Banco de Chile

SGO:CHILE

Earnings Call Transcript 2021-Q2

[Operator]

Good afternoon, everyone, and welcome to Banco de Chile's Second Quarter 2021 Results Conference Call. If you need a copy of the press release issued yesterday, 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; and Daniel Galarce, Head of Financial Control and Capital.

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 notes in the company's press release regarding forward-looking statements.

I will now turn the call over to Mr. Rodrigo Aravena. Please go ahead.

[Rodrigo Aravena, executive]

Good afternoon, everyone. Thanks for attending this conference call today where we will discuss the financial earnings reported by Banco de Chile during the second quarter. As we made in previous calls, we will share presentation divided into 3 parts: first, an analysis of the economic and financial environment; followed by a review of the main advances in our [ year-to-date ] initiatives; and finally, a review of our outstanding results achieved during the period.

I want to start with the macro discussion and then Pablo Mejia, our Head of Investor Relations, will continue with an analysis of the bank.

Please move to Slide #3. Generally, Brazilian economy has had a positive trend, outperforming the expectations held at the beginning of this year. All the charts presented in this slide show the significant improvement of [ serving ] activity and, to a lesser extent, in the labor market. Specifically, as you can see in the figure on the upper left, growth has posted an impressive cash during the year.

In the second quarter, the monthly GDP expanded by 17.4% year-on-year after increasing by 0.3% year-on-year in the previous period. On a broad sense, this positive trend can be attributable to the joint contribution of winning factors: first, very strong economic policies adopted since the beginning of the pandemic, which have positioned Chile as one of the most healthy countries, not only in the region, but also in the world; second, a temporary impact from the 3 parts that withdraw from pension funds, which have increased private consumption; third, the improvement in economic factors such as higher copper prices and the acceleration in key trade partners. I will refer to these factors later in this presentation.

Additionally, it's relevant to be aware that the annual growth rate increased even more due to the weak comparison base from 1 year ago when the activity plummeted more than 40% on a sequential basis. This means that the 2 of these growth rates will not last for a longer period of time. As a consequence of the faster growth, activity has reached its pre-pandemic level. Several figures suggest that GDP has been left by the start in consumption, for example, retail sales and durable goods rose by 61% and 126%, respectively, in June, along in the commerce sector to be 26% above the prepandemic level. On the other hand, services remains subdued since they haven't recovered the pre-COVID levels. Overall, it's worth mentioning that Chile was the first Latin American country to recover all the production lost during the crisis.

In line with the robust growth, the CPI has shown a steady rise, a trend that is reflected in the upper right chart. In June, the Chilean inflation rose to 3.8% year-on-year and all the different core measures have followed a similar price story. The core CPI, which is the index that excludes energy and food prices, rose 3.1% year-on-year, achieving the highest rate since [ 2016 ]. As a result of this trend, the Central Bank began a tightening cycle in the monetary policy meeting held in July when it increased interest rate by 25 basis points to 0.75%. According to the press release of the meeting, further adjustments in the near future are likely.

Prices continue increasing in July since the annual inflation rate rose to 4.5% while the core CPI increased to 3.6%, the highest figure since May 2016. These figures that were released this morning confirmed the material increase in inflationary pressures in the Chilean fund.

In this environment, long-term interest rates have been increasing, as the chart in the bottom left clearly shows. This trend can be explained by several cyclical factors, including the upward trend in global rate, expectations for higher monetary policy rate and inflationary pressures. This is also explained by some structural changes in the Chilean economy such as the increase in supply of bonds due to the higher fiscal deficit, coupled with the decrease in demand for bonds due to the pension fund withdrawal. The new structure of interest rate in Chile also have several impacts for available for sale financial instrument that affects comprehensive income for bank.

Since we've been aware about inflationary risk and the potential impact on interest rates, we have avoided taking risk in our financial portfolio, especially in a value for sales instrument, given its negative impact in the economic value of shareholders' equity. We will go over these aspects in more detail later in this presentation.

The labor market has also posted a positive trend, although at a slower rate. In June, the employment rate fell to 95% following the downward trend that began last year, as the chart in the bottom right shows. The lower employment level is explained by the partial recovery in total payroll, even though it remains below the presenting number, a similar trend can be seen in the labor force. Undoubtedly, the strong capacity of recovery tone by the Chilean economy has been a differentiating factor. That's why I'd like to analyze the key driver that has made possible such a speed of growth.

Please move to Slide #4 to discuss them. Beyond the positive figures that I described in the previous slide, it's essential to identify and understand the critical factors behind this improvement. We can highlight the following 2.

First, is improvement in sanitary conditions. As this chart in the upper left shows, there's been a successful vaccination process as more than 70% of total population has been immunized, exceeding any country in Latin America and becoming a reference globally. Thanks to these advances and the restriction implemented early this year, we've seen a substantial drop in active cases of infection, as you can see in the chart on the other right. In fact, the positivity rate has also fallen to less than 2%, posted in the lowest level since the beginning of the pandemic. Undoubtedly, this improvement is a key piece that allows normalization of mobility and activities in the country.

A second element has been the unprecedented fiscal stimulus. According to fiscal estimates, the government has implemented 9 points of the GDP in this direct transfers, another 9 points in indirect measures, such as capitalization of FOGAPE and the unemployment fund. The magnitude of fiscal stimulus can be seen in the bottom of the chart, which shows the strong pickup of fiscal spending during this year. In fact, total expenditure of the government will probably increase to around 30% this year after growing by 17% in 2020. Given the size of the fiscal stimulus, it's worth mentioning that Chile had a gross debt of 53% of the GDP last year, well below the average global debt seen in the chart on the bottom right. This confirms that [indiscernible] implements has a fiscal response without compromising fiscal sustainability, a situation that's been possible in only a few countries in the world.

Now I'd like to share with you our baseline scenario for this and the next year. Please go to the next slide, #5. Probably, 2021 will be marked by the strong recovery of Chile. We expect the economy to grow by 8.4% after falling by 5.8% last year. Due to this, Chile would be the country with the highest average growth rate between 2020 and 2021, a comparison that the chart of this slide clearly shows. Additionally, as can be seen in the table, GDP growth this year will be driven by a substantial increase in product expansion, followed by a cyclical recovery of investment.

For 2022, we foresee a slower growth due to the expected normalization of the expansionary policies that were implemented during the pandemic. We've [indiscernible] inflation rate of 4.4% at the end of this year due to the strong domestic demand. For the next year, however, we forecast an inflation rate of 3% with an upward [ bias ]. In this environment, we predict that the Chilean Central Bank will continue raising the interest rate to 1.5% and 2.75% by the end of this and the following year.

I want to highlight this section by mentioning a couple of things, which today are more important than ever. One of them is the evolution of the pandemic, especially in terms of the potential impact of new variants. On the local side, the main risk is the evolution of the political scenario. This year, there will be important events, including the presidential and congressional elections in November, the runoff of the presidential race in December and the exit referendum scheduled for mid-year of 2022, where people will decide to approve or reject the proposal of the new constitution. We are now [indiscernible] that an effective development in this area could have an important impact in the economic perspective for Chile.

Before moving to the bank, I'd like to review the main trends in the banking sector. Please move to Slide #6. The evolution of the banking industry is a good reflection of the overall economy in line with the greater dynamism we've seen a recovery in profitability. Although loan growth remains [ subdued ].

Total net income with CLP 154 billion in the second quarter, 4% below the previous quarter, but substantially higher than the same quarter last year. Consequently, profitability reached almost 16%. This positive result was a consequence of the following factors. First, asset quality indicators remain low, particularly in the cost of risk, also a ratio of only 0.8%, well below historical levels. NPLs also remained very low at 1.5%, similar to prior quarters. Despite the positive evolution of the economy, we are aware of some temporary factors affecting these measures, such as the higher disposable income, transfers made by the government in excess of liquidity. Hence, the normalization of these ratios in the future is highly likely once financial aid from the government expire.

On the other hand, we continue seeing mixed loan growth trends. As shown on the chart to the left, total loans during the quarter grew 1.5% driven by strong mortgage loan growth and partially offset by the contraction in consumer lending. The commercial portfolio activity is consistent with the lagged investments and the higher uncertainty of the economy, while consumer loans were affected by the temporary disposable income and the faster withdrawal from pension plans.

Looking forward, risk we will be an important factor to pay attention to mainly those related to the evolution of the economy and changes in the peso environment. Nevertheless, it's worth mentioning the resilience that the industry has shown through the cycles.

After analyzing this improved scenario, I'd like to note that Banco de Chile has continuously improved its competitive position in the country. During the rest of the presentation, Pablo Mejia, our Head of Investor Relations, will share the main achievements and results reported by our banks during the quarter.

[Pablo Ricci, executive]

Thank you, Rodrigo. Please move to Slide #8 to begin our discussion on our main advances in strategic projects. Over the years, Banco de Chile's proven its consistent and long-term strategy has allowed us to post superior profitability for our shareholders. To continue doing so, we continually reinforce 3 key areas in our strategy, which are digital transformation, efficiency and productivity and sustainability. Over the next 2 slides, we'll look at the advances we have made during this quarter with regards to these areas.

Please go to Slide #9, where we highlight some of our advances in digital banking. The pandemic has been an important driver for us in the economy as a whole to increase the use of technology in order to reduce the strain that the crisis has had on us as individuals and to our businesses. We have advanced daily during the pandemic, launching new products that our customers value.

In our corporate segment, we've recently launched a new app for businesses that's been installed in over 44,000 smartphones since February 2021. We are also proud that we are leading the industry in reactivating the economy through the government SME loan guarantee program, Fogape Reactiva with over 20,000 loans provided, and over half of these loans have been originated 100% online.

We also implemented a new feature in our personal banking web page that allows customers to transfer internationally in different currencies. In addition, we successfully implemented new innovations to our payment platforms where we have hundreds of thousands of transactions of customers using their smartphones or smart watches to make purchases at businesses. And we also reinforced this project by entering into an agreement with Transbank, the main acquiring business in Chile, to accept payments using our Mi Pago mobile app on their POS platforms. We are sure that these projects will make a real difference for our customers and strengthen our relationship.

In terms of our advances and our digital account, Cuenta FAN, we continue to see strong growth. We're delighted to share with you that we have over 500,000 new customers and that we have seen that our Cuenta FAN customers are actively using our account, not just opening it because it's free. As we have seen, that has occurred with some competitors. Based on the internal studies, our accounts have substantially higher balances there, anything greater usage levels.

Please turn to Slide 10. A key part of our success has been our customer-centric strategy. We continually seek to strive to improve our operations, and we always keep customer experience in mind when developing new products and services. The results of these ambitions are clearly reflected in many different customer preference indicators, as shown on this slide. We continue to lead the industry in Net Promoter Score, top of mind and bank preference. We also outranked all of our peers in other indicators such as the one shown on the bottom, where customers chose us as the bank with the best security and solvency as well as selecting Banco de Chile as the most transparent and reliable.

I'd like to highlight that all these measures were released by Adimark and Procalidad, which are leading surveying companies in Chile and are considered a representative data of customers from all banks in Chile, reducing potential bias that would appear if we only pooled our own customers. By doing so, we can reaffirm that Banco de Chile definitely has the best customer service and net recommendation in the Chilean banking industry.

By focusing on customer -- by focusing on providing customers first-class experience, we can gain more loyal customers and higher cross-sell ratios. This is especially relevant in the upper income segment where we lead the industry. These customers demand more, but also provide a higher profitability with very low risk. It's also important to mention that through digital evolution, it's easier for customers to switch banks that will be even easier in the future as new advancements develop. For this reason, we must be aware of the changes and provide continuously improvement to give the highest level of customer experience that our clients require.

Please turn to Slide 11. Optimizing and improving our operations is even more relevant today where banking -- where the banking industry faces a challenging environment with rising competitive pressures that can have an impact on profitability. In view of this, we have been persistent in our advancements and optimize our resources, automating processes by leveraging technologies and simplifying procedures. As you can see on the chart on the top, we have seen continuous advancements in total expenses to assets, loans per employee and loans per branches. We are also finishing the implementation of the new service model that includes merging the consumer finance network into Banco de Chile offices, implementing new self-service terminals and adjusting responsibilities of our staff to improve customer experience.

This quarter, we reduced the size of our network by 35 branches or almost 20% year-on-year. In the last 18 months, we have optimized our branch network by 90 branches, reducing the total number of branches to 277, which is lower than our main competitor.

Another relevant change that has accelerated the optimization of our cost with the of the productivity and efficiency division in 2020 and is focused on implementing a cross-enterprise cost management strategy. This area is implementing best market practices throughout the bank to seek incremental savings gained throughout all the procurement value chain. These initiatives are bearing fruit, and we expect these enhancements on how we run our business should lead to efficiency ratio gains in the medium term to around 42%.

Please turn to Slide 12. Our commitment to sustainability is a relevant part of our strategy. On account of our responsibility to our stakeholders, we are reinforcing our efforts to take our bank to another level of sustainability and in turn, increase our long-term value. In this context, during 2021, we developed several initiatives in order to strengthen the relationship with our stakeholders. One of the hardest hit sectors during this pandemic has been small- and medium-sized businesses. We are proud of their permanent commitment to entrepreneurship has allowed us to lead and assist many customers to set the stage for a new cycle of growth, granting more than CLP 1.5 billion in Fogape Reactiva loans since February. Along these lines, in the alliance and digital country foundation, we presented a technology adoption conference for SMEs to support the digitalization of their businesses. We also implemented free financial education courses, donated computers and improved connectivity for hundreds of students. And we launched the inspiring women recognition that reward women that manage projects with positive impacts for the community.

Within actions related to the environment, we launched a sustainable banking kit for new clients that include a biodegradable bags and recycled plastic cards as well as the green leasing products that provide special conditions for financing solar projects and electric cars.

In addition, in order to provide our stakeholders with relevant sustainability information, we adopted for the first time the SASB disclosure framework and it's available for your review on our website within the sustainability section. This is another step taken in order to improve even more the levels of transparency and quality of information available to the market.

Finally, as a result of our commitment to sustainability that has built a solid corporate reputation, we received recognitions from local and international institutions, including The European that recently considered us as the best Bank of the Year, the most Innovative Digital Bank and the Best Bank for Financial Inclusion.

Please turn to Slide 14 to begin our discussion on our financial results. Once again, we posted strong figures this quarter in terms of loan growth and net income, despite the challenging environment that the pandemic has produced. We're pleased by our customer-centric strategies, along with the prudent approach to risk and cost discipline has produced this excellent positive line of CLP 162 billion, which includes additional provisions by CLP 50 billion in the quarter. This translates into a strong return on average equity of 17%, especially when we consider a solid Tier 1 capital ratio, as shown on the chart to the right. Our capital strength undoubtedly allows us to be the bank in the best position to address the base of rescheduled higher capital requirements.

Please turn to Slide 15. Operating revenues continued showing a recovery driven by customer income. This confirms our revenues are generated from a more stable sources of lending and fee-based products, which is a core business of a commercial bank. Along these lines, our financial risks and revenues have remained more stable as our goal is to avoid excess volatility in our bottom line and to reduce the risk and the economic value of our capital base, which is relevant since rates are increasing. Especially, as can be seen in the chart on the left, operating revenues posted sequential growth rate of 3.4% over the first quarter of 2021. This was driven by a 3% rise in customer income generated from fees as well as interest revenues as broken down on the chart on the top right.

Fee income rose, thanks to the better economic activity and an economy that has evolved and successfully adapted to the new normal. Despite that we had new lockdowns in the second quarter of 2021, we saw strong income generation from transactional products, stock brokerage, mutual funds and wholesale fees. It's especially relevant to highlight that we have witnessed consistent improvement in fee income generation since the fourth quarter of 2020, as shown on the chart on the bottom right, posting a 15% increase over the same period last year when we exclude revenues generated from the upfront fee from a joint venture with an international insurance company.

Net interest income also rose this quarter versus the first quarter of 2021 primarily due to the expansion of both, the loan portfolio and noninterest-bearing deposits, the latter rising 11% on a sequential basis.

Before moving on to the next slide, I want to highlight that we are more optimistic as a result of the recent improvements in the sanitary conditions. As the economy continues to open, this should be further reflected in fee income and begin to be reflected in the growth of our portfolio, especially in consumer and commercial loans.

On the following slides, we'll discuss how our portfolio has changed during the quarter and go over the evolution of our asset quality.

Please turn to Slide 16. Total loans reached CLP 32 trillion this quarter, increasing by 1.6% when compared to the prior quarter, equal to 6.4% rise on an annualized basis. Year-on-year, the portfolio has grown 5%. Nonetheless, we saw mixed growth trends this quarter. As you can see on this chart on the right, we're happy to, as I mentioned, that we gained despite the spot, 85 basis points in market share over the last 12 months. We grew actively in commercial loans, although at a slightly lower velocity than in the first quarter. And most of this growth was focused on the SME segment, as you can see on the chart from the bottom, which grew 3% in the quarter. This dynamism continues to be driven primarily by the new government guarantee program that is directed to SMEs and middle market companies.

Year-to-date, we have placed $1.5 billion in loans, and we have the highest market share of 24% in this program. These originations also helped improve our loan spread for commercial loans and has permitted us to reduce our risk through the government guarantee.

As for personal banking loans, we saw an increase of 1.5% quarter-on-quarter. This was driven by mortgages that continued to grow strongly as opposed to consumer loans, which decreased by 1.5% quarter-on-quarter, in line with the industry. We believe that the sluggish consumer figure is still due to still low consumer confidence as well as higher temporary liquidity. However, we think that as a consequence of the recent results of the vaccination campaign, we should begin to see a reversal of this trend and commence a period of gradual growth in consumer loans in the near future.

Please turn to Slide 17. We pride ourselves by providing our customers with the highest quality products and services in the industry. This determination has been key in providing us with low-cost funding base and for driving demand deposit growth. Today, DDAs represent 37% of assets, which is substantially higher than all of our peers. Thanks for the brand positioning and soundness, we have seen a strong increase in demand deposits during the crisis from our customers. This preference to choose our bank as our customers' preferred bank is reinforced in the chart on the bottom left, where you can see the strong rise in average balances per cap versus our peers.

In terms of funding and gapping strategy, we are proud that we are a prudent bank that does not take large risk to generate short-term gain. In line with this, we manage our term gapping appropriately as depicted by the chart on the bottom right. As you can see, bonds fund 89% of our residential mortgage loans, similar to the industry average but quite different to other competitors. This is important, especially in light of the upward trend expected for interest rates, as we mentioned in the beginning of this presentation.

We expect that the interest rates given the economic scenario for Chile continue to rise, and this may have a negative effect for some banks holding significant term spread mismatches, or in other words, those funding long-term exposures in the banking book with short-term liabilities, which reprice faster than assets.

In terms of the capital, we have the strongest Tier 1 capital base of 12.5% with a substantial difference to our peers, as shown on the column. This, together with the excellent credit risk ratings, further assist us in continuing to diversify our funding base through the placement of bonds and growth in DDAs. Our fully loaded Basel III ratio was 16.6% in June 2021 with room to improve as we implement the internal models for credit risk weighted assets that are permitted by the regulation today under some considerations. It's also important to note that some of the regulatory thresholds are not yet in effect, but will -- but we are confident that our capital banks and the optimization of our risk-weighted assets should enable us to successfully overcome this new framework.

Also, we are 1 of the 6 systemically important banks in Chile and in our opinion. And based on the current methodology, we should be subject to a systemic risk buffer of around 1.3% beginning December 2021.

In turn, we are pleased that our strong capital base allows us to be well prepared for the transition to Basel III with no special actions needed to comply with this new standard. Another driver for our bottom line during this crisis has been achieved through our sound policies and prudent-risk approach that focuses on growing responsibly and sustainably.

Please turn to Slide 18. As you can see on the chart on the left, loan loss provisions remained low at CLP 77 billion this quarter, slightly above the level posted the prior quarter. Nevertheless, provisions from risk falls amounted only to CLP 27 billion and additional provisions represented CLP 50 billion during the quarter. This composition, together with our very low NPL ratio, confirms the high quality of our loan book, which resulted once again with a low loan loss provisions ratio of only 0.96% this quarter, well below the average running rate prior to the pandemic.

It's important to note that the CLP 50 billion of additional provisions that we established this quarter allows us to mitigate the transitory of positive effect of the better behavior of overdue loans and provisioning models when taking into account some uncertainties for the long term. The second quarter was highly uncertain for Chile with the rise of COVID cases and mobility restrictions. Nevertheless, the successful vaccination process deployed by the government has reduced cases, and we're confident that we may finally see improved conditions in the following months.

This is an area, if maintained, we can't rule out that we may release additional allowances in the future quarters if the positive evolution of the economy is confirmed, and there is a reduction of uncertainties.

Finally, please take a look at the chart to the right. I think it's important to highlight that our sound policies have permitted us to continue showing attractive results, combined with the best risk position in Chile. During our history, we have been the most profitable bank, especially when adjusted by capital, and we have managed to accumulate CLP 410 billion in additional provisions with a coverage ratio of over 3x. We are, by far, the leader in asset quality. We're confident that when the growth recovers, the solid position should enable us to take the most advantage of that cycle.

Please turn to Slide 19. Total expenses in this quarter dropped by 2% year-on-year and 3.2% quarter-on-quarter, as shown on the chart on the top left. The main drivers for the sequential reduction in personnel expenses are related to lower variable compensation and administration expenses due to a reduction in maintenance of [ projects and ] services, among other general expenses. Through our strict cost management, our efficiency ratio reached 43.6%, well below the level posted last quarter and the level recorded by the industry. To the right of the slide, you can see that total expenses -- that in total expenses, we substantially outperformed our main competition and that we continue to beat our peers in improvement from productivity as shown on the bottom right.

Please turn to Slide 20. It's relevant to understand how the industry operates and generates value for shareholders, which is not the only form of net income but also in comprehensive income. It's essential to review how different market factors and funding strategies affect diverse lines of our balance sheet. And for this reason, we think it's necessary to take a more complete view of the performance of financial institutions and supplement the traditional analysis of net income with the results recorded in comprehensive income, which includes unrealized gains and losses from the fair value of available-for-sale portfolio and derivative for cash flow accounting hedges that are accounted directly against equity. In other words, only part of the bank's treasury strategy is immediately recorded in net income.

As you can see, we, once again, outperformed our peers with the year-to-date comprehensive income figure of CLP 350 billion, equal to a return on average equity ratio of 18%. This is significantly higher than all of our peers, as you can see on the chart on the left and the table on the bottom. It's also important to highlight that losses in OCI increased ROE by reducing shareholders' equity. We believe that it's important to take this into approach when considering analyzing total profitability for shareholders, particularly in the more volatile periods that can increase the risk appetite and impact adversely on shareholders' equity.

A key difference of our business strategy with our main peer is our focus on commercial banking services that deliver solid customer income rather than treasury revenues, which usually involve higher risk. This can be seen on the chart on the right, which clearly shows an important difference in terms of stock of AFS instruments. But despite the potential short-term revenues, you can add more volatility to the bottom line and economic value for shareholders.

Please turn to Slide 21. Before moving on for questions, I want to highlight a few key ideas. First, we're convinced that the successful vaccination program and government initiatives are bearing fruit, which has translated into better figures of activity, employment and loan volumes. We expect that this scenario will generate GDP growth for 2021 of about 8.4% with a level of inflation of 4%.

The better economic activity should permit us to continue posting attractive results with adequate levels of risk. Nevertheless, we think it's reasonable to expect a long-term level of NPLs to loans to be close to 1.1% or 1.2% when the fiscal support programs come to an end. We expect, in terms of cost of risk, to settle at around 1.1% for us in the medium term with a more normalized economic scenario. Due to these relief programs, we expect that loans will grow around 7% for the industry. But we are confident that we should pick up market share in our best case scenario.

Finally, in terms of profitability, we're optimistic that our strong competitive advantages should continue to position us as the best long-term investment for our shareholders with a return on average equity reaching similar levels prior to the pandemic. Obviously, depending on the permanent impact of the crisis on the economy.

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

[Operator]

[Operator Instructions] Our first question comes from Jorge Anderson (sic) Henderson at Santander.

[Jorge Henderson Cubillas, analyst]

It's Jorge Henderson. I have a question regarding asset quality. Your NPL rate deal is great to companies has been increasing -- I mean, just a bit. You had 1.02% as of March. Now you have 1.14%. I just wanted to know that -- to get a little bit more into detail of why was the increase about that? What's happening behind these [ entity ] numbers not because, I think, that the industry actually stay flat for the week or -- we wanted to get some more color on that overall.

[Pablo Ricci, executive]

In general, the asset quality of the loan book is very high, and we've seen very good figures over the quarters with very good payment behavior. And all the segments, including the segments that had loans that were renegotiated, we've seen very low levels of cost of risk and of NPLs in terms of, for example, if we look at the NPLs of customers that had their loans reprogrammed, the 90-over day loan book, it's very low. It's below 1%.

So in general, we've seen a high-quality loan book that can be in certain operations, but that can increase the NPL ratio. But what we think is reasonable is that the NPL operates the NPL ratio. In the medium term, should return to a level of around 1.1%.

Also, if we think of cost of risk, our models are quite sensitive to NPL. So if we exclude the additional provisions, you can see that our cost of risk is very low this quarter. So it's an important factor to take into consideration that the NPL is actually a lag indicator rather than a forward-looking indicator for the bank.

[Rodrigo Aravena, executive]

Yes. And Jorge, this is Rodrigo Aravena here. It's important to be aware about the evolution of the economy in the future in terms of the potential recovery of the labor market, economic growth, but also it's important to pay attention to the evolution of new measures that would be announced by the government in future in terms of more transfers, et cetera. So that's why we've seen -- we have mentioned several times that 2021, several aspects will be a transitional year.

[Operator]

Our next question comes from Yuri Fernandes of JPMorgan Chase.

[Yuri Fernandes, analyst]

I have a question regarding the interchange law. I guess today, on the news that President Pinera has signed. We kind of knew [indiscernible] by the Congress. But what should we expect now? I guess it's about the committee to meet and decide what the cap will be. But if you have any preliminary view here how these -- what are the risks for your key line here coming from the interchange? And if you have no clue, what is the amount of interchange revenues we are making today? Like what percentage or fees are coming from interchange from credit cards?

[Rodrigo Aravena, executive]

Yuri, in several assets, it's too early to have a more accurate estimate in terms of the final impact of new interchange rate. There was a discussion in the Congress, and now there will be a group composed by different actors, different authorities, including the Central Bank and others. So we have to see what will happen in the future in terms of the final decision, in terms of the finance rate. So far, we don't have a new announcement in terms of our business models, et cetera. But of course, we are always analyzing different alternatives in order to continue providing the best service in terms of -- to our customers.

It's very important to analyze, at the end of the day, how will be the final level of that interchange rate in order to take a final decision of new initiatives. But so far, we continue working with the same model in terms of -- continue working with [ Transbank ] -- you know very well.

[Yuri Fernandes, analyst]

Perfect. And what is the amount of fees [ in terms of ] interchange?

[Pablo Ricci, executive]

Sorry. Can you repeat the question, please?

[Yuri Fernandes, analyst]

What is the amount of fees coming from interchange for you? Like, how we should -- what is the amount of revenue coming -- is coming from revenue that is coming from interchange revenues?

[Pablo Ricci, executive]

Total card fees, one of the -- what I can say is total card fees and the bank should be around -- give me just 1 second. As a percentage of income before taxes, it's around -- total card fees, which include credit cards, ATMs, debit cards and expenses related to those card fees, it's about 23% of net income -- sorry, of fees.

[Yuri Fernandes, analyst]

Super clear, Pablo. And if I may, a second question. On your presentation, you already discussed this, and thanks for the detailed explanation on OCI. But regarding available for sale, why do you think there is such a different strategy between you and your main peers regarding available for sale and as a result, the OCI results?

[Pablo Ricci, executive]

In terms of our strategy, Banco de Chile has always been a bank that's very focused on managing the bank with a strong focus on risk return and on managing the bank in terms of focusing the strategy based on the core product, which is loans, loans and then the deposits, fees rather than more treasury activities.

So in more cyclical periods, there's periods where you can be -- some banks can take a more aggressive approach than others. We've always considered that we want to continue growing those core revenues, which is the customer income revenues above the materials we showed in the presentation. Do you want to...

[Rodrigo Aravena, executive]

And basically, our main intention is to continue growing in the core business revenues because it's very important for us to reduce the volatility of our equity value. So that's why we are more focused on continue growing in terms of revenues in terms of net income, basically from loans, from the core business without having more volatility in our net income, in our equity shareholders there.

[Pablo Ricci, executive]

Yes. So -- and I think this is important for -- everything on how we run the business. So we're very focused on the core of the business, which is lending and funding and the size of the funding. We're also focused on maintaining low levels of risk. So trying to maintain a smaller term gapping, not taking large risk also on the funding side. So not funding long-term assets with short-term liabilities. So I think that's a clear difference. So our -- we feel that our strategy is more consistent and generate greater value for our shareholders in the long term, which is [ stable ].

[Rodrigo Aravena, executive]

And which is especially important today considering the upward trend that we've seen in interest rates in the market, which is even more important than ever.

[Yuri Fernandes, analyst]

Got it. But looking to your balance sheet, now it starts to move a little bit more secure for available for sale is still below your peer, right? I guess there was an increase quarter-over-quarter there. Is that a change in strategy? Or is it just using, well, let's move to available for sale and benefit from mark to market in the short term because of higher rates? What is the rationale there? Like are you changing to, basically, say, well, maybe the market is appreciating this market from our competitor, let's try to benefit more? Or this was one event? It was just like a quarterly change on the available for sale this quarter.

[Daniel Ignacio Galarce Toro, executive]

This is Daniel Galarce speaking. Well, basically, we were waiting for a right moment in order to invest in this kind of instruments. Also, our exposures are very, very modest in relation with other competitors and other players in the banking system. So we have -- all of our risk is very, very well controlled. And we are not -- we are not worried about that. And in addition, this kind of investment also give us some important timing in terms of interest rate margin. So we believe that it's a win-win for our shareholders as well in the long run.

[Operator]

We also have a question from Alonso Garcia at Credit Suisse.

[Ricardo Garcia, analyst]

I have 2 questions. My first one is on regulation. I don't know if there's anything else besides the team on interchange fees. If there is anything else worth mentioning on the regulatory pipeline, either coming from the CMF or the current Congress or even coming from the constitutional assembly. And my second question is on sustainable ROE. Year-to-date, you're at 17% in ROE. I think your guidance for the full year was 17.5%, which basically puts you at the same pre-pandemic level of 2019. So I was wondering what level you see a sustainable ROE in the coming years? And where is the potential upside or downside coming from?

[Pablo Ricci, executive]

Okay. So we'll start first with the ROE. So we're still facing certain uncertainties for this year and factors that could affect profitability in the future. We're not sure where the critical areas. For example, for employment, potential growth could evolve and what could be the permanent impacts in Chile. But we're confident that we should return to pre-pandemic levels of ROE in the medium term. For this year, since we have this new higher inflation figure, and for this reason, now we're expecting a higher level of inflation. For 2021, we're optimistic that we can achieve a similar ROE that we posted in the past, which is around 18% for this year.

So I would say, so the inflation, but also the implementation of our strategic projects that allowed us to offset some of the negative forces that we've seen this year. So it's not only the measure of inflation. Obviously, the inflation has helped increase this optimism to have a higher level of ROE for 2021, but it's also the result of everything we've done to offset the negative forces of lower interest rates and still weak unemployment. So we've been very proactive in terms of managing our costs and managing our risk, growing the portfolio where we can and high-quality, lower-risk products such as the SME loans with these FOGAPE guarantees. And obviously, we've been affected a little bit in terms of the mix because still, with all this liquidity in Chile, there's been lower demand than anticipated in terms of consumer lending, for example.

But we have seen positive figures in terms of fee growth as well. So that's also helping achieve this 18%. So for the medium term, we think it depends a little bit on the permanent impacts of the crisis, but we think that we can return to the pre-pandemic ROE levels that we have. And...

[Ricardo Garcia, analyst]

[indiscernible] sorry -- you mentioned...

[Pablo Ricci, executive]

[indiscernible] should be the most profitable bank in Chile.

[Ricardo Garcia, analyst]

Okay. And when you mentioned prepandemic, I mean, you referred to 2019, which was around 17.5%, or previous years where it was closer to the 19%, 20% levels?

[Pablo Ricci, executive]

It really depends on capital. So you have to take into consideration what capital level because if we adjust our capital levels in terms of prior years when we had a smaller Tier 1, obviously, it can be higher, but 17%, 18% is what we're thinking.

[Rodrigo Aravena, executive]

I'd like to reinforce when 1 idea in terms of that. 2021 is not a normal year, right? So basically, we have some factors that have affected the net income, the level of risk. For example, we have extraordinary low level of cost of risk because there's been an excess of liquidity. As I mentioned at the beginning of the presentation, we have more inflationary pressures as well. You know that a normal year for Chile in terms of inflation is 3%. This year, we will likely have an inflation of around 4.5%, 4.4%, 4.5%.

So that's why it's important to identify how important these factors have been for the bottom line of the bank. Looking forward, we have some levels of uncertainty. There is a discussion in terms of the potential impact of these prices. In terms of the potential growth of the economy, it's not clear what will be the level of interest rates in the future, et cetera.

So what we can say now is that when -- between 16% and 18% is reasonable for the long term. This year, as Pablo mentioned, 18% is very reasonable, but we'll see what happened in the future. But so far, a number between 16% and 18% is reasonable.

[Ricardo Garcia, analyst]

Or bearing in mind, I mean coming from the CMF or current discussions in Congress or something at the congressional assembly being discussed?

[Rodrigo Aravena, executive]

Okay. First of all, we are aware that probably this and the next year, we will have a higher level of uncertainty because as I mentioned at the beginning of the presentation, there will be important events where we have to pay special attention and election for a new president or still election for a new Congress, et cetera. Today, there are some discussions for new regulations. One of them, for example, related to fintech, one other with open banking. We are in the process of implementation of Basel III, et cetera. But it's too early to provide a more accurate estimate of the impact of new regulation because most of them are still under discussion. But in any case, we are very confident about our main strength to face a more challenging scenario for the future.

[Operator]

[Operator Instructions] So our next question comes from Sebastian Gallego at CrediCorp.

[Sebastian Gallego, analyst]

I have 3 questions today. The first one, just a follow-up on asset quality. During the presentation, you mentioned a potential room to release provisions going forward given a more optimistic view on the Chilean economy. Could you provide a bit more detail on specific timing on those potential reversion of provisions, also considering your -- that you have the highest coverage ratio today?

Second question is if you could discuss the outlook for customer income and particularly also on NIMs. We have seen much lower NIMs for Banco de Chile compared to 2020 levels even in an environment of higher inflation. So I'm just wondering if there could be structural reasons behind lower NIM, particularly when you compare to your biggest competitor?

And my final question is about capital and potential dividends going forward. You're clearly outpacing peers in terms of capital, in terms of coverage. Can we expect or can the market expect a higher dividend payout ratio going forward?

[Pablo Ricci, executive]

In terms of additional provisions. So as we mentioned in the call, we continued setting additional provisions in the quarter, CLP 50 billion this quarter. It was taken in an environment this quarter where there are several signs -- where there -- there's still a lot of uncertainty remaining, new lockdowns, et cetera. And we are still seeing the poor levels of -- or high levels of contagious events in terms of COVID.

Nevertheless, as we mentioned in the presentation, if we continue to see the strong recovery is permanent and the uncertainties tend to fall, we can't rule out that we would release a portion of these additional allowances in the future. This has to be something that's [ taken at ] the Board of directors, and there's no exact time frame that we can give you today as when we would release these additional provisions. So I think -- do you want to add something?

[Rodrigo Aravena, executive]

Just to clarify in terms of the potential release of this [indiscernible], we don't have a specific date for that. It's still under evaluation. It's a decision that has to be taken by the Board of Directors. So we don't have a specific target, a specific time line, sorry for that.

[Pablo Ricci, executive]

But I think what's important is to see permanent improvements in the economy globally, locally and reduce -- reductions of uncertainty and normalize levels of risk.

[Rodrigo Aravena, executive]

Basically, we'll have information in order to estimate the consolidation of a different trend to take this decision. So that's why we don't have a specific date for the action.

[Pablo Ricci, executive]

In terms of your second question of net interest margins, what we've seen is a period of low growth, where our -- since 2020. The entire industry has been impacted in terms of consumer loans. Higher-margin products have decreased in size, in proportion of the total loan portfolio affecting the spread. Also, the overnight rate affects the funding in terms of our demand deposits. So that has a negative effect of this repricing in the portfolio. And also, I think it's very relevant to take into consideration what we mentioned earlier in terms of risk management. So in terms of risk management, it's not only how the assets move, but also how we decide to fund and manage the risk in our bank.

So again, in terms of OCI, one way that you could increase is by taking large positions and available-for-sale securities that increase your net interest income during this time with very low cost of increases, NII at least, in terms of when you take into consideration the low cost of funding, but it can have a negative impact in terms of equity, but also the term gapping. So we also presented in the slide that we've managed our term gapping during the year in order to maintain our gaps in terms of how we fund our portfolio of the longer-term assets with longer-term liabilities, which is more expensive, but it's lower risk.

So I think those are relevant, as I mentioned. Going into the future, I think it's important to mention that we're the bank has a strongest relationships, the best customer segments in Chile, which could continue outperforming our peers in terms of our key market segments where we want to continue growing in SME loans and upper income individuals, and having a very good funding base for our bank, a diverse funding base locally and abroad in terms of institutional assets for the bond market.

[Rodrigo Aravena, executive]

Yes. To reinforce 1 idea that since we are a commercial bank and since we're expecting a stronger consumption growth in the future, which would translate into a better consumer loans as well, it could have a positive impact as well in the medium term.

Also important to keep in mind that the Central Bank began a [indiscernible] cycle since it began a normalization of the interest rate. So it's very likely that the final picture for the next year will be multiplied by better consumption growth in terms of loans, a higher level of interest rate. Probably, as I said in the beginning of the presentation, there is an upward bias in terms of inflation, which could also have a positive impact in terms of NIM. So that's why we are confident in terms of preserving a robust level of NIM in the future.

[Pablo Ricci, executive]

In terms of the dividend policy, we think that we have an appropriate level of payout ratio based on our best case scenario for the future. Obviously, this can be evaluated. But today, we think it's an appropriate level of payout.

[Operator]

We have no more questions. So I will now hand back to the Banco de Chile team for closing remarks.

[Pablo Ricci, executive]

Thank you for joining the call, and we look forward to speaking with you on our next quarter results. Thanks. Goodbye.

[Daniel Ignacio Galarce Toro, executive]

Thank you, everyone. Goodbye.