Banco de Chile

SGO:CHILE

Earnings Call Transcript 2022-Q1

[Rodrigo Aravena, executive]

Good afternoon, everyone. Thank you very much for attending this conference call today. It is a great honor for us to present the financial results posted by Banco de Chile during the first quarter of this year, a period that, once again, we continued leading the industry in different aspects.

In order to present these achievements, we have divided this call into 3 main sections. First, an analysis of the macroeconomic environment that we faced, including our forecast for this and the following year. Then we will review the main accomplishments and advances in our key strategic areas, such as digital banking, efficiency and sustainability. Then we will finalize with a deep analysis of financial results.

Let me start with a general overview of the Chilean economy. Please go to Slide #3. The economy expanded strongly in 2021 as the GDP went up by 11.7%, achieving the highest figure in our recent history. As we mentioned in previous conference call, this was positively influenced by temporary factors and policies, such as the 33% pickup in fiscal standing and the more than $55 billion withdrawn from pension funds. The sum of these resources represented almost 30% of the GDP, becoming Chile one of the countries with the strongest economic response during that pandemic.

Nevertheless, as these factors were only temporary, a slowdown in the overall activity has broadly been expected. In this environment, recent figures have been confirming that the economy began a slowdown in November last year, which has translated into lower expansion rate at the beginning of 2022. Accordingly, the economy grew 7.9% in the first quarter 2022 year-on-year, below the 12% seen in the fourth quarter '21.

The weaker activity is even more evident on a sequential basis as the overall GDP fell by 0.4% in the first quarter, posting the first contraction since the second quarter 2020. The downward trend of the activity can be seen in the chart on the upper left of this slide.

The weaker expansion has been led by the slowdown observed in the commerce sector, which has fallen 4.3% during the last 3 months, as the chart on the upper right displays. Generally, the lower expansion is mainly attributable to the reversal of several temporary factors that positively influenced domestic spending, such as monetary transfers and pension funds withdrawals. Therefore, the end of these factors, which coupled with the rise in inflation and interest rates, are fostering the slowdown in consumption even more.

It is also worth mentioning that the commerce clients last year growing at rates near 30%, as the chart shows, which was an unsustainable situation. Overall, the lower consumption is consistent with the normal adjustment of the economy towards its long-term fundamentals.

On the other hand, however, services have been recovering the ground lost during the pandemic, partially offsetting the sluggish commerce growth. In fact, services went up by 2.6% quarter-on-quarter in the first quarter this year, being the only sector with a positive change during the period. This has been chiefly due to the improved sanitary conditions, which have allowed greater levels of mobility, and consequently, normalization in several activities, more intensive in social contact.

The labor market has continued posting better figures. In March, for instance, the employment rate was 7.8%, which was 250 basis points below the level posted 1 year ago and much better than the peak of 13.1% seen in 2020, as the bottom left chart shows. The lower unemployment rate has been due to the partial recovery in employment, which grew 8% year-on-year in the first quarter, which resulted in a total number of jobs that is only 3.5% below its pre-COVID level, as you can observe in the chart on the bottom right. The labor force has also increased, although the participation rate remains below the level reached before the pandemic.

The positive trends posted by the domestic activity and several external factors have further increased inflationary pressures in the Chilean economy. I will refer to these factors and their implications for interest rates in the next slide.

Please go to Slide #4. The headline CPI has soared significantly during the last month, surpassing any expectations held just a few months ago. The overall CPI rose to 9.4% year-on-year in March, reaching the highest figure since 2008. This trend has been accompanied by an important pickup in the core inflation, which rose to 7.4% year-on-year in March. Therefore, as you can see in the chart on the top left, all CPI measures have been diverging from the policy target set at 3%.

Other alternative figures such as tradable and nontradable index have also increased to 11.5% and 6.9% year-on-year, respectively. These figures confirm that high inflation has been a multifactoral phenomenon led by different forces, local and external, that have contributed in the same direction.

On FX, despite the strengthening seen during the quarter, the Chilean peso remains weak compared to the previous years, contributing to inflation. This evolution can be seen in the chart on the top right. The soar in local inflation has pursued the Central Bank to continue its tightening process in the monetary policy.

In March, the Board decided to raise the overnight rate by 150 basis points to 7%. The Central Bank of Chile accumulated a total adjustment of 650 basis points since July last year when the rate was only at 0.5%, becoming Chile one of the countries with the greater adjustment in the monetary policy rate in the world. This evolution is displayed in the chart on the bottom left.

The forward guidance provided by the Central Bank anticipates further adjustment in the interest rate despite the expected slowdown in the overall activity. Particularly, in the baseline scenario outlined in its March monetary policy report, the Central Bank signaled an interest rate of around 7.5% to 7.75% by the end of the year and the beginning of an easing process only in 2023.

Nevertheless, this guidance of holding rate was made under the assumption of several factors such as lower commodity prices, a stronger Chilean peso and the absence of further fiscal stimulus. Consequently, given the evolution of both Chilean and global scenarios, we all know the possibility of higher-than-expected increases in the policy rate this year. As the bottom right chart shows, this balance of risk explains the evolution of long-term interest rate in Chile.

Now I'd like to share with you our baseline scenario for this and the following year. Please move to the next slide, #5. We expect the slowdown to continue in the near future. Specifically, the combination between lower fiscal spending, the lagged effect of interest rate tightening and the weak external growth, among other factors, should lead the economy into slight expansion in the second half of 2022.

We can rule out the possibility of negative annual growth rate for some months during the second half of 2022. We are forecasting a 1.5% expansion rate this year, and in 2023, a level slightly above 0. In the long run, we expect a level of around 2%. Therefore, it's reasonable to expect a U-shaped evolution for economic growth.

Our baseline scenario considers an inflation rate remaining above the policy target for the next couple of years. Despite the below trend growth, the inflation rate should persist at high levels due to further pressure for commodity prices, global supply chain disruptions and secondary effects among others. For these reasons, we expect further interest rate hikes this year to reach a level of 8.25%.

Before moving to the banking sector, I'd like to emphasize the existence of some critical risks that need to be watched. First, since Chile is one of the most integrated countries into the global economy, a negative evolution of external activity could have a material impact in the country, especially if the slowdown occurs in China or in the United States. Therefore, it is important to analyze the evolution of critical factors such as the pandemic and geopolitical conflict in Europe.

Second, several political developments are worth monitoring, such as the content to be included in the final draft of the constitution. Also, it is critical to see the result of the exit referendum to be held on September 4, which will determine if the constitutional conventions proposed so become the new constitution. Additionally, it is essential to pay attention to the implementation of potential reforms that have been announced by the government, especially in areas such as taxes, labor and pensions.

Now I'd like to discuss briefly the evolution of the banking industry. Please turn to Slide #6. Loans in the Chilean banking industry in the first quarter grew only 1% in nominal terms quarter-on-quarter and showed the similar trends by product. Retail loans continued to support growth. Consumer loans grew quarter-on-quarter by 4.2% and mortgage rose 2.4% quarter-on-quarter. This was strongly supported by the peak levels of inflation seen during the quarter. We expect that with price inflation levels, coupled with higher interest rate and more uncertainty, mortgage loan expansion should continue showing an important deceleration compared to the figures showed in previous quarters.

Lastly, commercial loans decreased by 0.4%, especially due to the current environment. The industry posted a strong result in the quarter associated to the high levels of inflation, which positively benefits operating revenues, together with credit risk charges that remain below historical levels. This was partially offset by higher operated expenses also due to the record high levels of inflation we have recently seen in Chile.

Now I'd like to pass the call to Pablo, who will go into more detail about Banco de Chile advances in the financial performance.

[Pablo Ricci, executive]

Thank you, Rodrigo. I'd like to begin with our main accomplishments in our key strategic projects. Please go to Slide #8. As we have mentioned in previous conference calls, we have developed a strategic project that focuses on 3 key areas. As you can see in this slide, they are digital transformation of the bank, permanent improvements in efficiency and productivity and our increasing commitment to ESG. In the next few slides, we will go over the advances of these initiatives, which are already bearing fruit.

Let me start with the analysis of digital transformation. Please move to the next slide, #9. Cuenta FAN once again posted strong gains in customer acquisition, closing the period at 844,000 new clients. Of these, we have cross-sold 24% to other products and services, which include current accounts, insurance products, investment solutions, credit cards, consumer loans and mortgages.

We also reinforced the digital journey to become a Banco de Chile customer by launching our new digital current account that can be opened 100% online in less than 5 minutes in 3 simple steps. This is a full bank account with no limits, with the possibility to open other products such as lines of credit, credit cards, investment products, among others.

In line with our goal of building the whole digital ecosystem, we released a great new investment app that permits customers to invest not only in local stocks and mutual funds, but also international ETFs and stocks listed on foreign exchanges. Additionally, in alliance with Scotiabank, we developed a service that facilitates to make quickly and easily money transfers between banking customers by only using the mobile telephone number. This service is now available for all banks in Chile at the automated compensation center, which provides payment processing services to all financial institutions registered and supervised by the CMF.

Lastly, I want to highlight some key digital advances. As you can see on the right, our customers are using more actively our digital channels. Monetary transactions through the app are up 34% over last year. 50% of consumer loans this quarter were taken online, and we have also had an important increase in digital customers.

Please turn to Slide 10. Our purpose is to create long-term value for shareholders and to be the best bank for our customers. For instance, in this quarter, we reinforced our efforts to put Banco de Chile at the Top of Mind by strengthening marketing activities such as supporting the music festival, Lollapalooza.

As you can see on the chart on the top left, our Top of Mind reached 29%, 1/3 higher than our closest competitor. Additionally, through our new customer service model, we have continued to outrank our peers in Net Promoter Score according to Procalidad survey. In addition, we are positioned as the most reliable and preferred bank in Chile according to the latest Adimark survey, as you can see on the chart to the right.

By focusing to create the best bank for our customers, we are standing out from other banks. This is generating greater demands for our products and stronger relationships, which means more originations to loyal customers that value and promote our products.

Please turn to Slide 11. Our consistent improvements in productivity have been supported through diverse initiatives, which are accelerated when we created the formal productivity and efficiency program. The incremental improvements together with technological advances and the streamlining of our branch network have optimized how the bank operates.

This quarter, we posted a groundbreaking 34.2% efficiency ratio. On the one hand, this level of efficiency was influenced by the strong top line growth we posted in the quarter. But on the other hand, we have also been able to continue controlling expense growth in real terms close to 0.

We recently implemented a new digital purchasing platform that introduces electronic auctions and tender processes to acquire goods and services for the bank that will further support our cost control management. This is just one more mechanism that we're applying to continue using our resources better.

It is clear that the efficiency we achieved this quarter benefited from the extraordinary items that positively impacted our revenues. But I would like to emphasize that we didn't stand still during this period. We are confident that through the continuous improvement of our efficiency program, increased automation and the use of new digital tools, we will be able to continue improving our sustainable efficiency indicators by consolidating the trend we have seen in many metrics such as cost to asset ratio, which are not influenced by the effects of inflation, and therefore, reflects gains in productivities.

Please turn to Slide 12. This quarter, we made several advances in ESG. We started a new series of our program, Cuentas con el Chile, which is a program aimed to educate entrepreneurs, students and new residents to Chile in financial literacy. This new version of the program will include cybersecurity knowledge and includes the methodology.

Regarding our diversity and inclusion initiative, we signed an agreement with a nonprofit organization, Women in Finance, that promotes their participation in the banking industry, and we held the 23rd edition of the Chilean Open Copa Banco de Chile wheelchair tennis tournament.

In connection with environmental actions, we launched the first national call for Glocal, social innovation and alliance with Sustenta Pucon Foundation, which seeks to join entrepreneurs to provide solutions to economic, social and environmental challenges.

We also recently entered into new agreements to consume electricity only from renewable resources through the purchase of energy certificates. This has reduced our carbon footprint by 28%. Moreover, we are especially proud to announce that we have created a Sustainability Committee composed of senior management and chaired by our CEO. This community aims to boost our sustainability and strategy and initiatives as well as define and monitor ESG KPIs.

Finally, we are glad to mention that we are recognized as the third most responsible company in the country in environmental, social and governments by Merco, and we improved significantly our sustained analytics ESG ratings to a low-risk level. This score positions us as leaders in the Chilean banking industry in this matter with a large gap to our competitors. It's also important to highlight that we have an A rating from ESG MSCI, which is the highest in the Chilean banking industry.

Please turn to Slide 14 to begin our discussion on our results. The economic scenario continues to surprise. This quarter, we witnessed another period of high inflation of 2.4%. This, together with sound business strategy that leverage diverse market factors in their favor, allowed us to post a record bottom line of CLP 292 billion, equal to an impressive return on average equity of 27%.

We are especially pleased that this result positions us once again as the leaders in profitability in terms of return on assets and in capitalization, as you can see on the chart to the right. Nevertheless, we are aware that these high levels of net income are temporary, but we are fully committed to creating a sustainable bank that generates superior results based on a consistent and responsible long-term strategy.

Depending on the potential impacts of the political landscape and the evolution of the pandemic, we believe that our long-term ROE should be in the range of 16% to 18%, even though this year we expect it to be well above this range.

Please turn to Slide 15. Operating revenues grew over 40% year-on-year, mainly due to noncustomer income as a result of a strong rise in inflation versus the same period last year. In fact, inflation revenues contributed more than half of the year-on-year growth of operating revenues. This figure was obtained by positioning the bank appropriately to benefit from the higher-than-normal levels of inflation and in rates.

On the other hand, it's worth highlighting that customer income grew 26% year-on-year, contributing to the year-on-year rise in operating income, thanks to the greater contribution of demand deposits to our cost of funds in an environment of significantly higher local interest rates and improved business activity that boosted fees amid lower COVID mobility restrictions. As a result, net interest margin grew from 3.4% in the first quarter of 2021 to 4.9% in the first quarter of 2022, a rise of 151 basis points. An important part of this rise was due to inflation, as shown on the chart on the bottom.

Nevertheless, income from interest, excluding inflation, grew strongly thanks to the effective and prudent management of our currency and maturity gaps together with our demand deposit positioning that allowed us to capitalize more than our competitors. Later in the presentation, we will go into deeper detail regarding our superior funding mix and how we compare to our peers.

Fee income generation was also very dynamic this quarter, contributing CLP 19 billion to the increase in operating revenues, equal to a rise of 17% year-on-year. This strong increment was a consequence to a rise in transactional services from debit and credit cards and ATMs as well as the higher account maintenance fees due to the expansion in our customer base.

We also saw a positive increase in fees generated from our mutual fund management and stock brokered subsidiaries. Finally, insurance brokerage also performed well, in line with the greater business activity in consumer loan origination.

In terms of financial income from treasury operations, we recorded good results thanks to the proactive management of our trading and investment portfolios that benefited from the changes in key market drivers such as higher inflation, interest rates and inflation expectations.

As you can see on the chart to the right, we have superior revenue generation. We outrank all of our peers in terms of net interest margin with a wide gap to our closest competitor. Additionally, we have an impressive evolution of our operating margin, net of risk, as shown on the chart on the bottom right. We surpassed all of the competition and even widen the gap to our main competitors in the last couple of quarters, clearly demonstrating our excellent and consistent business strategy.

Please turn to Slide #16. Loans reached CLP 34 trillion, up 8% in nominal terms from last year but remained flat when compared to the fourth quarter of 2021. Mortgage loans and commercial loan originations have slowed due to the weak economic environment and political uncertainty. Specifically, mortgage loans grew 9% year-on-year and 1% quarter-on-quarter. It's important to note that mortgages are almost completely dominated in the UF. Hence, this growth was fueled by the strong rise that we saw in inflation and not due to origination.

As for commercial loans, what we saw was a slowdown in both the wholesale and SME segments, which in total grew 6% year-on-year and decreased 1% quarter-on-quarter. On a positive tone, consumer loans showed better growth despite the environment, rising 12% year-on-year and 4% quarter-on-quarter. As opposed to mortgages, almost 100% of consumer loans are dominated in pesos. So this rise has been driven by great originations, thanks to reinforced commercial strategy campaigns that have boosted demand for consumer loans within the higher income customer segments.

Please turn to Slide 17. Our superior funding structure has been key in the rising rate cycle, rewarding us with higher asset and liability management margins. First, I'd like to highlight that our funding structure has remained relatively stable despite the strong hikes in the short-term interest rates and its potential impact in demand deposit balances. In fact, percentage of funding from DDAs continued at unprecedented levels, representing 33% of assets, as you can see on the chart on the top left, down slightly from the 36% recorded in the fourth quarter of 2021.

It's also relevant to mention that we lead our peers in terms of demand deposits to loans, benefiting us more from this balance sheet position. And this financing not only provides us with a lower cost of funds, but also supports part of our structural inflation gap. Today, the UF gap in the banking book is in the range of around CLP 7 trillion, which means that for every 100 basis point positive change in inflation, we earn about CLP 75 billion more in net interest income or approximately 20 basis points in NIM.

In addition, over the last years, we have pursued to optimize our funding structure in relation to maturity gaps. As such, we maintain a more stable funding structure than our peers when we compare mortgage funding gap, as shown on the right side of the slide. This has been a result of our consistent strategy aimed at matching longer-term assets with longer-term liabilities such as bonds placed locally and overseas.

All of this should permit us to take advantage of the rising rates more than our peers as seen in the evolution of our net interest margin and operating income. We've also positioned Banco de Chile as the most capitalized amongst our competition, as you can see on the next slide, #18.

Our total loans and Tier 1 capital ratio are significantly above the competition at 17.8% and 13.2%, respectively. These figures are a result of our long-term strategy, which is based on responsible growth that are linked to consistent capital management policies and an adequate risk return relationship.

We are convinced that the strong capitalization is a key factor not only for the sustainability of the bank, but also for the capacity to generate attractive dividends and profitability to our shareholders. This capitalization, together with our superior credit risk ratings and debt placements in both the local and overseas markets, has permitted us to fund our business competitively.

We're optimistic that the strong improvement and leading ESG position, as we discussed earlier in the presentation, will further support growth using alternative funding instruments.

These high capitalization levels also position us well for the implementation of Basel III in Chile that will require higher levels of capital than under Basel I. We are confident that we have sufficient capital to implement smoothly Basel III in our bank.

Please turn to Slide 19. Expected credit losses reached CLP 99 billion in the first quarter of 2022. However, a relevant portion of this figure is due to CLP 70 billion of additional provisions that were established this quarter, in line with the persistent uncertainty of the economic and political environment.

Also, we're aware that the extraordinary low levels of delinquency observed in the loan portfolio are strongly influenced by transitionary factors that mitigate the real deterioration of the fundamentals of the Chilean economy. That said, excluding additional provisions, we only recorded a cost of risk of 0.35%, significantly below our long-term expected level of 1.1%, approximately. This figure was also significantly lower than all of our peers, demonstrating the soundness relative of our portfolio.

Additionally, we continue to exceed our peers in many other risk indicators, as shown on the right of this slide. We have accumulated CLP 610 billion in additional provisions, providing us with a coverage ratio of 4.4x, and we recorded the best delinquency ratio of only 0.87%. We are confident that our conservative strategy should support us in negative economic cycles, but should also assist us in taking advantage of growth opportunities when they appear.

Please turn to Slide 20. Cost control has been a major focus at Banco de Chile. In fact, this is one of the 3 main pillars of our long-term strategy. In this environment, our efficiency and productivity plan and initiatives have consistently been bearing fruit. This quarter, our expenses grew in line with inflation, up 7% year-on-year or flat in real terms. This is consistent with cost that are indexed to inflation. For example, salaries are adjusted at least on May and November of each year and many admin services are priced in UF.

However, similar to other periods, the fastest-growing expense items are those related to IT, in line with the development and infrastructure we have implemented to boost our digital capabilities and automation of our operational processes to improve productivity. As a result, our efficiency ratio posted an impressive level of 34.2%, well below the industry and their peers, as you can see on the charts on the bottom of the slide.

We are determined to continue improving our cost structure and using our resources better to sustain high levels of efficiency. As we mentioned before in this presentation, it's clear that the ratio that we have posted this quarter is highly affected by top line growth. However, we are confident that the incremental gains we have made during the last years should lead to sustainable efficiency improvements compared to the levels we posted before the pandemic.

Please turn to Slide 21. Before moving on to questions, I just want to go quickly over some key takeaways and provide some guidance. We're expecting for 2022 GDP to slow down from last year to around 1.5% and loans in the industry to grow around inflation in nominal terms for this year.

For Banco de Chile, we are focusing our growth on consumer and SME commercial loans, and we aim to pick up market share in these segments. In terms of results, I want to emphasize that we had a very strong bottom line that was obtained by anticipating some market drivers and adjusting our balance sheet accordingly to benefit more from the rise in rates and inflation, but always managing our market and financial risks prudently.

This, together with our commercial activities, credit risk policies and strict cost control, allowed us to post a historical bottom line, exceeding all of our competitors. Along these lines, we expect our NIM to normalize as long as inflation will decline in the future.

In terms of cost of risk, we estimate a level of around 1% to 1.1% this year. And our goal for efficiency is in the range of 38% to 40% for this year. These drivers are consistent for our quarterly return on average equity to slow down to around 20% by the fourth quarter of this year, translating into a cumulative full year level above 20%.

Once again, these figures demonstrate that Banco de Chile is the strongest bank in Chile and a great investment for shareholders.

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

[Operator]

Thank you, Pablo. And apologies, we had a technical issue at the start and the introduction was not heard. We would like to thank you for listening to Banco de Chile's First Quarter 2022 Results Call. If you need a copy of the management financial review, it is available on the company's website.

Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer; Mr. Pablo Mejia, Head of Investor Relations; Daniel Galarce, Head of Financial Control and Capital; and Natalia Villela, Investor Relations Specialist.

Before proceeding to the questions, 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 notes in the company's press release regarding forward-looking statements.

We will now move to the question-and-answer section.

[Operator]

[Operator Instructions] So our first question comes from Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

I guess my question is in terms of the long-term ROE guidance you gave of 16% to 18%. Just to think about how soon you would expect to get there, right? I mean, this year, obviously, you said you'll be above 20%. Do you think you'll get there next year? And to understand it will be mostly a function of inflation coming down? Also kind of curious, you have a very low GDP growth expectation for next year. Do you expect a significant slowdown in loan growth next year? Any concerns about asset quality with GDP decelerating that much? Just to help us think about the trajectory to get back to that 16% to 18% ROE from here.

[Pablo Ricci, executive]

So one of the things what we mentioned is that this year, obviously, we have strong -- we had a high level of inflation, and that was benefiting us substantially in terms of our bottom line and profitability, and also the repricing of our assets and liabilities, which are affected very positively from the increase in interest rates.

So in terms of how long it will take to go back to that long-term ROE, it's still -- we're in a transitional period, where we're still seeing in the next quarters high inflation. But we should start to gradually see a reduction in ROEs in line with that level of inflation. So it's in part inflation-driven, but it will be offset by repricing of the portfolio. So what we're expecting is the first half of the year above 20% ROE and it will trend down to 20% around the end of the year.

For 2023, 2024, it depends on, on the one hand, inflation, which we're still expecting to be high in 2023, which is around 4% or 5% -- remember that every 100 basis points of inflation with the current gap that we have today is about -- we have the gap of -- that generates about CLP 75 billion in net interest income or close to 20 basis points in NIM. So that would be going down from around 8% to around 5% or 4%. So have an impact there in terms of the bottom line.

But we also have the benefit of the higher rates. Remember, if we look back 1 year ago, we were at 0.5% overnight rates. And today, we're expecting to be around the 8% level at year-end. And that should normalize a little bit downwards. But that's also benefitting us. So in the short term, for rates, a change of 100 basis points in rates. Over the year, on average, is about 5 to 10 basis points benefit for us. And once everything reprices, approximately 3 years, everything else equal, it's about 30 basis points. So we do get a benefit from that.

So next year will still be a positive year. So probably it's a transitional period, depending on many other factors, permanent impacts of the economy, employment, risks that could arise. If we're just looking at the top line, it will still be a positive year. We have to see how the economy evolves for the other line items.

[Daer Labarta, analyst]

Great. That's helpful. And then just any color you can provide on -- with that slowdown in GDP growth that you expect for 2023, how that could impact potentially loan growth and asset quality?

[Pablo Ricci, executive]

For the slowdown in GDP, we're seeing around a level of 1.5% for this year. And the elasticity, what we're seeing is closer to 1% and -- or 1x or around that, slightly lower for the industry. For us, what we're seeing is we're very focused in growing in the SME segment in consumer loans, which we feel that -- especially the latter -- will have a better dynamism than other products and services that we offer, especially because of the current uncertainty that we're seeing in Chile.

So there is a slowdown we're expecting with rates. So expect mortgage loans and other uncertainties which is affecting commercial loans. But we do still see positive levels of growth in terms of consumer loans and SME loans with the growth hovering around for the industry of 8% and us capturing market share -- the intention to capture a little bit of market share in those key products.

In terms of risk, we haven't seen any sectors today which is a particular concern, but we're monitoring all the cyclical sectors that do have more volatility during the slower economic times. So we are monitoring, but we haven't seen a sector that is concerning or that we're seeing a pickup in NPLs as of yet. But obviously, we have to take this into consideration with the higher levels of inflation, lower growth and uncertainty here and abroad and still where the COVID crisis isn't over. So this is something that we have to look at. But in terms of risk, we're seeing for this year a level of around 1% and then in the medium term is around the -- remains around the 1.1%, give or take a little.

[Operator]

Our next question comes from Jason Mollin of Scotiabank.

[Jason Mollin, analyst]

My question -- I mean, very robust outlook and seems realistic to expect that as inflation comes down, longer-term ROE will come down. What other risks do you see that could impact medium, longer-term profitability? We are hearing about this deal or this project that some in the government have proposed to eliminate -- I guess, forgive loans or eliminate reporting of past-due loans. How do you think of this? And is this a real risk to the way that the Chilean banking system has been operating?

[Rodrigo Aravena, executive]

This is Rodrigo Aravena. So we are aware of several uncertainties that we are facing now. One of them, of course, coming from the rest of the world -- of course, since the Chilean economy is a very open economy, you know that the trade volume in Chile, for example, represents more than 50% of total GDP. So that's why it's very important to monitor what's going on, for example, in China or the United States economic growth. This is a very important factor for us. The same for the copper price.

Internally, we can say that we have 2 key sources of uncertainty. One of them is related with the evolution of the economy. What we're expecting for this and the next year, I would say, is like a U-shaped trend in economic growth. We're expecting a negative economic growth actually for the second half year, which is consistent with the 1.5% economic growth for this year.

For 2023, we can rule out a negative growth for the overall GDP. Even though our estimate today is around 0.2%, 0.3% for the next year, we know the possibility of a downward bias in this estimate. So basically, for the long run, we have been adjusting -- slightly adjusting the estimate for the potential GDP growth for Chile. Today we expect an economic growth for the long run of around 2%. A couple of years ago, the number was between 2.5% and 3%.

So of course, in an environment where you have a lower capacity of growth for Chile, it would have a negative impact in terms of the potential loan growth for the medium term. Additionally, we are aware of the lower elasticity from the GDP -- sorry, between loans and GDP. In the past, we used to see elasticity of around 2x. Now we think that number is slightly above 1x. So that's why probably around 5%, 6% for the long-run nominal terms would be reasonable in terms of loan growth.

So the economy is 1/3 of uncertainty. One other is evolution, of course, of constitutional convention. As we said in the beginning of the presentation, the result of the exit referendum for the contribution will be a critical -- a key factor to monitor in the future because we can rule out some changes in the framework of the Chilean economy. So that's why it's important to analyze the evolution of that.

So having said that, we know some risks that potentially could reduce the economic growth in the next year, and know that we are bias in terms of the medium-term economic growth which, of course, affects profitability as well. So in one single idea, I would say that there is a downward bias in our estimates for GDP, in employment, et cetera.

With respect to the regulatory risk side, et cetera. As you said, there is a discussion in Chile, which is related with removing some information from debtors in the country. So what we can say today is that the bill is still under discussion in the lower Camara. And actually, yesterday, there was a discussion. This discussion will continue soon during the next few days. In the case that it were approved in the lower house, the discussion will continue in the Senate.

So we don't have enough information as to have a more accurate estimate in terms of the potential impact on profitability, net income, et cetera, for the bank. In terms of the idea of this discussion, we have to say that, in general, we are aware that removing information from the system can generate some negative impact in the economy. So we know that -- there is evidence that the policies in general are based on complete information. So that's why the lack of potential information can generate wrong evaluation of risk, leaving, for example, to overestimate some risk, which can affect, lastly, the financial inclusion in the economy.

So we have to say as well that this initiative in some way is against the objective followed by different industry, policymakers, et cetera, such as the consolidation of information between banking and nonbanking lenders. So it is actually the discussion on the opposite side. So -- but as I said before, it is a risk we have to monitor how it evolves in the future. But we need more information to estimate with more detail what these finance impact in the stores, in the banks, in the industry.

But it is important to keep in mind that the low income segment in Banco de Chile represents a minor part of total loans. So we're not anticipating important changes. But we have to follow the discussion and to monitor the other factors of risk for Chile.

[Operator]

Our next question comes from Yuri Fernandes at JPMorgan.

[Yuri Fernandes, analyst]

Congrats for the 27% ROE, very, very sound. I have a question regarding your earnings sustainability for 2023. I guess, maybe too early. But I see several headwinds, right, like volumes, like weaker GDP, potentially worsening asset quality, inflation. I know it's still very high, but decreasing from 2022. So a headwind for effective tax rate, a headwind for margins. So my question is, what is the likelihood of earnings decreasing next year versus a very strong 2022, especially in the first half. Do you think this is real, like earnings could decrease? Or like the bank could eventually revert additional provisions that I know you have a lot of additional provisions, so maybe that kind of offset like the potentially weaker revenues? So just trying to understand like the trend for the next year if that could be like a weaker kind of EPS given this normalization.

And I have a second question regarding competition. I remember in previous calls, you're saying that mortgages prices, they were very low, and you would be a bit more selective growing that segment. So just checking an update here. How do you see competition in Chile given this kind of lackluster economic environment? Like are you seeing other peers getting a little bit more rational, not yet? Like what is your view for different products here regarding your peers?

[Pablo Ricci, executive]

So for -- again, as we mentioned in the call, the last couple of years have been different years from normal cycles, where we've had very extraordinary events, for example, very low cost of risk, which has been sustained, and we've had high levels of inflation. And that's been generating the very high bottom line. Obviously, the current levels of inflation, the market didn't anticipate this earlier on or at the end of last year for 2022. So really, there are extraordinary levels of income for the bottom line in terms of these revenues.

So for 2023, probably will be more of, again, a transitional year, but will trend more downwards to a more normalized level of our ROE, maybe still depending on the outcomes of risk and all that. It could be still a transitional year, where we can see higher levels of ROE. But it's difficult to see that today.

In terms of additional provisions releasing, we really need to see a long-term view of how the economy evolves. There's still many risks being seen. And it's not a strange scenario that we could see that in that case for 2023. So I think it's reasonable to expect that 2023 is -- should be a year with an ROE that's lower than 2021 because of lower levels of inflation. 2022 -- sorry, not 2021. So we think that this is a transitional period.

In terms of competition in Chile, it's true in Chile there's a lot of competition. It's a competitive market, where we've seen over the years strong competition in different segments, players in the market. What we're seeing is a slowdown in Chile. Probably, there's a lot of uncertainties which need to be resolved before we can see growth pick up again. But there's nothing in particular that we could mention that we're seeing unreasonable in how the market is operating today.

[Operator]

Our next question comes from Carlos Gomez-Lopez at HSBC.

[Carlos Gomez-Lopez, analyst]

Also congratulations on the results. 2 questions. First one is on the payments business. We have seen some of your competitors set up alternatives, Getnet, in particular. Are you planning to start your own network? Or you expect to continue to collaborate with the single one that we had in the past?

And second -- and this may not be a question for you. It's more for your shareholders. Have you had any discussions with Citigroup regarding their long-term investment in the bank? And have they -- I mean they have been selling in other markets? Do they remain committed to Chile? Or should we perhaps think of a change in shareholding in the near or distance future?

[Pablo Ricci, executive]

So in terms of the different payment businesses that are existing, we've been investing a lot in different technologies and digitalization initiative. For example, we just launched a new payment service called Pago Dos, which is a very important payment service and it's very well known in other markets in the world, where you can do simple transfers by just using the telephone number. And we really hope that it catches on to other banks. It's available for everyone. We went into alliance with another important bank in Chile to make this payment system, as we showed in the presentation.

And today, we're comfortable on how we're working. Obviously, everything -- we're analyzing the different opportunities, but there's nothing that we can mention today that will change this perspective relevantly today. If we look at the main player in the market, it's Transbank. We work together with Transbank, and they have most of the volume in the industry. And for us, this -- our agreement -- we've been quite successful over the past. And with the changes that we've seen today, we're seeing a general adequate revenues.

In terms of the second question of Citigroup, what we're seeing is that the -- well, there's 2 parts to this agreement. It's important to mention that they have the investment through LQIF in Banco de Chile, which they've held since a long period ago and Banco de Chile has been a very profitable bank in that portfolio in terms of our profitability here in Chile.

We don't have information today which we can offer regarding their information on how they would continue in Banco de Chile. But this is something that you'd have to, I guess, speak with Citi. But there's nothing that we have or information that we can provide. But it's important to mention that, on one side, you have the investment. On the other side, you have the commercial agreement, which has recently been reapproved, we agreed upon, which aligns all of the commercial activities that we do together with Citi in international activities. So that continues.

[Carlos Gomez-Lopez, analyst]

Okay. And for how long has that agreement been renewed?

[Pablo Ricci, executive]

It's always renewed for a couple of years since its beginning. It's always reviewed and aligns all the initiatives. It's generally around 2 years at each renewal.

[Carlos Gomez-Lopez, analyst]

And on -- sorry, I'm coming back to Transbank. I mean, it has required a capital injection. You are happy to continue to provide capital to maintain your market share -- your capital ratio...

[Pablo Ricci, executive]

Transbank is generating revenues. So Transbank already -- in the past, there was a capital injection, but it's already generating revenues in it's a self-sufficient leader in the market.

[Rodrigo Aravena, executive]

So we don't have more news so far to share on that.

[Pablo Ricci, executive]

Yes.

[Operator]

We have a question from Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

My first question is on loan growth and asset quality. I just wanted to hear from you how you're seeing the evolution of the mortgage portfolio considering the macro expectations? And also what would be your lending appetite in the consumer portfolio? And then my second question is a follow-up on the sustainable ROE. Just want to double check if the sustainable ROE is around 16%, 18%.

And it is interesting that this year is supposed to be a strong year in light of high inflation. You have strong fundamentals in terms of asset quality, cost to risk, giving extra provisions, still economic growth. But when looking to 2023, you are expecting practically no growth. You're seeing negative growth in consumption. Inflation going down from 8% to 4.8%. But on the other hand, you are also saying that interest rates should benefit loan repricing, but also you have higher effective tax rates on low inflation. And also there could be some potential impact on the interchange fees. So I wanted to hear your thoughts and if you think that 2023 could be more challenging than you have previously expected?

[Pablo Ricci, executive]

In terms of asset quality, as I mentioned, what we're seeing is a good level, positive levels of asset quality, but don't align with the cycle. So a very, very low cost of risks that we've seen. There's no segments that we've seen that is particular concerning. But we are monitoring.

In terms of interest rates in Chile, it's important to mention that interest rates are generally fixed interest rates, but in UF -- salaries generally in Chile are indexed to inflation. So we haven't seen any changes in light of that as well.

If you look at other products and services, like you mentioned, consumer loans. Consumer loans also, what we've seen is very low cost of risk and adequate levels of -- actually, very good levels of growth we've seen up to date. Now risk appetite, what we're seeing is industry growing this year around the 8% level. We should -- we're looking to gain in key market segments, which are SME loans and in particular, consumer loans growing slightly above the industry. So we have an upside to grow there, especially in the upper income individuals.

And we've been very strong in growing our customer base through our new -- or relatively new Cuenta FAN, the digital bank account that we have. And also, we just launched a new current account, which is 100% digital as well that we're growing customers there as well. So we've been cross-selling those customers. And through renewed or reinforced marketing campaigns, we've been able to continue growing well in consumer loans.

For next year, we think that it will still be -- it's still uncertain here. We still aren't out of COVID. So there's still a lot of uncertainties, as Rodrigo mentioned in the call as well. So we'd have to see how that pans out. But in our medium-term -- or long-term levels of cost of risk, we're seeing something around the 1.1%, which is very reasonable. We're seeing improvements in NIM. If you look at our net interest margins, we went from 3.9% of last year. We're expecting to be around the 4.7% for this year, give or take a little bit.

For next year, there is some impact in terms of lower inflation. But we have a lot of benefit from the higher rates. We're going from 0.5%, and today we're ending around 8%, right? So for next year, the average level of higher overnight rate is very positive for us. And that's one of the reasons why -- if you look over the history in Chile, the recent history that net interest margins have been low because of the very low rates. So the benefit you get from having 0 cost or low-cost noninterest-bearing deposits. You can't receive that benefit or it's not as profitable or attractive when the rates are very low. So we should have a much better positive operating revenues there as well.

In terms of fees, we're seeing fees this year growing in the low double digits. Very strong fee growth due to the opening of the economy because of less COVID restrictions in Chile. And the interchange fee, what we've seen and what we mentioned is that the interchange fee will be way more than offset, especially the agreements in the cards and how we've managed to manage this product for us versus competitors. In reality, we don't have -- we're going to see very strong card growth this year. Next year, we should continue to see good levels of fees across the board. So we're not seeing an impact on that side as well. Generally, fees grow in line with customers, which is around the 8% -- 6%, 7%, 8% level in general. But this year, we're seeing a stronger growth because of the base -- comparison base.

And finally, for the long-term ROE, it really depends on the permanent impacts in the economy, how loan growth and how -- Chile is -- as you know, its banking sector is a mirror of the economy. So we're expecting that if everything remains similar to how they were, the economic growth and the unemployment levels and rates, we should be able to maintain the historical levels of ROEs that we've maintained adjusted for capital, obviously, around 16% to 18% ROE.

[Rodrigo Aravena, executive]

Let me add just what is the idea about -- relative to the evolution of activities that we are expecting for the future. You're right in terms that the average economic growth in the next year will be lower than this year. However, it's very important to be aware that there will be a negative economic growth in the second half of this year in both on an annual and sequential basis as well.

So my point here is that probably the weakest part of the economic cycle will be in the second half of this year in terms of activity. In fact, we have seen a decline in terms of the level of total consumption in Chile. For example, in the first half -- sorry, in the first quarter of this year, the total retail, e-commerce sector declined by 4.6% on a sequential basis in the first quarter. And probably, the total consumption will continue declining during the second half of this year.

I'm saying this because for the next year, we will likely have an upward trend inside the year. So basically, our forecast for -- our quarterly forecast for the next year is that in the first quarter there will be a negative economic growth on an annual basis, but there will be a recovery in the second half of 2023 in terms of both total activity and consumption as well.

It's very important to keep in mind as well that we're expecting an above trend inflation at least for the next couple of years. So we are not expecting a 3% inflation at least until 2024 in an environment where probably the interest rate of equilibrium of Chile is a bit higher when we compare with previous years. So at the end of the day, this positive trend inside of the year plus a high inflation plus higher equilibrium interest rate plus all the long-term positive impact from all the several initiatives that we've been taking in terms of the cost side, in terms of productivity will support our long-term estimate for ROE, which is between 15% and 18% for the long run.

[Operator]

I'm not seeing any more questions. So I will hand back to Pablo and Rodrigo for closing remarks.

[Pablo Ricci, executive]

Thanks for joining the call today. And we're happy to hold our next conference call with you on the second quarter results. Thank you all very much for your time.

[Operator]

That concludes today's call. Thank you.