Banco De Chile ADS

Good morning and good afternoon, ladies and gentlemen, and welcome to Banco de Chile fourth quarter 2021 results conference call on the 4th of February 2022. At this time, all participant lines are in listen-only mode. The format of today's recorded call will be a presentation by Banco de Chile team followed by a question and answer session. So without further ado, I would now like to pass the line to Banco de Chile team. Please go ahead.

Good afternoon, everyone. Thank you very much for attending this conference call. It's a great honor for us to host this call today where we will analyze and discuss financial results and main achievements of Banco de Chile during the full quarter 21 and consequently the full year 2021. We are proud to say that, once again, our bank shows its unquestionable leadership in the local banking industry. Apart from having the highest net income, we also posted the strongest capitalization, the most solid coverage ratio, and we ranked first in demand deposit, among other accomplishments. In simple words, we can say that 2021 reaffirmed that Banco de Chile has a unique capacity to generate attractive and consistent profitability, as well as the best fundamentals to face the challenges in the long run. We will review this and other aspects through this presentation. As usual, we will start this call with an overview of the Victorian economy and business environment, and then Pablo Mejia will go into the analysis of the bank. Let me start with the macro section. Please go to slide number three. Generally, 2021 was a successful year for the Victorian economy. GDP grew about 12% surpassing any expectations held at the beginning of the year, when the consensus pointed to an expansion of around half of the actual growth. The positive trend of activity can be seen in the chart on the upper left of this slide. As we mentioned in previous calls, the improved growth is mainly attributable to the joint contribution of three factors. as the expansionary fiscal policy implemented since 2020, which aimed to mitigate the adverse effects caused by the pandemic. The government deployed several measures, including direct transfers of nearly 10% of the GDP, which increased the total spending by 53% year-on-year, and the fiscal deficit to 7.6% of the GDP. It's worth mentioning that this policy was possible due to the fiscal discipline that Chile has had over the time, which allowed financing these measures without compromising the fiscal sustainability in the long term. A second factor was related to the strong, timely, and coordinated response adopted by the central bank, which supplemented the actions from the fiscal front. Several measures implemented at the beginning of the pandemic, such as interest rate reduction, liquid injection, and other specific policies undoubtedly played a key role in the recovery experience last year. Third, the successful vaccination process where Chile was globally recognized as one of the countries with the greatest proportion of its population immunized. In fact, 86% of population was fully vaccinated in 2021, which was crucial in the greater mobility in the country. This was one of the most critical drivers over the pickup experience in services in the second half of the year, as the chart on the upper right clearly shows. The labor market has also been strengthening consistently with the greater dynamism of the overall activity. In December, for instance, the unemployment rate dropped to 7.2% as the chart on the bottom left shows, achieving its pre-pandemic figure. This rate, which is well below the peak posted in 2020, which was 13%, has been led by the gradual recovery in employment. However, the sluggish recovery in the labor force has also reduced the unemployment rate further. Several leading indicators anticipate that favorable growth rate will remain in the short term. One of them is the increase observed in total imports at the chart on the bottom right displays, which typically anticipate the evolution of private demand. Nevertheless, the important recovery observed in Chile has had important consequences in prices, interest rates, and the Chilean peso. Please move to the next slide, number four. The rise in inflation has been a consequence of several factors. One of them was accelerated growth in expanding, especially since mid-2021. As can be seen in the chart on the top left, the total inflation rate went up to 7.2% year-on-year in December, well above the policy target set by the central bank, which is 3%. Consequently, the headline inflation achieved the highest figure since 2008. The chart also shows the upward trend of the core CPI, which is the measure that excludes food and energy prices, confirming that inflationary pressures have spread over several goods, not being attributable to a few volatile prices. In fact, all core measures are above the 3% target. while long-term inflationary expectations have also increased beyond this threshold. These trends have added more concerns about potential second-round effects and higher-than-expected persistence of the CPI in the current high levels. Apart from the impact caused by the stronger growth, as we discussed in the previous slide, the weaker-to-land peso has also increased inflationary pressures on tradable goods, As the other right chart shows, the value of the Australian peso against the dollar has been falling since 2019, a trend attributable to the uncertainty in local political and economic scenarios and the global strengthening of the dollar and higher commodity prices as well. As Chile is an open economy, nearly 60% of the CPA basket is composed of tradable goods, global inflation has also affected even more local prices. In response to these trends, the central bank began a tightening cycle in August 2021. Since then, the board has raised the overnight rate from 0.5 to 4% in December, a decision that was followed by a 150 basis point hike in January to 5.5%. Despite the changes, the central bank has maintained a hostage bias, leaving room for additional hikes in the future, as suggested in the last monthly monetary policy meeting press release. At the start, on the bottom right displays, the higher overnight rate coupled with pension fund withdrawal and higher local uncertainty, as well as the rise in inflation expectations, has driven a pickup in long-term interest rates. Undoubtedly, these nominal and real trends have significant effects on macroeconomic conditions and bank profitability. We will discuss this aspect over the next two slides. Please turn to slide number five. We expect a GDP downturn from the 12% posted last year to 2.2% in 2022. As can be seen in the table of this slide, we foresee a slowdown in domestic demand due to the fiscal and monetary stimulus withdrawal. On the other hand, exports should have a recovery this year due to the lagged impact of the weaker currency and the expected normalization in global supply conditions. Despite these assumptions, we acknowledge a downward bias in our forecast, mainly due to the uncertainty in local political factors, as well as the persistent uncertainty relative to the evolution of the pandemic and some global geopolitical risks. Inflation will likely remain above the policy target during the next two years in this environment. we see an inflation above 6% at least until the third quarter of this year, mainly due to the second round effect. Nevertheless, we expect a decline in the annual inflation rate to 4.5% by the end of the current year. In this environment, the central bank is expected to continue raising the interest rate to 6.5%. Finally, As you can see in the table, we also forecast the deficit in both. The current account and fiscal balance will persist at least this year. Now, I'd like to discuss briefly the evolution of the Chilean banking industry. Please turn to slide number 6. As you can note, the loans in Chilean banking industry recovered in nominal terms from the weak level since last year. growing 3.6% quarter-on-quarter and 10.1% year-on-year. Mortgage loans continue to support growth with a rise of 4.2% quarter-on-quarter and 15.5% year-on-year. This was followed by commercial and consumer loans that grew quarter-on-quarter by 2.7% and 6% respectively. On a yearly basis, Commercial loans grew by 9% while consumer loans grew 6.7%. Nevertheless, it's important to note that the high inflation and the weaker exchange rate influenced this nominal growth level positively. It's also relevant to mention that thanks to a more normal economic environment and greater mobility levels, demand for customer loans has steadily risen during the year. As per mortgage loans, we expect that this product in the mid-term should gradually slow down as long as interest rates remain high and lending conditions remain more restrictive. As per commercial loans, we expect that there is still a significant amount of uncertainty and this will keep loan growth subdued during this year. In terms of results, the Chilean banking industry posted a record net income of 1.1 trillion pesos in the fourth quarter as shown on the chart on the top right, due primarily to higher inflation and still lower than normal levels of cost of risk, as you can see in the chart on the bottom right. Despite this improvement, it's important to be aware that most of these factors are temporary, and consequently, we expect a gradual normalization in profitability in the future. I'd like now to begin our analysis of the main achievements and financial results posted by Banco de Chile. Please turn to slide eight. We are strongly convinced that the solid performance that we have accomplished through Google Our History is thanks to our consistent strategy and sound fundamentals. These factors, when combined with our strategy initiatives, set the path to create a sustainable bank in the long term. On this slide, we list some of our main achievements in 2021. Putting our customers first in all decisions has been key for our success. In 2021, we achieved the highest level of net income in our history of 793 billion pesos, and we began recovering lost ground in terms of loan growth by expanding 11% year-on-year. We also rank first among our peers in terms of DDAs, asset under management, net fit, capital adequacy, and asset quality as measured by our delinquency ratio and additional allowances. Furthermore, in 2021, we saw an important rise in our customer base, and today we are proud that we have almost 730,000 new fund account customers and we issued our first 144-8 senior bonds for an amount of $500 million, among others. We also achieved important advances in ESG, as we will discuss in the next slide, number nine. For Banco de Chile, the commitment to sustainability is a fundamental pillar. Together with our workers and in alliance with diverse foundations, In 2021, we created initiatives that contribute to the progress of people, entrepreneurs, the country, and to generate long-term value for our organization and stakeholders. This slide highlights some of the several ESG projects developed during the last year. In order to promote a culture focused on sustainability, we strengthened our procedures and policies related to diversity, inclusion, ESG risk at financing and sustainability requirements for suppliers. Additionally, we also adopted the SASB disclosure framework, taking another step to improve the levels of transparency and quality of information available to the market. I'd like to invite you to visit our renewed section of sustainability in our corporate webpage bancochile.co. On the social front, we have a permanent commitment to entrepreneurship, which is reflected in diverse programs for SMEs. In this line. We highlight our participation in the Fogape Reactiva program, where we granted $1.8 billion in credit to SMEs in our sixth national entrepreneurial challenge, which attracted 24,000 micro, small, and medium businesses across Cuba. Among several initiatives to strengthen our community relations, we also offered free financial education courses and issued a social bond to finance women entrepreneurs. Within the actions related to the environment, during 2021, we have trained our risk specialists on international standards for analyzing social and environmental risk, launched a sustainable welcome kit for new clients that include recycled materials, and offered ESG-related products to our customers, such as green leasing and sustainable investment funds. As a result of putting sustainability as a strategic pillar and generating initiatives that create value, we received recognition from local and international institutions, including the Europeans that consider us as the best bank of the year, the most noted digital bank, and the best bank for financial inclusion. Finally, before moving to the next slide, another important highlight of 2021 was the three nodes upgrade on MSCI ESG rating, in which our bank moved to an A rating, the highest level in the local industry. This upgrade, together with all other recognitions, is proof that our actions are on the right direction to continue building the best bank for not only our customers and society, but also for our shareholders. Now, I'd like to pass the call to Paolo, who will go into more detail about Banco Etile's financial performance. Please turn to slide 11.

Thank you, Rodrigo. The unprecedented change that COVID-19 has had on the global economy is astonishing. This has probably permanently adjusted how we live our lives and use technology. This pandemic accelerated the development of digital banking at Banco de Chile and we have continued to innovate, creating new products and solutions to improve the digital experience for our customers in several fields. For example, in 2021, we created new smart payment platforms that use watches and mobile phones to pay for goods. We also reinforced our QR payment platform and launched new apps and form payment functionalities. We were also very active in growing our digital onboarding debit account called FAN and made available several new tools for these customers that aided in strengthening ties with them such as cross-selling insurance, credit and investment products. In fact, as you can see on the chart on the bottom left, over 20% of our FAN customer base has been cross-sold to other products, demonstrating its potential. Our goal is to provide the best customer journey in order to offer a great experience. By doing this, we can stand out from the competition and continue growing strongly with customers that use our products actively. Thanks to the successful rollout of this product, its benefits and new digital functionalities, we have grown to almost 730,000 customers in just five quarters. This achievement is very positive for us, especially when you consider that this will expand our retail customer base significantly. Please turn to slide 12. We believe that by providing the best customer experience, we can outperform our peers. This focus is proven by our excellent Net Promoter Score rating of 68% and our record low level of attrition of only 2.2%. It's also worth noting that these excellent indicators have taken place in conjunction with our emphasis of promoting and increasing use of digital channels among our customers, which demonstrates that we've been able to do this without affecting the superior service we deliver. In fact, this commitment to our customers can be seen on the chart on the top right, and also in customer preference when choosing a bank in the chart on the bottom right. We firmly consider that by providing superior service in all of our banking channels, we can continue leading the industry in customer satisfaction and grow faster and better than our peers in loans, deposits and overall customer income sources. Slide 13 We continued our focus in optimizing how we run our bank in 2021. The fruits of these efforts can be seen in our impressive efficiency ratio of 39.8% for the full year, reached thanks to the almost 0% nominal annual growth of our cost base in 2021. Specifically, to optimize our expense base, we set clear targets in three main areas. First, we continued automating processes by using technology and simplifying procedures. By using technology in the front and the back office, we are helping to keep the bank competitive in this highly challenging industry. These advances have permitted us to continue growing without the need to increase our headcount. In fact, in January 2021, we continued adjusting our organizational structure in similar ways that we did in prior years and leveraging the advances we achieved in terms of productivity and digital transformation. As a result, we have reduced our headcount by 16% in the last 5 years, increasing our productivity dramatically while maintaining a high level of service quality. Second, through a sharp changes in customer preference to use online banking and more digital services, we continued to roll out a new service model and branches and this allowed us to have a reduction of 62 branches in 2021. When compared to 2018, we have reduced our total branches by 30%, reaching 272 in 2021. Besides adjusting the service model and branches, the project also involved the integration of the consumer finance network into nearby Banco de Chile offices as well as automation of customer service and cashier areas. Another measure that continues to contribute to cost reductions is the implementation of a specialized division that seeks to find efficiencies in all processes in the bank. In 2021, this division has accomplished important milestones in reducing administrative expenses. It's clear that part of this excellent level of efficiency ratio that we achieved this year was due to the extraordinarily high level of inflation. Nevertheless, we continue seeing improvements in loans per employee, loans per branches, and total expenses to assets as shown on the bottom of the slide. which reaffirm the accomplishments attained on this matter. Please turn to slide 15 to begin our discussion on results. Our net income for the fourth quarter 2021 and the full year was outstanding. The strong bottom line had to do with both temporary and core factors. For instance, we benefited from a temporary higher inflation, rising interest rates, that improve demand deposit contribution and a persistent low level of cost of risk. However, these effects coupled with an improvement on core revenues propelled by stronger loan demand and enhanced fee income As you can see on the chart on the top left, we had an impressive bottom line of 284 billion pesos, 54% higher than the previous quarter and 125% above the same period last year. For the full year results, we grew 71% over 2020, as you can see on the chart to the right, with a ROAE of 20.2%. This bottom line surpassed all of our competition as shown on the chart on the bottom left. We generated 18 billion pesos more than Santander and surpassed BCI by over 270 billion pesos. We are also very proud that not only did we beat the competition in terms of our bottom line but also in terms of profitability as measured by return on average assets and in our capitalization levels. It's especially important to note that we are fully committed in creating a sustainable bank that permits us to have a long-term strategy and dependable results. We are certain that our business approach on this matter will pay off as it has in the past and continue delivering sustainable and superior profitability for our shareholders. Please turn to slide 16. Operating revenues grew almost 30% quarter-on-quarter and 15% year-on-year as a consequence of an expansion of non-customer income due to inflation and in the lower extent to customer income thanks to the rise in short-term interest rates and the reactivation of the economy that led to stronger demand for higher margin products. Net interest income, as you can see on the chart on the right, has risen sharply not only due to higher inflation, but also our superior funding mix that takes greater advantage of the monetary policy rate hikes than our main peers. Further on in the presentation, we will go into greater detail on our funding mix and how we compare to our competitors. As for fees, we saw a strong 14% year-on-year rise, excluding the upfront commission that we recognized on a monthly basis with an international insurance company related to a joint venture in insurance brokerage, which amounted to $60 billion in 2020 and $14 billion in 2021. I want to emphasize that this increase was mainly attributable to a substantial rise in client interaction fees. Specifically, we had a 25% jump in net card fees Mutual fund management fees were also up 17% as a result of portfolio rebalancing from fixed income towards equity funds based on the change in investor preferences. And insurance brokerage grew 15% thanks to greater dynamism in loan demand, particularly due to the reactivation of consumer loans, among other fees. When we compare our customer income generation to our peers, we clearly outrank at every level. As you saw on the top of the slide, we outpaced our competition in net interest income and we also beat them in our fee margin and total operating margin net of risk. During the pandemic, we were uncompromising to maintain a prudent long-term business and risk policies and this clearly paid off. Our focus is to create a bank that generates long-term value for our shareholders based on a customer-centric strategy rather than one based on taking increasing market risks through an aggressive treasury risk appetite that looks for short-term gains. Please turn to slide number 17. Total loans reached 34.3 trillion pesos, 11% greater than one year ago. Commercial and mortgage loans drove loan growth, rising year-on-year by 11.8% and 10.2% respectively. The strong rise in commercial loans relied on specific lending transactions carried out during the quarter with certain corporate customers and the rise in SME loans that continues to be influenced by the effects of the Fogape-Reactiva program deployed during the first semester. Mortgage loans, on the other hand, benefited from higher liquidity during 2021 and low interest rates during most of 2021. Both of these were influenced by higher inflation and the weaker exchange rates. Nevertheless, we expect that the current level of long-term interest rates and stricter credit conditions will continue to reduce the dynamism of the mortgage loan book during 2022. In terms of consumer loans, we have seen a recovery in growth beginning the second half of 2022. This was due to a more open economy and better employment figures, in addition to temporary liquidity conditions that began to be constrained. As you can see, consumer loans grew strongly at 5.6% quarter on quarter. Please turn to slide 18. One of our key competitive advantages is our superior funding structure that is bearing fruit in the current cycle of high interest rates and inflation levels. As you can see on the chart on the top left, 36% of our funding comes from non-interest-bearing Tesla demand deposits. This position not only provides us with lower costs of funds, especially in times of rising rates, but it also provides us with a structural gap that benefits us during higher inflationary periods, such as the current one. Our brand has allowed us to continue capitalizing in this source of funding more than our peers, especially from the retail segment, as you can see on the chart on the bottom left that shows our growth in average balances per account for personal banking customers versus our main peers. In addition, we have maintained a more stable funding structure when we compare our mortgage funding gap, as shown on the chart in the middle of this slide. This has permitted us to be better prepared to neutralize the effects of rising rates than our main peer, as was seen earlier in the presentation in the chart regarding the evolution of our net interest income. This means that we will not fund, for example, the mortgage loan expansion with costly or short-term funding sources in the future or finance bespoke by placing significant amounts of additional bonds at current higher rates. As for capital adequacy, I want to highlight that our superior Tier 1 capital ratio of 13% is significantly higher than all of our peers. This together with our strong credit risk ratings and debt placements in both local and oversea markets has permitted us to fund our business competitively. Growing responsibly by taking a prudent approach to risk management has been key to our solid track record of success. Please turn to slide 19. As you can see on the chart on the left, loan loss provisions reached 149 billion pesos this quarter, up from prior quarters, but it's essential to note that this high figure was due to our prudent policies that established 80 billion pesos in additional provisions this quarter. On a year-on-year basis, total loan loss provisions dropped from 463 billion pesos to 373 billion pesos in 2021. The quality of our portfolio and our risk management culture is evident when compared to our peers, as you can see on the charts to the right of the slide. We surpassed all of our peers in these indicators. We have accumulated 540 billion pesos in additional provisions, which provides us with a coverage ratio of over four times, lower cost of risk excluding additional provisions, and we have the best delinquency ratio of only 0.85%. We firmly believe that this risk management advantage will allow us to face the aftermath of the pandemic cycle better than our peers while taking greater advantage of growth opportunities, as we have seen in the last semester, where we have been able to maintain our overall market share as compared to the decrease displayed by our main competitor. Please turn the slides 20. Our focus to control costs is bearing fruit. This year, through our efficiency programs, we have barely grown by only 0.6% year-on-year. As you can see on the charts on the right, salaries dropped by 6 billion pesos, principally as a result of lower headcount and organizational restructuring. Likewise, infrastructure related expenses posted a decrease as a consequence of the implementation of our new service model in the network branches, mostly deployed in 2020. In turn, administrative and other expenses showed a modest rise in line with our advances in digital banking and increased commercial activities that reactivated commercial campaigns, all of which explained the increase in IT and marketing expenses. In terms of our efficiency ratio, we improved by almost 6 percentage points from 45.5% in the fourth quarter of 2019 to 39.8% this quarter, and even surpassed our main competitor. Undoubtedly, the sharp improvement is influenced by the effect of higher inflation on net interest income. For that reason, it's even more important to emphasize that our ratio of total expenses to assets, which is not affected by inflation, also decreased by 20 basis points this year. We are confident that through our firm focus of continual cost improvements together with our advances in digital banking, which includes the use of business intelligence, robotic process automation and better digital contact channels for our customers should allow us to sustain better levels of efficiency than what we have posted in the past. Today, our efficiency ratio is temporarily positively affected by the high level of inflation, but we're certain that we should be able to post consistently better levels of efficiency than the levels we have achieved prior to 2021. Slide 21 As discussed in previous conference calls, it's important to fully understand how the banking industry works and creates value for shareholders in the long run. from both a net income perspective and a comprehensive income point of view. Different strategies and market conditions can change the bottom line result under net income or comprehensive income which includes unrealized gains and losses from the changes in fair value of available for sale portfolio and derivatives for cash flow accounting hedges that are accounted directly against equity. In some periods of time, net income only shows part of the valuation creation story. As you can see, we also outperformed all of our peers in comprehensive income with 821 billion pesos. This result is significantly greater than all of our competition, as you can see on the chart on the left. It's also important to highlight that paradoxically, losses in OCI actually increase ROE by reducing shareholders' equity. One of the primary differences of our business strategy to our main peer is our focus on generating dependable results from commercial banking activities rather than treasury revenues, which generally means taking greater market risks while imprinting volatility in the P&L. Please turn to slide 22. Before answering your questions, I want to highlight a few key ideas from this presentation. Clearly, the spread of COVID-19 has changed significantly the economic environment across the globe and Omicron has added to these uncertainties. Within this context, 2021 was a positive year for GDP growth and the slowdown is expected for 2022 to a level around 2.2% with a gradual recovery in employment. This assumes that there will be no more lockdowns and that Omicron doesn't impact the healthcare system significantly. Within this context, we posted a historic bottom line of almost 800 billion pesos and led the industry in capital, coverage and demand deposits. We achieved this by managing the bank accordingly given the environment growing responsibly in key market segments and prudently establishing 220 billion pesos in additional provisions. Based on these drivers and given our strong position in all capital ratios as well as the economic outlook that should translate into lower loan growth for the coming years, our board decided to propose a dividend payout ratio equal to 100% of our distributable earnings to our shareholders. Other noteworthy advances this year was ESG and digital banking. Our commitment to make Banco de Chile a sustainable bank is paying off. Not only are sustainable companies more profitable, but they also have greater access to financing. This is especially relevant today. For this reason, we are very honoured when we received an A rating by MSCI ESG and an unprecedented three-notch upgrade. In terms of digital banking, our progress was recognised with the impressive level of growth that we saw in our fund account customer base and the high level of cross-sell we achieved. As for our outlook for 2022, we expect that temporary drivers should remain, such as a higher than average inflation, low levels of cost of risk. If this occurs, we can't rule out that ROE will be higher than our long-term ROE levels of 16% to 18%. To conclude, we're proud that we have once again demonstrated that our long-term strategy has maintained Banco de Chile as the strongest bank in the country and the best investment for shareholders. Thank you for listening, and if you have any questions, we would be happy to answer them.

Thank you very much for the presentation. We will now be moving to the Q&A part of the call. If you have any questions, please press star 2 on your keypad, that's star 2 on your keypad, and wait for your name to be called. You may also ask a voice or text question using the web platform. Thank you very much. Our first question comes from Mr. Tito Labarda from Goldman Sachs. Please go ahead, sir. Your line is open.

Hi, Pablo. Good morning. Thanks for the call. My question in terms of your outlook for inflation and interest rates and remind us how that impacts your margin. Also thinking if inflation remains elevated in the first half of the year at around that 7% level or so, should that imply ROE can remain at the similar levels that we saw in 4Q? How do you think maybe inflation involves throughout the year, impact on margin, and I guess also profitability and also the sensitivity to higher interest rates. Does that offset some of the higher inflation that we're seeing, or how should it impact you? Thank you.

Thanks, Tito. So inflation is an important factor for our results, and one of the reasons why we had a – it's part of one of the reasons why we had a very strong net interest margin in 2021. And what's expected is the first half of 2022 should continue with higher than normal levels of inflation. Today, for every 100 basis point change in annual inflation, it affects us around 20 basis points in import. We have a gap on the balance sheet of about 8 trillion vessels. So for every 100 basis points, it's about 80 billion vessels. If we look at... The effects of the rise in the monetary policy rate, we have for every 100 basis point change in the short term, it's around 5, 10 basis point change in terms of net interest margins. That would be after one year. And when everything is fully priced in, we're seeing something close to the 25, 30 basis points for every 100 basis points. So if we put all this together, what we see is that 2022 should be a positive year because we've seen this strong rise in interest rates. And thanks to this, we should see slightly better NIMS in 2022 versus 2021. but being partially offset by the lower level of inflation. But we can't rule out that there'll still be higher rises in interest rates and inflation, depending on the economic cycle and what's to come. Rodrigo, do you want to add anything to that?

Yeah, thanks, Paolo. Thanks, Peter, for... For the question? No, I just want to highlight what I said previously in the beginning of the conference call, that we have an upward bias in different estimates of both interest rates and inflation rates. Even though our baseline scenario considers an inflation rate at 4.5% by the end of the year, the annual inflation rate will be hovering around 6%, 6.5%, at least until August or September of this year, which means that there are risks of some second-round effects in other prices and non-tradable goods, etc. So my point here is that we can rule out a higher than expected inflation rate at the end of the year, as well as the same for... the interest rate. So in our baseline scenario, we have an overnight rate of 6.5%, but once again, we can rule out that number slightly higher than this. So basically, in our baseline scenario, even though we have downward bias in our forecast for GDP, we have an upward bias in terms of interest rate and inflation as well. So we'll be basically dependent on the evolution of the chain rate and some political factors in the future. So the upward bias in price and interest rate is an important aspect to monitor during this year. Thanks, Paul.

Maybe one thing to add as well, the fourth quarter had very high inflation. It had a 3% level of inflation. So if you annualize that, that's close to 12%. So we're not expecting that the quarters will have such a high level of inflation in the next coming period. But for the full year, we're expecting net interest margins to be more positive than 2021.

Also, in our baseline scenario, the fourth quarter of the last year was a peak in terms of quarterly inflation. So we are assuming a gradual and very gradual normalization of inflation rate in the future, even though we are no less on our bias in that case. Thank you.

Okay, yeah, thank you, Pablo and Rodrigo. That's helpful. Just, I guess, one thing to clarify on the policy rate increase. You mentioned a five-bit change in margin after one year, and I assume, I think that was a positive change. But in the short term, is there a negative impact as your liability is repriced?

It's a five to ten basis point improvement in net interest margins. And in the short term, since there's been a strong structural change in net In the funding mix of Banco de Chile, where we have a huge amount of non-interest-bearing deposits, we're not seeing an impact in the short term. We're seeing smaller improvements, but it's possible.

Okay, so that's clear. So no impact from the rising rates in the short term and after year five to ten. No. In the past, it was different.

Funding was different.

Gotcha. Understood. That's clear. Thanks, Pablo. And then, so as the inflation normalizes throughout the year, and I guess also your tax rate was a bit lower in the quarter, just thinking about the ROE, you know, and you mentioned you should normalize back to pre-pandemic levels, but, you know, can you remain above 20%, I guess, in the short term as inflation is still a little bit elevated before kind of getting back to maybe closer to 17, 18 that you had, you know, pre-pandemic. Is that reasonable?

We're still like in transitional years. So everything's very different. There's still a high level of liquidity. We still have high levels of inflation. We have rising interest rates, low costs of risk, very good payment behavior. So when we combine all of this, it provides us with probably in the short term, higher levels of profitability than our long-term levels. The levels that we're seeing today, 2021 and 2022, will possibly, based on this scenario, be above those 16 to 18% levels that we say for the medium term, which are more sustainable, thinking of a cost of risk closer to 1.1%, inflation back down to 3%. So, in the short term, yes, it's possible to have a better, a higher level of ROE than what we should expect in a more normal scenario.

Okay. Okay, sorry.

So, let me add just one idea. So, basically, it's important to keep in mind that inflationary pressures will be remaining in the first half of the year. So that's why this transition, the normalization, that's how you already mentioned, will be from the high level in the first half of the year because we will have a high inflation, and therefore the normalization will be probably from the second half of the year and thereafter in the long run. We will likely have a more normalized ROE, which is a number, as we said in previous conference calls, with everything in equilibrium. It would be a number between 16% and 18%. But this year, given the high inflation and high interest rate as well, probably we will have a first half with a higher level of stability relative to the second half of the year.

Okay, yeah, that makes sense. That's good. Thanks, Pablo. Sorry, and just one final point to clarify on the tax rate, because it was only around 15%, I think also benefited from the higher inflation. Should that get back to the 20%, 22% level?

Yeah, so in taxes, the tax authorities use price level restatement to calculate taxable income, so higher levels of inflation. reduces the effective tax rate. So with the more normalized level of inflation, we should see an effective tax rate closer to the 23% level when we're at 3%. But for 2022, it will depend on the inflation that we see. So probably below the 23%, but above what we've seen in 2021, depending on where that inflation number is. Rodrigo, did you want to say something?

No, no, no, sorry, sorry. That was fine.

Sorry, sorry. Okay, great. Thanks for taking all my questions.

Thank you very much. Our next question comes from Mr. Jason Moline from Scotiabank. Please go ahead, sir. Your line is open.

Thank you.

Actually, maybe first just to follow up on the effective tax rate. And you mentioned the impact of inflation, and we know that. We've seen some discussions that the government will need to raise tax revenue and raise effective tax rates. How are you thinking about that? And is that potential change in your long-term ROE expectation that banks could pay higher taxes going forward? And secondly – maybe given the news about Citigroup's exit from retail banking, if you can provide an update on Citi's partnership with Banco de Chile. In the past, the bank has talked about Citi supporting international business opportunities. Maybe you can speak to us about Citi's involvement in other BCH activities, particularly if there are areas where a city supports Banco de Chile as a 50% owner of the entity that controls 51% Banco de Chile. Thank you.

Rodrigo, maybe I'll take the Citigroup question. I'll start, and then you take the taxes question. In terms of the... In terms of the relationship with Citigroup, we have a strong relationship with Citigroup and we have a commercial agreement that sets the guidelines on how we work together with Citigroup in Chile and abroad. Citigroup provides us support in terms of more international business, especially custody, multinational companies. So they're very much involved in that. place bonds outside the stock brokerage, et cetera. In terms of the retail side of the business, the strength with Citigroup within Banco de Chile is more focused on the commercial, on the corporate side of the loan book. Going forward, they continue to have the same level of participation in Banco de Chile. We don't have any additional information, whether there's something going to change in that front, but they've been happy with the relationship that we've had up to this point. So maybe, Rodrigo, if you want to add anything to that or go straight into the tax changes.

Thanks, Pablo. I guess that's in terms of the second question of your committee, the answer. In terms of the first question about the tax rate, I think that it's important to keep in mind seven things. First, We are aware of the increase in gross fiscal debt in Chile according to fiscal figures. Last year, the gross debt was 56% of the GDP. The fiscal deficit was 7.6% of the GDP. Of course, these are higher than second number when we compare with previous years. So that's why we will likely... be discussing in the country some taxes, tax reform, et cetera, et cetera. Having said that, it's very important to mention that any decision related to taxes or spending has to be defined by the central government. I mean, the next president of Chile will have to define any potential changes or proposals in terms of changing any tax or the fiscal spending in the future, etc. According to some interviews and other statements that connect people appointed by the next president of Chile, Gabriel Boric, probably the potential tax changes will be more focused on personal tax rates rather than corporate tax rates. So that's why in our baseline scenario, we are not considering important changes in that area, but It's very important to follow the discussion. Any proposal has to be made by the central government, which will take office on March 11th. But according to available information, probably there will be more changes from the personal tax rate rather than the corporate tax rate. But again, there is not an official draft. There is not an official proposal. It will have to be announced by the next president of Chile, by the next government, actually. So we don't have information as to assume important changes in terms of the tax rate so far.

Thank you very much for your comments. You're welcome.

Thank you very much. Just a reminder, star two for any additional questions. Our next question comes from Mr. Daniel Moore from Credit Core Capital. Please go ahead, sir. Your line is open.

Hi, good morning, everyone. Can you hear me?

Yes, please go ahead. Hi. Hi.

Thank you. Sorry that I have some communication problems. Thank you, Pablo, for the presentation of the Banco de Chile team. I have a couple of questions. The first one, I would like to understand the current trend of the cost of risk considering the pickup in the fourth quarter and the recording of additional provisions. The coverage ratio right now is above 400% are more than healthy indicator and with asset quality indicators under control, what are the expectations or what are you expecting ahead that may you keep this conservative approach? What should be considered the normal cost of risk in 2022? And my second question is regarding the Z1 ratio is 30%, well above that of peers and also the fully loaded, regulatory minimum. Do you expect to use part of this capital to boost loan growth or do any other investment or we could consider this indicator, this figure as the normal loan term seed one for Guantanamo, Chile?

Okay. So maybe the first question about risk and additional provisions, I'll take that question. And Daniel Galarte can touch base in terms of the basal In terms of cost of risk for 2021 and what we saw in 2020, you're correct that in 2021 we established 220 billion pesos in additional provisions and we had a very strong level of coverage of over four times. So what we're expecting for 2022 and what we've seen from 2021 as well is that customers are having a very good payment behavior because of high liquidity levels, because it's more of a transitional period, 2021, 2022. We expect to continue being transitional periods with probably lower levels of cost of risk than what we would imagine for our long-term level of cost of risk, which would be closer to 1.1 in 2020. 2022, we're expecting a level still in a transitional period below that 1.1, probably around a level closer to 1.0%. So what we've seen is very good payment behavior from all customers. We have good NPLs. What we've seen as well is that our loan portfolio, the SME loans, the Fogata loan portfolio, they're all operating very smoothly, but we still think that this is, this depends on the evolution of the economy and it's transitional. Going on to your, so in 2022, still a transitional year, close to the 1% cost of risk. Beyond that, we should probably trend to what we have always said is closer to our long-term level of 1.1% cost of risk, around that level. In terms of additional provisions, it's correct, we've had, we've implemented 220 billion pesos of additional provisions in 2021. In fact, in the fourth quarter, we had 80 billion pesos of additional provisions. So these provisions are still related to uncertainties relative to the long-term economy. The uncertainties of the economy still remain. So due to this economic scenario, political scenario, we've been implementing these provisions. But nevertheless, what we think is if there's a recovery continues in the future, and it's a clear recovery, and uncertainties tend to fall, we can't rule out as we've mentioned in the past, the portion of the additional provisions that we've implemented in the past, we can reverse and that's a decision that will have to be taken by the board. We don't have an exact trigger on how that would work. But it's something that the bank is and the board has mentioned that would be a possibility in the future when there's less uncertainties. Now, Daniel, would you like to go into the next question?

Yes, hi, this is Daniel Galarza. Yes, that's perfect. Thank you. Well, regarding the Z1 ratio, actually, we have a 13% Z1 ratios of December 21. Of course, this is... an important gap regarding the regulatory thresholds. We feel very confident with our capital structure today and capital position. This is not intended to finance any particular investment. Actually, it's basically the room we have to grow in our normal course of business over the future, given the scenarios and the economic scenarios that Rodrigo already analyzed. Our capital position basically relies on our income generating capacity, of course. We have a very successful year in 2021. And also, it's important to know that this is a same-scene implementation process. Of course, the Basel III landing in Chile is still in progress. It will be there will be a facing period of four years from now. And of course, we believe that we have, we need positive gaps and important gaps in order to address this implementation process in the future. And however, we feel very confident with our current position in terms of capital. And due to that, of course, that allow us to increase our dividend payout ratio from 60% in the last 60 or 70% in the last year to 100% as a proposal for our shareholders meeting that will be next March. So, net-net, again, we feel very confident. We don't think that we need more capital in the near future, but we are also aware that we need to face the transitional process of Basel III until it gets.

Perfect. Thank you so much.

Thank you very much. I am seeing no further questions at this point. I'll pass the line back to Pablo for the concluding remarks.

Well, thanks for joining us in this conference call, and we look forward to joining again in our next conference for the first quarter 2022 results. Thank you.

Thank you very much. This concludes today's conference call. We'll now be closing the call. Have a great day and a great weekend. Thank you.