Good afternoon, ladies and gentlemen. Apologies for the issues you've been having. I'm just going to repeat the initial message just to make sure everyone understood it. Good afternoon and welcome to Banco de Chile's first quarter 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 Aravena, Chief Economist, Senior VP of Institutional Relations, Mr. Pablo Mejia, Head of Investor Relations, and Mr. Daniel Galarce, Head of Financial Control. Before we begin, I'd like to remind you this call is being recorded and the 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 Aravena. 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 the presentation into three main sections. First, an analysis of the business environment and our macroeconomic profile. We will present our advances in strategic projects with a particular focus on digital transformation. In the final section, we will share our financial analysis of the results achieved during this quarter. Let me start with an overview of the economy. Let's move the slide number three. Overall, we're seeing a strong recovery in Chile, as the chart on the top left shows. After the strong drop in economic growth observed in the last year, mainly in the second quarter, activity has had a steady rise since the end of 2020.
Typically, on a sequential basis, the economy posted an annualized rate of 10% in the first quarter, after increasing by 51% and 23% in the previous period. As a result of this trend, the activity reached its pre-pandemic level in February 2021, as the chart on the top right clearly shows. Consequently, Chile has been the first Latin American country able to recover all the lost production as a consequence of the pandemic. The greater dynamism is highly attributable to the joint contribution of three main factors. First, the positive impact of the strong fiscal and monetary policy responses implemented since the last year. On the fiscal side, the government has announced different measures equivalent to nearly 15% of GDP, which is well above the average posted by most countries in the world.
The reduction in the interest rate applied by the Central Bank, as well as the quantitative easing policy, has also driven the activity this year. The global economy is also supporting a better growth for Chile, which is extremely relevant due to the high integration that Chile has into the global economy. The increase in copper prices, which have reached historical values, is driving foreign export and fiscal revenues. The growth in China is also positive for Chile. Pension funds withdraw savings. Although temporarily, more dynamism to the private consumption. Despite this recovery, the labor market remains subdued. In March, the unemployment rate was 8.4%, in line with the December figures. It remains well above the pre-pandemic rate, which was near 7%, as can be seen in the chart on the bottom left.
This is attributable to the sluggish growth in total employment, which is 9% below the level observed one year ago, which has been a consequence of the low activity in social intensive sectors like construction. Additionally, the 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% one 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 set by the Central Bank. In fact, as can be seen in the chart on the bottom right. The annual inflation rate was 2.9% in March, in line with the 3% forecast at the end of last year.
The core index, which is a measure that excludes energy and food prices, has also remained stable, although it's slightly below the headline inflation. On a sequential basis, the CPI went up by 1.1% in the first quarter, while the core CPI increased by 2.9%. Broadly speaking, inflation has resulted from two opposite forces. A positive contribution from non-tradable goods due to the pension fund withdrawal, which partially offsets the lower trading inflation resulting from the stability of the Chilean peso against the U.S. dollar. Looking forward, we expect this trend to continue in the future. Please move to slide number four to analyze our reasons behind this scenario. Chile continues having a positive economy, especially compared with other countries in the region. Let me talk about the three main factors supporting this view.
The most likely reason behind the increasing optimism for Chile is the impressive advance in the vaccination process. More than 35% of the population has received the two doses of vaccine, almost half of the amount needed to reach the herd immunity. The process in Chile positively compares with other countries in the region as the left upper chart shows. In comparison, this positivity relative to most countries in the world has Chile led in terms of share of people vaccinated, only behind Israel and the United Kingdom. This successful process allows us to expect greater mobility soon, probably in the second half of the year. Another factor is the capacity of Chilean companies to adapt their activities according to the new sanitary restrictions. The bottom of this chart shows an interesting comparison released by the Central Bank in the last Monthly Policy Report.
Specifically, it compares the evolution of activity relative to the phase announced by the government in the plan called Paso a Paso, or Step by Step in English, where each phase reflects the degree of sanitary restrictions, where five means no restrictions, meaning before the pandemic, for instance, while the phase one means a total lockdown. You can see how the activity has improved, reaching a pre-pandemic level, despite having similar consignments to the last year. Obviously, this confirms a strong pick-up in the overall growth path. Finally, it's also worth mentioning that a larger proportion of the pension fund withdrawals has been maintained in current accounts, savings, and investments. Actually, according to Central Bank estimates, only 15% of these resources have been spent on consumption, as the box on the right shows, suggesting the existence of room for further growth in consumption this year.
As a consequence of all these factors, as well as the positive trend that I described in the previous slide, we have anticipated favorable macro conditions. Please move to slide number five. 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 Monthly Policy Report, as well as by the IMF in its April macroeconomic update. Specifically, we now expect the economy to grow by 6.2% in 2021, and an expansion of nearly 3.5% the next year. As the breakdown of the table shows, we foresee the GDP will be fostered by private consumption with a large investment. In this environment, Chile will probably be the only country in Latin America with a positive average growth between 2020 and 2021.
We expect the CPI to remain within the policy range in the future. Specifically, we forecast inflation will post 3.4% and 3% year-on-year rate at the end of this and the following year, respectively. Since the economy has a significant output gap, there's still room for keeping the overnight rate unchanged 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 essential to pay attention to the trend of two of these risks. One, the evolution of the pandemic. Even though the significant advances in the vaccination process in the world, especially in Chile, several doubts relative to the efficacy of the existing variants remain in terms of response to any new variant.
On another side, there will be several key events this year, such as the election for members of the Constituent Assembly, presidential and congressional elections, and the discussion for a new constitution. Unexpected developments in these factors could generate impacts in the business environment. Now, I'd like to review the main trends of the banking industry. Please flip to slide number six. As we've mentioned several times, the banking industry is a reflection of the economy. Therefore, improvements 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, our loans went up by 1.3% quarter on quarter or 5.1% at an annualized rate, although a decrease of 2.4% year to year.
This recovery was driven by the robust activity in mortgage loans that increased by 3.6% quarter-on-quarter, while consumer loans expanded by 0.8% quarter-on-quarter, led by the positive impact of FOGAPE loans. On the other hand, consumer loans remained subdued, decreasing by 1.1% quarter-on-quarter, which is attributable to several factors, including the still 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 52%, equivalent to a cost of risk of only 0.7%.
Although these levels are extraordinarily low and to some extent decoupled from the economic backdrop, especially considering the weak activity and sluggish employment, we are aware of some temporary factors affecting these figures, such as the monetary transfers made by the government and the pension fund withdrawals, which have enabled customers to settle overdue loans while maintaining good payment behavior. Consequently, we can rule out the global normalization of these indicators in the following quarters to address medium-term levels. The stronger dynamic, lower provisions, and the positive impact from the higher inflation during the quarter led to a significant profitability in the period. The average ROE of the industry increased to 16.6% in the third quarter, above the low levels posted in the three previous quarters.
Despite these good quarterly results, we face a very challenging environment marked by a still ongoing recovery, new sources of uncertainty, and increasing competition from banking and non-banking players, as well as a wide array of regulation ranging from capital management to how to manage the banking business, among other factors. Given this scenario, Banco de Chile has been implementing several strategic projects to address these challenges. We will refer to these topics in the rest of this presentation. This moves us to slide number eight to share our main advances in strategic projects. A key differentiating factor of Banco de Chile has been our consistent and long-term strategy, which has allowed us to post strong profitability to our shareholders. Since we aspire to continue being the leader bank in Chile, we have reinforced three key areas in our strategy: digital transformation, efficiency and productivity, and sustainability.
Pablo Mejia, our Chief of Investor Relations, will now share with you our main recent accomplishments in this field.
Thanks, Rodrigo. Please go to slide number nine, 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, through the use of faster technology, the hardship of COVID-19 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 offerings 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 are completely dedicated to finding innovative solutions to heighten the customer journey while performing the experience that customers expect from our competitors. Based on these advances, this quarter, as you can see on the left, we were the first bank to offer our business customers the new FOGAPE Reactiva program with a solution that is mostly offered and executed online. This program is a continuation of the government loan guarantee mission that was launched last year, with a new focus on reactivating commercial and investment activity for companies. We are proud that we are the leader in the industry in the FOGAPE loans volumes, with more than 75% of originations being done through our online channels.
It is also important to mention that we successfully launched this quarter our new mobile banking app for business that provides important features, such as quickly making online transfers using our digital tokens, examine account movements and balances, among others. We also made other improvements for companies, such as tracking international SWIFT payments and new functionalities for multi-company accounts so that they can review subsidiary balances and move them to all within the parent account. We also enhanced our self-service machines in branches with more functions for personal banking that give customers a better overall experience for their everyday banking transactions. We launched a new feature with smartwatches and phones, so customers can pay at POS terminals without needing to use their debit or credit card, and we have rolled out an important enhancement to our mobile banking app that will permit QR payments in over 6,000 establishments in Chile.
With these enhancements, our customers will no longer need to use their credit cards to make purchases, their physical credit cards to make purchases. As per the new digital account Cuenta FAN, we have steadily grown strongly. Today, we have more than 300,000 new accounts with an important usage level and account balance that already makes this product profitable. Based on internal studies, our accounts have substantially higher balances than our peers and greater usage level. We are also currently working on creating a new customer journey to cross-sell these customers with other Banco de Chile 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 those strong relationships with clients and promote our customers to continue choosing our bank to be their primary account. Please turn to slide 10. Our customer-centric strategy is the key pillar of our success. During this challenging period, as mentioned in the prior slide, we have deeply innovated and improved the customer experience. These enhancements can clearly be seen in diverse indicators as shown on this slide. For instance, we continue to lead the industry in top of mind with a wide gap to our closest competitors.
When banking customers were asked if they were to switch to another bank, which bank would they choose, we remain at the top pick with a 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 Net 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 is extremely important in a context where customer loyalty is harder to 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 advancements and optimized our resources during the quarter to improve our operational productivity.
We have continued to automate processes by leveraging technology, and we further simplified diverse procedures. By digitalizing both the front and back office, we were able to be the highly competitive bank in this challenging industry that is being disrupted by new fintechs. We are also completing the implementation of a new service model that involves merging the former CrediChile network into Banco de Chile offices, as well as introducing more automation in 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. This allowed us to further optimize our distribution network by reducing branches to 312 or 9% year-over-year.
Another two measures we have contributed to reducing costs is the implementation of a specialized area that evaluates all purchases in the bank and the creation 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 improvements in efficiency and productivity, as shown on the bottom of the slide. As you can see, total expenses to assets, loans per branches, and demand deposits per employee have all had important improvements. We expect that these enhancements on how we run the bank should lead to an efficiency ratio close to 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 first quarter, we continued providing financial solutions to our business customers, which have had to adjust their strategies to operate and grow in this difficult environment. In this sense, we're proud to be the leader in the new Fogape program called Fogape Reactiva, or Reactivate in English, granting almost CLP 1 billion in loans since beginning in February. This program is not only focused on assisting businesses that struggled during the pandemic but also the companies that need funding to grow. Additionally, we have 2,000 career-approved loans for the tourism sector, one of the sectors most affected by the pandemic, and we have also created virtual showcases to give our SMEs more visibility to sell their products. We are also focused our efforts in supporting the community and employees.
As you can see on the list to the right, we have been providing activities to promote inclusion and diversification through our corporate volunteer program. Over 330,000 people have been benefited this year. With regards to employees, we're proud of our commitment to provide an attractive place of work with training and our focus to raise the quality of life of our team during our history and this pandemic. All of these actions, along with our permanent commitment to sustainable business, built on solid corporate reputation that has been recognized as penny for Chile's most competitive in local and global surveys and institutions, can be seen on this slide. Please turn to slide 14 to begin our discussion on our financial results.
Despite the challenging environment that the pandemic has produced, the first quarter of 2021 has been positive for our bottom line thanks to our firm focus on generating revenues based on a customer-centric strategy, together with an attractive level of inflation, prudent approach to credit and market risk, as well as strong cost control discipline. As you can see on the chart on the left, we recorded CLP 162 billion in net income with an ROE of 18.2%. Apart from having a high-quality revenue generation primarily concentrated in 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. This 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 of companies may be impacted by movements in different financial market classes, which is why we believe it 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 fair 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 growth is at 1%, while many of our peers have decreased substantially.
We believe by taking this approach into consideration is a critical factor when considering total profitability for shareholders, particularly amid highly volatile and uncertain periods when an increase in market risk appetite may produce an adverse impact on shareholders' equity, which could be potentially higher than earnings, which can both temporarily accrue in net interest income. As mentioned in many conference calls in the past, our focus in Banco de Chile is based on commercial banking services that support our customers' financial needs. This motivation generates long-term relationships that translate into stable, predictable, and recurrent revenues from both the accounting and economic point of view, while being consistent when prudently managing our financial position. Therefore, we're focused on the bottom line growth governed by manageable market factors and risks. Consequently, all these factors confirm that Banco de Chile has the strongest and most stable revenue generation for our shareholders.
Please turn to slide 16. Operating revenues showed a slight recovery from prior periods, with a sequential growth rate of 1% over the fourth quarter 2020. This was driven by customer income, principally quality income, thanks to the better activity that boosted transactional revenues from the stock brokerage mutual funds and retail segments. In addition, non-customer income increased quarter on quarter as a consequence of the impact of the increase in interest rates on the management of the investment and trading portfolios and higher net charges of the DDAs from derivatives, coupled with lower gains from inflation income during the period that went from 1.3% during the fourth quarter 2020 to 1.1% in the first quarter 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 the tough economic 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 of that. Any large changes in 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 and our swift vaccination process should permit stronger revenue growth, particularly in terms of customer income, given the expected rebound in the demand for loans, steadily growing fee income and slightly higher contribution of the demand deposits as long as interest rates continue to increase. On the following slide was our portfolio change during the quarter and the evolution of our asset quality. Please turn to slide 17. Total loans reached almost CLP 32 trillion this quarter, increasing by 2.7% when compared to the prior quarter. Equivalent to 10.8% increase on an annualized basis. As you can see, the chart on the right shows our recovery of growth across the board.
In terms of commercial loans, we grew actively in the new government guarantee program that's directed to SMEs as well as the middle market company. This program primarily focuses on providing finance 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 a maximum annual interest rate we can charge of 7.7% versus the 3.5%, and customers have a tenure of up to seven 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 FOGAPE program, which we are proud to say that we have already placed almost $4 million 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 continues to reflect a recovery from the economic outlook while benefiting from the still low interest rates. It was partially offset by a slight demand in consumer loans, which have been affected by stricter requirements in an environment of high unemployment and higher temporary liquidity associated with withdrawal of pension funds. It's important to point out that it seems the worst of the performance of these loans is behind us, and we should probably see a gradual growth in consumer loans in the second and third quarter of this year so that company replaces pace and growth.
Please turn to slide 18. We're providing a high-quality customer experience through innovative products and services to generate robust relationships with our customers. As a result, CDAs represent 35% of our funding structure, which is substantially higher than all of our peers. 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 brands and soundness have also provided us with a strong increase in demand deposits, which rose 32% year-on-year. As you can see on the chart on bottom right, we continue to be the preferred bank for personal banking purposes with a substantial gap to our peers in local balances in personal banking accounts. I want to emphasize that it's easy to issue many current accounts.
The hard part is to actually get customers to use them, which is why our leadership in the evolution of this indicator more than speaks by itself. As we mentioned in prior calls, the rise in current account deposits is going to change our funding structure. Today, we are much less dependent on institutional funding, as you can see on the chart on the top left. Demand deposits now represent our most important source of funding. It is also important to mention that over the past year, we have made an effort to divert our funding sources from shorter-term time 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 dynamism.
Today, long-term bonds represent 20% of our funding, and about 20% has been placed at risk. Also, in terms of capital, we have the highest Tier 1 capital base of 12.3%. This, together with our excellent credit risk rating, further assists us in continuing to 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, we can mention that our risk-weighted assets under Basel III, based on methodologies provided by the CMF, are slightly lower than our risk-weighted assets under Basel I, including credit, market, and operational risk. Thus, our asset density remains mainly unchanged when adopting Basel III guidelines, which will bring only a slight adjustment 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 adequacy as long as we develop and apply the use of 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 base and the optimization of our risk-weighted assets should enable us to successfully overcome this new framework. In the last month, we have noticed that we are one of the six systemically important banks in Chile. In our view, given the methodology defined by the regulator, we could be subject to a systemic buffer ranging from 1.2% to 1.5% since December 2021, which is also in line with our prior expectations. As for Pillar 2, the countercyclical buffer still obviously is a big question mark.
However, in order to address the former, we have anticipated the adoption of Basel III, notwithstanding the waiver provided by the regulators for the first year. All in all, we feel comfortable with the current capital levels. We are confident that we will be well prepared for the transition with no special actions to be taken ahead. Our excellent profitability has been sustained through our sound risk and risk policies are focused 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 CLP 64 billion, down from CLP 126 billion in the same period of last year and CLP 85 billion posted during the previous quarter.
As shown on the chart on the bottom left, completely in line with the evolution of NPLs, which continued surprising 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. It's important to note that we established CLP 40 billion of additional provisions to mitigate the transitory impact of the better behavior of overdue loans on provisioning models when taking into account the still weak economic environment. It's also noteworthy that we began the year 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, the successful vaccination program supported by the government as well as improved economic expectations for the year as a consequence of the impressive rise in the number of individuals that have been vaccinated, together with the higher copper prices, permits us to be more optimistic regarding the outlook. For this reason, we can't rule out the release of additional allowances in the coming quarters if the evolution of 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 has assisted in maintaining our NPLs low. In particular, we are glad to see that the payment behavior of our SME customers as well as the retail banking portfolio, whose requirements have evolved positively during the pandemic and has also contributed to this low NPL ratio.
Finally, through our prudent risk policies that have been established, CLP 360 billion in additional provisions with a coverage ratio of 2.5x has clearly positioned Banco de Chile as the most prepared bank to face the challenging cycle. We are confident that this should assist us to take advantage more than our peers of economic improvements that we see at the end of the 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 is the quarterly sequential reduction in operating expenses was a result of lower personnel expenses related to lower severance indemnities from organizational restructuring that took place at the beginning of 2021, as well as lower variable compensation.
As for administrative expenses, the higher sequential figure is due to a one-time release of the administration provisions that occurred in the fourth quarter of 2020. Between the third quarter CLP 11 billion and the fourth quarter 2020, administrative expenses grew slightly, mainly due to higher IT and marketing expenses as a result of our digital initiatives and greater banking activities this quarter. Thanks to our strict cost control efforts, we improved our efficiency ratio to 46.5% this quarter from 48.4% in the fourth quarter, thus performing the average level recorded by the industry. 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 can 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, most importantly, I want to emphasize that we're extremely proud that we have once again managed to stay the course and despite all the challenges we faced, we have delivered a great bottom line for our shareholders. While it's difficult to predict how this pandemic will end, 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 we have already more than 35% of the population with two doses.
As mentioned, we should have around 80% of the population vaccinated mid-year, allowing a herd immunity. This should permit the economy to gradually normalize, allowing a further recovery in employment and 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. We anticipate that we should pick up market share in our base case scenario. We have also begun to see a normalization of transactional products and continue to see good payment behavior from customers. Finally, I want to emphasize the health of Chile and how the business considers risk policy over the time.
As a difference to most banks in Chile, mainly our main competitor, we calibrated and scenarios risk models last year, anticipating the new normal due to the pandemic. That is why we are not anticipating a further adjustment in cost of risk in the short term, as these adjustments were seen last year and explained in previous conference calls. It is even more important to highlight that we finished 2020 despite having by far the highest penetration of Chilean banking industry. We expect in terms of risk expenses of around 1.1% for us in the medium term.
We feel the evolution of the economy evolves positively and normalized after herd immunity, we cannot rule out the release of a portion of our additional allowances in the near future. Main net, we are optimistic that this, combined with a strong competitive advantage, 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 them.
Thank you. The floor is now open for questions. If you have a question, please press star two on your keypad at any time. Our first question comes from Jason Molin at Scotiabank. Caller, please go ahead.
Thank you very much. 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, 6.5% with GDP growth in 2022. You mentioned some risks to that outlook on the pandemic evolution was one, with new variants and two, elections and the new constitution, et cetera. 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 should we expect? Thank you.
Hi, Jason. Thank you very much for the question. This is Rodrigo Aravena 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 this year. Now we're expecting 6.2%, as I mentioned in the beginning of this call. We are aware of an upward bias in that estimate. What I'm trying to say is that we can't rule out the possibility that the economic growth this year will be even better relative to what we are expecting right now. What has happened actually in Chile during this year? I would say that since January of the year, sorry, February, when there was the previous conference call, basically two very good news for Chile.
The first one is the copper price, which has a positive impact in the activity, as well as the very positive process of vaccination. However, in terms of the outlook. As I mentioned before, we are aware of risk. One, of course, which is a global risk for all the countries in the world, is related with the pandemic. We have to say that we are more optimistic of Chile related to other Latin American countries because our successful vaccination process. Of course, we are aware of the risk from the political side as well. Can you hear me well, Jason? Just to confirm.
Yeah. I can hear you.
Okay. The evolution of politics, of course, it will have to be followed carefully this year because there will be several elections. We will be discussing about a new constitution. I would say that despite the risk, today we are more optimistic about Chile. Of course, that we will have much more information by mid-year after observing the composition of the Constituent Assembly that will prepare the draft for the new constitution. We will have more information by mid-year in terms of the efficiency of the vaccination process because we are today in the middle of the second wave of the COVID-19 in Chile. We have to analyze how successful were or not the vaccination process in Chile. Having said that, we are confident that Chile will be able to preserve the main policy framework. Chile will be able to maintain, I would say, the main fundamentals.
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. Our base case scenario is, as we mentioned it in the call, that Chile should grow around 8% GDP. Sorry, 6.2% GDP, and this year that should lead to around an 8% level of loan growth for Chile. Now, if you 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 could affect the payment behavior of customers. As you mentioned, our guidance of around 1.1% for cost of risk and returning to levels closer to pre-pandemic ROEs, depending on the evolution of the economy and the permanent impact, is our base scenario.
No, basically, our main message in this call today is that, one of the main messages actually, is that we've been getting more optimistic about Chile, about the future, about the system, about our bank, of course, relative to what we were in the beginning of this year, and even more optimistic relative to other countries of the region.
I guess we're also conservative in terms of our market risk. We've taken the necessary steps to maintain a prudence and focus on those risks as well.
Just as a follow-up to that, does that mean that, in case things. It sounds like the optimism is very positive, or at least being more constructive. 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 risks you're taking?
In terms of the market risk, we've been very prudent in terms of managing our market risk exposure, not opening 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. With the volatility interest rates, with interest rates that could be rising, we think this is a concern, and that's why we have been active in that way of managing the funding and capping the bank in terms of tenures and interest.
One other important thing to consider here is that, as you mentioned, we have no idea about what will happen in the future. That's why we will be increasing our additional provisions. We have a very solid coverage ratio. What I'm trying to say is that we are pretty well prepared for negative scenarios as well. Even though we are more optimistic than we were in the past, we are expecting a global recovery in absolute terms, in also relative terms. It's important to keep in mind an important difference Banco de Chile related to most banks here in terms of our coverage ratio, in terms of our additional provisions. Basically, we are better prepared to face negative scenarios, which is not our base scenario anyway.
Thank you very much, Rodrigo, Pablo.
You're welcome.
Thank you. The next question we have is from Yuri Fernandes at J.P. Morgan. You can go ahead.
Thank you, Rodrigo , Pablo. Congratulations on the results. I had a first question regarding Basel III. I understood Pablo explaining his presentation. You have the pro forma from the last quarter, right? 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 implies no bigger improvements, right? I guess maybe years ago, one of the discussions from Basel III was that maybe the risk weightings in Chile could decrease, right? Despite it now putting operational risk. The question is, are those numbers final? For Basel III, we could see maybe a small improvement, but nothing more than that. That's the first question. I have a second question regarding margins.
I guess you already provided a soft guidance on loan growth, cost of risk, ROE, but the marginal outlook is not totally clear for me. What should we expect from margins here? Should this be the bottom for NIMs, and we should start to see NIMs kind of improving or no? The outlook for inflation, we don't know what's going to happen with the GDP. We don't know, FOGAPE Reactiva. What is the outlook for NIMs versus the first quarter? Should we see improvement here, flat-ish, more pressure, just in color? Thank you.
Hi, this is Galarce speaking. As for Basel III, basically, the risk-weighted assets density remains mainly stable and flat with respect to Basel I. Basically, all the savings we are having in terms of risk-weighted assets, credit risk remains, are more or less compensated and offset by the additional charges related to market risk and also operational risk. As Pablo said, the Chilean regulator provided basically standardized methodologies in order to compute market risk, credit risk, and also operational risk. Also, we have the possibility to apply for the use of internal models for credit risk and probably also for market risk in the future, but that is not clear yet. Basically, what we can say is that our total capital base is probably the strongest in the industry.
Actually, as Pablo said, we also anticipated our transition to Basel III by submitting a complete report to the ICAAP report to the Chilean regulator at the end of April. Actually, our capital base was also challenged by stress test as well, and our capital plan for the next three years basically demonstrate our capabilities in terms of our capital adequacy. We're pretty confident that our capital base is enough in order to afford and in order to face all of the risk we are facing today, the traditional risk and also some financial risk. Of course, our balanced growth as well over the next few years, not only in a baseline scenario, but also under stress test. We are pretty confident there.
I guess maybe we could see an upside here. I don't know, if you are able to have your own risk models, maybe we could see additional capital generated, and you have an additional buffer for dividend payments, right? One of them is the additional provisions you could revert at some point. A second one would be, if you are able to improve a little bit the capital because of lower model, that could be another avenue for dividends, right, at some point. Does it make sense?
Yeah. Well, basically, under internal models, of course, we should have more savings in terms of credit risk and hopefully in terms of market risk in the future as well, because basically, the standardized model is pretty expensive in terms of risk-weighted assets. In addition, of course, in capital base, we also have our additional allowances that is part of Tier 2 capital and also as permitted by the regulator and by the ruling, we are also compensated or computing additional Tier 1 capital with Tier 2 capital, basically, with subordinated bonds and also additional allowances. We believe that additional allowance is part of our capital base, and we can't rule out that additional allowance could change in the future, but so far, are part of our total regulatory capital.
Super clear. Thank you.
It's Pablo Mejia again. In terms of evolution of net interest margins, I think one of the things that's important to mention is that when we start comparing 2020 with 2021, the pace of the portfolio is quite different. We started 2020 with a portfolio on average that was more focused on higher margin products. We had a larger price in the industry, larger portfolio of consumer loans a portfolio of SME loans that had higher margins. As the year went on, consumer loans decreased, obviously, across in the industry. If we look at SME loans, which also decreased if we exclude the FOGAPE loans. The FOGAPE loans are a lower interest rate. In spite of that interest rate, the overall corporate commercial loan book is positive. For the SME book, it's a very low interest rate.
On average, we started the year with a higher level, in 2020, a higher level net interest margin because of mix. We ended 2020 with a mix that was a weaker mix, focused on more lower margin products. In 2021, it's a transitional year where we're recovering that lost mix. What we've seen so far is a reactivation or a higher dynamism in commercial loans, especially with the FOGAPE program, where we're leaders and we've been growing significantly, which have a more interesting interest rate. Also, higher inflation versus last year. What we've seen is in consumer loans are recovering. We still haven't seen growth yet. We expect this in the next quarter. We should start to see a higher demand for loan growth in consumer loans for the year.
Saying that, what we should expect is slightly higher inflation and improving for the transitional year of a mix, and that could translate depending on your expectations for inflation. Our inflation levels are, we have a gap of around CLP 6 trillion. Every 100 basis point change is about 20 basis point change in inflation. It's about 20 basis point change in net interest margin. Depending on that, you could expect the estimates are estimated 3.4% for inflation, slightly higher than last year, but some analysts have much higher expectations. Either flat to slightly lower net interest margin for 2021, depending on your expectations for inflation.
No, super clear, and thank you for sharing this sensitivity to public. 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 the intended regulation on interchange fees by the government, and if there is anything currently in the regulatory pipeline that we should be bearing in mind. My second question is just a follow-up on cost of risk. You shared a long-term level of 1.1%, which makes sense considering your pre-COVID level. Thinking about 2021, what would be your estimate for this year considering the 0.7% in the first quarter? Also in terms of cost of risk, I'm not sure I understood correctly in your remarks if you were considering reversing additional provisions in the coming quarters considering the positive performance of your asset quality, or if you were considering to create additional provisions considering the potential uncertainty in Chile. Thank you very much.
Could you repeat the first question? I didn't quite hear it.
Yes. My first question was regarding the interchange fees regulation that the government is trying to pursue, and if there is anything else in the regulatory pipeline that we should be considering.
Interchange? I couldn't quite catch the-
Yes. Yes, the interchange fees.
Okay. Yes. Okay, perfect. Sorry for not understanding the question. Yeah, as you mentioned, there is some discussion in the country in terms of applying some regulation to the interchange rate that applies to transactions to credit and debit cards. Basically, there's a discussion related to set specific rate charges to those transactions. After the Paso a Paso performance, there will be a committee composed by different parts, including central banks, finance minister, et cetera, that will finally set that rate. Important changes in this rate affect the profitability of the business, we have to say that we are paying attention to the final outcome of the discussion in order to evaluate potential adjustment in the strategy. We would like to emphasize that we are well prepared to face potential changes in order to adjust our strategy, since we are always evaluating different strategies, et cetera.
In terms of that, we would like to reinforce the idea that we want to continue being a relevant player in this industry, in this market as well, in order to provide the best customer service in Chile. Unfortunately, since we don't have more details relative to the specific changes in that rate, we don't have a potential impact of that measure, and therefore it's early as to anticipate any change in our strategy.
In terms of cost of risk, our expectations for cost of risk this year is that there could be, based on the government protection programs that have been implemented in Chile this year, there are some indications that could also help improve the customer payment behavior. What we are expecting is that not all the same benefits that were received last year will continue throughout the rest of 2021. For example, there are many different examples from last year. Basically what I am saying is, despite that in the short term, it could be, as you mentioned, very good cost of risk NPL. We expect that it is 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 is what we are expecting in our base scenario.
That would be based on the information that we have today, with expectations of our economic base scenario. In terms of what we've mentioned about the additional provisions, 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. If we, like I mentioned, if we continue to see positive signs in the future, and we see a solid improvement in GDP forecast actually come true and better confidence levels, as a trend in the future, we have rolled out that a portion of the additional provisions that we've established could be released.
I guess those potential reversal provisions are not included in the 1.1%-1.2%. Is 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 a vaccination 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 the additional provisions, because we're expecting a gradual recovery of the economy. Of course, we have to pay attention to the evolution of the economy in the future, if it actually will improve or not. Our baseline scenario is that the economy will be slightly recovering over the future and we are optimistic for the future.
Understood. Thank you very much.
You're welcome.
Thank you. We also have a question from Claudia Benavente from Santander. Please go ahead.
Hi. Thank you, Francisco. I just have one question. I was wondering, how do you see the ex-post in the market prices? The 30 controls currently running on with maybe a likelihood to see further a few controls be there is a lot of tightening economy, as you all mentioned in your presentation in current accounts, which has been hurting as well the development of consumer loan growth. Is there a likelihood that you see harder to achieve the 8% loan growth guidance? Any color there would be appreciated. Thank you.
Thanks, Claudia. There's a lot of liquidity in the industry, from households and from businesses, and there's still not a clear outlook. It's looking more positive, like the end of the COVID crisis is closer, it seems. That's providing. When we're close to that event, what our customers have been saying is that they're waiting to see, especially the corporate customers, commercial customers, how the next months evolve before taking on important steps. They have a lot of liquidity from the programs in the past. That would be from the commercial side. Probably you 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 gradually opens, we 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 lot of liquidity, as you mentioned. 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 excess liquidity. As we move forward, we think that we should begin to see a higher demand for loan growth for consumer loans, as long as there's not additional excess liquidity in the industry.
No, it's, s o maybe for t he loan growth will be driven by commercial loans, right?
By commercial loans, consumer loans, and mortgage loans. 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, if that doesn't pick up because of high liquidity, we expect that commercial loans will probably be more active in the remainder of the year, especially with the programmatic program and especially with a more clear understanding on how this economy evolves. 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. This is for all companies, SMEs and larger, that invest with these uncertainties. Is there another lockdown, or is there no more lockdowns? Is the vaccination process positive? Will it work well? Once these questions are answered, we think that commercial loans will also reactivate. Consumer loans, it depends.
The key question that we have for the future, Claudia, as you know, is based relative to the unemployment rate. At the end of the day, we've seen a very weak recovery of the labor market. Since we are expecting 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 consider that there are a lot of liquidity, as you said, which has different impacts in the economy. On one hand, we can argue that more liquidity will reduce the demand for loans. On the other hand, we have that more liquidity means a higher economic growth. 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 on mortgage loans as well. Let's see what happens in the next three months.
Back to you. Thanks a lot.
Thanks.
Okay, we also have a question from Sebastian Gallego from Credicorp. Sebastian, please go ahead.
Yeah, thank you. Hi everyone, and thank you for the presentation. 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 checks and other business lines across the fee lines? It will be helpful if you could provide some coloring guidance there. Thank you.
Fees have been, as the economy has reopened and been more active, we've been seeing a good level of transactional revenues from fees, as you can see, in all fees across the board, mostly, as you can see in the first quarter. If you look at the fourth quarter versus the first quarter 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 of the joint venture with an insurance company. That is the main driver of the lower growth in fees year-over-year. If we look at, for example, the quarter-over-quarter figures, we see stronger transactional fees from retail. We see credit, and we see card fees increasing, merchant fees increasing.
We've also seen better fee growth from our mutual fund business. Fee actually increased, if you look at year-over-year, asset management around 14%. Stock brokerage is also more active. We think fees will be an area that will have more stronger fee generation, especially as 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 we look at the Q1 2019 versus this quarter, we see a rise also if you look at different figures like our running rate. Looking forward, we think that for this year, we should have a rise of recurring fees of around 8%.
I think in the medium term, it's reasonable to expect fees that grow in line with customers, somewhere around 6%-7% in general. Makes sense. These customers, you can cross-sell them to new customers. As you know, Banco de Chile is a bank with a strong fee-based business in Chile. We have very customer-oriented. We are having customers that use Banco de Chile as their primary bank. As we continue to increase our customers, we expect that we can successfully cross-sell them to other customers, and this is one of the main points of focus of the new debit card switch of funds. We have more than 300,000 customers there, and we're working on how to do a new digital onboarding in terms of other products and services for these customers, which should also help fees in the future.
We're currently working on that. We hope to implement this later on in the short term.
All right. Thank you.
You're welcome.
Thank you. This concludes the question and answer section. At this time, I would like to turn the floor back to Pablo Mejia 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. This concludes today's presentation. You may disconnect your line at this time. Have a nice day. Thank you very much.