Hello, everyone, and welcome to Banco de Chile’s 2Q 2019 Financial Results Conference Call. If you need a copy of the press release, it is available on the Company’s website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations; Daniel Galarce, Head of Financial Control; and Cecil Diaz, Investor Relations Specialist. Before we begin, I would like to remind you that this call is being recorded and that 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 these forward-looking statements. I will now turn the call over to Mr. Rodrigo Aravena. Please, you may proceed.

Thanks. Good afternoon, everyone, and thanks for participating in this conference call today. It’s a pleasure for me to have the opportunity to talk about the highlights of this quarter for Banco de Chile, key trends observed in the Chilean economy and the recent performance of the local banking industry. After my presentation, Pablo Mejia, our Head of Investor Relations, will provide a deep analysis of the financial results posted by our bank during the second quarter. Please go to Slide number 2 on Banco de Chile highlights for the second quarter 2019. The second quarter for Banco de Chile been impressive in terms of results. We posted an ROE of almost 23%, well above the level recorded last year in the first quarter 2019. Our bottom line was also the highest in our history reaching CLP 192 billion. This achievement has been a result of both solid customer income generation as well as higher non-customer income, given favorable interest achieved rates and inflation. Due to our current operating income revenues, we were able to show a remarkable efficiency ratio of 43%. Additionally, it’s important to highlight that we have continued to implement new commercial strategies and data solutions for customers, and we are proud to say that this has result in 90% of our customers using online banking at Banco de Chile, and we continue to see important increases in usage rates in mobile banking where nearly 60% of customers are using these digital channels. Finally, we increased our free flows this quarter by 60%, reaching a level of 44%. Please go to Slide number 4. Since the second half of 2018, the global economy has have a clear deterioration. As Chile is a country with the highest integration into the global economy, not only in LatAm but also…

Thank you, Rodrigo. Please turn to Slide number 9. We are proud to present our second quarter 2019 financial results. This quarter, we recorded the highest quarterly net income figure in our history of CLP 192 billion, well above the level recorded in the first quarter of 2019 in the same period last year. As you can see on the chart on the bottom left, we ranked first in terms of net income generation with a wide difference when compared to our peers. The strong results was explained by robust customer and non-customer income growth, which more than offset higher provisions for loan losses, operating expenses and taxes. In the next slide, we’ll go into a deeper review of each one of these concepts. Please turn to Slide number 10. As you can clearly see, operating income this quarter grew strongly at 17.7% over the same period last year reaching CLP 538 billion, thanks to our superior business strategy that’s focused on continuing to penetrate the retail segment and growing selectively the wholesale segment. On the chart on the left is a breakdown of operating income. Revenues were up due to the large increase in customer income that grew 11.5% year-on-year or CLP 41 billion. This was driven by an expansion in loan volumes as well as higher contribution of demand deposits that benefited our funding costs. Additionally, we recorded a strong increase in fee income of 24.6% over the same period last year. We’ll go into greater detail regarding this further on in the presentation. In terms of non-customer income, we also had important results, thanks to a spike in inflation that reached 1.22% this quarter and drove the source of revenue up 40.2% or CLP 39 billion. Similarly, the decrease in nominal and real interest rates following the…

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from Alonso Garcia with Credit Suisse. Please go ahead.

Good morning, everyone. Thank you for taking my question. My first question is regarding fees. I just want to get some more granularity regarding the impact on your fee lines from a distribution of insurance with these new agreement that you reached earlier in this year. I just want to know out of these CLP 9 billion of additional income compared to last year, how much really came from this new partnership? And how much of that relates to the onetime payment and how much relates to the recurring additional income that you have throughout the life of this contract? And my second question would be on OpEx as some of these initiatives that you mentioned on the transformation front are still ongoing and look to be ongoing this year and next, I would like to get more color from you on the sort of total OpEx growth you’re expecting for this year and 2020. Thank you.

Hi everyone, this is Daniel Galarce. So regarding your first question, the impact in the fee line of this partnership in during June, we began to recognize that some of the upfront or some part of the upfront regarding this new partnership. As you mentioned, our fee income related to the insurance brokerage business increased CLP 9 billion year-on-year, and approximately CLP 4 billion were related to the recognition – part of the – recognition of part of this upfront. Today, we are just recognizing part of the upfront related to some part of the insurance business since we still need to start with the other part of the partnership related to the life insurance business. In the coming months, probably we will have some similar amounts of – as long as we implement this partnership. So basically, by the end of the year, we should have something similar between CLP 3 billion and CLP 4 billion per month.

Okay. And that comes from – again, sorry, from the upfront payment or…

Yes, absolutely. This is only related to the upfront payment. And of course, we have some methodology by which we recognize this over the lifespan of the transaction or of the partnership, but everything is additional income for us, of course.

Okay. So CLP 3 to CLP 4 billion each month going forward from this…

Something like that. It depends on the implementation.

In regards to their question about expenses, similar to how we showed in the slide, I think it’s important to mention that recurring expenses for the year should grow slightly above inflation. The increase that we’ve seen has been because of those three projects that we mentioned. And for the remainder of the year, we expect that there should be a slight decrease in total operating expenses. And this should translate into a better efficiency ratio of around 44% to 45%. We’re not expecting a large material effect that would really impact our bottom line. So we still expect that we should have improvements in efficiency ratio for the full-year figure and levels of around 44% to 45%. In 2021, we should have – sorry. In 2020, we should have levels similar, around 44% to 45%. And in the year 2021, we’re expecting that we should start to see an improvement in efficiency by those three percentage points that we were mentioning to gradually improvement in efficiency.

Sorry. I would like to highlight one thing that we mentioned in the presentation about our main role of improving the efficiency ratio for the future. So basically, after implementation of these initiatives, we aspire to have improvement in the efficiency ratio of around – about three points in the long run. It’s important to keep in mind what we mentioned in Slide 16 in terms of the recurring expenses grew 0% in real term and it’s also important to keep in mind that there will be important amount of investment in terms of the new branch model with new branch investment with the decision during the time. So basically, I think that it’s very important to keep in mind that there’s room to continue improving efficiencies for the time.

Perfect, thank you. Thank you very much.

Okay, thanks.

Our next question comes from Jason Mollin with Scotiabank. Please go ahead.

Hi, thanks for the opportunity to ask a question. You mentioned again reiterating the outlook for long-term ROE in the 18% to 20% range. I’m just wanted to get your feedback on the current environment for long-term interest rates in Chile and the implications on long-term returns. Do you think that where we are at under 3% was the last number I saw in the 10-year local currency Chilean bond – if that really, in the long-term, we should expect ROEs to come down with this kind of interest rate environment? Or are you expecting – is that expectation of 18% to 20% that rates will normalize? Thanks.

Yes. One second please, Jason.

Hi Jason, Pablo speaking. In terms of, for this year, we think it’ll be – this is a transitory event. But we don’t think that it’ll be a long-term interest rate levels at these low levels. We believe that the level’s closer to 4%. In terms for NIM, we think that NIM should be hovering around 4.3%-4.4% for this year. And in Rodrigo’s baseline scenario, which we’ll mention in greater detail right away, he’s expecting a gradual increase in the overnight rate in the coming years.

Yes. I think it’s very important to keep in mind with a long-term rights one – with a long-term view, the fact that the Central Bank improved the estimate of potential ability growth of Chile from 3.2% to 3.5%, which is consistent with different interest rates for the future. All in all, I think that it’s very important to consider that the neutral interest rate for Chile – the overnight interest rate for Chile is around 4%. And therefore, we think that these very low-interest rate will be temporary for the Chilean economy. We understand that we have a below-credit economic growth. We have inflation rates remaining below the Central Bank target, which is consistent with expansionary monetary policy. However, for the long run, it’s reasonable to expect higher interest rate. The neutral interest rate for Chile is around 4%. So in the next, I don’t know two or three years, perhaps we will have a more neutral interest rate with high inflation rate. So the current interest rate will likely be only temporary.

That’s helpful. Thank you very much, Rodrigo. Thank you, Pablo.

Thanks.

Our next question comes from Sebastian Gallego with Credicorp Capital. Please go ahead.

Hi everyone, thanks for the presentation. I have a couple of questions. First, just more color on fees. When you look at the actual financial statements for Banco de Chile, you see that expenses from fees have actually declined compared to a prior year. Can you comment if there are any accounting treatments that have resources in a decline of expenses from fees? Or is there any other accounting stuff that you have to mention just to mitigate the effect, the positive effect on all the things that you had mentioned? That’s the first question. Second question comes from the regulatory front. Are you expecting any changes on the regulatory front coming from the provision expense side? Should we expect to observe those? Thank you.

So in terms of fees, well, there is a one – or the recognition of the charge that – of this international insurer that Daniel Galarce mentioned, which was about CLP 4 billion of additional revenue. We also had very good revenues and other line items, especially in transactional products, which were related to the ATMs and credit card business. And in terms of expenses for these fee expenses, there was a reduction. And that’s also related to our credit card business. Basically, we adjusted our loyalty programs for the credit card business. In terms of the provisionary model for SMEs, your second question, the impact for us is actually quite low. But we’re expecting to implement in July. It’s around CLP 6 billion, higher cost of brick related to the new provisionary model. And then we’re not expecting right now any new changes in terms of provision.

All right. Just to clarify, can you – Pablo, can you clarify on the adjustment of the credit card business? What was the adjustment that you made that we can see lower expenses from fees?

It’s related to the loyalty program. The benefits our customers receive from the loyalty program fees, loyalty program, were adjusted.

Okay. All right. Thank you.

You’re welcome.

Our next question comes from Ernesto Gabilondo with Bank of America. Please go ahead.

Hi. Good afternoon. And thanks for the opportunity. My first question is a follow-up on expenses. We have seen one of your key competitors with an investment plan for the next three years. So why do you think your three new projects will be enough to remain competitive? Or why do you think you could be ahead of the industry? My second question is on market-related revenues. I believe it was kind of high during the quarter. So do you think this could be sustainable for the rest of the year? And my last question is on your effective tax rate. I believe it was lower than the previous quarter. So what is the normalized level we should expect in the next quarters? Thank you.

Hi, Ernesto. Can you repeat the second question, please?

Yes. The second question is on market-related revenues. I think they were kind of high during the quarter. So just wanted to know if this could be sustainable in the rest of the year.

Okay, thanks. In terms of the projects that we’re implementing on the cost side, the efficiency part that will improve efficiency and also improve our commercial activities, we think that this is a – digitalizing the bank has been very important for Banco de Chile not only this year but over the last four or five years. We began in 2015 with a variety of projects that you can see on the presentation, which improved the use of information, big data that Banco de Chile has basically to understand customers better. We implemented a personalized pricing system. We implemented a database for growing our customer base in a much more productive fashion. We also implemented a new preapproved consumer and SME book to also drive sales in that book at lower risk and higher spread. And now, we have began adjusting the service model in our branches. So basically, the new service branch model is focused on improving customer experience and by implementing self-service machines that will also reduce operating expenses, improve productivity, and at the same time, also improve customer experience at the branch. What we’ve seen is an improvement in operating expenses at the branch level, a higher level of commercial activities or the sales. And because we’ve seen this at the pilot program, we decided to roll this out across the entire branch network. The other projects in terms of efficiency is the efficiency project. Basically, what we’re doing today is identifying this year, 2019, different areas of Banco de Chile where there’s room to continue streamlining processes and improving their overall operative – the operations of Banco de Chile. And in the coming years, we’ll be implementing these changes across the bank. With this, I think the digitalization like we’ve been doing the last four or five years, this new service model, the improvement of the efficiency, this new area that’s looking at improving efficiency at Banco de Chile, it’s important steps in order to remain competitive in the industry not only on the sales side to continue growing and how the customers bank with us, but also on reducing cost to provide our shareholders with these high ROEs.

I would like to reinforce the idea that as we mentioned the last slide in the – of the presentation, in terms of the key takeaway, we reconfirm that after the implementation of all these projects, with an equivalent amount of between 300,000 for 400 millions of dollars over the next three years will be enough to maintain our sustainable ROE between 18% and 20% as we mentioned in the last slide of the presentation with a net – with the best Net Promoter Score and recommendation that we currently have in the industry. So, all in all, we are very confident that after the implementation of all these projects, we will remain continue being the leader I don’t know, Daniel, if you want to add.

Yes. Hi. Regarding treasury business or treasury revenues, of course, the second quarter was quite particular in terms of the behavior of interest rate and local interest rate in nominal and real. And it’s difficult to expect something very similar for the future. In particular, due to the current levels of interest rate. However, we also suspect over the rest of the year that that inflation should normalize to the levels of 2.6% to 2.8% on a year-on-year basis. So basically, probably we will not have the revenues that we saw during the second quarter in terms of a fair value adjustment for securities, but probably we will benefit from high inflation. So, all in all, we should be in the average levels between – that we had in the first quarter and the second quarter and in terms of treasury revenues.

Okay. Great. Thank you. And in terms the effective tax rate.

The effective tax rate should be around 23%, 24%. It depends on inflation, of course, even our taxation regime. But the difference between the first quarter and the second quarter, of course, was due to inflation. The inflation the first quarter was 0% and the second quarter was 1.2%. But with a normalized inflation of around 3%, we should have a lower interest rate regarding the statutory corporate tax rate, which will have an effective tax rate of around 23% to 24%.

Great. Thank you very much.

This concludes the question-and-answer section. At this time, I would like to turn the floor back to Banco de Chile for any closing remarks.

Thank you for listening to our call. And we look forward to speaking with you on our next conference call.

This concludes today’s presentation. You may disconnect your line at this time. And have a nice day.