Banco de Chile

SGO:CHILE

Earnings Call Transcript 2018-Q4

[Operator]

Hello, everyone, and welcome to Banco de Chile's Fourth Quarter 2018 Final 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 Vice President of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations; Daniel Galarce, Head of Financial Control; and Cecil Diaz, Investor Relations Specialist.

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

[Rodrigo Aravena, executive]

Good morning, everyone, and thanks for joining us today in the conference call for the fourth quarter '18 and full year results. It's a pleasure for me to share with you our view and forecasts of the Chilean economy and recent trends in the banking industry. After that, Pablo Mejia, our Head of Investor Relations, will review financial results posted by Banco de Chile during the quarter and the year.

I would like to start with an overview of the economic environment in Chile. Please move to Slide #3. The Chilean economy had a successful year. After posting a weak expansion of 1.7% on average between 2014 and 2017, there was a strong recovery in 2018. This confirms our positive expectation from last year, as we mentioned in previous conference calls. Specifically, the activity grew 3.1% year-on-year in November, resulting in a 3.1% average growth in the last 3 months. Therefore, if the monthly economic activity figure reached at least 2.5% in December, which is highly likely, the economy would expand 4% in 2018, achieving the best performance since 2012. Consequently, Chile is growing faster than its potential rates, having important implications on employment, inflation and interest rates.

The breakdown of activity reveals that private investment is driving growth. In the third quarter, for instance, while the overall activity was up 2.8%, gross investments expanded 7.1% year-on-year after increasing 7% in the second quarter.

This improvement has been a consequence of several factors such as better expectations, higher dynamism in the mining sector and the recovery in the housing sector.

Total consumption, on the other hand, decreased its growth rate from 4.2% to 3.5% in the same period. Available information for the fourth quarter suggests that private investment has remained strong. The other trends in capital goods imports can be seen in the upper-right chart shows the strengthening of private investments.

Additionally, the annual attrition rate has remained stable as seen in the lower-left chart. In 2018, the CPI posted a 2.4% increase on average, in line with a 2.2% last year. The core CPI, which is a measure that excludes energy and food prices, posted an average of 1.9% in 2018, also in line with the 2% observed in 2017. This trend has been the result of two opposite forces. On the positive side, the recovery in growth has driven more inflation in nontradable goods, while the stability in the Chilean peso has reduced the pressures from tradable goods. In this context, the overall inflation ended the year at 2.6% is still below the Central Bank target of 3%.

The evolution of the labor market has been extensively discussed in Chile. There is an appearance decoupling between improved activity levels and the weaker-than-expected labor market. In fact, a deeper evaluation was released in the last Monetary Policy Report, where the Central Bank mentioned the possibility of some exuberant changes in the labor force. However, it is worth mentioning the improvements seen in the composition of employment, which can be seen in the bottom-right chart.

While in 2016 and 2017, for instance, self-employment supported job creation in Chile, the trend today is positive. New jobs in Chile are salary, while self-employment is declining. This reflects that the quality of employment is improving.

Now I would like to present our baseline scenarios for this year. Please move to Slide #4.

In general, we expect 2019 to be a positive year for Chile, since GDP will continue growing above its trends and faster than our Latin American peers, with a slightly rising CPI. In particular, we estimate an economic growth of 3.5% for 2019, following the 4% level posted in 2018.

It's important to consider that Chile continues to expand above its potential rate, in spite of the material increase in external rates and lower commodity prices. Undoubtedly, this trend reflects the existence of the strong fundamentals and positive strategical drivers of the Chilean economy, which are offsetting worse external conditions. As we saw last year, private investment should continue leading domestic growth. The evolution of both GDP and investments can be observed in the 2 other charts in this slide.

In relation to inflation, we expect only a driver convergence toward the target of 3% set by the Chilean Central Bank. Despite GDP recovery and its subsequent impact on the output gap, the evolution of exchange rate will be critical, since tradable goods represent more than half of the CPI basket in Chile.

In this environment, we expect the Chilean Central Bank to continue increasing the interest rate. After releasing the rate and changes in November and December, the board increased the rate by 25 basis points yesterday. In our opinion, the above trend growth would leave room to continue adjusting the interest rate, although at a slower pace than the board assumes in the quarterly monetary policy reports. All in all, it is likely one additional hike rate within the next few months, although the new Central Bank scenario will be released in March.

Now I would like to move to some trends observed in the Chilean banking system. Please go to Slide #6. Total loan growth for the trailing 12 months picked up to 9.4% in November 2018 as seen on the chart on the left. The growth was driven by the acceleration in commercial loans, which also expanded by 9.4%, significantly better than the weak 1.8% observed at the beginning of 2018 and contractions observed in previous years. Commercial loans remain strong by posting 9.6% expansion rate, while mortgage loans were more stable, confirming that this product is less elastic to the economic cycle. All in all, these figures are in line with the recovery observed in the economy, especially investment, as we mentioned earlier.

The net origination breakdown on the chart on the right clearly shows the impressive expansion of commercial loans, growing 5x higher than 1 year ago with a contribution of 61% to the total loan origination.

We highlighted in previous conference calls the existence of an important relationship between the loan cycle and GDP growth. This thesis was confirmed by the numbers observed in 2018, where the elasticity was nearly 1.8x, in line with the historical average of 2x. Looking forward, we expect that the positive economic cycle will be reflected in solid growth rate for the industry. If we consider that economy would grow by 3.5% this year, led by strong private investment growth, it is reasonable to expect a nominal expansion of around 9% or 10% in loans for this year.

On the regulatory side, the new General Banking Act was enacted this month after remaining in Congress for almost 4 years. This is an important step in our regulation since this change will allow a convergence towards the best global standards of capital requirements in corporate government framework of the new regulator. The implementation of the new requirement will be divided in 2 stages. First, the integration of the current superintendence of bank to the financial market commission before January 12 of 2020. Although, the finance ministry announced that their intention is to complete this integration by June of this year. Second, within 18 months of the day that the CMS assumes the duties and the weather scope of this week and specific requirements must be defined by the new regulator such as waiting for calculation of risk-weighted assets and the determination of sustaining buffers, among others. Despite this uncertainty, we feel comfortable with our current capital levels as long as reasonable parameters are implemented in Chile.

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

[Pablo Ricci, executive]

Thank you, Rodrigo. Please turn to Slide #8. We are pleased with our financial results this year and the progress we have made. We ended the year with a bottom line of CLP 595 billion, 3.3% above the same period last year, proudly ranking us first in the Chilean banking industry in terms of net income attributable to shareholders with a market share of 25%.

If we look at this figure before taxes, our bottom line grew nearly 9% year-on-year, clearly reflecting the successful results of our business strategy.

As you know, our effective tax rate increased this year because we have accrued sufficient earnings to fully pay off the debt that our shareholder SAOS has with the Chilean Central Bank. The annual installments of this debt were a tax deductible expense for Banco de Chile.

On a quarterly basis, net income came in at CLP 162 billion, 13.5% above the same quarter last year and well above the prior quarter.

In terms of ROE, we posted a 19.8% level for the quarter and 18.7% for the year, both of which are in line with our guidance and expectations.

It is also noteworthy to highlight that how we compare on an annual and quarterly basis to our peers. On the charts on the right, you can see how we clearly led the industry in net income generation in both the quarter and the year. We believe that this is the result of our consistent long-term commercial strategy that is focused on delivering products through a world-class, digital and physical distribution channel and backed by an excellent team that provides top-tier customer service, while managing an appropriate level of risk in our portfolio.

Please turn to Slide #9 on operating income.

Total operating revenues for the quarter grew CLP 506 billion, up 16.6% over the same quarter last year. As you can see there on the chart on the right -- on the left, the growth was led by noncustomer income, which posted CLP 137 billion for the quarter due to the recognition of debit value adjustments on a derivative portfolio, a normalization of inflation and the positive impact of the depreciation of foreign exchange rate hedges.

Nevertheless, we continued to see good profitability from customer income, thanks to consistent growth in our core business that permitted us to post an increase of 5.3% this quarter when compared to the same period last year. This was driven by good growth in our average loan portfolio and DDAs.

In terms of our NIM, we reached 4.4% this quarter, in line with the same period of 2017.

For the full year figures, we saw similar trends. Noncustomer income rose by 33% as a result of a positive effect of inflation and gains from treasurer activities, while customer income increased by 4.1%. This was driven by an expansion in DDAs as a rise in our average loan balances and fees.

NIM increased from 4.2% in 2017 to 4.4% in 2018, mainly influenced by higher inflation and strong demand deposit growth that benefited our cost of funds.

It's important to highlight that we are a leader in net interest income generation through our superior loan mix and outstanding funding base, which no competitor has been able to develop. Our NIM almost 90 -- our NIM is almost 90 basis points above the average of the industry and this translates into a relevant difference in net income.

This means that we generate about CLP 270 billion more per year in net interest income than if we had the same NIM as the industry. In terms of profitability, this is equivalent to almost 7% of return on average equity. If we include our superior risk management ability, operating margin net of risk, as you can see on the chart on the bottom right, our difference increases even more when compared to our main competitors in the industry.

Please turn to Slide 10 on loans. We are more than satisfied to see that we have ended the year in line with our expectations for our portfolio, which picked up growth throughout the second half of the year. This resulted in an increase of almost 10% year-on-year, and we had another excellent quarter that rose 3.2% when compared to the third quarter of 2018 or 12.8% annualized.

As you can see in the chart on the left, the retail segment expanded 10.3% year-on-year, while the wholesale segment caught up in the second half of the year, posting an annual increase of 8.8%.

These figures have been possible due to our solid commercial activities and our improved environment and confidence as seen in Chile's investment figures.

On the chart -- on the retail side, which is our target growth segment, we continue to see improving growth trends in both Personal and SME banking portfolios. Our Personal Banking portfolio accelerated to 9.5% year-on-year, driven by consumer loans to middle- and upper-income individuals. Total consumer loan originations this quarter reached record levels of CLP 2.1 trillion, posting an impressive 25% year-on-year growth over last year. As shown in the chart on the right -- additionally, you can see on the chart on the bottom right, consumer loan debtors continue an upward growth trend. These successful figures have been made possible thanks to proactive commercial activities and new preapproved loan risk models for the consumer book and higher consumer demand. As a result, we posted a 28 basis point market share increase in consumer loans as of November.

SME banking loans also continued its trend from last quarters, accelerating 13.4% year-on-year. This was fostered by higher demand from customers as well as our positive outlook on the economy that allows to adjust appropriately our risk-return relationship of these loans.

On the chart on the right, you can see the SME loan origination grew by 17% year-on-year and loan debtors rose by 3.5%. We expect to maintain these good levels of growth and cross-sell in 2019.

As a reminder, at the beginning of 2018, we launched a new preapproved loan model for the consumer book that had successful results. The new models are very versatile and allows us to quickly adjust our risk appetite. It also improves efficiency and productivity as more than half of these loans are granted online via the mobile phone or our website.

The successful results persuade us to develop a preapproved commercial loan model for the SMEs. Today, the model is up and running and our account managers have access to this information to help expand the penetration in this segment during 2019.

We are currently working on making this available through our online channels so that SME customers can take these loans independently from their account managers. We are certain that this new capability will provide us strong support for growth in this segment.

For 2019, we expect that the industry as a whole should post levels around 10% nominal loan growth, and our goal is to gain market share in key focus areas of loans to middle- and upper-income individuals and SMEs. Nevertheless, since we are a universal bank, we want to begin growing gradually and prudently in the lower income segment. This area today only represents 2.4% of total loans, almost half of what it represented a decade ago.

We plan to expand this area by continuing to improve productivity, leveraging business intelligence and further incentivizing the use of digital platforms.

Please turn to Slide 11. Over the past 3 years, we've implemented many initiatives in business intelligence that have begun to bear fruit. Some of the advances that we have made are listed on the left of this slide. In summary, we began a journey that started in 2015 to improve our productivity in commercial strategy by leveraging business intelligence tools. This encompass collecting data and improving our segmentation of customers. By having this information, we were able to build a solid customer acquisition database to drive sales and improve productivity.

Once this was completed, we continued deepening the business intelligence by developing algorithms to identify key customer life cycles in order to maximize lifetime value and retention.

We also made a new pricing platform and adjusted protocols that allowed us to price our products more accurately based on the actual risk of customers. This was followed by the implementation of a campaign manager platform that clusters certain customers that have similar characteristics to offer them appropriate products and services. All these improvements were also accompanied by effective changes in how we -- how the bank operates. We aligned incentives with our midterm strategy in order to drive online sales, and we made enhancements in service models to improve our customer experience, among others. By implementing a plan that focused on this action, we've been able to make significant advances in our goals.

As you can see on the right part of this slide, we have made important improvements in productivity. Current account origination increased 26% for the full year and 12% in the quarter. In the last years, we're the fastest-growing bank in the industry in terms of net personal checking account origination, with a large difference when compared to our peers. Productivity in checking account originations per employees also, over the years, increased sharply from 2.3 accounts in 2014 to 3.9 in 2018, an improvement of 70% versus 2014.

Please move to Slide #12. Digital transformation in our front office has been concentrated, enhancing our customer experience by providing world-class online banking solutions together with our leading mobile app. As you can see on the chart, online mobile monetary transactions grew 24% this quarter, while branch transactions decreased 5.5%, in line with expectations.

In turn, more than half of the -- half of our online transactions are being made on the mobile phone and are growing 59%, as you can see on the chart on the right.

Currently, 84% of our customers use either mobile or online banking and more than 70% of our customers are younger than 50 years old.

We expect that these numbers continue to increase so that customer demographics change and that preapproved products will continue to take greater importance, in line with greater use of technology.

Finally, it's also important to highlight that we plan to be the bank with the highest group -- sorry, to highlight that we continue to be the bank with the highest rating on the App Store and Google Play with a huge difference when compared to our peers as seen on the charts on the bottom right.

Please move to Slide #13. We are the bank with the best funding structure in Chile, which is one of our most important competitive advantages and differentiating factors in an environment of rising interest rates like we are seeing today. As Rodrigo mentioned, the Chilean bank -- Central Bank began increasing interest rates with a 25 basis point hike. We expect that this will continue over the course of the next 12 months, with an additional 25 basis point increase in consensus points to a level of around 4% in 2020. In line with this, we have increased gradually the maturities of our liabilities from 11 to 22 months during the last years, mitigating temporary short-term impacts of the rising rates. However, in the medium term, we expect to have important benefits in our NIM as a result of higher rates.

This is particularly important since we are a financial institution with the largest share of DDAs in the local industry and these hikes should benefit Banco de Chile the most. As you can see on the slide on the top left, demand deposits represent 27% of total liabilities, where more than half of -- half is from the retail segment as you can see on the chart on bottom right. DDAs to total loans represent 33%, substantially more than all of our main competitors on an average within the banking industry. This combined with our excellent risk ratings has permitted us to post, once again, the lowest cost of funds in the industry of only 2.7%. This competitive advantage is also very important for us. In other words, for every 10 basis points of lower cost of funding, we generate before taxes an additional CLP 23 billion.

Please move to Slide #14 on operating expenses. Total operating expenses increased this quarter by 8.7% when compared to the same quarter last year and rose 7.4% for the full year. On the chart on the top right, there's a breakdown of operating expense growth for the full year of 2018. The most relevant rise in expenses was salaries that rose CLP 33 billion and administrative expenses for CLP 20 billion. The breakdown is shown on the table at the bottom of the slide. The increase in personnel expenses was largely influenced by benefits provided to our employees as a result of collective bargaining agreements we had earlier in the year with our unions. It's important to mention that we implemented our new accounting standard to record bonuses paid to unionized employees, which defers the expense base on a straight-line method over the period of the agreement. Our employees are qualified to receive this benefit of negotiations but were not unionized, these are registered as expenses when the funds are disbursed.

The remaining CLP 9 billion increase was related to variable compensation and inflation adjustments on salary.

The rise in administration and other expenses was mainly related to higher IT expenses, in line with all the advances we have made in digitalization of the bank, advisory services, marketing expenses and strengthening cybersecurity. Finally, in other expenses, the main increase was related to the cost associated with the charge-off of the related cybersecurity incident. However, it's important to note that the reimbursement associated with the insurance policy covering this event was recorded in operating income according to local GAAP and fully offset this charge.

Adjusted for the impact of the effect of collective bargaining and by taking into consideration this onetime expense, expenditures would have only grown by 3.3%, just slightly above inflation and in line with our guidance.

In terms of efficiency, we ended the quarter with a level of 43.5%. This was influenced in part by higher-than-normal noncustomer operating income as I explained earlier. Adjusting by this effect, this ratio would have -- would reach 45.3% this year.

Before moving on, I want to highlight that one of the areas that we've been putting special attention is operating expenses. We're in the process of improving the front and back-office processes and streamlining procedures. This, together with a focus of -- on cost control, has allowed us to improve our productivity across all areas of the bank. We expect that this should continue as we -- and will translate into better levels of efficiency in the years to come. We're confident that we can achieve this, especially with all the technological improvements that we have implemented company-wide that not only allows us to improve further productivity, but also to deliver superior top line growth and better customer service.

Please move to Slide #15. Loan loss provisions this quarter reached CLP 61 billion, equal to a ratio of 0.9%. This level of cost of risk is in line with our running rate, except the immediate prior quarter, which was higher due to a onetime charge related to the implementation of new group retail-based provision models of approximately CLP 39 billion

As we mentioned in the third quarter, this provision charge did not reflect the deterioration in the portfolio as proven in the figures of this quarter. It took a prudent risk approach that included new practice which have translated into higher coverage ratio.

Loan loss provisions for the year reached CLP 281 billion, equal to a ratio of 1.07%, in line with our guidance. However, 83% of the expansion of CLP 46 billion in loan loss provisions corresponds to the mentioned update of group-based models and can be seen in the chart on the right. The rest of this increase is related to volume growth and mix of CLP 21 billion and higher CLP 21 billion related to the negative effect of the depreciation of the Chilean peso against the U.S. dollar and our allowances for loan losses denominated in dollars.

This was almost offset by CLP 34 billion in net credit quality improvements for both the retail and the wholesale banking segments.

In terms of NPLs, we actually recorded a decrease this quarter to 1.09%, down from 1.19% from last year and 1.15% from the third quarter of 2018, confirming the quality of our loan portfolio.

We firmly believe that our excellent track record has been a result of our prudent risk management practices that focuses on growing responsibly through all the economic cycles.

Please turn to Slide 16. As you know, this year, we reached a very important milestone. Thanks to our successful growth track record over the last couple of decades, our shareholders' SAOS with the profits that we generated in 2018 will fully pay off in 2019, all the debt it owes to the Central Bank of Chile, 17 years before the deadline agreed with the authorities. Thus, ending the last traces of a financial crisis that affected our country in the 1980s. The final installment will take place in April of 2019 and SM-Chile and SAOS will be dissolved. Registered shareholders of SM-Chile A, B and D shares will receive approximately 3.4 Banco de Chile shares, while SM-Chile E stockholders will receive 1 Banco de Chile share for each of their respective shares of SM-Chile.

Once this occurs, our free flow will increase from 27.7% to approximately 44%. This will have very positive impacts on our index ratings on the Santiago Stock Exchange and the MSCI indexes. In fact, on the local exchange, we will be the company with the highest rating of a level near 10% and this should translate into improved visibility and liquidity of our stock.

Please turn to Slide 17. Before moving on to the final slide of highlights for the year, I want to emphasize our capacity of generating consistent leading levels of net income with the best risk-return relationship among the Chilean banking industry. As you can see on this chart, we are the bank with the best combination of risk return in Chile. This has been accomplished by effective business strategies that have permitted us to attract solid customer base in every segment that we serve. These clients not only drive interest income, but also allow us to produce the highest levels of fee income in the industry as we are, in most of the cases, their primary bank. This, coupled with our focus of growing responsibly through prudent risk management practices has created the best risk-return profile customer base.

Please turn to Slide 18 for highlights. 2019 was exceptional. We ended the year with a very healthy bottom line of CLP 595 billion, ranking us, once again, first in net income for equity holders of the Chilean banking industry.

We achieved this through our consistent commercial and risk management strategy that allows us to grow loans in 2018 by almost 10%, together with very good cost of risk of only 1.0% and a low NPL ratio of 1.09%.

It's also important to highlight that our wholesale segment retook growth, increasing 9% year-on-year. And that retail loans continued showing the most dynamic activity, increasing 10% year-on-year. As mentioned in the presentation, consumer loan origination was the highest in our history, up 25% year-on-year and current account origination was up 26%. This helps support fee growth on a continuing basis. We are confident that in 2019, we'll see a stronger expansion in all of our business areas, in line with positive economic indicators in investment, allowing us to reach high single-digit levels of business growth.

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

[Operator]

[Operator Instructions] The first question today comes from Alonso Garcia with Crédit Suisse.

[Alonso Garcia, analyst]

My first question is on the outlook for NIMs with higher rates but also higher inflation this year compared to 2018. How does all this play out for your margin in 2019? And maybe also into 2020, considering the timing effect of the repricing of both your assets and liabilities? My second question is on fees. We saw a strong growth in fee expansion in 2018. Yes, that took a toll in overall growth for net fees. So could you please provide some color on the reasons for the pressure on fee expense? And what should we expect then for net fee growth in 2019?

[Pablo Ricci, executive]

One second, please. Sorry. For 2019, we expect NIMs to be similar to 2018. Basically, what we're seeing is we'll have stronger growth in consumer and SME. And that's a benefit in terms of mix with normalized inflation rates. We acknowledge that there's a possibility of slight pressures due to the negative and temporary impact of rising rates, but we only expect around a 50 basis point increase in 2019. Also, it's important to take into consideration that, in the long term, higher rates is very positive for Banco de Chile. So ideally, there is some initial pressures, but in the medium term, it's a much more positive scenario for us. So with the higher inflation should offset the effect of the possibility of a pressure from the higher rate, and the higher competition that we see in terms -- in the industry and our desire to continue growing in this environment that we see lower risk. So always growing with looking at risk return in the equation. So since we see better risk, we can also be a little bit more competitive when we're growing. In terms of fees, for -- if you look at the fees for 2018, fees grew around just over 3%. And if we were to just adjust the fees associated to credit cards related to certain expenses on our loyalty program, our loyalty program is premium dollars, it's called, so exchange rates affect us, but it's hedged in the treasury line. So since there was a negative impact because of fluctuations in the exchange rate in 2017 and 2018, that affects negatively the fee line. If we were to adjust this out, fees actually grew, that's the main adjustment in terms of credit cards, fees would grow 10% in 2018. And that's what -- we're expecting similar levels for 2019, where we think that the main drivers for 2019 will be from credit cards. We're expecting good growth in terms of insurance with existing policies, current accounts and also ATMs, which we have entered into deals and have very high productivity of ATMs. So...

[Operator]

The next question comes from Sebastián Gallego with CrediCorp Capital.

[Sebastian Gallego, analyst]

I have 3 questions. The first one is related to the effective tax rate. As you mentioned, we should see a pickup in the effective tax rate, but this quarter, this fourth quarter 2018 was particularly high, around 28%. Can you provide a range of what you believe is a normalized effective tax rate after losing the tax benefit? The second question is related to the recent alliance that you guys announced with Chubb Seguros. And the question is, if you could provide additional color on how will the bank account for this revenues? Or what's the best way to think about this alliance in terms of financials? And last, I would like to ask about the CVA adjustment on the -- that was present on noncustomer income. Can we expect this to be just an extraordinary event in fourth quarter '18? Or can we see these adjustments impacting upcoming results?

[Daniel Ignacio Galarce Toro, executive]

This is Daniel Galarce. For your first question on effective tax rate, actually, we have -- fourth quarter '18 we had a high effective tax rate, basically due to some specific onetime effects that we recorded during this quarter. During the whole year, of course, the effective tax rate was higher, I would say, especially during the second half of 2018. First of all, due to the increase in the statutory corporate tax rate with respect to 2017 from 25.5% to 27%. In addition, during the second half and particularly during the fourth quarter, we also recorded the -- or we -- yes, we recorded a less important effect of the tax benefit that we maintain because of the SAOS debt with the Central Bank of Chile. As you know that debt was tax deductible for taxation purposes, and accordingly, during the -- during June or July 2018, we gathered enough net income in order to pay the debt off. And accordingly, during the second half, we almost didn't have any benefit due to the tax deduction. In addition, during the fourth quarter, we also have a onetime effect regarding the -- regarding an agreement we achieved with the -- for a collective legal action imposed by the Consumer Protection Agency in Chile. Basically, that agreement was settled with a payment for approximately CLP 20 billion by Banco de Chile, which was provisioned in our expenses from, I would say, a couple of years. And due to those -- this payment was considered for taxation purposes, less income from previous years, we were not able to deduct that payment from the taxable income for the fourth quarter in 2018. Regarding the alliance with Chubb, well, as you probably know, we -- due to this alliance, we will receive a couple of payments. The first one is a onetime payment upfront that we will receive when the contracts are actually signed after the approval of the antitrust agency in Chile. And in addition, we will earn some additional income through the lifespan of the contract during the 15 years. Regarding how we're going to account this, well, we are analyzing this with our auditors and accounting advisers. But it is very possible that this upfront payment will be recognized on an accrual basis during the life of the contract, considering the IFRS 15. And in addition, with respect to the CVA adjustment, we -- this was actually an extraordinary impact during the fourth quarter. This is not expected to be an ongoing impact on our results for 2019 because basically, we are recognizing not only the credit -- or the credit value adjustment for our counterparties, but also our own CVA or own debit value adjustment for Banco de Chile. So all in all, we should have less volatility in results regarding the Counterparty Value Adjustment for 2019. And actually, this recognition is in -- is absolutely in line with IFRS, as we file our financials with the SEC on international standards.

[Sebastian Gallego, analyst]

Okay. If I may follow-up, just a quick question. In the effective tax rate, you mentioned the effects on fourth quarter '18, but can you please provide or repeat, if I didn't hear you well, the effective tax rate that we should expect for Banco de Chile in 2019?

[Daniel Ignacio Galarce Toro, executive]

In 2019, we should consider an effective tax rate of approximately 23%, 24%, depending on the inflation level for that year. As you probably know, the -- for taxation purposes, inflation is not considered -- it's discounted for -- from our financials. So accordingly, you should consider the statutory corporate tax rate less effect of inflation on our EBITDA.

[Operator]

The next question comes from Marlon Medina with JPMorgan.

[Marlon Medina Rodríguez, analyst]

So my first question is regarding provisions, as it seems the regulator will continue adjusting provisioning rules for SMEs in 2019. Do you have an estimated adjustment for -- an estimate for this adjustment? And also, do you expect additional rate model changes post 2019? And my second question is regarding loan growth. So with the Chilean economy remaining strong in 2019, is it fair to assume that you will continue growing loans above 10%?

[Pablo Ricci, executive]

Okay. So for your first question, in terms of the commercial new standard model, the superintendency is applying this year. For Banco de Chile, we don't have any material -- we don't have significant material impact on our results based on our preliminary analysis. As you know, we have high coverage ratios and we have prudent risk management policies. So this should be mitigating the impact of the standard model. And in terms of your second question for growth for 2019. For next year -- well, for this year, we expect GDP of around 3.5%. And if you look at the last couple of decades, the elasticity is about 2x. So what we're expecting for the industry is somewhere around 7% growth, add inflation, that gives us somewhere around 10%. And for Banco de Chile, we're expecting to grow slightly above, with a focus on our target segments, which is middle- and upper-income individuals and SMEs, which, as you saw in the presentation, have been actively growing this year, and we expect that should continue for 2019.

[Operator]

The next question comes from Neha Agarwala with HSBC.

[Neha Agarwala, analyst]

My first question is on the dividend payout. You have maintained about 60% to 65% payout. What do you expect in the coming years? Do you have any rough estimate on the impact of the Basel III rules on your numbers which could influence your payout? And my second question is on the margin. So is it reasonable to expect some margin expansion in the coming year in 2019 as rates are slightly higher, inflation is higher on an average level?

[Pablo Ricci, executive]

Just 1 second. Okay. In terms of the dividend policy, for today, based on the information that we have, you should consider a similar dividend policy that we have, which is around 60% of distributable net income, retaining 40%. We should consider that at least until after the subordinated debt is paid with the Central Bank in April. And the Board of Directors has announced if there will be a change or not after that. Nevertheless, the levels that we have today are levels that are sustainable and what we know of Basel III and capital ratio. Obviously, we have to wait also to see how this is implemented and what risk weighting the regulator implements in Chile. In terms of margins, for NIM, for 2019, as I mentioned, it'll be probably similar levels of NIM than 2018. If we look at a little bit farther forward, you should expect at a higher overnight rate, that should benefit our NIM in a slightly -- if we look at more the medium term, long term, it's very beneficial, higher rates than what we've experienced in the past, thanks to our very good demand-deposit base in our funding.

[Neha Agarwala, analyst]

And an additional question on Transbank. We saw that the SM-Chile wants to sell its stake in Transbank. What is your position there? Are you continuing with the agreement? Or any updates there?

[Pablo Ricci, executive]

One second, please. Sorry.

[Rodrigo Aravena, executive]

Neha, this is Rodrigo Aravena. So far, we don't have new information. It is a matter that is still under evaluation. So there is no news on the front.

[Operator]

[Operator Instructions] The next question comes from Ernesto Gabilondo with Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

We saw that expenses and provision charges are already at very low levels. So would it be reasonable to still expect high-single-digit net income growth this year? And can you provide additional expectations or guidance on NII growth, expenses growth, cost of risk and ROE? And where are you seeing the sustainable ROE?

[Pablo Ricci, executive]

In terms of operating expenses, I think it's important to emphasize how we've been improving the operating expenses from year-on-year and over the last quarter. So our focus has been in controlling costs and implementing different initiatives in order to become more productive, trying to incentivize customers to use more our online channels and improving certain customer service protocols and service protocols, I guess. And this all should translate in better productivity for the bank and also top line growth. So if we look at the -- for guidance for 2019, you should expect as I mentioned, NIM sort of similar levels of 2018. Again, as I mentioned, fees in the upper single or lower double-digit growth in terms of fees with operating expenses, that efficiency ratio's improving and our level of cost of risk that should be around the levels that we've seen in the -- this year and the last. This year being 2018/2017. And in terms of ROE, we think that the levels of ROE that we've been posting are sustainable in the long term. We have sufficient initiatives in order to continue improving our cost base productivity, continue growing without the need to increase expenses significantly. So we think that we have a sustainable level of ROE for the future. Obviously, we have to see how Basel III is implemented, but if it's implemented in a similar fashion as in other countries, we think that it should be reasonable to expect a -- that level of sustainable ROE.

[Ernesto María Gabilondo Márquez, analyst]

So just to summarize, so we should expect for this year net income to grow at high-single-digit growth. And you think that the sustainable ROE could be maintained at levels of 19%, correct?

[Pablo Ricci, executive]

We think the level of sustainable ROE is between 18% and 20%. And all the factors that I mentioned should be driving that level of growth across all the line items that I mentioned to sustain that ROE.

[Operator]

This concludes the question-and-answer session. I would now like to turn the conference back over to Banco de Chile's management for any closing remarks.

[Pablo Ricci, executive]

Thank you. And we look forward having the next quarter's 2019 conference call in April or beginning of May. Yes. Thanks.

[Rodrigo Aravena, executive]

Thanks.

[Operator]

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