Banco de Chile

SGO:CHILE

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon, everyone, and welcome to Banco de Chile's Third Quarter 2021 Results Conference Call. If you need a copy of the press release issued yesterday, it's available on the company's website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Investor Relations Officer; Mr. Pablo Mejia, Head of Investor Relations; and Daniel Galarce, Head of Financial Control and Capital.

Before we begin, I would like to remind you that this call is being recorded and that all 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.

Without further notice, I would like to now pass the call to Mr. Rodrigo Aravena. Please go ahead, sir.

[Rodrigo Aravena, executive]

Good afternoon, everyone. Thanks for joining this conference call today. We are proud to present the performance of Banco de Chile during the third quarter. Once again, our bank was able to post outstanding results, leading the industry in terms of profitability and capitalization and comprehensive income, which is also an important measure to analyze the overall performance of a bank, given it's sort of impact on the shareholders' equity value. This approach is more important than ever, given the increased level of uncertainty and volatility that we are facing.

In order to cover this aspect, we have divided this presentation into 3 main sessions. First, an analysis of the macro and financial conditions; second, a review of the main advances and achievements in our key pillars; and finally, a review of the breakdown of financial earnings.

Let me start with a discussion of the macro and financial environment. Please go to Slide #3. Chile has been posting a faster than expected economic growth. Generally, this has been driven by the joint contribution of several factors, including a strong physical and monitory policy, the temporary impact from several pension funds withdrawal, and the significant improvement in sanitary conditions that have allowed greater mobility in the country.

The chart on the other left shows the speed of recovery.

[Audio Gap]

18.6% year-on-year during the third quarter, after expanding 18.1% in the previous quarter. The breakdown shows that the activity has been less by the material improvement in commerce and services. Although the pickup in annual figures was influenced by the weak comparison base as the country was under a national lockdown 1 year ago, the economy has been growing on a sequential basis.

As you can see in this chart in the other right, activity is 6% higher than the pre-pandemic level. In fact, the GDP exceeds its pre-pandemic level in February, becoming one of the few emerging countries that achieved a complete recovery earlier this year. Nevertheless, it's essential to be aware of the balanced recovery as some sectors like retail have grown significantly faster than the rest of the economy. These sectoral differences are unsustainable, and therefore, a future slowdown is highly likely. The higher dynamism has been reflected in the labor market.

As observed in the chart in the bottom left, the employment rates has gradually been improving. We think a figure of only 8.4% in September, well below the 15% same 1 year ago. This has been supported by a recovery in total employment, which went up by 15.3% year-on-year, although it remains below its pre-COVID level.

The labor force has experienced a similar trend. In line with this recovery, grate expectations have also improved during the last month. This can be seen in the chart in the bottom right, which displays the average trend in both consumer and business confidence, the latter reaching levels even better than those observed before the social prices of 2019. All in all, the combination between a stronger growth, lower employment and better confidence, coupled with the success of vaccination process, anticipate a good level of growth in the short term. However, inflationary pressures have increased as we've seen especially during the last month. Given the material change of inflation and interest rates, I will now refer to these aspects.

I'd like to ask you to move to the next slide, #4. We've seen another shift in policy targets in Chile. While most of the measures taken last year focused on promoting economic growth, the rapidly increasing inflation has raised several challenges. Even though higher inflation is consistent with better growth, the magnitude of the actual CPI trend is surprising and concerning.

The chart on the other left shows that today, all the inflationary measures are above the positive range set by the Central Bank. Specifically, the headline CPI rose by 5.3% in September, within the highest figure since 2014, while the core CPI, which excludes food and energy prices, rose by 4.4% in September, the highest in more than 5 years. These trends have been accompanied by increasing signs of an economy that is overheating and a continuous weakening in the Chilean peso, as you can see in the chart on the other right. These factors are increasing even more the average risk on overall inflation towards the future. In this environment, there have been charge adjustments in local interest rates.

On the monetary policy side, the Central Bank began a tightening cycle in September when the Board decided to let the overnight rate from 0.5% to 1.5%, a decision that was followed by an additional tightening of 125 basis points to 2.75% in October, as the chart on the bottom left shows. According to the press release that accompanied the decision, further interest rate hike will come in the near future.

With inflation and interest rate surpassing any expectations held at the beginning of this year, this unexpected situation in conjunction with the impact of the 3 pension funds withdraw has led to an unprecedented rise in long-term interest rates, which have increased nearly 400 basis points on average during this year.

The chart on the bottom right shows that long-term interest rates have been increasing much faster than the U.S. rate, confirming the way of local factors in the trend. Having said that, I'd like now to share our baseline scenario for this and the next year.

Please go to Slide #5. The table summarizes our forecast. We expect the GDP to grow by 11% this year led by traffic consumption. However, we foresee a slowdown in 2022 due to the contract scenario monetary policy and the end of several temporary fiscal measures. We expect that in relative terms total consumption continues offsetting the weak investment growth.

Despite this slowdown, we see an inflation rate above the policy target of 3% for at least until 2023. We save an inflation rate of almost 6% and 4% this in the next year as a result of the lag effect of the weaker currency, higher inflation expectations and inertia arising from U.S. linked prices. This at least will [ force ] Central Bank to continue increasing the interest rate to 3.75% a year and 5.5% next year.

Since there is an upward bias in CPI, we're no less the possibility of higher interest rates in the future. Despite the slowdown, Chile will continue posting the strongest growth in Latin America, as you can see in the chart on this slide. Also, I'd like to mention some risks, which are more relevant than ever. Some factors to pay a special attention to include: first, the evolution of the global economy. Second, the pandemic, as implementation of further restriction could negatively impact the economy. The last but not the least important factor is evolution of the political scenario in Chile.

Specifically, it's important to analyze the results of key events, such as the presidential and congressional elections and the outcome from the ongoing constitutional process. Before moving to the bank, I'd like to describe some recent trends observed in the banking industry.

Please move to Slide #6. The last 18 months have been extremely usual mainly due to the existence of some decoupled trends between the banking industry and the economy. Despite the damage caused by the pandemic, especially unemployment and GDP, the banking industry profitability has improved in part due to the exceptional payment behavior from customers, which have been supported by the huge amount of liquidity. High level of inflation, as I mentioned earlier, have also benefited the U.S. net asset quality position of the banking system offsetting the impact from reduced consumer loan growth demand.

As a consequence of these factors, total net income reached CLP 845 billion in the third quarter, substantially higher than the same period last year. Consequently, ROE reached 15%. This was due to inflation, better field revenues and low-cost of risk of only 1.1%, well below historical levels. The end of excess of liquidity should contribute to normalize this with ratios in the near future.

With regard to loan growth, we have begun to see some improvements across the board. As the left chart shows, total loans during the quarter grew 3.6%, driven by strong commercial loans and to a less extent by consumer lending. The mortgage portfolio shows the same dynamism of the last quarter. That is expected to slow down in the coming quarters as a result of the sharp increase observed in long-term interest rates. After analyzing these trends, I'd like to note that Banco de Chile has continuously improved its competitive position in the country.

During the rest of the presentation, Pablo Mejia, our Head of Investor Relations, will share the main achievements and results posted by our bank during the quarter.

[Pablo Ricci, executive]

Thanks, Rodrigo. Please turn to Slide #8 to discuss our main advances in strategic projects. Banco de Chile has demonstrated time and again that our consistent long-term strategy generate superior and more consistent earnings and value creation than our peers. In the next slides, we'll go over our advances in key areas, which are digital transformation, efficiency and ESG.

Please turn to Slide 9 to go over our advances in digital banking. Throughout the years, we have worked steadily to create a digital driven organization. This year, we have deployed many advances in both the front and the back office. In this sense, we are improving our customer experience by expanding digital channels, adding new products and functionalities. We're also increasing sales through these points of contact, working with advanced analytics, cross-selling our new FAN account holders with insurance, investment and other products, transforming operational processes and IP architecture, and we're working in their talent and digital culture development.

In regards to the advances in our digital onboarding Cuenta FAN account, we have seen an impressive evolution of our new customers, reaching 630,000 since its launch 1 year ago. This quarter, we released a new customer service channel with a Chatbot called FANi, that answers frequently asked questions, and we're proud to mention that based on our usage rate, more than half of our FAN clients use this account as their primary help. In the future, this customer base will be an important driver for our revenue growth.

We are also continually integrating new digital solutions, such as our new self-service modules at branches that include several functionalities and saves time for our customers, and we launched a new payment service, so clients can use their smartphone or smart watch to pay without their cards, among other initiatives. All of these efforts to provide the best digital experience, we have seen continuous improvements in our online channel usage rates, as you can see on the chart on the bottom of this slide.

Monetary transactions used in our mobile app has grown over 40% year-on-year, surpassing by far the growth seen on our website that reached just under 10% growth. The adoption of digital channels for everyday banking needs has resulted in that 89% of all monetary transactions are now being done online. This huge success for us and our -- will allow us to continue improving our productivity. Finally, all these efforts have permitted us to be recognized as the most innovative digital bank in Chile by the European and prestigious international publication.

Please turn to Slide 10. Our focus to provide the best customer experience has continued to improve as we have rolled out new digital solutions. This customer-centric strategy is always present when we develop new products and services, and the results are reflected in many indicators, such as the ones shown on this slide.

First, we continued leading the industry in net promoter score, a recommendation indicator. We also have ranked significantly in all of our peers in other areas, as shown on the chart on the right. Where customers consider that we have the most confident account managers in the industry and the chart on the bottom left that ranks our bank #1 in terms of having the highest transparency. These indicators along with many others reinforce the conviction that customers prefer Banco de Chile, as you can see on the chart on the bottom right.

By focusing on providing customers with first class experience, we have gained more loyal customers that have higher cross-sell ratios than our competition. This is especially relevant in the upper income segment in large corporates and multinational companies where we are the leaders. As the industry continues to evolve, we strive to maintain and improve our relationships with customers because we truly believe that this is the best way to differentiate ourselves from the competition.

Please move to Slide 11. We've continued to diligently optimize and improve how we manage our business in order to use our resources better. As mentioned, we continue automating processes by implementing new tools to make operational processes more efficient as a consequence of the new service model that began its implementation a few years ago. This has permitted us to reduce branches from a level of over 400 to 272 branches across Chile. This service model, together with many other initiatives, has not only improved our ongoing expense base. As you can see -- as you'll see later on the presentation, that has also been achieved with enhanced customer satisfaction levels.

In addition, we are accelerating these changes to a specialized area that's implementing across enterprise cost management program that speaks incremental savings gains. The results of these initiatives have been positive, as you can see on the chart on the right, where we've had continuous advances in total loans to employees increasing by 32%, loans per branches by 70% and total expenses to assets improved 57 basis points to only 1.8%, the lowest level recorded in the last decade.

Please move to Slide 12. Another key pillar of our strategy is sustainability. This quarter, we have continued to advance in various fronts. In order to do that, we have diverse social and environmental projects that we have developed to generate long-term value for our organization and stakeholders. Some of these initiatives that were taken during the third quarter are shown on this slide. In order to promote entrepreneurship and support SMEs, we have granted $1.8 billion in Fogape Reactiva loans, and we launched the 6th National Entrepreneur Challenge, which attracted thousands of micro small and medium businesses across Chile.

In terms of community relations, we held a financial education program, count on Banco de Chile that benefited approximately 5,000 people, including micro entrepreneurs and students from all over the country. In addition, we've created a policy to further advance their diversity and inclusiveness across our organization.

On another front, we understand that to be sustainable over time, banks need to incorporate nonfinancial risks in its lending practices. For this reason, we have trained our risk specialists on international standards for best addressing and identifying social and environmental risks. These efforts will enable us to accompany our customers on the transition to a sustainable future while minimizing risk. Additionally, we issued a social bond to finance female entrepreneurs.

Finally, before moving to the next slide, we recently received an unprecedented 3-notch upgrade in MSCI ESG ratings, moving from a B to an A rating, ranking us as the most sustainable bank in Chile. These results among many other awards that we have received during 2021 reflects our commitment to continue being a sustainable bank that incorporates ESG principles in its strategic pillars. The remainder of the presentation focuses on our financial results.

Please move to Slide #14. Net income was impressive this quarter, reaching CLP 184 billion, up from CLP 162 billion last quarter and more than double the level posted the same period last year. Both ROE and ROA was very robust, rising 18.6% and 1.5% respectively. Through our focus on generating consistent returns and maintaining this prudent risk approach, we have expanded the gap further with our peers in terms of our risk-return relationship, as you can see on the chart on the right. This capital level without a debt positions Banco de Chile as the best prepared bank to address Basel III schedule of higher capital requirements.

Please turn to Slide 15. Operating revenues reported in this quarter were very strong, up 9.3% over the second quarter of 2021 and 23% versus last year. The quarterly rise was due to both customer and noncustomer income. In terms of customer income, we saw greater revenues from lending and deposit margins as well as fee-based products. Net interest income rose this quarter versus the second quarter of 2021, primarily due to the expansion of both the loan portfolio and noninterest-bearing deposits, rising on a sequential basis 2.5% and 1.1% respectively.

I'd like to take a brief moment to discuss the evolution of our fee income. As you can see on the chart on the right, recurrent fees continued to grow strongly, up 22% year-on-year, thanks to the improved activity as well as the economy that has successfully adapted to the new normal. In the third quarter of 2021, most of Chile was out of lockdown. This has a positive effect on our transactional revenues. We especially saw strong income generation from transactional products and wholesale fees, especially from the mutual fund business.

In terms of noncustomer income, results were primarily driven from the management of structural financial positions as a result of higher levels of inflation, which were partly offset by the effects of higher interest rates on our trading and investment positions.

For the remainder of the year and 2021, we are more optimistic due to the improvement in sanitary conditions in Chile that are permitted to lift mobility restrictions. Today, Chile is more open than at any moment of the pandemic, and this should continue to drive fee income, and it should also continue to be reflected in terms of loan growth, especially consumer loans and commercial loans. On the next slides, we'll go over the evolution of the portfolio and the asset quality.

Please turn to Slide 16. We're proud to report that loans reached CLP 33 trillion, rising 2.5% when compared to the prior quarter or 10% on an annualized basis. Year-on-year, the portfolio grew 6%. This expansion in loans permitted us to continue gaining market share, as you can see on the chart to the right, where we gained 19 basis points year-over-year.

This quarter, we witnessed better levels of activity in all lending products. Wholesale and SME loans were up sequentially 3.2% and 1.1% respectively. In personal banking loans, we saw an increase of 2.5% quarter-on-quarter. The rise in personal banking portfolio was driven by both consumer and mortgage loans growing 3.6% and 2.3%. Despite the high levels of liquidity in Chilean households, this rebound is in line with the Central Bank's quarterly survey -- credit survey that reported strong loan demand and lower credit risk restrictions for consumer loans.

However, it's important to mention that mortgage lending rates have also risen in accordance to the higher long-term interest rates that we've seen in Chile due to the internal conditions. As a result, we expect that this should lead to a slowdown in the demand for mortgage loans in the coming quarters.

Please turn to the next slide, #17. Through a strong brand name and our focus to provide our customers with the highest quality products and services, we've grown significantly our demand deposits to represent 36% of total assets and to lead the industry in terms of deposits per count, as you can see on the chart on the left side of this slide. This source of funding provides us with stable low-cost financing as an important part comes from retail counterparties.

On the chart on the bottom of the slide, you can see the evolution of our mortgage loan funding gap. The stable evolution of our ratio of bonds to residential mortgage loans is particularly important in the context of rising interest rates since liabilities reprice faster than assets, which could negatively impact net interest margins.

Also in this environment of rising funding costs and weaker demand for long-term bonds from local institutional investors, it's a positive factor that our bond profile by currency, or in other words the foreign and local bondholders, is less concentrated in foreign markets. This provides us with more room than any other bank to increase our funding from external sources and other banks. In terms of capital, we have by far the strong CET1 capital base of 12.4%, with the substantial difference to our peers as shown on the top.

Finally, our fully loaded Basel III ratio decreased slightly from last quarter due to our portfolio growth reaching 6.2% as of September 2021. It's important to highlight that we have room to improve this ratio if we implement internal models for credit risk-weighted assets that are permitted by the regulation. Nevertheless, we're very confident that our strong capital base will allow us to be prepared to advance in the transition of the full implementation of Basel III. Next I want to go over how we manage risk in our current capital asset quality figures.

Please turn to Slide 18. Loan loss provisions this quarter reached CLP 93 billion, slightly higher than the level recorded in the second quarter of this year, but below the level close to the same quarter 1 year ago. This figure includes CLP 50 billion in additional provisions. Excluding additional provisions, our model recorded only CLP 43 billion of cost of risk, demonstrating once again the strength of our portfolio.

This composition of low-cost of risk from models, higher additional provisions, coupled with our low and stable NPL ratio of only 0.92% further confirms this. The elevated level of liquidity in Chile is producing in part these unusual indicators, which are well below the long-term levels. As this excess liquidity is used, we expect our asset quality figures should return to more normal levels of 1.1% for cost of risk in the medium term.

When compared to peers, our asset quality and prudent risk management culture is evident. We outrank all of our peers in relationship of risk and return, thanks to these policies. Today, we have accumulated $460 billion in additional provisions with a coverage ratio of almost 4x. We have seen this quarter as superior risk strength has permitted us to take advantage of growth opportunities by gaining more market share than all of our main competitors without fear of affecting our solid asset quality and cash flow levels.

Please turn to Slide 19. As mentioned earlier, our strict focus on cost control, together with strong revenues this quarter, permitted us to post solid efficiency ratio of only 40.1%, well below the levels posted in the past and the average in the industry. Total expenses, as shown on the chart on the right, reached CLP 218 billion this quarter and includes an extraordinary bonus of approximately CLP 5 billion that we've provided our staff in the gratification of the excellent performance we have accomplished in 2021, which would not have been possible without their commitment and dedication during this difficult period.

Despite this additional expense, we outperformed our main competitors this quarter, and we continued to show a better track record in our expense evolution as shown on the chart on the bottom right. Specifically, as you can see on the chart on the bottom left, expenses remained relatively flat quarter-on-quarter and a slight rise year-on-year. Excluding the extraordinary bonus, the main driver for cost management performance is due to our focus on implementing effective controls to use our resources more effectively and automate back and front office processes.

Please turn to Slide 20. As mentioned in prior calls, we think it's relevant not only to look at net income when analyzing how the industry operates and generates value for shareholders but also comprehensive income, which takes a more complete view of the performance of financial institutions. As you can see, we performed well with a year-to-date comprehensive income figure of CLP 542 billion, in line with net income.

On the chart to the right, you can see the breakdown of OCI for us and our main peers. One of the key differentiating factors of our business strategy is our emphasis in generating consistent recurring revenues. We are confident that this focus at Banco de Chile generates the greatest economic value for our shareholders in the long run.

Please turn to Slide 21. Before ending this part of the presentation, taking your questions, I want to highlight a few key ideas. First, the successful vaccination program and economic policy responsive have worked and reacted quickly on the economy. We expect that unemployment figures should continue improving, and this should help drive loan growth. Under this scenario, we expect GDP growth for 2021 to be around 11% with a level of inflation of almost 6%.

Consequently, Chile will continue posting the highest average growth in the region. This more dynamic economy with higher inflation will assist their bottom line with adequate levels of risk. In the medium term, we believe that NPLs due to loans -- NPLs to loans should creep up slowly when fiscal support programs come to an end. This results in a more reasonable -- this should result in a more reasonable level of cost of risk of around 1.1% in the medium term in our baseline scenario.

Depending on household liquidity, we expect the consumer loans should be more dynamic in 2022. However, mortgage loans will probably grow at a slower rate. For this year, we expect the total loan growth should be near 7%, slightly below the level next year. We're also confident that we should continue to pick up market share in our base case scenario.

Finally, we have successfully enabled us to face this challenging environment with robust results and outstanding achievements in several areas. We are still in their strong competitive advantages will allow us to continue to create value to all of our shareholders.

Thanks for listening, and we'll be happy to answer your questions.

[Operator]

[Operator Instructions] Our first question comes from Mr. Jason Mollin from Scotiabank.

[Jason Mollin, analyst]

My question is related to the additional provisions that Banco de Chile has been creating. And they look very robust and from a balance sheet strength perspective, we really like them. But there is a flip side to that in that -- it's not going to the bottom line. And that limits the payment of dividends in terms of paying a payout of earnings. So I'm just -- if you can frame how management thinks about them and the need for them. Is the idea really to create them because you see potential problems or you just want to be in a very strong position the next time? We see problems in the economy and with your clients or -- and how does that -- how should we think of that versus showing better net income and paying out more dividends?

[Pablo Ricci, executive]

Well, in terms of additional provisions, as we mentioned and you saw in the call, we had an additional provisions of CLP 50 billion this quarter, and this is a decision that was taken despite that we've seen several different signs of recovery since late 2020. But there's still certain uncertainties that there are still occurring today in the economy. So because we have a lot of liquidity, there's all these issues. That's really affecting NPLs temporarily. And there's still certain future events that could be occurring related to the economy and the political scenario.

So this is the reason -- this is part of the reasons that the Board decided to take on these additional provisions during the quarter. We can't rule out, however, that in the future, these uncertainties tend to fall. There's more certainty in the future that we could potentially release a portion of these additional allowances. This is a decision that has to be taken by the Board. There's not an exact trigger that I can give you or an exact time frame of when this would happen. In terms of the dividend, Rodrigo, do you want to?

[Rodrigo Aravena, executive]

Yes. Jason, just to emphasize the idea that we don't have any particular concerns. So basically, that decision reflects our prudent decision. So basically, we are waiting for having more information in terms of the economic cycle. We would like to see how the ratio, how the asset quality indicator will evolve in the future because we acknowledge that as a consequence of the excess of liquidity as a result of some policy measures allotted during this crisis, there we have seen some bias in some indicators. So basically, we are waiting for more information, the stabilization of the economic cycle, but I'd like to be clear that we don't have any particular concern behind this decision.

In terms of dividend, I'd like to mention that Banco de Chile has consistently been able to maintain an attractive dividend for shareholders in the last year. But even though we can anticipate the annual dividend because it has to be proposed as the Board of Director, it's very important to keep in mind that the Board takes into consideration bank different factors when determining the annual dividend proposal, such as, for example, their -- the existence of our robust capital level, which is superior to our peers, the slowdown expected in loan growth in the future. It's important to remember that in the past, the elasticity between loans to GDP used to be around 2x. For the future, we are not waiting for that. We're not expecting, sorry, this elasticity. So we are aware of the slowdown in loan growth in the future relative to what we had in the past and also a very good level of our additional provision, as you mentioned. So these conditions, at the end of the day, can maintain or change dividend payout relative to the levels that we recorded in the past.

[Jason Mollin, analyst]

Well, I like when you guys create additional provisions, and I think it's really crucial for analysts and investors to look at book value growth. Because I think if you look at -- if you consider that, that really does capture both earnings and whatever impact that's not going through the income statement and going directly to book. So I think that is very valuable.

Maybe a second question based on your presentation. You show on Slide 10, some very impressive data on the net promoter scores, the most transparent and reliable bank, the most confident account managers and preferred bank to change to. One thing I would ask in that context is, we've seen some data on account openings for the system throughout the year. And it's not -- we see some of your competitors or at least one of your competitors doing much better in getting new accounts. How would you describe what's going on there? And why this competitor that's not showing as well and the metrics you're showing, but when you look at account or checking account openings, they actually look like they're growing faster?

[Pablo Ricci, executive]

That's mainly to do with the information that's available in CMS. So with information that's available, you can't distinguish what's the digital accounts, what's not in terms of this other competitor, which uses the current account, right. There is a lot of change. So today, you don't need to have -- the package doesn't have to be the same as it was in the past with the line of credit and other additions to the current account. To make a more proper analysis, you would probably -- you need to look at what other banks also offer in terms of the prepaid cards for some banks, and we don't use a current account, but we use a site account. We use a debit account, which is basically the same thing. It doesn't have a line of credit. There, we're growing 630,000 customers year-over-year.

So you really need to add this information and based on the internal studies, based on the information that we can gather and see the evolution of the growth in terms of balances in these accounts, what we see is that we have, by far, much higher usage rates and by far we're the leaders with a substantial increase in terms of market share across the board. There's a report from the CMS for prepayment cards. And if you were to add the information that we have, unfortunately, without the information of the current account holders for these other digital accounts, we have well over 50% market share at that point in time.

So including what we think the other current account these other banks have in their current accounts for this product, we by far have the highest levels of usage rates. So it's not -- it's -- one thing is to open accounts and have many. It's the other thing that's more important is to have customers actually use their accounts consistently. And that's where we think we're -- where we've seen that we're the leaders.

[Rodrigo Aravena, executive]

In fact, in the Slide #17, we clearly shows an important difference in terms of the address current account, a pay balance held by between our customers relative to our main peers. So as Pablo mentioned, apart from this explanation of the growth, it's very important to be aware of higher balance held by our customers in the Slide 17 of this presentation.

[Pablo Ricci, executive]

I think all these other indicators is something part of the past, all these customer service indicators. So Banco de Chile has always been very focused in having the best customer service indicators and having the brand really stand out in all these attributes. So this really attracts customers more easily to the Banco de Chile. And customers really want to be a part of Banco de Chile and the program itself at Cuenta FAN is very strong with many different benefits that promote the products as well. And that's why so many customers are coming to ours. We think our benefit package for the customers are far more superior than what customers can have at other banks.

[Operator]

Our next question comes from Mr. Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

My question a little bit, I guess, on the political environment and the potential impacts. Maybe just give us your thoughts on the upcoming presidential election. What do you see the risk to be there from the different candidates and how you think about that in terms of what that could mean for GDP growth and also sustainable ROE for the bank, also, I guess, factoring the potential changes to the constitution, that would be helpful.

[Rodrigo Aravena, executive]

This is Rodrigo Aravena. Thank you for the question. We are aware of more uncertainty in the short term. So that's why in the beginning of this presentation, we mentioned some sources of uncertainty. We will have, as you mentioned, presidential election in November, a potential runoff in December of this year. But also there will be a change in the Congress because the lower house will be -- it will be changed totally while the half of Senate, it will be changed as well. And also there is an ongoing constitutional process with the next referendum which so far is scheduled for midyear of 2022.

So in the short term, probably political drivers will be an important factor to pay attention to because we know that it affects the evolution of the account events, evolution of expectations, economy, et cetera, et cetera. It's not clear what will be the policies adopted for the next President of Chile because today we have different candidates with different proposals. There are some candidates with some specific proposals, for example, writing taxes, while there is another candidate that in his program considers lower taxes for companies, for example. So I think that it's too early to provide a more accurate estimate in terms of the specific impact. I think that it's better to wait for the final results of both the Congress election in November and the final result of the run-off in December of this year.

But beyond this discussion, it's important to be aware that in 2022, there will be a lower economic growth because we will not have some temporary factors that positively influenced the economy during the year. For example, the Central Bank today is rising interest rates. It will affect the economy in the next year. And the government announced an important reduction of the fiscal spending for 2022. And probably, we will not have the pension funds withdraw as we have this year. And also we've seen a weakening of the Chilean peso. So it also will affect the capital imports, et cetera.

So beyond the political drivers, we are aware of the systems of some risk in the short term that could affect the economy next year. It's also very important to highlight that in 2022, we will likely have a high inflation rate with higher interest rate as well. So as I mentioned in the presentation, these factors have an important impact in terms of banking profitability. So that's why despite the slowdown, despite the political risks that we are observing now for the next year, we will have some positive driver for the banking profitability in the next year, for example, high interest rate, the high inflation.

So all in all, when we analyze in relative terms, probably the banking sector, the banking profitability will probably be less affected than other sectors in Chile. But again, it's extremely important to analyze the result of 3 factors: the potential runoff of the potential election in December, the final composition of the new Congress in November this year, and very important to analyze the contents and the results of the [indiscernible] of the constitutional process, which will be held in June on the -- by midyear 2022.

[Pablo Ricci, executive]

I think just to add for 2021 ROE will be quite strong especially in the fourth quarter because of what Rodrigo mentioned, the higher inflation that we're expecting for this year and next year. So there'll be good levels of inflation in the fourth quarter. The higher interest rates are also benefiting us. So the fourth quarter will be an ROE that should be over the 20% level for the fourth quarter ROE.

For next year, again, it should probably have similar ROEs to 2021. And in the medium term, in our base line scenario, obviously it depends on the outcomes of all these factors that Rodrigo said, we should have around 16% to 18% ROE, so in the medium-term ROE. [indiscernible]

[Operator]

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

[Ernesto María Gabilondo Márquez, analyst]

My question is on your NIM expectations not for the next quarter but for the next year. Considering we already have like important heights in this year and probably that should continue next year, how do you see the NIM pressure in 2022 and if you think that in 2023 you will be able to reprice the loan portfolio and then see an expansion? And then my second question is on how comfortable do you are to take market share considering the political risks, considering that at some point you will go to normality after the liquidity has gone down from the pension withdrawals? Then unemployment rate continues to be high and inflation, no inflation could still be sticky. So how do you see that in terms of loan growth?

[Pablo Ricci, executive]

In terms of NIM pressures, we're not seeing NIM pressures. If you look at all the figures, everything is positive. So I wouldn't say NIM pressure for this year or for the next. We have a higher level of inflation expected for this year, also a high level of inflation for next year. And if you analyze the liabilities of banks in Chile, you can see that the levels of current account balances, noninterest bearing balances has increased significantly. We look back 2 years ago or something, it's huge as a level. So the rise in interest rates is positive for banks because today that repricing is taking place much faster. So we're starting to see a huge benefit way quicker than we were in the past. So for next year, there's no pressure. NIMs are -- will be positive. And in the following years, positive pressures for NIM.

Obviously, as inflation comes down in '23 -- 2023 and beyond, you have that would be the pressure in those years, but in the short term, we see a positive event. If we look at the gap on the balance sheet, we have a gap on the balance sheet that's just over CLP 7 trillion, which means for every 100 basis points that's just over CLP 70 billion. That shows in change in net interest income. And in terms of rates, if we look at rates, how this positively affects us and if we think about, as you mentioned, what's the normalized level of current account balances and banks maybe that can go down, would be maybe for every -- for a 100 basis point change when everything is fully repriced, would be about CLP 100 billion more in net interest income. But if we look at the levels of today of this higher level, that's based in the balance sheet and the liabilities, it would be CLP 160 billion. So it's between 25 and 40 basis points higher net interest margins from a rise in rates -- for every 100 basis point rise in rates depending on where you believe of the funding from noninterest-bearing deposits are.

And in terms of market share growth, we're focused to continue growing in market share or in our key areas, which is the middle, upper income individuals in consumer loans. We see that this is an area that should continue growing in the next year, recovering the losses that we've had in the past, and we're comfortable to continue growing, obviously taking into consideration the risks that are at that moment. But we believe that we still have room and our focus is to continue growing in that area also and SMEs as well in the following years.

So obviously, it depends on what's occurring locally, but in a reasonable case scenario, we think that we will continue growing in terms of loan market share. Especially, it's important to mention that we have by far the highest level most capitalized banks in Chile. So this actually permits us to continue growing and we have by far, the best customer base in Chile as well. So that, combined with the additional provisions, permits us to grow, which maybe other banks have to be more cautious.

[Rodrigo Aravena, executive]

So all in all, at the end, when we put all these pieces together, it's reasonable to state an ROE for this and next year even above to the long-term level. So as Pablo mentioned, despite the slowdown of the economy, the political risks and sort of specific existing factors that we have, there will be a positive impact from the change in inflation interest rate in our final bottom line.

[Pablo Ricci, executive]

Yes. And we can continue growing especially because of the capital base. Since we have the capital base, we can continue growing, we continue -- also continue giving an attractive dividend to our shareholders.

[Ernesto María Gabilondo Márquez, analyst]

Just a follow-up on NIMs. We have already heard the conference call with your competitors. And you're expecting NIM pressure next year. And they say that the loan repricing takes around 12 months. So I just wanted to understand if it's different in your case?

[Pablo Ricci, executive]

I'm not sure why -- for our case and our balance sheet structure, we don't see NIM pressures.

[Rodrigo Aravena, executive]

And actually it's important to be aware that during the last year -- sorry, during the last month, we've seen our risk, inflation, higher interest rates, the guidance from the Central Bank relative to the interest rate has changed during the last month. So that's why expectations today are even better relative to that we had a couple of months ago.

[Pablo Ricci, executive]

It's also important to look at how we fund the business. So we haven't had large changes. We've increased our net interest margin this year based on funding, for example, long-term assets with short-term liabilities. So we don't have an issue related to this on our balance sheet. I'm not sure the detail you have for the other banks and why they are seeing such a drop in net interest margins.

[Ernesto María Gabilondo Márquez, analyst]

Okay. Perfect. And how much is the time -- I just wanted to know how much time takes you to reprice the loan portfolio, 6, 12 months?

[Pablo Ricci, executive]

Today, when you're looking today, we start seeing positive flows. If you look in the financial statements, you can see the maturities of assets and the liabilities are not [ boarding ]. But if you do an analysis, you can see that from already month one, based on the current structure of the balance sheet with a large level of deposits that we have today that we've accumulated over the last 2 years, we're already seeing positive impacts. If you look in the slide -- positive benefits. If you look on Slide #15, you can see where we have customer income breakdown. We're already having nearly CLP 10 billion more in income from our deposit margins and from low margins, we have $0.5 billion. So we're already seeing in this quarter benefits from the rise of the interest rates.

[Operator]

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

[Yuri Fernandes, analyst]

Congrats on the hedging policy on the booking of the growth, like RNAi was very sound. And as everybody mentioned, good to see [ Cuenta ] growing. I have some follow-ups in this margin question because for me, your speech has been surprising of stable margins for 2022 because we always thought that higher rates are negative for the Chilean banks in the short-term because you have a lot of time deposits, liability basically repriced faster than our assets.

And looking here for our balance sheet, I totally get your point on the main deposits. They are saying maybe 65% of total deposits. But historically, they were below 50% of our deposit and 50% is a good number. Don't get any wrong, like that's a very good number for further demand deposit, the ratio of the deposits. The point is, as rates move up, do you believe the main deposits will continue at that amount because I think there is a cost of opportunity here? Higher the rates, maybe some of those corporates that we're taking for that loans and trying to protect themselves and headlock excess liquidity. We can first use the liquidity or we can move to time deposits. And the same about the time is, right? Like, if people, I guess, the big increase in demand deposits, they were related to the pace of withdrawals. So as people have a higher cost of opportunity, maybe they will change that for time deposits, right? So that benefit, maybe it's short lived.

So my question is, what you think about deposits going ahead with higher rates? Two, what is your inflation expectation for 2022 because I think inflation will be high, but maybe not as high as the 5.8% inflation you are seeing for this year, right? So my point is, there are so many headwinds that for me, again, I'm trying to be pushy here and try to understand more because for me, having flat means if we're able to get that, that's good news. I think the market is not expecting this. So we are able to understand more the moving parts, maybe if you can tell me -- we have a different portfolio mix or we have a different hedging policy that would be very helpful for us to understand the flat NIMS.

And I have a second question regarding Cuenta FAN. Looking to the September data, there was a deceleration in net adds versus June. I guess the acceleration with starting October, you have a chart in the presentation showing like the net add, they accelerate again. But what happened in September, like why net heads were lower versus -- in the quarter?

[Pablo Ricci, executive]

Thanks, Yuri. In terms of NIMs and how this will evolve in the future, I think it's important to mention that it's not only -- we don't only see growth because of the Fogape. I mean, if you look at back since 2019 or so, it's pretty even the growth that we've seen in both individuals and companies. And obviously, a portion of that, like I mentioned when I was -- that I mentioned that the rise, the benefit once everything is fully priced in could be if nothing changes and continues to see increases in the current levels of account balances and current accounts, could be CLP 160 billion more in net interest income, but that's not reasonable really to expect. That's why I was saying that it's more reasonable to expect a level of CLP 100 billion, which would mean a decrease. Now when that decrease happens and how much, how long is this will depend, it's reasonable to expect that we should be able to see a decrease in the future that we shouldn't continue to see in these increases because of the higher interest rates because there's more reasons to invest that money or to spend the money that's in the current accounts.

And in terms of -- you also have to take into consideration inflation and expectations and how banks position themselves, if they position themselves well or not. If you look at our U.S. GAAP position, it's actually increased on the balance sheet. So today, we have a U.S. GAAP position that's over CLP 7 trillion, right? Last quarter, we had a GAAP position that was at CLP 6.6 trillion. And if we look at 1 year ago, we have a smaller U.S. GAAP position that was around the CLP 5.8 trillion. So this will also help us in terms of -- if you look at the level of how much income that we generated with the inflation for this year was a lower gas position than what we'll have for the next year. So we'll have a benefit on that side. And also of funding how we manage the bank.

As I mentioned, for next year, we weren't funding long-term liabilities with short-term funding. So when we start to see, which is reasonable to expect, a decrease in current account deposits, we won't have to go to the market to fund these mortgage bonds. So that shouldn't have pressure on our NIMs.

[Yuri Fernandes, analyst]

If I may just follow-up here, Pablo, what is your inflation expectation for next year because I understood like maybe you can have a higher inflation gap. So maybe even if inflation is lower, you can benefit more from that, right? I guess that's the point. How much is, like, for next year?

[Rodrigo Aravena, executive]

And you also have to take into consideration.

[Pablo Ricci, executive]

Sorry, one last thing. What I didn't mention is portfolio growth. So if you look at where we -- what happened in 2020, on average the assets are more focused in 2020 versus 2019 on lower-margin products, right? We started 2020 better and because everything that we know, 14% in loss in market share basically across the board for the banking industry and consumer loans, SME loans were focused on Fogape, low interest rates. For 2021, we've seen a recovery, a slight recovery in terms of consumer loans, very slight. 2021, we should have a better growth mix as well. And in terms of inflation, Rodrigo?

[Rodrigo Aravena, executive]

Yes. It's very important to keep in mind the different trends that we will likely see during the next year. So one thing is the average inflation -- of the average level of liquidity, but probably we will have a higher inflation rate in the first half of the year related to the second half of 2022.

So specifically, we state an inflation rate of almost 4% at the end of the next year, after posting an inflation rate of almost 6% during this year in an environment where the interest rate will continue rising. So probably the level of liquidity of the economy next year, including deposits, total deposits, of course, will likely have a negative growth in the next year. If we analyze, for example, a leading indicator, which is M1 supply money, which is released by Central Bank, a couple of months ago, it was growing 70% year-on-year. And today, the total money supply of the economy is growing around 50%, 55%, if I'm not mistaken.

So it's important to consider that even though the average inflation of the next year will be above the bullish target of the Central Bank, there will likely be a downward trend during the year with a negative growth of total deposits in 2022. Probably the slowdown will start by the -- slowdown of the level of liquidity probably will begin by April or the second quarter of next year. Pablo, do you want to?

[Pablo Ricci, executive]

Yes. In terms of the final comment, I think the current account is something that you can take online. It's very easy to do. It really depends on the economic situation as well. We had lockdown. There's many different reasons. It can be in some quarters it's a stronger driver. If you remember in between the -- we went back into lockdown in the second quarter of 2020-21. So -- and as the basic continues to increase, obviously we should start to see a slowdown. I don't expect that these levels will continue growing so strongly because if you look at the size of our current account holders in Banco de Chile, personal current account holders of Banco de Chile is about 1 million customers, right? So this is 640,000 customers, it's a huge number.

How high can this go? This workforce in Chile is around 8 million, 9 million. So really, these are very reasonable numbers. More than the growth of these numbers in the future, I would say, is how we'll roll out and continue to cross all these customers with new methods and get these customers back to you, as Banco de Chile their primary bank account. I think that's where Banco de Chile has been always very strong with very good customer service levels uptimes. And if you look at other indicators, the [indiscernible] is that we're the leaders in terms of current account deposits in terms of individuals. We have the highest level of current account deposits. And if you start looking at different indicators in other areas, you can see that we're leaders also amongst companies, et cetera. So customers generally use us as a primary bank account company and individuals. And hopefully that will translate to [ Cuenta FAN ].

[Yuri Fernandes, analyst]

And it's good because this is not just on a wallet account, right? It's on a checking account, as you said. So you can cross-sell, like, the loyalty of the bank, all those things. So like very clear.

[Rodrigo Aravena, executive]

So a Cuenta FAN customer, the idea of our FAN account was that a customer and Cuenta FAN belong to Banco de Chile. It's a part of Banco de Chile, uses the same website, uses the same apps. We cross sell them. They use the same branches as Banco de Chile. So it really connects them with Banco de Chile that gives this cross-selling opportunity. And it's a side -- it's a deposit account. It's not a prepaid account. It's the same as -- more or less the same as a current account. It's free. It has lots of benefits. It's an interesting account for individuals and there's new promotions every day that come out for the FAN. So it's really bringing in a lot of customers.

[Operator]

Our next question comes from Jorge Anderson from Santander.

[Jorge Henderson Cubillas, analyst]

Congratulations for the results. I have 3 questions. And my first question is on your cost of risk guidance. You mentioned you expect your medium-term sustainable level of cost of risk to be around 1% and 1.1%. My question is, do you consider any potential additional provisions on this range? And my second question is on for Fogape loans. So it's just a -- I just wanted to ask you the data of what percentage of your loan book is currently for Fogape loans? And my third question is on the current business. So in the context of the implementation of the 4 parts payments model in Chile, would you consider investing and compete in the acquiring business anytime soon? That would be it.

[Rodrigo Aravena, executive]

Jorge, this is Rodrigo Aravena. Let me take 2 of the 3 questions that you mentioned. In terms of the cost of risk, you are right, we said in the presentation that our guidance is around 1%, 1.1%. But actually, what is very important to keep in mind is that we are expecting that our cost of risk will remain below the average of the industry. So what we're expecting is a number of the industry slightly above our cost of risk. So it's reasonable to expect for the industry, a number higher than 1.1%, let's say, 1.2%, et cetera. So basically, our guidance for cost of risk, more than a specific number, what is more important to consider is that we're expecting that the best cost of risk relative to the industry will remain in the future because we are very confident that our quality is much better than most of our peers. So we expect that we will continue leading the industry in that area. But of course, it's very important to analyze the evolution of the economy, the outcome of the elections, the evolution of the employment, et cetera, et cetera.

In terms of the additional provisions, we have as said in different conference calls that -- and today as well that is very important to analyze the evolution of the economy, the uncertainties, et cetera. We have a prudent approach in terms of risk management for the bank. So that's why we've been increasing the additional provisions during this year, especially considering the value that we've seen in different asset quality indicators as a result of the excess of liquidity as a result of the pension funds withdrawals, et cetera. So we can rule out that a portion of these additional provisions will be released in the future, but only in the case that the uncertainty will be lower only if in the case that we have a normalization of the economy and lower political uncertainty et cetera. But we are aware that in the short run, we will face more uncertainty than we used to see in Chile.

In terms of your third question for the interest rate, okay, it's important to consider 2 main factors. The first one is that there is a committee, which is composed by representatives from different entities, including the Central Bank, the Finance Ministry, the CMS and the Chile Antitrust Agency, who are in charge of checking 10 years of prices and specifically for the interest rate. It's very important to consider that changes in interest rate will be announced no later than February of the next year. In this environment, since we don't have announcements so far, okay, we continue working with the same system. We haven't developed a different system. We don't have any announcements so far.

In terms of potential changes in the interest rate, I'd like to mention that we are very well prepared for that our business model to depending on the potential changes in the interest rate, which will be released by this [indiscernible] by February of the next year. So in this context, it's essential to pay special attention to the final outcome, the final decision of this ongoing process, specifically to potential changes in the interest rate because it will be very critical in our final decision in terms of adapting or changes or not our acquiring model. So far, we don't have any specific news or changes to announce here today.

[Pablo Ricci, executive]

So for your second question, in terms of Fogape, so we have for this year about 1.5 -- well, about 4% of the portfolio of this year is Fogape Reactiva and about 8% of the portfolio is the Fogape loans from 2020. So total of around 12%.

[Operator]

Our final question comes from Mr. Alonso Garcia from Credit Suisse.

[Ricardo Garcia, analyst]

I just wanted to touch base on your expectations for loan growth next year. If you could comment on how much you expect to grow by segment and if you could comment this on both sides. First, on the demand side, considering that next year individuals will not have as much liquidity as they have had over the past couple of years, but also considering that the macro outlook is also more uncertain probably. And also on the supply side, how much appetite is for you to grow in each of the segments?

[Pablo Ricci, executive]

So well, for this year and the next year, maybe just -- it's almost the year is over. But for this year, around 7% to 8% for 2021 growth. For what we have been seeing, which is positive, is better origination from consumer loans. So we had a good quarter this year, the industry us as well. For next year, we think that the figures will be better. But if we look in the medium term, it's important to mention what Rodrigo mentioned is that the 2x elasticity that we saw in the past of loans through GDP, probably I think going to be something that we'll see in the short term. So it's more reasonable to expect growth levels that are below that 2x elasticity in the medium term when you're projecting.

For 2022, what we're seeing is an expansion of around 6% to 7% in nominal terms. And this is really still going to be driven by the expense on the mortgage loans, but at a slower pace than we've seen in the past in 2021 because of the rise of the interest rate, which will affect the demand side. But there's also a tighter supply side that we're seeing from banks as well because it's more difficult with all these issues that have happened internally in Chile for funding. So obviously, this is affecting the higher interest rates. There's more supply issues for our funding locally. And that affects rates and duration of these loans.

In terms of consumer loans, we're seeing this recovery, as I mentioned, from this very weak performance posted last year. And we're expecting that we should be seeing somewhere around the 6% growth level. Obviously, it depends on these issues of liquidity. But if liquidity continues to how it is today and continues to evolve positively in terms of a more normalized level of liquidity, I mean, we should see something where around 6% growth for consumer loans. And in the commercial side area. It depends on the political, obviously, for the demand, so how much -- what's happening internally in Chile, how the short term events follow through. And that will really have an expectation or changes in our expectations.

But in our base case scenario, what we're seeing is the SME should continue to lead the commercial loans with a growth level of around 6%, while the larger companies should grow slightly below that. And the larger companies will be probably more dependent on what's happening internally in Chile. So for Banco de Chile, obviously we want to be growing above those levels, focused on these high-margin products, very focused on the consumer, middle to upper income individuals and obviously SMEs.

[Operator]

And thank you very much. It looks like we are showing no further questions at this point. I'll perhaps pass the line back to the Banco de Chile team for their concluding remarks.

[Pablo Ricci, executive]

Well, thanks, everyone, for joining our call, and we look forward to speaking with you for our full year results. Thanks.

[Operator]

Thank you very much. This concludes our call today. We'll now be closing all the lines. Thank you very much. Goodbye.