncertainty related with the evolution of margins and return in the future is related with macro factors. So as Pablo said, the strategy of the bank fundamentals remain same, very strong, that is not clear, for example, what will be the terminal interest rate in Chile in the current Asian cycle, in monetary policy, the Central Bank said, for example, in the last monetary policy report that the new interest rate was a number between 3.5% and 4.5%. But given the current discussion the highest than expected persistent inflation we can rule out — but the final terminal rate in Chile would be a bit higher than, for example, also, we’ve seen a very important correlation between industrial and grade, with U.S. rates and more recently, so we can roll out that overseas the final — the long-term interest rate will be a bit higher as well.

So, in terms of inflation, for example, reflection rate will be both the other bonds of the monitor policy range over the last two years. So, that’s why, at the end of day, the key source of uncertainty for the evolution of the margins return is related with macro factors. So, that’s why most of the changes in our guidance and forecast are related and based in a different view of the economy rather than different things in the bank. That is a matter of macro factors.

Pablo Mejia: Yes. So, this will also influence the ROE, return on average capital for the future. The market factors. They’re higher, the industry will be higher.

Yuri Fernandes: Well, perfect. Thank you very much.

Operator: Perfect. Thank you very much. Our final question for today is from Ms. Neha Agarwala from HSBC. Please go ahead ma’am, your line is open.

Neha Agarwala: Hi, thank you so much for taking my question. A quick one on costs. So, you had very good cost control this year. What should we expect for 2025 going in line with inflation, above inflation? I mean efficiency ratio obviously depends upon how the revenues also evolve that will be good to understand how do you expect the cost growth to be? And what would be the main drivers for an increase or decrease in terms of cost? And sorry to go back again on capital. I mean, you want to be 200 basis points above the regulatory minimum, but even with the dividend payout, you remain — your core equity Tier 1 is about 14%. Your total Tier 1 is above 18%. You remain around 18%, so you remain quite well above your peers. Why not consistently pay for a year or two, a higher dividend — commit to a higher dividend payout? Or is that something you will only evaluate as you get closer to the end of this year? Thank you so much.

Pablo Mejia: Hi Neha. The first question I’ll take. This is Pablo Mejia here. So, in terms of operating expenses and efficiency, we’re seeing levels in the guidance around 40%, flattish expense growth. Obviously, the efficiency ratio is — you have to take into consideration operating income. And there’s some, as we mentioned, market factors, which could be changing, which could influence the top line growth. So, that will influence the operating efficiency level. So, some of the things that we’ve been doing and the bank has been very proactive in terms of cost management across the bank. So, we’ve been streamlining the business and searching for different operational improvements, there are incremental changes, improvements across different areas.

We have a specialized area, which is looking at improving the efficiency, how we use our resources better using different platforms in order to reduce those costs even more. We’re continually implementing new products and tools to automate processes and provide digital solutions to customers, which is twofold. It’s better for the customer to have a better operating experience. And also, we also have a more efficient productive bank. We’ve also optimized our branch network and resource allocation. So we’ve actually closed 31 brands — around 31 branches in the last year, 226 branches we’re at today. So the banking industry globally is changing towards industry, which is more digital customers are growing more — are going less and less the branches.

So we have to offer the same solutions that we had before. And digitally, this again gives a better experience to the customer, but it also provides us with a more productive bank, and we’ve been doing other things such as improving the marketing, changing how we do marketing, using other online platforms, which have improved the expenses there also software licensing, looking at ways to improve on how we’re managing our licensing. So there’s a lot of incremental changes across the bank, which are managing to control expenses and maintain our cost base relatively flat. So, with the top line growing more, if it grows more, obviously, they will change the efficiency ratio, but the goal or the target of the bank is a relatively flat cost base for this year 2025.

And going forward is the 42% and obviously, market factors, et cetera. Obviously, that can change the efficiency ratio. But I think the goal at a level below 42%.

Neha Agarwala: I mean that’s quite commendable.

Rodrigo Aravena: Sorry.

Neha Agarwala: Sorry. Just continuing on the cost part. First, it’s quite commendable. I mean you had almost no growth in 2024 and you expect another year of almost no growth in terms of cost. Do you see more branch closed this year as well?

Pablo Mejia : It’s a process that we’re looking at optimizing the footprint above the Chile and where we need to have those resources allocated. So — but if we look back, we reached a level of 450 branches. So most of the reduction or the optimization of the branch network has been done. So it’s a continual process to see where that number will be in the future. In terms of capital, Daniel Galarce will take that question.

Daniel Galarce : Hi, Neha. As I mentioned earlier, we have today a 14% CET1 ratio. That’s true. And basically, in the future, we want to have enough capital buffers in order to address and afford potential growth of our balance sheet. As long as — we believe that as long as the economy retake some momentum in the — over the next two years, three years, we will need capital in in order to afford that and order to address the final stages of Basel III implementation as well Basel III implementation is still in progress. It’s finalizing in [indiscernible]. However, we are a prudent bank in terms of how we face the future and in this case, how we face the growth of our business, particularly in terms of loans as long as the economy we take some momentum, as I said before.

Neha Agarwala: Do you have any estimate on what could be the potential impact of the final stages of Basel III implementation?

Daniel Galarce: I’m sorry, can you repeat the final one?

Neha Agarwala: Do you have an estimate on what could be the potential impact in terms of basis points of capital from the final stages of Basel III implementation that you are mentioning?

Daniel Galarce: Well, there are still — there are some things that need to be clear. Today, we have a Pillar 2 to charge that has been decreased in the recent months. However, in the future, we don’t know what kind of charges can be imposed by the Chilean regulator. And since it’s a regulation that is still in progress. And since there are some things that need to be cleared by the regulator, we need to afford some possible charges such as Pillar 2 charges or also more requirements associated with countercyclical buffers. So in order to address that and in order to face that, of course, we need to have enough capital buffers in the future. But more importantly, I would say that we want to have enough capital in order to grow in the future since — over the last three years, basically the commercial business has been quite decelerated, and we expect to have more dynamism in the future as long as the economy, we take some growth.

Neha Agarwala: Perfect. Thank you so much for the answers. Congratulations on the results.

Daniel Galarce: You’re welcome.

Operator: Thank you very much for the question. We have no further questions at this point. I’ll be passing the line back to the management team for the concluding remarks.

Pablo Mejia: Well, thanks for listening to our conference call, and we’ll be happy to host you again in the next year. Bye.

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