Banco de Chile

SGO:CHILE

Earnings Call Transcript 2021-Q4

[Operator]

Good morning and good afternoon, ladies and gentlemen, and welcome to Banco de Chile's Fourth Quarter 2021 Results Conference Call on the 4th of February 2022.

[Operator Instructions]

The format of today's recorded call will be a presentation by Banco de Chile team, followed by a question-and-answer session. So without further ado, I would now like to pass the line to Banco de Chile team. Please go ahead.

[Rodrigo Aravena, executive]

Good afternoon, everyone. Thank you very much for attending this conference call. It's a great honor for us to host this call today where we will analyze and discuss financial results and main achievements of Banco de Chile during the fourth quarter '21 and consequently, the full year 2021. We are proud to say that, once again, our bank shows its unquestionable leadership in the local banking industry. Apart from having the highest net income, we also posted the strongest capitalization, the more solid coverage ratio and we rank first in demand deposits among other accomplishments. In simple words, we can say that 2021 reaffirmed that Banco de Chile has a unique capacity to generate attractive and consistent profitability as well as the best fundamentals to face the tolling is in the long run.

We will review these and other aspects through the presentation. As usual, we will start this call with an overview of the Chilean economy and business environment and then Pablo Mejia will go into the analysis of the bank. Let me start with the macro section. Please go to Slide #3.

Generally, 2021 was a successful year for the Chilean economy. GDP grew about 12%, surpassing any expectation held at the beginning of the year when the consensus pointed to an expansion of around half of the actual growth. The positive trend of activity can be seen in the chart on the upper left of this slide. As we mentioned in previous calls, the improved growth is mainly attributable to the main contribution of 3 factors. First, a very expansionary fiscal policy implemented since 2020, which aim to mitigate the adverse effects caused by the pandemic. The government deployed several measures including direct transfer of nearly 10% of the GDP, which increased the total spending by 53% year-on-year and the fiscal deficit to 7.6% of the GDP. It's worth mentioning that this policy was possible due to the fiscal discipline that Chile has had over the time, which allowed financing these measures without compromising the fiscal sustainability in the long term.

A second factor was related to the strong timeline and coordinated response adopted by the Central Bank, which supplemented the actions from the fiscal front. Several measures implemented at the beginning of the pandemic, such as interest rate reduction, liquid injection and other specific policies undoubtedly played a key role in the recovery experience last year.

Third, the successful vaccination process where Chile was globally recognized as one of the countries with the greatest proportion of its population immunized. In fact, 86% of population was fully vaccinated in 2021, which was crucial in the greater mobility in the country. This was one of the most critical drivers over the pickup experience in services in the second half of the year as the chart on the upper right clearly shows.

The labor market has also been strengthening consistently with the greater dynamism of the overall activity. In December, for instance, the employment rate dropped to 7.2% at the chart on the bottom left shows achieving its pre-pandemic figure. This rate which is well below the peak posted in 2020, which was 13% has been led by the gradual recovery in employment. However, the sluggish recovery in the labor force has also reduced unemployment rate further.

Several leading indicators anticipate that favorable growth rate will remain in the short term. One of them is the increase observed in total imports as the chart on the bottom right displays, which typically anticipate the evolution of private demand. Nevertheless, the important recovery observed in Chile has had important consequences in prices, interest rates and the Chilean peso.

Please move to the next slide, #4. The rise in inflation has been a consequence of several factors. One of them was accelerated growth in expanding, especially since May 2021. As can be seen in the chart on the top left, the total inflation rate went up to 7.2% year-on-year in December, well above the policy target set by the Central Bank, which is 3%. Consequently, the headline inflation achieved the highest figure since 2008. The chart also shows the upward trend of the core CPI, which is a measure that excludes full energy prices, confirming that inflationary pressures have spread over several goods not being attributable to a few volatile prices.

In fact, all core measures are above the 3% target while long-term inflation expectations have also increased beyond this threshold. This trend has added more concerns about potential second run effect and higher-than-expected persistence of the CPI in the current high levels. Apart from the impact caused by the strong growth, as we discussed in the previous slide, the weaker Chilean peso has also increased inflationary pressures on tradable goods. As the upper right chart shows the value of the Chilean pesos against the dollar has been falling since 2019, a trend attributable to uncertainty in local political and economic scenarios and the global strengthening of the dollar and higher commodity prices as well. As Chile in another economy, nearly 60% of the CPI basket is composed of tradable goods, global inflation has also affected even more local prices.

In response to these trends, the Central Bank began a tightening cycle in August 2021. Since then, the Board has raised the overnight rate from 0.5% to 4% in December, a decision that was followed by 150 basis points high in January to 5.5%. Despite the changes, the Central Bank has maintained a hawkish buyer, leaving room for additional high in the future as suggested in the last monthly monetary policy meeting press release. At the chart on the bottom right is place, the higher organize rate, coupled with pension fund withdrawal and higher local uncertainty as well as the right inflation expectation has driven a pickup in long-term interest rate.

Undoubtedly, this nominal and real trends have significant effect on macroeconomic conditions and bank profitability. We will discuss this aspect over the next 2 slides. Please turn to Slide #5. We expect a GDP downturn from the 12% posted last year to 2.2% in 2022. As can be seen in the table of this slide, we foresee a slowdown in domestic demand due to the fiscal and monetary stimuli withdrawal. On the other hand, export should have a recovery this year due to the lagged impact of the weaker currency and the spectrum normalization in global supply conditions.

Despite these assumptions, we are now face a downward bias in our forecast, mainly due to the uncertainty in local political factors as well as depreciating uncertainty relative to the evolution of the pandemic and some global geopolitical risk. Inflation will likely remain above the policy target during the next 2 years. In this environment, we see an inflation above 6%, at least until the third quarter of this year, mainly due to the second round effect.

Nevertheless, we expect a decline in the annual inflation rate to 4.5% by the end of the current year. In this environment, the Central Bank is expected to continue raising the interest rate to 6.5%. Finally, as you can see in the table, we also forecast the deficit in both the current account and fiscal balance will persist at least this year.

Now I'd like to discuss briefly the evolution of the Chilean banking industry. Please turn to Slide #6. As you can note, the loans in Chilean banking industry recovered in nominal terms from the weak level since last year, growing 3.6% quarter-on-quarter and 10.1% year-on-year. Mortgage loans continued to support growth with a rise of 4.2% quarter-on-quarter and 15.5% year-on-year. This was followed by commercial and consumer loans that grew quarter-on-quarter by 2.7% and 6% respectively. On a yearly basis, commercial loans grew by 9% while consumer loans grew 6.7%. Nevertheless, it's important to note that the high inflation and the weaker exchange rate influenced the nominal growth level positively. It's also relevant to mention that thanks to a more normal economic environment and greater mobility levels, demand for customer loans has steadily risen during the year.

As per mortgage loans, we expect that this product in the midterm should gradually slow down as long as interest rates remain high and lending conditions remain more attractive. As per commercial loans, we expect that there is still a significant amount of uncertainty, and this will keep loan growth subdued during this year.

In terms of results, the Chilean banking industry posted a record net income of CLP 1.1 trillion in the fourth quarter as shown on the chart on the top right, due primarily to higher inflation and still lower than normal levels of cost of risk as you can see in the chart on the bottom right. Despite this improvement, it's important to be aware that most of these factors are temporary, and consequently, we expect a gradual normalization and profitability in the future.

I'd like now to begin our analysis of the main achievements and financial results posted by Banco de Chile. Please turn to Slide 8. We are strongly convinced that the solid performance that we have accomplished through our history is thanks to our consistent strategy and some fundamentals. These factors when combined with our strategic initiatives set the path to create a sustainable bank in the long term. On this slide, we list some of our main achievement in 2021.

Putting our customers first in all decision has been key for our success. In 2021, we achieved the highest level of net income in our history of CLP 793 billion and we began recovering lost ground in terms of loan growth by expanding 11% year-on-year. We also ranked first among our peers in terms of DDAs, asset under management, net sales, capital adequacy and asset quality, as measured by our delinquency ratio and additional allowances.

Furthermore, in 2021, we saw an important rise in our customer base, and today, we are proud that we have almost 730,000 new fund account customers, and we issued our first 144A senior bonds for an amount of $500 million among others. We also achieved important advances in ESG as we will discuss in the next Slide #9.

For Banco de Chile, the commitment to sustainability is a fundamental pillar. Together with our workers and in alliance with diverse foundations, in 2021, we created initiatives that contribute to the progress of people, entrepreneurs, the country and to generate long-term value for our organization and stakeholders. This slide highlights some of the several ESG projects developed during the last year.

In order to promote a culture focus on sustainability, we strengthened our procedures and policies related to diversity, inclusion, ESG risk and financing and sustainability requirements for suppliers. Additionally, we also adopted the FASB disclosure framework, taking another step to improve the levels of transparency and quality of information available to the market.

I'd like to invite you to visit our renewed section of sustainability in our corporate web page bancochile.co. On the social front, we have a permanent commitment to entrepreneurship, which is reflected in diverse program for SMEs. In this line, we highlight our participation in the Fogape Reactiva program, where we granted $1.8 billion in [indiscernible] to SMEs in our 6 national entrepreneur challenge, which attracted 24,000 micro small and medium business across Chile. Among several initiatives to strengthen our community relations, we also offered 3 financial education courses and issued a social bond to finance women entrepreneurs.

Within the actions related to the environment, during 2021, we have trained our with specialists on international standards for analyzing social and environmental risk, launched a sustainable welcome kit for new clients that includes recycled materials and other is the related product to our customers, such as green lesson and sustainable investment fund. As a result of putting sustainability as a [indiscernible] pillars and generating initiatives that create value, we received recognition from local and international institutions, including the European that consider us as the best bank of the year, the most noted digital bank and the best bank for financial inclusion.

Finally, before moving to the next slide, another important highlight of 2021 was the 3-notch upgrade on MSCI ESG rating, in which, our bank moved to an A rating, the highest level in the local industry. These upgrades together with all other recognitions, it's proof that our actions are on the right direction to continue building the best bank for not only our customers and society, but also for our shareholders.

Now I'd like to pass the call to Pablo, who will go into more detail about Banco de Chile financial performance. Please turn to Slide 11.

[Pablo Ricci, executive]

Thank you, Rodrigo. The unprecedented change that COVID-19 has had on the global economy is astonishing. This is probably permanently adjusted how we live our lives and use technology. This pandemic accelerated the development of digital bank in at Banco de Chile, and we have continued to innovate, creating new products and solutions to improve the digital experience for our customers in several fields.

For example, in 2021, we created new smart payment platforms that use watches and mobile phones to pay for goods. We also reinforced our QR payment platform and launched new apps with foreign payment functionalities. We are also very active in growing our digital onboarding debit account called fund and made available several new tools for these customers that aided in strengthening ties with them such as cross-selling insurance, credit and investment products.

In fact, as you can see on the chart on the bottom left, over 20% of our Fund customer base has been cross-sold to other products, demonstrating its potential. Our goal is to provide the best customer journey in order to offer a great experience. By doing this, we can stand out from the competition and continue growing strongly with customers that use our products actively. Thanks to the successful rollout of this product, its benefits and new digital functionalities. We have grown to almost 730,000 customers in just 5 quarters. This achievement is very positive for us, especially when you consider that this will expand our retail customer base significantly.

Please turn to Slide 12. We believe that by providing the best customer experience, we can outperform our peers. This focus is proven by our excellent Net Promoter Score rating of 68% and our record low level of attrition of only 2.2%. It's also worth noting that these excellent indicators have taken place in conjunction with our emphasis of promoting an increasing use of digital channels among our customers. which demonstrates that we've been able to do this without affecting the superior service we deliver. In fact, this commitment to our customers can be seen on the chart on the top right and also in customer preference when choosing a bank in the chart on the bottom right. We firmly consider that by providing superior service in all of our banking channels, we can continue leading the industry in customer satisfaction and grow faster and better than our peers in loans, deposits and overall customer income sources.

Please turn to Slide 13. We continued our focus in optimizing how we run our bank in 2021. The fruits of these efforts can be seen in our impressive efficiency ratio of 39.8% for the full year reached thanks to the almost 0% nominal annual growth of our cost base in 2021. Specifically, to optimize our expense base, we set clear targets in 3 main areas. First, we continued automating processes by using technology and simplifying procedures, by using technology in the front and the back office where helping to keep the bank competitive in this highly challenging industry. These advances have permitted us to continue growing without the need to increase our headcount.

In fact, in January 2021, we continued adjusting our organizational structure in similar ways that we did in prior years and leveraging the advances we achieved in terms of productivity and digital transformation. As a result, we have reduced our head count by 16% in the last 5 years, increasing our productivity dramatically while maintaining a high level of service quality. Second, through a sharp changes in customer preference to use online banking and more digital services, we continue to roll out a new service model in branches, and this allowed us to have a reduction of 62 branches in 2021. When compared to 2018, we have reduced our total branches by 30%, reaching 272 in 2021. Besides adjusting the service model and branches, the projects also involve the integration of the consumer finance network into nearby Banco de Chile offices as well as automation of customer service and cashier areas.

Another measure that continues to contribute to cost reduction is the implementation of a specialized division that seeks to find efficiencies in all processes in the bank. In 2021, this division has accomplished important milestones in reducing administrative expenses. It's clear that part of this excellent level of efficiency ratio that we achieved this year was due to the extraordinarily high level of inflation. Nevertheless, we continue to see improvements in loans per employee loans per branches and total expenses to assets as shown on the bottom of the slide, which reaffirm the accomplishments attained on this matter.

Please turn to Slide 15 to begin our discussion on results. Our net income for the fourth quarter 2021 and the full year was outstanding. The strong bottom line had to do with both temporary and core factors. For instance, we benefited from a temporary higher inflation, rising interest rates that improved demand deposit contribution and a persistent low level of cost of risk. However, these effects, coupled with an improvement on core revenues propelled by stronger loan demand and enhance fee income.

As you can see on the chart on the top left, we had an impressive bottom line of CLP 284 billion, 54% higher than the previous quarter and 125% above the same period last year. For the full year results, we grew 71% over 2020, as you can see on the chart to the right, with an ROAE of 20.2%. This bottom line surpassed all of our competition, as shown on the chart on the bottom left. We generated CLP 18 billion more than Santander and surpassed BCI by over CLP 270 billion. We are also very proud that not only did we beat the competition in terms of our bottom line but also in terms of profitability as measured by return on average assets and in our capitalization levels. It's especially important to note that we are fully committed in creating a sustainable bank that permits us to have a long-term strategy and dependable results.

We are certain that our business approach on this matter will pay off as it has in the past and continue delivering sustainable and superior profitability for our shareholders.

Please turn to Slide 16. Operating revenues grew almost 30% quarter-on-quarter and 15% year-on-year as a consequence of an expansion of noncustomer income due to inflation, and in the lower extent to customer income, thanks to the rise in short-term interest rates and the reactivation of the economy that led to stronger than higher-margin products. Net interest income, as you can see on the chart on the right has risen sharply not only due to higher inflation but also our superior funding mix that takes greater advantage of the monetary policy rate hikes than our main peers.

Further on in the presentation, we will go into greater detail on our funding mix and how we compare to our competitors. As for fees [indiscernible] year-on-year rise. Excluding the upfront commission that we recognize on a monthly basis with an international insurance company, related to a joint venture and insurance brokerage, which amounted to CLP 60 billion in 2020 and CLP 14 billion in 2021. I want to emphasize that this increase to a substantial rise in client interaction fees, specifically, we had a 25% jump in net card fees. Mutual fund management fees were also up 17% as a result of portfolio rebalancing from fixed income towards equity funds based on the change in investor preferences. And insurance brokers grew 15%, thanks to greater dynamism in loan demand, particularly due to the reactivation of consumer loans among other fees.

When we compare our customer income generation to our peers, we clearly outrank at every level. As you saw on the top of the slide, we outpaced our competition in net interest income, and we also beat them in our fee margin and total operating margin net of risk. During the pandemic, we were uncompromising to maintain a prudent long-term business and risk policies and this clearly paid off. Our focus is to create a bank that generates long-term value for our shareholders. based on the customer-centric strategy rather than 1 based on taking increasing market risk through an aggressive treasury risk appetite that looks for short-term gains.

Please turn to Slide #17. Total loans reached CLP 34.3 trillion, 11% greater than 1 year ago. Commercial and mortgage loans drove loan growth rising year-on-year by 11.8% and 10.2%, respectively. The strong rise in commercial loans relied on specific lending transactions carried out during the quarter with certain corporate customers and the rise in SME loans that continues to be influenced by the effects of the Fogape Reactiva program deployed during the first semester.

Mortgage loans, on the other hand, benefited from higher liquidity during 2021 and low interest rates during most of 2021. Both of these were influenced by higher inflation and the weaker exchange rates. Nevertheless, we expect that the current level of long-term interest rates and stricter credit conditions will continue to reduce the [indiscernible] during 2022.

In terms of consumer loans, we have seen a recovery in growth beginning in the second half of 2022. This was due to a more open economy and better employment figures, in addition to temporary liquidity conditions that began to be constrained. As you can see, consumer loans grew strongly at 5.6% quarter-on-quarter.

Please turn to Slide 18. One of our key competitors funding structure that is bearing fruit in the current cycle of high interest rates and inflation levels. As you can see on the chart on the top left, 36% of our funding comes from noninterest-bearing peso demand deposits. This position not only provides us with lower cost of funds, especially in times of rising rates, but it also provides us with a structural [indiscernible] during higher inflationary periods such as the current period. Our brand has allowed us to continue capitalizing in this source of funding more than our peers, especially from the retail segment, as you can see on the chart on the bottom left that shows our growth in average balances per account for personal banking customers versus our main peers.

In addition, we have maintained a more stable funding structure when we compare mortgage funding gap, as shown on the chart in the middle of this slide. This has permitted us to be better prepared to neutralize the effects of rising rates than our main peer. As was seen earlier in the presentation the chart regarding the evolution of our net interest income. This means that we will not fund, for example, the mortgage loan expansion with costly or short-term funding sources in the future are financed spoke by placing significant amount of additional bonds at current higher rates.

As for capital adequacy, I want to highlight that our superior Tier 1 capital ratio of 13% is significantly higher than all of our peers. This, together with our strong credit risk ratings and debt placements in both local and overseas markets has permitted us to fund our business competitively.

Growing responsibly by taking a prudent approach to risk management has been key to our solid track record of success.

Please turn to Slide 19. As you can see on the chart on the left, loan loss provisions reached CLP 149 billion this quarter. up from prior quarters, but it's essential to note that this high figure was due to our prudent policies that established CLP 80 billion in additional provisions this quarter. On a year-on-year basis, total loan loss provisions dropped from CLP 463 billion to CLP 373 billion in 2021. The quality of our portfolio and our risk management culture is evident when compared to our peers, as you can see on the charts to the right of the slide. We surpassed all of our peers in these indicators. We have accumulated CLP 540 billion in additional provisions, which provides us with a coverage ratio of over 4x, lower cost of risk, excluding additional provisions and we have the best delinquency ratio of only 0.85%. We firmly believe that this risk management advantage will allow us to face the aftermath of the pandemic cycle better and our peers while taking greater advantage of growth opportunities, as we have seen in the last semester, we have been able to maintain our overall market share as compared to the decrease displayed by our main competitor.

Please turn to Slide 20. Our focus to control cost is bearing fruit. This year through our efficiency programs, we have barely grown by only 0.6% year-on-year. As you can see on the charts on the right, salaries dropped by CLP 6 billion, principally as a result of lower headcount and organizational restructuring. Likewise, infrastructure-related expenses posted a decrease as a consequence of the implementation of our new service model in the network branches, mostly deployed in 2020. In turn, administrative and other expenses showed a modest rise in line with our advances in digital banking and increased commercial activities that reactivated commercial campaigns all of which explain the increase in IT and marketing expenses.

In terms of our efficiency ratio, we improved by almost 6 percentage points from 45.5% in the fourth quarter of 2019 to 39.8% this quarter and even surpassed our main competitor. Undoubtedly, the sharp improvement is influenced by the effect of higher inflation on net interest income. For that reason, it's even more important to emphasize that our rate of total expenses to assets, which is not affected by inflation, also decreased by 20 basis points this year. We are confident that through our firm focus of continual cost improvements, together with our advances in digital banking, which includes the use of business intelligence robotic process automation and better digital contact channels for our customers should allow us to sustain a better level of efficiency than what we have posted in the past. Today, our efficiency ratio is temporarily positively affected by the high level of inflation, but we're certain that we should be able to post consistently better levels of efficiency than the levels we have achieved prior to 2021.

Please turn to Slide 21. As discussed in previous conference calls, it's important to fully understand how the banking industry works and creates value for shareholders in the long run from both a net income perspective and a comprehensive income point of view. Different strategies and market conditions can change the bottom line results under net income or comprehensive income, which includes unrealized gains and losses from the changes in fair value of available-for-sale portfolio and derivatives for cash flow accounting hedges that are accounted directly against equity. In some periods of time, net income only shows part of the valuation creation story.

As you can see, we also outperformed all of our peers in comprehensive income with CLP 821 billion. This result is significantly greater than all of our competition, as you can see on the chart on the left, it's also important to highlight that paradoxically, losses in OCI actually increase ROE by reducing shareholders' equity. One of the primary differences of our business strategy to our main peer is our focus on generating dependable results from commercial banking activities rather than treasury revenues, which generally means taking greater market risks, volume printing volatility in the P&L.

Please turn to Slide 22. Before answering your questions, I want to highlight a few key ideas from this presentation. Clearly, the spread of COVID-19 has changed significantly. The economic environment across the globe in Omicron has added to these uncertainties. Within this context, 2021 was a positive year for GDP growth and the slowdown is expected for 2022 to a level around 2.2% with a gradual recovery in employment. This assumes that there will be no more lockdowns in that Omicron doesn't impact the health care system significantly. Within this context, we posted a historic bottom line of almost CLP 800 billion and led the industry in capital coverage and demand deposits. We achieved this by managing the bank accordingly given the environment growing responsibly in key market segments and prudently establishing CLP 220 billion in additional provisions.

Based on these drivers and given our strong position in all capital ratios as well as the economic outlook that should translate into lower loan growth for the coming years. Our Board decided to propose a dividend payout ratio equal to 100% for distributable earnings to our shareholders. Other noteworthy advances this year was ESG and Digital Bank. Our commitment to make Banco de Chile a sustainable bank is paying off. Not only our sustainable companies more profitable, but they also have greater access to financing. This is especially relevant today. For this reason, we are very honored when we received an A rating by MSCI ESG and an unprecedented three notches upgrade.

In terms of digital banking, our progress was recognized with the impressive level of growth that we saw in our fund account customer base and the high level of cross-sell we achieved. As for our outlook for 2022, we expect that temporary drivers should remain such as a higher-than-average inflation, low levels of cost of risk. If this occurs, we can't rule out that ROE will be higher than our long-term ROE levels of 16% to 18%.

To conclude, we're proud that we have once again demonstrated that our long-term strategy has maintained Banco de Chile as the strongest bank in the country and the best investment for shareholders. Thank you for listening. And if you have any questions, we would be happy to answer them.

[Operator]

[Operator Instructions]

Our first question comes from Mr. Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

My question in terms of your outlook inflation and interest rates. And remind us how that impacts your margin also thinking your inflation remains elevated in the first half of the year at around percent level or so, should that imply ROE can remain at the similar levels that we saw in 4Q? How do you think maybe the inflation involved throughout the year, the impact on margin? And I guess also profitability and also the sensitivity to higher interest rates, does that offset some of the higher inflation that we're seeing? Or how should it impact you?

[Pablo Ricci, executive]

So inflation is an important fact of our results and 1 of the reasons why we had a -- is part of 1 of the reasons why we had a very strong net interest margin in 2021. And what's expected is the first half of 2022 should continue with higher-than-normal levels of inflation. Today, for every 100 basis point change in annual inflation, it affects us around 20 basis points in it. We have a gap on the balance sheet of about CLP 8 trillion. So for every 100 basis points, it's about CLP 80 billion.

If we look at the effects of that affects the rise in the monetary policy rate. We have for every 100 basis point change in the short term, it's around 5, 10 basis point change in terms of net interest margins, being after 1 year. And when everything is fully priced in, we're seeing something close to the 25, 30 basis points for every 100 basis points. So if we put all this together, what we see is that 2022 should be a positive year because we've seen this strong rise in interest rates. And thanks to this, we should see slightly better NIM in 2022 versus 2021, but being partially offset by the lower level of inflation but we can't rule out that there will still be higher rises in interest rates and inflation depending on the economic cycle and what's to come. Rodrigo, do you want to add anything to that?

[Rodrigo Aravena, executive]

Yes. Thanks, Pablo. I just want to highlight what I said previously in the beginning of this conference call, is that there is our bias in different estimates of both interest rates and inflation rates. Even though our business scenario considers an inflation rate at 4.5% by the end of this year. The adding inflation rate will be hovering around 6%, 6.5% and at least until August or September of this year, which means that there are risks of strong second round pace in other prices and nontradable goods, et cetera. So my point here is that we can roll out a higher-than-expected inflation rate at the end of the year as well as the same for the interest rates.

So in our different scenario, we have an overnight rate of 6.5%. But once again, we can roll out a slightly higher than this. So basically, in our best case scenario, even though we have a downward bias in our forecast for GDP, we have an outward is in terms of interest rates and inflation as well. So we'll be basically dependent on the evolution of different rates and some political factors including the future. So the -- our value in price to interest rate is an important aspect to monitor during this year.

[Pablo Ricci, executive]

Maybe 1 thing to add is on the fourth quarter had very high inflation, it has a 3% level of inflation. So if we annualize that, that's close to 12%. So we're not expecting that the quarters will have such a high level of inflation in the next coming periods. But for the full year, we're expecting net interest margins to be more positive than 2021.

[Rodrigo Aravena, executive]

In our business scenario, the fourth quarter the last year was a peak in terms of quarterly inflation. So we are assuming the gradual and very [indiscernible] of inflation rates in the future, even though we are now had our bias in that estimate.

[Daer Labarta, analyst]

Okay. Yes. Pablo and Rodrigo, that's helpful. Just I guess 1 thing to clarify on the policy rate increase, you mentioned 5 bps change in margin after 1 year. And I assume, I think that was a positive change. But in the short term, is there a negative impact as your liabilities reprice?

[Pablo Ricci, executive]

It's a 5 to 10 basis point improvement in net interest margins. And in the short term, since there's been a strong structural change in the funding mix of Banco de Chile where we have a huge amount of noninterest-bearing deposits. We're not seeing an impact in the short term. We're seeing smaller improvements, but it's possible.

[Daer Labarta, analyst]

Okay. So that's clear. So no impact from the rising rates in the short term and after year 5 to 10? And then...

[Pablo Ricci, executive]

And then different funding through it's different.

[Daer Labarta, analyst]

Got you. Understood. That's clear, Pablo. And then so as the inflation normalizes throughout the year, and I guess also your tax rate was a bit lower in the quarter. Just thinking about the ROE. And then you mentioned you should normalize back to pre-pandemic levels. But can you remain above 20%, I guess, in the short term as inflation is still a little bit elevated before kind of getting back to maybe closer to 17, 18 that you had pre-pandemic, is that reasonable?

[Pablo Ricci, executive]

We're still like in transitional year. So everything is very different. There's still a high level of liquidity. We still have high levels -- we have rising interest rates, low cost of risk, very good payment behavior. So when we combine all of this, it provides us with probably in the short term, higher levels of profitability than our long-term levels. The levels that we're seeing today, 2021 and 2022 will possibly based on this -- in this scenario be above those 16% to 18% levels that we save for the medium term, which are more sustainable thinking of a cost of risk closer to 1.1% inflation back down to 3%. So in the short term, yes, it's possible to have a better -- a higher level of ROE than what we should expect in a more normal scenario.

[Rodrigo Aravena, executive]

Okay. Sorry. So let me add just basically, it's important to keep in mind that inflationary ratios will be remaining in the first half of the year as this transition, the normalization that Pablo already mentioned, will be from the high level in the first half of the year because we will have a higher inflation, and therefore, the normalization will be probably from the second half of the year and thereafter in the long run, we will likely have a more normalized ROE, which is a number, as we said in previous conference call, with everything in equilibrium, it would be a number between 15% and 16%. But this year, given the above the high inflation and higher interest rate as well, probably we will as the first half with a higher level of profitability relative to the second half of the year.

[Daer Labarta, analyst]

Okay. Yes, that makes sense. That's a sorry. And just 1 final point to clarify, on the tax rate. because it was only around 15%, I think, also benefited from the higher inflation. Should that get back to that 20%, 22% level?

[Pablo Ricci, executive]

Yes. So in taxes, it's for the tax authorities use price level restatement to calculate taxable income, so higher levels of inflation, reduces our -- the effective tax rate. So with a more normalized level of inflation, we should see an effective tax rate closer to the 23% level when we're at 3%. But for 2022, it would depend on the inflation that we see. So probably below the 23% but above what we've seen in 2021 depending on where that inflation number is. Rodrigo, do you want to say some something?

[Rodrigo Aravena, executive]

No, no, no, sorry, sorry. That was fine. Sorry.

[Operator]

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

[Jason Mollin, analyst]

Actually, maybe first, just a follow-up on the effective tax rate. And you mentioned the impact of inflation, and we know that. We've seen some discussions that the government will need to raise tax revenue and raise effective tax rates. How are you thinking about that? And is that potential change in your long-term ROE expectation that banks could pay higher taxes going forward? And secondly, maybe given the news about Citigroup's exit from retail banking, if you can provide an update on Citi's partnership with Banco de Chile? In the past, the bank has talked about Citi supporting international business opportunities. Maybe you can speak to us about Citi's involvement in other BCH activities, particularly if the areas where Citi supports Banco de Chile as a 50% owner of the entity that controls 51% Banco de Chile?

[Pablo Ricci, executive]

Rodrigo, maybe I'll take the Citi Group question. I'll start, and then you take the taxes question. In terms of the -- so in terms of the relationship with Citigroup, we have a strong relationship with Citigroup, and we have a commercial agreement that sets the guidelines and how we work together with Citigroup in Chile and abroad. Citigroup provides us support in terms of more international business, especially custody, multinational companies. So they're very much involved in that if we place bonds outside the stock brokerage, et cetera.

In terms of the retail side of the business, we don't -- the strength with Citigroup within Banco de Chile is more focused on the commercial -- on the corporate side of the loan book. going forward, they continue to have the same level of participation in Banco de Chile. We don't have any additional information, whether there's something going to change in that front, but they've been happy with the relationship that we've had up to this point. So maybe, Rodrigo, if you want to add anything to that or go straight into the tax changes?

[Rodrigo Aravena, executive]

Thanks, Pablo. I give that in terms of the second question [indiscernible] answer. In terms of the first question about the tax rate, I think that it's important to keep in mind certain things. First, we are aware of the increase in gross fiscal debt in Chile according to fiscal year figures. Last year, the gross debt was 26% of the GDP. The fiscal deficit was 7.6% of the GDP. Of course, these are higher than second number when we compare with previous years. So that's why we will likely be discussing in the country some tax reform, et cetera. Other than that, it's very important to mention that any decision related to taxes or spending has to be defined by the central government. I mean the next President of Chile will have to define any potential changes or proposal in terms of changing the -- any impact for the fiscal spending in the future, et cetera.

According to some interviews and other statements that have made appointed by the next [indiscernible] understand the corporate tax rate is not an official draft. That is not an official proposal. It will have announced by the next President of Chile, by the next government, actually. But -- so we don't have information as to assume important changes in terms of the tax rate so far.

[Operator]

[Operator Instructions]

Our next question comes from Mr. Daniel Mora from CrediCorp Capital.

[Daniel Mora, analyst]

Sorry that I have some communication problems. Thank you, Pablo, for the presentation also the Banco Chile team. I have a couple of questions. The first one, I would like to understand the current trend of the cost of risk considering the pickup in the fourth quarter and the recording of additional provisions, the coverage ratio right now is above 400%, a more than healthy indicator and with asset quality indicators under control, what are the expectations? Or what are you expecting ahead that may you keep this conservative approach? What should be the considered the normal cost of risk in 2022? And my second question is regarding the CET1 ratio is 30%, well above that of peers and also the fully loaded regulatory minimum. Do you expect to use part of this capital to boost loan grow or do any other investment or we could consider this indicator of this figure as the normal long-term CET1 for Banco de Chile?

[Pablo Ricci, executive]

Okay. So maybe the first question about risk and additional provisions. I'll take that question. And Daniel Galarce can touch base in terms of the basal ratio question. In terms of cost of risk for 2021 and what we saw in 2020, you're correct that in 2021, we had was CLP 220 billion in additional. We had a very strong level of coverage of over 4x. So what we're expecting for 2022 and what we've seen from 2021 as well, is that customers are having a very good payment behavior because of high liquidity levels because it's more of a transitional period, 2021, 2022. We expect to be continue being a transitional period with probably lower levels of cost of risk than what we would imagine for our long-term level of cost of risk, which would be closer to 1.1% in 2020. 2022, we're expecting a level still in a transitional period, below that 1.1%, probably around level closer to 1.0%.

So what we've seen is very good payment behavior from all customers who have good NPL, what we've seen as well as in our loan portfolio, the SME loans, the -- FOGAPE loan portfolio, they're all operating very smoothly, but we still think that this is -- this depends on the evolution of the economy and it's transitional.

Going on to your -- so in 2022, still a transitional year. Close to 1% cost of risk. Beyond that, we should probably trend to what we have always said is closer to our long-term level of 1.1% cost around that level.

In terms of additional provisions, is correct. We've had -- we've implemented CLP 220 billion of additional provisions in 2021. In fact, in the fourth quarter, we had CLP 80 billion of additional provisions. So these provisions are still related to uncertainties relative to long-term economy, but the uncertainties of the economy still remain, so due to this economic scenario for the scenario, we've been implementing these. But nevertheless, we recovery continues in the future and it's a clear recovery and [indiscernible] fees tend to fall. We can't roll out, as we've mentioned in the past. There's a portion of the additional provisions that we've implemented in the past, we can reverse. And that's a decision that will have to be taken by the Board. We don't have an exact trigger on how that would work. But it's something that the bank is and the Board mentioned that would be a possibility in the future when the uncertainties when there's less uncertainties. Now Daniel, would you like to go into the next?

[Daniel Ignacio Galarce Toro, executive]

Well, regarding CET1 ratio, actually, we have a 13% CET1 ratios of December '21. Of course, this is an important gap regarding the regulatory thresholds, we feel very confident with our capital structure today and capital position. This is not intended to find the room we have to grow in our normal course of business over the future given the scenario and the economic scenarios that Rodrigo already analyzed. Our capital position basically relies on our income-generating capacity. Of course, we have a very a very successful year in 2021.

And also, it's important to know that this is a [indiscernible] seen implementation process. Of course, this -- the Basel III landing in Chile is still in progress. It will be -- there will be a phasing period of 4 years from now. And of course, we believe that we have -- we need positive gaps and important gaps in order to address the implementation process in the future. And however, we feel very confident with our current position in terms of capital. And due to that, of course, we -- that allow us to increase our dividend payout ratio from 60% in the -- last 60% or 70% in the last year to 100% as a proposal for our shareholders' meeting that will be next March. So net-net, again, we feel very confident. We don't think that we need more capital in the near future, but we are also aware that we need to face the transitional process of Basel III in Chile.

[Operator]

Thank you very much. I'm seeing no further questions at this point. I'll pass the line back to Pablo for the concluding remarks.

[Pablo Ricci, executive]

Well, thanks for joining us in this conference call, and we look forward to joining again in our next conference for the first quarter 2022 results. Thank you.

[Operator]

Thank you very much. This concludes today's conference call. We'll now be closing the call. Have a great day and a great weekend. Thank you.