Banco de Chile

SGO:CHILE

Earnings Call Analysis

Banco de Chile reports strong profitability and outlook for growth.

In the third quarter of 2024, Banco de Chile showcased robust performance, achieving a net income of CLP 288 billion, reflecting an 11% year-over-year increase. This translates to a return on equity of 21.3%. The bank's loan growth outpaced the market, increasing 3.9% year-on-year, primarily in consumer and mortgage segments. Looking ahead, they anticipate industry loan growth of about 5%, buoyed by improving economic conditions. With expectations for inflation stabilizing around 4.5% and a target return on equity of 18%, the bank remains well-positioned against peers, maintaining a strong capital ratio of 14.3%.

Strong Financial Performance Continues

Banco de Chile has shown remarkable resilience in its financial performance during the third quarter of 2024, with a net income of CLP 288 billion, translating to a return on average equity (ROE) of 21.3%. This performance represents an 11% increase compared to the same period last year. The institution continues to lead the industry in profitability metrics, outperforming peers in net interest margin (NIM) and operating margins as it maintains a strong focus on enhancing customer value.

Solid Revenue Growth Driven by Diverse Income Streams

The bank's operating revenues grew by 6% year-on-year, predominantly fueled by an 8% rise in customer income. Notable increases were observed in fees from mutual funds (up 23%) and transactional services (up 15%), signifying the bank's successful adaptation to changing market conditions. Improved lending spreads contributed significantly to growth within its consumer loan portfolio, where average spreads increased by 128 basis points.

Emerging Economic Trends Impacting Loan Growth

Loan growth has been modest, with an overall industry increase of just 2%, contrasted by Banco de Chile’s better performance at 3.9% year-on-year growth. This modest growth is mainly attributed to low consumer confidence and investment levels in the local economy. Specifically, mortgage loans grew 7.4% year-on-year, while consumer lending saw a healthy rise of 4.1%. However, the commercial loan segment remains sluggish, growing only 1.8% compared to the industry average decline of 1.2%.

Cost Efficiency Initiatives Yield Results

The bank has made significant strides in cost control, reflected in a cost-to-income ratio of 56.5% year-to-date. Efforts to optimize the branch network and leverage digital processes have resulted in operational efficiencies. The reduction in the number of branches by 10% over the last year showcases the bank's commitment to a more cost-effective operational model while improving customer service through technology enhancements.

Resilience Against Non-Performing Loans

Banco de Chile reported stable non-performing loans (NPLs) at 1.5%, maintaining a strong coverage ratio of 2.6x. Although slight increases in NPLs for commercial and mortgage loans were noted, the bank’s history of prudent risk management positions it well to handle potential future challenges. The anticipated economic recovery is expected to stabilize these ratios further.

Forward-Looking Guidance on Economic Conditions

Looking ahead, the bank forecasts GDP growth of 2.3% for Chile in 2025, with inflation expectations settling around 4.5% this year and potentially lower in the next. These economic factors are expected to shape the banking landscape, with an anticipated rise in demand for loans. The Central Bank's monetary policy is projected to ease, with interest rates expected to hover around 5%.

Commitment to Sustainability and Digital Transformation

Banco de Chile is actively engaging in sustainability initiatives and enhancing its digital banking capabilities. Through various programs aligned with corporate responsibility, such as environmental cleanups, and a strong focus on innovation in digital offerings, the bank aims to attract a broader customer base. The digital account growth of 36% year-on-year signifies successful adaptation to customer needs, indicating a promising future in digital banking.

Strategic Positioning for Future Growth

With a well-capitalized structure—evidenced by a CET1 ratio of 14.3%—Banco de Chile is poised for continued growth and investment. The bank's long-term strategic goal includes a return on average equity target of around 18%, driven by a commitment to responsible lending practices and efficient operations. Continuous focus on market leadership in consumer and commercial loans will help maintain its competitive edge.

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, and welcome to Banco de Chile's Third Quarter 2024 Results Conference Call. If you need a copy of the management's 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, Head of Investor Relations; and Daniel Galarce, Head of Financial Control and Capital.

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

[Rodrigo Aravena, executive]

Good afternoon, everyone. Thanks for joining this conference call today. We are pleased to present the performance of Banco de Chile during the third quarter of this year.

Once again, our bank demonstrated its unquestionable leadership and consistency over the time. Some of the main achievements of this period includes: we continue leading the industry in profitability after posting a net income of CLP 288 billion, equivalent to 21.3% return on average equity in the quarter and 22.8% year-to-date. We also outperformed our peers in terms of NIM, fees and operating margins.

In addition, our customer income continues to grow on an annual basis, primarily steered by income from loans on the ground of improved lending spreads. Despite the low industry business growth environment, we grew faster than the market in loans, gaining market share in all the segments, in line with our main long-term strategic goals.

We also had positive advances on efficiency, posting a cost-to-income ratio of 56.5% year-to-date, outperforming our main peers and our long-term target. On the nonfinancial side, we were distinguished by external entities due to our excellent service quality and corporate reputation. And also, we also continue carrying out several initiatives aligned with our 3 pillars, which will be presented later in this presentation.

As usual, we will begin this webcast with a brief analysis of the macro environment. Please go to Slide #3. The Chilean economy continues posting signs of recovery, as you can see in the chart on the left of this slide. In the second quarter, the GDP increased by 1.6% year-on-year following the 2.5% year-on-year expansion, seen in the previous quarter. It's important to mention that in 2023, the economy grew only 0.2%, as a consequence of the normalization after the several imbalances that we had during the pandemic.

The local recovery has mostly been attributable to the greater contribution in net exports, as the chart on the top right displays. As of June 2024, the trade balance posted in the last 12 months a surplus of $17 billion, a figure 43% higher when compared to the balance seen a year ago. This trend continued in the third quarter, as the last 12 months trade balance surplus improved even more, to $20 billion, increasing 31% year-on-year.

In a breakdown of domestic demand, consumption continues showing a slight recovery. In the second quarter, it expanded by 0.8% year-on-year after posting 1.5% growth in the previous 3 months. This trend has been consistent with the behavior seen in the labor market, where the employment rate has been hovering around 8.7% with higher real wages, as you can see in the chart on the bottom right. Nevertheless, gross investment remains subdued, as it has contracted by 6.1% and 4.1% year-on-year in the first quarter and second quarter 2024, respectively.

Available information from the third quarter suggests that the recovery is underway. The GDP expanded by 2.2% year-on-year and 2.1% year-to-date. However, the breakdown from the domestic demand still reflects mix trends, while several consumption-related figures such as retail sales and services continue improving. The main investment indicators, for example, capital goods imports and real estate indicators, continue suggesting a weak investment, at least in the short term.

I'd like to move to our analysis of prices and rates. Please go to Slide #4. The headline inflation rate in Chile continues hovering around the upper bound of the Central Bank target, as seen on the left chart. The annual inflation rate in September was 4.1%, in line with the 4.2% year-on-year posted in June. The persistence of the CPI has mostly been attributable to energy, which increased by 9.6% year-on-year in September due to the adjustment in electricity bills, which according to the Central Bank estimates, could rise the CPI by 150 basis points between mid-2024 and mid-2025. Services have also contributed to higher inflation, as they rose by 4.9% year-on-year in September.

On a sequential basis, the CPI increased by 1.1% in the third quarter after rising by 0.7% in the previous quarter. The downward trend in inflation has allowed the Central Bank to continue reducing the interest rate. In its latest monetary policy meeting held in October, the Board decided to cut the interest rate by 25 basis points to 5.25%, accumulating a total reduction of 600 basis points since the beginning of the current easing cycle in July of 2023, as seen in the chart on the upper right.

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

Now I'd like to present our baseline scenario for this year. Please go to the next slide, #5. We expect the economy to continue posting signs of recovery. In this environment, we foresee an increase in GDP growth from 0.2% in 2023 to 2.3% this year. This expansion would be driven by an increase of around 6% in export that should positively be influenced by external factors such as copper prices and the improved dynamism of our trade partners. Consumption is also expected to perform better relative to 2023 as a consequence of lower interest rate and the partial recovery in the employment. On the opposite, we expect investment to continue in negative territory this year as uncertainties surrounding the track of reforms in diverse economic fields has continued to drive and delay investment decision, which has coupled with lengthy approval processes in the case of large-scale projects.

Inflation expectations have increased this year, mainly due to the unexpected rise in energy bills, as I mentioned earlier in this presentation. Due to this, we expect the CPI to post a 4.5% increase this year in an environment where the Central Bank will likely maintain a contractionary monetary policy stance since the interest rate would end the year at 5%. In the table of this slide, you can see the summary of our estimates, while the chart on the right clearly shows the upward trend in consensus forecast for both interest rate and inflation. It is worth mentioning that these forecasts are subject to several risks. As we mentioned in previous calls, the evolution of the global environment is extremely important for Chile given its deep integration into the rest of the world, factors such as the GDP growth of China and the U.S. and the potential escalation of armed conflict in the Middle East and Eastern Europe and uncertainty related to the change of government in the United States are worth to paying attention to.

On the local side, it's important to analyze the evolution of inflation, especially considering potential second round effects after the rise in electricity bills, as well as the leading indicators of growth investments since it is the main concern on local growth. Finally, monitoring the discussion in the political agenda is also relevant, considering there are discussions related to pensions and taxes in an environment marked by several elections.

Before moving to the bank, I'd like to refer to some trends in the banking sector briefly. Please go to Slide #6. The banking industry profitability remains strong, even though we are in a slow economic environment. As you can see in the chart on the top left, return on average equity reached 15.8% this quarter, above the 12.7% posted the same period last year. This rise was due to greater operating income and lower cost of risk related to the release of additional provisions as well as greater recoveries of loan write-offs. This was partially offset by a rise in operating expenses related to personnel and administrative expenses.

In terms of volumes, as you can see in the chart on the right, the weak economic environment has maintained loan growth at low levels for the industry, expanding only 2% year-on-year. Of this, mortgage has been the main driver of growth, up 6.7% year-on-year, and consumer loans have increased 3% in the same period. However, commercial loans have taken a hit, dropping 1.2% year-on-year. This has resulted in a change of mix in the portfolio, as you can see on the chart on the bottom left, where today, mortgage represents 56% of total loans, up from 54% from 1 year ago. Commercial loans had dropped from representing 54% to 52% of the total in the same period, while the consumer portfolio has remained relatively stable. Consequently, due to both the weak economy and the normalization due to the more normal levels of liquidity from customers, NPLs have consistently increased to 2.5% and coverage has decreased to 1.5x. Despite these weaker business results, we should begin to see greater activity in line with the expected improvement in GDP and the reduction of interest rate. Now I'd like to pass the call to Pablo, who will go into more detail about Banco de Chile advances and the financial performance.

[Pablo Ricci, executive]

Thank you, Rodrigo. Let's begin by reviewing our strategic progress. Please go to Slide #8. We are steadily achieving strong results in executing our strategy, which emphasizes customer satisfaction, efficiency and long-term sustainability. This strategy is driven by 6 main priorities illustrated at the center of this slide.

On the right are our midterm targets. Our primary goal is to lead as the most profitable bank among our peers. In summary, this translates into a long-term return on average equity of around 18%, assuming a positively sloped yield curves and Central Bank inflation rate that targets are met.

Regarding cost to income, our performance continues to exceed our long-term targets. While this is partly due to a robust top line growth that has stemmed up from both increased revenue and extraordinary effects that have temporarily remained after the pandemic, we are confident that our productivity levels will continue to improve through current and upcoming efficiency initiatives, which we'll discuss later in the presentation.

For market share, our goal is to lead in commercial and consumer loans as well as demand deposits in local currency. In this regard, over the year, we have gained market share in high-margin lending products such as consumer loans by maintaining an adequate risk/return relationship on the grounds of responsible credit risk management practices. In addition, we have retaken the leadership in local currency demand deposits, which has been a traditional competitive advantage for us that provides us not only with a competitive funding, but also with a very stable funding source.

Lastly, we remain committed to delivering exceptional customer experience and positively impacting society. This commitment is reflected in our high net promoter scores and the corporate reputation that ranks among top 3 in Chile. These accomplishments are achieved by evaluations from reputable independent firms.

In the next slide, we will go over some advances in digital banking, efficiency and ESG. In order to keep our leading position, we continue implementing new innovations in digital banking. This quarter, we added new functionalities in our main banking app, including notifications about benefits, transaction blocking and profile updates, providing users a greater control and real-time information about their accounts and transactions. We also introduced a mortgage loan credit simulator on our website to simplify the home loan process and launched a digital account with a credit card option tailored for university students. Finally, we implemented tools to enhance the digital experience for companies, ensuring that they can seamlessly manage their finances through our apps and web pages.

Our constant efforts in digital banking have contributed to a substantial increase in our digital client base that grew 36% year-on-year, reflecting the positive impact of our strategy. Regarding efficiency and productivity, we continue the efforts to optimize our branch footprint, closing 5 locations this quarter, reducing 10% of the total network in the last 12 months. Also, the higher adoption of digital processes allowed us to reach important efficiencies in investment and commercial support functions. It's important to note that the gradual approach is a key element to ensuring that efficiency actions do not impact customer satisfaction. We have also made significant progress in transforming our retail service models, increasing technology adoption at branches.

Additionally, during the quarter, support areas have streamlined layers and dependencies, enabling synergies and agility, including optimizations at subsidiaries. By executing these initiatives and leveraging IT CapEx, we are confident that we are well positioned to maintain our leadership in the financial sector.

In terms of ESG matters, we have been active in volunteer programs, including beach and river cleanups, removing over 6 tonnes of waste to help preserve the environment. Aligned with our commitment to the entrepreneurship, we continued supporting SMEs, maintaining our market-leading position in the Fogape Chile Apoya Program. We also launched the ninth edition of entrepreneurial challenge to encourage businesses that create positive and innovative impact on society.

Finally, thanks to our dedicated team, strong reputation and best practices in talent management, we were recognized by Merco as the best bank in attracting and retaining talent for the 11th consecutive year.

Please turn to Slide 11 so we can begin discussing the key highlights of our financial results for the quarter. I am pleased to report that we delivered another quarter of solid results, thus continuing our strong performance track record. Our net income reached an impressive CLP 288 billion, up 11% when compared to the same period last year. This translates into a return on average equity of 21.3%, a clear indicator of our efficient use of capital. Moreover, when we benchmark our results against our peers, we continue to outperform across the board.

As demonstrated in the charts to the right, we have not only maintained a wide margin year-to-date in net income, but we have also sustained a superior return on average equity, further reinforcing our competitive advantage in the market. These metrics illustrate our ongoing leadership in the sector and the consistent execution of our strategic initiatives.

Please turn to Slide 12. In terms of operating revenues, we continue posting excellent results, growing 6% year-on-year, fueled by an 8% rise in customer income. This was partially offset by a 3% reduction in noncustomer income, which was mostly driven by the end of the FCIC program at the industry level that represented a low-cost funding source. In turn, improved income from trading investment portfolio due to favorable shifts in interest rates allowed us to partly mitigate this impact. The annual rise in customer income is explained by the expansion in revenues from loans equal to CLP 20 billion on an annual basis, a rise in the contribution of deposits by CLP 11 billion, as well as an increase in fees by CLP 13 billion.

In terms of income from loans, the consumer portfolio was the main driver of growth. Specifically, our focus on profitable growth has gradually allowed us to increase average lending spreads during the period by 13 basis points overall and 128 basis points in consumer loans due to both the maturity of former Fogape operations and improved consumer originations. This was further boosted by a rise of 4.3% year-on-year in average consumer loan volumes. And in terms of funding, we have also seen a higher contribution for deposits due to an expansion in margins from time deposits, thanks to a proactive and targeted pricing strategy as well as a moderate increase in demand deposit volumes.

Finally, the yearly rise of 10% in net fees was mainly driven by 2 business areas. First, revenues from mutual funds and investment funds, management grew by 23% year-on-year. This was driven by a significant expansion in assets under management that rose 37% year-on-year. Second, fees from transactional services posted an annual rise of 15%. This was primarily due to a positive effect in the appreciation of the Chilean peso against the dollar on our credit card loyalty program and to a lesser extent, a rise in usage rates from both credit and debit cards, thanks to campaigns and attractive benefits that incentivize customers to actively use our cards. This allowed us to reduce the impact of the effect of lower interchange fees that the industry experienced due to new regulations. Finally, fees from cash management services were also positively influenced for us due to revised fares associated with commissions for interbank transfers carried out at the industry level.

The charts to the right show how we performed compared to our competitors. This quarter, we continued outperforming all of our peers in the main profitability ratios. Net interest margin reached a notable 4.6% in the third quarter of 2024. Fee margins posted 1.3%, and total operating margin also remained ahead of the pack with a level of 6.4% for the quarter. This performance is a result of our well-executed business strategy and our commitment to offering an enhanced value proposition to customers across lending and non-lending products and services. This has proven effective, allowing us to adapt to changing market dynamics.

Please turn to Slide 13. The breakdown of our loan portfolio is strategically balanced across economic sectors, giving us stability in our revenue-generating capacity. Our total retail loan portfolio represents 65% of the total loan book, while wholesale commercial loans reached 35% of the total loan portfolio. Also, as you can see on the chart on the bottom right, total commercial loans by economic sector are well diversified. The weak dynamism in the Chilean economy has affected loan growth for the industry as a whole. Lack of investment, as well as low business and consumer confidence, has impacted growth. As a result, we see a moderate improvement in total loan growth with an expansion of 3.9% year-on-year and 1.6% quarter-on-quarter.

As you can see on the chart on the bottom left, we compare well against the figure posted by the industry of 1.7%. Most of this growth has come from the mortgage loan book and more recently from consumer lending. However, it's also noteworthy, taking into consideration the recovery of the commercial loan portfolio, which 1 year ago posted a yearly contraction of minus 3%. If we go into greater detail, consumer loans have been growing 4.1% during the last 12 months, gaining 20 basis points in market share. This expansion continued to be mainly steered by growth in the credit card loans, up 7% when compared to September 2023.

To a lesser degree, installment loans grew 2% on an annual basis. The good news, however, is that originations of installment loans have grown 9% year-on-year as of September 2024. Based on value offerings, we have continued to personalize in order to meet customers' needs through their life cycle, as well as lower the disposable income among individuals when compared to last year. On the other hand, notwithstanding the robust year-on-year growth, credit card loans have seamlessly reached a plateau of around CLP 1.8 trillion, which is reasonable after a nonrecurrent very strong ride between 2021 and 2023, when this product grew about 60%, in line with trends of noncash payments.

As for residential mortgage loans, these grew 7.4% year-on-year in the third quarter. Even though it's important to note that a large part of this growth is due to inflation as these loans are primarily denominated in UF, Unidad de Fomento, and inflation index currency in real terms, mortgage loans managed to grow around 3%. The weaker growth of this product for us and the industry compared to the past decade is due to the low demand from customers that is mainly explained by the increase in both home prices and the prevalent scenario of high long-term interest rates. This, together with lower levels of liquidity among individuals, has reduced the universe of target segments with appropriate risk/return equation across the board.

Commercial loans are dragging down growth, posting a rise of only 1.8% year-on-year. Nevertheless, this is significantly higher than the figure of minus 1.2% that was posted by the industry. Both business activity from the SME and the wholesale banking segments have remained subdued, growing below historical levels. Although our commercial loan balances have, to some degree, been positively affected by the Chilean peso depreciation, specifically the wholesale banking segment, we are also evidencing the SME banking, which have certain scheduled maturities of Fogape-related loans, is actually growing steadily in non-Fogape loans on a year-on-year basis.

Likewise, our corporate banking unit has completed 2 quarters in a row with positive annual growth, which on top of the exchange rate effect, has been possible on the grounds of specific lending operations in the concessions and the infrastructure industries, as well as improved value offering for trade finance and factoring loans. All these trends in wholesale banking have allowed us to partially offset the lower dynamism in the real estate and construction sector.

For the rest of 2024 and 2025, we expect loan growth to gain momentum, mainly in consumer and commercial loans. This trend should be driven by both lower cost of borrowing due to an environment of easing policy undertaken by the Central Bank and better perspectives for the local economy in terms of household consumption and private investment. In this environment, we expect to grow faster than the industry during the rest of 2024 and 2025.

Let's move to Slide 14 to review the structure of our balance sheet. As shown on this slide, we are shifting back to pre-pandemic balance sheet composition. On the asset side, government-backed low interest loans extended to SMEs during the pandemic have mostly matured. Also, the ratio of total loans to total assets has returned to levels above 70%, in line with the reduction of financial securities that were used to fully repay the Central Bank FCIC funding in April and July of this year. The reduction in the FCIC becomes clear in the item Financial Institutions and Central Bank in the chart on the top left.

In the table on the bottom left, you'll notice that despite repaying the Central Bank debt primarily with financial instruments, our liquidity stands at very strong levels and well above regulatory requirements. As of September 2024, our liquidity coverage ratio reached 201%, surpassing the regulatory minimum by 101 basis points, while our net stable funding ratio stood at 121%, exceeding the required level by 41 basis points. It's also worth discussing the evolution of our deposits, which, as mentioned in prior calls, remain as a primary funding source by representing 52% of total assets.

As shown in the chart on the top right and in the table in the middle of the slide, demand deposits have returned to their pre-pandemic levels by currently representing 47.5% of total deposits and 35% of total loans, both in line with our historic average. We've also recently begun to see a slight decrease in the portion of time deposits as a percentage of both total deposits and total loans, which is consistent with our experience in the past as well. Normally, inflows and outflows of time deposits follow the overnight rate and inflation. Consequently, the substantial decrease experienced by the overnight rate over the last year has led deposits to seek higher returns elsewhere, such as mutual funds, where we have seen a significant rise in AUM that has benefited our fee income.

Finally, on the bottom right, we can see the progression of our UF GAAP relative to inflation. This position reflects our proactive management of assets and liability mismatches, but primarily a strategic UF position that protects the real value of shareholders' equity. Through careful management, we've been able to capitalize on fluctuations in the inflation effectively over the last years. Currently, our position amounts to CLP 8.5 trillion, indicating that as of September 2024, our sensitivity to a 1% change in inflation is approximately CLP 85 billion.

Please turn to Slide 15. We remain a leader in capitalization among our peers. As illustrated in the chart on the top left, our CET1 ratio reached 14.3% in September 2024. This has consistently outperformed all of our peers. A similar situation occurs when we compare our total capital adequacy ratio, as shown on the chart on the bottom left. These levels position us positively for the last stages of the Basel III implementation. It should be also noted that the CMF has proposed modifications to the current Basel III regulations in Chile, with particular emphasis on changes related to the capital requirements regarding Pillar 2 risks, but particularly associated with interest rate risk in the banking book and the definition of outlier banks. The proposed ruling is available for public comment until November 8.

Please turn to the next slide, 16. Expected credit losses reached CLP 80 billion in the third quarter, up 32% from a year earlier as the third quarter 2023 was a low comparison base. Nevertheless, this is the fourth consecutive quarter of lower levels of cost of risk. This evolution reflects our prudent risk management approach that seeks an adequate level of risk and return. Through this approach, despite the less dynamic economy, we have been able to control and even lower expected credit losses, posting 0.84% for the third quarter.

As of September 2024, our total NPLs reached 1.5%, remaining relatively stable when compared to prior quarters, as illustrated on the top right chart. Our delinquency and consumer loans has returned to pre-pandemic levels of 1.9%, as shown in the chart on the bottom right. We have also observed a slight uptick in NPLs for both commercial and mortgage loans during this period, which aligns with broader industry trends and the weaker economy. However, we anticipate that with the gradual economic improvement that is expected, NPLs should stabilize and potentially begin to show improvements at some point in the coming quarters.

As shown on the chart on the bottom left, we hold the highest quality loan portfolio and lead the industry with a coverage ratio of 2.6x, supported by additional provisions totaling CLP 700 billion as of September 2024. This is substantially above all of our peers. This strong position enables us to effectively manage potential risk deterioration or face regulatory changes in risk provisioning models such as the CMF new standard model for consumer loan provisioning, which will go into effect in January 2025.

As reported earlier this year, we plan to utilize a portion of our additional provisions to deal with the impact of this model. We estimate that the implementation of this new regulation will cost around CLP 60 billion.

Please turn to Slide #17. Regarding operating expenses, this quarter, they totaled CLP 273 billion, reflecting a year-on-year increase of only 1.3%. This rise was mainly due to inflation, which grew 4.7% in the last 12 months, affecting most expense items. In turn, this reflects our firm cost control policies for the rest of the line items, which posted real contractions over the last 12 months. As shown on the chart on the top right, the slight growth was mainly driven by higher personnel expenses resulting from inflation adjustments and changes introduced in the collective agreements by the end of 2023. This rise was partially offset by a reduction in headcount achieved through our ongoing efficiency and productivity initiatives, as well as the development of digital banking commented a few minutes ago in this call.

Furthermore, depreciation and amortization expenses increased due to the amortization of software licenses, while admin expenses remained almost flat. The latter is mainly explained by a rise in IT-related costs due to enhancements in digital infrastructure, partially offset by a reduction in marketing expenses. In terms of efficiency, we reached a ratio of 36.5% year-to-date, below our peers, as shown on the chart on the bottom of the slide. We are confident that the progress we have made will help us ensure that our long-term efficiency levels continue to be below 42% when noncustomer income stabilizes.

Please turn to Slide 18. Before opening the floor for questions, I'd like to highlight a few key points from this presentation. First, expectations for GDP and the overnight rate in 2024 have decreased to 2.3% and 5%, respectively, while the inflation forecast has increased to 4.5% due to the significant impact of the rise in energy prices in Chile. Considering these economic factors, we are confident that our consistent long-term strategy and strong risk culture will continue to allow us to lead the industry in all major profitability and asset quality indicators. We also believe that we should be able to post the highest sustainable long-term return on average equity of around 18%, which could even be higher if market factors such as inflation and the overnight rate remain above historical levels.

Finally, we are in a unique position in which we consistently outpace our peers in profitability and net income with lower risk, as you can see on the chart on the left. Thanks for taking the time to listen to our presentation. If you have any questions, we'd be glad to answer them.

[Operator]

Thank you very much for the presentation. [Operator Instructions] First question comes from Mr. Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

My question is on your capital ratio. You show -- you're about 14%. You showed the implementation of Basel III, you're well above that. Profitability remains above expectations. So how do you think about that capital ratio? Is there room for additional dividend payments? And just given how well capitalized you are.

[Operator]

Pablo, we don't hear you. If you can just please unmute yourself, you are muted.

[Pablo Ricci, executive]

Hello?

[Operator]

Pablo, we hear you. Please go ahead.

[Pablo Ricci, executive]

Sorry, the speaker malfunctioned. So thanks for your question, Tito, regarding capital. We're well capitalized, as you mentioned, and we've been maintaining a good level of buffer between the current regulations. There's still some uncertainties in terms of Pillar 2, which is coming into effect. And there is changes in that regard. So there's some uncertainties in terms of the future on where the levels of capital could be and the requirements for the banking industry in Chile. Currently, there has been moves towards higher capital requirements, such as different buffers in Chile increasing and also the discussions on Pillar 2. So we're comfortable with the level that we have today.

We can't roll out changes in the future in terms of our growth, of how much capital we need in order to fund that growth and how much we need to use our capital efficiently like we've done in the past. We've adjusted our dividend policies that have gone from 60% in the policy to distributable net income, all the way to 100% of distributable net income. But this is something that is taken into consideration at the Board level, depending on the capital needs that the bank needs in order to fund growth and to comply with regulations. So this is something that's good. In particular, the payout ratio in January of each year, but we're aware that we need to use the capital efficiency for the future. So this is something that the Board takes into consideration every year.

[Daer Labarta, analyst]

Okay, thanks, Pablo. But there's no level of capital that you think is where the bank would like to be? I don't know if it's a 12% -- or how do you think in terms of what the right capital ratio should be? Any thoughts on that?

[Pablo Ricci, executive]

I'll pass the call to Daniel Galarce. But I think 1 of the important things I mentioned is the Pillar 2 buffers, so it's been discussed, and Daniel will be able to give you more information with regards to that and the capital requirements that we could use.

[Daniel Ignacio Galarce Toro, executive]

This is Daniel Galarce. In general, I would say that in the long run, basically, we want to slope above regulatory limits and all of our internal limit as well, around 2%, 2.5% in the long, long run. Today, we have some internal buffers, internal -- a positive GAAP in terms of capital ratios. And as Pablo said, there are still some room in terms of the implementation of Basel III. So we are not expecting anything in particular regarding the new regulation. However, we want to hold this kind of buffer above the regulatory limits in order to be prepared for coming or potential requirements.

[Operator]

Thank you very much. We'll be moving on to the next question. Our next is from Ms. Neha Agarwala from HSBC Global Research.

[Neha Agarwala, analyst]

Just quickly on the loan growth expectations for the coming quarters and for the next year. What kind of loan growth should we expect? Any sort of soft guidance? And which segments do you expect to outperform and underperform? And also in terms of the profitability, what kind of ROE should we expect for next year? And the trend over the quarters?

[Rodrigo Aravena, executive]

Neha, thank you very much for your questions. Even though we don't have official guidance yet because we are discussing about the quarter next year, it's reasonable to anticipate some trends for the next year. I think that's a keyword to keep in mind its normalization. The economy during the next year is going to have a normalization in terms of economic growth. In fact, we are expecting an economic growth of 2%, which is in line with the potential growth.

And also in terms of inflation, in fact, this morning, we knew that inflation -- the monthly inflation rate was [indiscernible] well above the numbers expected by the market. So we can rule out that in this year CPI will end the year above the 4.5% that we are expecting now. But why [indiscernible] 2025, it's reasonable to expect an inflation rate of around 3.5%, which, of course, it could have an impact in terms of operating revenues.

So how is that entitlement by market by -- like reduction in economic growth, lower inflation rate. The Central Bank will likely continue reducing the interest rate. Today, the rate is [indiscernible]. For the next year, we expect an interest rate around [indiscernible] 2.5%, something like that. So all these [indiscernible] expected to have an impact on the slope over the next year. But on the other side, it's reasonable as well to pay a higher dynamism in terms of loans after the very weak performance that the overall loan stability has during this year. So, even though today, we don't have a specific guideline for the next year, it's reasonable to expect that convergence toward a more sustainable leverage of ROE for next year.

[Pablo Ricci, executive]

Yes. I think it's important to take into consideration that the ROE's influenced by many factors in the normalization in terms of interest rates, inflation, repricing of different assets and liabilities will be affecting our balance sheet structure and the bottom line. So in the medium term or the long term, as we've mentioned in the past, 18% is what we think is reasonable. We think also is a reasonable part of our targets is to be the most profitable bank in the industry. So that's something very important to take into consideration. And there's some things that should be taken into consideration as well is where the final level of interest rates and where inflation will hover in the long term, which will also affect those numbers and could influence those either way after that.

[Rodrigo Aravena, executive]

Let me guess and reinforce 1 key area. It's very important to keep in mind that important changes or deviations in terms of ROE stability next year will be attributable to the evolution of macro drivers, macro factors rather than some specific changes in terms of the bank. So that's why for the next year, it's very important to [indiscernible] perspective for inflation, economic growth, loan growth. I mean, matter factors are much more important and relevant today than ever. These are the main sources of uncertainty [indiscernible] after regarding to the bank.

[Neha Agarwala, analyst]

If I can squeeze another one. In terms of digital offerings, you show very good uptake, good transaction levels with your clients. Are there any parts of additional franchises where you think there are gaps versus your peers? And what would be any key area of focus, if any, for 2025 in that regard?

[Pablo Ricci, executive]

I think all banks in Chile have been working very diligently in improving the digital offering. And accelerating digital growth in Chile have been -- and especially at Banco de Chile, we've been continually improving our customer experience from the branch level, from interactions in phases -- personal interactions and especially online products. So as we mentioned in the call and as we continually are doing, we're always enhancing all of our digital offerings and services that we provide customers.

So today, we're proud -- I mentioned that we had a very strong growth in the digital accounts. We have almost 2 million, which is very good from 0.8 million. And we continually are improving and implementing new changes to enhance those features. So I think the banking industry in Chile is very well prepared for all these new challenges with new entrants, players into the market and especially at Banco de Chile, we've been accelerating all of our digital offering and making sure that the customer experience in these products are doing very well. So we think that we're heading back in this area.

[Operator]

Next question comes from Mr. Yuri Fernandes from JPMorgan.

[Yuri Fernandes, analyst]

Good morning, good afternoon. Just some color on loan growth for 2028 -- 2025. I remember in the previous call, you mentioned that politics could be affecting some wholesale demand. I know you still have elections next year for President, but at least the regional elections, I guess, it's a little bit more clear now. So just asking if you want, you are seeing an uptick in volumes. I'm sure if you can provide any color on the outlook for the next year for loan growth? Thank you.

[Rodrigo Aravena, executive]

Thank you very much for the question. This is Rodrigo Aravena. Yes, our forecast for loan growth for the industry for the next year is around 5% in terms -- in nominal terms. There are different aspects to consider in the forecast. First of all, we're expecting a normalization from the current level or at least toward more sustainable elasticity with the loans in GDP. In the past, we used to see by loan growth of around 2x the growth stability. Today, we think that given the state of development of Chile, the banking penetration in the economy, et cetera. So there's this good thing that's more reasonable to say [indiscernible] around 1.5x in the very long term. For the next year, we're expecting a normalization with positive growth in different segments in [indiscernible] and with -- when we consider the inflation expectation for the next year, which is 3% to 5%, given that number, [indiscernible] growth around 5% [indiscernible] for the next year.

Looking forward, we have different forces. As you mentioned, quality will be an important [indiscernible] to monitor. The elections still [indiscernible] show an important shift in the support, a different political coalition in the country. When we compare to the elections held 4 years ago, there was greater support to parties from their [indiscernible] right coalition with [indiscernible] change in terms of the [indiscernible] support to the country. Historically, the municipal elections has been a very important leading indicator to the Congress election. It's important to remember that next year, in Chile, there will be election for President, the [indiscernible] for the spend and the half of the lower [indiscernible] as well. So given the results of the municipal election, it's reasonable to expect a shift in terms of the composition of the Congress for next year.

Nevertheless, we have to remember as well that Chile is a very urban economy. In fact, Chile is the most integrated country [indiscernible] the rest of the world. So that's why the evolution of the global economy, especially considering the perspective for China, United States, [indiscernible] and long-term interest rates, especially in the United States as well, are very important. Today, there is a consensus in terms of that the probability to have higher interest rate overseas in the next year that's where the probability is increasing, which would reduce the external -- the contribution from our main [indiscernible] for the country, which could use the engine of growth for the country.

So where -- we can pull out for the next year on the local environment. We can rule out a potential improvement in business confidence next year. In the future, [indiscernible] we have to be especially [indiscernible] with the perspective for the global economy, given the opening of the [indiscernible] economy. All in all, we expect a normalization of results in 2025 with greater dynamism in activity in loans, but at the same time, a lower contribution from inflation and interest rates.

[Yuri Fernandes, analyst]

No. Super. If I may, just a follow-up on this lower contribution translation. Can you tell [indiscernible] like a book case for inflation also, like higher global tariffs, like a stronger dollar? And then I don't know, maybe solution is more resilient, can we see you make more money on the UF gap?

[Rodrigo Aravena, executive]

Well, in terms of inflation today, we are aware -- we're aware of the asset risk for inflation, considering some sticky prices and persistence of inflation in Chile. We have several prices denominated in U.S. So that's why in the case of our country, the past inflation is important in terms of inflection expectations. We have to pay special attention to the evolution of [indiscernible]. We have to remember that the pass-through was [indiscernible]. It is in 10, 15%, which means that 10% of weakening of Chilean peso would rise inflation of around 100 basis points. That [indiscernible] that it's not very likely that the inflation next year will be higher compared to the inflation that we have now. It's very likely that inflation by the end of this year will be a number -- considering the number that [indiscernible] this morning and likely that inflation rate this year will be 4.6% or 4.7%. But also considering the asset risk inflation for the next year, it's not likely that inflation in 2025 will be higher compared to inflation that we're going to have this year. We're aware of the [indiscernible] back even considering these potential factors. We still continue expecting inflation rate next year lower compared to the prices in 2024.

[Operator]

[Operator Instructions] Our next question comes from Mr. Andres Soto from Santander.

[Andres Soto, analyst]

My question is regarding your coverage level. You have 262% NPL coverage. This is not only significantly above your peers, but also above your own historical levels. What do you see as a normalized coverage level given that some of the negative events that you were expecting to happen actually didn't materialize and you are sharing now a kind of more optimistic outlook for the economy?

[Pablo Ricci, executive]

Yes. So, today, we have a very good level of coverage, as you mentioned, higher than we've had in the past. In the past, this level has hovered well below this figure, closer to 200, slightly below that. And the result, maybe as I mentioned a little bit, everyone, the results of the traditional provisions was the permanent implementation of our prudent policies in order to take into consideration what was happening over the last 4 or 5 years. So because of different events, different inconsistencies in terms of the historically low levels of nonperforming loans that occurred during the pandemic, ensuring fees generated by the recession in Chile, as well as the institutional and political uncertainty in Chile, began increasing the levels of coverage through the use of additional provisions, which is something at the Board level have to implement -- or they implement.

So taking all this into consideration, we can't roll out at the level that we have today, based on these uncertainties, is less than it was before. And this could result in a release of a portion of these additional provisions in the future, but the triggers of these timings haven't been defined. So it's important to take into consideration we have to still look cautiously at what's occurring. In Chile, we don't have the triggers, you have defined on when or how these would be released. But it's something that it's taken into consideration at the Board level when evaluating the levels of additional provisions or the coverage that we have in the bank to cover the risks that we are assuming in Chile.

[Andres Soto, analyst]

Thank you, Pablo. And when you look at that possibility of releasing some of those provisions, would you imagine that being in a gradual process, and therefore, we should assume Banco de Chile to deliver very low levels of cost of risk over the next few years? Or will be that sort of a one-off process, and at some point, we can expect an extraordinary dividend to be paid out of that?

[Pablo Ricci, executive]

As I mentioned, the triggers and the definition of how this would evolve and when and what would have to occur hasn't been discussed and implemented. So it's something that the Board level is evaluating and taking into consideration for the future.

[Andres Soto, analyst]

Understood. And talking about asset quality and cost of risk. Do you believe that for the system as a whole, we are reaching an inflection point and we should see finally, improvement? Or what are the trends that you are forecasting for asset quality for the system? I know that you guys have a very good level, but for the system as a whole, what will be the trigger for asset quality to improve?

[Pablo Ricci, executive]

I think there's many challenges Chile is facing, and at certain points, things are getting better. The levels of inflation today is obviously a negative factor because if we look at different times in the history when inflation has been higher around the 2007 period, during the pandemic, it's a special case. But normally, with higher inflation, this affects the purchasing power of individuals, and this can affect the economy and the payment behavior. So it's something that we take into consideration and see how this evolves in the future.

So it's true that we've seen more of a plateauing and probably in the medium term as the economy improves and we return back to normal, we should see an improvement. But the uncertainties based on the level of inflation today and how this will continue in the future effect in households.

[Operator]

Okay. Thank you very much. It looks like we have no further questions at this point. I'll be passing the line back to the management team for their concluding remarks.

[Pablo Ricci, executive]

Thanks, everyone, for joining the call, and we look forward to speaking with you for our year-end results.

[Operator]

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