Banco de Chile

SGO:CHILE

Earnings Call Transcript 2019-Q2

[Operator]

Hello, everyone, and welcome to Banco de Chile's 2Q '19 Financial Results Conference Call. If you need a copy of the press release, it is available on the company's website.

Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations; Daniel Galarce, Head of Financial Control; and Cecil Diaz, Investor Relations Specialist.

Before we begin, I would like to remind you that this call is being recorded and that information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements.

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

[Rodrigo Aravena, executive]

Thanks. Good afternoon, everyone, and thanks for participating in this conference call today. It's a pleasure for me to have the opportunity to talk about the main highlights of this quarter for Banco de Chile, key trends observed in the Chilean economy and the recent performance of the local banking industry. After my presentation, Pablo Mejia, our Head of Investor Relations, will provide a deep analysis of the financial result posted by our bank during the second quarter.

Please go to Slide #2 on Banco de Chile highlight for the second quarter '19. The second quarter for Banco de Chile has been impressive in terms of results. We posted an ROE (sic) [ ROAE ] of almost 23%, well above the level recorded last year and the first quarter '19. Our bottom line was also the highest in our history, reaching CLP 192 billion. This achievement has been a result of both solid customer income generation as well as higher noncustomer income, given favorable fees in interest rate and inflation. Due to our current operating income revenues, we were able to show a remarkable efficiency ratio of 43%.

Additionally, it's important to highlight that we have continued to implement new commercial strategies and data solutions for customers. And we are proud to say that it has result in 90% of our customers using online banking at Banco de Chile, and we continue to see important increases in usage rates in mobile banking where nearly 60% of customers are using this digital channel. Finally, we increased our free float this quarter by 60%, reaching a level of 44%.

Please go to Slide #4. Since the second half of 2018, the global economy has had a clear deterioration. As Chile is a country with the highest integration into the global economy, not only in Lat Am but also amongst [ marine ] countries, the evolution of external conditions has accrued some impact on our economy. In the last world economic outlook, the IMF downgraded the estimate for 2019 and 2020 global GDP growth, arguing that the increasing work tensions have been raising the uncertainty, affecting investments and international trade. As you can see in the upper-left chart, there's been a generalized drop in the global industry where several PMI Indexes have fallen even below the threshold of 50 basis points. This evidence suggests that the negative cycle will last for a longer period.

In this environment, most central banks have been moving towards a more expansionary bias in their recent monetary policy meetings since most of them have opened the goal for rate cut before the end of this year. However, it's important to highlight that the Central Bank of Chile has been the only one able to drop the interest rate in Latin America after reducing the rate by 50 basis points to 2.5% in June. Consequently, Chile sees the lowest policy rate in both nominal and real terms in Latin America as can be observed in the other right chart. This decision confirms the strong ability of the Central Bank to implement countercyclical policies, which is extremely important in negative cycle like we have had this year. Undoubtedly, this earlier-than-expected change in monetary policy will contribute to offset the worst global conditions.

This change in monetary policy was supported by both the worsening in global conditions and the better-than-expected local growth. As the bottom left chart shows, the Chilean economy had a sluggish growth in the first quarter in line with the trends observed in most countries. Although part of this disappointing GDP was attributable to temporary factors, such as the heavy rains in several mine zones that reduced the copper production in the first quarter, we also observed a weak expansion in the rest of the economy. The good news, however, has been the slight recovery observed in recent months. Between April and May, for instance, the GDP was up 2.4% year-on-year, which is better than the 1.6% posted in the first quarter. On a sequential basis, by isolating seasonal factors, the economy expanded at annualized rate of 3.1% in May after the null expansion recorded in the previous quarter. Therefore, the Chilean economy is performing better than most of its peers.

This marginal recovery has been explained, in part, by the improvement in the labor market. As the bottom right chart shows, both nominal and real wages are growing slightly faster while the job creation has been supported by [ weight from ] employment greater than self-employment. These factors suggest that the labor market is providing more support to the -- sorry, for domestic demand compensating the negative spillover from the worse economy and declines in domestic confidence. We think that a strong fundamental and other cyclical factors, such as the more expansionary monetary policy, the better dynamic in the labor market and the weaker currency, will lead to better conditions for the future.

Having said that, I would like to talk about our baseline scenario for 2020. Please turn to Slide #5. We think the first quarter bodes the bottom of this negative cycle. As I mentioned before, the economies have shown signs of recovery, which we expect to continue in the future. Specifically, we estimate another economic growth of 3.3% in the second half of this year, which is consistent with an expansion of 2.8% over the whole year. In 2020, we expect GDP to go up by 3.2% as shown in the upper left chart.

There are several factors behind our positive view: first, the lag effect of the interest rate cut applied by the Chilean Central Bank here; second, the positive trends observed in private investments; third, the economy has increased its potential capacity for growth as a consequence of the material increase of immigration to Chile. In fact, the Central Bank of Chile raised the forecast for potential growth from 3.2% to 3.5%.

The inflation rate has remained in the lower part of the Central Bank range, which is between 2% and 4%. In June, the CPI posted a year-on-year increase of 2.5% as a consequence of the 1.2% quarterly change observed in the second quarter. As we have mentioned in previous conference calls, the lower inflation from the below-trend growth has been offset by the weaker Chilean peso. As the bottom left chart shows, we expect the CPI to convert to the 3% target in 2020.

Finally, on monetary policy, we expect the rate cut to continue in the future. Since inflation expectations have been anchored to the long-term policy target of 3% and the economy will likely remain growing as to lower than the long-term rate, the Central Bank has room to continue decreasing the monetary policy rate. Specifically, we see 2 25 basis point rate cuts in the remaining of this year and the beginning of a normalization process late in 2020, if the economy shows convincing signs of recovery. Our interest rate forecast is shown in the bottom right chart in this slide.

Now I would like to briefly discuss the evolution of the Chilean banking industry. Please turn to Slide #7. Despite the below trend economic growth observed since the last year, the banking industry has maintained solid financial result and high profitability level. In the second quarter, the local banking industry posted a net income of CLP 812 billion, which is 42% higher than the same figure of second quarter last year. Therefore, as of June 2019, the total net income was CLP 1,383 billion, representing an 8% increase in comparison to the first semester of 2018 equal to an ROE of 14%. The positive quarterly result posted by the industry were supported by several factors, including increased total revenues due to the effect of higher inflation on the [ total U.S. GAAP shelled ] by most of the Chilean bank, loan growth of 10% year-on-year as of June and these expenses remaining in low levels.

This chart located in the lower part of the slide shows the strong correlation between GDP and loan growth. On average, the elasticity of loans is close to 2x the GDP growth. As we expect the economy to increase its growth rates in the future, it's reasonable to forecast an acceleration in the loan expansion in the coming quarters to levels of almost 9% in nominal terms.

The positive result of the industry was in part explained by the outstanding bottom line posted by Banco de Chile this quarter. Pablo Mejia, our Head of Investor Relations, will analyze our performance in the second quarter as well as the main -- our main strategic initiatives.

[Pablo Ricci, executive]

Thank you, Rodrigo. Please turn to Slide #9. We're proud to present our second quarter 2019 financial results. This quarter, we recorded the highest quarterly net income figure in our history of CLP 192 billion, well above the level recorded in the first quarter of 2019 and the same period last year. As you can see on the chart on the bottom left, we ranked first in terms of net income generation with a wide difference when compared to our peers. The strong result was explained by robust customer and noncustomer income growth, which more than offset higher provisions for loan losses, operating expenses and taxes. In the next slide, we'll go into a deeper review of each one of these concepts.

Please turn to Slide #10. As you can clearly see, operating income this quarter grew strongly at 17.7% over the same period last year, reaching CLP 538 billion, thanks to a superior business strategy that's focused in continuing to penetrate the retail segment and growing selectively the wholesale segment.

On the chart on the left is a breakdown of operating income. Revenues were up due to a large increase in customer income that grew 11.5% year-on-year or CLP 41 billion. This was driven by an expansion in loan volumes as well as higher contribution of demand deposits that benefited our funding costs. Additionally, we recorded a strong increase in fee income of 24.6% over the same period last year. We'll go into greater detail regarding this further on in the presentation.

In terms of noncustomer income, we also had important results, thanks to a spike in inflation that reached 1.22% this quarter and drove this source of revenue up 40.2% or CLP 39 billion. Similarly, the decrease in nominal and real interest rates, following the 50 basis point cut in the reference rate by the Central Bank, also benefited our position in fixed income securities held for trading and AFS securities.

On the chart to the right, you can observe the impact of inflation on NIM. Last quarter, we recorded a NIM of 3.79% with 0% inflation. This quarter, our NIM rose by 75 basis points mainly as a result of higher inflation amounting to 1.2%.

Throughout our history, Banco de Chile's focus has been to promote a strategy of responsible growth in every segment we serve. We believe that this has been a core of our solid track record. As a result, today we have a larger percentage of our portfolio concentrated in low-risk segments, such as high net worth individuals, high-quality SME customers and blue chip wholesale book customers, all of which allow us to lead the industry in operating revenues net of provisions as a percentage of interest-earning assets with a 5.5% level. This figure denotes a wide gap with all of our peers. It's important to mention that every 10 basis points of operating margin translates for us into almost CLP 3 billion of additional revenues on an annual basis.

Please turn to Slide 11. Fees this quarter grew strongly, posting CLP 112 billion, up from CLP 90 billion the same period last year. These were mainly driven from the retail segment products and services. Insurance fees grew significantly, up CLP 9.2 billion or 33% due to a 19% increase in annual written premiums and the first-time recognition of income related to the 15-year joint venture agreement with a prestigious international insurer. Transactional products also had a superb growth during the quarter with card fees growing CLP 5.3 billion, in line with the changes we have made in our loyalty program as well as royalty payments and ATM fees that were up CLP 3.4 billion, thanks to the expansion of our ATM network, given a commercial partnership achieved with an important retail company at the end of 2018. Finally, mutual fund management fees have also grown substantially, up CLP 2.6 billion due to revisions on management fees of certain funds, changes in mix and expansion in assets under management.

Consequently, we have been able to enlarge our leading position in terms of net fees amongst our peers. We consistently rank first with the overall market share of 20.3%. As a percentage of operating revenues, we reached 21.9%, well above our peers as shown on the bottom charts of this slide. This level of results of our premium customer base reflected in our market share in personal banking, current account deposits that normally ranges from 25% to 30% as well as an excellent market share in AUM.

Please turn to Slide 12. Without a doubt, we are the financial institution with the best funding structure in Chile, which remains as one of our most important competitive advantages. The sharp reduction in overnight rate by the Chilean Central Bank in June caught everyone by surprise, and the consensus today is expecting more rate cuts in the coming months. We expect that this will benefit us during the next 3 months as a result of repricing of short-term liabilities and, in the medium term, should gradually see an impact in NII. The bank sensitivity to a reduction of 100 basis points over a 12-month period is negligible. However, in the medium term, more than 3 years, the impact is around 30 basis points in NIM.

As you can see on the chart, demand deposits are a very important source of funding for Banco de Chile, and they represent 26% of total liabilities where more than half of these liabilities come from the retail segment of these deposits.

In terms of market share, thanks to our effective commercial strategies and service quality and our ability to cross-sell and maintain customers that use our bank as their primary bank account, we have maintained our leading position with a stake that hovers around 23%. This market-leading position, together with solid credit risk ratings, has permitted us to post once again the lowest cost of funds in the industry with an average level of 2.3% in the local currency.

Please turn to Slide 13. Total loans this quarter grew by 8.7% year-on-year. The retail segment continues to be the driving force behind these figures, rising 11.1% year-on-year, while wholesale loans only grew by 4.9% during the same period. More importantly, on a quarter-on-quarter basis, our loan portfolio grew 2.3%, which is north of 9.5% annualized growth rate. Both the retail and the wholesale banking segments posted strong growth of 2.3% this quarter versus the immediate prior quarter.

The chart on the right shows the breakdown of loans by segment. In loans to individuals, the main driver for growth was mortgage loans and commercial loans to SME customers that led growth. Both are increasing more than 12% year-on-year. The strong level of mortgage loan growth is due to strong demand of properties together with very attractive rates that have recently become even more appealing to customers due to the prevailing scenario of low long-term interest rates.

On the chart on the bottom left, you can see how originations have sharply increased by 45% over the same period last year in residential mortgage loans. Our excellent performance in SME commercial loans was thanks to our effective commercial strategies that focus on bringing customers closer to the bank as well as new preapproved loan model for these customers. As you can see on the chart on the bottom left, SME commercial loan originations also grew sharply at 12.2% year-on-year. Since SME penetration in Chile is still very low, we expect that the SME book will continue posting attractive growth rates in the medium term.

In terms of our wholesale segment, growth was driven by loans to the middle-market companies, which increased 8.6% year-on-year. The corporate area grew more slowly at 3.6% year-on-year but, when compared to the first quarter 2019, accelerated to 3.6% or 10.8% annualized. Also worth noting is that during the second quarter of 2019, our corporate division managed to close important long-term lending deals that contributed to the quarter-on-quarter growth posted by the segment. Similarly, we expect loan growth in this segment to also show recovery in the coming quarters as soon as investments regain its dynamism.

It's indisputable that a key part of our success in growing the retail loan book has been our focus of continually improving customer experience by providing them with superior products and service channels that they demand. Please turn to Slide #14. The investments we have made in the recent years are permitting us to implement significant transformation in our retail banking service model. Since 2015, we have been developing many IT projects to create the best customer experience for our customers and to improve commercial activities as well as operating efficiency. In 2017, we began to test a pilot service model in 16 branches. Results were very positive, improving sales, customer experience and even job satisfaction. Consequently, we've decided to roll out this program across the entire branch network.

Three key changes of this model are, first, we are continuing to optimize the branch network by combining some Credichile branches into Banco de Chile locations in order to improve productivity and customer experience. This process is taking advantage of our strong brand and permits us to have better economies of scale; second, a significant improvement in our personal banking service model, which is focused on providing tailored services to all segments that we serve. This involves expanding our account manager responsibilities so that they manage both assets and liabilities of our customers. This has been facilitated through our new CRM platform that permit account officers to have a full 360-degree understanding of our clients, thus enhancing cross-sell opportunities in credit and noncredit products and services; third, we are improving several activities at the branch level. We're implementing modern self-service equipment across all of our branch networks. These terminals and ATMs will permit our customers to perform essentially all the functions that today require the assistance of a teller or customer service executive. We have been -- we have also seen employee improvements in customer experience through the use of greeters at these new branches. All of this technological investment will allow us to centralize activities, achieving simpler processes that will free up time of our account managers to carry out more commercial activities, increasing the productivity of our sales force.

Please turn to Slide 15. This quarter, we posted a cost of risk of CLP 67.9 billion. As you can see on the chart on the upper right, we incurred a net credit deterioration of CLP 15.6 billion, which was mainly originated in wholesale and the wholesale segment. Nevertheless, this figure was influenced by very good credit behavior in the second quarter of 2018. We also recorded CLP 6.8 billion higher provision expenses due to higher volume and change in mix towards the retail segment. As mentioned earlier, our growth has been concentrated more in personal and SME banking, which have higher risk than wholesale customers but also have much higher spreads. Lastly, depreciation of the Chilean peso to the U.S. dollar, when compared to the second quarter of 2018, benefited our allowances for loan losses denominated in foreign currencies by CLP 8.2 billion partly offsetting the prior impacts.

In terms of cost of risk, we reached 0.96% this quarter and 1.12% for the full year, completely in line with our guidance. It's important to highlight that we strive to have the best credit risk policies in the industry, and this translates into very stable and low NPL ratios as well as higher coverage ratios. As you can see on the charts -- on the chart on the bottom left, our delinquency ratio compares very favorably to our peers and actually decreased when compared to the first quarter of 2019 and the second quarter of 2018. In terms of coverage, we leave the industry with a level close to 2x while our main competition only has levels of around 1.2x.

Before moving on, I want to remind everyone that in July, we will be implementing the new standard model for provisioning SME loans, which will not only -- which will not have a material effect on our bottom line. Actually, we expect the impact to be much lower than the levels that have been recorded by our peers in the industry.

Please turn to Slide #16 on operating expenses. Total operating expenses increased 9.5% year-on-year. This rise was influenced by several strategic projects, which permit us to improve our cost structure in the coming years. Currently, we have 3 main projects occurring simultaneously at Banco de Chile. First, digital transformation has become one of our main short-term challenges. As a result, we have continued to work diligently to continue implementing new products and service tools and other processes in order to digitally transform Banco de Chile by means of a comprehensive front to back of all processes involved in our operations. Second, as I mentioned, we recently finished a pilot program that tested a new branch model. Throughout the rest of 2019 and 2020, we'll be transforming our branches into this new model. Lastly, we're in the first phases to implement an efficiency program at Banco de Chile. We're currently identifying processes that could be improved and streamlined to allow the bank to maximize returns without affecting customer experience.

The chart on the right shows the breakdown of expenses related to these projects. More than 70% of the additional expenses this quarter were related to these initiatives while only CLP 5.7 billion were related to recurring expenses. It's also important to highlight that recurring expenses grew 0% in real terms. Due to our strong operating revenues, our efficiency ratio improved to 43% this quarter. However, we expect that we should end the year at a level close to 44% to 45% for the full year. In the medium term, when all of our strategic projects have been implemented, we believe that we'll be able to reach a significant improvement in efficiency. As you can see on the chart on the bottom right, which shows a comparison efficiency ratios and expenses amongst different banks, we believe that we still have an important opportunity to improve our cost structure.

Please turn to Slide #17. As is widely known and thanks to a successful track record, our shareholder SAOS or our formal shareholder SAOS that -- with the profits that we generated fully paid off all the debt it owed to the Central Bank of Chile on April 30, 2019. This final payment triggered the dissolution of SM-Chile and SAOS. Registered shareholders of SM-Chile as of May 31, 2019, received Banco de Chile shares increasing their free float from 27.7% to 44.3%. This impacted positively our index in the Santiago Stock Exchange, and we expect that in August, our share will have an important change in the MSCI indexes. Actually, on the local exchange, we're the company with the highest weighting of 11% in the IPSA index. All this translates into increase of 27% in daily trading volumes. We also expect that this will improve our visibility in the market.

Please turn to Slide #18. Before moving on to the Q&A section, I would like to close by emphasizing some of the points we discussed in the presentation and also providing our guidance for the future. As Rodrigo mentioned at the beginning of the presentation, we believe that the Chilean economy will gradually increase its dynamism. Since we expect GDP growth to increase from 2.8% to 3.2% in 2020, we believe there is room for recovery in loan growth to levels close to 9% in nominal terms. In addition, potential increase in inflation to 3% will generate an additional boost in treasury revenues.

We strongly believe that there's space for further improvements and efficiency in addition to the cost [ facility ] we've had, which has been reflecting recurring expenses growing 0% in real terms this quarter. We think the implementation of the projects we're currently working on such as digital transformation, the efficiency program and the implementation of the new branch service model will allow us to sustainably improve the efficiency ratio. We estimate then the medium-term efficiency ratio should improve by nearly 3 percentage points. The cost of risk has remained in line with our guidance, which is between 1% and 1.1%. Given the prudent risk policies, the economic outlook and a healthy loan portfolio, we expect this ratio to remain at current levels for the foreseeable horizon. In this context, we reaffirm our view that Banco de Chile will be able to maintain a sustainable ROE between 18% and 20% in the midterm.

I'd like to end this conference call by highlighting the important increase in the free float, which I mentioned on the prior slide, which occurred after the payment of the subordinated debt. We believe that this will provide us with much more visibility, and hopefully, this will translate into greater trading revenues in the future.

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

[Operator]

[Operator Instructions] Our first question comes from Alonso Garcia with Credit Suisse.

[Ricardo Garcia, analyst]

My first question is regarding fees. I just want to get some more granularity regarding the impact on your fee line from the distribution of insurance with this new agreement that you reached earlier in this year. I just want to know, out of these CLP 9 billion of original income compared to last year, how much really came from this new partnership and how much of that relates to the onetime payment and how much relates to the recurring original income that you will have throughout the life of this contract.

And my second question would be on OpEx. As some of these initiatives that you mentioned on the transformation front are still ongoing and will still be ongoing this year and next, I would like to get more color from you on the sort of total OpEx growth you are expecting for this year and 2020.

[Daniel Ignacio Galarce Toro, executive]

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

[Ricardo Garcia, analyst]

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

[Daniel Ignacio Galarce Toro, executive]

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

[Ricardo Garcia, analyst]

Okay. So CLP 3 billion to CLP 4 billion each month going forward from this [ point ].

[Daniel Ignacio Galarce Toro, executive]

Something like that, something like that. It depends on the implementation.

[Pablo Ricci, executive]

In return -- in regards to the question about expenses, similar to how we showed on the slide, I think it's important to mention that recurring expenses for the year should grow slightly above inflation. The increase that we've seen has been because of those 3 projects that we mentioned. And for the remainder of the year, we expect that there should be a slight decrease in total operating expenses, and this should translate into a better efficiency ratio of around 44% to 45%. We're not expecting a large material effect that would really impact our bottom line. So we still expect that we should have improvements in efficiency ratio for the full year figure to levels of around 44% to 45%.

In 2021, we should have -- sorry, in 2020, we should have levels similar, around 44% to 45%. And in the year 2021, we should -- we're expecting that we should start to see an improvement in efficiency by those 3 percentage points that we were mentioning, to gradually improvement in efficiencies.

[Rodrigo Aravena, executive]

I would like to highlight one thing that we mentioned in the presentation about our main goal of improving the efficiency ratio for the future. So basically, after implementation of these strategic initiatives, we expect to have improvement in the efficiency ratio of around -- about 3 points for the -- in the long run. It's important to keep in mind the -- what we mentioned at Slide 16 in terms of the recurring expenses grew still over [ sustaining ] real terms. And it was important to keep in mind that there will be important amount of investments for the -- in terms of the new branch model with new branch investment with depreciation during the time. So basically, I think that it's very important to keep in mind that there's room to continue improving the efficiencies for the bank.

[Operator]

Our next question comes from Jason Mollin with Scotiabank.

[Jason Mollin, analyst]

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

[Rodrigo Aravena, executive]

Just one second please, Jason.

[Pablo Ricci, executive]

Pablo speaking. In terms of -- for this year, we think it'll be -- this is a transitory event, but we don't think there will be a long-term interest rate levels at these low levels. We believe that the level is closer to 4%.

In terms for our NIM, we think that NIM should be hovering around 4.3%, 4.4% for this year. And Rodrigo's baseline scenario, which he'll mention in greater detail right away, he's expecting a gradual increase in the overnight rate in the coming years.

[Rodrigo Aravena, executive]

Yes. I think it's very important to keep in mind with a long-term rights on -- with a long-term view the fact that the Central Bank improved the estimate of potential GDP growth of Chile from 3.2% to 3.5%, which is consistent with different interest rate for the future. All in all, I think that is very important to consider that the neutral interest rate for Chile -- the overnight interest rate for Chile is around 4%, and therefore, we think that these very low interest rate will be temporary for the Chilean economy.

We understand that we have a below-trend economy growth. We have inflation rate remaining below the Central Bank target, which is consistent with an expansionary multi-policy. However, for the long run, it's reasonable to expect higher interest rate. The neutral interest rate for Chile is around 4%. So in the next, I don't know, 2 or 3 years, perhaps we would have a more neutral interest rate with high inflation rate. So the current interest rate will likely be only temporary. I don't know, Pablo, if you want...

[Operator]

Our next question comes from Sebastián Gallego with Credicorp Capital.

[Sebastian Gallego, analyst]

I have a couple of questions. First, just more color on fees. When you look at the actual financial statements for Banco de Chile, you see that expenses from fees have actually declined compared to the prior year. Can you comment if there are any accounting treatments that have resulted in a decline of expenses from fees? Or is there any other, yes, accounting [ spots ] that you have to mention just to mitigate the effect, the positive effect on all the things that you have mentioned? That's the first question.

Second question comes from the regulatory front. Are you expecting any changes on the regulatory front coming from the provision expense side? Should we expect to observe those?

[Pablo Ricci, executive]

So in terms of fees, in terms of fees, well, there is a one -- or the recognition of the [ Chubb ] that -- of this international insurer that Daniel Galarce mentioned, which is about CLP 4 billion of additional revenues, we also had very good revenues in other line items, especially in transactional products, which are related to the ATMs and credit card business.

And in terms of expenses for these -- fee expenses, there was a reduction, and that's also related to our credit card business. Basically, we adjusted the -- we adjusted our loyalty programs for the credit card business.

In terms of the provisioning model, for SMEs, your second question, the impact for us is actually quite low. What we're expecting to implement in July is around CLP 6 billion, higher cost of risks related to the new provisioning model. And we're not expecting right now of any new changes in terms of provision.

[Sebastian Gallego, analyst]

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

[Pablo Ricci, executive]

It's the -- it's related to the loyalty program. The benefits that customers receive from the loyalty program. Fees of loyalty program were adjusted.

[Operator]

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

[Ernesto María Gabilondo Márquez, analyst]

My first question is a follow-up on expenses. We have seen one of your key competitors with an investment plan for the next 3 years. So why do you think your 3 new projects will be enough to remain competitive? Or why do you think you could be ahead of the industry?

My second question is on market-related revenues. I believe it was kind of high during the quarter. So do you think this could be sustainable for the rest of the year?

And my last question is on your effective tax rate. I believe it was lower than the previous quarter. So what is the normalized level we should expect in the next quarters?

[Pablo Ricci, executive]

Ernesto, can you repeat the second question, please?

[Ernesto María Gabilondo Márquez, analyst]

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

[Pablo Ricci, executive]

Okay. Thanks. In terms of the projects that we're implementing in -- on the cost side, the efficiency -- that will improve efficiency and also improve our commercial activities, we think that this is -- digitalizing the bank has been very important for Banco de Chile, not only this year but over the last 4 or 5 years. We began in 2015 with a variety of projects that you can see on the presentation, which improved the use of information, big data that Banco de Chile has, basically to understand customers better. We implemented a personalized pricing system. We implemented a database for growing our customer base in a much more productive fashion. We also implemented a new preapproved consumer and SME book to also drive sales in that book at lower risk and higher spreads.

And now we've begun adjusting the service model in our branches. So basically, the new service branch model is focused on improving customer experience and by implementing self-service machines that will also reduce operating expenses, improve productivity and, at the same time, also improve its customer experience at the branch. What we've seen is an improvement in operating expenses at the branch level, a higher level of commercial activities of sales. And because we've seen this at the pilot program, we decided to roll this out across the entire branch network.

The other projects in terms of efficiency is the efficiency project. Basically, what we're doing today is identifying, this year 2019, different areas of Banco de Chile where there's room to continue streamlining processes and improving their overall operate of -- the operations of Banco de Chile. And then in the coming years, we'll be implementing these changes across the bank.

With this, I think the digitalization that we've been doing the last 4 or 5 years, this new service model, the improvement of the efficiency at -- this new area that's looking at improving efficiency at Banco de Chile is important steps in order to remain competitive in the industry, not only on the sales side to continue growing and how the customers bank with us but also on reducing costs to provide our shareholders with a high -- these high ROEs.

[Rodrigo Aravena, executive]

I would like to reinforce the idea that, as we mentioned the last slide in the -- of the presentation in terms of the key takeaway, we reconfirm that after the implementation of all these projects, with an equivalent amount of between $300,000, $400 million over the next 3 years, will be enough to maintain our sustainable ROE between 18% and 20% as we mentioned in the last slide of the presentation with a net -- with the best Net Promoter Score and recommendation that we currently have in the industry. So all in all, we are very confident that after the implementation of all these projects, we will remain -- continue being the leader in the industry. I don't know, Daniel, if you want to add.

[Daniel Ignacio Galarce Toro, executive]

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

[Ernesto María Gabilondo Márquez, analyst]

Great. And in terms of your effective tax rate.

[Daniel Ignacio Galarce Toro, executive]

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

[Operator]

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

[Pablo Ricci, executive]

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

[Operator]

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