Banco de Chile

SGO:CHILE

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, everyone, and welcome to Banco de Chile's Third Quarter 2022 Results Conference Call. If you need a copy of the Management Financial Review, it is available on the company's website.

With us today, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer; Mr. Pablo Mejia, the Head of Investor Relations; Mr. Daniel Galarce, Head of Financial Control and Capital; and Ms. Natalia Villela, Investor Relations Specialist.

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

I would now turn the call over to Mr. Rodrigo Aravena. Please go ahead, sir.

[Rodrigo Aravena, executive]

Good afternoon, everyone. Thanks for joining this conference call today, where we will present and analyze the results and accomplishments posted by Banco de Chile during the third quarter of this year.

Before beginning this presentation, I'd like to say we are pleased with the several achievements of our bank during the quarter, demonstrating its unquestionable leadership in the Chilean financial industry. Some of them include the following: We posted the highest level of net income and profitability in the local industry. We remain the best capitalized bank in the country, confirming our superior position to face business challenges and Basel III phase-in transition in the future.

Despite the market slowdown, the quality of our portfolio remains strong, also attributable to our sound and prudent risk management. Additionally, we continued posting significant advances in key strategic areas for the long-term sustainability of our bank, such as digital transformation, focus on improving productivity and ESG, among others. We will go into further detail about this and other aspects in the rest of this call.

As usual, we have divided this presentation into 3 main sections. First, an overview of the macro environment that we face, including our forecast for the next year; second, a review of the main advances in strategic projects; and finally, a deep analysis of our financial results.

Let me start with the macro section. Please go to Slide #3. The Chilean economy is slowing down. After expanding by 11.7% in 2021, the GDP went up by 7.4% and 5.4% year-on-year in the first and second quarter of 2022. A valuable information for the third quarter shows a further decline as the monthly GDP decreased by 0.4% year-on-year in September, becoming the first negative figure since mid-2020 when the economy was highly affected by social restrictions implemented during the pandemic.

This slowdown shouldn't be surprising, especially considering the growth has remained well above the long-term capacity of the economy, which is nearly 2.5%. That said, it is worth mentioning that this downturn of the GDP has been driven by the normalization of several temporary factors that fueled the expansion last year. Among them, we can highlight the following.

First, fiscal spending is expected to fall more than 20% in real terms this year. This reduction is mainly attributable to the withdrawal of several non-permanent subsidiaries, especially in 2021 when the fiscal spending increased by 52% in real terms last year, clearly a sustainable figure for the long run.

Second, the tightening in the monetary policy is also beginning to affect the dynamism of domestic demand , as expected. Even though the Central Bank began to rise interest rate last year, there is a delay between these changes and the impacts on the overall activity. There has also been a negative impact of the higher inflation rate on disposable household income, reducing the dynamism in private consumption even more.

The slowdown is even more evident when we analyze the GDP sequentially, as seen in the chart on the top right. Despite the year-on-year growth rate posted in the first half of the year, which has been influenced by the weak comparison base from 1 year ago, the activity hasn't grown year-to-date. In September, for instance, the level posted by the monthly GDP was 1% below the level achieved in December of [ 2021 ]. The breakdown shows this negative trend has been attributable to the fall of 10% in the commerce sector in September and the negative tendency in private investment. Services have recovered the lost ground during the pandemic due to the greater levels of mobility because of the ease in sanitary restrictions.

Despite the lower growth, unemployment has remained stable. In the third quarter, the jobless rate was 8%, remaining well below the peak of 13% seen in the peak during the pandemic, May 2020. This result is explained by the global recovery employment, which grew 6% year-on-year in the third quarter, and the labor force expanded by 5.5% year-on-year in the same period. Nevertheless, both figures have been reducing their expansion rate in line with the slowdown of the economy. The participation rate measured as the share of the active population remained at 59%, below the 63% observed before the pandemic.

All expansionary measures implemented during the pandemic contributed to widening macroeconomic imbalances such as the current account deficit and fiscal balance. Nevertheless, there will be an important improvement in the fiscal side this year. As a result of the greater dynamism in the local activity, tax collection posted a substantial rise this year, which, coupled with adjustments in the fiscal spending, will drive a surplus this year as the bottom right chart shows. This will be the first positive balance in a decade, and this improvement should also contribute to reducing the current account deficit. These changes have affected prices and interest rates.

Please flip to the next slide, #4. Total inflation continued increasing during this year, in line with the trend observed in most countries. In September, the headline CPI went up by 13.7% year-on-year, the highest since the '90s. The breakdown reveals that local inflation has been driven by external prices and the weaker currency, which was reflected in 17.1% rise in the tradable index, while the 10.3% year-on-year rise in the core index reflects pressures beyond the most volatile prices. Additionally, the non-tradable index increased by 96%. Since all the measures have remained well above the 3% target set by the Central Bank, it is clear that inflation in Chile is a generalized process rather than a situation explained by increases in only few articles.

In this environment, the Central Bank continued tightening the monetary policy. In the meeting held in October, the Board decided to lift the interest rate by 50 basis points to 11.25%, which is the highest rate observed under the current policy framework. The 3% inflationary target was set in 2003. Apart from rising interest rate, the Central Bank adopted a neutral bias by mentioning that the pricing cycle was ended in that meeting after rising the rate by 1,075 basis points since July of 2021. Consequently, the rate should be maintained at this level probably until the second quarter next year. It is worth mentioning that the Chilean rate is one of the highest in the region, reflecting the Central Bank's strong commitment to the inflation rate.

Likewise, long-term interest rates have continued increasing in this year following the trend observed since the last year. The main drivers of this trend include a higher monetary policy rate, the persistent inflation and the recent upward trend in international rates, as seen in the chart on the top right.

Undoubtedly, the volatility has increased significantly since the beginning of the pandemic in an environment marked by lower growth, higher inflation and a weaker currency. In such types of scenarios, sound financial buffers could make a material difference in terms of the ability to mitigate negative shocks, since they bring the possibility to implement measures that aim to protect the financial stability and to finance supportive contracyclical measures. In this context, as seen in the chart on the bottom right, it's worth mentioning that the Central Bank maintains international reserves by $58 billion, which are equivalent to nearly 12% of the annual GDP. Since Chile has a flexible exchange rate regime, this amount of resources plus the flexible credit line of $17 billion maintained with the IMF, provides sufficient resources to address potential economic disruptions. Additionally, also important to mention the existence of $25 billion in fiscal reserves composed mainly by sovereign wealth funds, which should allow countercyclical measures if the cycle worsens even more.

Now I'd like to share our forecast for this and then the following year. Please move to the next slide, #5. We expect the GDP to increase by 2% in the current year. Since the economy expanded around 6.4% in the first half, this estimate is consistent with the negative growth for the rest of the year. This slowdown will be a consequence of several factors, including: first, the reduction in fiscal spending, as mentioned before; second, the lagged effects of higher interest rate; third, the subdued growth in several trade partners, mainly China; and fourth, the negative impact of high inflation and lower liquidity levels on disposable income. This negative year-on-year growth rate should last until mid-2023, translating into a contraction of 1.2% in the whole year.

We expect inflation to follow in 2023, although at a gradual pace. Specifically, we foresee the headline CPI will decline from 13% this year to around 4.5% in the next year as a consequence of lower pressures in non-tradable prices due to the recession in Chile as well as from the lower commodity prices. Nevertheless, it is reasonable to expect the CPI to remain above the target of 3% at least until 2024. In this environment, we expect the Central Bank to maintain the overnight rate until the first half of the following year and the beginning of a gradual easing process towards 6% by the end of 2023.

Finally, I'd like to mention some risks that would have a magical impact of the economy if they occurred. Apart from the global sources of uncertainty relevant for Chile such as the evolution of China and the geopolitical conflicts, it will be critical to pay attention to the constitutional discussion in Chile, especially in terms of the mechanism and content to be considered in the draft of the new constitution. It is also relevant to the discussion and implementation of several economic reforms announced by the government, including modifications to both the tax and pension system, among others.

I'd like now to present the Chilean banking industry's main trends. Please move to the next slide, #5. The industry posted solid operating income and net income this quarter, driven mainly by the high level of inflation. Nevertheless, if we consider the effect of inflation on the value of equity, the bottom line growth would be much less. For example, return on average equity for the industry reached 20.6% this quarter, but if this were adjusted by the effect of inflation on equity, profitability would decrease significantly.

With regards to the credit quality, the industry continued to show the deterioration in NPLs and consequently, posting higher loan loss provisions, as can be seen in the chart on the bottom right of this slide. This is in line with expectations and our guidance of normalization as excess liquidity is reducing in Chile. Additionally, direct and second round effect of higher inflation and interest rates are factors that could negatively affect the payment behavior of customers, and this could further be impacted by the subdued economic growth we are experiencing. Nevertheless, in our baseline scenario, we expect that asset quality will continue returning to pre-pandemic levels at a quicker rate, excluding the effect of additional provisions from the equation.

In terms of loans, we have continued to see a weak performance in the industry with only inflation and CLP depreciation being the main drivers of growth. This lower dynamism is in line with the weak business and consumer confidence levels and stricter credit supply conditions from higher interest rates and tightening risk policies.

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

[Pablo Ricci, executive]

Thanks, Rodrigo. Please go to Slide #8. The basis of our stronger and more sustainable bank has been achieved through our sound strategic pillars based on customer centricity, productivity and sustainability. To reach our midterm goals, we have established 6 strategic focus areas. In the next slide, we'll go over some of these advances that we have made in digitalization, productivity and sustainability.

Please move to Slide #9, where we will highlight some of our initiatives in digital banking. Our main digital debit account continues attracting new customers to the bank. As you can see on the upper side of the slide, we have a stock of over 974,000 FAN accounts, adding approximately 79,000 new accounts during the third quarter of 2022 and over 385,000 during the last 12 months. Even though this account is doubling our core customer base composed of debtors and/or current account holders, it's important to highlight that we did this without compromising our service, as you can see in our total Net Promoter Score that continues in the levels of 75%. In fact, Cuenta FAN, which is a 100% digital account, has a higher level of customer satisfaction registering as Net Promoter Score of over 80%, which means that we are offering a great digital experience.

In line with our strategy, during this year, we launched diversity functionalities, digital products and services to complement and improve our ecosystem as listed on the bottom left. Additionally, we have launched new functionalities to our app, Mi Pago, to make this app more comprehensive and useful for our customers. Some of the new features are the possibility to withdraw funds from ATMs without a card, to pay thousands of online and physical stores using QR codes and make and receive transfers between select banks through the Paga2 functionality.

Please turn to Slide 10. As we mentioned earlier, productivity has been one of our key factors in our long-term strategy. In order to build the basis for a more efficient and productive bank in the long run, we have carried out several projects during the last years, as can be seen in this slide.

First, as you can see on the upper side of the slide, in 2019, we started a structural cost reduction process. This led to the optimization of our branch network, the creation of an efficiency program and a corporate sourcing and procurement unit. Through these projects, we reduced the number of branches by approximately 30%, gaining a significant level of efficiency and digitalize the procurement practices.

In 2021, we completed the first stage of our efficiency program and implemented a group of specialized and cross-functional teams to not only maintain, but to also find areas of improvement to drive productivity further. These areas are working together with many others in the front and back office to improve productivity and implement new cost optimizations.

Through our productivity and improvement pillar, we designed a retail banking sales excellence plan to standardize commercial activities, a campaign management optimization to increase the effectiveness of campaigns and enabling products for digital sales to improve our operational efficiency.

Finally, another pillar that is ongoing is the cost categories optimization that aims to optimize the costs from suppliers through strategic sourcing annual plan, supply and demand management opportunities and projects linked to future budgets. Our effort in this matter is bearing fruit, as can be seen in our efficiency ratio, which is the best among peers with a 0 real expense growth year-on-year as of September 2022.

Please turn to Slide 11. We are constantly boosting our initiatives related to sustainability to generate value not only for shareholders but also for society. We believe that we can contribute to the development of the country and people in many ways. During 2022, we implemented diverse projects such as the launch of our first sustainability financing framework to issue ESG-related bonds, the Banco de Chile Blue Commitment program to promote green financial products and held national contests to boost entrepreneurship aimed at students and SMEs. In addition, in line with our culture transformation process, we held leadership training programs emphasizing gender equality, labor ethics, and we advanced in the implementation of labor flexibility.

Finally, Banco de Chile employees carried out diverse volunteer activities mainly aimed at supporting social organizations, elderly people and reforestation. We are also proud to be, once again, the main partner of the annual Teletón fundraising campaign for children with disabilities taking place this weekend. We provide our infrastructure to raise funds and an important number of Banco de Chile employees volunteered. Banco de Chile has been participated as the main partner of this campaign since the beginning, more than 40 years ago, which has become one of the most important fundraising campaigns in Chile and even globally. We are also very pleased that diverse institutions have recognized our sustainability strategies and that we have the best ESG ratings in the Chilean banking industry according to global research firms.

Please turn to Slide 13 to begin our discussion on our results. 2022 has been profitable for the banking industry in nominal terms, as you can see on the chart to the left, where we led the sector with over 30% nominal ROAE. A key differentiating factor, apart from our competitive advantages and strategic projects, has been our strong governance practices and proactive management actions that permitted us to take the proper measures during the pandemic while benefiting from an environment of high inflation, interest rates and liquidity.

However, it's important to be aware of the transitory impact generated by the high level of inflation on profitability in periods where inflation is extraordinarily high. Since 2009, the nominal effect of inflation under Chilean GAAP, similar to IFRS, doesn't take into consideration the full impact of inflation on our income and balance sheet. When we consider the effective inflation on equity in order to recognize the loss in purchasing power, this reduces profitability of banks significantly.

The chart on the right shows the inflation adjusted return on average equity from the main Chilean banks considering the impact of inflation and equity by deducting the effective price level restatement of capital in the income statement. In our view, this measure provides a clearer perspective of real profitability since it shows the full economic value that is generated by maintaining the real value of equity after considering the negative impact of inflation on its nominal value.

Under this perspective, as you can see on the chart on the right side of this slide, we generated a return on average equity well above our peers and even higher than our pre-pandemic figures, demonstrating our superior competitive advantages and consistent customer-centric long-term strategy.

Please turn to Slide 14. We posted another strong bottom line this quarter of CLP 340 billion, 89% above the same period last year. Inflation and interest rates were the main drivers of the results, supported by our solid risk management that kept both credit and market risks low. Especially relevant is how we performed in comparison to our peers. The chart on the right shows how we significantly surpassed all of them.

On a sequential basis, net income generation decreased in line with our expectations of a reduction of inflation during the second half of this year. CPI is predicted to begin slowly to decrease during the next quarters to return to the medium term to the Central Bank target of 3%. We believe that our long-term ROE should go back to levels we posted prior to the pandemic, near 18% as long as inflation converges to normal levels aligned with the Central Bank's target range and interest rates, particularly in the shorter term, return to neutral figures of around 4.5% to 5%.

However, this level of ROE depends on the long-term impacts of the pandemic and politics that have affected the economy in areas such as inflation, interest rates, workforce as well as the evolution of reforms that are being discussed. For 2022, return on average equity will be well above this level, and 2023 is also expected to be higher as interest rates and inflation will remain elevated and the excess of customer deposit volumes liquidity will be ending its process of normalization.

Please turn to Slide 15. Total operating income rose by an impressive 47% year-on-year, primarily from a rise in noncustomer income and in customer income. The strong increment in noncustomer income has been achieved by proactively managing our UF-denominated asset position that allowed us to benefit from higher-than-normal levels of inflation based on gains related to the contribution of our structural UF net asset exposure that hedges our equity from inflation. We have also benefited greatly from the favorable shifts in interest rates and inflation on contribution of temporary gaps held by our treasury when managing balance sheet and currency mismatches. As of September 2022, our UF net asset gap in the banking book was approximately CLP 8 trillion, translating into a sensitivity of about CLP 80 billion for every 100 basis point change in inflation, all things equal, or approximately 20 basis points in net interest margin.

In turn, the important expansion showed by our customer income is primarily explained by the higher contribution of demand deposits to our funding cost as the interest rates have risen significantly over the past 12 months, partially offset by the expected reduction in DDA volume that we have been anticipating in past conference calls. In addition, fees during the period also contributed positively to the rise in customer income growing 14% year-on-year. This was due to higher transactional income from credit cards up 43% from last year due to higher volumes, a 20% increase in checking account administration fees because of a larger customer base as well as the effective inflation on fares and the 5% rise in insurance premiums in line with the normalization of consumer loan originations as well as higher fees from all of our subsidiaries, among others.

Net interest margin this quarter rose to 5.8%, up from 3.4% a year earlier. And in terms of total operating margin, we recorded a ratio of 6.9% this period. Both figures were significantly higher than all of our peers, as shown on the right. We attribute this not only to our sound long-term strategy that has generated a track record of attractive returns, but also to our superior corporate governance that sets policies and effective controls for management and helps to ensure long-term sustainability of the bank.

Please turn to Slide #16. Total loans grew 9% year-on-year to CLP 36.1 trillion and 1% on a sequential basis. Except for consumer loans, most of this has been driven by market factors. It's important to highlight that 36% of commercial loans and almost 100% of mortgage loans are denominated in UF. Likewise, around 17% of commercial loans are denominated in foreign currency, mainly in U.S. dollars. Consequently, inflation and exchange rates behavior play a huge role in this loan growth figure. Isolating these market factors, loan origination remained weak, in line with the poor consumer and business confidence levels, higher interest rates and economic uncertainty we are facing as well as our prudent approach to credit risk. This slowdown is easily seen on the chart on the bottom where growth is in negative territory, as CPI reached very high level during the last 12 months.

Nevertheless, our consumer loans continued to show good dynamism, growing 17% year-on-year and 2.6% quarter-on-quarter. This positive performance is mainly due to strong origination figures, thanks to solid value propositions that accelerated business growth. Among other initiatives, we incorporated new commercial developments that permitted us to deploy more successful commercial campaigns aimed at both increasing consumer loan origination and enhancing credit card transactions by reinforcing loyalty programs.

More specifically, as mentioned last quarter, the retail banking sales excellence program has driven consumer loan growth by boosting the productivity of our sales force through 4 key pillars. First, we are improving the effectiveness of risk models to increase the amount of credit offers available for customers and improving the approvals being done at the branch level using preapproved loans and by increasing risk attributions. Second, leveraging digital tools to enhance analytics. Third, expanding our business intelligence and building new propensity models, which is a set of approaches to building predictive models to forecast behavior of target audience by analyzing their past behaviors. Lastly, developing commercial discipline through the implementation of management and training procedures branch-per-branch.

The successful execution of this program has improved KPIs, especially originations per account manager. As a result of this program's success, we are in the first stages of implementing the program for the SME segment. We have seen positive results so far, especially with important improvements in productivity measured by sales per account manager.

Please turn to Slide 17. Funding has been another key element during this economic cycle. Thanks to our outstanding level of demand deposits and their prudent positions taken in the balance sheet, we have been compensated with strong margins.

First, it's important to note that the evolution of deposits has progressed in line with our expectations, as shown on the chart to the top right. The Central Bank has continued increasing interest rates, which has decreased demand deposit volumes from customers and increased time deposits. We expect that this trend to continue until we reach more normal levels of liquidity in terms of deposits to loans of around 33%. Nevertheless, we are confident that we have the best quality of customers focused on per income retail segments and top-tier companies. This mix should permit us to maintain a leading position in demand deposit funding as liquidity returns to normal levels in the medium term.

Second, this source of funding and short-term deposits denominated in pesos support part of our structural gap on our balance sheet. Given the lagged response from nominal interest rates to inflation, we benefit from a trade-off when funding our UF net asset position with these liabilities. As a result, we gradually and responsibly increase our UF exposure in the banking book over the last quarters, reaching a gap on the balance sheet of around CLP 8 trillion, up from CLP 7.3 trillion 1 year earlier.

We also have the strongest capital ratio amongst our peers, as shown on the next Slide #18. Our total capital ratio reached 18% as of September 2022, well above the industry, and we also outranked our peers in this ratio and CET1 level with a level of 13.3%, as shown on the chart to the left. Despite our larger capital base, we have consistently posted a superior ROE versus our competition, as shown on the chart to the right. This is a unique situation and has been accomplished by our long-term consistent customer-centric strategy that focuses on driving results to responsible growth and sound credit and market policies. Additionally, we are very comfortable with this capital position, and we have ample room to implement Basel III requirements smoothly and at the same time, provide attractive dividends to our shareholders.

Please turn to Slide 19. We posted this quarter net credit charges of CLP 106 billion, up from CLP 89 billion in the third quarter of 2021. Additional provisions represented 33% of the total, substantially less than last year. This is in line with the normalization of liquidity that is translating into more normal levels of NPLs and expected credit losses for models as shown on the table on the left side of this chart.

When compared to our peers, we continue to have the soundest portfolio, as shown on the chart on the bottom left, with a significant gap to the next closest competitor. On top of this, we also have the highest coverage ratio of 3.7x and the most additional provisions amounting to CLP 685 billion. This positions us extremely well for the uncertainties that lie ahead to maintain cost of risk at acceptable levels if the economic environment worsens beyond our baseline scenario.

Finally, I want to emphasize on the chart on the bottom right that revenue generation widens even more from our peers when we include this indicator of cost of risk, thanks to our superior performance, clearly demonstrating our excellence in managing our business.

Please turn to Slide 20. Expenses this quarter rose by 20% over last year. Most of this rise is due to the high inflation levels we have faced since most of our expenses, including salaries, are indexed to CPI. Other factors that explain the expansion are higher provisions for variable compensation and the onetime bonus granted to part of our staff to recognize their commitment to the company in the achievement of our excellent performance in 2022.

In terms of efficiency ratio, we reached this quarter 33.2%, well below the industry and our peers, as shown on the chart on the bottom. As mentioned earlier in the presentation, this excellent cost control and efficiency has been feasible through a sound productivity plan and initiatives. We are convinced that the progress we have made will allow us to post long-term efficiency levels below 45% when inflation normalizes.

Please turn to Slide 21 for key takeaways. First, we expect the transitory recession between the fourth quarter of 2022 and the second quarter of 2023. In line with our baseline scenario, we do not expect to have a material impact in our results due to a riskier environment. Our strategy has been focused on growing responsibly to drive results. This, in the short term, has grown our bottom line more than our competition by fully taking advantage of higher inflation and interest rates to generate higher operating revenues. Additionally, the high levels of liquidity in the industry have permitted us to keep cost of risk low. Looking forward, we expect to return to long-term ROEs closer to 18% and in the short term [ to post ] ROEs above this level.

Before moving on to questions, I want to stress that we posted the best bottom line in the industry, the best ROE amongst our peers with the best capitalization levels. All of this is not by chance, but it's due to our sound strategy, top-tier corporate governance and first-class competitive advantages. This should continue to permit us to post solid results in the future and provide a great investment for our shareholders.

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

[Operator]

Thank you very much for the presentation. We'll now be moving to the Q&A part of the call. [Operator Instructions] Our first question comes from Mr. Alonso Garcia from Crédit Suisse.

[Ricardo Garcia, analyst]

My first question is on your cost of risk for next year. First, if you could comment on any kind of guidance that you have for 2023. I know that additional provisions are a decision of the Board. But I don't know if this guidance that you are seeing for next year could include either any creation of more additional reserves or maybe considering the challenging environment, a release of such additional reserves? Also in terms of the cost of risk, I don't know if you are -- if you have estimated the potential impact on your level of reserves from the regulatory change regarding methodology to provision the consumer portfolio. So that's question number one in terms of cost of risk. My second question is on your outlook for NIM. This year, you are guiding it for 5.3% NIM. But next year, you have a combination of lower interest rates, but also lower inflation. So I don't know if you could provide some color on where the NIM could go up to this 5.3% this year?

[Pablo Ricci, executive]

So in terms of what our expectations are for risk this year and the next year, what we're seeing is we're still in a transitional year with the low levels of cost of risk, I would say, through models and in the long term. You have to take into consideration that there's an important part that's composed of additional provisions, which today, as long as we start to see more certainty in the future, we can expect probably more normalization in terms of the cost of risk figure that should be more composed of provisions for models going forward. So what our expectations are for this year and the next is levels of around what we're seeing today at 1.2%, 1.1%, 1.2% for next year. And it's important to mention what you spoke about in your question is that there's a new model for the consumer loan book, a new provisioning model. Basically, where that new provisioning model is being discussed today for a standard consumer loan model. And there is a consultation period that's taking place today. It should end near the end of the year, and probably this will be implemented sometime next year.

So what's important to mention is that we've been very prudent in terms of our risk policies and how we manage our risk at Banco de Chile, and we've implemented more strict procedures and then policies in the consumer loan book. So more likelier than that is that the level of cost of risk from this new model should be substantially less than our market share in consumer loans and much less than that would represent of approximately USD 1 billion, that's the regulation -- that the regulators mentioned. That would be the cost of this new model. So I think more importantly even is that for 2023, what I mentioned, the 1.1%, 1.2% of cost of risk, which is in line with the long term for 2023, is also including what we expect as long as our baseline scenario comes true to include the new provisioning model. So around the 1.2% of cost of risk, including the expected cost of this new model based on the information that we have today. But it's important to mention that this is still being discussed, so we don't have a final draft.

[Ricardo Garcia, analyst]

Sorry, just a follow-up there, the 1.2% -- I mean when you say it includes this new methodology, do you mean that you are considering this 1.2%, the increase in your stock of provisions? Or only the new, let's say, run rate for the consumer portfolio as part of this 1.2% cost of risk?

[Pablo Ricci, executive]

It's -- the cost of risk that we should have, including the implementation of this new model.

[Ricardo Garcia, analyst]

Okay, but also...

[Pablo Ricci, executive]

Actually, you cut out.

[Ricardo Garcia, analyst]

I mean also the onetime impact for...

[Pablo Ricci, executive]

Yes, yes, yes. The onetime impact and the ongoing, all of it. So in a baseline scenario should be around those levels. We don't expect a strong deterioration in Chile. We're entering a short temporary period of a recession between now and mid-next year [ without ] relatively stable, slightly higher unemployment levels, but we don't expect a strong deterioration. So in this baseline scenario, we don't expect a relevant change. If we look at the portfolio and the NPLs per product, everything is below the levels that we've had prior to the pandemic. We have a very solid portfolio in all the segments that we operate in. There's a few segments that have had some issues, but we have a very strong risk management team. The issue is in the industry, not for us, which manages very well, and we haven't seen a relevant impact at all for us. So we're very, very comfortable with the level of coverage that we have today, especially that we have the highest level of coverage ratio in Chile and that's something that has to be reviewed in the medium term, obviously, as long as how the economy continues to evolve and what will happen with those additional provisions in the future, which is a Board level discussion. So we can't roll out a reversal of additional provisions in the future, but it really depends on the Board level and the evolution of the economy as a whole.

In terms of NIM, so if you look at NIM, today, we have NIMs that are in the level of 5.6% year-to-date. Last year, it was around 3.4%. What drove this high level of NIM is our prudent risk management practices, not only in credit risk but also in market risk, which allowed us to take the full gain of higher inflation and interest rate in this figure. So we had a very strong increase, which we can see in our bottom line in net interest margin and net...

[Operator]

Please stand by, ladies and gentlemen, I think we have dropped the host. Banco de Chile will be reconnecting shortly. Please stand by. [Operator Instructions] Please go ahead, Ricci. I [ know ] you are back, right?

[Pablo Ricci, executive]

Okay. I don't know where I was left off. But in terms of -- where I was cut off. But in terms of NIM, we had NIM around 5.6% year-to-date for 2022, around 3.4% in 2021, and this was driven by the prudent management of the bank and how we manage our total business market risk. And we took full advantage of the rise of inflation that went from around 3.5% year-to-date in 2021 to the 10.5% in -- that we've seen year-to-date, the variation of the UF for 2022 and the full year advantage of the rise in interest rates. So for next year, we foresee a decrease in inflation, which is going from the 10.5% half what we've seen today in year-end closer to 12%, 13%, somewhere around there. But for 2023, the full year inflation should be something similar to 4.5%, 5% and overnight rate of around the 6%. So under this scenario, we expect our net interest margins to be around 4.3%, 4.5%, somewhere around that range, which is in line with the longer-term levels of net interest margins considering a long-term overnight rate of around 4.5%, 5%, and inflation around 3%, 3.5% in the long term.

[Rodrigo Aravena, executive]

Hi, Alonso, this is Rodrigo Aravena. Let me highlight 2 important things to consider for the next year. One of them is that within those declines in the inflation posted at the year-end for this in the next year, as Pablo said, it's very important to keep in mind that there will be only a gradual decline in inflation in terms of the average inflation between these and the next year. Since for this year, we're expecting an average inflation rate of around 11.5%, while for the next year, we're expecting an average inflation rate, not year-end, an average inflation rate of around 18% for the next year. The same for the interest rate, we're expecting only a decline, only a gradual decline in the interest rate from 11.25% to 6% next year that the Central Bank would likely start the easing process by the second quarter of the next year. Also very important to analyze [ some factor of ] [indiscernible] for the next year, especially some reforms that probably will be discussed and implemented next year, for example, the tax reform, the pension reform. The government yesterday announced a proposal. So it's very important to analyze how these reforms will be discussed, will be implemented next year because these are one of the important ways to monitor for the next year.

[Operator]

Our next question comes from Mr. Jason Mollin from Scotiabank.

[Jason Mollin, analyst]

Congratulations on the very strong profitability and results in general in this quarter and the past quarters in absolute terms and versus your peers as well. I thought maybe top down, Rodrigo, you mentioned pension fund reform and tax reform. If you could talk a little bit about how that could impact the economy, the banking sector and Banco de Chile? And then maybe on a specific level, just to talk a little bit the ROE outlook in a normalized basis looks great. But just wanted to get a sense of the growth in fees, in particular, relative to the growth in expenses. So we saw total noninterest expenses were faster than fees. And you showed the breakdown on some of that is bonuses and such, which seemed very narrative in this current context. But if you can give us some color there, that would be helpful.

[Rodrigo Aravena, executive]

Jason, this is Rodrigo Aravena. So in terms of the long-term ROE for the bank and for the system as well, I think that before providing a specific number, it's very important to analyze which are the expansions that we are considering for that estimate. First of all, we are expecting an economic growth for the long term of around 2.5%, 2.3%, which is a bit lower than demand that we used to have in the past.

So there are several reasons behind this lower expectation for the long term in terms of economic growth, including, for example, the lower economic growth for the world, that some long-term impact from the pandemic, we have to remember that there was a deterioration in terms of savings as a consequence of the sovereign pension fund [ growth ]. So that's why additionally, we're expecting higher long-term interest rate in the future. Chile used to be a country with a new [ price ] interest rate of around 3% in terms of the monetary policy rate. Today, we have a different country, so they would have a different level of internal savings. So there are reasons that to be consistent with a higher level of interest rate of equilibrium in Chile. A similar analysis we've had in terms of inflation. We can rule out that the inflation for the next couple of years, I believe, will be a bit higher than the Central Bank target, which is 3%. So that's why we're expecting a year-end inflation at 4.5% for the next year. And we can rule out that in 2024, the inflation rate will remain above the Central Bank target, which is 3%. So what you can see here, we have some different trends, mix trends, I would say. On one hand, we have a negative impact from the lower economic growth. But on the other hand, the acknowledge, the impact for having a higher level of interest rate, high inflation in the future, we'll have the opposite impact in terms of our profitability. In terms of reform, the final impact on the economy in the long term coming from the reform, we'll have to analyze finally, how will be the discussion, the final contents to be included in the reform. We'll have to consider as well the impact, the phase of the absence of majority for any coalition in the congress, which can create a different result from this reform. So, so far, the analysis that we'll have for the long term, I would say, is a lower growth in terms of potential rate, but high inflation and interest rate at least for the next couple of years. So how this will impact in terms of our ROE for the long term and [ deposition ].

[Pablo Ricci, executive]

Okay. So well, in terms of ROE for this year and the next year, we have -- we're having very good figures. So from year-to-date, we have over 30% ROE. We have -- for the end of the year, will be one very strong as well, as you know. And for 2023, it's still a transitional year where we still have high inflation, high levels of the average inflation, high levels of average overnight rate, which the averages is very important in terms of the average inflation for fees and expense growth. So if we look at for next year, we should think that the bank will continue growing. Generally, we grow around 7%, 8% in number of customers. That's one of the main drivers for the growth, cross-selling those customers and also the inflation impact on the fares that we charge.

So we should have low double-digit fee growth for next year. For expense growth, it also should be slightly higher than the inflation that we're expecting because of the averages. So we have a high level of inflation in 2021, which affects inflation for -- which affects our cost for 2023. I think I had mentioned [indiscernible] we had high inflation for 2022, which is affecting the cost for 2023. On top of that, we have inflation in 2023. So the most likely scenario is that cost for 2023 should be slightly in line or slightly above inflation. So for 2023, we have to think something above 20% ROE. And in the long term, ROEs should be in line with a long-term level of 18%, which takes into consideration what Rodrigo mentioned, higher overnight rates on average inflation in line with the Central Bank target range of 3% or maybe slightly above that. That's important to mention. And also our expectations and our focus is to be the most profitable bank in Chile with the highest level of ROE.

[Jason Mollin, analyst]

I guess we just -- we'll need to wait in the -- to see how these reforms evolve or what the final versions are. Any comments on that process or when we could see that?

[Rodrigo Aravena, executive]

So it's important to keep in mind that there will be several discussions in Chile, especially over the next 6 months, I would say. Today, the congress is discussing the mechanism for the new constitutional process. You have to remember that there was a next referendum with mandatory [ both the ] -- more than 50% people rejected the proposal for new constitution. So the question is, okay, okay, what will be the next step in that process? There will be not a new referendum. It has to be decided very soon. The same for the tax reform. Today, there is a discussion in terms of mining taxes, personal and wealth taxes, et cetera, things for the pension reform. So I would say that the next 6 months probably will be critical in terms of the evolution of economy and the economic cycle for the next couple of years at least. So that's why we think that one of the few ways to monitor in Chile for the future is related with the economic discussion in Chile in both -- in terms of the new constitution as well as reforms.

[Operator]

Our next question comes from Mr. Andres Soto from Santander.

[Andres Soto, analyst]

I have 2 questions. The first one is related to expenses. You mentioned this target for efficiency ratio to be at below 45%. When I look at your numbers and the cycle evolution, and I look at them from a cost-to-asset perspective, I see that an impressive improvement that you delivered in 2021. You guys mentioned you got 30% of your branches. And you reached a long-time low of 1.8% cost-to-assets. Looking ahead, obviously, there is inflation, but if I take the 45% number that you just provided us along the guidance, that implies a cost-to-asset of 2.1%, which doesn't look too much -- too ambitious. So I would like to understand to what extent there is potential for this efficiency ratio to be below the level that you are currently projecting?

[Pablo Ricci, executive]

The 45% is -- the target is to be below the 45%. So before the pandemic, we had a level of around 45%, consistently around that level 44%, 47%, around that level. But -- and the target is to continue to be more efficient and especially through the use of digitalization, more technology, less branches. We can do more without the need of hiring more people. That makes it possible to become much more productive and efficient. So the 45% is what we have, and the target is to continue to be embedded. For example, for next year, we expect a level of efficiency, which will still probably below the 40% despite the drop in inflation. So it's -- to look at -- to use efficiency in Chile is difficult because efficiency is affected so much by inflation on the top line. So to use the over assets is a good way to measure the long-term productivity of the bank. And we should continue to be very efficient in the medium term in terms of cost to other indicators other than operating income.

[Andres Soto, analyst]

And looking more to the short term. When we look at the results in the third quarter, there was a significant increase in expenses. What part of that increase is structural? And what part is temporarily due to bonus payments or any other factors that could be not -- over the next few quarters?

[Pablo Ricci, executive]

It's not structural. It's mainly due to the large bonus that we gave employees for their merit for doing a very good job during these last few years. It's mainly related to bonuses.

[Andres Soto, analyst]

Got it. And then my final question is more related to dividends. When you described -- you guys described the outlook for Banco de Chile, you are thinking about lower growth of the medium term, higher rates, higher inflation, higher profitability. What are the levels of capital ratio that you guys feel appropriate for that situation? And how do you believe investors should think about Banco de Chile, should be more of a dividend payer looking ahead instead of a growth story? Or what are your thoughts around your capital levels and the potential for increased dividend distributions?

[Pablo Ricci, executive]

I think it's a combination of what's happening in Chile and the evolution of the economy and how strong all companies in Chile can continue growing. In terms of how we generate a consistent and long-term attractive dividend for our shareholders, we've been doing that very well in this scenario. We've had a very attractive dividend in the last years. We have a very -- we have the highest profitability in terms of ROE. We have the highest coverage ratios. And we have the highest CET1 ratio. So we also have to be very careful in managing our capital efficiently. And we think that we have a strong position that we can continue providing a strong and attractive payout to our shareholders. So when we look at our dividend payout ratios, we have the dividend policy, which we recorded provision for minimum dividends and equity accounts of 60% of distributable net income, which is net income less effective inflation. On equity, you get to distributable that -- but we also have to take into consideration the future periods and what the economy and expectations of growth that we can have to have a good level of risk return and a good level of CET1, et cetera. We can't have CET1 and baseload ratios growing infinitely [indiscernible] to what we've seen in the past. We have rolled out that we have a higher payout ratios in the following years, as we have had in March of this year and in prior periods when we've paid out more than the minimum annual dividend and the policy that we record for our equity accounts.

[Andres Soto, analyst]

And what will be the level of CET1 that will make you feel comfortable?

[Pablo Ricci, executive]

I'll pass this to Daniel Galarce.

[Daniel Ignacio Galarce Toro, executive]

This is Daniel Galarce. Yes, with the current levels of CET1, we are quite comfortable. Of course, we know that the CET1 has been reinforced by the excellent results we have recorded so far. But with the levels we are presenting today, we feel comfortable going ahead.

[Operator]

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

[Yuri Fernandes, analyst]

I have a question regarding like funding like deposits growth and all that. We saw CMS without a new public hearing for new liquidity requirements for the Chilean bank. So my question is, how do you see that regulation where you will be demanded to drive more funding? This can drive more competition for deposits and higher funding costs. Like is this something that could happen in the system? So that's kind of the first question in this regard. And the second one is just how you feel about funding, right, because you have a very good funding, best-in-class. So how can this become even a more competitive advantage for you, if that's the case?

[Daniel Ignacio Galarce Toro, executive]

Regarding liquidity, we have a solid position in terms of liquidity. Of course, one of our main patent setters is the deposit base that we have, not only in terms of demand deposit, but also time deposits. We're not really concerned about this going forward. But of course, we are also analyzing the new rules for -- in terms of liquidity for the whole system. But we consider that we are in a good position in order to address these requirements. And the second question was?

[Yuri Fernandes, analyst]

No, no. How comfortable you feel about funding, but I guess you already replied.

[Daniel Ignacio Galarce Toro, executive]

We normally set our funding needs, depending on the growth we are predicting for the whole balance sheet. And accordingly, we have room to grow in different sources of funding, like long-term bonds, depending on how the balance sheet is going to grow over the future. So today, it's not unserved for us.

[Yuri Fernandes, analyst]

And regarding the demand deposits and time deposits, is the worst behind? Or should we continue to see demand deposits shrinking given the cost of opportunity of higher rates while time deposits [ mature ]?

[Daniel Ignacio Galarce Toro, executive]

We should continue to see a normalization in terms of demand deposits. And of course, this is going to be replaced with time deposits mainly and particularly for individuals, for instance. But in the rest of the cases, probably we will have a mix between time deposits and long-term debt, depending on the growth of our balance sheet. In addition, it's important to mention that in the case of the recent liquidity changes, as you could see in our last report. Basically, the impact that we have in terms of the LCR ratio was not very significant because basically, we have a good grade buffer in terms of high liquidity -- high-quality liquid assets. And accordingly, the LCR is well above the regulatory [ events ]. Also -- and even the [indiscernible] could end in the future, our liquation so continue to be very comfortable for us.

[Pablo Ricci, executive]

I think one thing -- It's Pablo Mejia. So one thing I'd add also is that you have to take into consideration that we have the best quality of customers that we consider, at least. So we have a very high level of market share in upper income, retail segment and very top-tier companies. So this mix should continue to allow us to have a leading position in terms of demand deposit funding, especially in this time, the liquidity returned to more normal levels in the medium term when all these funds and current accounts from all these government and different regulations or changes during the last few years, this liquidity dissipates.

[Operator]

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

[Pablo Ricci, executive]

Well, thank you for everyone for joining our call, and we look forward to speaking with you for a full year 2022 results.

[Operator]

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