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.