Banco de Chile

SGO:CHILE

Earnings Call Transcript 2019-Q4

[Operator]

Hello, everyone, and welcome to Banco de Chile's Fourth Quarter 2019 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 Natalia Villela, 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'd now like to turn the call over to Mr. Rodrigo Aravena. You may proceed.

[Rodrigo Aravena, executive]

Good afternoon, everyone, and thank you for participating in this conference call. Today, I would like to share with you our view about the evolution of the Chilean economy with a special emphasis in the new macro perspective. After that, Pablo Mejia, our Head of Investor Relations, will analyze the financial results achieved by Banco de Chile during the last quarter and our guidance for this year. As usual, we will finalize this conference call with a Q&A section.

I would like to start with an overview of the Chilean economy, this leads to Slide #3. As you probably know, the last quarter of 2019 was marked by protests, as a consequence of the social unrest that started in October, affecting economic growth. As a result, GDP fell 3.4% and 3.3% year-on-year in October and November, after an expansion of 3.3% in the third quarter.

In the chart on the left, you can see how the economy was affected by the social crisis. This weakening can be explained by both supply and demand factors. Protests were accompanied by damage to private and public infrastructure reducing the capacity for growth or in other words the aggregate supply of the economy. According to official estimate, the damage was equivalent to nearly $3 billion or 1% of the GDP, affecting the subway service as well as retail and transportation sectors, reducing the average working hours. However, these supply shocks should be temporary as the government announced an ambitious reconstruction agenda that would probably be implemented this year. In fact, there was a strong recovery in the December monthly GDP figure, which posted an impressive 3.5% monthly change or 1.1% year-on-year overpassing private expectations. This reinforces our expectations about a temporary slowdown.

There have also been important impacts on domestic demand, which have been reflected by different figures, such as business and consumer confidence indicators and retail sales. However, some figures from retail and manufacturing sectors showed an improvement in December, in line with the trends observed in GDP.

Although unemployment has remained stable, as seen in the chart on the bottom left, it's probably that there could be a slight deterioration in the near future since the labor market has a delay following a slower growth. It's important to pay special attention to the evolution of employment as it has an important impact on the banking sector, especially in terms of asset quality. Despite this environment, the inflation rate, which is a key driver of our net income, has gradually been increasing during the last month. This trend can be seen in the top right chart, which clearly shows that tradable inflation, which represents nearly 60% of the CPI basket has led the pickup in the overall inflation. Consequently, the inflation rates achieved the policy target of 3% set by the Central Bank, leaving more room for the Central Bank to have a neutral bias in its monetary policy.

The exchange rate had unusual volatility. As seen in the chart on the right, the Chilean currency depreciated to CPL 840, reaching the lowest value seen in our history. This led the Central Bank to announce an intervention equivalent to $20 billion to be implemented by weekly sales of USD -- of dollars in the open market until May of this year.

After this measure, the FX strengthened to 750, reducing the gap between the FX value and its long-term fundamentals. Nevertheless, the currency has weakened during the last week as a result of the lower copper prices given fears on the impact of coronavirus on China's growth. Beyond the short-term volatility, it's worth mentioning the positive impact that the weaker peso should have on net export, offsetting, at least partially, the sluggish growth expected in both consumption and investment.

Now I would like to discuss our baseline scenario for this and the next year. Please go to Slide #4. The weaker activity observed in the fourth quarter '19, was likely the bottom of the negative cycle. Particularly we expect the economy to improve gradually this year, resulting in an overall expansion of around 1% this year.

For 2021, we forecast an expansion of 2.2%, which is consistent with a heavy convergence towards the potential growth. Our view is based on 4 main factors: First, demonstrations and disruption have calmed in relation to October and November. This has made possible, a gradual normalization of activities across all economic sectors. The improvements observed in several December indicators is consistent with this diagnosis. Next, the government announced a robust countercyclical fiscal plan in order to address social demands and reconstruction of public infrastructure, specifically the Finance Ministry increased the fiscal spending growth in the 2020 budget to 10% from the 3% set formerly. This change is mostly explained by additional spending of $5.5 billion on infrastructure, which has a positive fiscal multiplier. Third, the multilateral weakening in the Chilean peso generates better conditions for tradable sectors, especially mining. Lastly, we expect the Central Bank to leave the interest rate unchanged this year at 1.75%. This interest rate is negative in real terms, around minus 1.25%, confirming the existence of easing conditions in the monetary sector. Even though all these factors should contribute to improving activity in the future, uncertainty will potentially expect investment this year as seen in the chart on the top right.

Our scenario considers an inflation rate hovering in the range between 3% and 3.5% during the year, as a result of 2 opposite forces: our weaker currency, and on the other hand, subdued GDP growth.

Finally, as I mentioned before, we do not expect changes in the monetary policy rate this year. Since the CPI is within the range of the Central Bank, taking into consideration the important uncertainty, the Central Bank has more reasons to accumulate better information before changing the interest rate.

Please move to Slide 6 to analyze the evolution of the banking industry. Over the last 12 months, loans in the Chilean banking system have grown 10% and increased 3% quarter-on-quarter. The slowdown of the Chilean economy hasn't affected significantly loan growth. In fact, the 3% quarter-on-quarter growth is the same growth that we saw in the third quarter '19. Nevertheless, we say that loan growth will gradually fall, due to the below-trend growth, as I mentioned earlier. According to the Central Bank survey, for instance, the banking industry has become more restrictive for granted loans and demand has weakened over the last quarter of 2019. This survey indicates that 50% of banks reported more restrictive terms for consumer loans. The survey also indicated that, there was less dynamism in the demand side. In this context, 42% of banks saw a reduction in demand for consumer loans as well as an 18% decrease for mortgage loans.

In terms of results, the Chilean banking industry posted net income of CLP 527 billion in the fourth quarter. The decrease was mainly due to significantly higher loan loss provisions, in line with the events seen during the fourth quarter '19, and to a lesser extent, greater operating expenses.

As I mentioned before, we will likely have a challenging year with a below-trend growth and a potential deterioration in the labor market. In this environment, it's reasonable to expect that total loan growth for the industry will reach around 6% in nominal terms this year.

Please turn to Slide 8 to begin our discussion on Banco de Chile.

We are very proud to present our main achievements in 2019. We ended the year as the leader of the industry in many aspects, especially in financial results. We were ranked, once again, first in net income, net operating income as well as in net fees. We also recorded a very strong year in terms of SME and residential loans origination, with a 11.3% and 14.4% year-on-year rise, respectively.

These results have been achieved through our superior and consistent commercial and risk management strategies that focus to grow with an adequate risk return relation in key market segments. As a result of our constant efforts and improvement to give the best service to our clients, we were recognized as having the highest Net Promoter Score and best customer service by Procalidad, a prestigious Chilean nonprofit organization.

In addition, The Banker and Brand Finance honored our brand as the most valuable in the Chilean banking industry, and we also were recognized as the bank with the best corporate reputation in the last decade by Merco. As a result of our continued concern to take care in developing our employees we're chosen as the best bank to work in Chile according to university students surveyed by Merco. Moreover, showing our commitment with the environment, during 2019, we issued our first green bond. It was the first green bond from a Chilean financial institution, and it was issued to finance renewable energy for our operations. Lastly, Deva awarded us as having The best annual report of the banking sector, reflecting our focus on improving our reporting process and offering valuable information to our stakeholders.

Now I would like to pass the call to Pablo, who will go into more detail about financial results. Please turn to Slide #9.

[Pablo Ricci, executive]

Thank you, Rodrigo. The fourth quarter was challenging, as Rodrigo mentioned, we went from a scenario expecting strong growth in 2020 to subdued GDP with an expected rise in unemployment levels. This undoubtedly will impact growth perspectives for the banking industry in 2020. In turn, October and November were coupled with high credit costs, damage to infrastructure and a drop in confidence levels.

Despite this environment, we were able to demonstrate the effectiveness and consistency of our business strategy and the value of our competitive advantages. In the fourth quarter 2019, we posted a bottom line of CLP 147 billion, only 3% below the prior quarter and 9% below the same period last year.

On a full year basis, we recorded CLP 593 billion, basically in line with the results in 2018. This is especially noteworthy when we compare results to our peers, as you can see on the bottom part of this slide. We clearly outperformed all of the banks in our quarterly and yearly results as well as our ROAE. This leading result is not by chance but is consistent throughout our history.

We systematically post more predictable results throughout the economic cycles, clearly setting us apart from our peers and generating greater value for our shareholders.

Please turn to Slide #10. The fourth quarter operating revenues increased 5% when compared to the same period last year and 8% when compared to the full year period. The quarterly and full year rise was generated by solid customer income expansion that rose 13% in the quarter and 12% for the year, while noncustomer income dropped 18% in the quarter and 7% for the year.

Customer income was driven by a 9% year-on-year rise in average interest-earning assets that sustained net interest income growth for both the quarter and the full year.

Specifically, our net interest income, excluding inflation revenues, grew 7% during the fourth quarter of 2019 and 6% for the full year when compared to the same periods last year. These figures were partially offset by the lower overall spreads due to a change in mix as a consequence of greater growth in mortgage and commercial loans, together with the negative effect of the lower overnight rate that went from 2.8% on average in 2018 to 1.8% on average in 2019.

Fees continue to deliver solid results, growing 34% in the fourth quarter of 2019 and 27% for the full year when compared to the same periods last year. This was due to good dynamism of our transactional revenues, principally from the retail products, services such as higher usage rates derived from our larger ATM network as well as our more intensive use of cards. In addition, we recorded a strong increment in insurance brokerage fees associated with the income coming from the joint venture signed with an international insurer, and an increase in 10% in gross written premiums.

We also had solid revenues from mutual fund management in line with the rise in AUM. The strong results in customer income permitted us to offset lower noncustomer income revenues owed mainly to higher revenues recognized in the fourth quarter of 2018 as a result of the adoption of debit value adjustments. To a lesser degree, we also had lower revenues from the position that hedges FX fluctuations and loyalty program fees as well as credit risk allowances for dollar-denominated loans, which, coupled with the cumulative negative effect of flattened yield curves over the last 18 months on results, term gapping and ALM.

These drivers were partially offset by higher contribution of our UF structural [ gap ] position in both the fourth quarter of 2019 and the full year 2019. This has to do with higher inflation in the fourth quarter of 2019 as compared to a year earlier. For the full year, although inflation has decreased in 2019, the effect of lower nominal rates benefited the funding of the UF structural asset position.

Our focus at the bank has been to promote responsible growth in every segment we serve. We firmly believe that this is the main pillar of our proven and successful track record. We have advanced towards growing our bottom line by selectively expanding in key market segments that provide adequate returns for the risks we take.

In the next slides we will show you in which segments we have grown and the evolution of our asset quality.

Please turn to Slide 11. Total loans grew by 7.5% year-on-year, and on a sequential quarterly basis slowed to 1.5%. This trend is in line with both the weaker activity and the results showed by the Central Bank survey, which concluded that banks have become stricter in terms of risk and that demand for loans has dropped.

Nevertheless, on an annual perspective, according to our strategy, our retail segment was the principal source of growth. Loans to individuals rose by 11.4% year-on-year, and SMEs increased just over 10% during the same period. The main drivers for retail loan growth were mortgages and commercial loans to SMEs.

Mortgages grew 14.5% year-on-year and also had a similar level in the quarter when annualized. We didn't see a drop in the quarter in mortgage loan growth because loans were in the pipeline before the events occurred. However, we observed a reduction in about 20% of applications during October, November and December versus the running rate.

SMEs also performed well, posting double-digit loan growth of 10% year-on-year and 1.6% on a sequential basis. In fact, origination in this segment remained strong, growing 9% over the last year and at similar levels when compared to the immediate prior quarter.

It's clear that this was a demanding quarter for the segment and in line with our approach to build solid long-term relationships with our customers. We assisted those clients which had difficulties during this period by providing them with flexible financing options at special rates to get their businesses back in order.

On the other hand, wholesale lending, which was accelerating last quarter, slowed and grew only 1.7% year-on-year, on a sequential basis, it grew 1.2%. It's important to emphasize that we continually focus on maintaining an adequate relationship of risk and return as well as rational use of our capital because of the current environment, we have -- and because of the current environment, we have taken conservative steps to ensure responsible growth in this segment.

Regarding liabilities. Without a doubt, we are the financial institution with the best funding structure in Chile, which remains as one of the most important competitive advantages. We have the highest market share in demand deposits, and these represent 38% of total assets. In fact, customer deposits accelerated significantly year-on-year to 18.2%. The high level of growth during this quarter is associated to our strong credit risk rating and our superior brand positioning that results in flight to quality in times of higher uncertainty.

This is proven in the chart on the right, where we are the -- clearly, the bank with the greatest inflows of deposits in the industry during the fourth quarter of 2019, with 24% market share of the flow of deposits.

In 2019, we also continued pricing bonds at very good rates, including subordinated bonds with spreads that were below average of the banking industry. In fact, we issued bonds not only in Chile, but also in Norway, Hong Kong, Japan, Australia and Peru. As a result of -- as shown on the chart on the bottom right, our cost of funding was once again the lowest in the industry, reaching 2.6% on an annual basis.

Please turn to Slide 12. This quarter, we posted a cost of risk of CLP 101 billion. As you can see on the lower left chart, we incurred a net credit deterioration of CLP 32 billion, which was mainly originated in the retail segment as a result of particular circumstances that occurred in October and November. Nevertheless, we posted improvement in December with the result -- as a result of better payment behavior and more normal development in the collection process.

Also, volume growth increased in our loan loss provisions by CLP 10 billion.

Lastly, the lower depreciation of the Chilean peso to the U.S. dollar in the fourth quarter of 2019 when compared to the same period of 2018 had a positive effect on our allowances for loan losses denominated in foreign currencies by about CLP 2 billion, partly offsetting the aforementioned impacts.

As you can see on the chart on the top right, total overdue loans remained similar to the same period last -- beginning this year, although during the crisis, the mix changed. Specifically, we saw an increase in above 30 days past due loan book.

We reached the cost of risk of 1.37% this quarter and 1.21% for the full year, which we think are reasonable in levels considering the events occurred during the fourth quarter of 2019.

Please turn to the next slide, #13. We dedicated important resources to credit risk at Banco de Chile. Thanks to that, we have built a bank with the best fundamentals as to face the weaker economic cycle in Chile. Over the last decade, we have been conservative and created the largest buffer in additional provisions amongst private banks, as you can see on the chart on the left. As of December, we have CLP 213 billion of additional provisions, substantially higher than our peers, which is even more important when we consider the implementation of Basel III. Our coverage ratio including additional allowances, reached 220% as you can see on the chart on the right. This level of coverage is also substantially higher than all of our peers. As a consequence of the prudent and consistent risk policies, we have had a stable and low cost of risk and NPL ratios when compared to our peers.

We are confident that our commitment to managing risk prudently and growing responsibly throughout the cycles will permit us to continue outranking our competition, not only in credit risk but also in the bottom line.

Please turn to Slide 14 on operating expenses. Total operating expenses increased 7.5% this quarter and the same level year-on-year.

Personnel expenses were the main driver of this increase for both periods as a result of extraordinary bonuses granted to our employees due to the commitment during the events that occurred in the fourth quarter, an increase in severance payments and the rise in salaries driven by the effect of inflation.

Administrative and depreciation expenses decreased CLP 1.3 billion quarter-on-quarter and CLP 31 billion year-on-year. In the fourth quarter of 2019, we incurred nonrecurring expenses of CLP 8 billion in fixed asset related expenses as a result of charge-offs and repairs undertaken on branches and ATMs that were affected during the events that took place. We also grew IT and communication expenses due to software licensing and development of new IT projects to strengthen the digital platforms and cybersecurity infrastructure.

These increases were offset by lower marketing expenses and a reduction in outsourced services and lower expenses related to assets received in lieu of payment.

It's important to mention that we are focused on improving our efficiency in the medium-term from the 45% levels posted in the recent past as you can see in the chart on the bottom left.

In this context, I'd like to mention some important advances of our strategic priorities that we have made during the last year that not only will support a reduction in the medium-term expenses but also improvement in operating revenues and customer experience.

Please turn to Slide 15. We are proud of our robust and consistent results that we've had over time. However, we are aware about several challenges that we face in different areas, such as economic environment, social changes, more banking and nonbanking competition and new regulations.

In order to address this, we have defined 4 main strategic focuses as you can see in this slide. The first of these is to implement further steps in our digital transformation process that the bank has carried out in recent years. As we mentioned in previous conference calls, we have innovated in several fields, including the creation of new websites for companies and individuals, the launching of successful mobile apps for banking, investment products and insurance, which contributed to improving the speed and security of transactions made by our customers. We have also made advances in business intelligence, allowing us to accompany and understand even more the needs of our customers throughout their life cycle.

Additionally, we are working on several improvements in our CRM during the last years in order to better provide information to our customers and their account managers. Thanks to this, today, we have even a more comprehensive understanding of our customers, improving that service even more. Nevertheless, we're ambitious, and we want to go further. Based on our agile work methodology, which is centered on simple, fast processes with strong interconnections between different areas, we are continuously improving our roadmap that aims to strengthen our value offering. Specifically, we are identifying improvements in our processes with the goal of addressing more efficiently the needs of our customers and developing more and better products.

We are very convinced by doing so we are building the foundation for a stronger growth in customer base, and importantly, to continue being the bank with the best customer experience in the Chilean industry.

The second focus is related to reduce and manage operations risks in an environment of increasing use of technology in the banking sector. In particular, we have been working on strengthening our cybersecurity, not only in reinforcing the perimeters and transactions, but also on raising the awareness of our employees.

We are conscious that the main way of reducing the number of threats is by promoting safe conduct of our workforce. In this context, during 2019, more than 80% of our Banco de Chile staff participated in training programs on issues related to the information security, with an impressive increase in actions that mitigate potential attacks.

Furthermore, we have continued implementing several improvements in the service model of our branches, a project that began in late 2018, which basically aims to move towards a more intensive use of digital technologies. In particular, we have ended a successful transformation of more than 100 branches by the incorporation of new self-service terminals, which promote even more the use of digital tools by our customers.

In addition to that, we have automated several back office activities, allowing a reduction in several manual processes, which allow account managers to have more time to service better the needs of our customers. For this year, we plan to continuing the deepening this initiative to complete the remaining branches.

Another area that has received special attention in our strategy is productivity. In order to improve our efficiency, we have carried out a series of actions that aim to increase our income without raising our recurring costs. Some of these areas was being to reduce expenses including external adviser activities and new roadmap for internal processes, more efficient supplier auctions and optimization of physical space among others. It's important to mention that we have been implementing these measures gradually in order to maintain a superior quality of service we deliver to our customers. We aspire to have a gradual improvement to efficiency ratios in the long term.

Finally, our strategy pays special attention to the main basis of our long-term sustainability, mainly through actions in the environmental, social and corporate governance areas.

We are proud to have issued the first green bond in our history as well as have carried out a series of actions to support our SME clients who were affected by the events in October and November. We also have a National Entrepreneurial Challenge Contest, in which more than 50,000 micro entrepreneurs participated, and we also trained more than 7,000 people in financial education. In this context, I would like to also highlight that we are the bank with the greatest improvement in ESG disclosure in Chile according to the index released by Bloomberg.

We are convinced that these focuses together with our strong competitive advantages will allow us to maintain our leadership in the industry.

Please turn to Slide #16. Summing up, before we -- our results. We believe that our results are positive when compared to our peers and with our own performance in previous years, when taking into consideration the economic environment and the impact of the events that occurred in the fourth quarter. Our higher level of loans coverage ratio and additional provisions provide us with excellent capability to cope with the slowdown in our business activity.

Additionally, we are confident that our sound risk policies support a profitable business model and that this focus on maintaining adequate risk return relationship.

Finally, before moving on to questions, I would like to mention some key takeaways. In terms of GDP growth, we expect the activity to grow around 1% in 2020, which should translate into banking industry loan growth of approximately 6% nominal. Loan growth will most likely be concentrated in the retail segment, while larger companies will probably delay their investment decisions. However, as we mentioned in the first part of this presentation, we expect a recovery in both GDP and loan growth for 2021. In this environment, we expect net interest margin to remain at a level of around 4.1% this year. Due to the below-trend growth this year and the potential increase in unemployment, we believe cost of risk for us in the industry could increase. We can't rule out this ratio would reach a level of around 1.3% to 1.4%. And given our prudent and conservative approach to credit risk, we believe risk expenses may increase but below that of our peers.

Since we expect the economy to improve in 2021, a lower cost of risk in 2021 is likely. We expect that top line growth should slow, but given our emphasis on cost of control, this should still translate into slight improvements to our efficiency ratio. We expect a level of around 44% for 2020. With inflation hovering around 3.2%, this should imply an effective tax rate of around 23% for this year.

Our solid fundamentals, superior risk management and sound strategy should permit us to maintain a sustainable ROAE of around 18% in the medium term, in line with our baseline scenario, ROAE should be slightly below this level in 2020.

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

[Operator]

[Operator Instructions] And our first question will come from Ernesto Gabilondo of Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

My first question is related to loan growth and asset quality. Given a softer economic growth, the protests that are likely to resume in March as they were in holidays, expected higher unemployment, higher than in Chile. And the challenge is to reach constitutional agreements considering Piñera's approval of 6% and the Congress approval of 3%, how do you see the downside risk for loan growth and the upside risk for the cost of risk for the year? And then my second question is in line of expenses. OpEx growth was 9% in 2019. So where do you see this -- the growth for this line in this year? And finally, considering your guidance, should we expect mid-single digit net earnings growth this year?

[Rodrigo Aravena, executive]

Thank you very much for your question. This is Rodrigo Aravena. For the first part related to the loan growth, before moving to that answer from Pablo I think that it's very important to understand the trend that we are expecting for the same economy this year. We're expecting an economic growth of around 1% for 2020. However, it's very important to keep in mind that in the fourth quarter of 2019, the economy contracted by almost 2%. What I'm trying to say is that we are expecting that economy to move from a very weak fourth quarter towards a more positive activity during this year, in part because the government announced an important countercyclical plan because the Central Bank has been maintained at a very low level of interest rates. And additionally, it's very important to mention that the Chilean economy has been very resilient to this shock. Particularly, if you take a look to the latest figure -- the -- you must take the monthly GDP growth in December was a positive surprise because the economy recovered most part of the previous contraction that we saw between October and November. So having said that, even though the weak -- the below-trend activity growth that we expect for this year, as a whole, I would like to put on the table that we are expecting a recovery from that very weak activity in the fourth quarter, towards a more positive growth in the fourth quarter. So that idea only just to put in context our scenario. Pablo, for the loan growth.

[Pablo Ricci, executive]

So in line with the slower GDP and the potential increase in unemployment, we're expecting, obviously, a slowdown in the growth levels. So as Rodrigo mentioned, we're expecting somewhere around 1% for GDP for 2020, with inflation hovering around 3.2%, and we're estimating that the growth should be around 6% nominal for the industry.

Historically, elasticity of loans is about -- the GDP is about 2x. And we think that the retail products should be driving the growth for the industry, and the wholesale should be slightly below that 6% level. It should be below that 6% level. In terms of Banco de Chile, in line with what I just mentioned, we are focusing to continue to grow responsibly and taking care of our risk-return relationship. And we are aiming at focusing to grow in high-quality SME customers, consumer loans, basically, the retail segment. So we should be growing in line with that 6%, but with the special emphasis in the retail segment and always taking care of our spreads and growing responsibly. In terms of OpEx growth, we should be growing -- we're -- as we mentioned in the presentation, we've been implementing a strategy that continues to focus in improving how we operate the bank in the administration expenses especially, and in line with our new service models.

This should all assist us, including the digitalization of the bank and automation of back-office processes, to continue improving our cost. So we're expecting for 2020 a level of growth that should be below inflation for us.

And in terms of the net income, we should expect to continue, in the medium term, a level of around 18% ROAE. And we could consider that we should have low to medium single-digit growth.

[Operator]

Our next question will come from Jason Mollin of Scotiabank.

[Jason Mollin, analyst]

Just some continued further questions on the profitability outlook. You mentioned most of the line items. We're paying attention to 2 that I'd like some further details. One is fees, you mentioned very strong fee income growth in the fourth quarter on the back of insurance brokerage due to the joint venture and increase in premiums as well as an increase in fees from credit cards and ATMs as well as mutual funds. If you can talk to us a little bit about the drivers there and what we should expect going forward.

And secondly, in the construct of this outlook for 18% ROE in the medium term, what are you considering for taxes? Do you think that tax rates will go up, given the need to finance expenditures by the government?

[Pablo Ricci, executive]

In terms of fees evolution for Banco de Chile, most of our fees are generated by the retail segment. So the growth will be determined in that side. One of the areas that we saw a strong growth in 2019 and that should continue in 2020, is this agreement, this joint venture with this insurance company, where we'll be recognizing important revenues in terms of fees of around -- above 2019 is something around the levels of CLP 30 billion to CLP 40 billion. On top of that, we've been having very good growth in written premiums in the insurance business. In terms of other business in the subsidiaries, the asset management and stock brokerage, that will depend a lot on the evolution of the economy on how those will be driven in 2020.

And then transactional products, we should also think that we should be growing in line at slightly higher in terms of customer growth.

In customers, we grow about 6% year-on-year. And we should be at least growing at levels similar to that. And also, obviously, this will -- like an upside risk would be that the economy improves above our baseline scenario.

[Rodrigo Aravena, executive]

I would like to reinforce one idea of our long-term assumption. So basically, what we are taking like the key assumptions that the economy will be able to maintain the potential growth rate, which is around 3%. So basically, in our scenario, the slowdown will be only temporary, which in fact was confirmed by the improvement in activity in December. It's very important to consider as well, that we are expecting a higher inflation rate for this year in comparison to the previous year, which is a positive driver as well for the net income for the bank, mainly because the exchange rate today is weaker than before. In Chile, the inflation rate is very sensitive to the change in the FX, in the currency. So the key assumption here is that the slowdown is mainly temporary and that the economy will be able to converge towards a more healthy long-term -- [ agreement ] in the long term.

[Pablo Ricci, executive]

I think it's also important to mention in relation to income is the risk will play a very important part in 2020. So in terms of the evolution of the economy and how risk develops, it will be important for the bottom line of the bank. So the bottom line can grow faster, obviously, if risk is in lower levels. And then in terms of -- and I'm finishing off going back on fees for one second. We should be expecting double-digit growth in terms of fees.

[Jason Mollin, analyst]

And so on the expected tax -- effective tax rate? Are you making any changes?

[Daniel Ignacio Galarce Toro, executive]

This is Daniel Galarce. We are not expecting nothing different from this year. I mean effective tax rate should be in the range of 23% to 24%, considering an inflation of around 3%. We don't have any piece of information signaling that this should change in the future.

[Operator]

Our next question will come from Tito Labarta of Goldman Sachs.

[Daer Labarta, analyst]

My question is in terms of GDP growth and in terms of potential sensitivities to the upside and downside. I mean for the recovery that you expect in 2021, what do you need to see for that to happen or possibly be better?

And conversely, what could make it worse? So what are you looking at in terms of to drive GDP growth, just given the political uncertainty and the constitutional vote expected. What would you like to see, and what could be upside and downside risk to that?

[Rodrigo Aravena, executive]

Okay. This is Rodrigo Aravena. Thank you very much for the question. Basically, what we have today in Chile, in this scenario, is a combination between supply and demand factors. From the supply side, as we mentioned in the presentation, there was damage in some areas in terms of infrastructure, which was equivalent to nearly 1% of the GDP, which, obviously, affects negatively the capacity of growth, capacity of production in the economy. However, the government announced an important plan of the construction in this infrastructure.

So it's very important to pay attention when the government will be able to begin this, the construction in critical areas, for example, in the subway and other areas. In terms of the impact on demand, as you mentioned, there will be a very important discussion this year, in critical, in key areas: constitution, pensions, et cetera. And therefore, the evolution of the discussion is very important, mainly because the impact in terms of business confidence and investment, et cetera. But we don't have enough information today because this type of discussion will be held mainly between April and May of this year.

So all in all, what we expect today is an economic growth of around 1% with a neutral bias. We don't have a negative bias in this estimate, mainly because we have a positive surprise in the economy in December. And because, as I mentioned before, both fiscal and monetary policies will be supportive for growth this year. We also have to pay special attention to the copper price and the Chinese economic growth because China represents nearly 50% of total exports of Chile, so the recent negative news from coronavirus, et cetera, it's also important for the China economy. But more importantly is that, we expect to recover for 2021 because we -- basically, we think that all the measures announced by the government and the Central Bank will be positive for the economy. In terms of the breakdown, we expect a negative growth for investment this year, minus 3% nearly. For total consumption, we expect an increase of around 1%. In terms of export, around 2%. So -- but more importantly, we think that the bottom part of this negative cycle was in the previous quarter.

[Operator]

Our next question will come from Emilio Acevedo.

[Emilio Acevedo Caro, analyst]

I'm just wondering about the excess capital that you can have because of Basel III. Do you have any particular number in mind? And if, with this excess of capital, you can have a potential higher dividend for 2021?

[Daniel Ignacio Galarce Toro, executive]

Daniel Galarce. What we know so far are some regulations that have been published by the CMF for common. Chile, we have a draft of regulation for risk-weighted assets for operational risk and also credit risk. And in addition, some rules regarding buffers, countercyclical buffer, conservation buffer and also the systemic buffer. Although we believe that probably the -- this regulation is very in line with Basel III guidelines, which is very positive, of course, we are still evaluating the final effect that this will have in our capital adequacy.

First of all, we have some preliminary estimates. And in our view, the regulation that has been published, so far, it's barely in line with our preliminary estimates. As long as that we have more details and a detailed analysis of all of these regulations, probably we will have a more specific estimate. However -- and due to this regulation, it's more focused on the characteristic of the counterparty rather than on accounting methodology.

We believe that we should be benefiting more or less because of this Basel III approach.

Nevertheless, as I told you, we are still awaiting what's going to be the final step. Today, probably we have a kind of positive gap with respect to a fully loaded limit, for instance, common equity Tier 1 ratio. However, we believe that this positive gap is going to afford or is going to be the basis for future growth, in terms of total loans, as long as the economy retakes the economic growth. So we are not thinking that we have an excess of capital today. And according to that, we don't see any extraordinary dividend for 2020 or 2021. We feel comfortable with the levels of capital that we have today. We believe that probably the Basel III approach will benefit us as compared to our peers, for instance, since we have a premium loan portfolio on a premium customer base, for instance. But however, we can rule out that we are going to use -- or we are going to utilize this, our capital base, in order to support future growth of our balance sheet.

[Operator]

And our next question will come from Yuri Fernandes with JPMorgan.

[Yuri Fernandes, analyst]

I have a question regarding your additional coverage. It's pretty high, you mentioned in the presentation. And my question is, if you have like a level, like a number, that you don't feel comfortable in going lower? And what's your plan to use that coverage in the current credit cycle?

[Pablo Ricci, executive]

Well, Yuri, we have a good level of coverage, including additional provisions in Banco de Chile. And we've been generating this additional coverage of -- through the use of additional provisions during the last decade. When we've realized these additional provisions, therefore, periods of more stressful periods, not for any particular customer or segment. And we don't have -- we've never actually released these provisions in the past for an economic cycle, but if there was an event that affected us significantly in the banking industry or the banking industry and us, that would be a reason on to release these provisions.

We don't have a specific number, in terms of coverage, but we expect that we should continue hovering around the same levels that we have historically had, based on our credit risk model. So our credit risk models don't have a target for coverage, it's the result of our credit risk models. They are based on overdue loans, beginning from day 1.

[Yuri Fernandes, analyst]

But on my second follow-up, like, do you plan to use those reserves now? Like can you use a little bit -- I got like the message, but can we see like some more volatility on the additional provisions?

[Pablo Ricci, executive]

So the -- in terms of our baseline scenario, our baseline scenario is that Chile is relatively on level, but we're expecting in a baseline scenario for cost of risk is something slightly above what we had in 2019, between maybe 1.3%, 1.4% and a more cost of risk percentage of cost of risk in a more negative bias. However, it's not clear that we'll actually reach these levels. And at these levels, it's more difficult to justify releasing provisions when the banking industry and us haven't been -- wouldn't be significantly impacted with that level of cost of risk. This is more -- for example, in 2009, when there was a crisis in the South of Chile in a certain sector that the banks had a very large effect of this, where, for example, we could use these additional provisions. But there's no -- there's nothing today that would suggest that we could use this. It's not our baseline scenario.

[Operator]

And our next question will come from Neha Agarwala of HSBC.

[Neha Agarwala, analyst]

My first question is on our loan growth. I understand that you expect the economy to grow around 5%, 6%. But is it fair to say that you're taking a more cautious stand on loan growth? Because wholesale will remain weak and I believe the competition in retail will be high because everybody will be focusing on retail. And you would like to focus more on the risk-reward perspective, so not compromising on margins, I believe. So would that translate into slightly lower growth than the system? And the second question is on expenses. I believe you mentioned that you expect to grow expenses in line or slightly below inflation.

Do you expect any drawn recurring expenses for 2020? Could you elaborate on how many branches were impacted from the riots? And if everything was insured? Or could we see some impact in this year?

[Pablo Ricci, executive]

Neha, in terms of our loan growth expectations, like Rodrigo mentioned, we're expecting 2020 to have a GDP growth of around 1%. And generally, the elasticity of loans to GDP is 2x.

So that, including inflation, we're expecting somewhere close to 6% for loan growth, where we're focusing more in the retail segment. We have a very good retail segment of customers, that is focused in upper income individuals, and we have what we consider the best SME portfolio in Chile.

So we're expecting to continuing leveraging this customer base to continue growing in 2020, which is something similar that we've done in prior years. That's where we've seen stronger growth in our retail segment, thanks to our customer base, which also provides us with attractive returns and generally lower cost of risk because of the segment that they're in. In terms of expenses, could you repeat the question?

[Neha Agarwala, analyst]

How many branches were affected last year? And if everything is insured. Do you expect any nonrecurring expenses in 2020?

[Pablo Ricci, executive]

So last year, we had 9 branches which were closed because of the events. But all these branches were insured. So we're not expecting any significant impact in terms of this -- material impact in terms of this -- of these events. The rest of the branch network there is minor damage, but it wasn't something significant.

[Operator]

And our next question will come from Sebastián Gallego of CrediCorp Capital.

[Sebastian Gallego, analyst]

I have a couple of questions. The first one, if you can -- if you could elaborate a bit more on the NIMs and rates for this year. You mentioned that you expect stability around 4.1%. Can you talk about the forces that may drive business stability? And then the second question is regarding cost of risk. And I know you show on the presentation on Slide 12 a bit of the evolution of overdue loans. I know it's a bit too early, but could you maybe share what are you seeing so far this year in 2020, and how that trend do you expect to evolve over 2020?

And maybe one last question. You mentioned during the call that probably the contribution from Chubb this year would be more like CLP 30 million to CLP 40 billion. I understand previous guidance was around CLP 60 million for this year. Can you elaborate if that changed or if maybe I understood wrong?

[Pablo Ricci, executive]

Sebastián, in terms of your first question, there's a variety of effects that affect net interest margin for 2020 for us in the banking industry. Like we mentioned, we are expecting somewhere around the level of 4.1% for net interest margin. And so I would say there is 3 effects that would be more negative, and there's a few positive effects. So you have the lower overnight rate that we've been experiencing, which impact pricing. Initially, the drop of the rates are positive in the repricing of our liabilities. Now we're repricing at lower levels. But there's also a higher risk. So that also helps in adjust -- in offsetting this impact.

The second thing that is important is that -- to take into consideration in terms of NIM, is that the long-term rates in 2019 were very low before the events that occurred. And this triggered customers to refinance their mortgage loans. So this had a -- this will have a negative effect on our net interest margin. And the third negative effect would be the new regulation that was put in place in January of this year, which obligates bank to offer customers to choose to automatically pay their overdraft lines with funds in their current account. So we have about 2% of loans are in the overdraft lines. Obviously, not all of that would disappear. But a portion of that would disappear in terms of the loan and also in terms of deposits because what's being used as the deposits in the current accounts to repay these loans.

So this new regulation will have an impact as well in terms of our net interest margin.

Nevertheless, it's important to take into consideration that in terms of our baseline scenario, we're looking to continue to grow our retail book. We think that, in this year it will grow at around 6% for loans. And we're focused to grow at that same -- around that same level with a focus geared towards SME loans and consumer loans.

So a better mix should help us in terms of the net interest margins as well as we are expecting a higher inflation for 2020.

So this also has a benefit in net interest margin as well as a steeper yield curve. So these things -- these -- what I mentioned should help maintain our levels of net interest margins around 4.1% as we mentioned.

In terms of your second question, cost of risk? In that slide, I think it was Slide #12, we have the evolution of cost of risk. I think one of the very important things to mention there so you can see how the overdue loan book in 1 to 29 days has decreased significantly thanks to a more active corrections in Banco de Chile. We think that the levels that we've seen, the improvements that we have seen in the last months, if this continues, can be positive for 2020, and that can change our bottom line, obviously, because every 10 basis points of cost of risk is about CLP 30 billion before tax, in a positive or a negative impact. In 2020, it's difficult to say the evolution of how the customer behavior will be especially in these 2 months of the year, which tend to be more cyclical in terms of payment behavior because people are on vacation. So it's a difficult period of time in order to analyze the evolution of cost of risk. But what we saw in December was quite positive, where we were able to reduce significantly the early overdue loan book.

[Sebastian Gallego, analyst]

Perfect. And regarding Chubb?

[Pablo Ricci, executive]

In terms of Chubb. So Chubb is an agreement that we have entered into this agreement a couple of years ago. And we recognized the revenues beginning July 2019, more or less. We recognize about -- based on the model, it's about CLP 5 billion per month in Chubb, which basically means for 2020 versus 2019, which was closer to CLP 3.5 billion.

So we should have about CLP 30 billion more in recognitions in Chubb fees in 2020 than in 2019.

[Operator]

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

[Rodrigo Aravena, executive]

Thanks, and thanks for your questions, and joining us on this call. We look forward to speaking with you for our next quarterly results.

[Operator]

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