Banco Itau Chile

SGO:ITAUCL

Earnings Call Transcript 2023-Q2

[Operator]

Hello, and welcome to Banco Itau Chile Second Quarter 2023 Financial Results Conference Call and Webcast. [Operator Instructions] I will now turn the conference over to Claudia Labbe. Please go ahead.

[Claudia Montevecchi, executive]

Good morning. Thank you for joining our conference call for our second quarter 2023. I would like to remind you that our remarks may include forward-looking information, and our actual results could differ materially from what is discussed in this presentation. I would also like to draw your attention to the financial information included in this management discussion and analysis presentations, which is based on our managerial model in which we adjust for nonrecurring events and apply managerial criteria to disclose our income statement.

Please remind that since the first quarter of 2019, we are presenting our income statement in the same manner as we do internally. This managerial financial model reflects how we measure, analyze and discuss financial results by segregating commercial performance, financial risk management, credit risk management and cost efficiency. We believe this form of presenting our results will give you a clearer and better view of our performance from this different perspective. Please refer to Pages 12 to 14 of our report for further details. Now Mr. Moura will continue with the presentation.

[Gabriel De Moura, executive]

Thank you, Claudia. Good morning, everyone. Thank you for joining us for the second quarter 2023 conference call. As usual, we will update you on the progress that we are implementing in our strategy as well as present the highlights of our second quarter results.

We start on Slide 2 where we recap a bit of our history as a bank, starting this post-merger integration going through the period of social unrest in Chile as well as the pandemic and moving on to the transformation process that we started in late 2020. As a result of our transformation, we achieved industry leadership in customer recommendations while digitizing our relationship with customers. Given the progress we've made in customer experience, we believe we are now well positioned to pursue becoming the principal bank for most of our existing customers.

In Slide 3 is a reminder that we achieved the #1 position in recommendations for both individuals and firms according to independent services research. That is the base on which we are now aiming to become our customers' principal bank.

On Slide 4, we explain what we are doing to achieve principality in our retail segments. The numbers in the middle of the page show why principality is so important for profitability as it results in high volume and income per customer as well as a reduced churn.

In order to achieve principality, we are focused on products and services that are the biggest drivers of transactionality and customer segments. Pursuant principality required installing a principality mindset on our teams. Creating new digital functionalities in our platform, addressing new customers from the start of the relationship with the bank as well as focusing on clients with high propensity to become principal customers.

Moving to Slide 5. We are glad to share our alliance with Cardif, have been operational since when we launched the first products in our channels. Protection is a key element of what our customer needs for financial services. Good insurance products are highly valued by customers. So it was very important for us to strengthen our value proposition in that space. That is why we made a big move by partnering with Cardif in an alliance with great potential in which we are just getting stuck.

On Slide 6, we present our strategy of corporate principality in the wholesale business. A major element of that strategy is leveraging the Itau franchise, which is the biggest financial services franchise in Latin America. We are increasing customer digitization through online FX transactions and time deposits as well we're moving into digital documentation for clients on boarding and procurement. We are beginning to see the results. Having been the fastest-growing bank in demand deposits for companies in 2023 as well as the bank that most expanded it's market share in FX since the start of the year.

On Slide 7, we show how we are exploring the synergies between our wholesale and retail businesses. For example, in payrolls and mortgage financing. Our relationship with companies generate opportunities to offer payroll services for their employees, which is a good source of sticking relationship with individuals.

Our presence in financing of construction projects, which focus mostly on housing or real estate, also creates opportunities to offer mortgages to the buyers of those housing units. These efforts are good examples of how Itau corporate culture, which one of the pillar is working together as a senior Itaú team have been very effective at connecting different teams and pursuing opportunities together.

Moving to Slide 8, we announced that as part of our strategy to offer simple in digital products, we will launch our digital account into over the next few months. We have taken some time to develop an account with distinctive features and we'll give you more details as it comes in due course. It is also worth noting that our digital comp has been developed with a new IT platform that will be used with other products, giving us plenty of opportunity to gain speed and efficiency with bringing new products to the market.

Let's move to Slide 9. As part of our broad offering of financial services in line with our key pillar of sustainable results, we became a joint book runner of the Republic of Chile's first sovereign sustainability-linked bond in local currency. This bond will promote the reduction of greenhouse gases as well as promote gender equality in high-level positions. We are expecting to deepen our experience in those specialized services to become the #1 provider on sustainable finance for our customers.

Now moving forward to Slide 10, where we present the financial highlights of our second quarter of 2023. Our consolidated net income reached CLP 147.9 billion, increasing 1.8% year-over-year. Net income in Chile was basically flat at CLP 151.5 billion, which is a high level for us. Consolidated net return on tangible equity was 20.4%, while return on tangible equity in Chile reached 24% in this quarter.

Consolidated financial margins with clients grew 15.8%, boosted by high volume as well as high interest rates in both Chile and Colombia, which positively impacted financial margins on liabilities and capital. Consolidated fee income grew by 103.8% of course, positively impacted by the upfront income related to the alliance with Cardif in Chile.

Consolidated noninterest expenses decreased by 1.4% year-over-year as a result of a lower inflation observed during this year in addition to the progress of the efficiency plan implemented in Colombia.

The consolidated efficiency ratio for the second quarter was 21.6%. Consolidated cost of credit decreased by 5.2% over the high base recorded in the second quarter of the year 2022, which was negatively impacted by the worsening economic conditions at the time. When we look at our credit portfolio, it grew 8.7% in Chile and minus 1.5% in Colombian, in constant currency, compared to June of 2022 with consumer and mortgage loans in Chile as the big contributors for that growth.

Overall, we delivered strong results and had some not challenging point of the economic side. Even if we take out the effect of the upfront insurance income, return on tangible equity will be close to 17% in Chile and just about 14% consolidated, which is in line with our long-term goal.

We now move to Slide 11, where we show that our financial margin with clients in Chile increased by 3.1% during the quarter and 16.9% over the previous year. The increase compared to the first quarter is primarily driven by high margin of commercial spreads on derivatives and FX transactions and high capital margin.

The graph on the right-hand side demonstrates that our average rate of financial margin with clients was stable last quarter. As we mentioned in our guidance, we do not expect that rate to be strongly negatively impacted by the interest rates beginning to fall. As a result of the change in the mix of our assets towards retail as well as improving the spread on some business lines.

On Slide 12, we can see that in the second quarter of 2023, our financial margins with the market was CLP 16.2 billion, which is a 31% increase over the first quarter, which is a very low base. As I mentioned before, our financial margins with market is currently under the pressure due to falling inflation. Having said that, we managed to -- we managed our balance sheet sensitivity down with inflation. So our financial margin with the market should not be impacted by lower inflation expected towards the end of the year.

On Slide 13, our commissions and fees, which grew 140.6% this quarter, positively impacted by the upfront income related to our insurance alliance. The other fee lines grew mid-single digits year-over-year, except on financial advisers, which grew -- financial advisory fees which decreased. Clearly, the most important news this quarter has been the start of our operations of our alliance with Cardif, which we expect to be a major driver of fee growth going forward.

Here on Slide 14, we observe our main credit risk indicators in Chile. In the second quarter, the cost of credit was CLP 57.4 billion, which includes CLP 8.1 billion in additional provisions established during this period. NPLs were down 21 basis points and NPL coverage was up 172%, while the ratio of the cost of credit to average credit portfolio was 1%.

For the first half, that ratio was 1.2%, including the additional provisions. So well within our guidance of 1.1% to 1.5% for 2023. These are good news at the margin, but we remain vigilant in the management of this latter part of the credit and interest rate side.

On Slide 15, we highlight our successes in expanding our consumer credit portfolio much faster than market, 48.5% versus 18% over the last 5 years. With credit risk very much under control as well as consumer NPL ratio in the third lowest of the industry. This performance has been one of the major drivers of improvement of our returns over the last 2.5 years.

Here on Slide 16, we showed noninterest expenses over the quarter, which increased 6.3% compared to the last quarter and 8.9% year-over-year. The efficiency ratio in the second quarter was a long-time best of 36.9%. The graph on the right-hand side of the page shows that the head count has fallen by 612, which is 11% since the 2019. This 11-point improvement of our efficiency ratio has been driven both by the increase in revenues and costs growing below inflation, which has been one of the trademarks of our management model.

Let's move to Slide 17 in Colombia, where we continue to see results is slightly above breakeven in a challenging scenario -- some important banks have suffered losses this semester. We continue to implement our transformation plan while navigating through difficult quarters. Progress is again visible mostly on the efficiency side, where we continue to adjust the structure to a more focused strategy.

On the next page, Slide 18, we once again show that we are among the best capitalized and most liquid bank in Chile. The improvement of our financial strength over the last 2.5 years, both organically and through the $1 billion follow-on stock offering demonstrates our commitment to resilience and prudent management, which is the essence of the Italomanagement model.

More importantly, on Slide 19, I think that we can recap the key messages that we have for you on this presentation. First, we had strong results and a positive operational trends in a challenging quarter, having 20.4% consolidated return on tangible equity this quarter. Even when it excludes the impact of the Cardif alliance, our return on tangible equity was around 17% in Chile and 14% on a consolidated basis.

We continue to advance our strategic agenda, where we are now focused on building on our customer satisfaction to achieve principality. It is worth noting that this is a low-risk strategy at this moment of the cycle as we are mostly focused on existing clients in transactional products as opposed to lending.

The third point is that our partnership with Cardif is now operational, which is a big boost to our value proposition to customers in attractive line of business from a shareholder value creation perspective. And finally, we continue to prudently manage credit capital liquidity risks, which is Itau.

With that, we conclude the presentation that we have for you today, and we will gladly take any questions that you might have.

[Operator]

[Operator Instructions] Your first question comes from the line of Yuri with JPMorgan.

[Yuri Fernandes, analyst]

Congrats on the 17 ROE. I have a question regarding your fees. I guess you had Cardif benefited this quarter on the insurance broker. And I just want to check like if we should see any more benefits from this contract, if this was kind of a onetime and now it should be running at a more normal level, so just checking this on fees.

And on cost of risk, you mentioned in the call that things are doing better, and we agree here, we are seeing the [indiscernible] doing fine, NPLs coming down, like they're dropped, they were not super high. And you are running cost of risk below the guidance, right? So my question is, what should we expect for the second half? Should we see maybe you outperform your guidance on cost of risk? Or no, maybe you'll be doing more provisions, so you keep your coverage very high. So what is the outlook here for asset quality? And if I may, just a third one, regarding credit appetite, is asset quality is tracking better? When should we start to see loan growth accelerate in Chile.

[Gabriel De Moura, executive]

Sure. Thank you for your question, Yuri. Going to your point, first on fees. Of course, the fee impact that we had this quarter is due to the deal that we did with Cardif. This is a 10-year deal with exclusivity on our client base that we are joining export opportunities in the market here in Chile.

As we move forward -- when I take a look at the insurance business that we have, they're mostly credit reason, that works for us. And I believe that towards most part of the industry as well. So they are credit-related insurance that we have. As we move forward, I think that we are going to diversify away, and that's where principality helps us in this discussion is diversifying a way into north transactional and life centered insurance model. which goes for life for how -- for many products that we can explore together. Of course, at this point of the cycle, all the credit insurance is affected, as you saw, there is a lower credit volume throughout the industry. And of course, that affects as well the insurance business on the credit front.

Moving forward, the best expectations that we have are around principality. This is one major difference between the bank that we have in Chile to the bank that we have in Brazil, is that here, we -- for most of our clients, we are not their first bank. So moving towards principality. In principality for us has a strong transactional base components will help us with fees.

So I think that we have 2 divergent forces in here in which for credit-related fees, I think that we still see some pressure, downward pressure. And by increasing principality, through our association, diversifying a way in other products, we are going to have an important impact. I don't see in the short term a strong impact as we did on last quarter on fees, I think that will be a more stable growth, but we are very ambitious to what we can do with the insurance alliance as well as in fees.

For your second question about credit and credit costs, I think that we see somehow a more stable NPL evolution in the last few months. Nevertheless, because we are just opening the down cycle of interest rates in Chile, we're still in the process of an economic contraction compared to the expansion that we have in Chile, in many other countries in the last few years, a couple of years. We are still cautious on this credit cycle.

And somehow that connects to the second question that you have about credit appetite. We are monitoring the market and we are monitoring the credit cycle. I think that there perhaps credit conditions will still be tighter until the end of this year. And perhaps we'll lose in a little bit to start of this year. But I think that the main temperature to gauge how this is evolving, is exactly the NPLs that we see for the industry and for us as well.

So we are taking 1 month -- we are living from month to month in a way that we assess the situations and risk. We are on the lower part of our guidance. We are not changing the guidance that we have but we are working hard to be on the lower part of the guidance. But still, I think there are economic imbalances that make us cautious within the credit cycle and make us cautious in changing any guidance as of now.

[Yuri Fernandes, analyst]

Super quick, just checking the guidance, I think it's mid-single digits, right? Your loan growth guidance, like something closer to like 4%, 5% for the year, right?

[Gabriel De Moura, executive]

I'm sorry, Yuri. I didn't get the first part of your question. Can you repeat that, I'm sorry?

[Yuri Fernandes, analyst]

Sure. Just checking the low growth guidance. I think it's mid-single digits, right? So something closer to 5% year-over-year on loan growth.

[Gabriel De Moura, executive]

Yes. I think so. Yes, I think it makes sense for us. We saw this acceleration, especially in the commercial part in the last couple of months, I think that the guidance for growth makes sense. But those combined pairs of NPLs and growth, I think they will be very, very sticky for the next 12 months. So the ability for growth will be in a better environment NPLs. And I think that we are just a little bit cautious right now. And that's why the focus that we have it's on principality, it's on existing client relationships that we have. I think there is much that we can do on this risk-based approach that we will have right now.

[Operator]

Your next question comes from Alonso Aramburu and they ask, can you remind us of the sensitivity of the NIM to falling interest rates in Chile?

[Gabriel De Moura, executive]

Of course, the sensitivity that we have on our balance sheet and always you can take a look at the MD&A in the financial statements that we put together, you have all the metrics in there. But strategically, we have been decreasing the sensitivity that we have for balance sheet, especially, of course, in the banking book of our treasury this year.

According to the calculations that we have taking a look at public information, reports that the banks put for the CMF in Chile. I think that we were one of the banks who'll have the lowest exposure to interest rates on the banking book. But then again, this is according to our own estimates. But that tells you a little bit on how do we see -- we saw the scenario starting at the end of last year. and this year.

So if you take a look at the balance sheet sensitivity to interest rates and the balance sensitivity to inflation. They are very low right now. I think that -- it was a good way of going through the cycle. As we have a more clear view, especially that markets also have adjusted prices to lower interest rates this year and the next I think that we will rethink our strategy and how we position our balance sheet, but we were very light in risk given all the gains that we have from treasury in the last 2 years.

We thought that it will be a good approach to have a lighter balance sheet for all the volatility that we had at the end of next -- last year and the beginning of this year. I think that we will take benefit from the low interest rates. But I think that we manage well the cycle in being very cautious in the way that we manage interest rates and inflation indexing risks.

[Operator]

Your next question comes from the line of Juan Recalde with Scotiabank.

[Juan Recalde, analyst]

My question is related to the financial margin with clients, which remains strong in both Chile and Colombia. But we also saw some help from capital financial margins there. And the loan growth, especially in Chile, it seems like it's going to be relatively constrained. So my question is how do you see the financial margin with clients evolving going forward? And can we expect it at the combined entity to be about CLP 300 billion per quarter going forward? Or how do you see it evolving?

[Gabriel De Moura, executive]

Thank you for your question. When I think of financial margins with clients, as you mentioned, we decomposed it in 3 different ways. So the first one has to do with financial market -- financial margins with credit, with assets. So in there, basically, I think it's driven by volume and spreads. As I mentioned, I think that we are cautious in volumes.

We have been growing more than the market if you take a look at consumer and mortgages in the last 12 months. But we are cautious in what markets we are pursuing, et cetera. In the commercial side, I think that we are very focused in having value creation. So we are very disciplined in making all the cross-selling and also credit that remunerates adequately our cost of equity. So this is one point.

I don't think that we are going to see much pressure on spreads. Of course, as interest rates go down, that benefit goes directly to clients. But because the credit cycle is still tight, I personally don't see a market with a major spread compression in the next 6 to 12 months. So that's for financial margins with credit.

On financial margins with liabilities. I think that again, they are driven by 2 factors. One is volumes. And I think that the industry has been decreasing its deposits, especially because what happened during the pandemic and the effects of the withdrawal from the pension plans, we saw a major expansion of deposits within the industry and for us as well. We've been decreasing our volumes less than the industry.

So we've been gaining marginally market share on this. And we've been able to hedge our exposure to interest rates. We have a model that separates our core deposits than on noncore deposits. Our noncore deposits, they're much more driven by short-term interest rates. Our core part is hedged through a larger cycle. So I think that we are well protected on deposits, and we perhaps can see margins on deposits is still growing for the next 6 to 12 months.

On capital, it's quite the same thing. On capital is where we separate all the capital that we have and we hedge that exposure in medium to long-term interest rates. I think that we have good margins on this. I see that volume of course, depends on your ability to generate and retain profits, which, in our case, it worked well so far.

And on margins, I think that even with what we saw in interest rates going down 100 basis points here in Chile, I think that we are well protected for the short, medium term in terms of the margins that we have. So we don't see much pressure on the short term. Of course, when we think about our longer term of interest rates going down to historical levels in Chile, probably you're going to see more pressure on financial margins with deposits and also with capital. But for the short term, I think that we are still covered on this.

[Juan Recalde, analyst]

Thank you for the comments Gabriel, and congrats on the current results.

[Gabriel De Moura, executive]

Thank you, Juan.

[Operator]

Your next question comes from Francisco Rellil, and they ask, what is Atos strategy regarding the refinance of the Central Bank line FCIC 2024? How will the insurance alliance operate in terms of future income? And what is the alliance duration?

[Gabriel De Moura, executive]

The refinancing of the FCIC lines that we have for the Central Bank they are in place. We have a liquidity planning. If you take a look at the liquidity ratios that we have, they considerate all the payments that we have to do. As you know, Central Bank in Chile that we put in place last year a regulation that for every single month until the first trimester and second trimester of next year, you have to have debt liquidity available in fuels or bonds from the government as collateral.

So we are -- according to our plan, we are well into the plan. I think the markets were more liquid than also we expected in the first trimester. So I don't see any major issue in doing this convergence. And then again, if you take a look at the liquidity ratios that we have in, so how we compare to the industry, I think that we are pretty much covered on this. So everything according to plan.

With the alliance, the terms of the alliance that we have is 10 years. And we were distributing the products that we developed together with Cardif within our insurance base. And we are remunerated in commissions as we were with any other market company. So that's the P&L that we're going to see. It's commissions that we have for every product that we sell. Of course, the different products they have different commissions, but it's the way that we work, had we not had the alliance.

What helps with the alliance, it's a long-term view. So 10 years, there is a lot of product development, especially digitizing the client experience in deepening the product, understanding the client journey that we see, that helps a lot. But on the P&L day to day, it's as we were remunerated before with other insurance companies.

[Operator]

Your next question is a follow-up from Yuri of JPMorgan.

[Yuri Fernandes, analyst]

It's me again. Actually, it was about the FCIC lines. You just answered this, so no need to put more energy on this, but my question was just how this decline will impact you in 2024. But again, I don't think you need to explore this anymore. Thank you.

[Gabriel De Moura, executive]

The impact on the lines, I think they are twofold, Yuri. Since the publishing of the regulations regarding the repayment of those lines and how you have to put collateral on bills and bonds from the government that affects your liquidity ratios. So in the short term, what you see is that we had to somehow do other funding methods in order to compensate for LCR and especially NSFR impacts on this. And if you take a look at the numbers that we have for liquidity, they already considerate this.

So since the repayment that will happen next year, most of the impact has to do with liquidity ratio management. Next year, you're going to have a more impact on margins. Especially given the cost of those lines vis-a-vis the market rates that we were able to manage our balance sheet on it. So we expect a negative impact on this. We are measuring -- we're still measuring the path and doing all the plans that we have for 2024.

The flip side to this discussion is, as you have lower interest rates -- as I mentioned, we have -- we decreased the exposure that we had in our balance sheet to interest rates, but we have -- it's not that we have 0 exposure to interest rates. With lower interest rates, we are going to see a positive impact on the banking book. So -- the banking book was suffering this year because of lower inflation and also because of high interest rates.

In next year, I think that we're still going to have a low inflation, perhaps lower than we have this year. But we have a positive trend on the banking book because of low interest rates. So I think that will partially offset the negative impact from the FCIC lines from the Central Bank. But on a marginal basis, I think that the gain is a little bit negative compared to what we have this year.

[Operator]

Your next question comes from Daniel Mora, and they ask, we observed an improvement in NPLs in Chile, but also a material increase in write-offs. What are the expectations going forward? Do you believe that the bank really -- sorry, do you believe the bank already reached the peak in NPLs? Or can we expect a similar pace of write-offs going forward?

[Gabriel De Moura, executive]

Daniel. As you know, especially on the consumer side, Chile is a little bit different from other countries in the term that we do write-offs. Here in Chile, consumer credits you do the write-off at the 180 days. And so because of the short term compared to other countries. At the end of the day, you have provisioned something around 70% to 75% -- roughly 75% of the credit into write-off. So write-off, it's about 25% of the cost of credit that we have.

I think that we have seen higher write-offs from the cycle. That has to do with all the cycle that we see at the end of next year -- the last year and also the first quarter. But we see on a margin, a better behavior on write-offs. So I don't think that's still increasing compared to what we saw on this quarter. So I think that what might happen on the second semester is a still high provisioning rates given the level of NPLs that we have but lower pressure on write-offs.

I still have my questions if we are on the end of the NPL cycle growth. When I take a look at the industry on an aggregate, we see that somehow it's decreasing its velocity I think that the way that we saw interest rates going down now help that, labor markets are resilient. So I think on the margin, we have good news. I'm just not ready yet to say that we have ended the cycle that NPLs are not growing.

I think that all that happens with the pandemic and also with the withdrawal of pension funds. It changed a lot the sensitivity of models of macro variables. So I believe that for all the central banks and from all of us managing cycles, it's a little bit harder to estimate the future having all the impacts that are very just syncretic in the last 2, 3 years. So I'm optimistic with what I'm saying. I'm just not ready in saying that we have seen the end of the growth of the NPL cycle for the industry. We are taking this 1 month at a time.

[Operator]

Your next question is a follow-up from Daniel Mora. They ask what are the expectations for the Colombian operations considering the cycle of nonperforming loans in the country and the challenging scenario for the remainder of 2023. What is the strategy to improve profitability as we continue to see low figures of profitability impacting the overall operations of Banco Itaú Chile.

[Gabriel De Moura, executive]

Fantastic. I think that when I analyze Colombia, I see 2 different opposing trends. When I take a look at inside the bank. I see that the -- all the plans that we have implemented, the metabolism of the bank and the management -- the maturity of the management model, the maturity of risk management, we have increased debt in the last 2 years. So I'm glad to see the evolution that we have on our management execution capabilities in Colombia. And so that's one factor.

The opposing vector here is how you mentioned, the market in Colombia. So you do see interest rate cycle larger than expected. You do see an NPL market that it's stronger than previously thought. So on the margin, we do see a more negative news flow from Colombia on the macro trends.

Marginally, we see a stabilization. But then again, we're taking, as I mentioned in NPLs, 1 month at a time. I think that the good part of the discussion in Colombia is that when you take a look at the market in the last 2, 3 years, you saw major increases in portfolio, especially in consumer that we were not part of it. And we were not part of it for many reasons, most of them internal and has to do with developing our risk management capabilities in credit.

But I think that was a good thing because some of the NPLs that we have seen in the market perhaps, and this is a theory, they are connected to a more expansionary cycle that we saw in Colombia within the last 2 to 3 years. Then again, we are not part of it in growth. That doesn't mean that we are completely protected from the economy as a whole. That's not true. I think that we are affected. But I think that marginally, we are less affected than other banks, especially on the consumer side.

On the commercial side, I think that all the cleanup of the balance sheet that we did in the last 6 years in Colombia, they paid off in terms of our credit concession provisioning, that we do in Colombia. We did more additional provisions in Colombia, and we've been very cautious in reversing those provisions. Within the cycle, we did a little bit, but we are doing it very cautiously, because I think that will be a longer cycle. So we are confident with the building of internal capabilities that we have in Colombia within a more difficult macro scenario.

I think that the balance of those forces means that we are progressing is lower in Colombia than we previously thought or wanted. But that also means because we are building internal capability, the moment that the macro place more positively, I think that we are going to see a rapid evolution in Colombia. I mean, at the end of the day, that's what we are aiming for and that's what I'm hoping for.

[Operator]

And your next question is a follow-up from Daniel. What are the expectations of the financial margin considering the decrease in rates, the normalization of inflation and the fact that the U.S. exposure is now negative.

[Gabriel De Moura, executive]

I think all the things that we were mentioning is how we are managing the cycle in the balance sheet for the next 6 to 12 months, right? Because all the hedges -- not for interest rates, but especially for inflation, the hedges that we do, they are short-term hedges. So we have protected our balance sheet for inflation for this year. For next year, we are open to inflation, and we are going to hedge our balance sheet or expose our balance sheet according to our macro -- we're still discussing how we are going to do this. But we see this as an active risk factor that we take into our management decision process.

So in the short term -- short to medium term -- medium term for me is 12 months -- 12 to 18 months, I think that we are well protected in terms of interest rates for the scenario that we are seeing. As I mentioned, in terms of the FCIC payments, I think that will generate a negative impact, but I do see a positive impact in the way that we have positioned our balance sheet.

Inflation, the marginal decrease. If you take a look at the implicit inflation that we saw in the market, we began the year with something around 5% and then we went to something around 4%. And now we are seeing implicit rates below 4%, perhaps something around 3.8%. We hedged at higher volumes, which means that we will not suffer as much as inflation goes down in Chile according to the view that we had at the beginning of the year.

But on medium term, we are going to be impact on that, for sure, as we see lower interest rates and low inflation. As I mentioned before, for financial margins with the capital, with the liabilities and also with -- we are going to see negative on those fronts. And we're going to see that positive on the banking book.

But what we are doing as a bank is offsetting market movements with how we position the bank, right? Because that's the discussion about prices. I mean if we only act on prices, then it's how market volatility works and how our hedging ability works, right? I think that the way that we have to manage the bank in thinking medium to long term is how we are able to change the mix and change the volumes of deposits.

For instance, based on our principality in which I've been able to defend my margin even with other scenarios. Of course, the current account deposits that you have in which you pay 0% interest, at 11% interest rates they are worth something. At 3% interest rates, they are worth another thing. But having more volumes than you have at 3% is better than 0.

So I think that's the more important message is that I think that we did well in terms of balance sheet management, price management, hedge management. And -- but the way that we will converge to the results that we want, to the profitability that we want, it's through principality and our ability to engage clients transactionally with the bank with higher deposits and higher fees. I think at the end of the day is this.

[Operator]

There are no further questions at this time. I will turn the call back to Gabriel Mora for closing remarks.

[Gabriel De Moura, executive]

Fantastic. Thank you so much, everyone, for listening and for the questions. As always, Rodrigo, Claudia, Matias and I are always available to you for any follow-ups, and we see all of you in the next quarter. Take care.

[Operator]

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.