Banco de Chile (NYSE:BCH) Q2 2024 Earnings Conference Call August 2, 2024 4:30 AM ET
Company Participants
Rodrigo Aravena – Chief Economist & Institutional Relations Officer
Pablo Mejia – Head of Investor Relations
Daniel Galarce – Head of Financial Control & Capital
Conference Call Participants
Ernesto Gabilondo – Bank of America
Daer Labarta – Goldman Sachs
Yuri Fernandes – JPMorgan
Andres Soto – Santander
Operator
Good afternoon, everyone, and welcome to Banco de Chile’s Second Quarter 2024 Results Conference Call. If you need a copy of the management financial 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 would like to remind you that this call is being recorded, and information discussed today may include forward-looking statements regarding the Company’s financial and operating performance. All projections are subject to risks and uncertainties and actual results may differ materially. Please refer to the detailed note in the Company’s press release regarding forward-looking statements.
I will now turn the call over to Mr. Rodrigo Aravena. Please go ahead, sir.
Rodrigo Aravena
Good afternoon everyone. Thank you for joining this earnings call, where we will review the financial results achieved by our bank during the second quarter of this year, a period when once again our bank demonstrated its unquestionable leadership marked by its
strong capacity to generate sustainable and robust results over the time.
The performance of Banco de Chile was even more recognizable, especially considering the several challenges that remain in the macro environment. Some of the main achievements include, we led the industry in net income by posting CLP 324 billion equivalent to an ROE of 24.6%. Consequently, the return on equity was 23.6% in the first half of the year. We also continued leading the industry in capitalization by posting a strong 13.8% CET1 capital.
On the efficiency front, we had significant advances in cost control, as total expenses grew only 3.2% below the annual inflation rate. Consequently, the efficiency posted an impressive ratio of 55% in this period.
As usual, we have divided this presentation into three main sections. First, we will share our analysis of the business environment and our update on the macro side. Then we will move towards our advances on the three pillars. And finally, we will present our financial results in depth.
Please move to Slide number 3 to begin our macro analysis. As can be seen in the chart on the left, the Chilean economy continues posting signs of cyclical recovery. In the first quarter, the GDP increased by 2% year-on-year, retained the highest figure in two years. This acceleration was explained by the greater dynamism in exports, which expanded by 3.2% year-on-year and were influenced by better terms of trade and positive growth in trade partners of Chile.
Total consumption showed a slight improvement since it increased by 1.2%, posting the first positive year-on-year figure in two years. On the opposite, gross investment remained obvious, as it contracted by 6.1% year-on-year in that period. Available information from the second quarter suggests the recovery is underway.
I’ll go in a sec to the monthly figures. The GDP expanded by 1.6% year-on-year, a trend that was driven by the dynamisms in the mining sector. This was reflected in the improvement posted in the trade balance as seen in the chart on the top right, which reached a surplus of $5.5 billion in the second quarter accumulating $18 billion during the last 12 months, a figure that was influenced by the 20% year-on-year rise in corporate exports.
Nevertheless, the continuous fall in capital goods imports and several housing-related indicators revealed that investment remains weak partially offsetting the improvement in consumption and net exports.
The labor market is one of the main pillars behind the incipient recovery in consumption. As you can see in the chart on the bottom right unemployment has slightly improved reaching an 8.3% rate in the second quarter.
This figure which was 20 basis points lower compared to one year ago resulted from the 3.2% year-on-year increase in total employment and the 3% expansion in the labor force.
As a result the participation rate of the economy was 62.1% better than the
60.9% seen one year ago although it remains below the 63.4% observed before the pandemic. I’d like to turn to our analysis of prices and interest rates.
Please go to the next slide, number 4. The headline inflation rate continues hovering around the upper band of the Central Bank target as seen in the chart on the left of this slide. Particularly the annual inflation rate in June was 4.2% year-on-year higher than 3.7% year-on-year posted in March.
This trend has been attributable to higher food prices which rose to 6.6% year-on-year in June from 3.6% in March and energy prices which increased from 6.2% to 11.2% in that period.
On a sequential basis, the CPI increased by 0.7% in the second quarter after rising by 1.6% in the first three months bringing a 2.4% inflation in the first half of this year. The downward trend inflation in the last 12 months has allowed the Central Bank to continue reducing interest rate.
In the monetary policy meeting held in June the board decided to cut the interest rate by 25 basis points from 6% to 5.75% accumulating a total reduction of 150 basis points since July of 2023 the moment when the Central Bank began the easing cycle.
Chile has been one of the countries with the most aggressive reduction in the interest rate during the last year. In fact the spread with the upper band of the inflation rate in the United States has narrowed from 575 basis points one year ago to only 25 basis points today.
This situation has driven a weakening in the Chilean peso in multilateral terms as can be seen in the chart on the bottom right. Now I’d like to present our business scenario for this year. Please go to the next slide number 5.
We anticipate the economy to continue posting signs of cyclical recovery in the short term towards a rate slightly above its potential capacity. Specifically we foresee an increase in GDP growth from 0.2% in 2023 to 2.4% this year.
This expansion will be driven by a solid growth of net exports which should be positively influenced by external factors such as copper prices and the robust dynamism in several trade partners.
Consumption is also expected to perform better relative to 2023 due to the lower interest rate and higher growth and employment. On the opposite we think investments will continue in negative territory.
Despite the stability in GDP forecast for this year we have seen a material increase in CPI expectations for this year as a consequence of the announcement of a 57% rise in electricity bills over the following months.
According to the Central Bank, this measure will rise the CPI by 145 basis points over the next 12 months. Due to this, we now expect the CPI to post a 4.3% increase this year. We projected 3.7% in the previous call. In an environment where the Central Bank will likely leave the interest rate at 5.5% by the end of 2024. Moreover, we anticipate CPI to fall to the official target of 3% only by 2026.
In the table of this slide, you can see the summary of our estimates, while the chart on the right clearly shows the upward trend in market consensus of both interest rate and inflation.
We know that our best scenario is subject to several important risks. As we’ve mentioned in previous calls, the evolution of the global environment is extremely important for Chile given its deep integration into the Rest of the world. As such, it’s worth mentioning economic factors, such as the GDP of key partners such as China and by US, as well as geopolitical factors, including armed conflict and key elections. On the local side, it’s important to analyze the evolution of inflation, especially considering potential second run effect after the rise in electricity bills.
Finally, monitoring the discussion in the political agenda is also relevant, considering there are discussions related to pensions and taxes in an environment marked by several elections.
Before moving to the bank, I’d like to refer to some trends in the banking sector briefly. Please go to slide number 6. The industry reported a net income of CLP1,346 billion for the second quarter of 2024, translating into a return on average equity of 16%. Compared to the previous year, quarterly net income increased only by 2% and when compared to the first quarter, grew by 15%.
Total loan volumes remain subdued, posting below-trend figures. Loans grew by 3.9% year-on-year in nominal terms due to various factors. Commercial loans expanded by only 2.4% year-on-year nominal, reflecting the decline in total investment over recent quarters.
A similar trend was observed in consumer loans that saw a modest 2.7% year-on-year nominal increase, translating to a decline in real terms. Mortgage loans continued to be a key driver of growth rising by 6.6% year-on-year nominal. Given this context, we anticipate loans to increase only 5.5% by the end of this year.
Regarding delinquencies, the weak economic environment has led to a year-on-year worsening in nonperforming loans, but in recent quarters, this has begun to stabilize. The industry reported an NPL rate of 2.4% this quarter, up from 2.1% in the same period last year, but below the 2.5% recorded in the first quarter of 2024. We anticipate that credit risk will remain a primary concern for the banking industry in the short-term until we observe further improvements in the economy.
Now I’d like to pass the call to Pablo, who will go into more details about Banco de Chile advances and the financial performance.
Pablo Mejia
Thank you, Rodrigo. I would like to begin with the strategic advances. Please go to slide number 8. We continue achieving solid accomplishments on the deployment of our strategy that focuses on customer satisfaction, efficiency and long-term sustainability, which we implement through six key priorities as shown in the center of this slide.
First and most importantly, our target is to be the most profitable bank amongst our peers. Depending on the macro scenario, this means long-term return on average equity should be around 18% in the context of normalized yield curves and inflation within the target range of the Central Bank.
In cost-to-income we have performed much better than our long-term target although this has been partly due to our strong top-line growth particularly on the grounds of strengthened customer income. We are confident that we will continue improving our efficiency levels through the current and new productivity initiatives some of which we will go over later on in the presentation.
In terms of market share, we aim to be the leader in both commercial and consumer loans and demand deposits denominated in local currency. Finally, we continue providing an exceptional experience for our customers and contributing positively to society. Our commitment has consistently resulted in excellent levels of Net Promoter Scores.
Additionally we are proud that our corporate reputation ranks amongst the top three in Chile. These achievements are validated by assessments from reputable and independent external firms.
In the next slide, we’ll review some of our main accomplishments in our key strategic areas of Digital Banking, efficiency and ESG. Let me start with Digital Banking. Please move to the next slide. During the second quarter of 2024 we continue to enhance and develop new digital solutions. This quarter we integrated new features into our main banking app allowing customers to purchase insurance and open digital accounts directly through the same platform enriching user experience.
We have also implemented new digital functionalities for enterprises such as mass payments, consolidated investments and the authorization of multi-company signatures in a single view. Moreover based on customer feedback we have redesigned the electronic fund transaction, test experience for enterprises, improving the value offering we deliver in cash management services.
In addition this week we announced the launch of B-Pago for the acquiring business. This is a new subsidiary which will enhance the value proposition we provide our business customers especially in the SME and middle market segments by strengthening and widening the array of services that we offer.
On the efficiency and productivity front we continued implementing different initiatives to be a fast, timely, secure and digital bank. As part of our optimization plan, we closed 15 branches this quarter reducing 5% of the total footprint.
Today we have 240 offices across Chile. These changes were facilitated by our ongoing efforts in remote and in-person self-service process digitalization and digital adoption. We have also made substantial progress in balancing our resource allocation across branches particularly within our investment and customer service platforms.
Additionally, we achieved significant savings by rationalizing office software licenses, while putting efficiency plans in place for some of our subsidiaries, leading to a reduction in their total recurring expenses without affecting operations and more importantly, service quality.
Finally, as a consequence of a decrease in interchange rates for credit and debit cards as defined by the Technical Committee, we adjusted our loyalty program accordingly in early 2024, thus reducing our fee expenses, but also taking care to minimize the impact of our value proposition to customers.
We have also optimized our telemarketing expenses. For the rest of the year, we will continue with further actions such as shifting marketing efforts to digital channels and continue executing our productivity plans.
In terms of ESG, this quarter, we created a sustainable finance council with members from diverse departments to leverage our initiatives on this front. As part of our commitment to Chile, we implemented several corporate volunteering programs and financial education activities and partnerships with local institutions.
One of them was a program that in alliance with Fundación Chile has strengthened the educational proposal of 17 establishments, focusing on specialties of accounting, programming, telecommunications, and connectivity and networks.
Through these initiatives, over 600 students have been trained and certified in areas of high demand in the labor market. Additionally, we carried out diverse alignment activities to strengthen the connection between our corporate strategy and the cultural values of collaboration and teamwork.
Finally, this month, we released our first ESG allocation report, which presents the evolution of the portfolio corresponding to bonds issued under the ESG framework. This represents another important step in our ESG journey.
Please turn to Slide 11 to begin our discussion on our results. Net income remained robust this quarter, reaching CLP324 billion, which is equal to a return on average equity of nearly 25%, as shown on the left of the slide.
It’s worth noting that despite the slight decrease in inflation and lower income from term [ph] gapping, this performance closely matches last year’s figure of CLP332 billion, primarily as a result of steady growth in customer income.
Our track record has shown their strategy and management consistently deliver strong results, not only during positive economic cycles, but also in times of uncertainty and volatility.
Compared to our peers, we have consistently outperformed in both net income and return on average equity as illustrated in the charts to the right. We anticipate maintaining a higher profitability in the near term due to still elevated interest rates and the inflation environment, along with expected stable risk levels.
Please turn to Slide 12. Operating revenues grew 3% year-on-year, reaching CLP771 billion in the second quarter of 2024. On a sequential basis, operating revenues were relatively flat. This result is very positive, especially if considered that market factors and temporary positive effects that benefited our top line in the last two years are returning to normality.
Accordingly, the annual improvement in operating revenues was primarily boosted by strengthened customer income coming from loans and deposits, which enabled us to more than offset the adverse impact of both slightly lower inflation on our net asset exposures to the US and decreased net interest income from the management of interest rate mismatches as a result of the repayment of two-thirds of the FCIC at the beginning of April as expected.
In a few words, the overall improvement of our financial core revenues was reflected by our customer income that grew 13% year-on-year. This performance was the result of a rise of CLP61 billion in income from loans, margin from time deposits and a better funding base from noninterest-bearing demand deposits.
Specifically, our loan book generated greater returns, mainly thanks to improved lending spreads and a positive volume growth in consumer loans. Time deposits also contributed more this quarter as we have been actively managing pricing through our digital transformation strategy and the diverse actions we have taken in the front office operations.
Finally, demand deposits grew 5.2% year-on-year, providing us with a higher contribution to our total operating revenues by reducing our cost of funds, given interest rates that continue to be above normal levels.
The charts on the right illustrate our performance relative to our competitors. This quarter, we achieved an impressive 5% net interest margin, surpassing all of our peers. We also maintained a comparable advantage in net fees, margin and total operating income as depicted in the other charts on the slide.
Our remarkable performance reflects the results of a consistent business strategy and our ability to deliver enhanced value offerings to our premium customer base over time in both lending and nonlending products. This approach has paid off in times of increased uncertainty during the pandemic while adapting to a changing business environment marked by dramatic shifts in market factors that are gradually returning to more normal levels.
As a result, we have been able to maintain a strong track record in customer income regardless of the economic conditions, while wisely weighing market opportunities when they have arisen.
Please turn to Slide 13. Our loan portfolio is strategically balanced across different market sectors. As of the second quarter of 2024, our retail loan portfolio, which is composed of individuals and SMEs, concentrated 65% of loans and wholesale commercial loans amounted to 35% of the total loan portfolio. Total loans grew 4% year-on-year and 0.8% on a sequential basis. By product, mortgage loans drove growth up 7.2% year-on-year, while consumer loans expanded 3.4% in the same period.
On a positive note, commercial loans finally grew by 2.3% after posting four consecutive quarters of negative expansions. By segment, retail loans have increased 4.4% year-on-year. This growth has been driven by Personal Banking, while commercial loans to SMEs continued to be affected by the weak activity in some economic sectors.
As for mortgage loans, this expansion was primarily driven by the effect of inflation on period-end balances as these are mainly denominated in U.S. in conjunction with fundamental growth dynamics in the housing market.
Nonetheless, this product continues to grow at low levels than in the past due to the rise in long-term interest rates as a consequence of the reduction in the availability of long-term funding given the pension fund withdrawals, along with diverse regulations ranging from further capital requirements for this lending business to other impacts, including caps on prepayment fees, the end of that exemption for construction and increased taxes levied on properties.
In terms of consumer loans, the year-on-year expansion was due to an increase in the origination of installment loans in the first half of 2024, when compared to the same period last year.
Credit card loans have also continued increasing, thanks to attractive value offerings focused on key segments. It’s important to highlight that the installment loan growth has been persistent in terms of loan origination, while credit card loans have leveled off during the last few quarters after booming during the pandemic, given the significant increase in usage rates of electronic payments versus cash.
As for SMEs, commercial loans granted to these customers increased 1.3%, when compared to a year earlier. This low level of growth is partly attributable to a high comparison base in 2023, as loan expansion was highly influenced by the state guaranteed Folgate Chile assistance program, which ended in December 2023. However, this program was relaunched in 2024, but it has had a lower level of demand.
Additionally, the lagged effects of subdued economic activity in some specific sectors, such as services, commerce, manufacturing together with still high interest rates continue to pressure loan originations in this sub-segment.
On the other hand, the Wholesale Banking segment, commercial loans, retook growth, expanding 3.4% when compared to June 2023 after decreasing several quarters. This was partly due to an improved performance on our corporate banking area that enabled us to more than offset the annual decline in the large companies area.
In part, the improved performance was the result of year-on-year depreciation of the Chilean peso to the dollar of 18% as of June 2024, which boosted trade finance loans in particular. It’s worth noting that initiatives implemented to enhance value offerings in some specific lending products such as trade finance, leasing and factoring loans in the wholesale segment, leveraged on both customer knowledge and strengthen digital solutions have supported the overall annual growth.
However, it’s also important to highlight that as long as private investment continues to be behind the recovery of other macroeconomic indicators, it’s likely to expect subdued growth in this segment.
Likewise, further capital requirements on some sectors such as real estate, also play a crucial role in the evolution of this segment. From a concentration standpoint, it’s important to note that our commercial loans are well diversified across a wide range of economic sectors as illustrated in the chart on the bottom right. This diversification mitigates a reliance on any single industry, reducing the potential impact of economic downturns in specific sectors such as real estate, construction or the current challenges facing the private health industry and utilities, among others.
For the rest of 2024, we estimate loan growth to recover and post-annual expansion slightly above the industry’s average of 5.5%. This is slightly down from our previous expectations, which is in line with the slower than predicted interest rate cuts.
Please turn to Slide number 14 to discuss our balance sheet structure. As you can see on this slide, we are returning to a pre-pandemic composition of our balance sheet. In assets, the low interest rate loans for SMEs with government guarantees granted during the pandemic are gradually coming due, while the level of loans to total assets is gradually going back to levels above 70%, as a result of the reduction of financial securities used to repay the Central Bank credit line known as FCIC.
On April 1, we repaid two-thirds of this debt, and the remainder of this debt was repaid at the beginning of July. As you can see on the table on the bottom left, even though we repaid this debt to the Central Bank, mainly with financial instruments, we kept a high level of liquidity that exceeds significantly the limits set by the regulator. Our liquidity coverage ratio reached 256% as of June 2024, 156 basis points higher than the regulatory limit and the net stable funding ratio attained a level of 122%, 42 basis points higher than the limit during the same period.
It’s also important to note the evolution of our deposits, which is the most important source of funding on our balance sheet, representing 54% of total assets. As you can see on the chart on the top right, we can note that this has also normalized the levels seen prior to the pandemic. We don’t foresee significant changes as the composition of deposits is correlated to the changes in the overnight rate, which we assume will be close to these levels in the medium term.
I would also like to highlight the strong drop in the overnight rate has allowed us to reprice our short-term interest-bearing liabilities, primarily composed of time deposits held by customers, faster than our assets over the last quarters, which in turn has enabled us to partially offset the decline in extraordinary revenues seen in prior years, when benefiting from the FCIC funding.
Bonds is another important source of funding, representing 18% to total liabilities. These funds are primarily used to finance our mortgage portfolio and new issuances are influenced by the growth of this product. Since long-term interest rates continue higher than prior to the pandemic and housing costs have remained elevated, the mortgage loan portfolio for us and the industry is expanding slower than the levels seen in the past. For this reason, it’s reasonable to expect bond issuances to increase in line with maturities and the dynamism of mortgage loans.
Finally, on the bottom right is the evolution of our UF GAP compared to inflation. Our position is the result of both a proactive management of asset and liability term mismatches and the structural position in US that hedges the real value of our shareholders’ equity. The management of these positions has successfully positioned the bank appropriately to maximize returns during changes in inflation. Today, our position stands at CLP 8.3 trillion. This means that our sensitivity as of June 2024 to inflation is about CLP 83 billion for a 1% change in inflation.
Please turn to Slide number 15. We continue to lead the pack in capitalization among our peers. Our CET1 ratio for this quarter rose from 13.3% in March to 13.8% in June 2024. Over the past few years, we have notably outperformed our main competitors and the industry average in the indicator as shown in the chart on the bottom left. And we are well above the regulatory limit.
Also, our Basel III ratio rose to 17.5% from 16.9% in the first quarter of 2024, thanks to our strong bottom line. This significantly exceeded our fully loaded requirement of 12.75% as illustrated in the table on the right. With these capital levels, we comfortably meet the current phase-in and fully loaded Basel III requirements, including both the countercyclical buffer and the Pillar 2 charge recently defined by local regulators.
Please turn to Slide 16. Expected credit losses reached CLP 95 billion in the second quarter of 2024, up 42% from a year earlier. The year-on-year rise was primarily due to a comparison base effect. Specifically, we released certain wholesale segment provisions on an extraordinary manner during the second quarter 2023, due to specific situations of a group of customers in the real estate, construction and transportation sectors, which resulted in especially low provision expenses for that quarter.
To a lesser extent, this figure includes greater provisions from a slight deterioration of the Wholesale Banking segment due to the deterioration of a few customers belonging to the transportation sector. Additionally, this figure also includes the effect of the expansion of our loan book, which was largely concentrated in the Retail Banking segment, as well as an increase in impairment of financial assets due to higher credit spreads, as well as increased exposures in fixed income instruments issued by U.S. banks this year.
In terms of total NPLs, we posted a level of 1.5%, relatively stable when compared to the previous couple of quarters, as you can see on the chart on the top right. It’s also important to highlight that delinquencies in consumer loans have come down from the peak of 2% in the first quarter of 2024 to 1.7% in the second quarter 2024, as you can see on the chart on the bottom right.
On the other hand, commercial and mortgage loans have seen a slight increase in NPLs during the same period, which is a trend seen across the board. Nevertheless, we believe that the economy continues to improve. NPLs should level off across all products and should also begin to show signs of improvement.
Finally, as shown in the chart on the bottom left, we possess the highest quality of loan portfolio and the best coverage ratio of 2.6 times, including additional provisions of CLP 700 billion compared to our competitors. This positions us exceptionally well to manage unexpected risk deterioration or regulatory changes in risk models. In fact, it’s important to highlight that the CMF standard model for provisioning consumer loans has been established to be implemented in January 2025. In the last quarter, we reported that we will use part of our additional provisions to cover this change in model. Our estimates are that this will mitigate the impact of around CLP 66 billion.
Please turn to slide number 17. Regarding our operating expenses for the second quarter, they amounted to CLP273 billion, decreasing 3.9% when compared to the first quarter of 2024 and an expansion of only 3.2% compared to the same period last year. This increase is mainly due to high inflation with a year-on-year change of 4.1% impacting most expense lines.
On the chart on the top right side, we can analyze in detail the change in operating expenses between the second quarter of 2023 and the second quarter of 2024. Personnel expenses increased 2.7%, primarily due to inflation adjustments. As agreed in existing collective agreements salaries are adjusted for inflation twice a year.
In addition administrative expenses rose by 3.8%, explained mainly by an increase in IT-related expenses associated with improvements applied to digital infrastructure and internal initiatives that pursue to boost operational efficiency.
Regarding our efficiency ratio as shown in the chart on the bottom right, we continue to lead our main peers. We achieved an efficiency ratio of 35.4% in the second quarter of 2024 basically in line with the same period last year.
We are confident that our strong cost control branch optimization plans and that our continuous efficiency efforts will allow us to post cost-to-income ratio levels in 2024 close to 37% and help ensure that our long-term efficiency levels continue to be below 42%.
Please turn to slide 18. Before going to questions, I want to go over a few main ideas presented throughout this presentation. First, inflation and overnight rate expectations for 2024 have risen to 4.3% and 5.5% respectively, while the GDP forecast remains steady at 2.4% for the year.
Despite these economic conditions, our consistent long-term strategy and robust risk culture have enabled us to lead the industry in profitability, operating revenues, asset quality, efficiency and capitalization. This strategic approach positions us to outperform our peers.
Additionally, we’re proud to be recognized as one of the top performing banks in Latin America regarding ESG risk according to different ratings. Our commitment to environmental social and governance standards underscores our dedication to sustainable and responsible banking practices reinforcing a strong position in the industry.
Thanks for taking the time to listen to this presentation. Now, if you have any questions we’d be glad to answer them.
Question-and-Answer Session
Operator
Thank you very much for the presentation. We’ll now be moving to the Q&A part of the call. [Operator Instructions] The first question comes from Mr. Ernesto Gabilondo from Bank of America. Please go ahead, sir. Your line is open.
Ernesto Gabilondo
Thank you. Good morning, Rodrigo and Pablo. Thank you for the opportunity to ask questions. My first question will be on your guidance was revised to the upward in terms of ROE to 21%. So can you elaborate on what changed to have this higher guidance? You mentioned some factors, but I would like to have your full picture.
And then second question will be on your new acquiring business. So given that you have already some incumbents with acquiring companies, what do you think will be Banco de Chile’s advantage with this new subsidiary against other competitors? Thank you.
Pablo Mejia
Hi, Ernesto. Thanks for your question. Well, we’ve moved up our guidance to around 21% because of the good results that we’ve had year-to-date. One of the things that have changed is the macro, which I think Rodrigo would like to take a moment to discuss.
Rodrigo Aravena
Yes, perfect. Hi, Ernesto, thank you very much for this question. I think that it’s very important to be aware that the evolution of the trend in terms of margin, profitability, et cetera are a perfect reflection of some important trends and drivers of the economy. So having said that, we have to mention that today we have a different scenario for interest rate, for example, given different inflationary pressures discussions in Chile and also considering the recent discussion in terms of interest rates in the rest of the world.
Today we have different expectations for the overnight rate for Chile for the end of this year. So specifically as we discussed in the slide number 5 of this presentation today, we are expecting a 5.5% interest rate by the end of this year.
But in the beginning of this year we were expecting an interest rate of around 2.5%. It’s very likely that the interest rate in Chile will remain about 5% probably until the end of the next year. So this is one important factor.
And also we can rule out the possibility that the terminal interest rate in Chile will be higher compared to the levels that we were expecting last year and also in the beginning of this year. So the new scenario for interest rate is an important factor that we have to consider in the new guidance in the expectation for profitability for this in the next year as well.
We have a similar story in terms of inflation. Today we are expecting an inflation rate between 4% and 4.5% as a consequence of some changes in electricity bill prices in Chile. And also we are just upward adjusting the forecast for CPI. Probably the inflation rate will converge towards the 3% target only by 2026. So this is a second factor supporting the better perspective for profitability in the bank for this in the next year.
And one other important aspect to consider is the slowing of the yield curve — I mean the difference between the long-term interest rate compared to the short-term interest rate because today we have different reasons to expect a more steadiness in the yield curve for the future.
So when we consider these three factors, today we have different reasons supporting the year to have above trend profitability at least for the short-term. And these are the main changes compared to what we had in the beginning of this year.
So in terms of numbers Pablo can you provide some more specific figures?
Pablo Mejia
So I think in summary what Rodrigo was mentioning this affects directly NIMS, so the higher inflation is assisting our net interest margin. The mix of our loan portfolio, we’ve grown very well in terms of consumer loans, and also the reduction of the overnight rate and the still good levels of demand deposits have helped our funding. So this together with growth in fees, growth, a good level of cost control and operating expenses, and good levels of cost of risk, leads us to expect a ROE for this year of around 21%.
And if we look for the future periods, it’s reasonable to expect, as Rodrigo said, the terminal interest rates could be higher, inflation could be stickier. So it’s reasonable to expect returning back to the levels or long-term levels of around 18% or maybe higher in terms of where the economy ends in terms of the macro. So it’s reasonable. One of the things that we highlight as well is that our goal is to be the most profitable bank in Chile in terms of return on average capital.
Ernesto Gabilondo
Excellent. Thank you very much, Pablo and Rodrigo. And for the acquiring business?
Rodrigo Aravena
Okay. So just a couple of ideas. First of all, always it’s very important to keep in mind that in our long-term strategy, we have defined different pillars. And one of that is related with the customer centricity approach that we have. So in that environment, we are very proud for having today a stronger value proposition for our customer, where in the short term, we’re going to be more focused on our business customers, especially those related with the more massive segments. I mean, SMEs and middle market companies. We don’t have today a specific target in terms of a specific goal in terms of market share, in terms of some profitability indicators, but what we can say now is that we aspire to be a very relevant player in the industry in line with Bank of Chile has been in different activities, segments and products that we have historically and today. I don’t know, Pablo, if you want to add any idea.
Pablo Mejia
I think in line with that piece, our expectations for fee growth is to grow in the mid to high single digits. And one of the main drivers of that is customer growth. So if we look at current account balances, for example, in the last 12 months, current account, we’ve been growing 6%. So it’s one of the drivers to increase the number of customers in the bank. Also, Quinta Fund helps to bring in new customers, which we can cross out to other products and services. Our mutual fund business has been very strong. We’ve grown at the end of the period versus the same period last year, around 50%. On average balance is just a little bit lower, but that’s been very strong driving fee growth. So all of these initiatives together with the BPAGO will continue to assist in maintaining those mid to high single digit growth in terms of fees.
Ernesto Gabilondo
Perfect, perfect. Thank you very much, Ed.
Operator
Thank you very much. Our next question comes from Daer Labarta from Goldman Sachs. Please go ahead, ma’am, your line is open.
Daer Labarta
Yes, hi Rodrigo, Pablo. Thank you for taking my question. My question is on your outlook for loan growth. You mentioned that for this year, you’re expecting around 5.5% of loan growth. I wanted to know about your expectations for next year? Are you expecting any improvements if so, from which segments? And then I had a second question, but I can ask later.
Pablo Mejia
For the loan growth, the 5.5% is what we’re expecting for the industry. So, if you look at the year-to-date figures, the industry has been a little bit slower. Every player has a little been closer — a little bit lower in terms of loan growth. What we’re seeing in the second half of the year may be in line with the lower interest rates that we’ve seen throughout the last 12 months. There could be an acceleration, which we think could allow us to have loan growth slightly above the industry that we’re expecting is 5.5%.
And which products, what we’re seeing is still decent levels of loan growth in mortgage loans, partly driven by inflation. Consumer loans has been growing well, relatively well in the scenario, the unemployment rates continue to be stable. We’re expecting the second half of the year good in terms of the economy. And that we just believe that consumer launch should probably be around the level of those mid-single-digits, around the 6%.
In terms of commercial loans that’s been a little bit weaker. SMEs had been growing closer to the 1% level. Corporate lending has been a little bit weaker than it had been in the past from all the uncertainty that’s happened over the last few years. So, we have to see how that unwinds at the end of the year if that comes through to reach these numbers for the industry and for us.
And in the medium term we think that Chile is a country that has a loan to elasticity of around 1.5 times. That’s a variable that can change depending on the cycle. But we think that most likely it’s around that level which leads us to believe a level mid to high single-digit growth for loans in the industry and for us slightly above that. And important to mention that we want to be leaders in terms of commercial loans and consumer loans in the middle and upper income segment.
Daer Labarta
Perfect. Thank you so much Pablo. Second question if I may is just on efficiency, right? So I saw that you posted efficiency levels of around 36% throughout June. And in the guidance even though you decreased the guidance for efficiency this year is around 37%. So, what would explain the higher growth in expenses versus fee and net interest income growth throughout the rest of the year?
Pablo Mejia
Actually in terms of operating expenses what we’re expecting is pretty stable levels of growth in terms of flattish growth in terms of year-on-year. If you look at the full year figure, we should be pretty close to what we had at the end of the year and that’s what we’re expecting for that 37%.
We had a lot of different projects being put in place optimization of the branch that work and their resources new plans in order to improve the productivity throughout the bank in terms of marketing expenses and in different areas of Banco de Chile.
And all of this is helping us control expenses accordingly. And that’s why we think versus prior quarters, which we mentioned growth in line with inflation, which is around 4%. And today we’re thinking that inflation — that growth number will be closer to the zero or slightly above.
Daer Labarta
Perfect. Thank you so much.
Operator
Thank you very much. Our next question comes from Mr. Yuri Fernandes from JPMorgan. Please go ahead, sir. Your line is open.
Yuri Fernandes
Thank you very much, guys. I have a quick one on loan growth in elections like given you have elections in Chile this year. Just trying to understand how should we think. Like local elections is this good or bad for loan growth? And next year on presidential election is also this good or bad historically?
And then my second question I think this is the most classic question for you guys. It’s about dividends and excess capital. What should we expect? I know usually you declare in January and February. But I think in slide 18 that you put in the presentation it is a pretty shocking one, right? You have higher ROEs. Loan growth is not really accelerating a lot in Chile. So you are accumulating even more capital. So my question is when should we see a special dividend from you or I don’t know even M&A? How to think about
capital? Or will Banco de Chile just keep accumulating capital from here? Thank you.
Rodrigo Aravena
Thank you very much Yuri for the question. I’m going to take the first question then Daniel Galarce is going to take the second one. In terms of the cycle that we have today, you’re right there’s going to be different elections in Chile. This year in October there will be elections for mayors in Chile municipal elections, which basically it’s extremely important to analyze not only the results in the main cities of Chile, but also in terms of the composition in different city councilors et cetera because historically the results of the election has been a very strong leading indicators of the election — the presidential and the Congress elections, which will be held next year. So that’s why we are not talking about only about municipal elections, but also we are aware that the result of this election probably will anticipate there some results that we’re going to have next year in the Congress election.
But having said that we have to say that Chile today is growing. We are expecting an economic growth of around 2.4% for this year. I’m saying this because we have to remember that between 2014 — I mean during the last 10 years the average economic growth in Chile has been 1.9%. So I’m saying this because today we are having an expansion above the level that we posted on average in the last 10 years. So that’s why we have some green shoots in the economy.
The main challenges for Chile are related with investment, especially, in terms of some red tape, in terms of some specific areas like construction and in other areas. But despite this concern we have a positive view in terms of the evolution of net export consumption et cetera. But as you said and also as we mentioned as well in the first part of this call elections and political discussion in Chile is one of the ways that we have to monitor for the short-term. In terms of your second question Daniel Galarce? Daniel?
Daniel Galarce
This is Daniel Galarce. Regarding dividends as you said, well the decision is made in March every year of course and the decision is made by our shareholders. We normally talk about in the baseline scenario of about 60% payout dividend in the long run of course. And in terms of capital and our dividend distribution of course, you have to remember that we are still in a process of implementation of Basel III, although some of the uncertainties have dissipated in terms of Basel III as well and the implementation capital charges buffer and so on. There are still some things that need to be clear in the future. And given that we have a capital position with which we are pretty comfortable in order to address all of these challenges in the future in terms of capital.
Yuri Fernandes
Okay. Super clear. So Rodrigo just on your first one on the elections. Like maybe loan growth will be better not for elections per se but just a little bit of better economic activity, right? That’s kind of the message you are giving.
Pablo Mejia
Correct. The economic activity is positive.
Rodrigo Aravena
Yes. So in terms of the – we have a positive view in terms of activity for the future when we compare with the growth that we had seen during the last 10 years. But again, we have to analyze. We have to analyze the result, the composition, the discussion. But when
we analyze some more recent trends, et cetera we have enough reasons to expect still above trend activity for this year and probably for the next year, despite some uncertainties on the political area in the short-term.
Yuri Fernandes
Super clear. Thank you very much, guys.
Operator
Thank you very much. Next question comes from Mr. Andres Soto from Santander. Please go ahead, sir.
Andres Soto
Good morning, and thank you for taking my question. I wanted to ask about the additional reserves that you still have on your balance sheet. It’s CLP 700 billion. You just mentioned less than 10% of that will be required to cover the additional provisions from the update in the standardized consumer model. So I would like to understand what is your view regarding those? Are you planning to start to release those reserves at some point? Are they still necessary? And what is your view overall of the credit cycle in Chile?
Pablo Mejia
Andres, we have a good level of reserves and coverage CLP 700 billion as you mentioned well above our peers. Still as Daniel mentioned and Rodrigo, there’s still uncertainties in the market. And we don’t have a clear trigger of when we would release additional provisions other than what we mentioned in terms of the consumer loan model, which will be implemented in January of 2025. And it has a level of around CLP 66 billion of cost to implement that rule.
In terms of what will happen with the rest, we can’t rule out that in the future a portion of these additional provisions would be reversed, if we don’t need them. But today we don’t have a trigger for that. It is something that the Board would take into consideration at the monthly Board meeting to implement that always taking into consideration the evolution of the economy politics global factors as well when doing that.
Andres Soto
Thank you, Pablo. And regarding the credit cycle and the evolution of asset quality across segments when we look at the June numbers for the system it looks like we finally got some level of stability in commercial loans after almost two years of continued deterioration. Are you expecting any further deterioration in the consumer segment for the system in the second half of the year? Or are we already at the peak of the deterioration in asset quality?
Pablo Mejia
For the system, it’s difficult to mention because it’s a different loan portfolio different customers different aspects. If you think about what the economy is looking like in the future it’s a stronger economy, unemployment is stabilizing. We’re seeing a plateau in terms of cost of risk for us in terms of NPLs. Our customers are in very good shape. So everything points towards a better beginning. The worst has probably passed for us. We know our portfolio better.
And if we look at our figures, we can see that our impaired loan book for example consumer loans is still below the levels that we had prior to the pandemic. If we look at some of the other products in the product families, it’s slightly above. But we have to take into consideration that we’ve just come through a very high inflation period that has affected household income. The economy is very slow.
Some sectors of the economy have had a lot of weakness. So the numbers that we’re posting at Banco de Chile are still very good. But we think that in the second half of the year and towards next year things look positive as Rodrigo was mentioning.
Rodrigo Aravena
Yeah. Andres, just let me reinforce the importance to monitor three key factors. Pablo mentioned some of them. But probably the key word for asset quality in the near term is normalizing right? Normalizing. Probably, the worst part was left behind us basically because the labor market is normalizing even though the unemployment rate today has been more stable. But it’s important to be aware that the total employment is growing the same for labor force. The real wage bill is positive today as a consequence of the positive trend on the average real wages.
Interest rates even though the Central Bank maintained interest rate in the last meeting we’re expecting lower rates for the future, which also has a positive impact for disposable income. And the same for inflation so at the end of the day when we analyze the key macro drivers for asset quality all of them are consistent with I believe for normalization and a more stable asset quality in the future.
Andres Soto
Perfect. Thank you very much both of you, and congratulations on the results.
Operator
Okay. Thank you. Thank you very much. We see no further questions at this point. We’ll pass the line back to the management team for the concluding remarks.
Pablo Mejia
Thanks for listening to our call. And we look forward to speaking with you on our next quarter’s results. Thanks.
Operator
Thank you very much. This concludes today’s conference call. We’ll now be closing all the lines. Thank you and goodbye.
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