Good afternoon, everyone, and welcome to Banco DO Chile's First Quarter 2021 Results Conference Call.
If you need a copy of
the press release issued yesterday, available on
the company's website. Today with us, we have Mr. Rodrigo Ravena, Chief Economist and Senior VP of Institutional Relations Mr. Pablo Mecia, Head of Investor Relations and Mr. Daniela Galate, Head of Financial Control.
Before we begin, I would like to remind you that this call is being recorded and that information discussed today may include forward looking statements regarding the company's financial and operating performance. All projections are subject
to risks and uncertainties and actual results may differ materially. Please refer to the detailed notes in
the company's press release regarding
some of the different statements.
I will now turn the call over to Mr. Rodrigo Alevana. Please go ahead.
Hello, everyone. Here is Natalia from Banco DO Chile. Our team is going to reconnect in those 1 minutes. Please hold the line.
We have two numbers.
We can hear you now.
Okay. We have two numbers, Salve, just in case. 1 is muted. Paul will go on to the one that's muted.
Okay. Pablo, we are online. We can start the conference. They are here. Thank you, everybody, for waiting.
Apologies for the issues we've been having. I'm just going to
repeat the initial message just
to make sure everyone understood. So good afternoon, and welcome to the
Dunkirk in Chile's Q1 2021 results Conference Call. If you need a copy of the press release issued yesterday, it's available on
the company's website. Today, with us, we have Mr. Rodrigo Ravena, Chief Economist, Senior VP
of Institutional Relations Mr. Pablo Mejia, Head of Investor Relations and Mr. Daniel Galase, Head of Financial Control.
Before we begin, I'd 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 notes
in the company's press release regarding forward looking statements. I will now turn
the call over to Mr. Rodrigo Arena. Please go ahead. Good afternoon, everyone. Thank you for joining this conference call today, where we will present analysis of the financial earnings hosted by our bank during the quarter.
We have divided this presentation into 3 main sections. 1st, an analysis of the business environment and our macroeconomic profile. Then we will present our advances in the Trevegi project with a particular focus on clinical transformation. In the final section, we will share our financial analysis on the U. S.
Gulf Coast achieved during this quarter. Let me start with an overview of the economy. Let's move to Selena Street. Overall, we're seeing a strong recovery in Chile as the chart on the top left shows. After the strong drop in organic growth in the last year,
mainly in
the Q2, activity has had a steady rise since the end of 2017. Specifically, in a sequential basis, the economy posted an annualized rate of 15% in the 3rd quarter up to increasing by 51% and 23% in the previous year. For the full of this trend, the activity reached its pre pandemic level in February 2021 at the start on the top right clearly shows Consequently, it has in the first Latin American country able to recover all the loss reduction as a consequence of the pandemic. The greater dynamism is highly attributable to the joint contribution of treatment factors. 3rd, the positive impact of the strong fixed and monetary policy responses implemented since the last year.
On the retail side, the government has announced different measures equivalent to nearly 15% of GDP with ease well above the hydro exposed by most countries in the world. The reduction in the interest rate applied by the Central Bank and roll up the quantitative easing policy has also driven the key to this year. 2nd, the global economy is also supporting a further growth proceeding, which is extremely relevant due to the high inflation that Chile has into the global economy. The increase in copper prices, which has reached historical value, is driving for export in Eastern regions. In the same vein, the growth in China is also positive for Chile.
Finally, pension funds withdraw higher investors, although temporarily more dynamism to the private consumption. Despite this recovery, the labor market remains acute. In March, the unemployment rate was 8.4%, in line with the December figures. Next to last, it remains well above the pre compounding rate, which was near 7% as you can see in the chart on the bottom left. This is attributable to the sluggish growth in total employment with E9% below the level of served 1 year ago, which has been a consequence of the life activity in social intensive sector like sector.
Additionally, labor force is also lower relative to the last year due to the mobility restrictions that have reduced the possibility of finding a job. All in all, total participation rate in Chile fell to 57% from 62% 1 year ago confirming the weakening in this side of the economy. Probably, the recovery in the labor market will take a longer period of time. In this environment, total inflation has remained stable, hovering around the target spent by the central bank. In fact, as you can see in the chart to the bottom right, the annual inflation rate was 2.9% in March, in line with the 3% forecast at the end of the last year.
The core index, which is a measure that excludes energies and food prices, has also remained stable, although slightly below the headline inflation. On a sequential basis, CPPI went up by 1.1% in the 3rd quarter, while the core CPI increased by 69%. Growthly speaking, the seasonal inflation has resulted from 2 other a positive contribution from non tradable goods due to the pension funds withdrawal, especially offset the lower trade and inflation resulting from the stability of the Chilean peso against the dollar. Moving forward, we expect positive trends to continue in the future. Please move to Slide number 4 to analyze our reasons behind this scenario.
We continue to have been a positive Europe economy, especially compared with other factors in the region. Let me talk about the 3 main factors supporting this deal. The most likely reason, besides increasing optimism for Chile, is impressive advance in the vaccination process. More than 35% of the population has received the 2 doses of vaccine, almost half of the amount needed to reach the health immunogen. The process in Chile positively compares with other countries in the region as the less advertised shows.
In comparison, the cost of Africa relative to most countries in
the world
must be less in terms of share of people vaccinated, which became well on the combined treatment. This successful process allow us to expect rate and mobility tons probably in the second half of the year. Another factor is the capacity of the plant companies to adapt their activities according to the new sanitary rotation. The board on this chart
shows an important comparison to this in the
Central Bank in the last most requested report. Specifically, it compares to the evolution of activity relative to the pay announced by the government in the plant called Paco Abaco or Estevez, where this phase reflects the degree of sanitaire patients where 5 means no patients, meaning before the pandemic, for instance, while the Phase I means a total lockdown. You can see how the GDP has decreased within a pre pandemic level despite having similar consignment to the last year. And obviously, this will bring a strong pickup in the overall Peru. Finally, it's also worth mentioning that a larger proportion of the pension funds withdrawals has been contained in bank account, savings and investments.
Actually, according to Central Dynamics, only 15% of these resources have been spent on consumption, which is both on the right shows, suggesting the existence of room for further growth in comparison this year. As a consequence of all these factors as well as the positive trend that I described in the previous slide, we have identified favorable macro conditions. Please move to Slide number 5. We have raised our GDP forecast for this and the next year. These changes were in line with the adjustment made by the Central Bank in the latest monetary policy report, as well as the IMF in its April macroeconomic update.
Specifically, we now expect the economy to grow by 6.2% in 2021, with an expansion of million to $2,500,000,000 expense the next year. As the breakdown of the table shows, we foresee the GDP would foster the tariff expansion with a large investment. In this environment, Chile will probably be the only country in Latin America with a positive adverse growth between 2020 and 2021. We expect the CPI to remain within the quality range in the future. Electricity, we forecast inflation will post 3.4% to 3% during the year at the end of this and the following year.
Since the economy has a significant outlook, we see room for the overall rate contained until the next year. Before moving to the banking sector, I'd like to emphasize the risk, which is an important factor, especially this year. Particularly, we think it's the intention to pay attention to the trend of 2 of these risks. 1, we do not have pandemic. Even though the significant advances in the vaccinating process in the world, especially in Chile, set us out relative to the efficiency of the vaccine regime, mainly in terms of the response to gain new variants.
On the local side, there will be several key events this year, such as the election for members of the constituent assembly, prescient calcification elections and the discussions for a new constitution. Non expected development in these factors could generate impact in the business environment. Now I'd like to review the main trends of the banking industry. Please, please, slide number 6. As we've mentioned several times, the banking industry is a replacement of the company.
Therefore, improvement in the business environment that I described in previous slides has translated into a broader recovery, continued low levels of delinquency rate and higher profitability. Similarly, loan loans went up by 1.3% in the 2nd quarter or 5.1% as an anti freight, although a decrease of 2.4% during the year. This recovery was driven by the robust activity in mortgage loans that increased by 3% quarter on quarter, while credit loans expanded by 0.8% quarter on quarter, led by the positive impact of FURAV loans. On the other hand, consumer loans remained subdued, decreasing by 1.1% quarter on quarter, which is attributable to several factors, including the actual high unemployment rate and the 10% pension fund withdrawal. Asset quality continues posting healthy figures.
NPLs, for instance, remain flat, maintaining the good levels of the previous quarter, while the loan loss provision decreased by 50% equivalent to a cost of risk of only 0.7%. Although these levels are extraordinarily low and to some extent, it happens from economic factors, especially considering the weaker credit environment, we are aware of some temporary factors affecting these figures such as the monetary transfers made by the government and the pension pass withdraw, which have enabled customers to settle overdue loans while retaining good payment behavior. Consequently, we can't allow the gradual normalization of these indicators in the following quarters to average midterm level. The stronger dynamics, lower provisions and the positive impact from the higher inflation during the quarter led to a peak harvest catastrophe in the areas. This average ROE of the industry increased to 16.6% in the first quarter above the low results posted in the 3 previous quarters.
Despite this good quarterly result, we faced a very timely environment marked by a feeling volume recovery, new sources of uncertainty and increasing contribution from banking and non banking failure as well as a wide array of regulation, willing from corporate management to help manage banking business among other factors. Given this scenario, Banco DO Chile has been implementing several per day projects to address these challenges. We will refer to these topics in the rest of this presentation. Please move to Slide number 8 to share our main advances in the Peche project. Some profitability to our shareholders.
Since we aspire to continue being the leader bank in Chile, we have reinforced 3 key areas in our strategy. This transformation, efficiency and productivity and sustainability.
Thank you, Rodrigo. Please go to Slide number 9, where we'll highlight some of our initiatives and advances in digital banking. The past 12 months have been challenging in many aspects for the banking business. Thankfully, for the use of passive optical technology, the harsh of COVID-nineteen has been more bearable than it would have been in the past. At Banco de Chile, we were in the process of widening and improving our digital value offering by enhancing our operations from a front to back perspective.
This has permitted us to continue growing during the pandemic by being the first to market for many services that our customers needed to better face the pandemic. During the last year, we have further enhanced our digital solutions through a team of over 440 employees that's completely dedicated to finding innovative solutions to tighten the customer journey, of performing the experience that customers distribute from our competitors. Based on these advances, this quarter as you can see on the left, we were the 1st time to offer our recent customers, the new FOGACI Reactivate program with a solution that is most adopted and executed online. This program is a continuation of the government loan guarantee initiative that was launched last year, but with a new focus on reactivating commercial and investment activities for the company. We are proud that we are the leader in the industry in the capital loans volumes of more than 75% of originations being done through our online channels.
It's also important to mention that we successfully launched this quarter our new mobile banking app for HSBC to provide important features, but just quickly make an online transfer using our digital token to examine account movements and balances among others. We also made other improvements to the company such as tracking and Celestial Swift payments and new functionalities for multi company accounts so that they can reduce subsidiary balances and movements all of them in the parent accounts. We also enhanced our self private systems and branches with more functions for personal banking that give customers a better overall experience for the everyday banking transaction. We launched a new feature with smartwatches and phones to customers in pay at POS terminals without needing to use their debit or credit card. We have rolled out an important enhancement to our mobile banking app that will permit QR payments in over 6,000 established in Chile.
For these enhancements, our customers will no longer need to use their credit card to make purchases their physical credit card to make purchases. As per the new digital account Quinta Funds, we have steadily grown stronger. Today, we have more than 300,000 new accounts with an important usage level and balance that already makes this product comfortable. Based on internal studies, our accounts have substantially higher balances than our peers in greater usage level. We're also currently working on creating a new customer journey to cross selling these customers with other contribution of products and services.
We firmly believe that cross selling these customers is the only approach to make this product highly profitable. We expect to have more news regarding this development later on in the year. Before moving on to the next slide, I'd like to say that we're personally pleased with all the advances we have made for our business and personal banking customers. We confidently expect that these changes will reinforce our strong relationships with clients and promoted customers to continue creating our bank to be their primary account. Please turn to Slide 10.
Our customer centric strategy is the key pillar of our success. During the talent during this challenging period as mentioned in the prior slide, we have innovated and improved the customer experience. These enhancements clearly be seen in diverse indicators as shown on this slide. For instance, we continue to lead the industry on top of mind with a wide gap to our closest competitors. Also, when banking comes to us, we were to switch to another bank, which frankly reduced to remain as a subject of the large difference to all of our peers, as you can see on the chart to the right.
More importantly, we ranked once again as the bank with the highest best promoter score and for the first time outpaced the leading bank in having the best loyalty program. All of these indicators support customer growth and it's extremely important in the context of customer loyalty is greater gain and easier to lose, especially with new regulations that make it simpler to switch from one bank to another. Please turn to Slide 11. We have been persistent in our advancement and optimizing our resources during the quarter to improve our operational productivity. We have continued to automate processes by leveraging technology and with further intensified diverse procedures by utilizing both front and back office, they're able to be highly competitive clients in a challenging industry that is being disrupted by new face recognition.
We are also completing the implementation of a new service model that involves merging the former Phase 2 network into the Kila office, as well as introducing more automation and branches and adjusting processes made by our tellers and account managers. It's worth mentioning that we have conducted this process without affecting the customer experience, as I showed in the previous slide. It allowed us to further optimize our distribution network by reducing prices to 312% or 9% year on year. Another two measures have contributed to reducing process of implementation of a specialized area that evaluates all purchases in the banking administration late last year of the Productivity and Efficiency division, which is accelerating and deepening the savings initiatives across the entire organization. These changes have resulted in important and strategic and productivity as shown on the bottom of the slide.
You can see total expenses passed at loans for branches and demand deposits per employee, all had important initiatives. We expect that these enhancements and how we run the bank should lead to an efficiency ratio close to the 42% in the medium term. As we mentioned in the previous call, we are deeply focused on supporting our customers and society and employees especially during this pandemic. In the Q1, we continued providing financial solutions to our business customers, which have had the adjusted strategy to operate and grow in this difficult environment. In this sense, we're proud to be the leader in the new Fugate program called Fugate Reactiv or Reactivate in English, granting almost $1,000,000,000 in loans since the beginning of February.
This program is not only focused on the 16 businesses that struggled during the pandemic, but also the companies that need funding to grow. Additionally, we have 2,000 peer approved loans for the tourism sector, one of the sectors most affected by the pandemic, and we have offered 3 virtual to give us the needs more visibility to their solid products. We also focus our efforts since deploying the community and employees, as you can see on the left to the right, we have been providing activities to promote inclusion and our certification to our corporate volunteer program. Over 330,000 people have been benefited this year. With regards to employees, we're proud of their commitment to provide an attractive place to work, standing and are focused to raise the quality of life of our team during our history and this tremendous.
All of these actions, along with our permanent commitment with a sustainable business, help on solid corporate reputation that has been recognized as any prestigious independent local and global surveys of institutions can be seen on this slide. Please turn to Slide 14 to begin our discussion on our financial results. Like the challenging environment that the PhenoGenx has produced, Q1 of 2021 has been positive for the bottom line, thanks to our firm focus on generating revenues based on a customer centric strategy together with attractive level of inflation within the flows to credit and market risk as well as strong cost control discipline. As you can see on the chart of the left, we reported MXN163 1,000,000,000 in net income with an ROE of 18.6%. Apart from having a high quality revenue generation, primarily content traded and recurring customer income, we also continue to have the best relationship between profitability and capitalization as you can see on the chart to the right.
The strong capital position undoubtedly the best among our peers is particularly relevant in light of the new regulations related to Basel III, which has started its implementation phase. Please turn to Slide 15. In periods such as the current one, many elements that are part of the value creation companies may be impacted by movements in different financial market practice, which is why we believe it's necessary to take a more complete view of the performance of financial institutions. For this reason, it's important to reinforce that the traditional analysis of net income must be supplemented with the results recorded in comprehensive income, which includes unrealized gains and losses from the fixed value of available for sale portfolio and derivatives for accounting hedges that are accounted directly against equity. As you can see, our superior performance is clear.
In fact, the comprehensive income rose by 1%, while many of our peers have decreased substantially. We believe by taking this approach into consideration, it's a critical factor when considering total profitability for shareholders. Particularly, amid highly volatile uncertain periods, funding in market risk appetite may produce an adverse impact on shareholders' equity, which could be potentially higher than earnings, which can both temporarily accrued net interest income. As mentioned, in many conference calls in the past, our focus is on services to support our customers' financial needs. This motivation generates long term relationships that translate into stable, digital and recurring revenues from both the accounting and economic point of view, while being consistent when prudently managing our financial position.
Therefore, we are focused on the bottom line growth governed by manageable market factors and risks. Consequently, all these factors confirm that Honkechiwa has the strongest and most stable revenue generation for our shareholders. Please turn to Slide 16. Operating revenue showed a slight recovery from prior periods with a sequential growth rate of 1% over the Q4 2020. This was driven by customer income sensibly, solid key income, thanks to the better activity that was the transactional revenues from the stock brokerage mutual funds and retail segments.
In addition, non comps were in place quarter on quarter as a consequence of the impact of fairly increase in interest rates from the management of the investment and trading portfolios and higher net charges of the CPGA from derivatives, coupled with lower gains from inflation income during the period that went from 1.3% during the Q4 of 2020 to 1.1% in the Q1 of 2021. Additionally, I should highlight that we always promote responsible growth in every business segment. This strict focus has assisted in achieving a successful track record as you can see on the chart to the right. We posted once again the highest fee margin and operating margin net of risk in the industry. By growing selectively in a positive amount of times and taking the proper precautions during negative cycles, we have been able to generate a sustainable and dependable return for our shareholders.
The evolution of our business results is completely in line with the fundamentals of the economic cycle and the evolution of our NIM makes sense. Large changes of NIM can be attributable to changes in inflation or higher exposure to market risk. Before moving to the next slide, I want to highlight that we are optimistic that the gradual reopening of the Chilean economy in our swift financial process should permit stronger revenue growth, particularly in terms of customer income. Given the expected rebound in the demand for loans, slightly growing fee income and slightly higher distribution over demand deposits as long as interest rates continue to increase. In the following slides, where the ticket tower portfolio has changed during the quarter and the evolution of our asset quality.
Please turn to Slide 17.
Total loans
reached almost SEK33 1,000,000,000 this quarter, increasing by 2.7% when compared to the prior quarter, equipping a 10.8% increase on an annualized basis. As you can see, the chart on the right, we saw a recovery of growth across the board. In terms of commercial loans, we grew actively in new government guaranteed program that is directed to SMEs as well as the middle market company. This program primarily focuses on providing financing for capital investments as well as working capital. As opposed to the program that was launched in 2020, this program is more attractive for us with the maximum annual interest rate and charge at 7.7% versus a 3.5%.
And customers have a tenure of up to 7 years, leaving room to grow even more in this segment with proper levels of risk. As you can see on the chart on the bottom left, we increased our wholesale portfolio by 2.7% quarter on quarter. The SME portfolio grew an impressive 4.7% during the same period. This acceleration is attributable to the full gas program, which we are proud that we have already placed almost $4,000,000 in loans and we have the highest market share of 27%. In terms of personal banking loans, these increased 2% quarter on quarter.
Mortgage loans grew strongly, which continued to reflect as we continue from the economic outlook, while benefiting from the still low interest and consumer loans, which have been affected by stricter requirements in an environment of high unemployment and higher temporary liquidity associated with all pension funds. Nevertheless, I'd point out that I've seen some work of the performance of these loans behind us and we should probably see a gradual growth in consumer loans in the 2nd Q3 of this year with a continued economy rebates and pace in growth. Please turn to Slide 18. We're providing a high quality customer experience through innovative products and services that generate robust relationships for customers. For the results, GBAs represent 35% of our funding structure, which is substantially higher than all of our peers.
And as you can see on the chart, on the right, we continue to have the most important market share in local currency demand deposits. Over the past 12 months, solid trends and soundness have also provided us with a strong increase in demand deposits, which rose 82% year on year. You can see on the chart bottom right. We continue to be the preferred banks for our personal banking purposes with substantial gap to our peers and local balances in personal banking accounts. Once emphasized that it's easy to issue many current accounts, the hard time is to actually get customers to use them, which is our leadership in the evolution of this indicator more than speaks by itself.
As we mentioned in prior calls, the Orion experience account is positive to continue to change by funding structure. Today, we are much less dependent on institutional funding as you can see on the chart on the top left. The land deposits are our most important source of funding. It's also important to mention that over the past year, we have made an effort to then acquire funding sources from shorter term land deposits to longer term bonds, which are more stable while matching their long term assets, particularly residential mortgage loans. This strategy reduces our interest rate risk particularly in times of rising rates as expected once the economy begins to reach its value.
Today, long term bonds are about 20% of our funding and about 20% has before. Also in terms of capital, we have the highest Tier 1 capital base of 12.3%. Tipped together with our excellent credit risk trading to further assist us in continuing further diversify our funding base. Before moving on to the next slide, I'd like to mention that we are well prepared to face Basel III, which is in line with our historical guidance. In this regard, you can mention that our weighted assets under Basel III based on methodologies provided by the PMS are slightly lower than our estimated assets under Basel I, including credit, markets and operational risk.
Thus, our asset density remains mainly unchanged when adopting Basel III guidelines, such as only slight adjustments to common Equity Tier 1 capital as shown on the chart on the bottom of this slide. This is undoubtedly good news for us. More importantly, we believe that we can further strengthen our capital ladder as long as the development of life for the use of the internal models for credit risk weighted assets as permitted by the regulation today. Although some of the regulatory thresholds are not yet in effect, we are confident that our capital gains and the optimization of our risk weighted assets should enable us to effectively overcome this new framework. In the last month, we've noticed that we are one of the 6 equity important banks in Chios.
In our view, given the methodology defined by the regulator, a systemic buffer ranging from 1.2% to 1.5% since December 2021, which is also in line with our prior expectations. Slide 4 Pillar 2, the transfix of the buffer, these are others to leave a 3 question mark. However, in order to address the format, we have anticipated the adoption of Basel III notwithstanding the waiver provided by the regulator for the 1st year. All in all, we feel comfortable with the current capital levels, but all confident that we will be well prepared for the transition with no special actions to begin to Our excellent profitability has been sustained for a sound risk and risk policy for working on responsible and sustainable growth. Please turn to Slide 19.
As you can see on the chart on the left, cost of risk this quarter reached MXN64 billion, down from MXN126 1,000,000,000 in the same period of last year and MXN85 1,000,000,000 posted during the previous quarter. As shown on the chart on the bottom left, it's completely in line with the evolution of our NPLs, which continue to surprise us and reached only 0.96% this quarter, well below the average running rate prior to the pandemic and in return resulted in a lower cost of risk. Important to note that we established MXN 40,000,000,000 of additional provisions to mitigate the transitory impact of the weather behavior of overdue loans on provisioning models and taking into account a still weak economic environment. It's also noteworthy that we began to share with an important level of uncertainty in terms of economic effects of the second wave of the pandemic that resulted in new lockdowns across the entire country. Nevertheless, successful vaccination process required for the government as well as improved economic expectations for the year as approximately impressive rise in the number of individuals that have been vaccinated, together with the higher copper prices, permits us to be more optimistic regarding Dau.
For this reason, we can't rule out the release of additional allowances in the coming quarters to see evolution as the economy is positive and there is a reduction of uncertainty. It's very relevant that we are pleased to see a sustained positive payment behavior from all of our customer segments and this is a testament to maintaining our NPLs low. In particular, we are glad to hear that the payment behavior of our SME customers as well as the recent banking portfolio with refinements as the refinements has evolved positively during the pandemic and has also contributed to this low NPL ratio. Finally, through our prudent risk policies that have been established, DKK360 billion additional provisions with a coverage ratio of 3.5 times has clearly positioned Banco Xuela as the most prepared bank to take the challenging segment. We're confident that Vishla seems to take advantage more than our peers and economic improvements to pursue the end of the social cycle.
Please turn to Slide 20. Total expenses this quarter rose by 2% year on year and dropped 2.1% quarter on quarter as you can see on the chart on the top left. The main reason for the quarterly sequential reduction in operating expenses was a result of lower personnel expenses related to lower expense indemnities from organizational restructuring that took place at the beginning of 2021 as well as lower variable compensation. As for administrative expenses, the highest expense figure is due to a one time release of the administration provisions that occurred in Q4 of 2020. Cleaning the provision for MXN11 1,000,000,000 in the 4th quarter of 2020 as expenses grew slightly, mainly due to higher IT and marketing expenses as a result of our digital initiatives and greater savings savings 0.5% this quarter from 48.4% in the 4th quarter, both performing the average level recorded by the industry.
It's also very relevant to highlight how we compare to our peers in terms of cost control. As shown on the chart at the bottom right, since 2019, we have been able to significantly improve our total expenses when compared to the performance of our main peers. As mentioned, we expect that all of the controls and enhancements we have made to lead to an important improvement in our efficiency ratio and reach a level close to 42% in the medium term. Please turn to Slide 21. Before taking questions, I want to go over some key takeaways from this call.
First and most importantly, I want to emphasize that we are extremely proud that we have once again announced the cycle well and despite all the challenges faced, we have delivered a great bottom line for our shareholders. While it's difficult to predict how the pandemic went, we believe that we are beginning to see the light at the end of the COVID tunnel. The local vaccination program has done exceptionally well and they already have more than 35% of the population with 2 doses. It's mentioned that we should have around 80% of the population vaccinated midyear allowing a herd immunity. This should permit the economy to gradually normalize allowing further recovery in the employment in GDP.
This positive scenario could lead to better loan growth, to better GDP growth of 6.2% for 2021, consequently greater loan demand from all of our customer segments. Our expectation for loan growth in the industry is around 8%. We should pick up market share in our pay to pay scenario. We have also begun the normalization of transactional products and continue to see good payment behavior from customers. Finally, I want to emphasize the top of the Chima and how the product considers its quality over the time.
As a difference in most banks in Chima mainly in our main competitors, we calibrated our international risk models last year anticipating the new normal due to the pandemic. That's why we're not anticipating further adjusting the cost of risk in the short term. These adjustments were seen last year and explained in previous conference calls. It's even more important to highlight that we continue to expect in 2020, the state having by far the highest permutation of Spain by the industry. We expect in terms of risk expenses of around 1.1 percent for us in the medium term.
We feel the evolution of the economy evolves positively and normalized after polyamics. We can't rule out the release of a portion of their additional allowances in the near future. Saying that, we are optimistic that this combined with these strong competitive advantages should allow us to continue being the best long term investment for our shareholders. Thanks for listening. And if you have any questions, we'd be happy to answer
So our first question comes from Jason Mollin at Scotiabank.
Hi, everyone. Thanks for the presentation and details. I have a question on just the base case outlook that you guys are looking for with
GDP growth
of 6.2% this year and more recovery, 2.5% with GDP growth in 2022. And you mentioned some risks to that outlook on the pandemic evolution was 1, with new variants and 2, elections and the new constitution etcetera. Can you talk about the upside and downside scenarios like if these things don't work out? What do you see as a downside scenario and what that means for the operational outlook for the bank? And potentially, what could be also some upside risk to this outlook?
What could we see? What could we expect? Thank you.
Jason, thank you very much for the question. This is Rodrigo Adena here. Yes, as we mentioned today, we are a bit more positive relative to how we were in the beginning of this year. Perhaps it's important to remember that by January of this year, we were expecting an economic growth of around 5% for the year. Now we are expecting 2.4%, as I mentioned
in the
beginning of this call. However, we are aware of an upward bias in that estimate. So, what I'm trying to say is that we can rule out the possibility that the economic growth this year will be even better relative to what we are expecting right now. So what has happened actually in Chile during this year? I would say that in January of the year or February when there was the previous conference call, Basically, 2 very good deals for Chile.
The first one is the corporate price, which has positive impact in the activity, as we will have a very positive process of the company. However, in terms of the outlook, as I mentioned before, we are aware of risk. 1, of course, with the technical risk for all the countries in the world is related with the pandemic, but we have to say that we are optimistic to be related to other Latin American countries because of our access to vaccination process. Of course, we are aware of the risk on the political
roll this one just to confirm?
Yes, I can hear you. So there will be some politics, of course, it will have to be followed here with year because there will be several election where we'll be discussing about a new constitution. So I would say that despite the risk, today we are more optimistic about Chile. Of course, that we will have much more information by midyear after observing the composition of the COVID that will prepare the draft for the new constitution. We will have reformation by midyear in terms of the efficiency of the vaccination process because we are today in the middle of the 2nd wave of the COVID-nineteen Chile.
So we have to analyze how successful we were or not the vaccination process in Chile. But having said that, we are confident that Chile will be able to preserve the main quality framework, it will be able to remain maintained, I would say, the next one. So that's why we are confident that the economy will continue growing 3% in terms of potential growth without important changes.
Obviously, there's upside and downside risks in all these scenarios that could occur. But our base case scenario is, as we mentioned in the call, that Chile should grow around 8% GDP, that's already 6.6% GDP and this should lead to around an 8% level of loan growth for Chile. Now as we look more in the medium long term impact, we really have to see what's the permanent impact of the pandemic on the economy and how that affects the payment behavior of customers. But our as you mentioned, our guidance of around 1.1% for cost of risk and we're turning to levels closer to pandemic ROEs depending on the evolution of the economy and the permanent impact is our base scenario.
No. And basically, our main message in this call today is that one of the main message actually is that we've been getting more optimistic about the future, about the season, about our bank force relative to what we were in the beginning of this year and maybe more optimistic relative to other countries of the year.
Year. And I guess we're also conservative in terms of our market risk. So we've taken a net break to maintain a prudent and focus on those risks as well.
So just as a follow-up
to that, does that mean that I mean, in case things, it sounds like the optimism is very positive or at least being more constructive. But are you you're taking measures in case things go to a more negative scenario. Are you worried about that market risk? Are you closing the gaps or the risk that you're taking?
In terms
of the market risk, we've been very prudent in terms of managing our market risk exposure and not assuming unnecessary gaps on our balance sheet in order to increase significantly our net interest margin. We've been very prudent in terms of market risk. So with the volatility in interest rates, with interest rates that could be rising, we think this is a concern and that's why we haven't been active in that way of managing the funding and drafting of banks in terms of finance and
And one other important thing to consider here is that as you mentioned, we have no idea about what will happen in the future. So that's why we will be increasing our additional position. We have a very positive quota ratio. So what I'm trying to say is that we are all we are very well prepared for negative sematics as well. Even though we are more optimistic than we were in the past, we are expecting a global recovery in absolute terms and also in relative terms.
But it's important to keep in mind an important difference, bank rates relative to most banks here in terms of our COBRA ratio, in terms of our additional provisions since basically we are better prepared to stay negative scenarios, which is not our base scenario anyway. Scenario,
by the way.
Thank you. The next question we have is from Yuriy Fernandez at JPMorgan. Please go ahead. Thank you, Rodrigo, Pablo. Congratulations on the results.
I had a first question regarding Basel III. I understood Pablo was planning and presentation.
And you have the pro form a
from the last quarter, right? But my question is, could we see any kind of upside here? Because the way it is today, your RWA divided by total assets, it kind of implied no bigger improvements, right? And I guess maybe years ago, one of the discussions from Phase 3 was that maybe the risk benefit in Chile could decrease, right, despite it now putting operational risk. So the question is, is those numbers final?
Like is that right? Like for Phase III, we could see maybe as far as too much, but coughing like that. So that's the first question. And I have a second question regarding margins. I guess you already provided like a soft guidance on loan growth, Costa 3, ROE.
But the margin outlook is not really clear for me. So what should we expect from margins here? Should like this be the bottom for NIMs and we should start to see NIMs kind of improving or no like because you see outlook for inflation. We don't know like what's going to happen with Q3. We don't know, I don't know, Agape, Realtiva, like what is the outlook for means versus the Q1?
Like should we see improvement here, that much
more pressure? Just in color. Thank you. As for Basel III, we're basically restricted asset density remains mainly stable and flat with respect to Basel I. So basically, all the savings we are having in terms of risk weighted assets, competitive risk, I mean, are some more or less compensated and upset by the additional charges related to market risk and also the ratio of risk.
As Pablo said, the Chile later provided basically a standardized methodologies in order to compute market risk, credit risk and also operational risk. And also, we have the possibility to apply for the use of internal models or well, internal models for credit risk and probably also for market risk in the future, but that is not clear yet. So basically, what we can say is that our total capital base is probably the strongest in the industry. And actually, as Paolo said, we also anticipated our transition to RASK 3 by
submitting
a complete report to the IACUC report to the Chilean regulator
at the
end of April. And actually, our capital rate was also challenged stress test as well. And our capital plan for the next 3 years will basically demonstrate our capabilities in terms of our capital adequacy. So we're pretty confident that our capital base is enough in order to afford and in order to face all of our all of the risks we are facing today, the traditional risks and also non financial risks, And of course, our balance sheet growth as well over the next few years, not only in a baseline scenario, but also under stress that. So we are pretty confident of that.
So I guess maybe you could set an upside here. I don't know like when you are able if you are able to have like your own orders, maybe you could see additional capital generated and have an additional buffer for dividend payment, right? One of
them is the additional provisions you could revert at some point. And a
second one would be like if we're able to take a little bit of capital because of like lower market fixed model, that could be another avenue for business, right?
Yes. Well, basically, under internal noise of food, we should have more savings in terms of trade and hopefully in terms of market risk in the future as well because basically the standard base model is pretty expensive in terms of risk weighted assets. And in addition, of course, in the capital base, we also have our additional allowances that is top of Tier 2 capital and also submitted by the regulator and by the ruling, we are also compensating or computing additional Tier 1 capital with Tier 2 capital, basically with total unit bonds and also additional allowances. So we are we believe that we well, additional allowance as part of our capital base and we can't rule out that additional levels could change in the future, but so far are part of our regulatory capital.
It's Pablo. McGeer speaking again. In terms of evolution of net interest margin, I think one of the things that's important to mention is that when we start comparing 2020 with 2021, the base of the portfolio is quite different. So we started 2020 with a portfolio on average that was more focused on higher margin products, right? So we had a larger for us in the industry, larger portfolio of consumer loans, portfolio of SME loans that had higher margins.
And as the year went on, consumer loans decreased, obviously, for us in the industry. If we look at SME loans, it also decreased if we exclude the Fugate loans. And the Fugate loans were a lower interest rate. In spite of that interest rate, the overall corporate loan book is positive. For the SME book, it's a very low
interest rate.
So on average, we started the year with a higher level 2020 a higher level net interest margin because of mix. And we ended 2020 with a mix that was weaker mix focused on more lower margin products. 2021 is a transitional year where we're recovering that lost mix. So what we've seen so far is reactivation or higher diastiminism. And commercial loans with especially with the program where we're leaders and we've been growing significantly, which have a more interest rate.
Also higher inflation versus last year. And what we've seen is in consumer loans are recovering. We still haven't seen growth yet. So what we expect is in the next quarter, we should expect to see higher demand for loan growth and consumer loans per year. So saying that, what we should expect is slightly higher inflation, been improving for the transitional year of a mix, and that could translate depending on your expectations for inflation.
Our inflation levels have a gap of around ripsix 1,000,000,000,000. So that's a 100 basis point change is about 20 basis point change in inflation, it's about 100 basis point change in net interest margin. So depending on that, you could expect our estimate is 3.5 percent for inflation slightly higher than last year, but some analysts have much higher expectations. So you get flat to slightly lower net interest margin for 2021, depending on your expectation of differentiation.
Super clear. And thank you for sharing the sensitivity, Cabo, very helpful.
You're welcome.
Thank you. Next question comes from Alonso Garcia from Credit Suisse. Please go ahead.
Thank you. Hello, everyone. My first question is if you could provide some update regarding intended regulation on interchange fees by the government. And if there is anything currently in the regulatory pipeline that we should be bringing in mind? And my second question is just a follow-up on cost of risk.
I mean, you shared a long term level of 1.1%, which makes sense considering your pre COVID level. Talking about 2021, what would be your direct impact for this year considering that you're concerned percent in the Q1? And also in terms of cost of risk, I'm not sure I understood correctly in your remarks, if you were considering reversing additional provisions over the coming quarters considering the positive performance of your asset quality? Or if you were considering to create additional provisions considering the pension subsidy in Chile?
Could you repeat the first question? I think I'm quite curious.
Yes. My first question was regarding the exchange lease regulation that the government is trying to pursue and if there is anything else in the regulatory pipeline that we should be considering.
Okay, perfect. So sorry for not understanding the question. Yes, as you mentioned, there is a discussion in the context in
terms of
applies some regulation to the interest rate that applies to transactions, to credit and credit card. So basically, as I discussed already to set specific rate cards to transactions After the deal, there will be a economy, a controlled by different parties, including pentagrams, entities, etcetera, that will finally set that upgrade. Since important changes in this rate affect the profitability of the business. We have to say that we are seeing a change of attention to the final outcome of the discussion in order to evaluate potential adjustment in the Estradino. Nevertheless, we would like to emphasize that we are well prepared to pay potential 10 years in order to adjust our strategy.
Since we are always evaluating different strategies. But thanks to that, we would like to reinforce the idea that we want to continue being relevant players in the industry, in big market as well in order to provide the best customer service in Chile. But unfortunately, since we don't have more details relative to the specific changes in that rate, we don't have any potential impact to that measure and therefore, it's too early as to anticipate any change in our strategy.
In terms of cost of risk, our expectation for cost of risk is that there could be, based on the government, consistent programs that have been implemented in Chile this year, There could be there's some indications that that could also help improve the nicotine mitigation. So what we're seeing is that not all the same benefits that were received last year will continue throughout the rest of 2021. For example, there's a bit of many different examples from last year. So basically, what I'd say is despite that there's in the short term, it could be, as you mentioned, very good cost of risk NPL. We expect that it's more likely that there should be some level of normalization from here to the end of the year.
And that should lead to a level of 1.1%, 1.2% cost of risk, which is what we're expecting in our base scenario. That would be based on the information that we have today with expectations of our economic base scenario. And in terms of what we mentioned about the additional provisions, so for additional provisions, we feel that we've been very proactive in managing the bank, taking the necessary steps in managing risk or risk exposure in the bank. We did the changes, as mentioned, in our provisioning models last year, and we increased significantly our total coverage ratio. So we'd like I mentioned, we continue to see positive signs in the future, And we see a solid improvement in GDP forecast actually come to become true and better confidence levels.
It's going to trend in the future. We can't roll out that a portion of the additional provisions that we've established could be released.
And I guess those potential reversal provisions are not included in the 1.1 to that, correct?
We don't have an exact date when we could release those provisions. We have to see how the evolution of the economy evolves.
It's very important to keep in mind that Chile is in the middle of the mitigation process. There are some uncertainties relative to efficiency of that process. We have to see what happens in the political side as well. We are saying that in terms of additional provisions because we have we're expecting a gradual recovery of the economy. And of course, we have to pay attention to the evolution of the economy in the future.
Basically, it's improving our base line scenario that the economy will be slightly recovering towards the future and where opportunity for the future.
We also have a question from Claudia Annaventes from Santander.
I just have one question. I was wondering how do you see the exit in the margin process? A 30% growth currently running on with maybe a likelihood to see further a few of those. There is a lot of spending in the economy, as Johan mentioned in the presentation in consumer's currency count, which has been hurting as well the development of consumers' loan growth. So is there a likelihood that you see harder to achieve the 8% loan growth the number 8% loan growth guidance?
Any color there would be appreciated. Thank you.
Thanks, Tari. There's a lot of liquidity in the industry from households and from businesses. And there's a lot of there's still not a clear outlook. It's looking more positive. The end of the COVID crisis is closer, it seems.
And that's providing a little bit of when we're close to that event, what our customers have been saying is that they're waiting to see a customer, corporate customer, commercial customer, how the next month evolve before taking on important steps. They have a lot of accelerated from the programs in the past. That would be from a commercial side. So probably, we could expect that as the COVID crisis continues to end in Chile, as vaccination process ends, as we see less stress in the economy and the economy that gradually opens, expect that we should see stronger loan growth based on those reasons for commercial loans. In terms of consumer loans, obviously, there's also a loss liquidity, as you mentioned.
And in the short term, probably they'll be a little bit more challenging to grow like we've seen in the past quarter because of the success in the period. As we move forward, we should begin to see a higher demand for loan growth, for consumer loans as long as there's no additional if there's not an additional excess liquidity in the industry.
No. So maybe the numbers will
be driven by commercial loans, right?
Yes. By commercial loans, consumer and commercial loans, consumer loans and mortgage loans. I think we're seeing that all the figures should be similar to around 8%, more or less. There's some degree of risk in terms of consumer loans, the customer and pickup because of that. Expect that commercial loans will probably be more active in the remainder of the year, especially with the program and especially with a more clear understanding on how this economy evolves.
And businesses will be more willing to take on investments today. There's a lot of uncertainty and customers prefer to have more liquidity than invest on the and this is for all companies, SMEs and margin. The investor is there another lockdown or is there no more lockdowns?
Okay. The key question that we have for the future, Claudia, is relative to the unemployment rate. At the end of the day, we've seen a very weak and more weak recovery of labor market. So since we are taking a lower unemployment rate in the second half of the year, so it would be consistent with greater expansion of the consumer loans. It's important as well to see if that there are a lot of liquidity, as you said, which has different impact in the economy.
So on one hand, we can argue that the liquidity reduced the demand for loans, but on the other hand, we have that more liquidity means higher economic growth. So we are more optimistic for the second half of the year. We also have to keep in mind the impact of inflation in terms of the impact in mortgage loans. So let's see what's happening in the next three 2 months.
We also have a question from Sebastian Gallego from Credit Corp.
Sebastian, please go ahead.
I have only one question today regarding fees. Can you talk about the outlook for fees and how the bank will manage lower income from the lines with CHOP and other business lines
So fees have been as the economy has reopened and been more active, we've been seeing a good level of transactional revenue from fees, as you can see, and all fees as you can see in the Q1. If you look at the Q4 versus Q1 of 2021, we have an increase of around 8%. It's down from last year, but it's down from last year because there was lower recognition of mainly the upfront payment to the joint venture with an insurance company. So that is the main driver of the lower growth in fees year on year. But if we look at, for example, the quarter on quarter figures, we see stronger transactional fees from retail.
We see credit we see card fees increasing, merchant fees increasing. We've also seen better fee growth from our mutual fund business. It's actually increased year on year. Asset free management around 14%. On brokerage, it's also more active with these degrees would be an area that will have more stronger fee generation, especially if the economy opens.
And we see the end of this crisis closer to the end of this crisis. If we look at figures prior to the pandemic, we also see a rise if look at Q1 of 2019 versus this quarter, we see a rise. Also, if we look at different figures like our running rate. Looking forward, we think that for this year, it should have a rise of around Ukraine, I think, around 8%. In the medium term, it's reasonable to expect these to grow in line with customers.
And we're around 6% to 7% in general. Makes sense to do these customers. You can cross sell them to new customers. As you know, Banco de Chile is a bank with a Chinese fee based business in Chile. So we have very much committed that having customers have used Bank of America as a primary bank.
So as we continue to expect customers, we expect that we can successfully cross sell them to other customers, and this is one of the main points of focus with our new credit card points a month. So we have more than 300,000 customers there, and we're working on helping to do a new digital onboarding in terms of other products and customers other products and services for these customers, which will also help to use in the future. We're currently working on that, but we haven't we hope to implement this later on in the short term.
This concludes the question and answer section. At this time, I would like to turn the floor back to Jonathan Chile for any closing remarks.
Well, thank you for listening to our conference call. If you have any other follow-up questions, you can contact us.
Thank you. Thank you.
This concludes today's presentation. You may disconnect your line at this time, and have a nice day. Thank you very much.