Banco De Chile ADS

Good afternoon, everyone, and welcome to Banco de Chile's fourth quarter 2024 results conference call. If you need a copy of the management financial review, it is available on the company's website. With us today, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer, Mr. Pablo Mejia, Head of Investor Relations, and Daniel Galarza, Head of Financial Control and Capital. Before we begin, I would like to remind you that this call is being recorded, and the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties and actual results may differ materially. Please refer to the detailed notes in the company's press release regarding forward-looking statements. I will now turn the call over to Mr. Rodrigo Aravena. Please go ahead, sir.

Good afternoon. Thank you for attending this conference call. Today... We represent the overall performance of Banco de Chile during the fourth quarter and consequently the full year 2024. We are proud for the overall performance of Banco de Chile in the last year. The strong financial results and significant advances in several key areas reaffirm the unquestionable leadership that our bank has had over time. As we highlight in slide number two, In 2024, we managed to outperform our main peers in many dimensions. On the financial side, we left the banking industry by posting a net income of 1,207 billion pesos, equivalent to a return on average capital of 23.1%, well above the 15.8% achieved by the local industry. This outstanding result was explained by positive figures for margins, asset quality and efficiency. We also had important accomplishments and results in several non-financial aspects. Some of them include further advances in digital banking, the creation of a new subsidiary that will compete in the acquiring business while keeping our leading position in key areas contributing to our strategy, such as service quality and mutual funds. Our positive performance was recognized by several institutions, as can be seen on the right of this slide. In the rest of the webcast, we will present a deep analysis of the performance of our bank during the last quarter and the full year. Before that, I'd like to share a brief analysis of the macroeconomic and business environment. Please go to slide number four. Brazilian economic growth continues improving. as can you see in the slide on the left. According to the monthly GDP index, the economy expanded by 2.5% in 2024 after the weak 0.2% expansion posted one year ago. The chart shows a sequential improvement in activity during the last year, when the GDP growth rate went up from 2% year-on-year in the first half to 3% year-on-year in the second half, which was partially attributable to the gradual normalization in deflation and important reduction in the overnight rate, among other factors. In fact, as you can see from the chart on the other right, factor growth has been led by the acceleration in commerce, reflecting the gradual improvement in domestic demand. In the fourth quarter, commerce activity, according to the monthly GDP breakdown, went up by 7.4% year-on-year, posting the highest expansion in almost three years. Consequently, commerce expanded by 3.8% in 2024, well above the 3.5% contraction seen in 2023. Mining also had an important recovery as it grew by 7.5% year-on-year in the fourth quarter and 6.2% in the full year. Service growth has been more stable as they have already improved during previous years. The slight recovery in the activity has also been seen in the labour market. In the fourth quarter, the unemployment rate was 8.1%, declining 40 basis points compared to the rate seen one year ago, due to the 0.9% year-on-year increase in total employment, while the labour force went up by 0.5%. it is worth highlighting that employment was driven by wage workers, a category that increased by 2.7% year-on-year in the quarter. Because of these figures, the unemployment rate decreased from an average of 8.6% in 2023 to 8.5% in 2024. Please go to slide number five to analyze the evolution of price rates and their impact in the overall economy. We've seen a higher than expected persistence in the overall CPI. In December 2024, the CPI posted a 12-month increase of 4.5%, a figure that stood well above the expectations held a few months ago. This situation has been a consequence of two main factors. First, the rise in electricity bills, which according to central bank estimates, should have a total impact of nearly 150 basis points in inflation. Second, the unexpected weakness in the trillion peso, a factor that is especially relevant for an open country as Chile, where more than half of the CBA basket is composed of tradable goods. Given these trends, the central bank has acknowledged the existence of average risk in inflation. In this environment, the Board decided to maintain the interest rate at 5% in its last Monetary Policy Meeting held in January of this year. Nevertheless, it is important to mention that the Board reduced the rate by 625 business points between July 2023 and December of 2024 as seen in the upper right chart. Consequently, the Central Bank of Chile has been one of the most active globally in reducing reference interest rates. The 29 peso weakened significantly in 2024, as seen in the chart on the bottom left. Specifically, the chain rate averaged 944 pesos per dollar in the full year, rising 13% when compared to 2023 and posting the weakest figure historically. Nevertheless, it's worth mentioning this depreciation has been explained, apart from the easing cycle in local monetary policy, by the strengthening in the US dollar globally, which has been reflected in the upward trend shown by the DXY line in the chart. In this context, it's important to be aware of the positive influence that the weaker peso has had on the external account. since the trade balance reached a historical surplus of $22 billion, which helped to narrow the current account deficit. I would like now to share our baseline scenario for this year. Please move to the next slide, number 6. we expect the economy to expand by 2% this year. This expansion will be driven by a still positive dynamism in export, which should positively influence by the weak exchange rate and persistent high copper price. Nevertheless, we acknowledge the negative bias in our GDP forecast as a consequence of several measures, such as import tariffs implemented by the US and other countries. We also expect the domestic demand to improve because of the slight recovery that we would see in investment, driven by better expectations and lower levels of interest rates. After the temporary rise in inflation, we expect rather normalization this year. This focus is based on three main factors. First, the absence of adjustment in regulated price comparable to the magnitude of electricity bills last year. the expected appreciation in the trillion pesos should contribute to reduce pressures at the tradable level. Finally, the slight reduction in the GDP growth should also contribute in the margin to reduce inflationary pressures. However, these factors will not be enough to take the CPI variation back to the 3% target midpoint this year. Overall, we expect 3.8% inflation this year with an upward bias. In this environment, We do not expect changes in the reference interest rate, at least in the first half of this year, and reduction by the end of this year towards 4.5%, only if inflation expectations decline to 3% in the two-year policy timeframe, without second-round effects. As we mentioned in previous webcasts, these forecasts are subject to risk. The evolution of the global environment is extremely important for Chile, given its integration into the rest of the world. In this regard, factors such as the GDP of China and the US, geopolitical tensions, and the new measures to be implemented by the new authorities such as in the US, in crucial respects such as tariffs and migration policies, are factors to watch. On the local side, it is important to analyze the evolution of inflation, especially considering potential second-round effects, as well as the leading indicators of gross investment, since it is the main concern on local growth. Finally, monitoring the discussion in the political agenda is also relevant, considering this year there will be presidential and congress elections. Before moving to the bank, I'd like to present briefly the main trends observed in the banking industry. Please move to the next slide, number 7. Despite the slow economy, banking profitability remains strong. The return on average capital was 15.4% this quarter, slightly below the previous quarter and last year, as shown in the top left graph. This stability in profitability can be attributed to diverse factors, including efficient cost management, income diversification, market factors that have gentle return to normal levels, and robust risk mitigation strategies. Financial institutions have managed to maintain their performance despite global economic challenges, demonstrating resilience and adaptability in a changing environment. Additionally, technological and digital innovation are playing a crucial role in optimizing operations, reducing costs and improving customer experience, thus positively contributing to overall financial performance. In terms of business volumes, as illustrated by the chart on the right, the weak economic environment resulted in modest loan growth for the industry in 2024, with a nominal expansion rate of 4% year-on-year in total loans, Mortgages have been the primary driver of this growth by increasing 6.2% year-on-year, while consumer loans have risen by 4.6% over the same period. Instead, commercial loans experienced a slower growth by rising only 2.4% year-on-year. The persistent weak growth, particularly in commercial loans, has led to significant shifts in portfolio mix when compared to pre-pandemic levels. Currently, As described in the chart on the bottom left, mortgage represents 35% of total loans and increased from 29% in 2019. During the same period, commercial loans have decreased from 56% to 52% and the consumer portfolio has declined from 15% to 12%. Accordingly, without taking into consideration the fact of higher than normal inflation during this period and higher than neutral overnight rate, net interest margin would be lower than in 2019 due to portfolio rebalance, all things equal. Next, Pablo will provide more details about Banco de Chile progress and financial performance.

Thank you, Rodrigo. Let's start with an overview of our strategic progress. Please go to slide number nine. We are successfully executing our strategy that is focused on customer satisfaction, efficiency, and sustainability. Our advances are driven by six main priorities shown at the center of the slide, and on the right are our mid-term targets. our main priority in this regard is to be not only the most profitable but also the most sustainable bank among our peers. As such, We are aspiring for a long-term return on average capital of around 18%, assuming positively sloped yield curves and inflation returning to the central bank target. If yield curves begin to steepen, inflation remains above neutral levels in the short run, and we recover our pre-pandemic mix of loans, this level could possibly be higher. In line with this, our cost-to-income performance in recent periods has consistently surpassed our long-term targets. For 2024, in particular, this has been attributable to strong top-line growth resulting from increased customer revenue and temporary extraordinary effects post-pandemic as well as effective cost control initiatives. We are confident that our long-term productivity levels will continue to improve through ongoing and forthcoming operating improvements, which we will discuss later in the presentation. In terms of market share, our aspiration is to be the leading bank in commercial and consumer loans as well as demand deposits in local currency. Throughout the year, we have increased our market share in high margin lending products such as consumer installment loans, by maintaining an appropriate risk-return balance based on responsible credit risk management practices. Additionally, we have regained leadership in local currency demand deposits, a traditional competitive advantage that has provided us with both competitive funding and a stable source of funds. We are also dedicated in providing high quality customer experience and contributing positively to society. The result of this is reflected in our remarkable Net Promoter Score and Corporate Reputation ranking where we are positioned in second place. We have achieved this by actively investing in resources and comprehensive training programs for our employees to ensure they deliver exceptional service, continuously reviewing customer satisfaction levels, making relevant adjustments to improve contact channels, processes and product offerings, and actively engaging with the community in diverse areas such as volunteering, education, entrepreneurship, among others. In the next slide, number 10, we'll cover the highlights of our advances in digital banking, efficiency, and ESG. In terms of digital banking, we are pleased to report continued growth in our main digital account fund, achieving 1.7 million customers last year. We have further expanded our customer base with the introduction of new digital accounts such as Fanaoro and a current account for university students. We have also enhanced our main banking application by adding new features to ensure seamless experience to our customers. A key milestone was the integration of the insurance platform which allows customers to manage their policies directly within the app instead of using a separate application. For companies, we remain committed in innovation, delivering enhanced financial solutions. In 2024, we launched many initiatives, including Pago Fácil, a tool designed to simplify mass payment services for customers and streamline their financial operations. Additionally, we announced a new subsidiary focused on expanding our role in payment processing, which will be providing businesses, especially SMEs and middle market clients, with a flexible and efficient payment solution. On the efficiency and productivity front, we continued implementing diverse initiatives to position ourselves as a fast, secure and fully digital bank. As part of our optimization plan, we have digitalized our branch sales and service processes, creating a more seamless customer experience that encourages greater adoption of online channels. These enhancements have allowed us to reduce our branch network by 12% year-on-year and headcount declined 5% year-on-year, reflecting our commitment to efficiency while providing customers with the tools and incentives to manage their banking needs digitally. On another front, we have worked closely with our subsidiaries to generate corporate-level synergies, optimizing resource allocation and space usage. Additionally, we are optimizing technology-related expenses by renegotiating key contracts, consolidating IT and some back-office processes, and enhancing cloud and data center infrastructure. In marketing, we have prioritized digital strategies, reducing traditional marketing costs and optimizing loyalty program expenses. Importantly, all these initiatives have been accompanied by high customer satisfaction and an outstanding organizational climate, reinforcing our strong relationship with our clients and employees. Our commitment to becoming a more efficient bank has been driven by significant advances including expenses growing below inflation while maintaining a solid cost to income ratio. While there is still room for improvement, we are confident in our ability to achieve even better long-term goals. Finally, in 2024, we remain committed to being a sustainable and responsible bank. At Banco de Chile, we recognize that entrepreneurs are a key force for the development of the country, which is why we actively support them through diverse programs. For example, we led by far the market in financing SMEs through the Fogape Chile Apoya program. Additionally, we organized various contests such as the Entrepreneur Challenge and Women Who Inspire, fostering innovation and inclusion in the business landscape. Last year, we also continued boosting our volunteering program, covering areas such as financial education, technical professional education, entrepreneurship, environmental care and inclusion. And finally, for the 11th year in a row, we were named the best company for attracting and retaining talent in Chile, demonstrating our positive impact on the community and our employees. Please turn to slide 12 so we can begin discussing the key highlights of our financial results for the quarter and the full year. We have once again demonstrated our capabilities of achieving a strong quarterly and annual results despite the challenging environment, sustaining our track record of success. Our net income for the quarter reached 298 billion pesos, representing an increase of 3.5% to the previous quarter, For the full year, our results amounted to 1.2 trillion pesos with a return on average capital of 23.1%. Furthermore, when comparing our results with those of our peers, we consistently achieved a superior performance across all metrics throughout the year. As illustrated in the accompanying charts, we not only maintained a significant year-to-date lead in net income, but also continued to deliver an exceptional return on average assets that almost doubles our closest competitor. These achievements underscore our competitive edge in the market, demonstrating our sustained leadership in the sector and the effective implementation of our strategic initiatives. Please turn to slide 13. Regarding operating revenues, we posted a 10% decline in quarter-and-quarter growth and an annual increase of 1.9% full-year figures. This performance was driven by steady growth in customer income which showed a quarterly rise of 3% and an annual increase of 9% given the recovery in certain commercial products. Nevertheless, this was counterbalanced by a quarterly reduction of 38% and an annual decrease of 19% in non-customer income. This decline was primarily attributable to the maturity of the FCIC program across the industry which had provided a low-cost funding source and also the effect of lower inflation on our revenues. It's important to note that the main drivers that expanded customer income on a yearly basis were income from loans up 107 billion pesos, higher contributions from both demand deposits and time deposits growing 70 billion pesos and fees rising 26 billion pesos in 2024 when compared to 2023. The core of our commercial strategy is long-term sustainability. This means avoiding unnecessary short-term risks and focusing on long-term growth by managing all business units responsibly. This emphasis has gradually allowed us to increase average spreads as well as to expand loan volumes in target segments and products. Consequently, the growth in income from loans was largely due to consumer loans and to a lesser degree, residential mortgages. The consumer loan book balances and spreads grew 4.6% and 164 basis points, accounting for over 90% of the total rise in loan income. Mortgage loans also contributed significantly with average balances increasing by 7.4% year-on-year. In contrast, Commercial loans rose by only 0.6%, with SME segments growing 2.6% while wholesale business remained flat, reflecting the different dynamics affecting the banking segments. In terms of funding, we benefited from higher contribution from total deposits driven by a 6.8% expansion in DDA average volumes, particularly over the second half of the year, and improved margins on time deposits. The expansion in time deposit contribution has primarily been the result of proactive and targeted pricing strategy which has been deployed across all business segments. Finally, the yearly 4.8% increase in net fees was concentrated in three income streams. First, revenues from mutual and investment fund management grew by 20% year-on-year. This was driven by a significant expansion in assets under management that rose 38% year-on-year on the grounds of the launch of new series of funds offered to our customers. Second, fees from credits and contingent loans rose 20% year-on-year. This was supported by both greater fees from layers of credit, guarantees and collaterals which is aligned with a positive trend posted by trade finance loans and the annual increase in loan prepayments, primarily attributable to greater prepayments in consumer loans and to a lesser degree by commercial loans due to some wholesale banking operations that were repaid in advance or restructured, all in line with the reduction of the interest rates throughout the year. Finally, cash management services and wire transfer payments Orders rose 11 billion pesos due to the renegotiated interbank clearance fees and greater transactions and foreign currency payments orders requested by our customers. The charts on the right show how we performed compared to our competitors. We continued our trend of outpacing our peers in all the main profitability ratios. Net interest margins stood at 4.9% for the year, while fees margins and operating margins posted solid levels of 1.2% and 6.6% respectively. This positive performance stems from the successful implementation of our business strategy and the dedication to providing an enhanced value proposition to customers through both the lending and non-lending products and services by leveraging both our banking capabilities and the specialized services provided by our subsidiaries. Please turn to slide 14. The breakdown of our loan portfolio is distributed across different business segments, providing stability and revenue generating capacity. Currently, our retail loan portfolio represents 65% of the total loan book, while wholesale commercial loans account for 35% of the overall loan portfolio. Additionally, as illustrated in the charts on the bottom right, Commercial loans are well diversified across different economic sectors. This distribution is important because during economic cycles, like the ones we have been experiencing in recent years, one sector can outperform another, helping to support our bottom line on average while avoiding results in volatility. The sluggish performance of the local activity during the last years has impacted loan growth across the industry. A lack of private investment coupled with low business and consumer confidence has hindered growth. Consequently, total loans grew moderately in nominal terms of 3.4% and decreased 1% in real terms. As mentioned earlier, the main drivers of this growth came from the retail segment as illustrated in the chart on the bottom left. Instead, the wholesale banking segment was affected by the market dynamics that led to subdued demand for loans from both corporations and SMEs. For 2025, we anticipate a reversal of this trend with commercial loans gaining momentum versus the low expansion in 2024, primarily driven by lower inflation, reduced political and economic uncertainties, and lower short-term interest rates. These factors should also enhance dynamism in retail products. As a result, we expect the industry to grow by approximately 4.5% in nominal terms with Banco de Chile outperforming this, particularly in our target segments. Please move to slide 15 to review the structure of our balance sheet. As shown on this slide, Our balance sheet is returning to the structure of assets and liabilities that we had before the pandemic. On the asset side, government backed low interest loans extended to SMEs during the pandemic have predominantly matured. Additionally, The ratio of total loans to total assets has returned to levels of almost 75%, consistent with the important reduction in financial securities that were utilized to fully repay the central bank FCIC in April and July of 2024. As shown on the chart on the top left, the effect of the FCIC repayment is evident in all the asset line items associated with the fixed income securities and loans and advances to banks which include overnight deposits in the central bank. Also, on the table on the bottom left indicates despite repaying this large debt to the central bank, primarily with financial instruments, the liquidity levels have remained strong and well above the regulatory requirements. As of December 2024, The Liquidity Coverage Ratio was 214%, exceeding the regulatory minimum by 114 percentage points, while the Net Stable Funding Ratio was 120%, surpassing the required level by 40 percentage points. It's also worth discussing the evolution of our deposits as shown in the chart on the top right and in the table in the middle of this slide. Demand deposits have returned to pre-pandemic trend by currently representing nearly half of total deposits and 31% of total liabilities, which is slightly above our historical average and well above the average of the industry. On the other hand, we observed an 8% year-on-year decrease in customer time deposits, well aligned with the Chilean Central Bank rate cut from 8.25% to 5%. in 2024 together with inflation rate that has remained above the central bank target range reducing the real profitability of these savings instruments consequently customers are looking for investments with higher returns this is one of the key factors behind their strong results in mutual fund management which saw nearly 40 year-on-year growth in aum Before moving to the next slide, I want to share with you our UF GAAP progression as shown on the bottom right, reflecting our proactive asset and liability management. Effective management over recent years has allowed us to capitalize on short-term inflation fluctuations as well as to protect our shareholders' equity real value in the long run. As of December 2024, our position is 9 trillion pesos, meaning that a 1% change in inflation generates a sensitivity in income of approximately 90 billion pesos. Please turn to slide 16. From the capital adequacy perspective, we maintain a leading position in capitalization among our peers. As depicted in the chart on the left, our CET1 ratio attained the 14.4% level in December 2024, consistently exceeding that of our peers while remaining well above the regulatory thresholds. A similar trend can be seen in our total capital adequacy ratio as depicted in the chart located on the bottom left. These levels allow us to be well prepared for both the final stages of Basel III implementation and the expected recovery in the banking business that should translate into balance sheet growth in the medium term. Along these lines, the CMF has proposed modifications to the current Basel III regulations in Chile, focusing on changes related to capital requirements concerning Pillar 2 risks, particularly associated with interest rate risk in the banking book IRRBB and the definition of outlier banks. The proposed ruling was available for public comment until November 8, 2024, and the final set of rules has not yet been published. However, it's important to note that in January 2025, under the current standards, the CMF reduced our Pillar 2 charge from 0.5% to 0.13%, This reduction was possible on the grounds of the important decrease we recorded in the current long-term IRRBB metric, or delta EV. It's important to note that this does not account for changes proposed by the CMF regarding Pillar 2, which should be announced in the near future. Please turn to slide number 17. Expected credit losses reached 103 billion pesos in the fourth quarter of 2024. down 19% from a year earlier. The reduction is due to higher than normal provision expenses in the fourth quarter of 2023 as a result of two factors. First, adjustment in provision models in December 2023 focused on personal banking and second, a temporary rise in 30-day NPLs in that period. On a yearly basis, expected credit losses posted an 8.4% increase equal to 31 billion pesos. This led to a slight increase in a cost of risk ratio from a low level of 0.98% in 2023 to a still low level of 1.03% in 2024. The rise was the result of opposite forces. Wholesale banking annual expected credit losses expanded 36 billion pesos in 2024, supported by a lower-than-normal comparison base in the prior period and its deterioration in the risk profile of certain customers belonging to the real estate and transportation industries in 2024. On the other hand, the cost of risk in the retail banking segment declined to 25 billion pesos when compared to 2023. This decrease was mainly related to the previously mentioned revised parameters for provisioning models in 2023 together with stabilized NPLs during 2024 after a period of steady growth in 2023. As of December 2024, our total NPLs decreased from the third quarter 2024 from 1.5% to 1.4% as illustrated in the top right chart and we have performed exceptionally well when compared to our peers. The delinquency ratio in consumer loans has returned to the pre-pandemic levels of 1.9%, as indicated in the chart on the bottom right. We have also observed a slight uptick in mortgage loans during this period, which align with a broader industry trend and the weak economy. NPLs for commercial loans have decreased 1.4% from the 1.5% posted a year earlier. We expect NPLs to continue stabilizing and to begin to show signs of improvement as the economy gradually recovers in the coming quarters. As shown on the chart on the bottom left, Our loan portfolio has the highest quality with a coverage ratio of 265%, supported by additional provisions totaling 700 billion pesos as of December 2024, which are by far above that of our peers. This position allows us to manage potential risk deterioration or face regulatory changes in risk provisioning models, such as the new CMS standard model for consumer loan provisioning, which took effect in January 2025 and resulted in a one-time impact of 69 billion pesos. As reported in 2024, we used our additional provisions to address the impact of this model. Please turn to slide 18. Regarding operating expenses, our cost base totaled $303 billion in Q4 2024, down 4.9% from the level posted in Q4 2023. The reduction was a result of strict cost control measures implemented throughout 2024, which coupled with a high comparison base in the fourth quarter of 2023 due to one-time expenses incurred due to the renegotiation of collective bargaining agreements with our staff. This was partially offset by an annual increase in severance payments in the fourth quarter of 2024 related to organizational restructuring. On a yearly basis, offering expenses amounted to 1.2 trillion pesos in 2024, which is only 1.5% above the figure posted in 2023 and well below inflation of the period of 4.4%. The slight nominal growth was mainly driven by higher admin and other expenses, as shown in the chart at the top right. This is mainly the result of IT-related costs related to updates of software licenses, support services, and cloud usage expenses that stems from internal developments aimed at supporting our digital channels. This was also partially mitigated by a $5.7 billion reduction in advertising and marketing expenses, along with various other cost items compared to the previous year, which aligned with our cost control initiatives that pursue to improve productivity across all operational and administrative processes. In terms of efficiency, we recorded a ratio of 39% for the quarter and 37% for the year, better than our peers, as shown on the chart on the bottom of this slide. We are confident that the progress we have made in efficiency and productivity will help us ensure that our long-term efficiency levels continue to be below 42% in the long term and around 40% in 2025. Please turn to slide 19. Before moving on to questions, I want to highlight key points from this presentation. We expect a 2% GDP growth in 2025 with a recovery in the domestic demand. Inflation and interest rates are expected to remain above their long-term levels. Given the economic factors, we are confident that our long-term strategy and a strong risk culture will keep us leading in profitability and asset quality. We aim for a sustainable long-term return on average capital of around 18%, potentially higher if market conditions like inflation and overnight rates stay high. We hold the strongest capital base among peers, which makes us well-equipped to seize emerging business opportunities and drive future growth. Finally, we continue to consistently outperform our peers in profitability and net income with lower levels of risk, as shown in the chart to the left. Thank you for listening. We're happy to answer any questions you may have.