Banco De Chile ADS

Good afternoon, everyone, and welcome to Banco de Chile's fourth quarter 2020 results conference call. If you need a copy of the press release issued yesterday, it is available on the company's website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations, Mr. Pablo Mejia, Head of Investor Relations, and Daniel Galarse, Head of Financial Control. Before we begin, I would like to remind you that this call is being recorded and that information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements. I will now turn the call over to Mr. Rodrigo Aravena. Please go ahead.

Good afternoon. Thank you for joining this conference call today, where we present the financial earnings posted by Banco de Chile during the last quarter. We have divided this presentation into three parts. First, a discussion relative to the main economic trends and our forecast for this year. Then, we summarize the main achievements and key advances in our strategic pillars. The final section includes a review of our financial results read in the full quarter and, consequently, during the whole year. Let me start with a brief discussion of the Chilean economy. Please move to slide number three. As the IMF recently said, 2020 was a year like no other. The entire world was strongly affected by a pandemic that can be comparable only with the Spanish flu of 1918. In order to reduce the spread of the virus, several authorities implemented strong sanitary measures and mobility restrictions, leading to the worst recession at least in the last century. All in all, the global economy probably contracted more than 3% in the last year. Chile has a similar trend. as the economy was so suspected by the global recession and the negative impact of the pandemic. The GDP fell 6% in a year, led by substantial contraction in the second quarter. Nevertheless, the resilience of the Chilean economy positively compared with most of Latin American countries, as reflected by a robust recovery and better expectation for the future. On the whole, This recovery has been led by the joint contribution of three main factors, easing mobility restrictions, expansionary fiscal and monetary policies, and, to a lesser extent, the temporary impact of pension fund withdrawal on consumption. I will go over these factors later in this presentation. As can be seen in the chart on the top left, GDP posted a significant recovery during the second half of the year. In fact, the GDP posted annualized rate of 23% and 28% quarter-on-quarter in the third quarter and the fourth quarter respectively, after plummeting by 44% on a sequential basis in the second quarter. Due to this, the GDP has reduced its annual decline rate and it will probably retain positive rates over the next few months. The overall inflation a slight increase by the end of the year, in line with the greater dynamism of the chart on the other right shows. Specifically, the CPI went up by 1.2% in the fourth quarter from 0.3% in the previous one, lifting the year-on-year figure to 3% at the end of the year. Since the CPI is within the policy target, in an economy with an important output gap, The central bank seems to be comfortable with maintaining the overnight rate at 0.5%. In fact, the board has mentioned the intention of keeping the policy rate for a long period of time, as well as most of the liquidity measures announced since the beginning of the pandemic. The recovery has also been reflected in the labor market, although at a slower pace. The unemployment rate has fallen from the peak of 13% observed in July to 10% in December, as the bottom left chart shows. This improvement has been driven by the steady rise in total employment, as seen in the bottom right chart. The youth creation has been concentrated in sectors that benefit from the greater mobility, such as contraction and retail. On the other hand, services sectors remain subject since they've been much more affected during this pandemic. Based on these trends, there's been an improvement in the total economic expectations. In fact, according to different sources, including the consensus released by Bloomberg and Latin Focus, as well as the IMS based on the scenario, Chile should have the best average growth rate between 2020 and this year. I'd like now to focus on the main reasons that support this positive view. Please move to slide number four. Chile has been recognized for implementing several active and effective measures during this pandemic. In this slide, I'd like to highlight some of these policies. The country has also been successful in terms of reducing the spread of the virus after implementing strong lockdowns in mid-2020, the number of new enacted cases of COVID-19 has remained under control, leaving room to ease some mobility constraints relative to those that we had in the first wave of the pandemic. Consequently, as the chart on the other left shows, the share of positive tests has remained well below not only the threshold of 10%, but also from levels seen in other countries. Additionally, the government began a vaccination process with an increasing number of people being immunized, as the chart of the other right shows. According to government estimates, nearly 80% of the population will receive the vaccine during this semester. Philly has also made a difference in the economic area. On the monetary side, the central bank adopted several measures beyond the low interest rates. As the chart on the bottom left shows, the money supply has sharply risen as a result of bond purchasing, effects interventions, and the FCIC line, among others. The government has also played a key role, since the fiscal package is equivalent to nearly 10% of the GDP, being the only country able to maintain an expansionary fiscal policy in the region, according to the IMF estimates. Disposition shown in the chart on the bottom right is possible thanks to the strong fiscal position held before the pandemic. Therefore, we are confident that the recent green shoots will gradually translate into better dynamism in the next couple of years. Please move to the next slide where I will share with you our forecast as well as the main reasons supporting this positive view. We expect the economy to grow nearly 5.3% this year after falling 6% in 2020. These figures position Chile as one of the strongest and most resilient countries in the region at the chart on the right shows. The existence of better perspective for Chile is based on the following factors. First, the persistence of expansionary policies. The government announced that the fiscal spending will be maintained this year, with a special emphasis on infrastructure and public investment. This type of policy is particularly favorable for employment and consumption. A second factor is an improvement in the external scenario. The pick-up in the copper price, which represents more than half of our exports, is undoubtedly positive for the country. This trend is even better when we also consider the acceleration in China, a country that explains nearly one-third of total exports. Finally, as I mentioned before, Chile has begun a vaccination process which will allow greater mobility levels in the future. The table summarizes our main forecast. We see a recovery in all the components of the GDP, mainly in private consumption, which should be the main driver of growth. Additionally, we see an inflation rate stable at 3% over the next couple of years, leaving room to the central bank to maintain the interest rate at 3.5% for a longer period of time. Despite our expectations, we are aware of several risks for the future. Some of them include the global GDP growth, especially considering the high dependence of Chile to the international trade. The evolution of the pandemic is also a critical factor to monitor in the future. Also, the last, but not the least important, will be the political discussion in Chile. 2021 will be a key year for the future, since in only nine months, between April and November, there will be elections for a new president for most of the Congress and members of the body in charge to prepare the proposal for the new constitution. Now, I'd like to revise the main trends in the banking industry. Let's move to slide number six. Over the last 12 months, loans in the Chilean banking system have consistently slowed down in line with the weak economic growth by increasing only 2.4% year-on-year. As you can see in the chart on the top left, only mortgage loans remain relatively stable rising 8.1% year-on-year. As for the rest, commercial loan growth dropped to only 6% year-on-year, as for gap and loan demand pulled off by the end of the last year. The most intense drop was seen in consumer loans, which fell... Sorry for the interruption.

Just in case for the people that may be having trouble seeing the presentation, if you could just refresh the... the slide presentation, the page, and then we'll pop up again. Okay, thanks Pablo.

So, as I was mentioning about the banking industry, about the loan growth, okay, I'd like to mention that the most intense growth was seen in consumer loans, which fell by almost 14% over the last year, in line with the findings presented in the central bank survey that, with exception of the full quarter, has shown a weaker supply and demand for loans, as you can see on the chart on the bottom left. Nevertheless, loan demand for mortgage and consumer loans has risen sharply in the fourth quarter, while SMEs and corporations have normalized due to lower demand for COVID loans and a reduction in excess liquidity levels. We believe this indicates that we will begin to see an improvement in loan growth during this year, in line with the better evolution of the economy. In terms of results, the Australian banking industry posted a net income of 607 billion pesos in the four quarters, excluding its out-years, which is the highest level recorded during the year, due to high inflation and lower cost of risk, as shown on the chart to the right. 2021 will probably be a transitional year for the industry. It's not yet totally clear how the pandemic will continue affecting the economy, but we think it's reasonable to expect that loans should grow in line with GDP growth of 8% nominal and cost of risk should return to the level seen pre-COVID towards the medium term. Before passing the call to Pablo to discuss our advances and financial results, we want to highlight some achievements that we obtained during 2020. Please move to slide number eight. Once again, we ended the year as the leader of the industry in many aspects regarding our financial figures and social initiatives. First, despite the crisis, we were able to increase our loan book by 3% in a scenario where the global economy decreased. In addition, during this uncertain time, our bank remained as a fly-to-quality institution, leaving the industry in demand deposits and asset under management through Bansile Investiones. This trust was achieved by our corporate reputation and our focus on growing responsibly, which is confirmed by the lowest non-performing loans ratio of only 0.97% and the highest cover-up ratio of 366%, both far superior from our peers. In the same line, this soundness was further reinforced by obtaining the strongest capital adequacy of the largest bank in Chile, as measured by the Basel Index, reaching a 16%. We also know that, more than ever, 2020 was a year when financial institutions must participate in the solution and provide assistance to citizens to overcome this crisis. In this context, we granted $2.6 billion in Fogate loans and we rescheduled thousands of loans for SMEs and personal banking customers. Please move to slide 9. These excellent results in 2020 were also recognized, as you can see on this slide. First, we received the National Customer Satisfaction Award for providing the best service in the Chilean banking industry. This is a result of our efforts to offer the best experience to our customers through initiatives in innovation and other fields of our operations. In this line, we achieved significant advances in digital banking. By far, the most important was the launching of our digital onboarding bank account that has attracted 170,000 customers. As a result of our improvements in digital transformation, we were recognized as Innovative Digital Bank of the Year by the European Magazine. As we mentioned in the last slide, We created a national plan to support our customers in this difficult moment. The efforts we have made in this sense were acknowledged by global finance that honor us with the outstanding crisis leadership recognition and by a survey that resulted in our bank being the best financial institution in dealing with the health crisis. Since 2016, Banco de Chile has had a plan to promote inclusion within the organization, based on a policy and a declaration of principles, which is materialized in various initiatives to support employees, clients and the community. Our actions are bearing fruit and the Europeans recognize us as the best bank for financial inclusion in Chile. As a result of our continuing goal of developing our employees, We were considered the best company in the country to attract and retain talent and the best bank to work for in Chile, according to university students. Finally, our sustainable business model was recognized once again and the European, the banker and global finance considered us the bank of the year. Now, I will pass the call to Pablo Mejia to discuss our advances in our strategic initiative and financial results posted by Banco de Chile. Pablo.

Thanks, Rodrigo. Please move to slide number 10. Throughout our history, we have been able to be very successful in providing attractive returns to our shareholders through a proven track record of consistent and robust results. We aspire to continue doing so, and we truly believe that this is the only way to maintain our lead position to continue to be the most sustainable bank. To do so, we are continually reinforcing three key areas of our long-term strategy. Digital transformation, efficiency and productivity, as well as ESG. Strengthening these key areas will allow us to support our success in the long term and overcome future challenges. Please move to slide 11. The pandemic has accelerated the use of technology and the banking industry has been part of this change. During the past year, we confirmed our leadership in digital banking by successfully managing a very important increase in the usage levels of our digital channels by processing over 400,000 loans online to support our customers' liquidity needs. Additionally, we innovated in several fields. updating all of our main online platforms, bringing more functionality, agility, inclusion, and security to our channels, and integrating analytics tools, which provide us with valuable information to better understand customers' preferences. Among the valuable advances in digital banking in the second half of 2020, we released our new digital bank account called Quinta Fund. This account was created through a new methodology that allows us to design and add new complements easily with marginal costs. Quintafon offers many benefits to customers in all segments of the population because it focuses on bringing new clients to Banco de Chile with all the advantages that our current customers already enjoy. For this reason, we've seen an important demand to open this account. from low-income to high-income individuals, and this makes us very confident that this product will be profitable quickly. We believe that banks that only focus on providing digital payment means are neither an ideal way to compete nor a suitable platform to generate profitability. Some of the most valuable benefits for our Quenta Fund customers are that there is no entrance and maintenance fees, and that these customers have access to the same loyalty program as a traditional Banco de Chile customer. All of our customers use the same loyalty program with the same banking ops. There's a potential customer base in Chile we've found of around 5 million, and this could become a Quenta Fund customer, and 2 million of these individuals are already pre-qualified with products. In terms of numbers, Quenta Fund has been a total success. Since its launch in September, we have already had around 170,000 new customers, This is a huge figure when we take into consideration the total current account customer base, which is around 1 million. It's also important to mention that part of our strategy is to expand and get closer to the younger segment and grow this customer base. This is also bearing fruit as 92% of customers are new to Bonto de Chile and almost 90% of customers are younger than 50 years old. Please turn the slide to number 12. The successful implementation of the complete digital package of our customers has played a critical role in providing the best experience and standing out from our peers. Even through this period that has been very challenging, we continue to maintain our high and leading indicators. As you can see, we posted once again the highest brand recognition in the Chilean industry with a top of mind of 23%, with a wide gap with our closest competitors. Also, when banking customers were asked if they were to switch to another bank, which bank would they choose, we remained as a top pick. Along with their superior brand recognition, we are also the leader in best service quality, as shown in the chart on the bottom left. The success in the satisfaction levels has been precisely due to the quality of our services and the products that we provide, and which helped to generate strong, long-lasting relationships. These figures are reinforced with the evolution of client complaints, which despite all the challenges that the industry incurred in 2020, we managed to improve from our prior years, as the chart on the bottom right shows. Please turn to slide 13. We continued advancing and optimizing our resources in 2020. To reduce our operational costs, we set clear targets based on three main areas. During the year, we moved forward and continued automating processes by leveraging technologies and simplifying procedures. Through greater use of IT in all areas of the bank, we are assisting that we remain competitive in this highly challenging industry that is continually being disrupted by new financial technology firms. The advances in technology have permitted us to reach more efficient processes in many areas of our bank. As a result, during January, we had to adjust our organizational structure, laying off approximately 4% of our staff to maintain the high level competitiveness and ensure long-term sustainability. The indemnities associated to this decision were reflected in our P&L in December of 2020. The second area identified for optimization is our branch network. In 2019, we started a process of adjusting our structure that led to a reduction of 14% of our branches in two years. This strategy includes a new service model that involves integrating CRE Chile network, merger of nearby offices, as well as automation of customer service and cashier areas. It's had a positive impact on operational productivity and efficiency. Another measure that contributes to reducing costs is the implementation of a specialized area that evaluates all purchases in the bank and has had excellent results in reducing admin expenses. We have especially seen advances in expenses related to maintenance, rental, travel, marketing, and external advisory services. Additionally, we have created a new division called Productivity and Efficiency, which will be responsible for accelerating the implementation of savings initiatives that were already identified and discovering new opportunities for improvements in productivity across the entire organization. The improvement in efficiency and productivity can be seen on the charts of this slide. For instance, loan per employee has improved 36% since 2016, and total expenses to assets has dropped.

has dropped 59 basis points.

We expect that we should be able to continue improving our efficiency ratio and reach a level closer to 42% in the medium term. Please turn to slide 14. Another key strategic pillar of Banco de Chile is our strong commitment to sustainability that has accompanied us during 127 years of our history. Since we are living in the unprecedented health crisis, our sustainability strategy during 2020 was concentrated in responding to the emergency and bringing support to the most effective by the COVID pandemic. In this context, we implemented a national support plan that included diverse initiatives to directly assist the most vulnerable families, customers, SMEs, and community in general. One of these initiatives that I would like to mention is our alliance with Desafio Levantamos Chile, a non-profit organization that allowed us to support the health emergency, raising resources to benefit almost 440,000 people. In addition, one segment that was particularly affected by the pandemic is SMEs. In order to promote their entrepreneurship and support this segment, we launched the 5th National Entrepreneur Challenge, which attracted over 56,000 participants. Our national plan also considers supporting our customers as well as mentioned in the previous calls. We were the first bank to implement a national plan for retail banking and commercial customers. It included a series of special measures to support our clients so they could cover their most urgent financial needs. All the initiatives that we have been taking to support the society maintain our bank as a financial institution with the best performance in terms of actions taken during this health crisis. according to Ipsos, a leading surveying company. This recognition demonstrates that we are advancing in the right direction as a sustainable institution that contributes to the development of Chile and its people. Finally, as a result of our actions towards sustainability, Banco Chile is listed in the Dow Jones Sustainability Index. In addition, through our mutual fund subsidiary, Banco Chile, we incorporated ESG factors to investment decisions that were adopted by the United Nations Principles for Responsible Investment. Now, please move to slide 16, where we go into further details of our financial results. As Rodrigo highlighted in the presentation, 2020 was a very challenging year. The subdued GDP growth and higher unemployment observed in 2019 was further amplified by the arrival of COVID. GDP tanked and unemployment skyrocketed. This was accompanied by a major drop in business and consumer confidence, adversely affecting the banking industry's perspectives. Thankfully, it looks like we're beginning to see the light at the end of this COVID tunnel. In the fourth quarter, the economy gradually opened, loan originations increased, and activity and transactional products began to return to more normal levels. This more dynamic environment together with the effective and consistent business strategy permitted us to post a good bottom line this quarter of 126 billion pesos, showing a slight change in trend when compared to the prior two quarters. On a full-year basis, we record 463 billion pesos with an ROE of 13%, a level that is more than acceptable considering the magnitude of this crisis. Nevertheless, if we exclude the one-time effect associated to the recalibration of our group-based provisioning model that was implemented in the third quarter 2020, as reported in Note 2 of our financial statements, our full-year bottom line would have reached $520 billion. This action confirms our more conservative and prudent risk approach during the crisis. This is especially noteworthy when we compare outperforming results to all of our peers, as you can see on the bottom left of the slide. We also beat all of these banks in profitability as measured by return on assets and record by far the highest Tier 1 ratio, both of which are shown on the chart on the bottom right. We've managed this leading result not by chance, but by consequence of our consistent strategy that puts risk first. We steadily record more predictable results throughout the economic cycles, clearly setting us apart from our peers and generating greater value for our shareholders. Please turn to slide 17. Operating revenues in 2020 decreased 3.7% year-on-year in line with the weak economy, but rose to 8.4% on a sequential basis. As expected, the pandemic affected all of our lines of business, as you can see on the chart in the middle of the slide, for the first time in many years. Customer income for the full year fell from 1.6 trillion pesos to 1.5 trillion pesos, or 5%. This was mainly due to the factors shown on the top right chart. Specifically, income from loans went down by 35 billion pesos due to the sharp contraction in consumer loan balances as a consequence of both a more prudent bank offering and, at the same time, the lower demand from customers as a result of the pandemic. Additionally, the low overnight rate negatively affected the contribution of our DDAs, which was partially offset by a 34% rise in deposits during the same period. Despite our fee-based business was very resilient because most of our revenues are generated by our large and well-diversified retail customer base, it also dropped, but only marginally. by 2.5% year-on-year thanks to the joint venture we embarked with an international insurance company. On the other hand, sales and distribution revenues grew by 6.2 billion pesos during the year as a result of more activity from derivative transactions related to our corporate and wholesale banking units. Overall, negative growth in customer income was partially offset by non-customer income which grew 3% year-on-year. Our treasury business had a strong year and it's explained by the good results in the management of our trading and AFS portfolios and a scenario of decreasing interest rates as well as a lower CBA, DBA charges as a result of improved probabilities of default and higher revenues from asset and liability management. Despite the 2020 was very challenging, we have finally begun to see some signs of recovery. Loan demand started to strengthen and our view on the economy is improving. This should translate into better loan growth figures in the near future, which help grow interest income. We have also begun to see that the normalization in the economic activity, which is being reflected in higher transactionality, and in turn fee income. The second and third quarter were the worst in this respect. Excluding income that we recognize from the joint venture and fee income and the one-time greater expense and commissions paid related to credit cards, we grew fee by 2% quarterly sequential basis or 8% annualized. This is due to the most products are recovering to more normal levels of fee income generation, such as credit cards, collections, payments, as well as mutual fund management and some products are actually posting higher revenues with respect to the same quarter last year. These products include current account administration, guarantees, layers of credit, as well as trading and securities management. We expect that this more dynamic activity should continue in the coming quarters and that we should post positive growth figures in 2021 as long as there are no more major lockdowns in Chile similar to the ones we saw in the second quarter of 2020. It's important also to highlight that the focus of Chile has always been to promote responsible growth in every segment we serve. We firmly believe that this is one of the main pillars of our proven and successful track record. As you can see on the charts to the right, this focus has allowed us to post once again the highest fee margin and operating margin net of risk in the industry. Through this approach of growing selectively in positive economic times and taking the proper safeguards during downturns, we've been able to provide an adequate return for our shareholders. On the following slides, we take a closer look on how our portfolio has changed throughout the course of the year and the evolution of our asset quality. Please turn to slide 18. Polo loans grew by 3% year on year, ending the quarter with a portfolio of almost 31 trillion pesos. The general trend in 2020 was an environment of lower demand from customers stricter credit risk requirements from banks. As you can see on the chart on the top right, loan volumes were sustained by COVID's Fogata program. In our case, the program was mainly focused on customers in our SME segment, which are businesses with annual sales below $3 million per year. As you can see on the chart on the bottom of the slide, loans on the segment grew by 21% when compared to 2019. On a sequential basis, we saw a little more than a quarter in personal banking posting a rise of 1.3% or 5.2% annualized. Once again, residential mortgage loans were the main driver of growth, up 1.8% from the third quarter of 2020. The demand from this product has been more dynamic and more resilient than initially expected. Investors seem to be seeking more profitable, low-risk investments in real assets as interest rates worldwide have reached historically low levels. In terms of origination, mortgage loans grew by 29% on a sequential basis, but only represent approximately 60% of the level we recorded the same period last year. Meanwhile, it's also worth mentioning that consumer loans, for the first time since 2019, rose this quarter, growing 0.3% over the third quarter of 2020. It's also notable to highlight that consumer loans have consistently increased monthly originations, accumulating a rise of over 50% when compared to the third quarter of 2020. Despite this impressive rise, it still falls short to even the levels recorded in the fourth quarter of 2019, representing only 73% of the level posted during that period. With regards to wholesale lending, this area slowed and grew 2% year-on-year and on a sequential basis decreased 5% mainly due to a reduction of liquidity buffers maintained by a large number of multinational companies during the year in order to face uncertainties associated with the pandemic. To a lesser extent, the sharp decrease in exchange rate of Chilean peso appreciation negatively impacted the balances of foreign currency denominated loans. Looking forward, we expect that 2021, in line with the latest credit survey from the Chilean Central Bank and the better perspectives for the overall economy, demand should rise and risk appetite from banks will likely rise as well. Thus, we expect lending to gradually resume. particularly consumer and commercial loans, which are the products most affected in 2020. We estimate that the total loans should pick up some market share and grow around 8% in 2021. Please turn to slide 19. Without a doubt, we're the financial institution with the best funding structure in Chile. This is one of the strongest competitive advantages, which has been possible through our ability to provide the best service experience to our customers' value and through a solid brand and capital soundness. 2020 had significant changes in our funding structure. First, demand deposits grew significantly, rising 34% over last year, and today represents 33% of total assets, as shown on the chart on the top left. This is significantly higher than all of our fears that you can see on the chart to the right. The low interest rates combined with an uncertain economic scenario and multiple financial aid packages for individuals and SMEs drove this increase in deposits. Second, we also took advantage of the liquidity facilities provided by the central bank, which we obtained mid-term funding that dominated in pesos and varying the monetary policy interest rate. These two important changes that are shown on the chart on the bottom left, which mainly replaced time deposits held by financial counterparties, particularly in local grants. This combination with the world-class risk ratings that allow us to place bonds at low spreads has permitted us to continue to be the leading banking cost of funding. Finally, we finished the year with the strongest level of Tier 1 in our recent history of 12.2%. This is especially important when we begin to implement Basel III at the end of 2021. In this regard, based on our current information estimates, we expect to implement Basel III without any material issues, taking into consideration the phase and period adopted by the Chilean regulator. Moreover, as you can see on the chart to the right, we have the highest level of Tier 1 versus all of our peers. We're confident that we can take advantage of the opportunities that presented during this period to grow our assets and strengthen our relationships with our current customers, as well as to continue increasing their share of wallet, especially through our digital contact channels. Our new digital initiatives should permit us to keep expanding our customer base while improving our market leading positioning core demand deposits. Please turn to slide 20. Cost of risk in 2020 reached 463 billion pesos, up from 33% from last year. Nevertheless, if we exclude additional provisions in the one-time adjustment of our risk model in the third quarter, cost of risk would have dropped 20% year-on-year. Clearly, this is not in line with the economic scenario, but shows the impact of diverse financial temporary aid packages and justifies the proactive measures taken by the bank regarding additional provisions and adjustment in risk models. The financial industry and us first gave various payment holidays to its customers, and this was later accompanied by government-guaranteed loans for SMEs, as well as two pension plan withdrawals that amounted to approximately $35 billion, amongst other initiatives, mainly for the lower-income segment of the population. The sum of all the cash disbursements of these assistance programs actually, for the first time in Chile's history, rose disposable income. These factors drove a reduction in NPLs and improved significant customer payment behavior. Nevertheless, we can't rule out that once this liquidity is used, our core cost of risk and NPLs will return to more normal levels. For this reason, we have accumulated the highest level of coverage in the industry of 3.6 times, clearly differentiating us from our main peers, as you can see on the chart on the top right. Our delinquency ratio is more than 50% lower than our peers, and the level of additional provisions, despite that, we have the best In terms of the quality of our retail book that had payment holidays, this portfolio has evolved well. The personal banking area has shown excellent payment behavior with low levels of MPLs that are below the levels reported prior to the crisis. With regards to the SMEs, we provided a six-month grace period to almost 40,000 small and medium-sized businesses, and one-third of these customers have begun to pay their first installment in December. Of this client base, we've also seen very positive payment behavior as reflected in our good cost of risk indicators. All of these results are the consequence of the important resources that we deployed to credit risk in Blanco de Chile. We're confident that our commitment to manage risk prudently, growing responsibly with consistent strategy will permit us to continue posting a track record about ranking our competition, not only in credit risk, but also in profitability. Please turn to slide 21. Our determination to improve our operating costs continues to bear fruit. Year-on-year total operating expenses decreased 3.1% for the full year when compared to last year and 2% this quarter when compared to the fourth quarter of 2019. As you can see on the chart to the right, personnel expenses decreased $18 billion driven by lower variable compensation and a drop in severance indemnities that was partially offset by a rise in salaries. but was below the level of inflation mainly as a result of the strict rehiring processes that we have implemented and this produced a reduction in our headcount throughout the prior years. Administration expenses also had an important drop explained by the lower outsourced and external advisory services due to the internalization of core developments aiming to improve efficiency and due to lower business activity affected by the pandemic. There was also a reduction in maintenance of fixed assets and lower market expenses thanks to improvement in cost-effective campaigns implemented throughout 2020. These effects were partially offset by a rise in IT expenses explained by various IT projects related to digital transformation and regulatory projects as well as the temporary expenses due to sanitation measures that we had to undertake to keep our customers and staff safe during the pandemic. Through our effective cost control measures, we've been able to maintain our efficiency ratio flat this year at 45.5% and actually reduced our cost of assets from 2.2 to 1.9 as you can see on the charts on the bottom left. Also, I think it's important to highlight how we compare to our peers in terms of cost control. Please take a look at the charts to the right. Since 2018, we have been able to improve our cost base in both salary expenses as well as administrative and other expenses while our main peers have been performing comparatively worse. Please turn to slide number 22. 2020 was one of the most challenging years in the last century. The good results in the banking industry has been attained due to solid risk management practices in the banking industry as well as a coordinated effort that took place between the financial industry and government to reduce as much as possible the negative effects of the crisis and to avoid that this temporary cycle affects the economy on a permanent basis. We are positive for 2021, especially as Chile has already begun the vaccination process, and this should allow us to get back to more normal life classes in other Latin American countries. As you can see on the chart, Banco de Chile has been the best performing bank not only in Chile, but also between our main peers. This shows how much confidence the market has in their superior business approach, as well as its view on our outcome in the crisis. We are confident that this will continue to support the leading banking in Chile and thanks to superior risk management that supports our business model and permits us to have more stable and reliable returns for our shareholders. Finally, before moving on to questions, I'd like to mention some key takeaways. In terms of GDP, we expect activity to grow around 5% in 2020. And like other years, we don't expect that the banking industry will grow two times real in GDP loan growth. For this reason, it's important to understand that the current state of the cycle 2020, total loans for the industry grew 2% year-on-year, despite the 6% decline in the overall activity, showing counter-cyclical growth that we hadn't seen in any other crisis. This growth was driven by commercial loans due to the POGAPA program and mortgage loans partially offset the reduction of 14% in consumer loans. In this environment, given a very high comparison base, we anticipate that 2021 loan growth for the banking industry will only partially recover the expansion rates that we saw prior to the pandemic, even though we have better perspectives for GDP. Specifically, we think it's reasonable to expect loan growth of around 8% in nominal terms for the system. In terms of Banco de Chile, we expect to grow slightly higher than the industry's average, focused on high-margin products. We continue to focus on growing in the consumer to middle and upper income segments, as well as commercial loans for the SMEs. We're expecting that we should pick up market share in consumer loans in 2021. In this environment, we expect NEM for us and the industry to be below the level obtained in 2020 because of the negative effect of the low overnight rate on loan spreads, flat inflation, as well as a reduction of the contribution of DDAs to net interest income. We think it's reasonable and realistic to expect a slightly lower NIM for us in the industry with respect to the average level obtained in 2020. In terms of risk, we expect 2021 as a transitional year, more likely, as worse is behind us, and we should begin to see a cost of risk and improvement above the levels that we've seen, especially in banks that have not made adjustments in the provisioning models. Despite that NPLs are very low at 1%, it's important to highlight that this was positively affected by the various temporary factors such as assistance programs to our customers and withdrawal from the pension funds. Since these factors will tend to dissipate during the year, it's reasonable to expect a more normal level of NPLs and a cost of risk this year, probably around 1.2% to 1.3% respectively. Nevertheless, it's even more important to note that we have A solid loan portfolio with a retail customer base that is more concentrated in lower risk segments and a strong SME book with a historic low levels of delinquency. Actually, we've been recognized for having the strongest customer base in the industry with a proven track record. This has been as a result of our solid risk culture, which always focuses on growing responsibly. This strategy should allow us to slowly transition back to more normal levels of cost of risk. We expect that the top-line growth should slow, but given our emphasis on cost control, this should permit us to maintain our cost ratios relatively flat in 2021, efficiency ratios. And finally, in terms of profitability, we're still facing several sources of uncertainty, mainly in terms of the degree of the recovery of the pandemic. We don't know the impact of this crisis in critical areas as employment and potential growth which will affect the evolution of the asset quality indicators. So, the future trend of risk indicators will be critical for the ROE for us and the industry as a whole. In this environment, we expect a gradual increase of ROE this year relative to the average level posted in 2020. The implementation of the strategic projects will allow us to offset some negative forces, such as lower interest rates and still weak employment. In the medium term, we think that this should see an improvement in our ROE towards levels closer to our history as long as the economy improves and the capacity of growth and interest rates converge towards higher levels. It's important to reinforce the idea that it will be strongly dependent on the evolution of the economy once the pandemic was left behind us. Thank you, and if you have any questions, we would be happy to answer them.

Thank you. The floor is now open for questions. If you have a question, please press star 1 on your touchtone phone at this or any time. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. Questions will be taken in the order they are received. We do ask that when you ask your question that you pick up your handset to provide optimum sound quality. Please hold while we poll for questions. The first question is from Yuri Fernandez with JP Morgan. Please go ahead.

Hi, Pablo Rodrigo. Thank you very much. I have some question on the strategy of Banco de Chile regarding consumer loans, right? I guess with the fund account, maybe the bank will return stronger to this market, I guess, since you asked the Credit Chile years ago. This has been a market the bank has not been focusing a lot. So I would like to understand if this is correct. Like this is part of your core strategy. Now the bank want to be more aggressive on consumer loans, maybe moving as lightly to the lower income segments. And if that's right, how do you see competition there? Because we see other banks doing a similar approach like Santander with life and and super digital, we have match with BCI, we have like maybe the retailers, right? Like how do you see competition there? Like how much should we expect the customers of fun to keep growing? I don't know, like a little bit more of color on the consumer side. And I have a second question regarding margins. This year, your name ended at 3.5. this is about 50 bits lower than your main pier, than Santander, Chile. And when we look historically, the name of Banco de Chile and Santander, Chile, it has always been very close, right? Like 10 bits, sometimes you have higher margins, sometimes Santander, Chile has higher margins. And I guess the message you had in the call is that maybe margins pressure may continue a little bit 2021. So maybe it will still come down from this 3.5. And when we take your peer message, they also point to some decrease, but as you said, like some marginal decrease. And my point is, why now in 2021 should we see a bigger gap between your margin and your peer? You know, like why should we not expect both the Chile to catch up in the margins versus your peer? Thank you.

Thanks, Yuri. So in terms of our strategy going forward, our strategy is today being focused on growing our customer base using the Quenta Fund. So the Quenta Fund is a product which is something that was recently launched, as mentioned. We've grown strongly with over 170,000 new customers in around one quarter, which is super relevant if we consider that our customer base is current accounts is about 1 million customers. So the interesting thing of this account is that it permits us to cross-sell these customers quickly. There's a plan that we're developing in order to cross-sell these customers quickly into Banco de Chile customers where they can maintain their current account, their bank account number and transfer that as a current account. Plus, there's a lot of incentives for these customers to come into the bank, which is not only lower income segments, which maybe some players in the industry are focusing on. But for us, it's to bring these new customers into Banco de Chile, which can be from all customer segments because we're providing them with the same loyalty program. So the idea for us is to pick up market share in consumer loans, but it's more focused on the middle and upper income individuals and to bring new customers into the bank using this new Quinta fund, which is attractive for all the customer segments. uh... thanks to the business that's been up they've been uh... after you've been saying uh... loyalty program et cetera so that's been one of the that's been the the main driver uh... for customer uh... growth today in terms of margins what they can say in terms of margins is that what we're trying at what what what we've mentioned in the presentation and then uh... and in the press release is that One of the pressures and margins has been from a variety of factors. The loan book and high margin products has decreased. For example, consumer loans is in low double digit figures in terms of percentages around 13%, 13, 14% for us in the industry. If you look at the growth in SME loans, it's been focused more in terms of So that's a lower interest rate product. So you're having a negative impact on that side. You also have the effect that we've had a huge increase in deposits in Banco de Chile. So that also increases the level of available for sale instruments, which is recorded in interest income. So that affects the margins. And as well as some other players in the industry, as you well know, have acquired portfolios, and that also increases their margins or maintains them flat, while the rest of the industry in 2020 probably saw a decrease in margins. So it's also in terms of comparison-based. And by saying that also by acquiring another company, you may maintain your margins flat, But you also have to take into consideration the risk of the portfolio, which maybe today risk hasn't been a major impact on banks other than with the additional provisions because there have been many different programs to assist the customers and all these payment holidays, all this help from the government. But in reality, the reason why we did the additional provisions and we made these changes in the provisioning model is because the... these programs can't last forever. So we decided that it was prudent to undertake these provisioning models, adjustments and additional provisions, which from our understanding from financial statements, no other banks actually did an adjustment in their risk model last year. And that's why we highlighted on the first slide of Banco de Chile that we had the highest net income when we adjust this by our risk. If we hadn't adjusted our risk model, we would have had a higher net income than the main peer in the industry.

No, super, super clear, Pablo. Regarding the consumer loans, so do you think it's reasonable to work, I don't know, you said maybe 8% nominal for the industry and you're growing slightly ahead. Do you think like 10, 12, it's reasonable for consumer loans growth this year?

Slightly above eight. In low double digits, it really depends on the evolution of the economy, the outcome of the vaccines, how quickly the economy and employment improves. So there is a possibility that 2021 could be better than the market's perspectives, but today it will all depend on the outcome of the vaccination process.

Super clear. Thank you very much.

You're welcome. The next question is from Tito Labarta with Goldman Sachs. Please go ahead.

Hi, good morning, Rodrigo and Pablo. Thanks for the call. My question is on efficiency. You mentioned you think you can eventually get, I think, around 42% efficiency. Just I guess the how you would get there. And you mentioned cost control. I think it's definitely an area of focus. I mean, you're seeing some pressure on margins, as you mentioned, and revenue growth in general. So to achieve that 42% efficiency, what type of cost control does that imply? Expenses in line with inflation, below that, what type of revenue growth do you think it would take to get there in terms of timing in a couple of years. Any color you can give on that would be helpful. Thank you. And also just to add to that, just given the Quintafon and digital initiatives, how much is all this digitalization trend benefiting their efficiency or potential improvements to efficiency? Thanks.

Thanks. Today, on how we measure our efficiency ratio, we have a 45.5% level. We think that we have room to continue improving that level to levels around 42%. It's really focused, as we showed in the presentation, in those three main areas. One is to control our costs better in order to use our resources better across all the banks. in 2020, an area that focuses on reviewing all the major purchases in Banco de Chile, advisory services, and is really focused on reducing our administration expenses. We also have been implementing for a while now more automation in the back office processes, and we're also improving our service model across the branches. as well as being very, very strict in terms of rehiring individuals who leave the bank on their own. So over the last five, ten years, you can see how that has evolved and our headcount has gradually reduced because of this strict rehiring process. Going forward, we've also implemented a new area that's looking at making the bank more productive and efficient. and they'll be looking at many diverse areas that we can continue improving. This includes digitalization of the bank, but there's no one key area that I could say that this is the key area that will mean 1% reduction in efficiency. It's the effort across all areas of the bank, a conscious effort to reduce expenses in each division by each manager. Also this year, For 2021, I think it's important to mention that the costs going forward for 2021 in general, what we should expect is costs outside extraordinary events should be below efficiency.

Okay, great. Thanks, Pablo. And is that a trend that can continue sort of keeping the cost below inflation? Is that part of what it will take to get there?

Yeah, so the focus, if we look at some important facts to consider as well, I'm not sure how you calculate the efficiency ratio, but our efficiency ratio, we don't include the operating income, excluding, it's not net operating other expenses. So if we look at the leader of the industry, the leader has 42.5%, so we have a gap there with 3%, and we should think that Bank of Australia still has a lot of room to continue improving our efficiency across administration expenses. You can see there is room as well to be more efficient as we grow. We can use digitalization at the Bunk of the Chile more efficiently to grow in the future without having to rise our expenses.

All right. Thank you, Pablo.

You're welcome. Excuse me, the next question is from Neha Agrawale with HSBC. Please go ahead.

Hi, Pablo and Rodrigo. Thank you for the presentation, and thank you for taking my question. Could you give us some sort of guidance or indication on how the cost of risk could evolve for next year, and what kind of dividends can we expect for 2021? Thank you so much.

We're still in a very uncertain time, so it's uncertain politically, it's uncertain economically. We don't have a clear idea, understanding yet on the evolution of COVID, but we think that 2021 should be a better year economically than 2020, which that should mean that we should Gradually, it's like a transitional year, gradually begin to return to more normal levels of cost of risk, which is between 1.2 to 1.3%. Probably because of all these measures that the government undertook and different benefits of the banking industry provided, we should probably see NPLs for the industry rise a little because the level that we've seen in 2020 are probably artificially low. And it should, in the medium term, 2022 probably, around the cost of risk, which is more in line with our long-term level of 1.1%, would be reasonable to expect.

Hi, Neha. This is Rodrigo Aradena. I'd like to add one idea here. It's important to keep in mind that 2021, I mean this year, will be a transitional year and we will have a lot of uncertainty this year so uh we don't know for example what will be the long-term impact of the pandemic in key factors key drivers of our business for example the long-term impact on potential growth in terms of long-term interest rates as i mentioned before um This year we will have a very important discussion for the future of the country, you know, a lot of elections, etc. So that's why we try to provide the most realistic guidance in terms of providing more basis, fundamentals, and mentioning that we have still a lot of uncertainty. Just to have an idea, for example, only in 2022 we will recover the GDP level that we have in 2020. The unemployment rate will likely remain around 10%, 10.5% during this year. So that's why we are still cautioned for this year. We acknowledge that 2021 is an early transitional year, and we will likely have more long-term figures only in 2022.

In terms of dividend, we recently announced that we proposed for the shareholder meeting a payout of 60% of distributable net income, which is in line with what we had mentioned and released in a material fact in 2019 would be our level 60% of net income payout ratio. That's the level that we pre-provisioned in our in their equity account.

That's with relation to 2019 earnings, right?

In 2019, there's a material fact where we mentioned that the level of provisions, the level that we saved in terms of in their equity accounts will be, their balance sheet will be 60% of distributable net income. So in the past two years, We had 70%, 70%, if I'm not mistaken, and 60% for this year, based on distributable net income.

So based on 2020 distributable net income, would you be paying off 60% during this year?

60% of distributable net income. So distributable net income is slightly below 50% of net income.

Okay. Okay. Got it.

Thank you so much. So it's net income less the effect of inflation. You get to distribute net income based on that figure, 60%.

Okay, great. Thank you.

You're welcome. The next question is from Pia Alessandri with Credit Corp Capital. Please go ahead.

Hi Pablo, hi everybody. I have two questions. First, it was one regarding the relief programs. You mentioned that as of December you had 46 hundred thousand personal loans still in the program. If you could give us the amount that it's related to those 46 And the second one is regarding return on equity. Do you believe that returning to 16% IOE for 2021 is a challenge or it's something realistic for the bank given the current expectations?

In terms of the second question, ROE for us, we think that ROE is still difficult based on the information that we have and the expectations and all the different variables that can occur from here to the year end. What we're confident in is that 2021 should be a better year than 2020. Cost of risk should be lower. We're expecting a more dynamic loan growth. which should be able to have at least a partial recovery of the high-margin products that we lost in 2020, consumer loans, for example. So it's a transitional year, which we think that after this, while interest rates return more to normal levels, GDP maintains at the levels that we've seen in the past, we can return to more similar levels of ROE that we had in the past. But for 2021, there's still many uncertainties, but it's difficult to give you a clear answer. But what we're certain of is that we should have the best profitability ratios in Chile amongst the banks.

Can you repeat the first question, please?

Okay, it's regarding, I believe it's, I'm going to see here on which page of the, okay, it's on page 14 of the presentation. You have personal banking in the customer support plan, 4,604,000 of personal loans rescheduled. That is as of December 2020. And if you could give us the amount considering these 4,604,000 The $460,000, that's personal loans rescheduled. The value.

Okay, so of the personal loans rescheduled, we had in 2020, there's different plans that were implemented in Chile to help customers reschedule personal loans which are related to consumer loans and mortgage loans. We also help customers in credit cards as well. So what we provided customers in the second quarter of last year and the third quarter is to reschedule or defer consumer loans for three months. And in terms of mortgage loans, we offered them the possibility that we schedule those loans for up to six months. Today, the customer support plan for personal loans, for consumer loans and mortgage loans has already come due. So these customers are already paying. In terms of SMEs, there's about 40,000 customers that were benefited from the COVID-19 pandemic. government guaranteed loans and for these customers it also included a deferral plan so of the 40,000 customers of the almost 40,000 customers about one-third of those customers received or began paying their first installment in December and of these customers and also the other personal banking customers are all having very good payment behavior and have been doing exceptionally well. And you can see that in the numbers that we've posted in cost of risk. Our models are sensitive to early deterioration, so early delinquency. So if they don't pay within the first month, generally you can see those impacts. And what we've seen and what you can see analyzed is that the payment behavior of the personal banking customers and the SMEs has been very positive.

So that $454,000 is the number of the loans rescheduled throughout 2020, not necessarily the ones that are pending or still have a rescheduled value?

Those are what was rescheduled at one point in time, not what's pending.

Perhaps it's important to mention that in the annual report of the bank of 2020, which will be released by early March, there will be much more information, breakdown, and details about all the program of rescheduled loans and other similar things.

As well in the financial statements. You can see in the financial statements there's a note regarding that with the breakdown.

Thank you very much.

You're welcome. The next question is from Ernesto Gabilondo with Bank of America. Please go ahead.

Hi, good morning, Rodrigo and Pablo. Thanks for the presentation and for the opportunity to ask questions. My first question is a follow-up in the reprogrammed portfolio. I know that you will provide further details, but Can you share with us what is the percentage of delays that you have seen so far? And for my second question, can you provide your expectations for fee income? Should we expect a growth above or in line long growth? And I don't know if this could be supported by a recovery in insurance and your alliance with CHOP. And how should we think about your effective tax rates? Then finally, When incorporating your guidance, would it be reasonable to expect a net income of around 600 billion Chilean pesos? Thank you.

One second, please. Okay, so in terms of your, as I mentioned, in terms of your first question, the payment behavior of customers and all the segments has been evolving very positively. So we've had a good level of payment behavior in SMEs and consumers and mortgage loans. And we're posting, as you can see, throughout the first quarter, sorry, the fourth quarter, very low cost of risk, which most of the cost of risk that we had was we had a level of around $85 billion and $80 billion was additional provisions. So you can confirm that the payment behavior has been exceptionally well at Boncovicia. So we have around, and there's different ways to look at this, so I could tell you in 30 days, 60 days, 90 days overdue, In 30 days overdue, we have a level close to 2% of loans that are overdue from customers who have had some sort of payment holiday. In the second question for fees, what we've seen in fees is more transactionality and good performance in the last month returning to more normal levels. It's like a V-shape. So what we've been seeing is customers, as the economy continues to open, transact more, and this has been helping our fee-based business. Obviously, we're still not at the levels that we've had prior to the crisis, but we think as the economy continues to evolve, the vaccines continue to roll out and normalization begins, we can return to those levels. So in terms of fee growth, we think that the core fee growth is around 8% for us. And that would be excluding all the chub speeds that we had. In terms of the expectations, obviously those could be better if the economy improves faster than we expect and the market expects.

Also important to consider the role of inflation in the future. So as Pablo mentioned, we would likely have a V-shaped recovery during this year. In the margin, we're expecting a more dynamic economy in the second half of the year, so that's why there is a possibility to have greater economic growth, higher inflation, probably potential recovery interest rate, but given the uncertainty, we are not providing a more specific guidance in terms of numbers for this year, especially in terms of That's why we would like to reinforce the idea that it will be a transitional year. On average, perhaps in some measures, on average, 2021 will be similar to 2020, but we're expecting a better performance in the future, especially in the next year.

Perfect. Thank you, Rodrigo and Pablo. And just for my question on your expectations for the effective tax rates,

Expectations of a tax rate with a 3% level of cost of inflation, generally the banking industry should be around the 23%, more or less. In general, that should be the level. If there's extraordinary items in there for others, I'm not sure, but for us, 23%, with 3% inflation.

Perfect. Thank you so much.

You're welcome. The next question is from Claudia Envante with Santander. Please go ahead.

Hi. Thank you. So, basically, I'd like to know a little bit more on additional provisions. Let's suppose that we see an economic recovery. How should we see the amount of additional provisions created in 2020, not the buffer that you already have? created since years ago. So basically, I would like to know if there is a likelihood that we see these amounts of provisions being released, or should we see it as an additional security buffer? Thank you.

In terms of additional provisions, these provisions were made, a large amount of these provisions were made in 2020 because of all the insurances that exist in the economy. with regards to the pandemic and how this is evolving. I think today it's very early to tell how the economy will evolve. The expectation is that it should be better, but we can't rule out anything at this moment in time. It's still a moment of uncertainty and it's difficult to say the evolution of those additional provisions

in the future. So we are waiting for more information in terms of the impact of the pandemic in the economy. We don't know what will be the legacy of this crisis in the economy. So that's why today we can roll out similar actions. But perhaps what is more important is to keep in mind the total stock of provisions that the banks have today, especially when we compare with other banks in cities. So our coverage ratio is much better than our main competitors.

No, I know. What I was asking is supposing that we see an economic recovery, should we see this created additional provisions in 2020 as something that could be released? Or you believe that having a 3.5 times coverage ratio is better, like an economic recovery?

Sorry. In that case, Claudia, what we would need is a more sustainable recovery. It's almost impossible to have this year in Chile a nearly zero output gap than employment rate. Despite the recovery, we can discuss, for example, if the economy will grow this year 5% or 6%, but in any case, the employment rate will likely remain above the levels that we saw in the past That's why today it's very difficult to answer this question because despite the potential recovery, we need that this recovery will be sustainable in the time without having that type of policies from the government. I would say now that we would need more information and more signs of recovery as to change the direction of provision. So that's why today we remain very cautious. We would like to see the quality of recovery in the beginning of the year. Perhaps in the next quarter our vision will be different. I don't know. But according to the information that we have so far, we remain very cautious. and we prefer to say that we can rule out similar decisions today. Let's see what happens over the next few months.

Okay. Thank you.

You're welcome.

This concludes the question and answer session. At this time, I would like to turn the floor back to Banco de Chile for any closing remarks.

Okay. Thank you for participating, and we look forward

forward to speaking with you in the next quarterly earnings.

Thank you. This concludes today's presentation. You may disconnect your line at this time and have a nice day.