Banco de Chile

SGO:CHILE

Earnings Call Transcript 2018-Q1

[Operator]

Hello, everyone and welcome to Banco de Chile's First Quarter 2018 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; Mr. Daniel Galarce, Head of Financial Control and Mr. Cecil Diaz, Investor Relations.

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.

[Rodrigo Aravena, executive]

Good afternoon, everyone, and thank you for joining us today on our conference call for the first quarter '18 financial result. It's a pleasure for me to share with you our comments regarding the evolution of the Chilean economy and the banking system during the first quarter. After that Pablo Mejia, our Head of Investor Relations would review the financial results of Banco de Chile in that period.

Please turn to Slide #3. In general, the Chilean economy continue to display positive signs of recovery. This improvement has mostly been explained by 3 main factors. First, better perspectives for the global economy, which is critical for a small and open economy like Chile. Second, high copper prices, creating positive terms of trade, and third, improvement in business confidence, which has returned to the optimistic zone for the first time since the beginning of 2014. Specifically, GDP growth has reached the highest level in more than 4 years, as seen on the top-left chart. After posting a disappointing growth of only 1.5% in 2017, the activity expanded 3.9% and 4% in January and February respectively. With an average of 3.3% in the last 6 months. The breakdown shows a recovery across different sectors, mining activity, for instance, grew 16% in the first quarter as a consequence of both, a low comparison base due to the strike in the mines at Escondida and better perspective for the sectors. Retail sales were also growing since they expanded 2% in the same quarter, led by the 21% rise in car sales. Manufacturing activity has also grown after falling several years. It is worth mentioning that on a sequential basis, it is after adjusting by seasonal effects, the GDP has grown at an annualized rate of 3.4% in the last 3 months suggesting that the economy is accelerating even in the margin. In other words, the higher growth has not been a consequence of only a weak comparison base.

One of the main factors behind the improvement in the Chilean economy has been the rise in business confidence which has a strong correlation with the GDP growth, as shown in the top-right chart. In this context, the [ pick up ] growth does not appear to be surprising. The various sentiment has also been observed in consumers, as their confidence measures have also risen to highest levels in 4 years. This improvement has been led by different factors, such as the positive trends in the labor market, [ in terms ] that were simply job creation has been driven by salaried workers instead of self-employment jobs, the low inflation rate which increased real income and the actual improvement observed in several economic figures. In summary, it's likely that all components of the GDP, it is consumption, investments and exports will be stronger this year. On inflation, the CPI remains below the Central Bank target of 3%. In March, it posted a lower than expected 0.2% monthly change, reducing the annual inflation rate from 2% in February to 1.8% now. The core PPI, which is the measure that excludes food and energy stood at 1.6%.The downward trend in Chile, CPI has mostly been explained by the stability in the exchange rate, tradable inflation is only 0.9% and a negative output gap which is the difference between GDP and potential GDP. In this context, the Central Bank has adopted a neutral bias in the monetary policy guidance, specifically, the board has maintained the interest rate at 2.5% since May of last year. In its last monetary policy report, the board mentioned that the interest rate would remain unchanged until the next year, due to the assumption of gradual convergence of the CPI towards the policy target of 3%.

Now, I would like to share with you our baseline scenario for this year. Please move to Slide #4. We expect the positive cycle to continue at least until the next year, specifically we forecast an economic growth of 3.7% this year, which is consistent with a lower output gap in the future. Additionally, we think that economic growth would be even better in 2019 indicate that both support global conditions and positive expectations in Chile will last for a longer time. We expect an important recovery in growth in investments this year, specifically as shown on the top-right chart. The market expects an increase close to 4% this year after declining for 4 years in a row. Therefore, investments would be the component of the GDP with the highest increase in its annual growth rates. According to [ several factors ] and estimates, investment growth will be led by different sectors, such as energy, infrastructure and mining among others.

In relation to inflation, we expect it to continue in the lower [ band ] of the Central Bank range. It would be the result of 2 opposite forces. On the positive side, higher pressures from the pickup in growth. On the other hand, the stability in the exchange rate would contribute to maintain tradable inflation strategies. In all, it is reasonable to expect an inflation close to 2.5% this year after posting 2.3% increase in 2017. Given this macro scenario, we do not expect changes in the monetary policy rates which is at 2.5% now, indicates that the economy continues its positive trends. The Central Bank would evaluate a normalization in the monetary policy although only in 2019.

Now, I would like to go over recent trends of service in the Chilean banking system. Please turn to Slide #6. Once again, the industry was able to achieve solid results demonstrating the existence of solid fundamentals and a strong management capabilities to adapt strategies in different economic cycles. During the first quarter, the industry recorded a net income of CLP 630 billion which was 2% higher in comparison to the figure posted 1 year ago. On the call, as seen on the chart, this result was largely explained by higher operating income, it expanded by [ 5% ] driven by the high inflation rate, provisions remaining in low level and operating expenses rising by 5.3%. As a result, the system posted an average ROAE of [ 18.2% ] similar to the 14% of services the same period of last year.

In terms of the portfolio of the industry, we have seen a slight recovery of total loan growth, in line with higher dynamism of the domestic activity. This trend can be seen on the left chart. Specifically, total loans grew by [ 3.6% ] year-on-year in the first quarter, which is higher than the 2.9% observed last quarter. Once again, mortgage loans, led the growth, as they expanded by 7.7% although at lower pace when compared with the previous quarter.

Consumer loans remain strong. They grew 5.2%, but commercial loans are still subdued since they rose only 1% year-on-year. These figures are consistent with the GDP breakdown where private consumption is supporting the economic activity and private investment will remain weak. However, it is worth mentioning that we expect to see higher growth in the coming quarters due to the positive economic scenario, as previously mentioned in this conference call.

Now, I will pass the call to Pablo Mejia, Head of Investor Relations, who will discuss Banco de Chile results for the first quarter of 2018. Pablo?

[Pablo Ricci, executive]

Thanks Rodrigo. Please turn to Slide #8.

Net income for the quarter reached CLP 143 billion, 2% higher than the level recorded in the same quarter last year. The increase in net income was driven by focusing our growth in segments with higher profitability, a moderate increase in volumes, improved spreads and a proactive management of our U.S. asset exposure that provided higher revenues from inflation and lower cost of funds in the quarter. These effects were partially offset by a higher loan loss provisions due to a low comparison base, higher corporate taxes and the one-time expense related to the end of the negotiation with 1 of our trade unions. When adjusted for this one-time expense, net income for the quarter would have reached CLP 147 billion, 5% higher than the same quarter last year and just over 3% with respect to the fourth quarter of this year.

We are confident that the improved economic scenario and our strong competitive advantages should deliver better dynamism in loan volumes and cross-selling opportunities that should drive customer income growth in the coming quarters. Please turn to Slide 9. Our consistent and very successful track record has been a result of our customer-centric strategy that focuses on delivering sustainable and profitable growth by promoting greater penetration in the retail segment. Strengthening customer experience and improving productivity while taking appropriate levels of risk for the returns that we aspire. In the following slides, I will go over the results we have obtained in each of the strategic pillars and we will discuss [ who have the ] improvements in the cyclical conditions of the economy combined with the competitive advantages will provide foundation to retake growth and to continue to record attractive returns for its shareholders.

Please turn to Slide 10. Total loans, this quarter grew 1.8% year-on-year. And on a sequential basis, we grew 1.7%, which is in line with improved confidence levels experienced by both companies and individuals. The year-on-year growth figure was driven by the retail segment, increasing 6.9% year-on-year, while wholesale loans decreased 5.5% year-on-year. This breakdown is consistent with our focus of growing faster and more profitable segment and with the like, that is common when companies begin to become more positive with the economic environment and the time it takes to reactivate postponed projects. In fact, when compared to the fourth quarter of 2017, our wholesale segment showed an improvement growing 6.4% on an annualized basis. Within the retail segment, SME commercial loans were the fastest growing product, increasing 10.9% year-on-year, whereas loans to individuals grew almost 6% year-on-year, thanks to mortgage loan book and the middle and upper-income loans. We expect that SMEs will continue to lead growth in their loan book, especially since this segment [ initially ] has very low banking penetration. Within personal banking, we expect that the better consumer confidence level and improvement in the quality of jobs should continue to increase the demand for consumer loans. In fact, figures from March 2018 already showed an important increase where we grew our consumer loan book by 2.2% over the prior month, which is also significantly higher than the level posted in the same month last year. As you can see on the chart on the top right, quarterly consumer loan sales have grown by 26% year-on-year. This is clearly is showing how the better economic environment is helping support better balance sheet figures. As for financing, we continue to lead the industry any cost of fund. Thanks to our robust deposit base and in particular due to our deposit base from our retail customers as well as low spreads reach when we issued long-term debt.

DDAs grew almost 8% year-on-year as you can see on the chart in the bottom of the slide. This performance also allows us to continue leading the market in terms of DDAs and consequently permits us to deliver a lower cost of funds of only 2.5% in local currency. These excellent results are largely due to effective business strategies that have promoted us to grow our customer base strongly.

Please turn to Slide 11. As you can see, we have continued to expand the [ refill ] current account holders at attractive levels of 6.4% year-on-year. This growth has been possible, thanks to effective initiatives that leverage business intelligence to not only grow accounts strongly but to also retain customers better and expand our customer base effectively with clients that use Banco de Chile as their primary account. If we analyze our customers, we have built a bank with the highest net worth of personal banking clients. There are many indicators that show this. But 1 way to look at this is through the metrics on the chart on the right. The average balance per account is significantly larger than any of our competitors and this advantage not only provides us with customers that have a higher profitability potential but also gives us a better funding structure.

Additionally, we have the largest number of debtors in Chile as you can see on the chart on the bottom right, where we clearly stand out from our peers. The successful strategy of attracting profitable customers and developing a high net worth client base has been the driver of operating revenues, as you can see on the next Slide #12. Total operating revenues came in at CLP 445 billion this quarter up 5.3% year-on-year and 2.4% on a sequential basis. As you can see on the chart, this growth was driven by non-customer income, which grew 15.5% year-on-year as a result of the positive inflation impact on the contribution of our structural U.S. GAAP on our balance sheet, together with higher revenues from trading and available-for-sale instruments primarily explained by favorable shift in interest rates and inflation in the first quarter of 2018, as compared to the first quarter of 2017.

On the other hand, retail customer income expanded at a pace of 3% year-on-year. This level of growth is explained by a one-time lower commission expense posted in the first quarter of 2017, related to a change implemented in the credit card loyalty program. If we exclude this, customer income would have grown 6.1% year-on-year. The main drivers for this growth were results of the improvements in credit lending spreads together with the change in loan mix that is geared more towards profitable segments and an improvement in recurring net fees of 13% as detailed on the chart to the right of the slide. This increase was particularly due to higher net revenues from stock brokerage which almost doubled in traded volume. Mutual fund management, insurance brokerage and transactional products because of greater cross-selling and a growing customer base due to effective commercial strategies that pursuit the increased penetration of high-income individuals.

In terms of wholesale customers, we posted a slight year-on-year increase of 0.7%, despite the reduction of lower volumes in this segment. We are confident that the wholesale segment income should begin to show a gradual improvement in the coming quarters as soon as companies begin to increase demands for commercial loans. Undoubtedly, the clear trend shown by our retail customer income has been the consequence of a business strategy focused at reinforcing customer experience by providing the best products and services through the channels that client's demand.

Please turn to Slide #14. At Banco de Chile, we work vigorously to enhance the products and services that we offer by implementing effective changes in service models in branches, improving customer contact channels such as the implementation of world-class mobile app and new online banking platforms for retail and wholesale customers as well as streamlining processes among other initiatives. These changes have resulted improving our net promoter score, which is a very critical test that measures customer service. Through an independent research company, banking customers are contacted to rank their overall experience with their bank based on a scale of 1 to 7. We are proud to say that over the last few years, we've improved our ranking significantly placing us first amongst our peers with a ratio of 73% as seen on the upper left chart. We also have the strongest brand name measured by different metrics. On the top right chart is the brand asset valuator or BAV for short. This measures the value of a brand based on brand vitality which refers to the current and future potential of brand [ holding it ] and brand [ stature ] which refers to the power of the brand. As you can see, our brand reached the highest percentile in the local industry clearly marking a difference with our closest competitors. This is the basis of our competitive advantages, that allow our [ CrediChile ] brand to attract new customers more easily and [ influence both ] our loan book and fee-based services.

In terms of digital banking, online monetary transactions are continuing to take more important role and are growing in double-digit rates. What's even more impressive is the role that mobile banking is taking. Branch monetary transactions are growing only 1% per year, reflecting that clients are beginning to prefer to interact with the banks using remote channels as you can see in the breakdown on the chart on the right, where mobile transactions are growing 61% year-on-year, and Internet transactions through the web-page are increasing nearly 17%. We expect that this trend will continue and for the same reason, we are adjusting the services offered by our branch network in order to capture synergies and to promote and sell more complex products and services or to provide personalized financial advisory of our account managers to customers that require it.

Additionally, we have mentioned in previous conference calls, we are developing a new CRM platform, which is being made in-house and the first release is expected to be implemented during the last quarter of this year. This new platform should not only allow us to improve service quality and customer loyalty, but also productivity and in turn should benefit our efficiency ratio in the future, in line with our strategy. Furthermore, we are convinced that we must continue optimizing and streamlining processes in order to improve productivity in both front office and back office activities. Please turn to Slide 16 on operating expenses. Total operating expenses increased 6% year-on-year, which was mainly due to the one-time effect of a payment of CLP 5 billion related to the bonus, that is paid to start when a negotiation with the trade union is completed. And an increase of CLP 5 billion related to other diverse administrative expenses. As a result, our efficiency ratio reached 45.9% this quarter. Excluding this one-time expense, operating expenses only grew 3.5% year-on-year and our adjusted efficiency ratio reached 44.7% this quarter, 73 basis points lower than last year.

We are committed to continue optimizing the operations of the bank by streamlining processes and implementing new technologies to automate labor-intensive task. We are also working on improving both the selling process and our distribution network. Based on a value offering that is increasingly incorporating digital banking, we have restructured our branch network, reduced headcount and automated student services and back office tasks. Nevertheless, we have been implementing these changes gradually in order to ensure that our customer experience remains high. In fact, we've been able to implement these changes while improving our net promoter score. Going forward, we are confident that our focus on cost control and new projects would translate into better productivity, customer experience, as well as higher levels of efficiency.

We pride ourselves on having a solid track record of risk management and prudent risk policies. Please turn to Slide #18 to discuss this. This quarter, we posted a loan loss provisions ratio of 1.1% and a cost of risk of CLP 70.9 billion. The year-on-year increase is mainly due to a normalization of the wholesale segment and the change in loan mix is geared more towards retail and wholesale loans when compared to the mix 1 year ago. The chart on the right show this, where the extraordinarily low level of cost of risk in the wholesale portfolio in the first quarter, 2017, is due to the provision releases from prepayments of certain loans to the customers in the fishing and retail industry, shown as in the chart as deterioration this quarter, completely offsetting the good performance that we have experienced in personal banking loans as you can see in the chart on the bottom right. Thanks to the good performance, especially in the retail segment, NPLs showed a downward trend over the last quarters and registered the lowest figure in the first quarter of 2018 of 1.17% versus 1.22% a year earlier. It's important to mention that key part of our risk management strategy is [ depended ] on the high involvement of the Board of Directors and upper management as well as the important human and financial resources allocated to develop strong credit acceptance, collections and monitoring practices.

During in the last quarter, we've been working on updating our admission models of personal banking and fine-tuning our pre-approved risk model. Both of these adjustments together with higher demand from customers have contributed to accelerating the consumer loans that we have seen in this first quarter. Nevertheless, I have to emphasize that we are committed in growing responsibly and that these changes have been made in line with the proven track record of prudent risk management policies.

Please turn to the next Slide #19. I think it's important to mention today that we are more confident about the economic outlook than in previous quarters. As Rodrigo mentioned, 2018 is looking very positive and this should be reflected in our performance. Some key results for this quarter were our ability to grow net income despite the normalization of loan loss provisions, higher corporate taxes and the one-time expense related to the negotiation with one of our trade unions and the one-time lower expense and fees in the first quarter of 2017. We also continued posting good growth in retail customer income that was offset by the slower growth we experienced in the wholesale segment, this was sustained by impressive growth levels in recurring net fees and consumer loan sales which expanded 13% and 26% respectively. As for risk, NPLs decreased 5 percentage points, thanks to the good performance of our retail book and our efficiency ratio adjusted for one-time expenses improved 73 basis points from the same period last year. Finally, our Basel ratio remained above 14%.

Before moving on to questions, I want to highlight that we firmly believe that our consistent customer-centric strategy that is focused on providing the best customer experience, leveraging the use of technology for growth and a superior competitive advantages should led us to continue delivering solid and reliable results. This without a doubt [ adds ] to contribute to preserving our profitability figures and to continue creating value for our shareholders. Thank you and if you have any questions, we'd be happy to answer them.

[Operator]

Thank you. [Operator Instructions] The first question comes from Ernesto Gabilondo with Bank of America Merrill Lynch

[Ernesto María Gabilondo Márquez, analyst]

I have 3 from my side. The first one is in terms of loan growth. The economy is recovering, but we continue to see modest year-over-year growth in the loan portfolio and this is mainly due to the wholesale segment. As you have mentioned this segment had a sequential improvement during the quarter but we continue to see inactivity of investment projects and we see that the bank's strategy has been in not engaging in low margin deals and this has resulted in the loss of some market share. So how do you perceive competition and when should we expect loan growth to reflect double-digit growth? Secondly on the effective tax rate. I think it was close to 17% in the quarter, lower than what we saw in 2017. So how should we think about the effective tax rate in the next quarters?

And finally, when do you expect that we can start to see net earnings delivering double-digit growth in the next quarters?

[Pablo Ricci, executive]

In terms of your first question. What we're expecting in terms of loan growth for the system and expectations of the commercial loan portfolio. What we're seeing today is total loan growth going around 9% which is in line with the improvements and expectations of the economy, the higher GDP figures, the better consumer and business confidence. And we expect in the coming quarters is generally a lag between the business confidence and improvements in GDP for corporates. So we expect in the coming quarters to be more higher demand in that segment. What we're expecting is something around commercial loans to grow around 8%, nominal consumer around 9%, mortgage loans around 7% for the system. And for us, we're expecting to grow above that with the focus in middle and upper-income consumer loans, SME loans and we're expecting that once the pickup from corporates occurs that we should also continue to grow above the industry and corporates and we should see better loan growth figures. If you look at that on a sequential basis, you mentioned it briefly, we grew very strong -- we grew 1.7% on a sequential basis. And if you look at where that -- most of that loan growth was, it was from commercial loans and consumer loans. Consumer loans grew 1.7%, annualized it's about 7%. We should continue seeing improvements there, probably with better economy, better employment figures, et cetera. And if we break down commercial loans, SMEs grew 3.4% on a sequential basis and the wholesale segment grew 1.6%. In terms of annualized basis, SMEs grew well over 10%, [ 13.6% ] and wholesale 6.4%, obviously what we're expecting like I mentioned is a pickup in demand should occur in the coming quarters as postponed projects are initiated by companies and they demand more [ good ] loans.

In terms of the effective tax rate for 2018. What we're expecting is a level of around 20% and as you know, the effective tax rate is related to in part has an effect of inflation -- the tax authorities use inflation accounting to calculate taxable income, so depending on what happens with inflation from one quarter to the next, we can adjust that figure but we look at the levels for 2018, we're expecting inflation around the 2.5%, and maybe a little bit higher. Around that level, we should expect an effective tax rate of 20%.

And in terms of net earnings. What I can say is -- what you should expect for the long term for Banco de Chile is ROEs that should run around 19% some years between '18 and others 20% depending on what happens with inflation, economic cycle. Obviously, with more positive economic cycles, we should have better results.

[Ernesto María Gabilondo Márquez, analyst]

Just a follow-up in terms of the loan growth. So you're saying that the higher GDP, better employment and better business confidence should help the corporate lending in the next quarters, but what about competition. Any concerns about it? As you mentioned, you are not engaging in low margin deal, so just want to know your perception on this?

[Pablo Ricci, executive]

In terms of competition. Well, obviously competition in Chile is very strong. Historically, Chile has been a market with a lot of competition. There is 20 banks in Chile. If you look at the commercial portfolio, we compete with 20 banks. So it's a segment that's very competitive. Obviously, when -- if you look at the last couple of years, commercial loans in the real terms haven't grown and that's been affecting. So companies are very price sensitive. We're expecting that in the next quarters, there should be more demand for loans and that should increase loan growth for the industry and that should be compared to be reflected in our results.

[Unknown Executive]

[ Lastly ], just want to add something regarding the effective tax rate. As Pablo said, the effective tax rate is impacted by inflation but also by the tax benefit we received from the payment of the subordinated debt. As you know, probably we will [ win it ], so we will totally pay this subordinated debt over the next year, but actually, the tax benefit will expire by the mid of 2018. Accordingly, the effective tax rate within the first quarter, that was approximately 17%, probably you will have something similar during the second quarter but over the rest of the year, probably, the effective tax rate over the third and the fourth quarter will be something more similar to 23%. So in average, you will have tax rate for the full year of approximately 20%. And this will be -- for 2019, probably you will have something more similar to 23% or 24%, which is the corporate tax rate less the effect of inflation.

[Operator]

Your next question comes from Thiago Batista with Itaú BBA.

[Thiago Bovolenta Batista, analyst]

I have 2 questions, the first 1 regarding the number of new clients. In the press release, you have mentioned that the number of new clients or new bank account, increased by 26,000 clients this quarter. Can you comment what has caused this big increase in the number of clients? This was the improvement in the Chilean economy or the bank made any change in the strategy to explain this huge increase in the clients. The second question about the branch, the strategy on the bank's branch. One of your main competitors is doing a kind of different strategy in the branch network. So they are putting [indiscernible] inside of this -- the branch. What are you thinking in your branch network? Are you planning to be something similar? What you can expect to see in your bridge network in the future?

[Pablo Ricci, executive]

Well in terms of the new clients, if you look at the level of growth that we show that also on slide, in one of the first slides of the presentation. You can see that customer base is around 837,000 customers where that's personal banking -- personal banking and SME banking, where there is 732,000 customers in personal banking, 105,000 customers in SME banking and that we normally have been growing if you look at the last few quarters or years, around the 6% level. And the 26,000 customers growth is gross. So what does that mean? It means all the accounts that we open and it doesn't take into consideration accounts that have closed either by us or by a customer. We have very low attrition -- very good attrition rates, which are 7%. So, basically half of that figure is us closing the accounts and another half is customers leaving Banco de Chile. So what have we done to continue growing at those levels? Well, one of the things and this kind of ties into your second question is that we've been very active in using business intelligence in order to grow. This is our main focus where we think that how customers want to interact with the bank and do transactions with the bank, is more geared towards digital banking, through these more alternate new channels rather than going to the branches. And like we showed in the presentation, branch transactions have been growing at very low rate while mobile and online have been growing much faster and that's where we put our emphasis. So we've implemented a new web page for companies, for individuals. There is world-class [ pass ] for implementing a new CRM system, which will be better than the world-class CRM system. And in terms of sales, we earlier or late 2016, we implemented a new system basically. We analyzed a huge pool of potential customers and pre-approved those customers as products and services and put this on the cloud and made this information available for our account managers, which provided them access to customers, which were customers that we wanted in the bank, which were much more -- which was a method of selling to customers, which were much more effective and would actually use our products and services in a more likely manner.

We also implemented personalized pricing model, which -- personalized pricing model provides better or more accurate interest rates for the -- for customers based on their actual risk. In general, what we've been doing is we've been focusing a lot in the digital transformation of the bank, to offer new channels and the correct life cycle of the customer through the channels that the customers want. We've been using business intelligence to understand these customers better and that's how we've been focusing our growth, and that's the way at least Banco de Chile sees how we should continue growing in the future by implementing [ digitals ], digital transformation to channels and then changing a little bit the service model within the branches by implementing more automated services at the branches, so that we can reinforce selling the main business of the bank at the branch.

[Rodrigo Aravena, executive]

This is Rodrigo Aravena. I would like to add some ideas regarding the -- some focal aspects of the Chilean banking industry that support our area of further growth in the future. First of all, it's important to mention that the labor market in Chile is stringent. You can see for example that the participation rate, especially from the women's side, is increasing faster. Additionally, recent figures from the labor market are showing strengthening in the quality of yields specifically in the last month, for example, and the wage employment grew faster than sales employment and therefore there are more room for higher income supporting higher levels of debt and number of clients. And additionally, it's important to mention here that the total debt ratios in Chile in comparison with other [ OCB ] countries are still low, which is especially relevant for SME companies for household as well, and in other words, we have several [ visits ] from the [ Metro side ] [indiscernible] asset of the Chilean economy, that support the idea of further growth in the future in terms of number of clients, customers, debt source, the total debt ratios et cetera.

[Operator]

The next question comes from Yuri Fernandez with JPMorgan.

[Yuri Fernandes, analyst]

I had a question on expenses about the collective bargaining bonus. You paid those CLP 5 billion this quarter. Do you expect additional payments in the future? I'm asking this because when you look to 2014 from I guess, more unions, you paid CLP 45 billion. So, not sure, if we should expect additional events here. And also on expenses, I remember in the previous call, you mentioned like you -- and that expense should grow more close to inflation likely below 3%. But even adjusting by these, we still see like expenses growing is likely above 3%, 3.6% should be more precise. So how do you see expenses behave and in particular administrative expenses, that I think are the one pushing the increase on expenses? And after this, I make my second question. Thank you.

[Pablo Ricci, executive]

In terms of the expenses that we're seeing today, a large part of that was due to the negotiation with the trade unions. If we exclude the growth that we saw was about 3.5% year-on-year and we should expect for in the coming -- for the full year levels, it's similar to an inflation on a recurring basis. What we've been doing is implementing new technologies. Obviously, that should reduce -- make the bank much more productive and efficient. And that should allow us to continue maintaining more efficient cost base of the bank. I mentioned a lot of the projects in the prior question. All these projects have -- are in somewhat more a front office commercial base but these projects also provide the bank with a much more productive and much more efficient way on how to sell different products and services and this should continue allowing us to streamline the process of the bank.

[Rodrigo Aravena, executive]

Yes. The bank with some agreement with [ CLP 1 billion ] but there are still remaining, other decision with other union. But it's impossible to anticipate an amount. What we can say is that the remaining negotiation represent -- the headcount represent nearly 48% of the total headcount of the bank. But it's impossible to anticipate a specific amount in terms of the impact of course. Just to have a reference in 2014, there was a one-timer impact on cost that was CLP 45 billion but again it is only a reference. It's not possible to anticipate specific amount coming from the future negotiation with the trade unions.

[Yuri Fernandes, analyst]

And regarding the Banking Law in Chile, do you have any updates there?

[Rodrigo Aravena, executive]

Unfortunately, there is not further news. But the government said that it will be a priority. It will be very important but we don't have further details in terms of the timeline for the congress. We are aware that it is very important for the market because there are some important details to define, for example, the changes in the rate with asset, the further definition for a sustainable relevant bank et cetera but unfortunately, we don't have more news on that law.

[Operator]

Your next question comes from with Alonso Garcia with Crédit Suisse

[Alonso Garcia, analyst]

My first question is regarding net provisions. I know it might be still early because this is still a project and it's something preliminary but. Do you have an estimate, an initial estimate on the potential impact to your cost of risk from the change in provisions that the SBIF is planning on commercial loans that are analyzed on a group basis? That would be my first question.

And my second question is just if you could provide some update on your strategy that you announced or that you communicated last -- in the last conference call to accelerate growth in the consumer finance segment?

[Pablo Ricci, executive]

In terms of the provisions -- the new provisioning model that was mentioned by the Superintendency. It's a model that still hasn't been implemented. They are still -- we're still waiting on more information from the government from the Superintendency regulator. What I can say is that we are one of the banks with the highest coverage ratios. We have very prudent risk policies and in the past, we haven't had -- we've been able to implement these new changes in the models, without difficulties.

In terms of the update on our strategy. What we mentioned in the last conference call is that we're a universal bank. That we're a bank that historically has attended all segments of the population and that we haven't exited any segment. So we -- our proprietary services from consumer finance to the middle and upper-income individuals, SME to the largest corporations. How --we are planning to continue banking all -- the entire retail segment of individuals, personal banking is by what I mentioned earlier, by implementing new technologies, new channels and sales, services and updating our brand service models. We haven't left any segment but we plan to continue grow in these segments using these digital channels and an improved service channel at the branch. We don't expect lot of changes in the size of our lower income, our consumer finance division, which has been relatively flat over the last few years, because of all the changes that you all know that occurred few years ago. But obviously with an improving economy, with a better employment figures and better business confidence, we should see improvements in that segment of the banking industry.

[Operator]

[Operator Instructions] The next question comes from Neha Agarwala with HSBC.

[Neha Agarwala, analyst]

My first question is on your digital banking indices -- the extended reach of the digital banking. Which sectors or segments do you believe are more receptive to growth through online and webpage means? And do you have a rough percentage of how much of the loans approved in any particular segment is done through the online platform?

And my second question is to get more clarity on the effective tax rate. If I understand correctly, the benefit of the subordinated debt extinguishes by mid next year. So this year, you still have about 5 percentage points benefit throughout the year from the subordinated debt?

And my last question would be on the dividends. Do you expect to change -- your expected dividend payout rate next year once the debt is paid off?

[Pablo Ricci, executive]

In terms of the digital platforms and which segments it will be used the most. I think today, it's most likely that the segments that use the digital platforms the most is the middle, upper income segments and also expanding to the lower income segment. But if you know in our portfolio, the lower income segment only represents 3% of total loans. The rest of the other 60% is -- or just under 60% is represented by SMEs and middle and upper-income individuals. For SMEs, obviously, there's a lot of things that customers still have to go into the branches to do. And the driver or the area that it will be most used in terms of the online digital banking and taking on loans online is the middle, upper-income segments where on average about 30% of consumer loans are sold online in that segment. For SMEs, it's difficult. And for larger companies obviously, it's more related to their account managers.

In terms of the sub debt. The benefit of the tax benefit for this year is about 3% because what owns today -- what our shareholder owns today and it's a tax benefit for us, it's about [ 90 ]

[Unknown Executive]

It's approximately [ half ] that we normally pay every year with regards to our earnings. So basically, we will have this year, half of the benefit that we normally have every year.

So in terms of the effective tax rate, as Pablo said, we will have approximately 3 percentage point something like that.

[Neha Agarwala, analyst]

Okay. So, the benefit this year is only 3%. It is not 5 percentage point?

[Pablo Ricci, executive]

No. Only 3% exactly. That's why 20% effective tax rate.

And then in terms of the dividend policy. There is no news today in terms of changes to the dividend policy. It's something that -- it's promoted as share -- at Board of Directors and approved by the shareholders. And -- but we can't roll out any changes. Today, we have a much more sustainable dividend policy than we've had in the past and after the subordinated debt, we'll capitalize a little bit more. And also we have much more capital than we've had in the past. Nevertheless [ we ] further mentioned that we still have all the information of the new General Banking Law which we need to find those in order to give a more accurate outlook on the how that will evolve.

[Neha Agarwala, analyst]

And your -- the operating -- the core Tier 1 level at this, you would like to operate. Your comfortable level would be?

[Pablo Ricci, executive]

Can you repeat the question please.

[Neha Agarwala, analyst]

At what core Tier 1 level, would you like to operate in the medium term?

[Pablo Ricci, executive]

At what Tier 1 level?

[Neha Agarwala, analyst]

Yes

[Pablo Ricci, executive]

Right now, we have a Tier 1 level of 11% and we're comfortable with that Tier 1 ratio today. But we need to see what happens with Basel III implementation Chilean, how that will affect these ratios in the future.

[Operator]

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

[Rodrigo Aravena, executive]

Thank you for listening to our conference call and we look forward to speaking again in the next quarter. Thanks.

[Operator]

Thank you, this concludes today's presentation. You may disconnect your lines at this time and have a nice day.