Banco de Chile

SGO:CHILE

Earnings Call Transcript 2020-Q1

[Operator]

Hello, everyone, and welcome to Banco de Chile's First Quarter 2020 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; Daniel Galarce, Head of Financial Control; and Natalia Villela, 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 forward-looking statements.

I will now turn the call over to Mr. Rodrigo Aravena. Please, you may proceed.

[Rodrigo Aravena, executive]

Good afternoon, everyone. First of all, I hope that all of you are healthy and safe in this challenging time.

I would like to start this conference call by thanking you all for joining us this afternoon. Today, we will share our views related to the evolution of [indiscernible] in the macro environment, and then we will present a review of the financial results posted by Banco de Chile during the last quarter with a special focus on our competitive advantages and our long-term fundamentals.

Let me start with our analysis of the new macro scenario. Please move to Slide #3. As you may know, the rapid spread of COVID-19 has had a material impact on the global economy with GDP estimates plummeting in a very short period of time. In only four months, the IMF has reduced the global growth forecast from 3.3% in January to minus 3% in April, with a deeper slowdown in advanced economy as seen in the top-left chart. In this environment, the IMF said the world economy is facing the worst recession in a century. However, this crisis has a lot of differences from any other observed in the past. One is the magnitude, as nearly 2/3 of the global labor force is not working normally in their physical workspaces.

Additionally, since this crisis doesn't have an economic route, the role of economic policy is limited to reducing further negative [indiscernible] instead of solving the problem. The greatest impact will be seen in the real sector of the economy, mainly employment and production rather than in the financial sector as we saw in the last global crisis. In fact, the sharp increase of the initial jobless claims in the United States reflects a rapid deterioration in the labor market, which will probably be a figure repeat in various countries. Even though there is a lot of information to quantify the size of this shock, we can anticipate a deep recession, at least in the short term.

Undoubtedly, this will have an impact in Chile. Since we are highly integrated into the global economy, the drag on external growth will reduce the local growth. In fact, GDP fell by 3.5% year-on-year in March due to the 5.7% monthly drop despite measures oriented to reduce the spread of COVID-19 took place at the end of March. As seen on the bottom left chart, this negative growth interrupted the positive trends observed in the beginning of this year after the construction in the previous quarter. The gradual increase in the employment rate is also reflecting the worst economic environment as the chart on the bottom right shows. Since several sanitary measures have been implemented by local authorities, a double-digit GDP contraction is likely for this quarter.

Despite the unusual level of uncertainty, which leads to substantial differences in forecast, there is a broad consensus in one area, the strong position of Chile relative to any other Latin American countries. This means that Chile should have a shorter recession and a stronger recovery in the future. What is behind this view? Let me explain this in the next slide.

Please move to Slide #4. Fundamentals made the greatest difference in difficult times. In this regard, Chile has a unique combination of solid fundamentals and a strong policy framework, which makes possible the partial reduction of the negative impact caused by the virus. As you can see in the upper left chart, Chile has important buffers that allow aggressive responses on both fiscal and monetary sites. International reserves held by the central bank are 30 -- $57 billion (sic) [ $37 billion ] or 14% of the GDP, while sovereign wealth funds held by the government are equivalent to $23 billion or 8% of the GDP. Thanks to this, Chile is one of the few countries with the opportunity to finance an entire fiscal packet by using only its own savings.

Although fundamentals are relevant, the quality of economic and finance policy is even more important. Chile has been recognized by its timely, coordinated and strong policy responses. Some of them can be seen in the table on the right, which shows the main tools used in these comprehensive and coordinated economic measures. In terms of the government, it's been implementing several measures focused on protective employment, household disposable income and liquidity to SMEs. The total fiscal plan implies resources of nearly 7 points of the GDP, which positively compares with other countries. The greatest part of the spending has been oriented towards in getting resources to the employment fund, making direct transfer to vulnerable people and providing capitalization to both Banco Estado and more recently to FOGAPE, which is a government program that aims to facility lending to SMEs by guaranteeing their obligations with banks. By doing so, the government expects that most companies in the private sector might have better access to working capital loans equivalent to 3 months of sales with 6 months grace period and paid in a term between 24 to 48 months.

The Central Bank has also been taking an active role. Apart from the sharp reduction in the interest rate to only 3.5%, it's been implementing nonconventional policies. These measures include the new conditional financing facility, or FCIC, where banks have access to full (sic) [ 4 ] year loans at the current policy rate. This special line has an upper limit of $24 billion, depending on the actual increase of both consumer and commercial loans. The Central Bank is also allowing corporate bonds and commercial loans granted by corporate customers as eligible collaterals for making use of liquidity facilities and also is purchasing banking bonds up to $8 billion. Other measures include the extension of the FX intervention program until January next year and a temporary easing of conditions of liquidity requirements.

Finally, the Financial Market Commission has taken diverse measures such as postponing the implementation of Basel III for 1 year to 2021. Additionally, the commission announced temporary easing in provision requirements, which permit banks to provide more flexibility to their customers' obligations. The combinations of all these factors have contributed to the optimism of -- for the future of the Chilean growth relative to other countries. In fact, the IMF expects Chile to post the highest growth in Latin America in 2021 as the bottom left chart shows.

Now I would like to present our business scenario for this and the next year. Please go to Slide #5. Despite the strong position of Chile, we are aware of the high level of global uncertainty relative to the evolution of COVID-19, which makes it much more difficult to provide any forecast for the future. On GDP, we expect the economy to post a negative growth of around minus 3% this year. This might be the result of a default in the second quarter of almost 10% year-on-year and a sequential improvement since the second half. We are confident about the potential recovery next year as a result of economic policies implemented this year. Despite this slowdown, we don't expect a substantial drop in CPI due to the persistent weaker currency. This is a key factor in the CPI trend as tradable goods represent nearly 60% of the total basket. Therefore, we expect inflation to drop to 2.5% by the end of this year from 3% last year. We expect the CPI to return to levels of around 2.8% in 2021. Consequently, we don't expect changes in the monetary policy rate at least until midyear 2021.

Now I would like to discuss briefly the evolution of the Chilean banking industry. Please turn to Slide #6. Loans for the Chilean banking system grew about 4% over the last quarter, led by the acceleration of commercial loans. On the other hand, mortgage lending flowed to 2.8% quarter-on-quarter, and consumer loans dropped 1.5% when compared to the prior quarter. The full impact on mortgage loan originations as a result of the effect of COVID-19 pandemic will probably not be totally reflect in the next few months due to the normal delay of the time it takes for homebuyers to agree to purchase homes and the days that the loans are actually paid out. This weaker dynamic in personal banking loans is consistent with the slowdown in the overall economy in the last quarter and also with the negative impact of COVID-19 in March, which affected the loan demand in a period that is seasonally strong for consumer loans. In fact, the quarterly central bank loan survey, which was released this week, shows that more than 90% of banks received a weaker demand for consumer and mortgage loans in the beginning of this year. On the other hand, there was a strengthening in demand for wholesale loans, particularly from corporations, which persists to improve their liquidity position in order to deal with the initial effect of the COVID outbreak.

Looking forward, there will likely be a similar trend during the following quarter. Subdued or negative growth in consumer loans, a steady decline in mortgage loans due to the inertia of these products and a positive expansion of commercial loans as a result of both the capitalization of FOGAPE and measures taken by the central bank that should increase loans to SMEs companies and middle-market companies.

In terms of results, the Chilean banking industry posted net income of CLP 614 billion in the first quarter, well above the level recorded last year, mainly due to lower expenses. Since economic activity is entering into a negative cycle, we think it's important to note that the temporary impact suffered by the industry in previous recessions. The chart at the bottom of this slide shows how resilient the Chilean banking sector has been in negative periods as the industry maintained positive levels of ROE and only experienced temporary deterioration in asset quality.

Although the COVID-19 crisis is different to any other situation observed in the past, it's important to keep in mind the strengthening in most of Chile long-term fundamentals over the time. According to the work on Forum Global Competitiveness Index, for instance, Chile was in the fourth place in terms of robustness of banks. This is attributable to our positive fundamentals, including good capital levels, a strong policy framework, together with good management capabilities to adapt to new scenarios. These factors should contribute to post better figures in subsequent years as we've seen in previous crisis.

Now I would like to pass the call to Pablo, who will go into more detail about Banco de Chile. Please turn to Slide 8.

[Pablo Ricci, executive]

Thank you, Rodrigo. Our successful history has been achieved through a consistent strategy and strong fundamentals. All these factors, together with our strategic initiatives, have set the ground to create a sound bank that Banco de Chile is today. A key element of our business strategy and a clear competitive advantage has been our focus in transforming Banco de Chile from a traditional bank to one that delivers superior service with an increase in importance on digital channels. In this new context, we firmly believe that we must provide the same level of customer service that we have offered in the past through excellent relationship managers, but we also must excel in new digital solutions. Customers are demanding more with less contact and faster delivery times.

During the last years, we have implemented many initiatives such as deeply understanding our customers and their life cycles based on big data and using this knowledge to increase cross-selling. In this more modern bank, we are also preserving the importance of our branches. And despite that we have been optimizing the network, we believe that branches are an important component of our service model, especially because we are a universal bank that attends all segments of this -- of Chile. A large number of these branches are located in areas outside of Santiago, and this is precisely where a significant part of the GDP is generated, especially industry, energy, infrastructure, mining and SMEs as well as personal banking customers. Thanks to this network, we not only have account managers in regions, but we also have risk specialists that are closer to projects, allowing us to understand risks better and providing superior local knowledge that, in turn, helps us maintain and reduce cost of risk, especially in negative cycles.

We also have the best brand in the Chilean banking industry. Year after year, we have consistently outperformed the competition in many different attributes, including, top of mind, when customers are asked if they were to switch to other banks, which banks would they choose; and security and solvency, all with a very large gap when compared to the next main competitor. A recent report conducted by Ipsos, which is a leading global surveying company, confirmed -- reconfirmed the leadership of our brand, which reached an unprecedented 32% top of mind in March, almost 50% above our main competitor.

Our scale and the diversification of our business are other strong advantages. We are #1 and #2 in most of the products and services that we offer. We're with a consistent leadership in demand deposits and the best fee-based business in the industry, thanks to our ability to generate strong and long-term relationships with customers while constantly innovating products and services. Additionally, we are a universal bank with an important diversification in terms of customer segments and economic sectors. Thanks to this, we are able to adapt this strategy in different stages of the economic cycle, allowing an additional source of stability to our results.

In addition, we have the best funding structure in the industry with an important level of stable retail funding, thanks to the customer base that chooses to use Banco de Chile as their primary bank. Another important and positive aspect that makes a difference is our approach to credit risk. We consider that we have the most -- we are the most prudent bank in the local industry in terms of risk management, and this has been demonstrated through our consistent and more stable cost of risk. This is a result of vast amounts of human and technological resources that we use to effectively control and manage risk. This, together with a focus of growing responsibly and applying prudent risk policies, provide us with coverage ratios of over 2x.

Lastly, but not least important, is our increasing commitment to maintain the best relations with all of our stakeholders, where ESG has become more important in our strategy. A key role played by our Board of Directors, which has been successful in controlling, say and obtaining our long-term objectives. We have many businesses and risk committees in order to achieve these goals and keep our Board members constantly updated and well informed. We have also accomplished important advances in other areas, such as inclusion, support entrepreneurs and, more recently, environment. For example, last year, we issued the first green bond. These and other initiatives are specified in our annual report, which is available on our website.

Another differentiated aspect of Banco de Chile has been our permanent commitment with the community, which is especially relevant in difficult times. Please turn to Slide #9. COVID has been a challenging experience for the world and our economy. To face this pandemic, we have developed numerous initiatives that are focused on maintaining the bank's continuity as well as supporting our customers and society. To begin, our operations continuity plan addresses the stability of our services as well as the safety of our employees and clients. About 200 branches are open, and we are taking all the necessary precautions to provide a safe working environment. We are also continuously encouraging customers to use our virtual channels to satisfy their banking needs with the purpose of reducing concentration of people within branches. We are proud of the results of these actions together with that of our employees that have limited the number of cases in our workforce. This change on how we run our business has meant that nearly 28% of employees are working at branches that remain open, while the rest are working from home. However, this adjustment poses new risks in our operations in term of cybersecurity. With this in mind, we have reinforced our cybersecurity measures, ensuring that all employees are working remotely and are using platforms with the highest standards. Additionally, we have implemented a prevention plan for higher risk staff requiring those individuals to work from home until the current contingency is under control.

Our commitment to Chile has accompanied us for more than 125 years. In this regard, we are proud that we were the first bank to announce and implement a national support plan for our customers. The plan comprehends a series of special measures to support our clients so that they can cover most of their urgent financial needs. In Personal Banking, we provided customers with the option of postponing the next 3 installments of their consumer and mortgage loans to the end of the contract, and we made available a facility to reprogram credit card debt installments at preferential rates. We are also the first bank to make these programs available 100% online, and we processed almost 300,000 requests from approximately 250,000 customers in record time. As for SME customers, we have provided several support programs, including postponing the next 6 installments, offering new loans at preferential rates and also began implementing a new FOGAPE loan facility for working capital that is guaranteed by the state. We are pleased to inform that we've already supported over 4,000 businesses and granted almost CLP 150 billion in COVID loans.

Furthermore, we have implemented many actions to soften the consequences of the pandemic for the most vulnerable groups in Chile. For example, we have been delivering personal care and health items for retirement homes across the country, and we have provided 18,000 door-to-door deliveries of medicines, food as well as telemedicine services to senior adults in vulnerable sectors of Santiago.

Lastly, we are honored that we are able to support once again the most important annual National Telethon Fundraiser for children with disabilities. Unlike prior years, we didn't have any physical locations available to receive donations, and this took place 100% through our digital channels. This event was extremely successful, collecting almost CLP 40 billion, surpassing by far the level collected the prior year.

Please turn to Slide 10. The impact and unprecedented change that COVID-19 is making to the global economy is astonishing. This is probably adjusting permanently how we live our lives and the use of technology, and banking doesn't escape these changes. In fact, the role of digital banking in the pandemic has probably made huge leaps forward. In this context, we're proud to be considered the best digital bank in Chile as well as to have the best online platforms according to Global Finance. In addition, as a result of our efforts to understand customers' needs, our app, Mi Banco, is considered the best in the Chilean banking industry as rated on the Apple Store.

In the recent periods, we have innovated our digital experience for customers in several fields, including the creation of new online banking platforms for companies and individuals, launching world-class mobile apps and many other initiatives as we are continually looking for improvement opportunities in all areas of the bank. Along these lines, we want to highlight some projects that we'll be releasing over the next few quarters. We are currently in the final stages of launching a new digital onboarding platform, and we are working on improving the origination process for consumer loans. We'll give more details about these projects as soon as they are officially launched, but we can anticipate that both programs are based on mapping the customer's journey and behavior in order to offer the best experience in reducing significantly delivery times. It's important to mention that we worked on these projects through the agile methodology, which is centered on simple, fast processes with strong interconnections between multi-scenario areas.

We're also implementing robotic process automation to streamline our operations, reduce costs and for employees to focus more of their time to serving customers with other high-value tasks. It's also important to highlight the usage rates of our digital channels has been growing significantly. First, 100% of our banking customers reschedule their loans of our -- personal banking customers rescheduled their loans online with relation of the COVID-19 crisis support program, and an important percentage of our customers are using online banking. I should also mention that the online usage rates continue growing and now represent 76% of total monetary transactions with an important increase in mobile as shown on the chart on the right. Furthermore, online consumer loan originations continued growing strongly, increasing from 38% of total operations to 47% this quarter. We firmly believe that all these figures demonstrate that we have generated a solid digital platform that our customers appreciate and depend to perform their everyday banking needs.

Please turn to Slide 12 to begin our discussion on our results for this quarter. Net income for this quarter was positive considering the events that we are currently facing as a nation. We ended 2019 with an outlook of weaker expectation on GDP, greater political -- and greater political uncertainty. It was widely agreed that 2020 would be a significantly better year. Nevertheless, COVID-19 reversed these expectations, and now consensus suggests that 2020 will probably be the one of the worst recessions that we have seen in the world economy in recent times. Despite that, the impacts of this pandemic occurred during the second half of March, we were proactive in risk management, adjusting risk ratings in the wholesale banking segment for those customers evaluated on an individual basis in order to take into consideration the recent developments of the pandemic and our corporate risk allowances. Even with these allowances and the higher-than-normal provision expenses that we incurred due to the seasonality effects in our consumer loan book in the summer months of every year, we recorded a bottom line of CLP 137 billion with a return on average equity of 16%, slightly below the figure of the fourth quarter of 2019 and above the level recorded the same period last year.

Nevertheless, it's even more important to consider risk policies and how well-capitalized banks are today to face this threat. As you can see on the chart on the right, not only did we record the highest return on average assets for the quarter, but also our capital base is meaningfully higher than when compared to our main peers. It's no surprise to suggest that we're far more prudent than our peers in terms of risk management amid the current context. We assume that a conservative approach on this matter and a consistent strategy will pay off as it has in the past and continue delivering sustainable and superior profitability for our shareholders.

Please turn to Slide 13. Operating revenues grew 15.4% year-on-year as a consequence of an expansion of customer income that rose 6% year-on-year and noncustomer income that jumped 75% during the same period. Customer income grew at attractive levels, supported by fee-based business as well as slight rise from interest revenues from loans and better results from the sales and structuring desk. Noncustomer income was sustained by much higher inflation of 1% in the first quarter of 2020 when compared to the 0% inflation into the first quarter of 2019. And additionally, we had an extraordinary increase of CLP 7.6 billion from treasury activities, mostly attributable to higher results from trading and available for sale instruments of CLP 6.2 billion. This performance was concentrated in March 2020 as we benefited from the decreases in local and foreign interest rates followed -- following sharp cuts and reference rates across the globe in response to COVID-19.

In regards to net interest margin, as you can see on the chart on the right, inflation was the main driver of year-on-year increments, reducing the negative impacts of mortgage loan renegotiations at lower rates, which occurred mainly during the second half of 2019 as well as a new rule regarding automatic payments of overdraft lines that became effective in January of 2020.

In terms of fees, these rose by 21.3% year-on-year and was mostly attributable to the recognition of CLP 20 billion in fees related to insurance brokerage, driven by the joint venture we entered into with an international insurance company as well as a rise of 5% in written premiums. To a lesser extent, these strong figures were supported by CLP 1 billion year-on-year rise in fees from mutual fund management as assets under management rose 29% when compared to a year ago.

Finally, as you can see on the chart on the bottom right, once again, we were able to post the highest operating margin in the industry. This is a result of our responsible growth in loans together with the premium customer base that chooses to use Banco de Chile as their primary bank account and generates the best fee-based business in the industry.

Please turn to Slide 14. Total loans reached almost CLP 31 trillion this quarter, increasing 9.5% year-on-year and accelerating to 2.8% quarter-on-quarter. The wholesale segment was the main driver, growing 11% year-on-year and 8% quarter-on-quarter. This was due to increased demand for financing from high-rated middle-market companies and corporations who saw financing to improve liquidity in the context of COVID-19.

The trends in the SME segment were similar to that of personal banking, recording a 7% annual increase, while posting declines of 1.4% when compared to the fourth quarter of 2019. The 12-month period increments is due to the dynamic activity that this segment had prior to the weakening seen since the fourth quarter of 2019. After these events that took place in October of 2019, the business activity of many SMEs were affected, which coupled with the rise of uncertainty and lower consumer and business confidence that reduced the demand for loans and adjusted the supply for this sector. This, coupled with restrictions put in place by the government due to COVID-19, has further affected the sector's balance sheet. However, as mentioned earlier, the government is implementing a strong stimulus package that is directly made for companies with sales less than approximately $35 million per year. Specifically, our entire SME portfolio as well as a growing portion of our middle market segment will qualify for this package. The program focuses on providing working capital loans with government guarantees at maximum preferential nominal rate of 3.5%. We expect that this will be the main driver for loans in the next quarter.

In terms of personal banking, loans increased 9.2% year-on-year, while remaining almost flat quarter-on-quarter. The annual rise was mainly due to residential mortgage loans that grew 12%, while in contrast, consumer loans during the same 12-month period decreased 0.2%. On a quarterly basis, mortgage loans remained flat and consumer loans actually dropped 2%. These weak figures are associated to lower consumer confidence levels and weaker employment figures following the slowdown that took place in the fourth quarter of 2019. This led to reduced household spending and lower demand for home sales. In fact, new home sales dropped 39% in the fourth quarter of 2019 and 50% in the first quarter of 2020 according to the National Chamber of Construction. We expected a dynamism of the personal banking loans should continue weak in the near term as we should begin to see the negative impact of COVID-19 in the economy, especially in the mortgage loan book that has a lag from the time of the customers request the loan and the date that funds are effectively booked on our balance sheet.

Please turn to Slide 15. We continue to have the best funding structure in Chile, thanks to having the highest cross-sell level with our customers. This is clearly one of our main competitive advantages. A reflection of this is in our leading market share position and 24% year-on-year increase in demand deposits. This, coupled with a superior brand that makes us a flight to quality bank in Chile in times of high uncertainty, as shown on the chart on the left. Since the weakening in the activity in Chile began, we increased our gap with our competition, collecting more demand deposits funding than any of our peers, as you can see on the chart on the top right. From October 2019, we grew CLP 1.6 billion, equal to 26% market share of the flow of deposits, above the level of our closest competitor. As you can see on this slide on the bottom right, demand deposits represent 27% of total assets, considerably higher than our main competition, where approximately 50% of this funding comes from the retail segment. This is even more notable when we analyze average current account balance by personal banking customers that reaches levels of approximately CLP 3 million per account compared to CLP 2.4 million to our closest competitor. This, together with our strong credit risk ratings and debt placements in both local and overseas markets, with spreads below the average of the banking industry, has permitted us to have our lower cost of funding base. Creative risk management and responsible growth have been fundamental to our success in our central and our long-term strategy.

Please turn to Slide 16. As you can see on the chart on the left, loan loss provisions grew from CLP 101 billion in the fourth quarter of last year to CLP 126 billion in the first quarter of this year, mainly due to the wholesale loan book. In fact, we strongly -- we grew strongly this quarter in terms of large corporate commercial loans. This expansion explains more than half of the rise in provision expenses. The rest of the increase is exclusively due to the impact of COVID-19 on the financial position of certain large customers. Specifically, as shown on the chart on the bottom of this slide, we grew over CLP 800 billion in loans to high-quality customers. This growth caused a price and provision of CLP 17 billion with no changes in risk classification. On the other hand, the remainder was due to the net credit quality deterioration of certain corporate customers amounting to CLP 12.5 billion as we took a proactive approach in thoroughly reviewing the segment, which is evaluated on an individual basis for provisioning purposes using a forward-looking approach. As a consequence of this evaluation, we downgraded certain customers due to the deteriorated economic scenario they are facing, affecting more in certain economic sectors, such as hospitality, transportation and commerce.

As a result of the prevailing provisioning criteria established by regulators, we believe that it's reasonable to expect that the individually reviewed commercial loan portfolio will be the first to see these effects of the COVID-19 crisis in the banking industry.

In terms of the retail book, despite that we had a positive trend in our NPL ratio until February, we did observe some signals, but clearly deterioration of the 30-day-past-due consumer loan book as seen on the chart on the bottom left. This is also a direct impact of COVID-19. Mobility restrictions produced by lockdowns in certain neighborhoods, coupled with the temporary shutdown of some of our branches resulted in the loan collection processes becoming less effective while affecting the payment behavior of certain customers. We expect that the strong government reactivation plan should provide good support for companies and individuals, and it is expected to assist in eliminating the impacts of the Chilean economy and the banking sector. This led to temporary adjustments in the rules how the regulator requests banks to provision for renegotiated loans during the next 3 months. As a result, it's unlikely that we'll see important changes in the cost of risk of this portfolio during the next few months due to the postponements of monthly installments. We expect that we will see a deterioration of our retail book and, in turn, higher provisions in the second half of 2020.

However, despite this risk, it's still important to highlight that we have a very diversified loan portfolio. Thanks to the fact that we are a universal bank that provides products and services to all segments in Chile, this allows us to be widely diversified in loans as well as in revenues. We continue to be confident that our proven track record in risk management and our prudent approach to growing responsibly over the last few years should show a difference with our competition. We put a very critical emphasis in risk management in Banco de Chile. The significant resources that we use to manage risk allow us to have an approach that is deeply present through the entire life cycle of our customers. This undoubtedly has supported to identify risks quickly and implement strategies to minimize those exposures.

Please turn to Slide 17. Our focus on managing costs is beginning to bear fruit. This quarter is an example of that determination. As you can see on the chart on the right, we managed to maintain our total operating expenses flat year-on-year and decreased almost 7% when compared to the fourth quarter of 2019. The drop in expenses was driven by lower variable compensation partially offset by higher admin and other expenses related to, among others, higher costs on IT infrastructure in order to facilitate home office for our staff, higher costs related to the enlargement of our ATM network, additional expenses related to the implementation of new service models for personal and SME banking segments as well as higher expenses associated with the maintenance and cleaning workforce.

In terms of our efficiency ratio, we improved 677 basis points for the -- from almost 50% in the first quarter 2019 to just under 43% this quarter, expanding our gap with the industry of 46%. In addition, when we measure our total expenses per current account, we have decreased by almost 3% year-on-year. We are confident that through the permanent improvement and efficiency of our branches, reinforcing the use of business intelligence and using robotic process automation and providing better digital contact channels for our customers should allow us to continue improving not only our efficiency ratio but also our Net Promoter Score. In addition, we have implemented a purchasing desk that has been bearing fruit. This has reduced our admin expenses continuously by reviews of operational acquisitions and services hired. We are certain that our focus on providing outstanding customer service and experience will allow us to outperform our peers when activity picks up.

Please turn to Slide 18. As you can see on this slide, we are the undisputed leader in customer service as measured by Net Promoter Score. Our Net Promoter Score is substantially higher than all of our peers, and we have managed to improve our Net Promoter Score since the beginning of the slowdown that began last October. We are especially proud of the results from our SME segment. This confirms the comments that we frequently hear from these clients when they tell us how they appreciate how our bank supports their small business during difficult times and our score of a preferential banking segment, which shows our ability to fulfill the highest standards of service quality. We believe that this sets us apart from the competition that historically has always been focused more on the first strategy of selling while we prefer a full strategy of attracting customers to our bank for the quality of our products and services, which generate stronger, long-lasting relationships. That is one of the key differentiating factors when we are compared to our peers. These figures are reinforced with the recognition of receiving an important national price for customer satisfaction in 2019 and for being the first bank in top of mind in the Chilean industry during this quarter as you can see on the right side of the slide.

Please turn to Slide 19. Before moving on to questions, I would like to highlight a few key ideas. Clearly, the spread of COVID-19 has changed significantly economic environment across the globe. The sheer magnitude of the shock is unprecedented with no comparable examples, clearly adding a layer of uncertainty and making it impossible to provide accurate guidance. What's clear is that the deteriorated scenario should have a negative impact on profitability for almost all businesses this year and for the Chilean banking industry. Nevertheless, we worked diligently to implement an effective and successful strategy to maintain operational continuity with the best customer service experience in this challenging environment.

For instance, we are the first bank to provide programs designed to help our customers and the first to allow personal banking clients to reprogram their loans 100% online, benefiting almost 250,000 customers since the beginning of this pandemic. We have additionally focused on advancing our projects and digital transformation, and this has aided our bank during this time.

Nevertheless, high levels of uncertainty remain. Asset quality will most likely deteriorate for the industry as a whole, beginning in the second half of 2020 when the benefits that banks have provided customers of postponing payments come to an end. This undoubtedly will affect the industry's bottom line. However, we're optimistic for the economic recovery in 2021, thanks to the strong stimulus package that the government has implemented this year. This should contribute to improving the economy when the pandemic comes to an end. In this scenario, we are confident that we have the strongest fundamentals amongst Chilean banks and are better prepared to face this crisis since we have been focused on growing responsibly as well as being strict in applying our prudent risk policies during the more positive economic cycles. This has allowed us to maintain the highest coverage ratio, along with maintaining the best capital ratios in the industry.

Finally, I would like to end the call by emphasizing that we're committed with the development of Chile, especially during the difficult times. We are determined to continue providing the best customer experience while taking care of our employees and contributing to the community.

Thanks for listening. And if you have any questions, we'd be happy to answer them.

[Operator]

[Operator Instructions] The first question comes from Claudia Benavente with Santander.

[Claudia Benavente, analyst]

I was wondering a little bit regarding Slide 16, like you've made already a downgrade to some corporate loans. And the net impact to reserves since barely unchanged. We hold a strong position on additional reserves. So the fact that the macro environment will continue deteriorating, do you think it's necessary to build more additional reserves? Or do you think with the current level you hold is enough?

[Rodrigo Aravena, executive]

Thank you very much for the question. What can we say about that, that Banco de Chile has had a conservative risk policy over the time, which is reflected in the strong code of ratio higher than 2x, which possibly compare with any other bank in Chile? Since the economy is beginning to have a deep recession with an unusual uncertainty, we can rule out that the bank will increase its additional provision at some point of the year. However, it's important to mention that this decision is taken by the Board of Directors. So any decision related to that area has to be taken by the Board of Directors.

[Claudia Benavente, analyst]

And maybe a follow-up on that respect. I understand that coverage ratio is a result. Nonetheless, do you feel that there is, like, a minimum level that is comfortable for you? And when considering that, do you add the additional reserves on your, I don't know, guidance estimate or you don't take a look at all to the coverage ratio?

[Pablo Ricci, executive]

Right now, because of the high level of uncertainty, it's difficult to give guidance for these figures. But it's important to mention that in terms of our coverage ratio, it's more a product of the provisioning model that generates the level of provision. We don't have a target for generating a certain level of coverage.

[Rodrigo Aravena, executive]

There's not a specific target above that. Yes.

[Operator]

The next question is from Tito Labarta with Goldman Sachs.

[Daer Labarta, analyst]

Paolo and Rodrigo, I guess following up just in terms of asset quality and provisions. I know it's hard to give any guidance in this environment. But just trying to put into perspective, right? If you look at your NPL ratio, it's already, like, 1.4. It's like the highest level it's been in a while and I know probably impacted by the process at the end of 2019. So just when you think about the cost of risk today compared to history and previous crises and the NPL ratio where it is, how can we just kind of put that into perspective, right? Because if you look at cost of risk, historically, you were around 1%. You're already at 1.6% this quarter. Is looking at history helpful at all? I mean, if you go back to the global financial crisis, I think you peaked around 2%. Is that sort of a good sort of an example to look at given also changes in the loan portfolio over the years? So if you could just help us at least put into context how bad things can get in terms of the cost of risk and NPLs. I don't expect specific numbers or anything, but just kind of how we should think about it and compared to history in particular.

[Rodrigo Aravena, executive]

Tito, and this is Rodrigo Aravena. We are going to divide this answer in 2 parts. So at first, I think that is very important to keep in mind that this crisis is very, very different from any other crisis that we had in the past. So today, we don't have enough information as to provide any estimate, for example, in terms of the size of the recession in the short term. We don't know how many quarters there will be a negative growth. And therefore, it's very hard to forecast any number about unemployment rate in the future. So that's why there is a very important uncertainty in terms of the potential increase in the cost of risk in the future. Of course, we can anticipate a higher cost of risk relative to what we thought in the beginning of this year. So the -- it's very hard now to make any comparison with the previous recession. Pablo, do you...?

[Pablo Ricci, executive]

I think some point to mention about previous discussions in -- at the end of the 1990s and the Asian crisis, the level of provisions for the industry rose to around 1.8%, 1.9%, if I'm not mistaken, and a similar level in the financial crisis. In Chile, there is 2 events occurring in the financial crisis. One was the financial crisis where we saw a rise in unemployment that went the levels of around 11%, 12%. But at the same time, we had the salmon industry crisis, which was a virus that affected that industry and affected the quality of that product and, in turn, affected the exports. So in 2009, that was very significant for the industry. In terms of how Banco de Chile looks at that point, we had an important participation in that segment similar to our market share. And we also had a very important participation in the lower-income segment, which meant that almost 1/3 of our loans to that lower to the consumer finance segment was represented total consumer loans. So today, if we look at consumer loans due to different regulations and changes that occurred after different events since 2009, the consumer finance portfolio has decreased the size of its importance within our -- the relative importance within our portfolio. So it went from around 7%, 8% to around 2% today. So that should also have a limiting factor in terms of the impact that we have on our figures.

[Rodrigo Aravena, executive]

And one other important thing to consider here, Tito, is that there will probably be a difference between the economic cycle in terms of GDP growth, unemployment and the asset quality cycle because as a consequence of reprogrammed loans, we can't rule out that there will be a deterioration in terms of asset quality in the second half, in the third or even in the fourth quarter of this year in a moment when the economy will likely be better than now. So it's important to have -- to keep in mind this potential difference in terms of the cycle of the asset quality relative to the economic cycle.

[Daer Labarta, analyst]

Okay. That's helpful. And maybe just a follow-up. I guess, maybe in terms of exposures to sectors that are most at risk, I don't know, like tourism or retail, how do you see in terms of your exposures and the sectors that are most at risk?

[Pablo Ricci, executive]

We have a widely diversified portfolio, not only in terms of segments, but also in sectors. If you look at the portfolio and we compare our portfolio with the industry, you can see that Banco de Chile has the lowest exposures, and the industry is most at risk. For example, if we look at the hotels, restaurants and retail exposure, we're at a level of around 4% when the industry is at levels of around 7%. In transport, we're at levels of below 2%, while the industry is at levels of 3%. In terms of other areas, education, we don't have anything relevant there. So we're quite comfortable with the positions that we have managed in Banco de Chile.

[Operator]

The next question is from Jason Mollin with Scotiabank.

[Jason Mollin, analyst]

Can you hear me?

[Rodrigo Aravena, executive]

Yes. We can hear you.

[Jason Mollin, analyst]

Hello?

[Rodrigo Aravena, executive]

Yes, yes, yes.

[Jason Mollin, analyst]

Okay. Great. First, maybe a question, Rodrigo, on -- just a question, maybe an update on the constitutional referendum that we're expecting in the political environment on Chile given this particular social unrest we had last year. What are your thoughts on how -- on the implications for that going forward in Chile? And more specifically on the bank, if you can talk about cost and long-term strategy? You showed an increasing use of the digital channels. Does this change the long-term strategic objective, for instance, in the value of branches? Could we see some branch closings? And what other factors, your efficiency is already looking pretty strong, especially year-on-year, but what could the bank do in this kind of tough environment to improve efficiency going forward?

[Rodrigo Aravena, executive]

Jason, thank you very much for the question. First of all, it's very important to mention that in our baseline scenario, there will be a temporary worsening in the economy. We are aware of the contraction that we will likely see in the short term. In the second quarter, for instance, we are expecting a decline on the GDP of around 10% with a negative growth of around minus 3% for the whole year. However, we are working with a better scenario for 2021. So if it works, we have attained our long-term strategy. Pablo will go into more details on that. But the key element of our baseline scenario is that there will be a temporary contraction of the economy. In terms of your question about the constitution, the political discussions, et cetera, what we have to say is that most of the discussion in the -- during the last 2 months, I would say, have been more related to the countercyclical policies in terms of the social spending growth, in terms of the support to households, possible income for family, the same in terms of providing more financial support for SMEs company. So what I'm trying to say is that during the last 2 months, I would say, what we've seen is a shift in terms of the discussion moving from one discussion more focused on political issues, the new constitution, the referendum, et cetera. But more recently, we've been discussing much more about the policies that the country needs to face these -- to address this crisis. The referendum was scheduled originally for April this year. It has to be postponed due to the COVID-19. So far, the date for the new referendum will be October, but there is an uncertainty in terms of when will finally be the referendum because we don't know how will be the contagion of the spread of COVID-19 in the future. So I would say that we are aware of the political uncertainty in some areas remain, but during the last month, we've been more focused on discussing the contracyclical policies as to have a shorter crisis and a stronger recovery in the medium term. So far, what can we say, that there's been a very important package from the government, from the Central Bank, from the financial, from CMF as well. So we are optimistic on that. Pablo, for the long term...

[Pablo Ricci, executive]

So in terms of expenses, we've been very focused on continuing to control expenses in Banco de Chile, and it's beginning to bear fruit, as you saw this quarter. So this continuing focus has had many different projects. If we just name a few, we've been -- we improved the credit evaluation in the past. Banco de Chile made it much more efficient. We improved the personalized pricing system, which not only made it more efficient the whole process but also improved the customer experience by improving delivery times. Just recently, we implemented a purchasing desk, which basically evaluates all of the purchases that we do in Banco de Chile that are related to administration expenses. And basically, they review all the services, materials, advisory services that we do in Banco de Chile to control our cost better. And in terms of digital bank and how this has been changing how we do our business, it's something that we've put a lot of effort in the last 5 years, implementing many different changes by improving the whole customer experience from the point that they log onto our website, via the [indiscernible] or by using the app. So we've been focusing on improving that experience. And we have new projects that will be coming out in the following -- this year regarding that, as mentioned in the presentation, which should continue improving that experience for customers. So all this has meant that we've been improving our customer experience -- our cost in Banco de Chile. And we haven't left aside the branches. So what we've been doing in the branches, we have a new branch model, which is basically adjusting the service model within the branches, including much more services, their self-service, more ATM, where customers can do more transactions quicker, adjusting the responsibilities within the branches to give a more appropriate experience based on the new environment for living with the digital evolution. And this has meant that we've been renovating branches and optimizing the network. So we've been closing branches. If you look at this year, we've closed 17 branches, and this is a project that we should continue seeing a more streamlined branch network in the near future. It's important to remember that Chile is a long country. So outside of Santiago, there's not that many branches within each of the cities. So it's limited the number of branches that we could potentially close. And in terms of this year, we should be seeing a efficiency ratio somewhat similar to what we had last year we're expecting and a cost base increase of around flattish.

[Rodrigo Aravena, executive]

I would like to reinforce one idea. We haven't changed our long-term strategy. We haven't changed our main long-term priorities where digital bank is increasing more and more important.

[Operator]

The next question is from Ernesto Gabilondo with Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

Rodrigo and Pablo, I have a follow-up in this economic or in this referendum to changes in the constitution. I believe it will return again at some point in the year as I think social unrest is not showing up because of the lockdown. But if next October, the population decides to do constitutional changes, I believe this could be an important subject for future economic growth. So if this is delayed more, do you think this could be a risk for the economic growth next year?

[Rodrigo Aravena, executive]

Thank you very much for the question. I think that it's very important to identify the short-term drivers for growth relative to the long-term drivers of growth. In the short term, we've been more focused on the design, discussion and implementation of countercyclical policies that reduce the size of the impact, the negative impact of the COVID-19 crisis in the economy. In that area, we can say that Chile has been very successful and positively compared with other countries in terms of the size of the fiscal response and the monetary response and the coordination and timely response as well. So we have to consider that, for example, in Chile, the first sanitary measures were taken only 16 days after the first case of COVID-19. So in terms of the policies that aim to reduce impact of this crisis in the economy, we've been very successful. And this has been the main area where we've seen more discussion.

In terms of the discussions for new topics or contents or proposals for new constitution, naturally, we haven't seen a deeper discussion on that. Of course, that a new postponement of this referendum, there would be a higher risk in terms of more uncertainty, lower growth. But to be honest, I think that given the size, given the degree of uncertainty that we have right now with COVID-19, I think that is much more important to pay attention to the evolution of the virus, the ability of the government to react if more stimulus are needed, et cetera. So in the short term, I think that it's much more important to pay attention to the next figures of the economy, the further responses of the authorities. I would say that the discussion in terms of constitution, in terms of the potential results of the referendum will be more retaken by the end of this year.

[Ernesto María Gabilondo Márquez, analyst]

Can I have a second question in terms of provision charges? It's a follow-up. So just wondering, when do you expect the peak in provision charges? And what of your portfolio is based on expected losses? Are you building provisions from those clients that apply for the relief programs? Or as they have not defaulted, do you expect to create more provisions by year-end? We have seen U.S. banks, banks in Spain, Peruvian banks, Colombian banks that are already recognizing big provisions during the first quarter. So why not creating this contracyclical provisions that Chile can do now?

[Pablo Ricci, executive]

In terms of what's happening with provisions, it's true because of all these benefits that are received by customers and certain flexibility of the regulator, this changes the way how banks are provisioning in Chile their loan portfolio. Banco de Chile has been very proactive. I don't know if it's the most proactive, but we're -- like we mentioned in the call and the earnings release, we are proactive in reviewing the corporate book, which we'll continue reviewing, obviously, and that was part of -- that was -- an important part of rises in provision expenses this quarter.

When we look at which sectors and how this will evolve in the following quarters, probably, we should start to see a certain level of impact in the second half of this year, closer to the end of the second quarter probably in the provisioning models, because most customers have had or has to be made available a facility that they could postpone those payments, those loan installment payments. So the model uses a lot of overdue loans, the base credit risk. Also, SMEs have had benefits as well from different initiatives of the government and from banks. So probably, we should see, first, the impacts in the wholesale segment, like we did this quarter, which that should continue for us possibly as we review the loan book and for the industry, followed by -- as the 3 months pass of these benefits that banks gave their customers, we should begin to see an impact in the retail portfolio. Depending on how the evolution of the economy evolves and how quickly COVID-19 is recovered or not recovered, that will be -- that's a big question mark, what occurs with COVID-19 to get back to running the economy normally.

[Ernesto María Gabilondo Márquez, analyst]

And please, let me ask a third question on loan growth. We saw an important acceleration in middle-market loans due to the currency depreciation. And I also think there were some withdrawals from companies anticipating to have more liquidity. So I would like to know your strategy in the short term. Are you going to focus on your own client base? Or are you also going to provide credit to new clients? And any color in which segments you expect to be more selective? And which ones do you expect to grow? I think it will be very helpful.

[Pablo Ricci, executive]

So right now, there's not so much demand in Chile because of the high level of uncertainty that's occurring. So obviously, we're always reviewing different deals as they come about, but there's not much going on in terms of demand. Probably what we'll see in the next quarters is stronger demand related to these COVID loans that have guarantees from the government, which is a huge program of CLP 24 trillion. If you take into consideration the size of the Chilean banking industry, it's a significant amount of loans. And what we should probably expect is that the driver for loan growth for the industry and most banks will come from that, which will be applied to the SME customers. But it's not only SMEs because it's up to sales of $35 million -- equivalent to $35 million per year. So it also includes an important amount of larger companies as well. So that's probably the main driver for the remainder of the year.

In terms of mortgage loans, you have to remember that the mortgage loan, what happened there, it's a pipeline of loans. So what customers purchased in December is what banks reflect in March. It takes 2 to 3 months to reflect that loan. So probably what we saw in the chamber of commerce of sales, lower demand, lower sales should slowly be reflected in the bank's balance sheet. And in consumer loans, there's also less demand in terms of consumer loans. So we should probably not see a significant change in that level -- in that product as well.

[Operator]

The next question is from Yuri Fernandes with JPMorgan.

[Yuri Fernandes, analyst]

Rodrigo, Pablo, I have a question regarding the amount of renegotiated loans as a percentage of the book, if you have this number. I read in the release, I guess, 25% of the retail clients, but I don't know how much on the wholesale book you also have and like how much renegotiated loans represented on your total loans. And my second question is regarding the renegotiations you had back in the social unrest. How they are behaving? Do you need to renegotiate them again? And any lessons you learned back then like that you say you are going to use now for the COVID, your renegotiations that you want to share?

[Pablo Ricci, executive]

Okay. In terms of -- so you mentioned you already know the retail book. In terms of the SME book, the renegotiated loans were actually not so significant prior to the COVID loans have represented something less than 2% of customers. It was, if we have 100,000 SME customers, over 100,000, and there was about -- if I'm not mistaken -- sorry, it was about 2,500 customers. So not a very relevant, not so relevant there. And in terms of the COVID loans, this is probably what will be the most relevant, and it's just beginning this week. It just began on Monday. And we have about CLP 300 billion in COVID loans.

[Rodrigo Aravena, executive]

But we have to see how we did...

[Pablo Ricci, executive]

4,000 customers have taken those loans. But it's also very early to tell. What we should probably see is a rise in demand because most banks have just recently, in just these few days, some just yesterday, have been providing offers to customers to take on these COVID loans.

[Yuri Fernandes, analyst]

Those numbers, they appear low, right? Like when you compare to other countries, we are hearing like from 20% to 50% of the loans being renegotiated. Any reasons like for that number to be so low?

[Pablo Ricci, executive]

I'm not sure about the other banks. The number of renegotiations for the SME portfolio for us, we didn't have a significant demand despite that we were the first bank to offer these -- this benefit program to both our individual banking customers and SMEs. For us, if you take a look at our portfolio, we've always had a very high-quality loan book that's very much associated to our high net worth individuals. So that could also have a benefit in terms of the level of the initial program that we offer to customers. In terms of renegotiations that we had and after and during the events of last year, we really didn't have a significant change in the level of renegotiations that we normally do. So it wasn't anything -- it wasn't any -- there wasn't any important change on the level of renegotiations we had prior to those events.

[Rodrigo Aravena, executive]

But it began this week. So...

[Yuri Fernandes, analyst]

And we're going...

[Pablo Ricci, executive]

Sorry.

[Yuri Fernandes, analyst]

I was just going to ask regarding delinquencies of those loans, like are they behaving well? Like how were those October, November, December loans that were renegotiated last year behaving? Like on an asset quality standpoint, like are they doing well? Like what can you tell us about that?

[Pablo Ricci, executive]

It's similar to the renegotiations that we've always had. And we really didn't change the policies for renegotiations during that time.

[Operator]

The next question is from Neha Agarwala with HSBC.

[Neha Agarwala, analyst]

If I can follow up again on the cost of risk. It seems like most of the increase in provision would come later in the year in the second half. Should we expect the -- any spill off in level of provisions from COVID in 2021? Or do you expect to cover most of it in 2022? Any indication on how much we can expect on a quarterly basis? Would there be a jump in the third or the fourth quarter? That would be very helpful. And do you expect to use your voluntary provisions during this crisis? Or you still think that this is -- it's not required, given the level of crisis at this point? My last question is on your digital platform. You will continue to invest in your digital platform, as you said. But what are the key areas of strength that you think you have versus peers? And any points where you would like to improve where you think your peers are doing a better job? That will be very helpful.

[Pablo Ricci, executive]

In terms of risk and if there's any spillover into 2021, I think it's important to mention that the entire banking industry was proactive and is being proactive in offering different types of benefits to their customers in terms of postponing loan payments. For us, we offered 3-month postponement for consumer loans, mortgage loans as well as doing refinancing for credit cards and certain preferential loans for our customers. And in terms of SMEs, many banks, including us, offered 6 months postponements on consumer loan installments, adjusting payment terms and durations. So if we analyze that last figure and we look at the role of the COVID loans, which under the COVID loans that we're providing customers, banks must supply, renegotiate all the other loans to the customers as well when they take these COVID loans. So what does that mean that in November, around November, October, customers will begin paying. And that's when banks will know for many customers if they'll be able to continue paying. So we should have more information by the end of the year, but I think it's highly likely that there should be a spillover in 2021 because we'll just be recently in October, November, December, having more information on the commercial portfolio. And other banks have offered at the 6-month postponement on the retail book. So they'll have more information in terms of the retail book also at the end of the year. So the 90-day past due book will just be entering in the beginning of 2021. The second -- and the second question, sorry, was additional provisions?

[Neha Agarwala, analyst]

Yes. And you have voluntary additional provisions that you have.

[Pablo Ricci, executive]

The additional and voluntary provisions were one of the banks that has been the most conservative in terms of our risk policies and growing responsibly and provisioning, which we consider appropriate for the level of risk that we've had. Clear examples of how this proves -- that our coverage ratios were appropriate was when we implemented different standard models in Chile, where for us, the impact of these standard models was minimal versus other banks, which was much more important. In terms of specifically provisioning -- additional provisions, obviously, this is something that you can't rule out for any bank in the industry. And it's something that is seeing...

[Rodrigo Aravena, executive]

So basically, we can't rule out that possibility in the future, but it has to be decided by the Board of Directors. But it's important to keep in mind that we are more conservative in that area. So given the uncertainty that we have in terms of the future evolution of the economy, we can rule out that possibility.

[Pablo Ricci, executive]

And in terms of digital banking, what our strengths are? I think the most relevant strength that Banco de Chile has is that our customers use our bank as their primary bank. We have the highest top of mind, the highest Net Promoter Scores and the best customer service with our customers. Despite that, we've worked diligently in order to improve all the digital banking solutions, and we think we have a very good platform today. What we're working on, and it would be, obviously, the area that is something that we would like to complete this year is the new solution for onboarding, which is obviously something that is very attractive in order to bring customers into the bank at a quick delivery times and also improving the whole process of the consumer loan origination process. So with those 2 areas, I think we'd have a well-rounded digital solutions for our banks, which we want to offer to all of our banking customers. We don't want to have a separate bank. We want to give all these solutions to all of our customers in Banco de Chile and to the brand of Banco de Chile.

[Operator]

The next question is from Alonso Garcia with Crédit Suisse.

[Ricardo Garcia, analyst]

My question is on the NIM. I was wondering if you could share some color on the NIM performance you expect for the remainder of the year, considering your expectation of 2.5% inflation this year, rates at 50 basis points and the implications of the relief programs at individuals on financing support to SMEs.

[Pablo Ricci, executive]

I think, like you mentioned, there's a lot of pressures for NIM in 2020. We have flattish variation of the U.S., which affects NIM. But also there is other impacts that we mentioned in the call and in the earnings, which is the 2 changes in regulation -- well, the one change in regulation on how customers now have their overdraft lines automatically repay, which affects both funding in terms of deposits and also the loans outstanding average balances. Also, we have impact of the renegotiating -- or the refinancing of mortgage loans, which was an important impact for us. And we're in an environment of very low interest rates. So the low overnight rate is also having an impact. As you recall, last year, we already had reductions so that's starting a pricing pressure in terms of the NIM. And as well, you have to take into consideration that we have the COVID loans, which there'll be a change in mix for us and the industry. So that should also have an effect, but that will also have a positive driver in terms of net interest income. We don't expect to have a bottom line, which is positively affected. This should probably be a 0 effect because the interest rates are low. But -- and there's costs involved when originating these loans. But we should expect to see some pressure in terms of NIM for next year. So net-net, the level of NIM that we recorded on how we calculate NIM was around 4.5% -- 4.05%, 4.1% this quarter with a high level of inflation of around 1%, which annualized is closer to 4%. And last year, we ended the quarter -- the year at 4.17%. So it's reasonable to expect a decrease in terms of NIM that we recorded this first quarter of the year. I guess the -- what could change is -- and drive that figure up or down is inflation. Today, 100 basis point change of inflation is somewhere around 16, 17 basis points of NIM.

[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.

[Pablo Ricci, executive]

Thank you for participating in our call. Stay safe, and we look forward to speaking with you in the second quarter 2020 results.

[Operator]

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