Banco de Chile

SGO:CHILE

Earnings Call Analysis

Banco de Chile maintains strong Q2, anticipates stable future.

Banco de Chile showcased its industry leadership with a net income of CLP 324 billion and an ROAE of nearly 25% for Q2 2024, despite challenging economic conditions. Total customer income grew 13% year-on-year, driven by increased loan margins and demand deposits. The loan portfolio rose by 4% with notable growth in consumer and mortgage loans. Efficiency improvements kept expense growth below inflation at 3.2%. Moving forward, Banco de Chile raised its ROE guidance to 21% for 2024, supported by stable interest rates and inflation forecasts, and anticipates continued strong performance relative to peers.

Strong Financial Performance Despite Economic Challenges

Banco de Chile showcased remarkable financial performance in the second quarter of 2024, achieving net income of CLP 324 billion and a return on average equity (ROAE) of 24.6%. This solid performance was accomplished despite a challenging macroeconomic environment, with total expenses rising only 3.2%, below the annual inflation rate. Consequently, the bank's efficiency ratio stood at a robust 55% during this period.

Macroeconomic Context and Business Environment

The Chilean economy exhibited signs of recovery, with GDP growth reaching 2% year-on-year in the first quarter, the highest in two years. This recovery was driven by improved exports and slight increases in total consumption. However, gross investment saw a significant 6.1% contraction. The GDP expanded by 1.6% year-on-year in the second quarter, bolstered by the mining sector, although concerns persisted regarding the investment sector.

Revenue and Loan Portfolio Growth

Banco de Chile's customer income grew 13% year-on-year due to increased income from loans and a better funding base from noninterest-bearing demand deposits. The bank's net interest margin was impressive at 5%, surpassing its competitors. Total loans grew by 4% year-on-year, with mortgage loans up 7.2% and consumer loans expanding 3.4%. Notably, commercial loans returned to growth after four quarters of decline, increasing by 2.3%.

Expected Credit Losses and Asset Quality

Expected credit losses rose 42% year-on-year to CLP 95 billion, primarily due to a comparison base effect and increased provisions in the Wholesale Banking segment. Total nonperforming loans (NPLs) remained stable at 1.5%. The bank maintained a high-quality loan portfolio with a coverage ratio of 2.6x, including additional provisions of CLP 700 billion. Asset quality is expected to stabilize as the economy improves.

Cost Control and Efficiency Initiatives

Operating expenses amounted to CLP 273 billion, a 3.2% increase from the previous year. Personnel expenses rose by 2.7% due to inflation adjustments, while administrative expenses increased by 3.8% due to IT-related improvements. The bank's efficiency ratio was 35.4%, in line with the previous year, thanks to strong cost control measures and ongoing branch optimization plans.

Guidance and Future Outlook

Banco de Chile revised its ROE guidance upward to around 21% for the rest of the year, reflecting positive financial performance and economic trends. The bank expects the Central Bank to maintain an overnight interest rate of 5.5% by the end of 2024, with inflation hovering around 4.3%. The bank also anticipates loan growth of 5.5% for the industry this year, with potential improvements in mortgage and consumer loans driven by stable unemployment rates and positive economic activity.

Digital Transformation and ESG Commitment

The bank continued to enhance its digital banking solutions, integrating new features into its main banking app and implementing digital functionalities for enterprises. Significant progress was also made in ESG initiatives, including the creation of a Sustainable Finance Council, corporate volunteering programs, and the release of the first ESG allocation report. These efforts underscore the bank's commitment to sustainability and responsible banking practices.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, everyone, and welcome to Banco de Chile's Second Quarter 2024 Results Conference Call. If you need a copy of the management financial review, it is available on the company's website. Today with us we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer; Mr. Pablo Mejia, Head of Investor Relations; 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 the 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 go ahead, sir.

[Rodrigo Aravena, executive]

Good afternoon, everyone. Thank you for joining this earnings call, where we will review the financial results achieved by our bank during the second quarter of this year, a period when, once again, our bank demonstrated its unquestionable leadership marked by its strong capacity to generate sustainable and robust results over the time.

The performance of Banco de Chile was even more recognizable, especially considering the several challenges that remain in the macro environment. Some of the main achievements include, we led the industry in net income by posting CLP 324 billion, equivalent to an ROAE of 24.6%. Consequently, the return on equity was 23.6% in the first half of the year. We also continued leading the industry in capitalization by posting a strong 13.8% CET1 capital.

On the efficiency front, we had significant advances in cost control as total expenses grew only 3.2%, below the annual inflation rate. Consequently, the efficiency posted an impressive ratio of 55% in this period.

As usual, we have divided this presentation into 3 main sections. First, we will share our analysis of the business environment and our update on the macro side. Then we will move towards our advances on the 3 pillars. And finally, we will present our financial results in depth.

Please move to Slide #3 to begin our macro analysis. As can be seen in the chart on the left, the Chilean economy continues posting signs of cyclical recovery. In the first quarter, the GDP increased by 2% year-on-year, retained the highest figure in 2 years. This acceleration was explained by the greater dynamism in exports, which expanded by 3.2% year-on-year and were influenced by better terms of trade and positive growth in trade partners of Chile.

Total consumption showed a slight improvement since it increased by 1.2%, posting the first positive year-on-year figure in 2 years. On the opposite, gross investment remained obvious as it contracted by 6.1% year-on-year in that period. Available information from the second quarter suggests the recovery is underway.

I'll go in a sec to the monthly figures. The GDP expanded by 1.6% year-on-year, a trend that was driven by the dynamics in the mining sector. This was reflected in the improvement posted in the trade balance as seen in the chart on the top right, which reached a surplus of $5.5 billion in the second quarter, accumulating $18 billion during the last 12 months, a figure that was influenced by the 20% year-on-year rise in copper exports.

Nevertheless, the continuous fall in capital goods imports and several housing-related indicators revealed that investment remains weak, partially offsetting the improvement in consumption and net exports. The labor market is one of the main pillars behind the incipient recovery in consumption.

As you can see in the chart on the bottom right, unemployment has slightly improved, reaching an 8.3% rate in the second quarter. This figure, which was 20 basis points lower compared to 1 year ago, resulted from the 3.2% year-on-year increase in total employment and the 3% expansion in the labor force. As a result, the participation rate of the economy was 62.1% better than the 60.9% seen 1 year ago, although it remains below the 63.4% observed before the pandemic.

I'd like to turn to our analysis of prices and interest rates. Please go to the next slide, #4. The headline inflation rate continues hovering around the upper band of the Central Bank target as seen in the chart on the left of this slide. Particularly, the annual inflation rate in June was 4.2% year-on-year, higher than 3.7% year-on-year posted in March. This trend has been attributable to higher food prices, which rose to 6.6% year-on-year in June from 3.6% in March, and energy prices, which increased from 6.2% to 11.2% in that period.

On a sequential basis, the CPI increased by 0.7% in the second quarter after rising by 1.6% in the first 3 months, bringing a 2.4% inflation in the first half of this year. The downward trend inflation in the last 12 months has allowed the Central Bank to continue reducing interest rate. In the monetary policy meeting held in June, the board decided to cut the interest rate by 25 basis points from 6% to 5.75%, accumulating a total reduction of 150 basis points since July of 2023, the moment when the Central Bank began the easing cycle.

Chile has been one of the countries with the most aggressive reduction in the interest rate during the last year. In fact, the spread with the upper band of the inflation rate in the United States has narrowed from 575 basis points 1 year ago to only 25 basis points today. This situation has driven a weakening in the Chilean peso in multilateral terms as can be seen in the chart on the bottom right.

Now I'd like to present our business scenario for this year. Please go to the next slide, #5. We anticipate the economy to continue posting signs of cyclical recovery in the short term towards a rate slightly above its potential capacity. Specifically, we foresee an increase in GDP growth from 0.2% in 2023 to 2.4% this year. This expansion will be driven by a solid growth of net exports, which should be positively influenced by external factors such as copper prices and the robust dynamism in several trade partners.

Consumption is also expected to perform better relative to 2023 due to the lower interest rate and higher growth and employment. On the opposite, we think investments will continue in negative territory. Despite the stability in GDP forecast for this year, we have seen a material increase in CPI expectations for this year as a consequence of the announcement of a 57% rise in electricity bills over the following months.

According to the Central Bank, this measure will rise the CPI by 145 basis points over the next 12 months. Due to this, we now expect the CPI to post a 4.3% increase this year -- we projected 3.7% in the previous call -- in an environment where the Central Bank will likely leave the interest rate at 5.5% by the end of 2024.

Moreover, we anticipate CPI to fall to the official target of 3% only by 2026. In the table of this slide, you can see the summary of our estimate, while the chart on the right clearly shows the upward trend in market consensus of both interest rate and inflation.

We acknowledge that our baseline scenario is subject to several important risks. As we mentioned in previous calls, the evolution of the global environment is extremely important for Chile given its deep integration into the rest of the world. As such, it's worth mentioning economic factors, such as the GDP of key partners such as China and the U.S. as well as geopolitical factors, including armed conflict and key elections.

On the local side, it's important to analyze the evolution of inflation, especially considering potential second-round effect after the rise in electricity bills. Finally, monitoring the discussion in the political agenda is also relevant considering there are discussions related to pensions and taxes in an environment marked by several elections.

Before moving to the bank, I'd like to refer to some trends in the banking sector briefly. Please go to Slide #6. The industry reported a net income of CLP 1,346 billion for the second quarter of 2024, translating into a return on average equity of 16%. Compared to the previous year, quarterly net income increased only by 2%, and when compared to the first quarter, grew by 15%.

Total loan volumes remained subdued, posting below trend figures. Loans grew by 3.9% year-on-year in nominal terms due to various factors. Commercial loans expanded by only 2.4% year-on-year nominal, reflecting the decline in total investment over recent quarters. A similar trend was observed in consumer loans that saw a modest 2.7% year-on-year nominal increase, translating to a decline in real terms.

Mortgage loans continued to be a key driver of growth, rising by 6.6% year-on-year nominal. Given this context, we anticipate loans to increase only 5.5% by the end of this year. Regarding delinquency, the weak economic environment has led to a year-on-year worsening in nonperforming loans. But in recent quarters, this has begun to stabilize.

The industry reported a NPL rate of 2.4% this quarter, up from 2.1% in the same period last year, but below the 2.5% recorded in the first quarter of 2024. We anticipate that credit risk will remain a primary concern for the banking industry in the short term until we observe further improvements in the economy.

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

[Pablo Ricci, executive]

Thank you, Rodrigo. I would like to begin with the strategic advances. Please go to Slide #8. We continue achieving solid accomplishments on the deployment of our strategy that focuses on customer satisfaction, efficiency and long-term sustainability, which we implement through 6 key priorities as shown in the center of this slide.

First and most importantly, our target is to be the most profitable bank amongst our peers. Depending on the macro scenario, this means long-term return on average equity should be around 18% in the context of normalized yield curves and inflation within the target range of the Central Bank.

In cost-to-income, we have performed much better than our long-term target, although this has been partly due to our strong top line growth, particularly on the grounds of strengthened customer income. We are confident that we will continue improving our efficiency levels through the current and new productivity initiatives, some of which we will go over later on in the presentation.

In terms of market share, we aim to be the leader in both commercial and consumer loans and demand deposits denominated in local currency. Finally, we continue providing an exceptional experience for our customers and contributing positively to society. Our commitment has consistently resulted in excellent levels of Net Promoter Scores.

Additionally, we are proud that our corporate reputation ranks amongst the top 3 in Chile. These achievements are validated by assessments from reputable and independent external firms.

In the next slide, we'll review some of our main accomplishments in our key strategic areas of Digital Banking, efficiency and ESG. Let me start with Digital Banking. Please move to the next slide. During the second quarter of 2024, we continue to enhance and develop new digital solutions. This quarter, we integrated new features into our main banking app, allowing customers to purchase insurance and open digital accounts directly through the same platform, enriching user experience.

We have also implemented new digital functionalities for enterprises such as mass payments, consolidated investments and the authorization of multi-company signatures in a single view. Moreover, based on customer feedback, we have redesigned the electronic fund transaction experience for enterprises, improving the value offering we deliver in cash management services.

In addition, this week, we announced the launch of B-Pago for the acquiring business. This is a new subsidiary which will enhance the value proposition we provide our business customers, especially in the SME and middle market segments by strengthening and widening the array of services that we offer.

On the efficiency and productivity front, we continued implementing different initiatives to be a fast, timely, secure and digital bank. As part of our optimization plan, we closed 15 branches this quarter, reducing 5% of the total footprint. Today, we have 240 offices across Chile. These changes were facilitated by our ongoing efforts in remote and in-person self-service, process digitalization and digital adoption.

We have also made substantial progress in balancing our resource allocation across branches, particularly within our investment and customer service platforms. Additionally, we achieved significant savings by rationalizing office software licenses while putting efficiency plans in place for some of our subsidiaries, leading to a reduction in their total recurring expenses without affecting operations, and, more importantly, service quality.

Finally, as a consequence of a decrease in interchange rates for credit and debit cards as defined by the Technical Committee, we adjusted our loyalty program accordingly in early 2024. Thus, reducing our fee expenses, but also taking care to minimize the impact of our value proposition to customers.

We have also optimized our telemarketing expenses. For the rest of the year, we will continue with further actions such as shifting marketing efforts to digital channels and continue executing our productivity plans.

In terms of ESG, this quarter, we created a sustainable Finance Council with members from diverse department to leverage our initiatives on this front. As part of our commitment to Chile, we implemented several corporate volunteering programs and financial education activities and partnerships with local institutions. One of them was a program that in alliance with Fundacion Chile has strengthened the educational proposal of 17 establishments, focusing on specialties of accounting, programming, telecommunications and connectivity and networks.

Through these initiatives, over 600 students have been trained and certified in areas of high demand in the labor market. Additionally, we carried out diverse alignment activities to strengthen the connection between our corporate strategy and the cultural values of collaboration and teamwork.

Finally, this month, we released our first ESG allocation report, which presents the evolution of the portfolio corresponding to bonds issued under the ESG framework. This represents another important step in our ESG journey.

Please turn to Slide 11 to begin a discussion on our results. Net income remained robust this quarter, reaching CLP 324 billion, which is equal to a return on average equity of nearly 25%, as shown on the left of the slide. It's worth noting that despite the slight decrease in inflation and lower income from term gapping, this performance closely matches last year's figure of CLP 332 billion, primarily as a result of steady growth in customer income.

Our track record has shown that our strategy and management consistently deliver strong results, not only during positive economic cycles, but also in times of uncertainty and volatility. Compared to our peers, we have consistently outperformed in both net income and return on average equity, as illustrated in the chart to the right. We anticipate maintaining a higher profitability in the near term due to still elevated interest rates and the inflation environment, along with expected stable risk levels.

Please turn to Slide 12. Operating revenues grew 3% year-on-year, reaching CLP 771 billion in the second quarter of 2024. On a sequential basis, operating revenues were relatively flat. This result is very positive, especially if considered that market factors and temporary positive effects that benefited our top line in the last 2 years are returning to normality.

Accordingly, the annual improvement in operating revenues was primarily boosted by strengthened customer income coming from loans and deposits, which enabled us to more than offset the adverse impact of both slightly lower inflation on our net asset exposures to the U.S. and decreased net interest income from the management of interest rate mismatches as a result of the repayment of 2/3 of the FCIC at the beginning of April as expected.

In a few words, the overall improvement of our financial core revenues was reflected by our customer income that grew 13% year-on-year. This performance was the result of a rise of CLP 61 billion in income from loans, margin from time deposits and a better funding base from noninterest-bearing demand deposits. Specifically, our loan book generated greater returns mainly thanks to improved lending spreads and a positive volume growth in consumer loans.

Time deposits also contributed more this quarter as we have been actively managing pricing through our digital transformation strategy and the diverse actions we have taken in the front office operations. Finally, demand deposits grew 5.2% year-on-year, providing us with a higher contribution to our total operating revenues by reducing our cost of funds, given interest rates that continued to be above normal levels.

The chart on the right illustrates our performance relative to our competitors. This quarter, we achieved an impressive 5% net interest margin, surpassing all of our peers. We also maintained a comparable advantage in net fees, margin and total operating income, as depicted in the other chart on this slide.

Our remarkable performance reflects the results of a consistent business strategy and our ability to deliver enhanced value offerings to our premium customer base over time in both lending and non-lending products. This approach has paid off in times of increased uncertainty during the pandemic while adapting to a changing business environment marked by dramatic shifts in market factors that are gradually returning to more normal levels.

As a result, we have been able to maintain a strong track record in customer income regardless of the economic conditions, while wisely weighing market opportunities when they have arisen.

Please turn to Slide 13. Our loan portfolio is strategically balanced across different market sectors. As of the second quarter of 2024, our retail loan portfolio, which is composed of individuals and SMEs, concentrated 65% of loans, and wholesale commercial loans amounted to 35% of the total loan portfolio. Total loans grew 4% year-on-year and 0.8% on a sequential basis.

By product, mortgage loans drove growth, up 7.2% year-on-year, while consumer loans expanded 3.4% in the same period. On a positive note, commercial loans finally grew by 2.3% after posting 4 consecutive quarters of negative expansions. By segment, retail loans have increased 4.4% year-on-year. This growth has been driven by Personal Banking, while commercial loans to SMEs continued to be affected by the weak activity in some economic sectors.

As for mortgage loans, this expansion was primarily driven by the effect of inflation on period-end balances as these are mainly denominated in UF in conjunction with fundamental growth dynamics in the housing market. Nonetheless, this product continues to grow at low levels than in the past due to the rise in long-term interest rates as a consequence of the reduction and the availability of long-term funding given the pension fund withdrawals, along with diverse regulations ranging from further capital requirements for this lending business to other impacts, including caps on prepayment fees, the end of VAT, exemption for construction and increased taxes levied on properties.

In terms of consumer loans, the year-on-year expansion was due to an increase in the origination of installment loans in the first half of 2024 when compared to the same period last year. Credit card loans have also continued increasing thanks to attractive value offerings focused on key segments. It's important to highlight that the installment loan growth has been persistent in terms of loan origination, while credit card loans have leveled off during the last few quarters after booming during the pandemic, given the significant increase in usage rates of electronic payments versus cash.

As per SMEs, commercial loans granted to these customers increased 1.3% when compared to a year earlier. This low level of growth is partly attributable to a high comparison base in 2023 as loan expansion was highly influenced by the state guaranteed FOGAPE Chile assistance program, which ended in December 2023. However, this program was relaunched in 2024, but it has had a lower level of demand.

Additionally, the lagged effects of subdued economic activity in some specific sectors, such as services, commerce, manufacturing, together with still high interest rates, continue to pressure loan originations in this sub-segment.

On the other hand, the Wholesale Banking segment commercial loans returned to growth, expanding 3.4% when compared to June 2023 after decreasing several quarters. This was partly due to an improved performance on our Corporate Banking area that enabled us to more than offset the annual decline in the large companies area.

In part, the improved performance was the result of year-on-year depreciation of the Chilean peso to the dollar of 18% as of June 2024, which boosted trade finance loans in particular. It's worth noting that initiatives implemented to enhance value offerings in some specific lending products such as trade finance, leasing and factoring loans in the wholesale segment, leveraged on both customer knowledge and strengthened digital solutions have supported the overall annual growth.

However, it's also important to highlight that as long as private investment continues to be behind the recovery of other macroeconomic indicators, it's likely to expect subdued growth in this segment. Likewise, further capital requirements on some sectors such as real estate also play a crucial role in the evolution of this segment.

From a concentration standpoint, it's important to note that our commercial loans are well diversified across a wide range of economic sectors, as illustrated in the chart on the bottom right. This diversification mitigates a reliance on any single industry, reducing the potential impact of economic downturns in specific sectors, such as real estate, construction or the current challenges facing the private health industry and the utilities, among others.

For the rest of 2024, we estimate loan growth to recover and post an annual expansion slightly above the industry's average of 5.5%. This is slightly down from our previous expectations, which is in line with the slower than predicted interest rate cuts.

Please turn to Slide #14 to discuss our balance sheet structure. As you can see on this slide, we are returning to a pre-pandemic composition of our balance sheet. In assets, the low interest rate loans for SMEs with government guarantees granted during the pandemic are gradually coming due, while the level of loans to total assets is gradually going back to levels above 70% as a result of the reduction of financial securities used to repay the Central Bank credit line known as FCIC.

On April 1, we repaid 2/3 of this debt, and the remainder of this debt was repaid at the beginning of July. As you can see on the table on the bottom left, even though we repaid this debt to the Central Bank mainly with financial instruments, we kept a high level of liquidity that exceeds significantly the limit set by the regulator. Our liquidity coverage ratio reached 256% as of June 2024, 156 basis points higher than the regulatory limit, and the net stable funding ratio attained a level of 122%, 42 basis points higher than the limit during the same period.

It's also important to note the evolution of our deposits, which is the most important source of funding on our balance sheet, representing 54% of total assets. As you can see on the chart on the top right, we can note that this has also normalized the levels seen prior to the pandemic. We don't foresee significant changes as the composition of deposits is correlated to the changes in the overnight rate, which we assume will be close to these levels in the medium term.

I would also like to highlight the strong drop in the overnight rate has allowed us to reprice our short-term interest-bearing liabilities, primarily composed of time deposits held by customers faster than our assets over the last quarters, which in turn has enabled us to partially offset the decline in extraordinary revenues seen in prior years when benefiting from the FCIC funding.

Bonds is another important source of funding, representing 18% to total liabilities. These funds are primarily used to finance our mortgage portfolio, and new issuances are influenced by the growth of this product. Since long-term interest rates continue higher than prior to the pandemic and housing costs have remained elevated, the mortgage loan portfolio for us and the industry is expanding slower than the level seen in the past. For this reason, it's reasonable to expect bond issuances to increase in line with maturities and the dynamism of mortgage loans.

Finally, on the bottom right is the evolution of our UF GAP compared to inflation. Our position is the result of both a proactive management of asset and liability term mismatches and the structural position in UF that hedges the real value of our shareholders' equity. The management of these positions has successfully positioned the bank appropriately to maximize returns during changes in inflation. Today, our position stands at CLP 8.3 trillion. This means that our sensitivity as of June 2024 to inflation is about CLP 83 billion for a 1% change in inflation.

Please turn to Slide #15. We continue to lead the pack in capitalization among our peers. Our CET1 ratio for this quarter rose from 13.3% in March to 13.8% in June 2024. Over the past few years, we have notably outperformed our main competitors and the industry average in this indicator, as shown in the chart on the bottom left, and we are well above the regulatory limit.

Also, our Basel III ratio rose to 17.5% from 16.9% in the first quarter of 2024 thanks to our strong bottom line. This significantly exceeded our fully loaded requirement of 12.75%, as illustrated in the table on the right. With these capital levels, we comfortably meet the current phase-in and fully-loaded Basel III requirements, including both the countercyclical buffer and the Pillar 2 charge recently defined by local regulators.

Please turn to Slide 16. Expected credit losses reached CLP 95 billion in the second quarter of 2024, up 42% from a year earlier. The year-on-year rise was primarily due to a comparison base effect. Specifically, we released certain wholesale segment provisions on an extraordinary manner during the second quarter 2023 due to specific situations of a group of customers in the real estate, construction and transportation sectors, which resulted in especially low provision expenses for that quarter.

To a lesser extent, this figure includes greater provisions from a slight deterioration of the Wholesale Banking segment due to the deterioration of a few customers belonging to the transportation sector. Additionally, this figure also includes the effect of the expansion of our loan book, which was largely concentrated in the Retail Banking segment as well as an increase in the impairment to financial assets due to higher credit spreads as well as the increased exposures in fixed income instruments issued by U.S. banks this year.

In terms of total NPLs, we posted a level of 1.5%, relatively stable when compared to the previous couple of quarters, as you can see on the chart on the top right. It's also important to highlight that delinquencies in consumer loans have come down from the peak of 2% in the first quarter of 2024 to 1.7% in the second quarter 2024, as you can see on the chart on the bottom right.

On the other hand, commercial and mortgage loans have seen a slight increase in NPLs during the same period, which is a trend seen across the board. Nevertheless, we believe that if the economy continues to improve, NPLs should level off across all products and should also begin to show signs of improvement.

Finally, as shown in the chart on the bottom left, we possess the highest quality of loan portfolio and the best coverage ratio of 2.6x, including additional provisions of CLP 700 billion compared to our competitors. This positions us exceptionally well to manage unexpected risk deterioration or regulatory changes in risk models. In fact, it's important to highlight that the CMF's standard model for provisioning consumer loans has been established to be implemented in January 2025. In the last quarter, we reported that we will use part of our additional provisions to cover this change in model. Our estimates are that this will mitigate the impact of around CLP 66 billion.

Please turn to Slide #17. Regarding our operating expenses for the second quarter, they amounted to CLP 273 billion, decreasing 3.9% when compared to the first quarter of 2024 and an expansion of only 3.2% compared to the same period last year. This increase is mainly due to high inflation with a year-on-year change of 4.1%, impacting most expense lines.

On the chart on the top right side, we can analyze in detail the change in operating expenses between the second quarter of 2023 and the second quarter of 2024. Personnel expenses increased 2.7% primarily due to inflation adjustments. As agreed in existing collective agreements, salaries are adjusted for inflation twice a year. In addition, administrative expenses rose by 3.8%, explained mainly by an increase in IT-related expenses associated with improvements applied to digital infrastructure and internal initiatives that pursue to boost operational efficiency.

Regarding our efficiency ratio, as shown in the chart on the bottom right, we continue to lead our main peers. We achieved an efficiency ratio of 35.4% in the second quarter of 2024, basically in line with the same period last year. We are confident that our strong cost control, branch optimization plans and that our continuous efficiency efforts will allow us to post cost-to-income ratio levels in 2024 close to 37% and help ensure that our long-term efficiency levels continue to be below 42%.

Please turn to Slide 18. Before going to questions, I want to go over a few main ideas presented throughout this presentation. First, inflation and overnight rate expectations for 2024 have risen to 4.3% and 5.5%, respectively, while the GDP forecast remains steady at 2.4% for the year. Despite these economic conditions, our consistent long-term strategy and robust risk culture have enabled us to lead the industry in profitability, operating revenues, asset quality, efficiency and capitalization. This strategic approach positions us to outperform our peers.

Additionally, we're proud to be recognized as one of the top performing banks in Latin America regarding ESG risk according to different ratings. Our commitment to environmental, social and governance standards underscores our dedication to sustainable and responsible banking practices, reinforcing a strong position in the industry.

Thanks for taking the time to listen to this presentation. Now if you have any questions, we'd be glad to answer them.

[Operator]

[Operator Instructions] The first question comes from Mr. Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

My first question will be on your guidance, was revised to the upward in terms of ROE to 21%. So can you elaborate on what changed to have this higher guidance? You mentioned some factors, but I would like to have your full picture. And then how do you think about the earnings or our expectation for the rest of the year? How should we think about next year? And where do you see the medium-term ROE? That will be my first question.

And then second question will be on your new acquiring business. So given that you have already some incumbents with acquiring companies, what do you think will be Banco de Chile's advantage with this new subsidiary against other competitors?

[Pablo Ricci, executive]

Well, we've moved up our guidance to around 21% because of the good results that we've had year-to-date. One of the things that have changed is the macro, which I think Rodrigo would like to take a moment to discuss.

[Rodrigo Aravena, executive]

Yes, perfect. I think that it's very important to be aware that the evolution of the trend in terms of margin, profitability, et cetera, are a perfect reflection of some important trends and drivers of the economy. So having said that, we have to mention that today we have a different scenario for interest rate, for example, given different inflationary pressures, discussions in Chile, and also considering the recent discussion in terms of interest rates in the rest of the world. Today, we have different expectations for the overnight rate for Chile for the end of this year.

So specifically, as we discussed in the Slide #5 of this presentation, today we are expecting a 5.5% interest rate by the end of this year. But in the beginning of this year, we were expecting an interest rate of around 2.5%. It's very likely that the interest rate in Chile will remain about 5% probably until the end of the next year. So this is one important factor.

And also, sorry, we can rule out the possibility that the terminal interest rate in Chile will be higher compared to the levels that we were expecting last year and also in the beginning of this year. So the new scenario for interest rate is an important factor that we have to consider in the new guidance in the expectation for profitability for this in the next year as well.

We have a similar story in terms of inflation. Today, we are expecting an inflation rate between 4% and 4.5% as a consequence of some changes in electricity bill prices in Chile. And also we are just upward adjusting the forecast for CPI. Probably the inflation rate will converge towards the 3% target only by 2026. So this is a second factor supporting the better perspective for profitability in the bank for this in the next year.

And one other important aspect to consider is the slowing of the yield curve -- I mean the difference between the long-term interest rate compared to the short-term interest rate, because today we have different reasons to expect a more steadiness in the yield curve for the future.

So when we consider these 3 factors today, we have different reasons supporting the year to have above trend profitability at least for the short term. And these are the main changes compared to what we had in the beginning of this year. So in terms of numbers, Pablo, can you can provide some more specific figures?

[Pablo Ricci, executive]

So I think, in summary, what Rodrigo was mentioning this affects directly NIMs. So the higher inflation is assisting in our net interest margin. The mix of our loan portfolio, we've grown very well in terms of consumer loans. And also the reduction of the overnight rate. And there's still good levels of -- demand deposits have helped our funding.

So this together with growth in fees, growth -- a good level -- cost control in the operating expenses and good levels of cost of risk leads us to expect a ROE for this year of around 21%. And if we look for future periods, it's reasonable to expect, like Rodrigo said, the terminal interest rates could be higher, inflation could be stickier.

So it's reasonable to expect returning back to the levels or long-term levels of around 18% or maybe higher in terms of where the economy ends in terms of the macro. So it's reasonable. One of the things that we highlight as well as is that our goal is to be the most profitable bank in Chile in terms of return on average capital.

[Ernesto María Gabilondo Márquez, analyst]

And for the acquiring business?

[Rodrigo Aravena, executive]

Okay. So just a couple of ideas. First of all, always it's very important to keep in mind that in our long-term strategy we have defined different pillars. And one of that is related with the customer-centricity approach that we have. So in that environment, we are very proud for having today a stronger value proposition for our customers, where in the short term we're going to be more focused on our business customers, especially those related with the more massive segments, I mean SMEs and middle market companies.

We don't have today a specific target in terms of a specific goal in terms of market share, in terms of sound profitability indicators. But what we can say now is that we aspire to be a very relevant player in the industry in line with -- Banco de Chile has been in different activity segments and products that we have historically and today.

I don't know, Pablo, if you want to add any idea on fees?

[Pablo Ricci, executive]

I think in line with the fees, our expectations for fee growth is to grow in the mid to high single-digits. And one of the main drivers of that is customer growth. So if we look at current account balances, for example, in the last 12 months, current accounts we've been growing 6%. So it's one of the drivers that increased the number of customers in the bank, also quite the fund helps to bring in new customers, which we can cross-sell to other products and services.

Our mutual fund business has been very strong. We've grown at the end of the period versus the same period last year around 50%. On average balances, it's a little bit lower. But that's been very strong, driving fee growth. So all of these initiatives together with the B-Pago will continue to assist in maintaining those mid to high single-digit growth in terms of fees.

[Operator]

Our next question comes from Daer Labarta from Goldman Sachs.

[Daer Labarta, analyst]

My question is on your outlook for loan growth. You mentioned that for this year you're expecting around 5.5% of loan growth. I wanted to know about your expectations for next year. Are you expecting any improvements? If so, from which segments? And then I had a second question, but I can ask later.

[Pablo Ricci, executive]

For the loan growth, the 5.5% is what we're expecting for the industry. So if you look at the year-to-date figures, the industry has been a little bit slower. Every player has been closer -- a little bit lower in terms of loan growth. What we're seeing in the second half of the year maybe in line with the lower interest rates that we've seen throughout the last 12 months. There could be an acceleration, which we think could allow us to have loan growth slightly above the industry that we're expecting is 5.5%.

In which products? What we're seeing is still decent levels of loan growth in mortgage loans, partly driven by inflation. Consumer loans has been growing well, relatively well in the scenario. The unemployment rates continue to be stable. We're expecting the second half of the year to be good in terms of the economy. And that we just believe that consumer loans should probably be around the level of those mid-single digits, around the 6%.

In terms of commercial loans, that's been a little bit weaker. SMEs had been growing closer to the 1% level. Corporate lending has been a little bit weaker than it had been in the past from all the uncertainty that's happened over the last few years. So we have to see how that unwinds at the end of the year, if that comes through to reach these numbers for the industry and for us.

And in the medium term, we think that Chile is a country that has a loan to elasticity of around 1.5x. That's a variable that can change depending on the cycle. But we think that most likely it's around that level, which leads us to believe a level mid to high single-digit growth for loans in the industry, and for us, slightly above that. And important to mention that we want to be leaders in terms of commercial loans and consumer loans in the middle and upper income segment.

[Daer Labarta, analyst]

Perfect. Second question, if I may, is just on efficiency, right? So I saw that you posted efficiency levels of around 36% throughout June. And in the guidance even though you decreased the guidance for efficiency, this year is around 37%. So what would explain the higher growth in expenses versus fee and net interest income growth throughout the rest of the year?

[Pablo Ricci, executive]

Actually, in terms of operating expenses, what we're expecting is pretty stable levels of growth in terms of flattish growth in terms of year-on-year. If you look at the full year figure, we should be pretty close to what we had at the end of the year, and that's what we're expecting for that 37%.

We had a lot of different projects being put in place, optimization of the branch, that work and their resources, new plans in order to improve the productivity throughout the bank, in terms of marketing expenses and in different areas of Banco de Chile. And all of this is helping us control expenses accordingly. And that's why we think versus prior quarters, which we mentioned growth in line with inflation, which is around 4%. And today we're thinking that inflation -- that growth number will be closer to the 0 or slightly above.

[Operator]

Our next question comes from Mr. Yuri Fernandes from JPMorgan.

[Yuri Fernandes, analyst]

I have a quick one on loan growth in elections, like given you have elections in Chile this year. Just trying to understand how should we think. Like local elections, is this good or bad for loan growth? And next year on presidential election, is also this good or bad historically?

And then my second question, I think this is the most classic question for you guys. It's about dividends and excess capital. What should we expect? I know usually you declare in January and February. But I think in Slide 18 that you put in the presentation, it is a pretty shocking one, right? You have higher ROEs. Loan growth is not really accelerating a lot in Chile. So you are accumulating even more capital. So my question is, when should we see a special dividend from you or, I don't know, even M&A? How to think about capital? Or will Banco de Chile just keep accumulating capital from here?

[Rodrigo Aravena, executive]

I'm going to take the first question, then Daniel Galarce is going to take the second one. In terms of the cycle that we have today, you're right, there's going to be different elections in Chile.

This year, in October, there will be elections for mayors in Chile municipal elections, which basically it's extremely important to analyze not only the results in the main cities of Chile, but also in terms of the composition in different city councilors, et cetera, because historically, the results of the election has been a very strong leading indicators of the election -- the presidential and the Congress elections, which will be held next year.

So that's why we are not talking about only about municipal elections, but also we are aware that the result of this election probably will anticipate there some results that we're going to have next year in the Congress election. But having said that, we have to say that Chile today is growing. We are expecting an economic growth of around 2.4% for this year.

I'm saying this because we have to remember that between 2014 -- I mean, during the last 10 years, the average economic growth in Chile has been 1.9%. So I'm saying this because today we are having an expansion above the level that we posted on average in the last 10 years. So that's why we have some green shoots in the economy.

The main challenges for Chile are related with investment, especially in terms of some red tape, in terms of some specific areas like construction and in other areas. But despite this concern, we have a positive view in terms of the evolution of net export consumption, et cetera. But as you said and also as we mentioned as well in the first part of this call, elections and political discussion in Chile is one of the ways that we have to monitor for the short term. In terms of your second question, Daniel Galarce? Daniel?

[Daniel Ignacio Galarce Toro, executive]

This is Daniel Galarce. Regarding dividends, as you said, well, the decision is made in March every year, of course, and the decision is made by our shareholders. We normally talk about in the baseline scenario of about 60% payout dividend in the long run, of course.

And in terms of capital and our dividend distribution, of course, you have to remember that we are still in a process of implementation of Basel III, although some of the uncertainties have dissipated in terms of Basel III as well and the implementation, capital charges, buffer and so on. There are still some things that need to be clear in the future. And given that, we have a capital position with which we are pretty comfortable in order to address all of these challenges in the future in terms of capital.

[Yuri Fernandes, analyst]

Okay. Super clear. So Rodrigo, just on your first one on the elections. Like maybe loan growth will be better not for elections per se, but just a little bit of better economic activity, right? That's kind of the message you are giving.

[Pablo Ricci, executive]

Correct. The economic activity is positive.

[Rodrigo Aravena, executive]

Yes. So in terms of the -- we have a positive view in terms of activity for the future when we compare with the growth that we had seen during the last 10 years. But again, we have to analyze. We have to analyze the result, the composition, the discussion. But when we analyze some more recent trends, et cetera, we have enough reasons to expect still above trend activity for this year and probably for the next year despite some uncertainties on the political area in the short term.

[Operator]

Next question comes from Mr. Andres Soto from Santander.

[Andres Soto, analyst]

I wanted to ask about the additional reserves that you still have on your balance sheet. It's CLP 700 billion. You just mentioned less than 10% of that will be required to cover the additional provisions from the update in the standardized consumer model. So I would like to understand what is your view regarding those? Are you planning to start to release those reserves at some point? Are they still necessary? And what is your view overall of the credit cycle in Chile?

[Pablo Ricci, executive]

Yes, we have a good level of reserves and coverage, CLP 700 billion as you mentioned, well above our peers. Still, as Daniel mentioned and Rodrigo, there's still uncertainties in the market. And we don't have a clear trigger of when we would release additional provisions other than what we mentioned in terms of the consumer loan model, which will be implemented in January of 2025. And it has a level of around CLP 66 billion of cost to implement that rule.

In terms of what will happen with the rest, we can't rule out that in the future a portion of these additional provisions would be reversed if we don't need them. But today, we don't have a trigger for that. It is something that the Board would take into consideration at the monthly Board meeting to implement that, always taking into consideration the evolution of the economy, politics, global factors as well when doing that.

[Andres Soto, analyst]

And regarding the credit cycle and the evolution of asset quality across segments, when we look at the June numbers for the system, it looks like we finally got some level of stability in commercial loans after almost 2 years of continued deterioration. Are you expecting any further deterioration in the consumer segment for the system in the second half of the year? Or are we already at the peak of the deterioration in asset quality?

[Pablo Ricci, executive]

For the system, it's difficult to mention because it's a different loan portfolio, different customers, different aspects. If you think about what the economy is looking like in the future, it's a stronger economy, unemployment is stabilizing. We're seeing a plateau in terms of cost of risk for us, in terms of NPLs. Our customers are in very good shape.

So everything points towards a better beginning. The worst has probably passed for us. We know our portfolio better. And if we look at our figures, we can see that our impaired loan book, for example, consumer loans, is still below the levels that we had prior to the pandemic.

If we look at some of the other products in the product families, it's slightly above. But we have to take into consideration that we've just come through a very high inflation period that has affected household income. The economy is very slow. Some sectors of the economy have had a lot of weakness. So the numbers that we're posting at Banco de Chile are still very good. But we think that in the second half of the year and towards next year things look positive, as Rodrigo was mentioning.

[Rodrigo Aravena, executive]

Yes. Andres, just let me reinforce the importance to monitor 3 key factors. Pablo mentioned some of them. But probably the key word for asset quality in the near term is normalizing, right? Normalizing. Probably the worst part was left behind us, basically because the -- the labor market is normalizing even though the unemployment rate today has been more stable. But it's important to be aware that the total employment is growing, the same for labor force. The real wage bill is positive today as a consequence of the positive trend on the average real wages.

Interest rates, even though the Central Bank maintained interest rate in the last meeting, we're expecting lower rates for the future, which also has a positive impact for disposable income. And the same for inflation. So at the end of the day when we analyze the key macro drivers for asset quality, all of them are consistent with, I believe, for normalization and a more stable asset quality in the future.

[Andres Soto, analyst]

Congratulations on the results.

[Operator]

We see no further questions at this point. We'll pass the line back to the management team for the concluding remarks.

[Pablo Ricci, executive]

Thanks for listening to our call. And we look forward to speaking with you on our next quarter's results. Thanks.

[Operator]

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you and goodbye.