Banco De Chile ADS

Good afternoon and welcome to Banco de Chile's second quarter 2025 results conference call. If you need a copy of the financial management review, it is available on the company's website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer, Mr. Pablo Mejia, Head of Investor Relations, and Daniel Galarce, Head of Financial Control and Capital. Before we begin, I'd 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 would now like to turn the call over to Mr. Rodrigo Aravena. Please go ahead.

Good afternoon, everyone. Thank you for joining this conference call, where we will present the key results and developments achieved by our bank during the second quarter of this year. Once again, we are proud of Banco de Chile overall performance during this period, since our bank has demonstrated its strong position in the local market by delivering solid results across various areas. As of June 2025, we reported a net income of 664 billion pesos that represent a year-to-date growth of 2%, resulting in an ROE of 21.9%. As we will discuss later, these outcomes were driven by a strong customer income, improved asset quality, increased loan activity in targeted segments, and ongoing efforts in cost control and efficiency. As mentioned in previous calls, These results are particularly meaningful given the ongoing challenges and rising uncertainties in the global macroeconomic landscape. In circumstances like we currently face, solid long-term fundamentals truly stand out. In this context, it's worth highlighting the bank's key strengths, including best-in-class asset quality, a strong capital base, and a robust level of additional provisions. These elements set us apart not only in Chile, but also across the region. Now, I'd like to share a brief analysis of the macroeconomic environment. Please refer to slide number 3. The Chilean economy continues to show signs of recovery. As illustrated in the graph on the left, growth has followed an upward trend since the second half of 2024, peaking in the fourth quarter with a 4% expansion. In the first quarter of this year, GDP grew by 2.3% year-on-year, still above the estimated long-term trend of around 2%. Although this represents a slowdown when compared to the previous quarter, it is important to note the improvement in certain components of domestic demand, such as durable goods consumption at 10.9% year-on-year, investment in machinery and equipment at 5.3% year-on-year, as shown in the upper right chart. Certainly, the strengthening observed in domestic demand could anticipate a better trend for long growth. Preliminally, data for the second quarter suggest a similar trajectory. According to the monthly economic index, IMASEC, the economic expanded by 2.9% in the second quarter and 2.6% in the first half of this year, still above the long-term trend. The breakdown showed the commerce sector was one of the main drivers of this expansion. The labor market continues to show mixed signals. In June, the unemployment rate stood at 8.9%, at 60 basis points from a year earlier and 20 basis points above the first quarter. This increase was driven by 0.6% year-on-year rise in the level 4 while there were no changes in the number of employed individuals. As a result, the level 4 participation rate reached 62% still below the pre-pandemic peak of nearly 64%. On a positive note, real wages rose by 3.6% year-on-year, well above the long-term average, providing additional support for private consumption. Please go to slide number 4 to review inflation and interest rate trends. Inflation has remained above the central bank's 3% target since late 2020, although it's been trending downwards, as shown in the chart on the left. In June, headline annual inflation rate stood at 4.1%, down from 4.9% in March. However, core inflation, which excludes volatile items, remained relatively stable, rising by just 10 basis points to 3.8%. This evolution suggests that the decline in inflation has been largely driven by volatile components, such as food, which fell from 5.4% in March to 1.9% in June, and energy, down from 14.2% to 9.9%. The superindex for goods excluding volatile items was 2.9% in June. Overall, various indicators point to easing inflationary pressures in recent months. In response, the central bank lowered the policy rate by 25 basis points to 4.75% in line with market expectations. The accompanying statement indicated that further rate cuts are likely this year if the fundamentals continue being consistent with the normalization of inflation towards the 3% target. In this context, the central bank suggested that the interest rate is expected to converge towards its neutral level, estimated at around 4%, over the coming quarters. The trend peso has remained volatile by hovering around 950 pesos per dollar in recent months. However, as shown in the bottom right chart, The US dollar, measured by the DXY index, which reflects the multilateral value of the dollar against a currency basket, has weakened significantly this year, a trend not yet reflected in the local exchange rate. This decoupling may be influenced by trailer faster pace of interest rate cuts when compared to other countries. I'd like to present our basic scenario for 2025. Please go to slide number 5. We have revised our GDP forecast for 2025 upwards, from 2% in the previous poll to 2.3% now. This adjustment reflects higher than expected growth at the beginning of this year rather than improved prospects. As a result, we anticipate that the economy will grow slightly below the 2.6% recorded last year due to weaker global activity, which is expected to dampen export growth. However, a stronger domestic demand should partly offset this external drag. This scenario should support a gradual decline in year-end headland inflation to a level below 4%, assuming no major external shock or significant depreciation of the client peso. Under these conditions, the central bank could lower the monetary policy rate to around 4.25%. Finally, it's important to reiterate the unusually high levels of uncertainty we face, particularly regarding downside risk to growth stemming from global factors. Domestically, Attention will also be focused on the upcoming presidential and parliamentary elections in November. Please turn to slide 6, where we provide an overview of the latest trend in the Chilean banking industry. As shown in the chart on the top left, the industry posted another quarter of good results. Net income reached 1.4 trillion pesos. This performance translated into a return on average equity of 16.3%. Overheated revenues seem to be recovering on the grounds of the resilience of recurring drivers associated with the lending and deposit activity. After some years marked by a greater prominence of financial-related revenues, given important adjustment in key market drivers, such as inflation, interest rate, and the emergency of the FCIC funding. Regarding asset quality, the chart on the top right shows that non-performing loans have remained stable at 2.4% with a coverage ratio at 148% in line with recent quarters. These figures suggest that Despite a challenging microeconomic backdrop characterized by increased unemployment and higher than normal borrowing costs, banks have managed to maintain delinquency under control while keeping prudent provisioning levels and adequate buffers to absorb potential credit deterioration. In terms of loan growth, however, as illustrated in the bottom left chart, the loans-to-GVT ratio continues to be below trend by reaching 77% as of June 2025. This reflects the subdued pace of credit expansion relative to economic activity registered after the pandemic. This became clear in the chart on the bottom right, the persistent weakness in loan growth across all segments in real terms. Since 2019, total loans have contracted, with consumer lending showing the sharpest decline, followed by the commercial portfolio. Mortgage loans have shown some resilience, but still very weak considering the demand for housing given recent demographic, economic and social changes. This slow demand for loans has been largely constrained by high interest rates, cautious corporate borrowing due to uncertainty, as well as weak unemployment figures. In summary, while the industry has shown signs of recovering profitability and maintained solid asset quality, credit activity remains soft. Nevertheless, as long as some sources of uncertainty dissipate, such as the potential impact of external risk factors on the local economy and the outcome of the upcoming presidential and parliamentary elections, among other factors, the lending business should gradually return to long-term GDP multiplies. Next, Pablo will share information regarding Banco de Chile development and financial results.

Thank you, Rodrigo. Let's review slide 8, which outlines our strategic framework and aspirations. On the left side of the slide is our strategy, structured around three key elements, our purpose, strategic pillars, and strategic plan. Our purpose is straightforward. to support the development of Chile, its people, and its businesses. We achieve this by leveraging our long-standing competitive strengths, trust, stability, and deep relationships across every segment in which we operate. Our strategic pillars define how we operate with a strong focus on efficiency, collaboration, and a customer-first mindset. These principles guide both our short- and long-term decision-making, keeping us aligned with innovation and operational excellence. Our business scopes are defined as where we will operate and how we will deliver value, making us more agile, competitive, and responsive to a constantly evolving environment and to the needs of our clients. Through this strategic framework, we aim to meet our mid-term targets as shown on the right-hand side of the slide. We aim to achieve sustainable, long-term, industry-leading profitability. We are also targeting market leadership in both commercial and consumer loans and a high net promoter score, which reflects the strength of our customer relationships over time. Additionally, we aspire to rank among the top three in corporate reputation in Chile, And on the cost front, we are committed to maintaining a cost-to-income ratio below 42%, reinforcing our focus on operational efficiency and disciplined execution through the development of digital capabilities and the continuous improvement of technological infrastructure. To summarize, our strategy is centered in long-term sustainability with management incentives aligned with these strategic priorities, ensuring we continue to create value for all of our stakeholders. please move to slide 9 where we will go over our key business achievements. During the first half of this year, we made significant progress on several initiatives aligned with our strategic priorities. On the digital front, we launched multiple enhancements aimed at improving customer experience and supporting commercial activity. These included new authentication tools for individuals and companies, the integration of our payment app into the main banking platform, and the rollout of new credit simulators. In parallel, our FAN digital accounts continued to perform strongly, achieving a 30% cross-sell rate to current accounts, reinforcing FAN's role as a key driver of customer acquisition. To further unlock its potential, we introduced credit cards and microloans tailored to FAN users. In terms of AI adoption, we expanded the capabilities of FANI, our virtual assistant, which now supports queries across all FAN accounts. We also extended the use of AI to internal operations, particularly within the commercial and technology teams, contributing to improved productivity. In addition, we continued to execute our efficiency and productivity agenda through targeted initiatives. These include IT cost control measures such as the renegotiation of licensing agreements and gains in productivity driven by digital sales and technology adoption. Likewise, we have captured significant value through initiatives aimed at centralizing subsidiary functions, optimizing organizational structures, reducing infrastructure expenses, and redesigning the service model. With this, we recently integrated our debt collection subsidiary called Socofin into the bank's operations, generating synergies and enhancing both operational efficiency and customer experience. In addition, we have made significant progress in the technological transformation process of some of our subsidiaries to continue leading the industry in both the mutual funds and securities brokerage business. In the sustainability front, we actively participated in the FOGA-IS state guarantee credit programs aimed at stimulating economic activity through the housing, construction and mortgage lending. Furthermore, we issued a $122 million bond in international markets to fund social initiatives with a particular focus on supporting women-led small and medium-sized enterprises. Together, these initiatives reinforce the strategic positioning and strengthen our foundation to capture future growth opportunities. Please turn to slide 11 to begin our discussion on our results. We continue to deliver strong results in the second quarter of 2025, posting a net income of 305 billion pesos, equivalent to a return on average capital of 23.3% and a return on average equity of 20.5%. as shown on the chart and table to the left. Although these figures represent a slight decrease as compared to the 324 billion pesos recorded the same period last year, our profitability remains solid. It's important to mention that we outperformed our peers in both net income market share and return on average assets, as illustrated on the charts to the right. Specifically, in the first half of the year, our market share and net income remained well above our competitors and our return on average assets continued to lead the industry with a very wide gap to our competition, as illustrated on the charts. These results reflect our consistent focus on customer engagement, prudent risk management, disciplined cost control, and above all, the resilience of our core business and recurrent income generating capacity, particularly focused on customer income. Our strategy remains centered in building a sustainable and profitable bank, and we continue to aspire to be the industry's benchmark in profitability. Let's take a closer look at our operating income performance on the next slide 12. We continue to demonstrate the strongest operating revenues in the local industry, reaffirming the resilience of our superior business model through market cycles. As shown on the charts to the left, operating income totaled 763 billion pesos in the second quarter of 2025, reflecting a stable performance despite the context of subdued business activity. This figure was composed of a solid customer income of 626 billion pesos, up 2.7% year-on-year and non-customer income of 137 billion pesos which declined as it compared to the 161 billion pesos recorded in the same period last year. The decrease in non-customer income was primarily attributable to lower inflation revenues on management of our structural U.S. net asset exposure and the maturity of FCIC funding from the central bank in July of 2024. These effects were partially offset by increased net revenues from the management of our investment portfolio that benefited from a downward trend in the second quarter of 2025. Customer income growth was driven by a 6.2% year-on-year increase in net income from loans and the 8.1% annual rise in fee income, which enabled us to offset the decline in the contribution of both demand and time deposits as a consequence of the annual decline in short-term interest rates, which naturally compressed profitability in both products. The annual rise in income from loans was primarily driven by the consumer loan book due to improved lending spreads and the 3.7% annual increase in average balances. Additionally, commercial loans and residential mortgages contributed to customer income growth mainly thanks to greater average volumes on an annual basis. Taking a closer look at commercial loans, the SME portfolio continued to expand 4.8% year-on-year, supporting customer income growth as well. Notably, when isolating BOGAPE loan amortization, the portfolio has been gaining momentum by rising 8.1% year-on-year, helping to improve lending spreads in this segment. As a result, our net interest margin reached 4.7% this quarter and 4.8% as of June, maintaining a leading position in the industry. Fee growth was led by mutual fund management and transactional products. Fee income from mutual fund management rose 23.8% year-on-year, driven by a solid 16.6% increase in assets under management. Fees from transactional products were driven by both checking fees that posted an 11.2% year-on-year increase, supported by a 4.9% rise in total account holders, and fee income from debit accounts growing 6.9% year-on-year, largely fueled by the success of our FAN products, which contributed to an 8.2% increase in the volume of debit card transactions on an annual basis. In this regard, it's worth noting that our fan product has been a key driver of current account originations, accounting for approximately one-third of all new current account customers. The strong performance in operating revenues translated into an operating margin of 6.6% for the first half of the year. These figures underscore the strength of our business strategy and our ability to consistently deliver value to our premium customer base across both lending and non-lending products, regardless of the prevailing economic environment. Please turn to slide 13, where we will review the evolution of our loan portfolio. As illustrated on the slide on the left, total loans reached 39.4 trillion pesos as of June 2025, reflecting an annual increase of 3.9%. This credit expansion continues to reflect subdued business dynamics across the industry, lagging the pace of economic activity. This trend aligns with the central bank's latest credit survey, which confirms that overall credit demand remains soft, which in our view continues to be primarily driven by low consumer and business confidence. Breaking it down by segment, mortgage loans grew 8.1% year over year, supported by demand from upper income clients. In particular, Originations in this segment were dynamic, growing 14.1% in the first half of the year compared to the same period last year. Meanwhile, consumer loans rose 4.5% annually amid a cautious borrowing environment and interest rates that remain above historical averages. As for commercial loans, they posted a moderate increase of only 1%, constrained by weak investment and ongoing political uncertainty. When analyzing the real loan growth relative to pre-pandemic levels, distinct patterns emerge compared to the industry. As illustrated on the right of the slide, we've delivered stronger growth in consumer loans, a segment where we aim to lead, while maintaining a comparable pace of expansion in commercial loans. In the mortgage loan segment, the industry has outpaced us, which is consistent with our strategic focus, as this is not a segment where we aspire market leadership. It's also important to note that loan volumes remain well below pre-pandemic levels in real terms, indicating room for future faster growth on the grounds of more favourable financial conditions for borrowers, a rebound in domestic demand and a decline in interest rates. In terms of portfolio composition, our commercial loans remain well diversified across sectors. As of June 2025, the largest exposures are in social, and personal services, financial services, and retail, hotels, and restaurants, all representing 45% of the commercial loan portfolio, while the real estate and construction sectors jointly represent only 11%. This distribution reflects their prudent risk management approach and their continued commitment to supporting key sectors of the Chilean economies. please turn to slide 14 to discuss our competitive balance sheet structure. As depicted in the charts on the top left, our assets and liability structure remains solid and aligned with our strategic focus on commercial banking. As of June 2025, loans represented 73.8% of our total assets. Financial instruments in turn, including trading and AFS and held to maturity portfolios, jointly accounted for almost 12% with held to maturity assets representing a minor portion of this figure. It's important to highlight that we exchanged bonds denominated in UF during the quarter issued by the Chilean government that were close to maturity and formally booked as held to maturity for newly issued bonds denominated in pesos maturing in 2027. The new bonds were booked as available for sale with changes in market value reflected in equity. On the liabilities side, deposits remain our primary source of funding, representing 54.8% of total assets. Within this, time deposits and saving accounts accounted for 28.7%, while demand deposits reached 26.1%. As shown on the chart to the right, our non-interest-bearing demand deposits fund 35.4% of our loan book, which represents a significant advantage over our peers in terms of cost of funding. This balance sheet structure continues to be one of the key drivers of our outstanding net interest margin. Moving to liquidity, our ratios remain well above regulatory requirements. As of June 2025, our liquidity coverage ratio stood at over 195%, comfortably above the 100% regulatory limit. The liquidity coverage ratio is designed to ensure that banks hold sufficient high-quality liquid assets to withstand a 30-day stress scenario. Accordingly, our current level reflects the strength of our liquidity position. Similarly, our net stable funding ratio reached 117%, exceeding the minimum requirement by 27 percentage points. The net stable funding ratio measures the stability of a bank's funding over a one-year horizon, ensuring that long-term assets are backed by stable funding sources. These figures reflect our prudent liquidity management and strong funding profile. In addition, our US GAAP reached 9 trillion pesos by the end of June 2025, implying the sensitivity of approximately 90 billion pesos in net interest income for every 1% change in inflation. It's important to recall this gap is composed of both our structural UF position, which serves as an economic hedge against inflation for our equity, and directional positions managed by a treasury to capitalize on short-term rate differentials between the peso and the UF. Given the persistence of inflation above the central bank's target range and the view of our treasury on the evolution of key market factors, We increased our inflation index exposures for a period of time. Although this exposure came down in the second quarter of 2025, as inflation expectations seemed to be normalized. We firmly believe that income generated from this strategy has effectively offset the associated risks over time, as demonstrated by the market lean position we have held in terms of profitability over the last years. please turn to slide 15 to review our capital position. As shown on the slide, Banco de Chile continues to maintain a solid capital base well above the regulatory requirements and our peers. As of June 2025, our common equity Tier 1 ratio reached 14%, positioning us among the top performers in the industry. Including additional Tier 1 and Tier 2, our total Basel III capital ratio stood at 17.8%, significantly above the regulatory minimum and providing a strong capital slack to support future growth. This robust capital position is the result of a combination of factors, including consistently high profitability and solid earnings retention practices over time. In addition, our positive capital gaps have also resulted from subdued loan growth. Strong capital strategy is designed to face regulatory changes stemming from the final phase of Basel III implementation while maintaining enough business flexibility to address both organic and inorganic growth opportunities in the future. It is also important to note that Chile operates under one of the most stringent regulatory frameworks with higher risk-weighted asset density in comparison with other countries operating under Basel III, where internal models have a key role. In summary, risk-weighted assets under Basel III in Chile are comparable to those formerly existing in the Basel I framework. On top of that, the local regulations have basically imposed the same capital requirements on the Chilean banking system than those existing in countries that present lower risk-weighted asset density, including the systemic and Pillar II capital charges, together with conservation and counter-cyclical capital buffers. Despite this, we continue to exceed all capital requirements, underscoring the strength and resilience of our balance sheet. Please turn to slide 16 to review our asset quality. Banco de Chile continues to demonstrate leading asset quality, supported by prudent risk management and conservative provisioning strategy. During the second quarter of 2025, Expected credit losses totaled 96 billion pesos, reflecting a 1.5% increase compared to the same period last year. This figure remains positive, particularly in the context of a still normalizing credit cycle marked by higher than normal delinquency in some business segments. This translates into a cost of risk of only 0.98%, which is slightly below our long-term level and stable versus recent quarters, demonstrating the strength of our loan portfolio diversification and effective risk management. Regarding delinquency, it's important to note that non-performing loans remained above pre-pandemic levels, as shown in the chart on the top right. This trend is observed across the banking industry. However, Past due loans seem to be beginning to gradually return to more normal levels as credit conditions continue to ease, particularly in certain lending products as illustrated in the charts on the bottom right. In this environment, our delinquency ratio stood at 1.47% in June 2025, which is well below the levels posted by our peers. Looking ahead, we expect to see a gradual improvement in asset quality as economic conditions continue to strengthen across all lending categories. In terms of provisions, we maintain the strongest coverage level in the industry. As of June 2025, our total provisions amounted to $1.5 trillion, composed of $825 billion in allowances for loan losses and $631 billion in additional provisions, which provides a robust buffer to absorb potential credit deterioration. Accordingly, our coverage ratio stands at 252% in June 2025, reflecting a conservative and forward approach forward-looking approach to credit risk management while significantly outpacing our peers. Overall, our strong asset quality metrics, high coverage levels, and disciplined risk management continue to differentiate us from peers and position us well to navigate evolving credit conditions. Please turn to slide 17. Operating expenses totaled 281 billion pesos in the second quarter of 2025, remaining flat when compared to the first quarter of 2025 and increasing 3% year over year. It's important to mention this growth remains below the inflation rate that accumulated 4.5% over the past 12 months. The modest increase in operating expenses demonstrates both our ongoing efforts in cost control initiatives their sustained focus on driving efficiency across the corporation through the adoption of digital solutions. In the top right chart on the slide, we can see a detailed breakdown of the change in operating expenses between the second quarter of 2024 and the second quarter of 2025. Personal expenses rose by 0.8%, primarily due to higher severance payments and an increase in one-off bonuses following collective bargaining processes conducted during the quarter by two of our subsidiaries. Administrative expenses went up by 4.3%, mainly driven by higher IT-related costs associated with enhancements to our IT infrastructure. Internal initiatives aimed at boosting operational efficiency and marketing expenses due to sponsorships aligned with our commercial strategy. As shown on the chart on the bottom right, our efficiency level reached 36.4% this quarter, a notable achievement driven by a sustained focus on productivity across the organization, which has significantly improved efficiency compared to the pre-pandemic levels that averaged nearly 45%. Looking ahead, we remain confident that our strong cost control Branch optimization efforts and ongoing efficiency initiatives will support our mid-term target of maintaining efficiency levels below 42%. Please turn to slide 18 for key takeaways. On the macroeconomic front, we have raised our GDP forecast for 2025 to 2.3%, up from the 2% projected last quarter. This revision is mainly explained by stronger-than-expected economic performance in the early part of the year. However, it doesn't reflect an improvement in the outlook of the remainder of 2025, given the deterioration in global conditions, particularly rising trade and geopolitical tensions. As for Bank of Chile, given the solid performance achieved in the first half of the year, we have also updated our baseline scenario for the full year 2025. From a revenue perspective, we expect our net interest margin to remain around 4.7% by year-end, supported by an inflation rate measured as a UF variation of 3.4% that remains above the midpoint of the central bank's target range, and steepen local yield curves as the monetary policy rate continues to decline. In terms of credit risk, we now forecast an expected credit loss ratio of approximately 1% for the year below the 1.1% projected in the prior quarter based on slightly better than expected credit charges posted during the first half of the year. We also anticipate a gradual improvement in our past due loan ratio as economic activity gains momentum. In operating expenses, we continue to benefit from productivity gains and a strong cost control culture. As a result, we have revised our efficiency ratio forecast down to approximately 38% for the full year, compared to the 39% previously forecasted. Based on these drivers and the absence of non-recurrent factors, we have increased our full year return on average capital estimate to approximately 21%, up from 20% in the prior guidance. In summary, we remain confident in our ability to continue delivering industry-leading results and to maintain our position as the most profitable and well-capitalized bank in Chile over the long term, as shown on the chart on the left. Thank you, and if you have any questions, we'd be happy to answer them.

Thank you very much. We'll now be moving to the Q&A part of this call. If you'd like to ask a question, please press star two on your phone. That is star two. If you're dialed in by the web, you can also ask a voice question. We'll wait a few moments for the questions to come in. Okay, so our first question is from Ernesto Gabilondo from Bank of America. Your line is now open. Please go ahead.

Thank you. Hi, good morning, Rodrigo and Pablo, and thanks for the opportunity to take questions. My first question will be on the political landscape. I would appreciate, Rodrigo, if you can give us your two cents on the presidential polls. and potential regulation related to taxes, interchange rate, and mortgage and subsidiary, and there could be potential impacts for the Bank of the Chilean. My second question will be on means. As you have explained in your presentation, for every change of 1% in interest rates, Meme has an impact of around 9 billion Chilean pesos. But just wondering, looking beyond this year, how do you see the overnight rate next year? And also, how should we think about memes next year? And for the last question, as you said, in terms of the ROE, you're expected to be around 21% this year. But we just wanted to double-check how are you seeing the ROE for the medium term and what will be the minimum common equity tier one ratio you would like to have under that scenario? Thank you.

Hi, Ernesto. Thank you very much for your question. Well, on the political scenario and macro concerns, we have different things to consider. First of all, I think that it's very important to be aware that according to different surveys, it's very likely that there will be a second round in Chile. uh which will be by the end of this year since there is not any candidate with more than 50 percent of votes and it is very important to remember that in chile when uh there is any candidate with more than um 50 percent of votes uh there is a second second round which is scheduled for uh december of this year even though it's not clear who's gonna from tips in the run-off. There are some topics to where there is a broad consensus in Chile that are very important to put on the table in terms of the discussion of the value policy in Chile for the next presidential term. One of them is related with economic growth. So we have seen a growing concern for different candidates in terms of the need to improve the growth in the future. It's very important to remember that in Chile, The average economic growth since 2014 until now has been only 2%, which is below the average global economic growth. That's why we've seen some proposals related with lower corporate tax rates. We've seen some different proposals in order to improve, for example, or to reduce the bureaucracy uh different uh to improve as well but system related with uh environmental licenses and permits so what we've seen in general is that there is a consensus in in terms to address the different challenges uh related with growth employment fiscal debt as well and one of the measures that uh is getting more popular in chile is the possibility to reduce taxes in the future but uh it's important additionally to be aware that uh any change related taxes have to be approved by the congress in both cameras of the congress and so that's why it's also important to analyze the result of the parliamentary elections in Chile for the next year. So, when we consider all the available information, I mean, the week here is a global environment in Chile. Chile is a very open economy, as you know. This is negative news for Chile, but on the other hand, we've seen more dynamism in terms of demand, in terms of employment, in terms of investment, and durable consumption, for example. So that's why we're so comfortable with the forecast of 2.3% for this year, and it's reasonable to expect a similar number for the next year. In terms of the overnight wage, which was your second question, or part of your question, uh we are expecting lower interest rate in the future the central bank reduced the rate by 25 basis points in the latest monetary policy meeting to 475 percent it's reasonable to expect an interest rate of around 4.25 percent or even four percent at some point of the next year but it's gonna depend of the evolution of you know the global inflation exchange rate etc uh of course uh these market drivers, market factors will be very important in terms of the final profitability of the bank. And, Raul, do you want to go into that? Okay.

So in terms of your second question, in terms of net interest margins, what we have today is a level around 4.8% for net interest margin, obviously, depending on how the inflation level is in the next couple of months. will depend on the evolution of that figure for the rest of the year, and especially for the third quarter, because, you know, we had negative inflation a couple months ago. So that would be an important driver to see how the inflation will be the rest of this year, where we're expecting a level of inflation slightly above in terms of the U.S. variation, above the long-term level target of the central bank. And we expect that should continue to move more aligned with the central bank in the medium term. So we have a little bit higher levels of net interest margin today because of that. But 0.5%, more or less, generates, as you mentioned, about $40 billion more in net interest income. That's equal to around 10 basis points of NIMH. And in the medium term, we think a level of NIM, a reasonable level is somewhere around 4.5 to 4.7%, as we've said in prior calls. And obviously that depends on different factors. It depends on the mix. If we see a recovery in the loan mix, how this recovers, which segments. Our target segments is consumer loans, SME loans, but we also want to be leaders in commercial corporate banking. So the evolution will depend on the mix. inflation as we just spoke as well as yield curves so how the interest rates move in the future today we're in a much better position than prior to the pandemic but that will depend on these factors on how the evolution of our net interest margin will evolve in the future and if we go into ROEs Our aspiration is to be the leader in the industry. So we think we have all the tools to do this. We've been enhancing all of our digital platforms, improving productivity across the bank, focused on growing in the most attractive segments in the industry. So this should allow us to maintain a very attractive return on assets and also return on total equity, return on average capital. It's also important to note that when we calculate the traditional calculation of return on average equity, return on average capital, we tend not to include the AT1 bonds. It's important to remember that the AT1 bonds and the interest rates of these bonds is actually recorded in retained earnings and not in net interest expense, as you would see, or in the profit and loss, as you would see normally of any other bond. So we're actually emitting issuing AT1s, we can actually see that the capital is retained earnings is coming down. So that actually helps ROE. So today we don't have AT1s. So this is something to take into consideration when comparing us to other banks in the industry or globally. And in terms of the capital adequacy ratios, your question, we'll pass that to Daniel Galarza.

Hi, Ernesto. This is Daniel Galarza. As you probably know, our CD1 ratio is 4 or 5% above regulatory limits today, and this is basically due to the subdued economic growth, of course, and also the excellent financial results we have achieved this year. By the end of the year, we also expect to maintain the current levels of capital adequacy ratios by the end of 2025. Certainly, loan growth has been below expectations, and accordingly, it is probably to remain like that over the rest of the year. But as we have said in the past, we expect to use our existing capital buffers in order to support future loan growth in the coming years, as long as the economy gains some momentum, of course. Also, our current capital position should allow us to not only comply with capital requirements associated with Pillar 1, but also any requirement related to Pillar 2, if any. So as long as the economy reactivates and we need more capital in order to operate, of course, in the normal course of business, we expect to always maintain a favorable gap of at least 1%. in terms of capital adequacy when compared to regulatory limits, okay? At least 1%, of course. And this obviously depends on the evolution of long-growth and also financial results. Overall, also, we, excuse me?

No, no, yes, I agree, and thank you. Thank you very much. I interrupted. Sorry. Okay. I just have a couple of follow-ups. One is you can give us also any comments related to potential regulatory changes or negative taxes, the interchange rate, the mortgages of CDI. Any update on that would be helpful. And the other one is a follow-up on your ROE for the medium term. In the past, you have said it could be around 18%. I just want to double check if it's no longer 18, it could be more at the 20. I just also wanted to have that. Thank you.

um okay uh this is rodrigo in terms of the regulations what we've seen so far is that uh most of the discussion in chile is more related with the macro policies uh related with corporate tax rate uh related with some adjustment of fiscal standards something like that but uh in terms of any material regulation affecting the banking industry and more idiosyncratic regulation. We don't have any different assets to highlight here today. Most of the discussion is related with the macro The macroanalysis, the macroeconomics in Chile, back again, it's going to depend on who's going to be president in Chile and the composition of the Congress as well. In terms of Haruhi, a little term.

As I mentioned, our aspiration is to be the most profitable bank in terms of profitability of return on average capital. And it really depends when asking that question in what scenario, in what scenario of inflation, what scenario of rates, um and yield curves so if we look today if we look at how we are today or over the past few years we've been a very profitable bank in the industry and that's been with a very high level of capital if we look at our regulatory capital um or just our total capital we have a very high level and we have room to continue growing so for the future we think that we should be uh we have all the tools to be the most profitable but it really depends on the scenario so when comparing one bank to another it's it's a challenging to to give an exact number because it depends on which scenario because it depends on the cycles so in this cycle we're a bank that has over 20 percent In a cycle where interest rates were much lower, like in the past, it would be a different scenario. But today, the banking sector is a profitable banking sector, and we think we should be the leaders amongst us.

So, let me just to reinforce one idea. So, the main difference in terms of the evolution of ROE in the future is more related with the market factors rather than a specific aspect of the bank. So, our strategy is very clear. We have been mentioned in different presentations. today, which are our main strategic focus. We've been discussing that, but the main source of uncertainty in terms of the long-term ROE is related with the final level of the interest rate, the final level of inflation, clearly the final CCT in terms of the loans compared to the GDP. So, my point here is that the main source, you know, of um uncertainty of doubt are related with them with matter factors which will affect all the banks in italy not only for us but in our case uh the strategy is directly and i will transmit these factors as well so that's why apollo said we are confident in terms of our fundamentals have to be the leader in stability okay fair enough thank you very much thank you

Thank you very much. Our next question is from Lindsay Shima from Goldman Sachs. Your line is now open, please go ahead.

Hi, good afternoon and thank you for taking my question. I was wondering if you could expand on what cost control initiatives particularly have driven the lower than expected expense growth and then looking forward, should we start to see expenses accelerate towards inflation levels and then if so, What would that timeline look like? Thank you.

Thanks.

So if we look at the evolution of Banco de Chile, I think we can see some very important changes over the last, let's say, 10, 15 years, where at one point we had efficiency levels worse than the average of the industry, and today we're amongst the leaders. One of the things that we implement is a lot of cost controls across the bank, improve incremental changes across different levels, which is using our resources better. One of the main things that we've seen recently is a reduction on the branch network. Before the pandemic in 2018, we had 390 branches. Today, we have 224 branches. Also, the increased use of digital tools, digitally enhancing Banco de Chile in terms of the front office and the back office has allowed us to be a much more efficient bank to grow with less operational expenses. And if we look at the very short term, what we've been doing is we've reviewed our loyalty programs in line with the adjustments of the acquiring reduction fees for the credit card business. We've optimized different areas of the bank in terms of, for example, telemarketing expenses. We've shifted marketing efforts to more digital channels, which we've seen an improvement in terms of cost as well over the last year. This whole initiative started very easily where you could find a lot of easy areas to reduce expenses, but today it's becoming a little bit more complex taking a little bit longer in terms to find the significant improvements quickly as we did in the past. We have a branch network that today is more streamlined. We have implemented a lot of digital solutions. and however we think that we can continue still to be uh have very good efficiency indicators despite the high operating income that we've had thanks to inflation and other one-time effects so in the long term we think that we we should have a efficiency ratio better than 42 percent that's our aspiration um and um i i think With that, it explains the question. But there is a second part to your question, which I didn't catch.

It was just how long should it take for us to see the efficiency ratio get towards that 42% and when we should start to see expenses growing closer to inflation?

Well, the aspiration is less than 42%, so we're well below that. Probably what I would say is this year we have 38% expected efficiency ratio in the guidance. The aspiration is to be below 42%. It's something that we've, over the last few years, been well below, so not necessarily returning to 42%. It's something that's reviewed on an annual basis, and it'll change depending on the evolution of the bank, especially today there's so many changes over the past, let's say, five years with all the digital initiatives that a bank can operate much more efficiently. So it's important to take that into consideration. So the target isn't to increase expenses. We'll continue to look for new areas and where we can improve. And we're doing that. But it's a lot of incremental changes. Today, we've implemented a lot of changes in terms of even purchasing areas where how we purchase different products and services from other companies. We've implemented a lot of changes, which has helped improve the indicator, but not necessarily we're planning to move to 42%. We'll continue looking to improve and be better.

Okay. Thank you very much. Thank you. Our next question is from Yuri Fernandes from JP Morgan. Your line is now open. Please go ahead.

Thank you, Rodrigo. Thank you, Pablo. And congrats on another very good quarter. I have a few questions as well. Maybe I would like to start with your long-growth outlook. I know you have a guidance. to grow slightly above industry. And for the industry, you're talking about 4%. This is below the nominal GDP, right? You just revised the GDP up to 2.3. Inflation should be, I don't know, three, 4%. So industry is still growing below nominal GDP in Chile. And maybe you grow slightly above the industry. My question is why not higher appetite? Like when should we start to see better loan growth year for you. Because my concern is that once inflation normalize and you are growing your loans at a very, at a very timid pace, like 4%, I don't know where the revenue will come from. And then I have my second question regarding fees. Like fees, they have been saving the day. These are growing some 80% over a year. This is way above loan growth. This is above the number of clients growth. So I would like to explore a little bit more the C-line. What is the outlook for the fees? Do you believe this can continue to grow above the loan growth, above the number of clients? I think this year it has been a lot driven by your mutual funds, right? I think you put this in the release. And even in the mutual funds, we see fees growing faster than AUM. So maybe, I don't know, performance fees, a little bit of price regarding your mutual funds. But also checking accounts, right? Checking accounts have been growing a lot, like 11%. This is also above the number of clients. So I don't know. I tend to see there is a component of pricing in most of those things. And I don't know how sustainable those things are. So if you can help me to understand one, loan growth, because I think this is the model of many of the revenue lines, right? And two, fees, like how fees, you know, can evolve going forward. Because they have been very good and congrats on that. But my concern is that how sustainable this good pace is. And if I made just a follow up on fees regarding the costs, we saw an increase on your credit cards loyalty fees. If you can explain a little bit, what were those campaigns? What is your credit card strategy? I think this is an entire other topic, but I would love to hear your view on the credit card operation as well. Thank you.

Hi Yuri, this is Rodrigo Aravena. Thank you very much for your question. I'm going to do the first question. In terms of the loan growth, what we have today and what we also believe is that there is like a decoupling between the loan cycle compared to the GDP growth. In fact, If you analyze, for example, the loans to GDP ratio in Chile, that number today is around 76%, 77%. in terms of the nominal loans compared to the nominal GDP pesos, which is a number that is well below the numbers that we used to have in the past. It's worth to mention, for example, that before the pandemic, that number was higher than 80%. During the pandemic, that number was even close to 90%, but we annulled it. the existence of temporary factors that increase that temporarily that uh that ratio between loans but all in all we think that 76 77 is basically low the numbers consistent with the fundamentals but there are some explanations on that When we analyze the chart that we showed in the presentation, we can see that there is a very important delay in terms of consumer loans, which are nearly 20% in real terms below the level that we have by 2018. But there are some explanations behind that. For example, the very high levels of interest rate that we have until until the previous year and also the excess of liquidity that uh negatively affected the demand for consumer loans and also uh we have an important delay for commercial loans bad explanations that places with the very weak investment growth that we've seen during the last year it is also important to to to keep keeping uh keep in mind that uh Despite the positive economic growth that we had last year, the main driver of that growth was related with exports rather than domestic demand. that aspect uh we have to remember that the key driver for loans is related with the domestic demand and in this area we are more optimistic for the future since uh today we have a better living indicator for investment a similar uh story we have for private consumption so basically this year we are expecting uh that at the better domestic demand with at least partially offset the weakness in total exports. So that's why we're expecting a gradual recovery in loans for the future. What is reasonable to expect in the long term? It's reasonable to expect the elasticity of loans to GDP of a number of around 1.5 times, something like that. In some times, it would be higher. In more negative times, it could be a bit lower. The elasticity that we have today is not sustainable for the long term. And so basically what we have today is an important delay, a decoupling, but in the future, It's reasonable to expect a recovery in both commercial loans and consumer loans, which are our main targets.

In terms of fees, what we've always mentioned is that fees should grow in the mid to high single digits, which is completely in line with customer growth plus low inflation. customers have been growing between around the 5% to 7% over the last decade. And that continues to be the case. If we look at current accounts, we continue to grow strongly. And one of the reasons why we're very optimistic about the fund account was precisely to expand our customer base so that we could have new customers entering the bank that we could cross out to other products and services. In fact, 30% of the new customers Current accounts come from FAN accounts, FAN existing accounts. So this is an important area where we've seen improvements. So these customers are also, we're offering credit cards. The customers that enter Banco de Chile, they receive obviously a current account package. And these also drive fees. So in this quarter or this first half of the year, the fees have been driven through by AUM growth because customers are searching for higher profitability from their investments. We're coming from a high inflationary period. So their investments in time deposits, for example, were earning at one point around 11%. And today, the overnight rate is around the 5% level. So things have changed and we've seen a change in terms of how customers are investing their liquidity and that's moved into the mutual fund business and we've made new products to also enhance that offering. So moving forward, what we see is a customer base that should continue to grow and continue to be driven in part by new fund customers moving into Banco de Chile and as well as cross-selling across the bank. So working together with the subsidiaries and Banco de Chile to cross-sell the customers and the subsidiaries in Banco de Chile and Banco de Chile and their subsidiaries. um so so the eight percent growth that we've seen here today is reasonable in terms of the level of customer growth what we've been doing in terms of cross-selling and it's important to remember that uh fees are are charged based in uf so inflation plays a role as well so uh mid to high single digits makes complete sense

No, thank you. Thank you, Pablo. Thank you, Rodrigo. If I may, just a follow up on Caesar, because one of your strategies, and I think part of the competence you have is that you always create new avenues, even whenever we don't see long growth. And I think this is part of your answer. Just on the acquire, on ban chile pago, like the pagos, I think it's target for the year end. Is there any update on that? Like any KPI you can share, like any goals you have? I think like I read an interview and given you are entering the game a little bit late, maybe were less positive, but maybe this can be good for fees as well. So if you can comment on Bipago also, like on Banco Chile Pago, would be interesting. Thank you.

So yeah, so Bipago, Banco Chile Pago,

It's an important initiative that we're planning to launch in the last quarter of this year. So this strengthens our position as a full-service financial institution to all of our customers. So obviously now we can give them a complete suite of products and services to these business customers. And where it's focused is SMEs and middle market companies. where we have a very strong position. So it's an area that we can cross-sell, give this value-added product to these customers with a bunch of Achieva infrastructure. So this is very important for us. So based, if you look at the size of our SME book, we have about... 15%, a little bit less than 15%. Total loans come from SMEs. There's 150,000 customers there. There's a huge growth potential that we have for Banchi Le Pago as well. KPIs, we don't have anything to share today, but we don't think that we've entered the market late. We've been waiting to see a clear understanding of what the risks and benefits regulatory changes that were occurring would happen and how we could implement an acquiring business ourselves. So we think that similar to the fund account, which we proved, which was also considered that we were entering late, we proved very successful. And today we have almost 2 million customers from fund. And it's one of the most important drivers of current accounts growth. So we're confident with this new acquiring business.

Judy, sorry, just to clarify and reinforce the idea, despite the disabling that we have this year in terms of the loan growth compared to the GDP growth, we expect a normalization in the future. So, if we assume, I don't know, an electricity of 1.5 times, for example, of loans compared to the GDP, it's reasonable to expect that if the economy view for example uh a number between two and two point five percent real terms and inflation rate between three and three point five percent it's reasonable uh suspect in that scenario uh long growth in nominal terms of high single digits uh just to be clear i was respect for the future no no thank you for the clarification perfect thank you both thank you guys congrats

Thanks. Thank you very much. Our next question is from Daniel Mora Ardila from Credit Corp. Your line is now open. Please go ahead.

Hi. Good morning. Good afternoon, Rodrigo, Pablo, and thank you for the opportunity to ask questions. I have just one question regarding loan growth. Considering that we are in a challenging scenario for loan dynamics, I would like to understand what is the short-term strategy to grow above the industry level? What segments or products are you planning to grow? And also, given the recovery that we are expecting in the future, do you plan to change the longer the strategy or it will be maintained as the same as we should see in the short term? Thank you so much.

Hi, Pablo here. So in terms of loan growth, what we're expecting or what our focus is, is we're focused on high potential segments. So those high potential segments is SMEs, consumer and consumer lending. And in terms of SMEs, we're targeting businesses with obviously scalable models, strong credit profiles. This is a segment that has mentioned, as I mentioned earlier, we have just under 15% of the total loan book is dedicated to the segment we have very high quality customers here and it's a customer base that we're interested to continue growing we work a lot with these customers we hold a variety of conferences we have very strong relationships and is another tool that we're we'll be offering in the fourth quarter for these customers which will continue strengthening the relationship So this is an area that historically has been less penetrated in Chile. It became a little bit more penetrated during the pandemic, but we still consider it to be there, one of the areas that will have the fastest levels of growth in the future. Today, the demand is a little bit slower, but as the economy improves, we should expect an improvement in this segment together with the corporate segment. In consumer lending, we're a bank that's focused in the more affluent, the more upper income and middle income segments. So we're very focused in the type of service services that we offer these customers, how we're offering, and we're using a lot of digitalization as well in order to grow consumer loans across the board, but we're more focused in the upper and middle income segments. So what we've seen today is some banks gaining a little bit market share, but they're focused on a little bit different segments than we are. And we've been bringing out new innovative products, which have been driving these client acquisitions and making new cross-sell opportunities. um if we we look at a little bit of the digital initiatives that we've done in order to because obviously in this segment it's important to be a bank that offers um a very high quality uh service across all all channels so today where banks has implemented a lot of front office digital solutions most of the transactions are being done online for example over 90 percent time deposits as well is very high over 80 percent um Even mortgage loan applications, we have a very high level of 50%. So we're a much more digital bank than we were 10 years ago, obviously. So this is also helping to grow this segment in consumer lending. And obviously, as the economy improves, we should expect to see an improvement in the multinationals and large corporations in Chile. But that has had very little demand due to the economic and political situations that we've had over the past five years.

Perfect. Considering, do you expect that this change in the loan mix to be significant and offset the normalization of inflation and also the normalization of interest rates on margins? If we see that you're planning to grow in SMEs and consumer, I'm wondering if we could see that NIM could be maintained around 4.7, 4.8, even with the normalization of inflation and interest rates?

Remember that this year we're expecting only inflation of 3.4% in terms of variation of the U.S. So that 0.4 or 0.5% above the level of the long-term target, it only represents around 10 basis points. So our expectations is that net interest margins should be around the levels that we have today, maybe slightly less than 4.8, but around 4.5 to 4.7 is reasonable, depending on inflation. it also depends on loan mix is very important so today what we've been seeing is a lot of growth in the industry and us in mortgage loans which has lower net interest margins and what's happened over the last 15 years is the mortgage loan portfolio grew significantly and that brought down significantly together with other market factors net interest margins to what we saw prior to the pandemic And today, thanks to market factors, we have these higher levels of net interest margins. But the rates in terms of interest rates, we think that it will probably remain higher for longer. Maybe Rodrigo can mention about the long-term interest rate for overnight rate that he expects in the long-term, medium-term.

So basically, the main question that we have today is, okay, what's going to be the main parameters in the long-term? uh today with the information we have today uh in the in the next during the next year we're gonna have an interest rate above the level that we used to see for example before the pandemic a similar economic growth but at the at the end of the day we have a different uh mixed trend that we have to evaluate so that's why uh we we have mentioned uh that inflation probably will i will be lower in the in the future but we don't have an important gap in the inflation today compared to where we we will have in the in the future uh interest rate probably the terminal rate will be around four percent today the rate is at uh 4.75 percent uh where but on the other hand we're expecting a recovery in long growth so that's why these opposite trends uh will likely be that the result of that uh mixed trends will be a similar level of stable means as Pablo said uh before perfect thank you so much thank you

Thank you very much. Our next question is from Neha Agarwala from HSBC. Your phone line is now open. Please go ahead.

Hi, congratulations on the results and thank you for the very clear and detailed answer through the call. Just quickly,

Okay, looks like Niha dropped. Perhaps we can take her question once she dials back. Our next question is from Andres Soto from Santander. Your line is now open. Please go ahead.

Hi, Rodrigo, Pablo. Thank you for the presentation. Most of my questions have been already addressed. But I still have a question regarding dividends and capital position. Previously on this call, you mentioned that your target for core equity year one was to be 100 basis points above the minimum regulatory requirement for at least 100 basis points. And you are way, way, way above that level at this point. And that in addition to the additional reserves that you have in your balance sheet that is, as you mentioned, 600 billion pesos. So I would like to understand your thoughts around the possibility of an extraordinary dividend and what will need to happen for that to be considered as a potential for investors.

Hi, Andres. This is Daniel Velarse. Extra dividends or a payout ratio higher than 60%, that is our long-term view with respect to dividends, would be only possible under some specific circumstances like we have had in the in the in the recent years no and it's only possible under under consistently lower than expected growth and also higher than normal net income it's also important to know that at least we will always retain the the inflation effect on equity or on capital no every year So if economic activity and private investment in particular remains subdued in the midterm and our financial performance keeps strong, we cannot allow to temporarily decouple from our midterm view in terms of dividend distribution as we have done in the recent years. and definitely the the during 2025 our results have continued to consistently be our expectations and long growth also remains remains tempered no and and and subdued however any change from from this baseline scenario uh in terms of dealing payout is something that needs to be determined by by our shareholders every year absolutely thank you daniel and and regarding the additional reserves

that you guys have in the balance sheet, it's much higher than any other bank in Chile and despite having much better asset quality indicators, what are your thoughts around that position is going to be released gradually and risk pressure or is that a potential source of dividends for shareholders?

The idea, this is Pablo speaking, the idea behind the additional provisions is to use in negative cycles. We did release them earlier this year for the change in models for the consumer loan books. Looking forward, obviously, the Board of Directors makes these decisions and analyzes based on circumstances that we're seeing. So what we've mentioned in the past is if we don't need these additional provisions, a portion of these additional provisions could be reversed. but there's no clear time frame regarding that. Today there's still a lot of uncertainties in terms of the economical, global, macro scenarios, geopolitical. So today we don't have any new information, but it's something that's taken into consideration every year. Releasing these provisions slowly hasn't been or a payout of these additional provisions hasn't been discussed, but it's something that we have to continue looking forward.

Understood. Thank you, guys, and congratulations on the results.

You're welcome. Thank you. We'll get back to Neha Agarwala from HSBC. Your phone line is now open. Please go ahead.

Hi, can you hear me now?

Yes, you can hear me.

Perfect. Thank you so much. Congratulations on the results and thank you for the detailed answers through the call. Just a quick one. What kind of cadence should we expect in the coming two quarters for this year? Any big moves that we should be mindful of to create volatility. And second, just on the upcoming elections, any uncertainty that you see depending upon which candidate finally goes through the elections and wins the presidential election? Any kind of risk that you see from the upcoming elections? Thank you so much.

I think one of the things to take into consideration is how the evolution of inflation will move from here on. The last figure that we had was a negative level of inflation. So it will be interesting to see the next print, which comes out in a couple of days. to see how that will affect the third quarter results. This will be very important. So depending on that, we'll see how our bottom line will be affected for us in the industry in terms of interest income from inflation. Okay. I think that's the most relevant area. Other than that, what we're expecting in line with what we mentioned in the guidance is a return on average capital of around 21% and that interest margin that will drop a little bit because there's an expectation that this inflation number will drop the third quarter figure. a little in terms of inflation for that quarter a nymph of 4.7 percent efficiency 38 and the cost of risk which we've uh reduced to one percent around one percent and this is because of the very good performance we've had in the first half of the year so and we're expecting that this trend should more or less stay similar we don't see any large changes uh in the immediate term in terms of risk um so other than the the the uf variations uh is what we've taken into consideration for our guidance for for this uh for this quarter and rodrigo will answer the other part sure uh thanks for the question um we know that uh the political environment is getting more more important everywhere

In our case, I think that it's critical to be aware that the political system in Chile is based in important counterweights between the government, the Congress. Also important to keep in mind that any important reform in Chile has to be approved by the Congress, both cameras in the Congress, that is valid, for example, for the case of changes in taxes, changes in... in the constitution etc so so that's why i would say that it will be very important to analyze uh the results not only of the presidential election but also in terms of the composition of the congress given the very very important role that the congress has uh in chile so far what we've seen is that there is a broken census in the country in the sense that it's very important to address the important challenges in economic growth especially today even the growing uncertainty that we have in the rest of the world also important to address different challenges from the labor market in terms of reduce the bureaucracy the retakes etc so far we haven't seen any discussion related to structural changes in the economy. But again, the main uncertainty that we have today for the countries related with the global economy, related with the evolution of the corporate price, the evolution of growth in our main three partners, which are China and the U.S. And locally, I would say that it's not only a matter of who's going to be president in Chile, but also the composition of the Congress.

Okay, thank you. Thanks. Our next question is from Ewald Stark from Vice Inversiones. Your line is now open. Please go ahead.

Hello, and good afternoon. Thanks for taking my question. Well, the current basic capital ratio is really high, especially compared with what's required by the regulator. So, and this is basically a result of almost zero loan growth in the past couple of years. So, my question is, what's your targeted basic capital ratio once loan growth reactivates? Or at least, where do you feel comfortable?

Hi, well, this is Daniel . Well, basically, as long as the economy reactivates in the future, we expect to use our capital for doing business, of course. And accordingly, we aim to always maintain a favorable gap of at least 1% over regulatory limits for all of our capital and equity rates. This is basically what we are seeing in the future, but there is not a specific timeframe for that, of course.

Okay, but Banco de Chile traditionally has, do you hear me?

Yes, we can hear you.

Banco de Chile traditionally has always complied with capital ratios and other requirements. What about what's the minimum required ratio? So do you have any guidance about

where where basic capital could like be in the next couple of years well in the next couple of years it will depend on the on the on the economic growth and also longer of course and how we can use our our capital for doing business uh but basically if if everything works as we expect This is the economy reactivates and so on. The minimum amount or the minimum ratio of capital that we expect to comply with is to be at least 1% over total regulatory limits.

Okay, perfect. Well, thanks.

Thank you very much. We would like to thank everyone for the participation today. I will now hand it back to the Banco de Chile team for the closing remarks.

Well, thanks for listening to the call today and we look forward to discussing our third quarter results with you in the future.

Have a good day.

That concludes the call. Thank you and have a nice day.