Hello, everyone. And welcome to Banco de Chile's 3Q '19 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 Vice President of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations; and Daniel Galarce, Head of Financial Control. 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 forward-looking statements. I will now turn the call over to Mr. Rodrigo Aravena. Please, you may proceed.

Good afternoon, everyone, and thank you for attending this conference call. Today, I'll begin with an overview of recent trends observed in both the Chilean economy and banking industry and then Pablo here, our Head of Investor Relations, will provide a deeper analysis of the performance of Banco de Chile during the last quarter. Please turn to Slide number 3. The annual GDP growth rate has a positive evolution this year, increasing from a weak 1.6% in the first quarter to 3.3% in the last quarter. This reflected an important resilience relative to the rest of the world where the GDP growth decreased in most countries. The softer performance of Chile relative to other OE3 countries can be seen in the table chart. On a sequential basis, the economy grew 2.9% annualized in the last quarter, even though the lower-than-expected growth in September. Additionally, this rise has been boosted by the weak comparison base from 2018, causing a positive statistical effect. As Chile is a most open Latin American country to the global economy, it's worth to understand how the recovering took place. The answer to this question is simply the result of our policy framework. Thanks to the low and stable inflation, the Chilean Central Bank has been able to reduce the monetary policy rate this year from 3% to 1.75%, which is one of the lowest rates in the world. In the bottom left chart, you can see how expansionary the momentary policy rate in Chile is compared to other countries in the region. It's interesting to see that Chile is the only country with negative interest rate in the region. The shipment inflation has remained below the target of 3% since late 2016, as a consequence of their below trend GDP growth despite the recovery in the…

Thanks, Rodrigo. Once again, we were able to lead the quarter in terms of net income with CLP 152 billion. It's also important to highlight the large gap in profitability in terms of net operating income as a percentage of interest-earning assets, as you can see on the chart on the right. Our consistent strategy and customer focus have allowed us to deliver sustainable and superior profitability for our shareholders. As shown on the - please turn to Slide 9. As shown on the prior slide, net income reached CLP 152 billion, equal to a return on average equity of 17.8% this quarter and year-to-date CLP 446 billion with a similar ROE of 17.7%. As you can see on the chart, on the bottom of the slide, the 19% increase achieved in the third quarter, net income versus the same period last year was due to strong operating income growth, together with lower loan loss provision expenses, which more than offset a moderate rise in operating expenses and taxes. On the following slides, I will go into greater detail how our shift towards retail segment, together with higher productivity, cost control and stable risk levels are contributing to these positive numbers. Please turn to Slide 10. Operating revenues increased 8% year-on-year as a consequence of an expansion of our customer income that rose 13% year-on-year, while non-customer income dropped 11% year-on-year. In turn, the rise in customer income was due to higher net interest income, thanks to effective the commercial strategies that leverage business intelligence to us to concentrate growth in key market segments and products that provide more attractive returns with adequate levels of risk. Customer income was also driven by an important increase in fees that rose CLP 31 billion as a result of first, insurance brokerage that…

[Operator Instructions] The first question will come from Jason Mollin of Scotiabank.

Hello. Thank you. My first question is on the macro outlook. Rodrigo, perhaps you could talk to us. You mentioned the outlook for real GDP next year in the 2.5% range. Can you talk, given the recent developments, can you talk about the discussion around potential GDP for Chile? Can we get back to the 4% level going forward? And my second question for you, Pablo, would be, you mentioned on the slide about efficiency, you mentioned digital initiatives. If you can provide some details on where the bank stands now and perhaps some metrics showing the trends in this area? Thank you.

Okay. Jason, this is Rodrigo Aravena. Thank you very much for your question. With respect to the question of economic environment, I think that we have to consider 3 different things, okay? First of all, in the very short term, I mean, in the economic growth of October, perhaps November we don't have enough information, there is a possibility of having a negative economic growth for October. We can't rule out an [indiscernible] which is the monthly GDP figure of around minus 1%, okay? And we can't also rule out the possibility of having a pure economic growth for the fourth quarter as a whole. In short, we will likely have negative news in terms of employment, growth, et cetera, in there for the fourth quarter. With respect to the 2020 economic growth, I think that is very reasonable to expect a below trend economic growth. In the previous conference call, we were expecting an expansion of the GDP of around 3%, which was in line with the potential GDP growth. But now we are expecting a 2.5%, but we have a downward bias in this estimate, which means that we can't rule out lower-than-expected growth because we are aware that there are some risks in the global economy, as you know, the international monetary funds, for example, we used the forecast for economic growth for the global economy for the next year, which is a negative news for us. And additionally, we have more uncertainty in terms of the evolution of the global economy as a consequence of recent events. Finally, with respect to your question about the potential GDP growth, we don't have enough information as to have a final estimate in terms of our capacity of growth in the long term. I'm saying that because in one hand, there are some reasons from the global economy supporting a more negative bias for growth. But perhaps you remember, in the last monetary policy report, the central banks estimated that as a consequence of the integration in Chile, we have a better capacity of growth because of the impact on the labor force. The key question here today is, how will be the reconstruction activity? How will be the fiscal policy and other policies that we are discussing now in Chile? And therefore, I think that is reasonable to expect. So far, based on the available information, that GDP growth in Chile remains around 3%. But for sure, in the next conference call with more information, we will likely have more accurate estimate in terms of our capacity of growth for the long term.

In terms of expenses, we're expecting for the next year is something around low single-digit growth, similar levels of efficiency that we had this year. And we haven't changed our targets that we've spoken before. Our intention of where we'd like to be is still continuing to maintain and actually, I mean, improve our efficiency level by 3 percentage points. And how are we doing that? Well, we've implemented many different projects in the past and those are bearing fruit today. So over - since the beginning of 2015, we've implemented different tools and initiatives in order to digitalize the bank better, in order to automate the back-office processes, and that's what's allowing us today to sell more or originate more loans, which are not only focused on originating more loans, but also in acquiring new customers in all the segments. So some of the more recent projects that we had implemented, a new pre-approved loan model for the SME book, which has been very successful this year. We also are implementing a new service model in the branch network, which is also very positive in terms, not only in improving the cost base, but also improving the origination, selling in those branches. And it's also improving the customer relationships and net promoter score. Looking forward, we're looking at continuing to reinforce all of our apps, our website, which are already rated number one in Chile, but we think we can continue improving and giving them better customer service and providing the parts and services to the channels that our customers are demanding. And we believe that there's still room to continue improving the back-office automation of processes in order to reduce - to continue growing without the need to increase expenses in the same way.

That's helpful. That's good color. Any kind of metrics that you would talk about in terms of percentage of transactions taking place digitally, the trends there versus, let's say, in the branch or any kind of digital sales metrics that you could share?

Yeah. In terms of metrics, in terms of online brands, online and branch monetary transactions, so actually, money that's been moved around. We have - in total, we have in the branches, decreases generally of around the 7% range. While online, which includes the mobile phone and the website, is increasing 22% or just - over 20%. What's really interesting is the importance of mobile banking. So if we look at the monetary transactions in mobile banking, it's actually - it's probably expected this year or very soon to be the most important channel in terms of transactions. Today, it represents almost half of the online transactions, and the mobile monetary transactions are growing over 40%. While the website is growing at a slower rate of around 10%. So it’s been very successful, the online banking for us.

Thank you, Pablo.

Thank you.

The next question will come from Claudia Benavente of Santander.

Hi. I was wondering if you could provide us more color on what you expect a little bit on the cost of risk side? Like trying to get a little bit of sense talking to other banks as well, many - some have indicated that maybe there could be some deterioration as the collection process has become a little more challenging due to the current crisis that we are leaving. So I was wondering if you're facing any challenge in that respect?

Hi, Claudia. Based on the information that we have today, we expect that the long-term loan loss provisions should remain similar to the recurring rate that we've had in the past of around 1.1%. Obviously, nevertheless, the temporary volatility depending on the current events or on the economic cycle can adjust that slightly. And obviously, during these times, it's a little bit more difficult to do collections. So that could have an impact, but we expect that this is more of a temporary event, more than something that we would expect to be long term. Also, as we always mention, I think it's super important to mention that we put a significant amount of resources in order to control risks and to implement prudent policies. So we're always looking at growing responsibly, and we always focus to have a good relationship between risk and return in all the segments that we provide services for. And I think that's one of the main competitive advantages of Banco de Chile. And if you look at our track record, it's something that stands up.

Great. And one more question, if you can give us, again, more color on the Basel III requirements? You have an excess of capital, should we expect Banco de Chile to pay an extraordinary dividend or you would be - feel more comfortable of holding - on holding in an extra capital position to face any, I don't know, macro uncertainties? Thank you.

We think that we're well prepared to implement Basel III in Chile, but it's very difficult to give guidance or understand how they would be implemented in Chile without one of the most important pieces of information of the weights of the risk-weighted assets. So today, what we've done is improved our capital position, and we're comfortable where we're at today. And in the following quarters, we will have more information regarding our capital position.

And what would be a comfortable level for the CET1 ratio, looking forward, like a minimum CET1?

We're - we still have to have all the information from the regulators in order to understand well our requirements, and how we would like to maintain Basel III within Banco de Chile.

Thank you.

The next question will come from Neha Agarwala of HSBC.

Hi. Thank you for taking my question. I wanted to ask about the fee income, you saw a very strong growth in non-interest income this quarter, how much of that is sustainable? And what is the level that you expect for this year and next year? And primarily insurance, which has been growing at a very good pace. What is the reason for that growth? And what is the outlook for that? And my second question is about your loan growth. It has been quite stable at around 9%. With the current [unrest] in today, do you see a slowdown in loan growth? Would it be more supply they were driven or demand driven? And any specific pocket of concern that you see for yourself? Thank you so much.

In terms of - for fee growth, we expect in the medium term, high single digits level. But if we look at what's been happening today, the main growth - the growth that we've seen is through insurance, as I mentioned, that we entered into a joint venture with an insurance company, and that's been providing us healthy fee growth. Also, we've had very good fee growth from cards as well as ATMs because we've grown the ATM network significantly, and our mutual fund business has been growing quite positively as well with an increase of 15% in assets under management. In terms of loans for us and the industry, what we're expecting is, obviously - what we can say because it's important to take into consideration the current situation, which is occurring in Chile, which is making it a little bit more difficult to do the everyday activities. So this, in turn, is affecting different areas of the economy, which is the, for example, retail, sales, salaries and of course, loan originations. So as Rodrigo mentioned, we expect the GDP in the fourth quarter will slow down and that 2020 will be weaker than our original expectations in the past, in turn, affecting loan growth, obviously. So if we - we also have to review consumer and business confidence levels in order to understand the impact of their origination. But it's reasonable to expect the elasticity of loan growth to GDP should grow slightly lower maybe based on the scenarios and 2 times in 2020. And we're expecting something around the 7% nominal range for the industry, and in terms of Banco de Chile, we think in line with what I said. We are focusing on growing responsibly and taking care of our risk-return relationship and aiming to concentrate growth in high-quality SME customers as well as higher net worth individuals in the retail segment.

Okay. If I can ask one more question. I noticed that your LDR has been increasing gradually. Any steps that you are taking to improve your funding base and to bring down your LDR or that is not a concern to you? Thank you so much.

Which indicators, sorry?

Loan to deposit ratio.

It's important to mention the loan-to-deposit ratio is influenced by time deposits. So if you looked at the past of Banco de Chile, what we've done is, we have replaced time deposits for bonds. And generally, bonds, what we've done is changed the way how we fund the bank in order to take on more dependable funding versus short-term funding, which would be time deposits replacing time deposits with long-term bonds to fund the mortgage loan book. So if you look at our loan to the deposit ratio and exclude those mortgage loans, it's much more in line with international standards.

Okay. Thank you so much for the clarifications.

The next question will come from Yuri Fernandes of JPMorgan.

Thank you, gentlemen. I had the first question regarding expenses. If you have any estimates of like the wage reduction, how much it could hurt personnel expenses if it's implemented with reducing the weekly hours for 40 or below 40? If you have any kind of estimates on that? And second question is regarding buybacks. I think it's not a common topic in Chile, but what would be the pros and cons of having buybacks at those levels? Thank you.

In terms of what's being talked about the 40-hour work week. For Banco de Chile, it's not very material because we already have our workforce working at 41 hours and 15 minutes. So in essence, the loss for us would adjust their daily working hours by only 15 minutes per day. So it's not a material impact for Banco de Chile that changed. But…

Are 41?

Yes, for Banco de Chile. So it's not a - for Banco de Chile, it's not a material - it's not an issue at all.

There's not a material difference between the 40 hours in the average working hours in Banco de Chile. That's the point.

Okay. No, I was just surprised because looking to the unions of the banks, I think every bank has a lot of units, but the main ones for most banks is [45] to [245], so surprising that…

Banco de Chile for a very long time has been at this level, over 10 years.

Okay. So no major impact on that?

No. And the second question was?

Regarding shares buybacks, like if the bank would pass it on buybacks at those levels?

Share buybacks is very difficult in Chile, and it's not something that's very common. So it would be something that would have to take into consideration in a future period of time. But it's not something that we're looking into at this time. We can't rule it out, obviously. But at this time, it's not something that's been discussed with the market anyway.

The next question will come from Tito Labarta of Goldman Sachs.

Hi. Just following up a little bit on the recent events, and I know you kind of lowered the GDP growth for this year. But just any sort of immediate impact that you guys have done in terms of just kind of running the bank in terms of maybe changing your credit granting policies? Any update just in terms of the branches or expenses related to that or delays in opening up some branches and how that could impact the business? I just want to get a little bit of sense of kind of some of the short-term impact if you can quantify a little bit how that could play out? Thank you.

Give me - one second, please. I think it's very important, first of all, to pay a special attention to the coming information because we don't have enough information to have a more aggregate evaluation in terms of the final impact on the GDP growth for the next year, et cetera. So far, we have some bias in terms of the down work adjustment in terms of GDP growth, perhaps in employment as well, et cetera. So what we can say so far is that we are not expecting a material impact in terms of result for the next year, et cetera. What we have to say here is that we can't rule out from adjustment in terms of cost of rise, NPS referral in the very short-term as a consequence of - the - some constraints for the normal activity in the GDP in this month. However, it's very important to mention that we expect these changes will be only temporary, okay? So what we are expecting is a normalization over the next quarters in terms of cost of risk, in terms of loan growth, et cetera, et cetera. So - give me one second, sorry.

And in terms of other areas of the bank P&L fees, for example, we don't think that there's a material impact in those lines.

Sorry, one other thing to consider, we didn't know not only for Banco de Chile for the industry as a whole is that we will likely have a more timing and that is for the next year. In terms of below trend economic growth, some pressures in terms of lower interest rates. So we are expecting that the Central Bank reviews interest rates next year, we can't rule out that the economy will take a longer time to convert towards potential GDP growth rate. So all in all, we are aware in terms of some challenge coming from the low - the below trend economic growth, the lower than 3% inflation rates, lower interest rates. So we are aware about this challenge coming from the macroeconomic side, not only for Banco de Chile, for all the industry in general.

And this concludes the question-and-answer session. At this time, I'd like to turn the floor back to Banco de Chile for any closing remarks.

Thanks for participating in this quarter's call. We look forward for the next quarter. Thanks.

Thank you. This concludes today's presentation. You may disconnect your lines at this time. Have a nice day.