Banco de Chile

SGO:CHILE

Earnings Call Transcript 2017-Q4

[Operator]

Hello, everyone, and welcome to the Banco de Chile's Full Year 2017 and Fourth Quarter 2017 Financial Results Conference Call. If you need a copy of the press release, it is available on the company's website.

Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations; Mr. Cecil Diaz, Investor Relations Officer; and Daniel Galarce, with -- Head of Financial Control.

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

I will now turn the call over to Mr. Rodrigo Aravena. Please, you may proceed.

[Rodrigo Aravena, executive]

Good morning, everyone, and thank you for joining us today on our conference call for the full year and fourth quarter '17 financial results. It's a pleasure for me to share with you our comments regarding the Chilean economy and the results of the banking industry during the quarter. Finally, Pablo Mejia, our Head of Investor Relations, will review our fourth quarter '17 financial results and main and strategic achievements.

Please turn to Slide #3. During the quarter, the Chilean economy continued to show strong signs of recovery. The monthly GDP, as seen on the top-left chart, grew faster in the second half of last year. In fact, while the economy was up only 0.5% in the first half, it completed an expansion of 2.5% between July and November, which is the latest available figure.

As a consequence of the higher than expected 3.2% annual expansion in November, the economy accumulated an annual growth of 2.6% in the quarter and in that month, the highest figure since April of 2014. This recovery has been a consequence of diverse factors. One of them is important improvement in external conditions, which is a critical driver for a country like Chile, where the trade volume is more than half of GDP. The factor growth in favor of our trade partners and the increase in copper prices, as you can see on the top-right chart, has supported better expectations for Chile.

Since copper would extend more than 10% of total GDP and it is a relevant amount of our fiscal revenues, this chart generates a spillover to different areas of economy.

A second driver has been the normalization of mining activity after the strike in Escondida, which affected the copper production in the beginning of 2017.

Internal factors are also supporting the growth of the Chilean economy. As seen on the bottom-left chart, private expectations have risen significantly, reaching their best levels in more than 4 years, which sharply indicates, for example, of consumer confidence. In December, it reached 44 points, accumulating the fifth consecutive improvement in achieving the best number since May of 2014. More importantly, expectations concerning the future 12 months have sharply increased to 66 points, the highest since 2010.

Other figures are also confirming this digital improvement. In December, for instance, the unemployment rate went down to 6.4% and retail sales posted a strong 5.6% annual increase in November, led by a substantial 14.1% year-on-year gain in durable goods. All in all, these figures reflect that domestic consumption is still supporting the Chilean growth.

Another important factor has been the steady rise of inflation. It has increased slightly in the margin, although the annual rate remains in the lower part of the Central Bank range, which is between 2% and 4%. After posting a monthly increase of 0.1% in December, the CPI accumulated a 0.7% rise in the fourth quarter, higher than the 0.1% observed in the previous quarter. As a result, the annual inflation rate ended the year at 2.3%, remaining below the policy target of 3%.

Now I would like to share with you the baseline scenario for this year. Please move to Slide #4. There are important signs of recovery in Chile, anticipating a better environment this year. Actually, we expect the GDP to increase around 3% this year, well above the 1.5% observed in 2017. This means the economy is expected to perform its best year since 2015. Also we have noticed an outward bias in our estimates, we do feel that growth is likely to be even faster. Consequently, we expect a slight improvement in the labor market. We forecast a decline in the average unemployment rate from 6.7% last year to nearly 6.5% this year, with an improvement in quality of jobs as a consequence of the expected starts in price demands, particularly investments.

Regarding inflation, we also estimate a gradual increase in the annual CPI from 2.3% in 2017 to nearly 2.8% this year. Even though the economy is a timing factor, the strengthening in the Chilean peso is contributing on the opposite side. All in all, we estimate the CPI to convert to the 3% target only in 2019.

Finally, our scenario considers that the Central Bank maintains the rate at least until the second half of this year, although we acknowledge the possibility of further cuts, in the case that inflation remains around the 2% for a longer period of time. If the economy continues growing, the Central Bank would begin a gradual normalization of interest rate by increasing it by 25 basis points this year and possibly more in 2019.

Please turn to Slide #6. I would like to go over some of the last trends we have seen in the local banking system. Once again, the Chilean industry achieved solid results despite the existence of some negative factors such as the weak economic growth and the low inflation rate. Undoubtedly, these reflect the existence of the strong fundamentals and prudent capabilities to adopt the strategies to change in the economic cycle.

In 2017, the system posted a net income of CLP 2.2 trillion, 13.8% higher when compared to the 2016 figure. As you can see on the chart, this improvement was explained by an important increase in net operating income, mainly to one-offs in many of our competitors, partially offset by higher risk operating expenses and taxes.

In terms of the portfolio for the industry, total loans grew 2.9% in real terms year-on-year and slightly lower than the 2.4% increase over the last year. The breakdown shows a figure consistent with the GDP composition. Commercial loans decreased 0.2%, in line with the reduction in growth investment, while housing and consumer loans increased by 8.2% and 5.3%, respectively, consistent with the resilience of service in private consumption. However, it is important to mention that the better dynamism expected for this year in the economy to translate into an improvement in loan growth, especially in commercial loans.

Please move to Slide #7. Despite the total loans, the GDP or loan penetration in Chile hovers just over 90% as a percentage of GDP, which is relatively high when we compare Chile to other emerging markets. There is still substantial growth potential to continue expanding retail loans.

When analyzing loans by products and segments, we find that loans to corporates and mortgage loans represent around 60% of loans for GDP. If you take a closer look at the chart to the right, SMEs and middle market companies only represent 58% of total commercial loans, but represents 99% of their [ purse ]. This clearly shows the huge potential to continue penetrating the SME segment with loans and fee-based products.

Loans to individuals also have potential to continue increasing. First, consumer loans penetration is in line with our LATAM peers. And, second, even though mortgage loans represent 26% of GDP, this level is relatively low when compared to more developed markets. For example, the chart on the bottom of this slide shows a comparison of total household debt to total loans for OECD countries.

As you can see, Chileans have very low debt levels when compared to more developed countries, demonstrating that there is room to also continue penetrating this segment. These 2 segments are specifically what we're focusing at Banco de Chile to grow. However, it is important to mention that the various dynamism expected for this year in the economy which would be led by [ sharp ] private investments should translate into important improvements in loan growth, especially in commercial loans.

For this year, we are expecting that total loan growth in the Chilean banking system will be back to levels between 5% and 6% in real terms. This will be driven by mortgage loans and consumer loans, growing above 6%, followed by commercial loans that we expect to grow back above 4%.

Now I would like to pass the call to Pablo, who will go into more detail about our strategy and our financial results.

[Pablo Ricci, executive]

Thanks, Rodrigo. Please turn to the next Slide #9, to begin the discussion of Banco de Chile's financial results. Despite that 2017 was sluggish in terms of economic growth, inflation and loan demand, we posted once again strong financial figures.

Net income for the year reached CLP 576 billion, 4.3% higher than 2016. And we continued to maintain attractive levels of profitability of 19.3%. It's also important to point out that this was obtained despite a higher corporate tax rate that went from 24% in 2016 to 25.5% in 2017. On a pretax basis, net income for the year was 7.8% higher than 2016.

On a quarterly basis, we generated net income of CLP 142 billion, 14.8% higher than the same quarter last year, mainly due to lower loan loss provisions. We were able to obtain these figures by developing tailored commercial strategies that improved our customer experience, and also drive recurring income. Additionally, we have been concentrating on maintaining adequate levels of risk/return, improving productivity and controlling expenses proactively.

Please turn to Slide #10. We have consistently demonstrated our ability to deliver sustainable and superior profitability for our shareholders thanks to our long-term customer-centric growth model.

The next few slides will go over how we have shifted our strategy to focus on the retail segment. We will also discuss how our emphasis on strengthening customer experience is helping to build the foundation for success in this more competitive environment. And we will go over the positive financial results thanks to improvements that we've made that has driven the productivity. Lastly, we will examine how we have managed to keep risk at these very low levels despite an important change in mix.

Please turn to Slide 11. Our large and diversified customer base is clearly one of our main competitive advantages. First, we have the largest customer base of debtors in the industry with a market share of 18.7%, as you can see on the chart on the top left.

Also, thanks to business initiatives that have taken advantage of new technologies as well as how we proactively use business intelligence to target new customers, we've been able to build a large current account customer base that is growing faster than all of our main peers, as you can see on the bottom left. And this is even composed of higher net worth individuals. You can see this through many ways.

One way to see this is by examining current account balances where we maintain CLP 2.9 million per account on average while the closest competitor bank has nearly 40% less average balances. Additionally, we have an overall market share of 30.1% in personal banking current account balances. It also is important to highlight that not only we're growing in new accounts but also that these customers are taking on other products as well.

In only 90 days, new customers reached the average loan share of wallet that our overall customer base maintains, as you can see on the chart on the bottom right.

The importance of this high net worth customer base is clearly more apparent when we analyze our loan book and deposits. Please turn to Slide 12.

Total loans this quarter grew only by 0.2% year-on-year. Retail loans were far more dynamic than wholesale segment as a result of the lackluster economic environment that kept corporate loan demand weak and the implementation of our strategy, which prioritizes growth in certain segments. For this reason, it's important to point out the great benefit that we maintain for having a well-diversified loan book. That is, when one segment slows down or when we don't see adequate balance between risk and return in that segment, other segments are capable of offsetting that weak performance.

Retail loans in this scenario grew 7%, while the wholesale segment dropped by 9%. Within retail, SME commercial loans were the fastest-growing product at 10.4% whereas loans to individuals grew 6.3% year-on-year, thanks to the mortgage loan book and the middle and upper income loans.

Retail SMEs continue -- we continue our strategy in retail SMEs of building long-term relationships with clients. This quarter, we held numerous SME conferences across many cities in Chile. These events consist in panel discussions and presentations that help customers grow their business and give them a unique chance to network with other entrepreneurs.

We also continued reinforcing customer experience by adding new features to mobile apps, successfully introducing a new investment management app, launching a new company banking webpage and entering into new loyalty programs with British Airways and GOL Airlines, which is from Brazil, amongst other initiatives.

We're confident that by providing the best customer experience to our customers through initiatives such as these, coupled with excellent customer service and deeper use of business intelligence, we'll be able to continue taking advantage of new growth opportunities while maintaining favorable risk-return equation.

As for funding, demand deposit accounts grew 6.1% year-on-year, well above loan growth. And we continue to lead the industry in cost of funding, thanks to the solid deposit base. Our leadership in cost of funding, particularly in local currency, as you can see on the chart on the bottom right, of 2.5% is due to our solid demand deposit base from both retail and wholesale customers that choose to bank with us over other competitors, as well as lower spreads reach when we issued debt, thanks to our strong risk ratings from -- of A from Standard & Poor's and Aa3 from Moody's.

Thanks to these strong ratings, we continue placing debt in foreign markets at very attractive spreads. We recently placed long-term unsecured bonds in Germany and Japan totaling nearly $275 million with tenures that went from 5 to 20 years. It's also important to note that most of these placements were accompanied by cross-currency swap hedge accounting in order to neutralize any effects associated with changes in FX and tenures that hit our cost of funding.

Locally, we also issued bonds for an amount approximately $650 million denominated in U.S. with tenures ranging from 4 to 12 years.

In terms of capital ratios, thanks to a more sustainable dividend policy that was changed a couple of years ago from 70% cash payment to 60%, our Basel ratio ended the year with a solid 14.5% level and the Tier 1 capital ratio of 11.5%, both figures higher than our main peers.

In terms of adoption of Basel III, the Finance Ministry sent mid-year a bill reforming the General Banking Law. In January 2018, the bill was passed by the Lower House and is now pending further approvals. There is still a lot of information that needs to be set by the regulator, such as buffers and risk weighting. So based on our estimates, we think that we won't require any additional capital to comply with this standard as long as the new standards are implemented gradually.

Please turn to Slide #13. Operating revenues decreased 1.5% year-on-year, mainly due to higher comparison base given the onetime sale of AFS instrument of approximately CLP 59 billion in 2016 and in a lesser extent to lower inflation recorded in 2017 of 1.7% versus the 2.8% the year prior. As you can see on the chart on the right, through effective commercial strategies that have leveraged new business intelligence tools to concentrate growth in key market segments, which provides more attractive returns with adequate levels of risk, we're able to grow customer income by 5.3% year-on-year, offsetting almost completely the negative effect of lower inflation and the onetime, as I mentioned earlier.

Specifically, strong growth in loans to SMEs and personal banking provide us with higher lending spreads as you can see on the chart on the bottom right. And by effectively cross-selling our customers, we grew fee income by CLP 26.4 billion or 8.2% year-on-year as you can see on the following Slide #14.

The increase in fees was due to, first, greater use of transactional products, such as credit cards, ATMs and checking accounts, which together totaled approximately CLP 15 billion, boosted by onetime expiration of loyalty program points that reduced fee expenses. Second, greater contribution from the mutual fund and stock brokerage for about CLP 9 billion. This increase was achieved thanks to greater risk appetite from investors, which translated into higher trading volumes in the stock brokerage business, and an expansion of assets under management. Third, higher fees from insurance brokerage of about CLP 2 billion, associated with higher premiums, thanks to successful sales strategies. And, finally, more deals in financial advisory services which are down to approximately CLP 1.4 billion.

Thanks to these proactive commercial efforts to continue growing our fee-based business, we were able to maintain our leadership position in this source of income with a market share of 20%.

On the next Slide #16, is a review of how our digital strategy is bearing fruit of our new digital -- and our new digital initiatives. Digital banking platforms continue to increase their importance in everyday banking. Customers are coming to branches less and they are using digital channels more intensively.

We're continually focusing our efforts in providing our customer experience through these channels and consistently challenging ourselves to come out with new and better apps with more features that customers appreciate. Saying that, we're proud that we are considered to be the best digital platform in the industry based on a wide array of independent surveys and our Net Promoter Score mobile apps.

On the chart on the left, you can see that in only 1 year personal banking online transaction volumes have increased in double-digit rates by 31% and today represent over 50% of total transactions. On the chart on the right, the increasing importance of mobile banking continues.

Specifically, transactions have been mainly driven by more of the mobile phone and to a lesser extent, the webpage, while branch transactions have seen a reduction of 2.2% year-on-year. We expect this trend to continue. And for this reason, our efforts are focused on streamlining processes, implementing smart ATMs and gradually beginning to decrease the size and density of our branches while improving significantly our digital contact channels. We're also implementing a new CRM, which should improve customer experience and also the productivity across all segments of the bank.

By streamlining processes and using new technologies across different front and back office area, we've been able to drive productivity and reduce costs, as described on the following Slide #18.

As you can see on the chart on the left, total operating expenses remained basically flat year-on-year, increasing only by 0.1%. Despite negligible growth in expenses, our efficiency ratio increased from 45.4% in 2016 to 46.2% in 2017 due to effective -- due to the effect of onetime sale of AFS instruments of approximately CLP 59 billion in 2016 that increased the operating income and the negative impact of lower inflation over our operating income this year.

In terms of operating expenses to total average assets, this ratio improved moving from 2.6% in 2016 to 2.5% in 2017.

Through projects aimed at improving customer experience and by keeping a permanent focus on cost control, we have been able to optimize how the bank is run. And thanks to this, we have been able to show important advancements in productivity. Moreover, if we compare growth and expenses this year, as you can see on the chart on the bottom right of this slide, we are the only bank that have been able to keep costs low.

For the coming years, we are confident that these initiatives should continue to bear fruit, which will consequently maintain expense growth at lower than operating income and continue to improve our efficiency and productivity levels.

Prudent risk management is one of the fundamental pillars of our success and continues to be a part of our long-term strategy. We ended another year with low levels of cost of risk, as you can see on Slide 20. Despite another challenging year, we recorded a decrease of 24% in provisions for loan losses, which reduced cost of risk ratio from 1.25% to 0.93%.

This reduction was due to 2 -- mainly 2 factors. First, in 2016, we recorded additional allowances of CLP 52 billion. Second, a net credit quality improvement of nearly CLP 42 billion year-on-year, which was related to both the credit behavior of our retail segment and the wholesale segment as it had in further improvements in the credit profile of specific customers, while other corporate customers, specifically the salmon industry, reduced their exposure with us.

I think it's important to highlight that we have achieved these levels of risk not only due to improvement in credit behavior of customers as a whole in Chile, but also due to our prudent risk management approach that is deeply present throughout the life cycle of our customers. This no doubt assists us in identifying the risk and implement strategies to minimize our exposures.

Please turn to the next Slide #21. Before we move on to questions, I would like to go over some of the key financial highlights for 2017. We finished the year once again with great figures. Net income attributable to shareholders was the highest in the industry with a market share of 26%, equal to CLP 576 billion. We grew this figure by 4.3% year-on-year despite the weak economy, low inflation and higher taxes.

Pretax income also grew by 7.8% year-on-year. We also continued penetrating the retail segment and proactively managing lending spreads across all of our business segments [ causing ] many of us to continue to grow sustainable core revenues as customer income expanded by 5.3% year-on-year and net fees grew 8.2% during the same period. Cost of risk also came in at very good levels, reaching only 0.93%. And we continued implementing new technologies and streamlining front and back office operations that permitted us to maintain operating expenses basically flat. These results were essential to reduce the negative impact of lower inflation that affected noncustomer income and higher corporate taxes.

Finally, when we look at the year ahead, we're confident that 2018 will be much more dynamic. Business and consumer confidence has already begun to show signs of improvement. There is a consensus in terms of GDP growth will be more than double than 2017, and inflation should return to the Central Bank's target range of 3%.

All these factors should help us to continue to post attractive results for our shareholders. We expect that our strategic priorities, which are deeply focused on digital transformation, will permit us to take greater advantage and gain market share during the better economic cycle that is quickly approaching.

Thank you for listening. And if you have any other -- if you have questions, we'd be happy to answer them.

[Operator]

[Operator Instructions] The first question comes from Ernesto Gabilondo with Bank of America Merrill Lynch.

[Ernesto María Gabilondo Márquez, analyst]

Three questions from my side. The first one, we have seen Banco de Chile losing market share. So how do you see competition? And who you see as the most aggressive competitor? My second question. How do you see NIM expansion and NII grow in 2018? And what will be the assumptions behind in terms of inflation and loan growth? And finally, how do you see asset quality, particularly the cost of risk? I believe you have done a fantastic job there. But how much room do you have to improve it? And just considering that you will like to enter into the middle-, low-income segment through retail, and actually, when do you expect to have your new platform or model to attend these segments? And finally, any guidance that you can provide in any of the lines, I think, will be very helpful.

[Pablo Ricci, executive]

Thanks, Ernesto. I think it's important to emphasize the strategy to deliver sustainable and high profitability. It's important to highlight this for your question. I think, first, continuing to penetrate the retail segment is very important for us. We're also planning to continue doing this by using advanced technologies, which will provide new and improved digital solutions for customers and help us leverage business intelligence in order to continue growing. We're also very focused on cost control, streamlining processes, which should help maintain a good level of efficiency. And we think that our superior competitive advantages based on these factors should allow us to continue to start gaining market share in 2018 when we see a pickup and improvements in the economy. It's true that we've seen a deterioration in market share in 2017. But it's also very important to focus on how we've been growing. We've been growing in the key segments that we consider to be the most important and the most profitable. If you look at spreads, spreads have been improving at Banco de Chile. If you look at lending, interest rates are comparative. I don't think you can say the same for other banks, especially the more middle-sized banks, which are the ones that we've seen that have been very aggressive. So I think it's important to emphasize that for 2018, I think we have the competitive advantages and the strategies that we should be able to leverage well and use business intelligence in order to gain market share in all the key segments that we're looking at. In one of your questions, you also mentioned entering the low-, middle-income segment. I think it's important to emphasize that we're a universal bank, we've always been a universal bank, and we've never decided to exit the lower-income segment. We're a bank that's focused on having a long and stable strategy. We don't enter and exit segments from one year to the next. And I think that's one of our superior competitive advantages at Banco de Chile and it has been thanks to that, that we've had a very successful track record in growing with this customer-centric view. In terms of net interest income, our net [ CF ], our 2018, inflation is very -- obviously, very positive for us -- for the industry and for us. We're expecting to return to inflation levels of the Central Bank target of around 3%. This should give us -- if you look at the last quarter 2017, we had a net interest margin of around 4.3%. Probably for the next year, it should be around 4.3% -- sorry, 4.4% -- between 4.3% and 4.5% depending on the inflation. The last quarter, there was only 0.5% inflation. So there is some room to continue improving in the net interest margin. Especially considering that we have very good spreads as well, that should also help continuing to improve that margin for next year. And in terms of asset quality, we ended the year just below 1%, between 0.9% and 1%. If you look at 2018, we should expect cost of risk to be closer to the 1.1% level. And why are we seeing an increase in cost of risk? Basically, from what we mentioned in the call, what we had mentioned in the press release, 2017, there is a lot of onetimers, which -- not a lot of onetimers, but there were certain customers that we released provisions because they reduced their debt with us, right? And we also didn't grow in the wholesale segment and that made loan loss provisions decrease in -- particularly in that segment. We think that 2018 will be more balanced growth. Therefore, we should see growth in both retail and wholesale. And cost of risk should be returned to more normal levels, which we consider to be between -- around 1.1%. And other guidance, which is probably important to mention that you would like to hear, in terms of ROE, we had long-term ROE with GDP at more reasonable levels and inflation at more reasonable levels, it's like we'd mentioned on other calls, between 18% and 20%.

[Ernesto María Gabilondo Márquez, analyst]

Great. Pablo. Just in terms of CapEx growth, any assumptions for this year?

[Pablo Ricci, executive]

CapEx growth, you should expect CapEx growth to be less than inflation, with a slight improvement in the efficiency ratio. Always, it's important to mention that for the efficiency ratio, we have to see that inflation is 3%. So if that's the case, we should have an efficiency ratio of 45%. There are [ older ] assets it should be a slight improvement over this year.

[Operator]

The next question comes from Tito Labarta with Deutsche Bank.

[Tito Labarta, analyst]

I'll keep it to one question so others have a chance to ask, others. We recently saw one of your main competitors announce a new product to go after the middle-, lower-income segments. I know you just mentioned that you don't enter and exit segments. But given the improved macro outlook, is this a segment where you may see more opportunity and you may start to maybe increase penetration there? And how does maybe your product offering potentially compare? I know you talked a lot about digital initiatives. Is this something that you're using to go after this segment? Just wanted to get a sense of how you kind of see the growth there and this potentially new competition in that segment.

[Pablo Ricci, executive]

Like I mentioned, we're a universal bank, and we've always been in that segment. But I think the main difference that we've seen if we compare Banco de Chile today with 5 years ago, is that of the portfolio and Credichile, that's what we call that segment, has remained relatively the same. How we've grown is definitely, we've cross-sold our wholesale customers, employees to grow that segment. We've adjusted the model accordingly depending on the cycle that we've found ourselves in. And going forward, we think that there should be an opportunity there, and we'll continue to adjust our service models in order to continue maintaining our position there. And if the case may be that Chile continues to show improvement, then we'll continue growing in that segment.

[Tito Labarta, analyst]

Great. And do you think just with Credichile like that's the way to go after it, do you see more an opportunity as you move towards more digital penetration? Is that also a way to grow in this segment?

[Pablo Ricci, executive]

Well, I would say in every segment today -- and Chile is a very advanced economy in terms of digital solutions and how people use mobile apps and the Internet. So through digital solutions is definitely one of the ways that we'll be looking at growing in these segments as with all the other segments in the bank. It's just how we feel that the future is evolving for banking. So the brand name is Credichile. It's just -- it's within the commercial division of Banco de Chile. So it's not a different subsidiary or a different commercial segment.

[Operator]

The next question comes from Felipe Ikari with Itaú BBA. Actually, it looks like he just left the Q&A. So I will then go to the next participant, who is Alonso Garcia with Crédit Suisse.

[Alonso Garcia, analyst]

My question is a follow-up also in the previous questions. I wanted to ask, I mean, over the past couple of years, you and also other banks in Chile had been focusing their attention in the mid- and higher-income segment. So I wanted to ask if at this point you are seeing some kind of -- or anticipating to procure soon an overcrowding in the mid- and higher-income segment, that is together with the better economic prospects making you more interested, again, in the consumer finance segment.

[Pablo Ricci, executive]

I would say that we're -- like I mentioned, we're a universal bank, and we're interested in all segments and depended on the cycle. We can grow a little bit more or less in certain segments. So I think over the past years, there has been less demand. And we expect in the future years there should be more demand in all segments, including the middle- and upper-income segment where we're by far the leader in that segment. And in the lower-income segment, which we're actually also have a very high market share -- market position with the information that's publicly available in that segment. So I think both segments, the lower and the upper -- well, all 3 lower, middle, upper, are very attractive for growth in the future. And there will just -- what we'll be interesting will be how we service these customers, especially the lower income, which has always been very focused on servicing customers with -- in the lowest cost of means necessary.

[Operator]

The next question comes from Neha Agarwala with HSBC.

[Neha Agarwala, analyst]

We've seen significant improvement in the cost of risk over the past 4, 5 years. Where do you expect this to stabilize going forward in the medium to long term?

[Pablo Ricci, executive]

I -- we think that a good level of cost of risk for the portfolio that we have today, which is something like 60% retail, 40% wholesale. It's a level of what I mentioned between -- around the 1.1% is reasonable. Obviously, if we continue to expand the retail loan book much quicker and as Chile continues to grow, GDP per capita continues to grow, you should see Chile as a whole expand its presence in the retail segment. There could be changes there, but in the medium term, what we can see today, obviously, it's closer to that 1.1%.

[Neha Agarwala, analyst]

And if I can ask another question. In terms of NIM expansion with high inflation and slightly higher rates this year, do you have an estimate of how much NIM expansion you can expect?

[Pablo Ricci, executive]

NIM expansion? Well, right now, we're at a level -- we ended the quarter -- if you just look at the quarter, it was around 4.3%. For the year. It was at the level of 4.24%. Broadly with the gap that we have today in the balance sheet, with the spreads that we have today, we should be within a level above that 4.3%. So let's say, around 4.4%, maybe even reaching slightly higher. Obviously, depending on inflation.

[Operator]

The next question comes from Sebastián Gallego with CrediCorp Capital.

[Sebastian Gallego, analyst]

I only have one question, actually. You mentioned the 2017 digital achievements and how you are working on your strategy. Can you tell us what's the focus or what are the key projects or initiatives in 2018 that we should be looking at?

[Pablo Ricci, executive]

There is many different initiatives, I forgot to mention them all in this call, but I think the most important would be the new CRM system that we're currently working on, and we've launched certain aspects or modules of this system. Today, we have the 360-degree view of customers, where a customer comes in and we understand the customer, all their products. Everything is on one page. It allows us not to use different systems in order to bank -- to offer products and services to customers. It gives a more complete view of the customer. So the customer experience, when they contact us through different channels, will be much better. What's being launched? Well, what's left to be launched is being able to take on all the products and services through this new CRM and to expand this CRM across all the segments. So today, it's mainly the retail segment that uses the CRM, but our subsidiaries, our wholesale segments will also use the CRM. We recently launched a new company webpage. We're continually improving the apps that we provide customers. We're really pushing viewers that say, "What's Banco de Chile doing that's very different in terms of apps and digital banking." I would say, most banks are doing -- what most banks offer is pretty similar with the exception of one app that I would say that's quite different from Banco de Chile, which is an app that allows you to do purchases. And that's different. You can do purchases in retail establishments. You can do instant transfers between customers using QR codes. I think that payment system is one of the most important -- one very important aspect of our digital mobile app platform and it's a huge benefit. It's a more technological way to do purchases than the historical credit cards and cash payments. We're also implementing a new platform for insurance, a new platform for [ factoring ]. And then business intelligence, we're continually improving the use of business intelligence on how we understand the customer, following them through their life cycle. How we use the information of the customer to provide better customer service, show red flags and -- if a customer is using our products less, in order to maintain and improve attrition level. And recently -- a recent new IT project is personalized pricing. We have a personalized pricing model. Rather than segment customers by income or which banking segments they operate in, we actually look at many different factors to do a more precise pricing in terms of the actual risk that they have with us, I mean, the industry. So the price is much more accurate.

[Operator]

[Operator Instructions] The next question comes from Yuri Fernandes with JPMorgan.

[Yuri Fernandes, analyst]

I have a question on your branch strategy. We note that Banco de Chile has been reducing the number of branches. That digital is something to be here and it's a multiyear trend. But given better macro, do you think it's time to stop cutting branches in the short term? And I ask you this because your main competitor has a plan to start open more branches in the coming 5 years. So just to have an overview on your strategy for branch. That's the first question. And the second question is about the banking law. We know it was approved in the Lower House in January and sent to the Congress. But can you just provide an update on it, like what is the expected provision time? If you have any visibility on the buffers. And also, if you can remember us the capital impact your base case. We know that there will be like capital need for you. But if you can provide a little sense, only a number view on the potential Tier 1 impact, it would be helpful.

[Pablo Ricci, executive]

Okay, thanks. In terms of our branch strategy, obviously, I think, the most important aspect for how customers are using banks is more through the digital side. So the digital channels are becoming much more important. How we're looking at managing our branch network is very important. So how we've adjusted our branch network is we've been optimizing the branch network moving customers from, if we close branch, to nearby branch because we're -- we've seen no impact in terms of Net Promoter Score and how customers perceive their experience with us. We've been doing these adjustments slowly, always keeping in mind how this could impact Net Promoter Score. And we don't expect large changes that occur rapidly. I would say, there is a good presence in Chile today for Banco de Chile branches. And how we're looking to move forward in the future is continue offering new types of channels in order for these customers to operate with us within our branches with smart ATMs, reducing the size of the branches. Today, the branches are very large, somewhere around 600 meter square. We're looking at reducing the size of those branches to around 200 meter square. But we don't think that we can make the branches, at least today, more interesting in order to get the customers kind of to come back to the branches. Customers want ease of use and to use digital channels in order to bank with us. And we're focused and trying to make those platforms better where a customer can begin to, for example, take a product on one channel and finish it in another channel. Not all customers are the same, and obviously, that's why we need to continue maintaining branches. But I think it's important advantage that we're doing in digital banking for the future. So saying that, I'll pass the call to Rodrigo to answer of Basel.

[Rodrigo Aravena, executive]

Hi, Yuri. With respect to the General Banking Law, unfortunately, we don't have more information. What we know is that it passed the Lower House, but there are other new process in the Senate and other parts of the Congress. But we have to consider that there would be new Congress in terms of that's completely [ signed ] in the Lower House, on the half of Senate. So it's not clear when it finally will be approved. But it's important to highlight here, as Pablo mentioned in the presentation that according to our internal estimate, we won't need more capital in the short term. But it's very important to analyze some information that goes with that, for example, for definition in terms of the areas for designing, for example, when a bank is [ sustainable ] or not, et cetera. So I think it's better to analyze new information, the new priorities in terms of the Congress, et cetera. After that, the new government will take place in March.

[Operator]

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

[Pablo Ricci, executive]

Well, thank you for listening to our call and participating. We look forward to speaking with you for next quarter's financial results. Thanks.

[Operator]

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