Banco de Chile

SGO:CHILE

Earnings Call Transcript 2018-Q3

[Operator]

Hello, everyone, and welcome to Banco de Chile's Third Quarter 2018 Financial Results Conference Call. If you need a copy of the press release, it is available on the company's website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations; Mr. Daniel Galarce, Head of Financial Control; and Mr. Cecil Diaz, Investor Relations Specialist.

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

I would now like to turn the conference over to Mr. Rodrigo Aravena. Please, Mr. Aravena, you may proceed.

[Rodrigo Aravena, executive]

Good morning, everyone. Thank you for joining us on our third quarter '18 conference call. It's a pleasure for me to share with you our comments about the main trends observed in the Chilean economy and the banking system during the last quarter. After that, Pablo Mejia, our Head of Investor Relations, will review the financial results of our bank.

Please move to Slide #3. As we have mentioned in previous conference calls, the Chilean economy continues growing, confirming the existence of a positive cycle. GDP has increased 4.4% between January and August, posting the strongest growth since 2012, well above the 1.5% observed last year. The pace of this recovery can be seen in the top-left chart. In this context, Chile has reached one of the fastest rates of expansion in Latin America during this year. It is worth mentioning that Chile has improved its economic growth in spite of some recent opposite forces, such as the decline in copper prices, the slowdown in some trade partners and increasing uncertainty in the global economy. It suggests that the positive cycle of our economy is mostly explained by local factors, with our support in the domestic demand. The upward trend observed in confidence figures is a good example of this.

In the bottom-right chart can be seen the pickup in both consumers and business sentiment indexes remaining in the optimistic tone, which is above the threshold of 50 points.

The economic recovery has been contributing to more inflationary pressures. In the third quarter, for instance, the CPI went up by 0.7% when compared with the previous quarter, raising the annual inflation rate to 3.1% in September. As seen in the top-right chart, the headline CPI has returned to the Central Bank target of 3% after remaining below this number during the last 2 years. Additionally, the core measure, this is CPI excluding food and energy prices, is also picking up, which is consistent with the stronger economy.

In the labor market, however, there have been opposite signs. On the positive side, there's been an improvement in the quality of jobs, since employment growth has been led by salaried jobs. In previous years, there was a drop in private employment, which was partially offset by self-employment and physical jobs. On the other side, there's been a sluggish growth in wages, lifting some doubt regarding the future contribution of private consumption to economic growth. Therefore, it's important to pay special attention to the evolution of the labor market in the future.

Now I would like to talk about our macroeconomic scenario for this year and 2019. Please move to Slide #4. In general, we expect a similar scenario in comparison to what we outlined in previous conference calls. In other words, we expect the GDP to remain growing faster than the potential rate, with inflation hovering around the CPI target and higher interest rate. Specifically, we are forecasting an economic growth of 4% and 3.8% for this and the next year, respectively, led by strong growth investments, as seen on the 2 charts on the bottom of this slide.

The recent evolution of several indicators, such as capital goods imports and business confidence, are still supporting this positive view. In relation to inflation, the weaker Chilean peso and the stronger activity will likely contribute to maintaining the CPI around the current levels. This leads us to suspect that inflation will be close to 3% this and the next year, after posting 2.3% increase last year. Given these macro scenarios, the Central Bank began a tightening cycle this month, when the board raised the interest rate to 2.75% from 2.5%. We expect further adjustment in the policy rate to 3.5% by the end of the next year. It is also likely that the new [ drug ] overnight rate, which is around 4%, will be achieved by 2020.

Now I would like to present the main trends observed in the Chilean banking system. Please move to Slide #6. This quarter, we continue to see a positive trend in demand for loans, similar to what we observed in prior quarters. Total loans picked up by 9% because of a strong acceleration in commercial loans, in line with the better economic environment and higher business confidence.

On the chart on the right, this improvement in commercial lending activity can be clearly seen in net originations in commercial loans. It's important to mention that the recovery of the dynamism of commercial loans has been seen in environments where consumer loans have also increased their rate of growth in the margin, while the velocity of mortgage loans has remained without major changes, showing that this product is more inelastic compared to variables related to economic activity versus other lending products.

As you can see in the graph below, there's an important relationship between GDP growth and the loan cycle. We expect that higher level of GDP will be reflected in greater growth in the industry, as has already been seen in commercial loans. If we consider that the economy should grow around 4% this and the next year and that historical elasticity of loans to GDP is close to 2x, so we expect that real growth will reach around 7% to 8% real in the coming quarters, or around 10% to 11% nominal.

Now I would like to pass the call to Pablo Mejia, Head of Investor Relations, who will review Banco de Chile results for the third quarter.

[Pablo Ricci, executive]

Thank you, Rodrigo. Please flip to Slide #8. Once again, we had another successful quarter in terms of core revenue and business volume growth. On an adjusted basis, we grew our bottom line by 19.2% over the same quarter 1 year ago and maintained a similar level quarter-on-quarter, equal to an ROE of 20%.

On an adjusted basis, we posted CLP 128 billion this quarter. This lower result was due to an increase in loan-loss provisions as a result of an implementation of a new risk group model, nonrecurring effects in operating expenses, and to a lesser extent, a higher effective tax rate that went from 15.4% in the second quarter 2017 to 20.3% in the third quarter of 2018. This rise in income tax expense was due to an increase in the corporate tax rate from the tax reform and the fact that we have accrued sufficient income to provide a large enough dividend to fully repay the remaining balance of the subordinated debt owed to the Chilean Central Bank. And consequently, we are no longer recording a tax benefit related to these payments.

These higher expenditures were partially offset by accelerating growth in both retail and wholesale segments in terms of loans and fees, with strict cost controls and normalization of inflation. It's important to mention that despite these impacts, we're less than 1% below the market leader in the year-to-date bottom line. On the following slides, we'll go into greater detail of these changes.

On the next slide, you can see how our financial results for the quarter have developed. Total operating revenues for this quarter grew to CLP 465 billion, up 15% year-on-year. As you can see on the chart on the left, this growth was led by non-customer income, which posted CLP 99 billion for the quarter due to a normalization of the inflation that went from nearly 0% to 0.7%, or 2.9%, if this figure is annualized, which in turn is completely consistent with the inflation target for the Chilean economy.

Nevertheless, customer income coming from our core business grew strongly at 6% this quarter when compared to the same period last year. This was driven by good performance in both the retail and wholesale banking segments.

The wholesale figures were supported by a more dynamic economy that increased demand for commercial loans, together with an important increase in demand deposits, which grew 12% year-on-year. Additionally, we saw important improvements in fees in this segment, specifically from investment banking.

In terms of retail customer income, the expansion was mainly due to a change in loan mix that is geared towards more profitable products as well as lower cost of funds from our continued improvements in demand deposit balances and solid growth in fees. More specifically, retail fee growth for the segment was driven by mutual funds, distribution deals carried by our securities brokerage and a 24% increase in stock turnover as well as higher insurance brokerage fees.

On the other hand, ATM and checking account administration fees also went up, in line with the strong growth we have achieved in checking account origination. Card fees, however, fell this quarter versus the same quarter last year, due to almost a 4% depreciation of the Chilean peso to the U.S. dollar in the third quarter of 2017 and a 2% depreciation of the Chilean peso in the third quarter of 2018. This affected our loyalty program points. Adjusting for this, card fees would have grown in double digits.

Our net interest margin has remained consistently higher than the local industry, thanks to a good loan mix and superior funding costs. This quarter, we reached 4.4%, 100 basis points higher than the same period in 2017, mainly due to normalization of inflation.

Please turn to Slide #10. The good business environment, coupled with our more positive view of the economy, has permitted us to retake growth in wholesale banking while maintaining a solid expansion in retail banking. As you can see on the chart on the left, total loans this quarter continued to accelerate, growing 6.3% year-on-year, and on a sequential basis, went up 2%, or 8% annualized. In line with our strategy, retail segment continued to support growth, expanding 8.6% year-on-year, while the wholesale segment managed to grow for the first time since the first quarter of 2016, up 2.8% on a 12-month basis. On top of this, we reported for a third quarter in a row, positive quarter-on-quarter growth for this segment. This acceleration is consistent with the improvements seen in private investment this year.

On the retail side, we continue seeing improved growth trends in both personal and SME banking portfolios. Our personal banking portfolio grew 7.6% year-on-year, driven by consumer loans to middle- and upper-income individuals. Total consumer loan origination this quarter reached record levels of CLP 570 billion, 26% higher than last year, as shown on the chart on the right. This was driven by the recent relaunch of the preapproved consumer loan model, which I'll go into further detail on the next slide, and higher consumer demand, which together permitted us to grow 27 basis points in market share year-to-date, the large increase posted by the bank during this year. Additionally, as you can see on the chart on the bottom right, consumer loans, that has continued an upward trend that began by the end of last year.

SME banking also continued its trend from last quarters, growing in double digits of 12.5%. This growth was fostered by the higher demand from customers as well as our positive outlook on the economy that allows us to adjust accordingly our risk-return relationship of these loans.

As mentioned earlier in the presentation, our expectation for 2019 is that the bank industry should post levels of around 10% nominal growth, and our intention is to gain market share in our key focus areas, which are loans to middle- and upper-income individuals and SMEs. We also expect, as long as the demand and business confidence remains positive, that we should be able to gradually retake part of the market share that we lost in wholesale lending in 2019. We plan to do this by continuing to leverage business intelligence, increasing share of wallet and managing customer relationships proactively through comprehensive and sophisticated value offerings, which is especially important in the wholesale segment, where we continue to see high competition.

Please turn to Slide 11. A key element of our business strategy over the past year is summarized on this slide. All of our focus has been on working diligently in preparing the bank for a new digital era in both the back office and the front office. In this new context, we firmly believe that we must provide the same level of customer service that we have offered in the past through excellent relationship managers. But today, that must be done by also using digital solutions. Customers today demand that we know more about them, with less contact, and demand faster delivery times.

As you can see on the chart on the left, we have, amongst other initiatives, focused our back office digital transformation efforts on deeply understanding our customer base and their life cycles by creating new contact channels to provide our products and services. The first main achievement was based on generating a database that was populated with numerous sources of information that included data provided directly from customers and other publicly available sources. This allowed us to better understand who our customers were and what characteristics they have in common, which permitted us to generate new strategies on how to cross-sell.

After this, we began a series of -- of developing a series of tools in order to provide better service for our customers and to attract new ones. This included building a database of over 1 million potential customers, which a large portion of these have been preapproved with products by our credit risk areas. This has been made available to our account managers via an app, accessible remotely, allowing us to increase significantly our productivity of current account origination levels. Also, we are not only increasing the size of our customer base, but we're also bringing customers into the bank who actually use our bank. A new current account customer who enters the bank reaches a similar share of wallet as our historical customers within 3 months.

As you can see on the chart on the right, current account originations have grown to record levels of 19% in the third quarter as compared to the same period last year, an impressive rate of 31% year-to-date. This equals over 7% year-on-year growth or almost 56,000 new accounts, ranking us first, with a large difference once we compare ourselves to all of our peers. We also developed algorithms to identify key events in customers' life cycles to maximize lifetime value and retention. This drove sales of diverse credit and noncredit products as well as helped improve our attrition levels that reached levels of around 6%.

We also generated a personalized pricing system for the retail customers. This platform uses information that we have available from internal and public sources and assesses customers' risk profiles. With this, we can provide more competitive conditions based on the actual risk of customers instead of basing the rate on the segments where the customer is in, as we used to use in the past. Also, this new platform provides more flexibility for account managers to adjust rates to close deals and provide much faster delivery times. Historically, all changes or exceptions had to be approved by a supervisor or manager. This new platform frees up time of our supervisors and managers to work on more value-added activities.

We also implemented a proactive customer relationship management system that allows us to continually monitor customers' behavior in order to trigger alerts if there are signals that may be reducing our share of wallet of a customer. This way, we can be more proactive to fix problems, instead of reactive when customers call to close their account. We also developed a new sales campaign manager that uses data we have acquired and permits us to send out commercial offers to clusters of customers that have similar life events. For example, a customer that purchases an airline ticket probably needs travel insurance. Today, we can target those customers with a travel insurance offer. This has also been very successful and much more effective than sending out mass campaigns to all of our customer base.

We also launched a new advanced preapproved loan model for the consumer book, with successful results. As I mentioned earlier, this new model is very versatile and allows us to quickly adjust our risk appetite and has proven itself to be more accurate than the prior model in determining and limiting risk. Also, more than half of the preapproved loans are taken online through the mobile or the website. That's improving efficiency levels dramatically.

Additionally, we're working on a preapproved commercial loan model for the SMEs, which we are certain will provide strong support for further growth and efficiency in the segment. We expect that this new model will be implemented by early 2019.

And finally, we're in the final stages of completely rolling out our new CRM commercial platform. This system is being built in-house in our innovation center. The most fundamental part of this new platform is that it will be used corporate-wide and has been programmed together with each area of the bank who actually uses the platform. This has been possible by taking advantage of everything -- taking advantage of that everything we have learned of using a previous world-class platform and developing one that takes the best characteristics of that platform and adds better usability to fit our needs.

Our account managers will have access to information regarding customers, which we call the 360-degree view, and will manage the entire pre- and post-sales process for the product. We expect important productivity gains, for example, reduce the time it takes to open a current account from 25 minutes to only 8 minutes, as shown on the chart on this slide. This will free up a huge amount of time of our account managers to do other commercial activities, and that will allow us to continue improving our efficiency.

It's also worth highlighting the importance of our branch network. Despite that we have been optimizing the network by reducing branches, we believe that branches still serve a purpose for our business model and especially because we are a universal bank that attends all segments of Chile. A large number of these branches are located in areas outside of Santiago, and this is precisely where a significant part of GDP is generated, especially in industry, energy, infrastructure, mining and SMEs as well as personal banking customers. Thanks to this network, not only do we have salespeople in regions, but also risk managers that are closer to projects, allowing us to understand risks better. This allows us with -- this provides us a superior local knowledge, which in turn helps maintain and reduce cost of risk as well.

Please turn to Slide #12. Digital transformation in our front office has been concentrated in enhancing customer experience by providing world-class online banking solutions together with our leading mobile app. We strongly believe that mobile banking will continue to increase its relative importance as a distribution channel. As you can see on the charts on the left, online transactions are growing at 26% year-on-year, well above the trend that has been seen at the branch level. The charts on the top right presents how mobile banking today accounts for 55% of total online transactions. Also, today, 84% of our current account customers either use mobile or online banking, up from 80% 1 year ago. And this is clearly the result of an important change of our composition of customers as well. More than 70% of our personal banking customers are younger than 50 years old, and they are considered middle-, upper-income individuals, and our focus is continually increase our customer base, which includes bringing in younger customers into the bank. In fact, customers under the age of 35 years old represent 38% of the total current account clients, and over 60% of the new customers are younger than 35 years old. On the chart on the bottom left, you can see how insurance premiums have also increased, thanks to the launch of our insurance app.

Finally, I think it's important to highlight our superior ratings on mobile banking. The chart on the right shows how we compare to other banks in terms of customer ratings of banking apps on the Apple and Google Play Stores. It's impressive how we rank well above all of our competitors. This leading position has been a result of our admirable innovation centers and technological development unit that have more than 300 people working there, helping to create new ideas and developing world-class apps and other digital channels that customers demand and appreciate.

I am confident that we will continue developing new and exciting banking services through our commitment and resources that we make available to drive innovation at Banco de Chile. And I think it's also very important to mention that a leading company called GfK Adimark and the University of Adolfo Ibáñez just this month recognized Banco de Chile as the most innovative financial company in Chile.

Please move to Slide 13. As everyone is probably aware, we are the bank with the best funding structure in Chile, which is a competitive advantage and important midterm differentiating factor in an environment of rising interest rates like we are seeing today. As Rodrigo mentioned, this month, the Chilean bank -- the Chilean Central Bank began increasing interest rates with a 25 basis point hike. We expect that this will continue over the course of the next 12 months, with an additional 75 basis point increase. In the short term, we should have a moderate impact in the repricing of our liabilities that reprice faster than our assets. However, our strategy over the past few years has been to increase the average maturity of our liabilities from 11 to 22 months, which should limit the minimal short-term impacts of the rise in rates. In the medium term, and as long as the yield curve steepens, we expect to have important benefits in our NIM from positive repricing of our assets and gapping between short and long term. This is particularly important, because we are the bank with the highest market share in demand deposits in the Chilean banking industry, and these hikes should benefit us the most.

As you can see on the slide, DDAs represent 26% of total liabilities, where more than half is from the retail segment, and also represents 32% of total loans, substantially more than all of our main competitors and the average in the banking industry.

Please move to Slide #14 on operating expenses. Total operating expenses increased 7.3% year-on-year, which is mainly due to personnel expenses, as shown on the top-right chart. During the first semester of this year, we successfully completed 3 selective bargaining agreements with our unions. We also began to apply new accounting standards to record the customary bonuses paid to unionized employees at the end of these negotiations. This entails the [ furry-ness ] expense based on a straight-line method over the period of the agreement of 36 months. As a result, we recorded in the third quarter of 2018 recurring higher expenses for this concept of CLP 3.9 billion.

In terms of nonrecurring expenses, we booked CLP 6.9 billion, mainly associated to bonuses paid to non-unionized employees. These bonuses are recorded in the months they are incurred, as they do not qualify to be deferred over the course of the agreement that was signed with the unions. Finally, there was an increase of CLP 3.2 billion mainly related to inflation adjustments on salaries. At the bank, we adjust inflations -- we adjust salary for inflation in May and November of each year.

Before moving on, I wanted to highlight that we are putting an important emphasis on controlling expenses as well as improving the front and back-office processes by implementing new commercial and back-office tools and streamlining procedures. So these improvements of productivity, as shown on chart on the right, has consistently improved, reaching CLP 1.2 million of retail loans per employee, almost 11% better than last year, and reaching an efficiency level of 45.5% this quarter. We are confident that we can continue improving this level of efficiency through effective cost-management strategies and by delivering superior top line growth.

Please move to Slide #15. Loan loss provisions this quarter reached CLP 95.3 billion, equal to a ratio of 1.43%. This higher level of cost of risk is chiefly due to a onetime charge related to the implementation of a new group-based provision model of approximately CLP 39 billion, mainly affecting the consumer loans, and also, the acceleration in growth that we have been experiencing. This was partially offset by a good performance in our wholesale book. It's important to mention that the provision charge for the new model does not reflect deterioration in the portfolio. It takes a prudent risk approach that includes new factors, which we have translated into higher -- into a higher conservative coverage ratio. Additionally, NPLs remain flat year-on-year and decreased quarter-on-quarter, confirming the quality of our portfolio. Adjusting for this effect, our loan-loss provision ratio would have reached 0.84%, in line with the prior quarters. It's also important to reiterate that our long-term consistent strategy is based on prudent risk management policies that ensure the sustainability of our business for our stakeholders. This undoubtedly has been one of the main drivers for success and has differentiated us significantly from our competitors.

Please turn to Slide #16. We're very excited to highlight that as of July, we have accrued sufficient net income to fully repay the subordinated debt that one of our shareholders maintains with the Central Bank from the financial crisis of the '80s. This final installment should take place at the end of April 2019. And beginning May 2, SM-Chile shares will no longer trade on the stock market. Registered stockholders of SM-Chile A, B and D series will receive approximately 3.4 Banco de Chile shares, while SM-Chile E stockholders will receive 1 Banco de Chile share for each of their respective shares of SM-Chile. Once this occurs, our free float will increase from 27.7% to approximately 44%, and our stockholder structure will become simpler, with LQIF holding directly around 51.2% in Banco de Chile; Ergas Group, which has been a shareholder since the merger of Banco de Chile and Banco Edwards, as of September, is holding 4.5%; and the rest will be held in free float. It's also important to mention that last week, we made changes to our ADR program. And on November 15, our ratio of local shares to ADRs will change from 600 to 200. This was done to align our ADR price with other banks' share prices, and this could also help improve trading volumes.

Please turn to Slide 17 for highlights. We're pleased with our results this quarter. Despite that our bottom line was below levels that we have seen in prior quarters due to the onetime provision charge related to the implementation of the new group-based risk models, we have made important advances across all business lines. For our second quarter -- for a third quarter in a row, our wholesale segment has posted positive growth. This, together with strong figures in the retail segment, has permitted us to report a 6.3% increase in total loans. Consumer loan origination was the highest in our history, up 26% year-on-year, and retail income was dynamic, thanks to healthy fee growth from our subsidiaries and also to robust current account origination that drove current account administration fees.

Finally, through effective cost management strategies, we reached 45.5% in efficiency, despite the higher-than-regular costs associated with the collective bargaining agreement.

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

[Operator]

[Operator Instructions] The first question today comes from Neha Agarwala with HSBC.

[Neha Agarwala, analyst]

My first question is on the economic outlook. What is your expectation in terms of the economic growth for next year? And for the loan growth, do you expect to grow below the system or in line with the system? And my second question is on your consumer division. We saw that you made some adjustments to your consumer division and closed some branches in Credichile. So what is your strategy to cater to that segment?

[Rodrigo Aravena, executive]

Neha, this is Rodrigo Aravena. With respect to the economic scenario for the next year, basically, what we are expecting is a positive cycle, with an economic growth of around 4% in average between this and the next year. It's very important to highlight that we still think that the driver for this positive cycle will be the private investment, which is good news in terms of commercial loans, in terms of private investment, taxation, et cetera, et cetera. And additionally, it is also consistent with a stronger labor market. In that regard, what we have seen is some important improvements in terms of the breakdown of the job creation since the salaried jobs has been growing faster in comparison to previous years, where the physical employment and the self-employment was the main driver. Additionally, it's very important to take into consideration that in this positive cycle, we expect that the inflation to remain nearly 3%, with higher interest rate. So in other words, the key difference between this and the next year will be the upward trend in terms of interest rate. Now Pablo is talking about the banking system.

[Pablo Ricci, executive]

For the banking system, what we're expecting is for 2019 to grow above the average of the industry. We're expecting a level of around 10% for nominal growth in the industry. And where we're looking to grow is in the middle- and upper-income consumer loan segment for individuals, SMEs, and to retake some of the market share that we lost in prior years in the wholesale segment. And we're planning to do that, I would say, through 6 key areas: So to use risk intelligence better; we've been improving all the -- everything surrounding risk. In terms of preapproved loans, we recently relaunched the new preapproved loan book. And beginning of this year, we're relaunching -- or we're launching preapproved commercial loan book for SMEs in the first half of 2019. That should be very important for growth as well for that segment. We've been leveraging business intelligence in order to grow as well. And as I mentioned, we've made a variety of different investments in IT, where we improved the pricing through a personalized pricing system, continuous improvements on the web platform, the web page as well as improving our loyalty program in order to get customers to continually use our products. In terms of Credichile, it's true we've been optimizing the branch network over the last few years. We've moved from levels of around 440 branches to around 400 branches, as I mentioned in the presentation. We still think that the branch is a very important area for us, customer point of contact. And improving efficiency optimization of the bank is important across the entire bank. And this is a especially important for Credichile in order to grow. So going forward, we've been improving the service models. We've been looking at different ways on how to improve the Credichile model in order to retake loan growth in this segment as well in the coming quarters.

[Neha Agarwala, analyst]

If I can ask for the bank as a whole, do you have a target as to how many branches do you expect to have in the next 2 to 3 years? Do you plan to remain at the current levels or open some branches? I believe you'd be adjusting some of the branch models as well, meanwhile.

[Pablo Ricci, executive]

The most important thing for us is to have the highest level of Net Promoter Score and not to affect the service quality to our customers. So we're being very careful on how we optimize the branch network in order to continue providing the best-quality service to the customers. And that's the main focus that we'll have when deciding on the evolution of the branch network in the coming years. We don't have a specific target today that we can tell you.

[Operator]

[Operator Instructions] The next question comes from Sebastián Gallego with CrediCorp Capital.

[Sebastian Gallego, analyst]

I have actually 3 questions. The first one is related to profitability. In 2019, we know that, as you mentioned, Banco de Chile no longer has the tax benefit. Can you provide an update on how do you expect to mitigate this effect, if you could provide a breakdown on how do you think about profitability next year, taking into account this elimination of the tax benefit? The second question is related to the recent pension reform in Chile. Can you provide just an initial color on what do you expect from the pension reform? And what's the impact for Banco de Chile? And lastly, on the SM-Chile decision and just the conversion of shares, I was just wondering if there's any decision as of now by the board related to potential stock issuance once the SM-Chile has -- I mean, just expires, or becomes Banco de Chile shares?

[Rodrigo Aravena, executive]

Yes, one second, please.

[Pablo Ricci, executive]

Okay, in terms of your first question for ROE, we think it's super important to take into consideration that we've been coming out of a slower cycle in Chile, where today, we're starting to see benefits or retake demand -- see demand from corporate customers as well as from the consumer. We think that this is important to take into consideration when you look at the -- when you look to the future. We have an improving economy with stable risk, and we think that we should be able to continue posting solid returns. And that will be based on better demand from corporate customers, which will help both the fees and net interest income. Consumers, we're expecting to continue growing strongly in terms of middle- and upper-income segments, so we should have an improvement in mix and total volumes as well as SME loans, which we see today that we're growing above 10%. And we should leverage more risk intelligence in 2019, which should continue to help sustain those levels of growth. Also, in terms of efficiency, everything that we've been doing in efficiency in terms of improving our models and improving the streamlining processes, and on top of that, implementing the new CRM system, which will be fully launched in the beginning of 2019, we think that these will have important improvements in terms of productivity and improve our efficiency level. So saying that, we continue to think that our sustainable level of ROE is in the same range that we mentioned in prior years, which is between 18% and 20%. In more negative cycles, it can be in the lower part of that range; and in the more positive cycles, at the higher part. Also, it's important to mention the important benefits that we have in terms of repricing. So since we have the best cost of funding, the best funding mix, that will have important benefit for us in the following years.

[Rodrigo Aravena, executive]

In terms of the pension reform, we don't have enough information to anticipate any specific impact on the economy, et cetera. So what we have to see is how this discussion will be in the Congress in the future, so we don't have enough information. But it's important to mention again that we're expecting a positive cycle for the next year, with higher growth -- sorry, with above-trend growth, with positive inflation, with higher interest rates. So it will be the key driver for the system as a whole for the next year. But specifically, in this point of the pension reform, there's not enough information as to anticipate any specific impact from that.

[Pablo Ricci, executive]

And for the final question on SM-Chile, this change in structure has no effect in terms of -- these are all shares that are issued and held by shareholders on the stock market. So the only change is who holds these shares directly. It's a change from indirect holdings to direct holdings, which affects our direct -- the direct holdings of our free float that previously was under SM-Chile, part of it.

[Sebastian Gallego, analyst]

Yes, I understand that. And probably, there is a confusion on the question, probably, on the third question. My question is more related to the fact that Banco de Chile usually, every year, declares a stock dividend, that at the end of the day, translating into higher shares outstanding, as we saw in the third quarter '18. My question probably is, if we could -- if we should expect this trend to continue every year?

[Pablo Ricci, executive]

So in terms of if we'll have stock dividends in the future years, that -- a decision hasn't been made in determining if there will be stock dividends or not.

[Operator]

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

[Pablo Ricci, executive]

Thank you, and we look forward to speaking with you on our full year 2018 financial results. Thanks.

[Operator]

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