Hello, everyone, and welcome to Banco De Chile's 2Q 'twenty Financial Results Conference Call. If you need a copy of the press release, it is available on the company's website. Today with us, we have Mr. Rodrigo Arrabena, Chief Economist and Senior VP of Institutional Relations Mr. Pablo Maguilla, Head of Investor Relations and Mr.
Daniel Velarce, Head of Financial Control. Before we begin, I would like to remind you that this call is being recorded and that 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 note in the company's press release regarding forward looking statements. I will now turn the call over to Mr.
Rodrigo Arevena. You may please proceed.
Good afternoon, everyone. Thank you very much for joining us on this conference call. Today, we'd like to present our analysis of 3 main areas. 1st, the evolution of the macro environment with a special emphasis on the role of economic policies and strong fundamentals as key factors in the potential recovery in the future. Then, we will present the main advances in critical strategic areas of our bank.
Finally, before moving to the Q and A section, we will go over our financial results for the Q2 of 2020. I'd like to start with an overview of recent developments on the macro side. Please move to Slide number 3. Chile has been experiencing an ongoing contraction since March, in line with the trend observed in most countries. This downturn has mostly been explained by the strict social distancing measures, which aim to reduce the spread of COVID-nineteen.
This has led to a sharp drop of 14% in the GDP during the Q2, as seen in the chart on the left. The breakdown shows a significant deterioration in sectors more intensive in social activities such as hotel, restaurants and transportation. On the other hand, the positive growth posted by mining production has offset the charge decline in the rest of the economy. The overall CDI has also been falling. As seen on the other right chart, CDI went down to 2.6% in June from 3.9% in February before the pandemic.
This trend has been driven by the slight growth reflected in the lower nontradable inflation and the stability in the Chilean pesos, which has reduced tradable prices. The labor market has also been affected by subdued growth. The bottom left chart shows the increase in the unemployment rate to 12.2% in June, led by the annual decline of 20% in total employment and the 15% drop in the labor force. I'm aware that this scenario described so far is not entirely encouraging. However, we are optimistic about the future, especially relative to other countries in the region.
In fact, the lower duplication of the Chilean currency, as shown in the chart of the bottom right, confirms the better outlook for Chile. Therefore, the natural question is, what is behind this positive view? Let me try to answer this question on the next slide. Several factors support a positive view of Chile in the future. One of them is existence of sound fundamentals, which make Chile the strongest economy in Latin America.
Apart from having the highest per capita GDP and the most stable economy, we also have a unique combination, the lowest vulnerability and the most significant wound to implement countercyclical policies. As the table shows, Chile has the best country risk, reflected in the lowest sovereign credit for swap among peers. Thanks to this, the government has issued bonds in foreign markets with very favorable conditions. Additionally, Chile has important buffers that make possible the implementation of further fiscal and monetary measures. Resources available from the Central Bank, including international reserves and the credit line with the IMF, are nearly 20% of the GDP, while the net fiscal debt was only 14% at the end of 2019 due to $22,000,000,000 held in sovereign wealth funds.
Chile is also less vulnerable to external shocks. According to a statistics released by the IMF, foreign investors represent only 10% of the local equity market due to the strong base of domestic institutional investors. Consequently, Chile would experience lower impact if there were capital outflows from emerging countries. That's why typically the Chilean markets have been more resilient in negative cycles. These fundamentals are even more relevant when they are supplemented by a strong countercyclical policy as we've seen in Chile.
The magnitude of the fiscal policy can be seen in the significant rise in the fiscal deficit as the left chart shows. Silicon implements this policy because the solid position has before the pandemic, as shown in the chart on the right, due to the low public debt relative to most countries in the world. The improvement in GDP growth will likely take place in the short term. Let me explain why in the Slide number 5. Chile is easing the social distancing measures adopted in this pandemic as a result of improvement in the number of active cases of COVID-nineteen.
The other chart shows the continuous downturn of them, while the number of recovered people has risen significantly. Based on these positive trends, the government reduced zones in quarantine, making possible the beginning of gradual normalization. This change follows a period marked by very strict social distancing measures where, as the chart on the bottom shows, more than half of the population was under quarantine. In fact, the premiums index, which is released by Oxford University, confers that Chile applies strict measures due to the temporary suspension in schools and commerce as well as constraints to the mobility. These changes should be augmented by the economic measures adopted in this crisis.
As we mentioned in the previous conference call, Chile has been recognized by having a coordinated timely and robust response from different economic authorities, as the table on the right shows. The government has announced measures equivalent to nearly 11% of the GDP, including the fund of $12,000,000,000 to finance transfer to vulnerable people and public investments for the next year. These resources supplemented the measures announced before, sets up the capitalization of both FOGATE and the unemployment fund. The Central Bank has eased even more the monetary policy. In addition to the interest rate cut to 0.5%, the Board implemented a forward guidance mode, anticipating that the interest rate will likely remain at 0.5% for the next couple of years and also now an extension of the FDIC program by further $16,000,000,000 and asset purchasing in the open market by $8,000,000,000 Finally, Congress approved a bill that allows withdrawal of up to 10% of personal savings, health and pension funds.
Despite the long term impact, this measure will contribute to an increase in private consumption this year. Additionally, they will discuss a change in the constitution that will allow the Central Bank to buy and sell treasury bonds in the open market, providing an additional tool to stabilize liquidity in the threshold scenarios. All in all, we expect a recovery for the next year, which I'd like to discuss in the next slide. Please go to Slide number 6. This table summarizes our macroeconomic forecast.
We expect the GDP to decline by 6% this year. Since the GDP plummeted by 14% in the Q2, this estimate is consistent with better growth ahead, which is more likely after the recent easing in social distancing measures announced by the government. In this environment, we estimate a 4% growth in 2021 as a result of expansionary policies, the better outlook for the global economy and favorable copper prices. Nevertheless, we are aware of the unusual uncertainty, mainly that related to the future evolution of the pandemic as well as internal factors. We expect the CPI to be at 2% this year and 2.2% next year due to the subdued growth and the stable currency.
These changes in the macro conditions have had a direct impact on the banking sector. Please move to slide number 7 to analyze them. Undoubtedly, sluggish growth, weaker employment and lower inflation have affected the result of the banking industry. Total net income adjusted by Itau figures posted ARS437 1,000,000,000 in the 2nd quarter, which is 7% lower than the previous quarter and almost 50% down relative to the same period last year. In a broad sense, this decrease is mainly explained by the pickup in provisions, lower dynamism in loans and to a lesser extent, the lower NIM due to the reduced CVI.
As shown in the chart on the right, there was a lower nominal growth in total loans, mainly in those related to more profitable products, as reflected by consumer loans declining 6.8%. In the case of mortgage loans, quarter on quarter growth has slowed to 1.4% during the quarter. The changes are explained mainly by lower disposable income and lower consumer confidence. On the other hand, commercial loans maintained the base of growth, increasing 3.7% quarter on quarter as a result of implementation of COVID loans program. Total provisions increased, doubling the level observed the same period last year.
This increase is mostly attributable to the considerable deterioration in commercial loans sorry, in commercial sectors affected by the pandemic and the weak employment outlook, resulting in banks regarding an important level of additional provisions during the quarter. Due to this, the cost of risk for the industry increased to 2% from 1.15% last year. It's essential to keep in mind that these figures have not reflected the total impact of the weaker economy in asset quality yet, particularly for loans evaluated on a group basis due to the deferral of housing and consumer loan installments that have been implemented during the crisis. Therefore, as part of the deterioration over the next month is likely for these types of loans. Instead, cost of risk for individually evaluated loans should have already been part of the outlook for the economic sector in which those companies participate.
I'd like to finalize this part by highlighting the important role that the banking industry is playing in the current crisis. We know about the positive correlation between GDP and total loans, which tend to be higher in the case of commercial loans. This means that in positive cycles, loans to companies grow even faster than the overall economy, while in negative cycles, we get to see a contraction as was the case in 2,009. The chart on the bottom shows the strong relationship between them. However, today the story different.
Despite the sale of the fall of 14% in the GDP during the Q2, commercial loans increased by 3.7%. This decoupling has been attributable to the peak added loans with a state guarantee mainly to SMEs, which are known as COVID loans. This confirms the strong countercyclical role that our authorities and the banking sectors are playing in this crisis, which undoubtedly will contribute to a faster and healthier recovery after the pandemic. It's important to highlight this has been possible thanks to the solid position of Chile as well as the robust position of Chilean banks, especially in terms of capital. Now we would like to move to our advances in key strategic pillars by its ability to post consistent and robust results over time.
Since we aspire digital transformation, efficiency and productivity and the increasing commitment to ESG standards. We strongly believe that strengthening these areas will be critical in transforming Banco de Chile according to the challenges that arise in the new business and social environment. Now, Paolo Mejia, our Head of Investor Relations, will share with you the advances accomplished in this area. Paolo, please go ahead.
Thanks, Rodrigo. Please move to Slide 10, where we'll highlight some of our initiatives in digital banking. The pandemic we are facing is changing the way we live, especially in terms of using technology to fulfill our needs. In this sense, digital initiatives that we have implemented in the last years have allowed us to understand their customers' behavior further and has built a solid basis to provide 100 percent online solutions for most of their requirements during the sanitary crisis. Even though we already have robust platforms, we recognize that the pandemic challenged us to accelerate our digital transformation as we provided an essential service and our role is critical to support our clients' financial activities.
As you can see in the timeline, we have innovated in our digital experience for our customers in several fields, focusing on delivering the best customer experience through the incorporation of business intelligence, data mining, analytics, digitalization of our process and branches. In order to continue to provide the best customer service for customers, we're working on launching a new digital onboarding platform that will give us significant improvement with the possibility of opening a new account 100% online at a very low cost for us. This will also allow us to gain a greater number of customers, particularly within the younger segments as we will promote financial inclusion as well as we will promote financial inclusion. Another recent advancement in our front office digital platforms is our new webpage that offers improved customer experience and incorporates analytics tools. It's more modern, secure and intuitive and has inclusive features for the visually impaired.
We also included a heat map that will provide us with valuable information understand even better customers' preferences. Those efforts contributed to establish the best digital bank in Chile as well as having the best online platforms according to Global Finance. All the investments we have made in the previous years allowed us to undertake high digital demands of financial services in the current crisis. During the pandemic, we processed over 6 times the number of loans pre COVID using robotics and through agile developments, we were the 1st bank in the market to provide a facility to both phone installments for personal banking customers 100% online and to offer COVID loans to SMEs through our digital channels. On the other hand, we also noticed that usage rates in our digital channels have been intensifying significantly.
As we can see on the bottom of the slide, online consumer loan originations increased from 37% during the first half of twenty sixteen to 46% of total operations in the first half of this year. On the right side, the activities done through our online platforms continued growing now represent 88% of total monetary transactions, an important rise in mobile transactions, representing an increase of 16% year on year. Although we acknowledge that the lockdown mostly explains the higher digital channels preference, we believe that this trend will continue after the pandemic has finished. Please turn to Slide number 11. The successful implementation of our digital transformation has played a critical role in providing the best experience to our customers.
Despite this challenging period, we've continued to show excellent indicators. As you can see, we posted once again the highest brand recognition in the Chilean industry and top of mind for the high income segment with a very wide gap with our closest competitors. Along with our superior brand recognition, we're also the leader in customer satisfaction as measured by net promoter score. It's important to note that we have historically been recognized as the bank with the best customer experience levels according to many different sources. We attribute the success to the quality of our services and products, which have helped to generate stronger long lasting relationship with customers.
These figures are reinforced with the recognition of receiving a distinguished national award for customer satisfaction in 2019. Another relevant point I want to mention is the strength of our brand. In one survey, customers are asked if they were to switch to another bank, which bank would they choose? As you can see on the chart in the middle, we are the most preferred bank in Chile. Another key aspect we highlighted related to security and solvency where we lead the perception with a large gap when compared to the next main competitor.
This position in surveys is especially relevant in the context of new regulations where it will be much easier for customers to switch from one bank to another. This customer satisfaction is most clearly demonstrated by a low attrition rate that you can see has remained historically low on the chart on the bottom left, which we believe if it's not the best, it's one of the best in the Chilean banking industry. Please turn to Slide number 12. Another aspect of our long term strategy is efficiency and productivity. Our combined focus of digitalizing the bank by implementing technologies that increase productivity and streamlining processes together with identifying savings areas and implementing better cost controls has begun to bear fruit.
In addition to these improvements, in 2019, we started a process of optimizing our branch network, which includes a new service model that was that has resulted in decrease in branches. We have reduced our network to 336 branches, almost 50 less when compared to a year earlier. The new office model should not only permit further improvements in efficiency, but also increase client experience, which is even more important in this context. We have implemented for instance new intelligent self-service machines to provide more services that traditionally had to be executed by the service desk area. Another measure that contributes to reduce their cost is our purchasing desk, which has shown excellent results due to the reduction in expenses in areas such as acquisitions and services hired.
Through all of these initiatives, we've been able to show consistent and significant improvement in our productivity as measured by loans per employee and total assets to expenses as seen on these charts. We expect that through these projects, we continue improving our productivity and delivering a better customer experience. We strongly believe that through the greater use of technology across our business, we should continue to see improvements in efficiency in the long term. Please turn to Slide 13. The final aspect I would like to share before moving on to our Q2 results is the advances we have made in our commitment to sustainability.
Today, we are witnessing an unprecedented health crisis that is still impossible to quantify the effects that we'll have in the long term. We're aware of our role in supporting the recovery of economic and social development, especially in challenging times. Now this is not an exception. During the pandemic, we strengthened our commitment to society and implemented a national support plan. We took several measures to support our customers.
Apart from being the 1st bank to offer the option of reprogramming loans 100% online, we're the 1st bank to offer SME customers COVID loans. For this segment, we went beyond providing liquidity and hosted for the 4th time our National Entrepreneur Challenge, where we achieved a record of 56,000 applications and we promoted a virtual fair for 60 entrepreneurs where they were able to exhibit their product. Furthermore, we have also implemented many actions that aim to reduce the consequences of the pandemic for vulnerable groups in Chile. We delivered packages with essential groceries for people with disabilities and their families, offering food, medicine and telemedicine services to senior adults as well. All of these efforts rewarded our banks to be recognized as a financial institution that did the best job in taking actions during this health crisis as seen on the chart on the right.
Please turn to Slide 15 to begin the discussion of this second quarter. During this quarter, we recorded a bottom line of MXN112 1,000,000,000 with an ROE of 12.5%, a level we consider reasonable given the magnitude of the crisis we're facing globally and the low level inflation for the period. We also outperformed their peers. Apart from having the highest profitability indicators and coverage ratio, we maintain the best capitalization level as shown on the chart on the right. We're confident that our prudent risk management approach, strong capitalization and our consistent strategy will allow us to continue delivering sustainable and superior profitability for our shareholders.
Please turn to Slide 16. Operating revenues dropped 6% year on year due to the fall of inflation from 1.2% to only 0.3%, impacting non customer income and to a lesser 3% a slight decline in customer income, which even though remains strong when taking into consideration the weaker environment. In this context, NIM fell 4.5% last year to 3.5% this year, as you can see on the table on the bottom left. About 50% of this decrease was caused by lower CPI we had quarter and the lower contribution of demand deposits to our cost of funds given the sliding interest rate. To a lesser extent, these factors coupled with the negative impacts of mortgage loan rate, negotiations at lower rates in the second half of twenty nineteen and the new regulation regarding automatic payments of overdraft lines, which became effective in January of 2020, both partly offset by higher income from loans.
The rest of the decrease in NIM is explained by higher exposure to low margin and low risk assets such as the Central Bank short term bonds used to comply with the reserve requirements linked to boost demand deposit balances and other effects. As the chart on the upper right shows, customer income remained relatively stable as a result of offset forces. The lower overnight rate interest rate sharply reduced the contribution from deposits, even though the impressive gross imbalance is seen during the last month. On the other hand, as mentioned, there were positive contributions from the increase in commercial loans, higher sales distribution desk from the treasury division and higher fee income. Most of the Horizon fees was associated to a $9,300,000,000 increase in insurance brokers linked to the partnership with an international insurance company.
Unfortunately, this was partly offset by a substantial decrease in economic activity amid the strict lockdowns at lower transactional fee income from other sources such as cards. Market volatility also affected revenues from our mutual fund and stock brokerage business due to customers moving to their AUM to fixed income funds that generate lower fees as well as lower transactions and stock trading. I think it's also important to note that our fee business is chiefly related to the retail segments. Although we had some drawbacks this quarter as a result of the weak activity that affected the aggregate demand from customers and therefore transactionality, we believe that this is temporary. Despite this impact, we continue leading the industry in net operating income and fee margin.
As you can see on the charts on the right, our margin as a percentage of average interest in asset reached 3.8% and 1.2%, well above the average level of our peers. Please turn to Slide 17. Total loans reached almost MXN31 1,000,000,000,000 this quarter, increasing 7% year on year and remained basically flat quarter on quarter. Demand except for COVID loans was weak across all segments this quarter. In the wholesale segment, we posted a year on year growth of 5%, but the quarter on quarter dropped by 3%.
There was a similar trend in personal banking loans increasing 5% year on year and falling by almost 2% quarter on quarter. The annual rise was mainly due to residential mortgage loans that grew 8%, while in contrast consumer loans during the same 12 month period decreased 6%. On a quarterly basis, mortgage loans remained flat and consumer loans actually dropped 6%. These results were attributable to the lockdowns in the weaker economy as we discussed in the beginning of this call. This resulted in reduced household spending as well as lower demand for home sales.
In fact, the expectation of the National Chamber of Construction is that new home sales will actually drop by 40% in 2020 and the sector will only return to normal business level mid-twenty 21. We expect
that the
dynamism of the personal banking loan should continue weak throughout the remainder of the year. These results were almost offset completely during the quarter by the strong growth we experienced in COVID loans for the SME book, which grew 19% year on year and an impressive 14% quarter on quarter. Please turn to Slide 18. As mentioned, strong results in the segment was attributable to the government stimulus package for companies that provided guarantees of up to 85% for working capital loans. We are proud that we have been able to assist our customers and the country by taking part in this program.
We placed during the quarter over 1,000,000,000,000 vessels equivalent to 3.7% of total loans as of June 30. Most of these loans were directed to provide liquidity to small and medium sized enterprises. And as of July 2, we granted almost 25,000 loans with a market share of 18%, which is similar to our market share in the sector and aligned with our risk appetite. In terms of total loans reprogrammed and taking into consideration the total value of the load, for the bank with the lowest proportion of total loans amongst their peers, as shown on the chart on the bottom right. Finally, if we only look at the installments that have been reprogrammed and of the loans granted, this reaches only RMB495 1,000,000,000 or 1.6 percent of total loans as the chart on the top right side of this chart and this slide demonstrates.
I think it's very important also to highlight that the banking industry has made an important effort to assist those customers. We believe that the efforts combined with all of the programs that the government has provided to land should make a difference during the economic recovery post COVID. Please turn to Slide 19. We continue to have the best funding structure in Zealand. This has been possible thanks to our customers using us as their primary bank account.
This is clearly demonstrated by the strong increase we had in demand deposits, which rose 37% year on year and 11% on a quarterly basis. Also important to note the significant change the rise in DDA has for our funding structure. Today, our demand deposits represent 28.5% of total funding, up from last year 25.7 percent and significantly higher than our peers as shown on the bottom right. More importantly, approximately 75% of our DDAs come from non financial counterparties, which represents a stable source of finance. And like with this, we have been able to replace time deposits from financial counterparties with DDA.
We also have a well diversified funding base, which is very relevant today, as can be seen on the chart on the left. And other things, makes another positive difference of Banco de Chile. All in all, our strong brand coupled with our leading risk indicators and a strong Tier 1 capital base with 10.9% allows us to place debt at favorable conditions and have permitted us to maintain a leading level of cost funded of only 2% in the local currency. We're confident that this crisis will open new opportunities to strengthen our already solid relationships with our customers and continue increasing our share of wallet. Our long history of good risk quality and very reasonable growth have been fundamental to our sustainability over time, and the range of points to our long term strategy.
Please turn to Slide 20. Managing risk globally across all levels of the corporation is a key component to our consistent and attractive results. Our Board of Directors play a vital role actively participating in establishing policies and guidelines for expected risk levels for developing and validating provision models as well as to define additional provisions. Management is responsible for controlling and complying with the mandates of the Board, especially in terms of control of different types of risk. As you can see on the chart on the right, cost of risk this quarter jumped to MXN 139 1,000,000,000, up from only MXN68 1,000,000,000 last year and MXN126 1,000,000,000 from the first quarter.
However, our net net sale ratio dropped 1.4% in the Q1 of 2020 to 1.3%. This combined combination of higher cost of lower NPLs was principally due to 2 factors. Please take a look at the chart on the bottom right. First, COP70 1,000,000,000 of the COP139 1,000,000,000 posted in the second quarter were due to additional provisions. These provisions were recorded to protect the bank against unforeseeable economic fluctuations.
In line with this, pandemic has brought forth many uncertainties such as citywide lockdowns, deterioration in employment and financial stressing companies. These uncertainties have made it extremely difficult for traditional risk models to properly gauge credit risk. And as a result, our Board approved the establishment of these general provisions. It's important to note that these allowances are not for any certain segment, sector or customer, but therefore the entire portfolio has implemented in different circumstances such as the one we are facing today. 2nd, the remainder of the quarterly provisions was chiefly due to the impact of COVID-nineteen on the financial position of certain large customers, which have suffered a deterioration in their business environment and income generating capacity.
As a reminder, large companies are evaluated on an individual basis for provisioning purposes using a forward looking approach. In terms of retail book, the retail book composed by consumer mortgage and commercial loans evaluated in a group basis, delinquency levels had remained relatively stable. Nevertheless, this was mainly due to the support measures we provided this segment, which included grace period, loans at preferential rates and government backed COVID commercial loans for SMEs. In addition, as a way to promote lending and assistance to banking customers, local regulator gave a special treatment to reschedule loans in terms of provisioning, which has a positive effect on cost of risk when compared to a normal period, even though we expect deterioration in the portfolio in the next few months. In this regard, we're confident that our prudent risk policies have made Banco de Chile the most prepared banks that face negative cycle as shown on the next slide number 21.
As you can see, our coverage ratio reached 2 35% as of June 30, significantly higher than our peers and we recorded the lowest delinquency ratio of 1.3%. Our prudent risk culture has also contributed creating the highest level of additional provisions in the industry reaching MXN283 1,000,000,000 as you can see on the chart on the bottom right. All of these figures demonstrate the soundness and quality of our portfolio and our prudent management when it comes to risk. Our consistent and successful strategy has been centered to grow our portfolio responsibly and this has allowed us to portray a solid track record of dependable results. As shown on the following Slide 22, a well diversified portfolio with lower overall exposure to the riskier segments also contributes to these results.
Our portfolio is highly diversified and concentrated in lower risk sectors. Despite this, we are the most profitable bank in Chile because our customers choose to use us as their primary account and this provides many additional benefits that I'm sure you're all aware. As you can see on the chart on the top left, retail segment represents 63% of our portfolio and this is divided in 3 main areas. First, consumer loans for middle and upper income individuals as well as mortgages are focused to the low risk individuals. We have the highest market share in high income individuals, which are low risk in nature.
2nd, our exposure to consumer finance through our Credit Suisse brand is only 2% today, significantly lower than the level we had in 2009 during the subprime crisis, which represented nearly 7%. And lastly, our SME book is a very high quality portfolio that has had historically low levels of cost of risk and is closely related to our upper income individuals. We may not have the largest market share in this segment, but we certainly have the best portfolio in the industry. The remaining portion of the portfolio is the wholesale footprint represents 37% of total loans. We work with the largest companies and multinational corporations in Chile, and by nature, this segment is lower risk.
For this reason, we're proud that we have historically had a solid performance when it comes to wholesale risk. The pie chart on the bottom of the slide shows our exposure to different sectors in Chile. As you can see, our penetration in the highest risk sectors is lower than our peer group. In retail, hotels and restaurants, we have an exposure of 9% versus our peers of 11%. In construction, our exposure is 7% versus the competition's 10%.
And lastly, we compare similar to our peers in transportation, but it's important to note that we don't have any important loans for the airline industry. We are confident that our prudent approach to risk management should set us apart in the coming months when banks have more information regarding the quality of portfolio and how this will translate into cost of risk. Please turn to Slide 23. More important than ever is our focus on managing costs. As you can see on the chart, on the left, we managed to maintain total operating expenses basically flat quarter on quarter and decreased 4.4%
year on year.
The yearly drop in expenses was driven by lower salaries and other expenses as shown on the chart on the right. Specifically, we were able to increase our business activity without increasing significantly our salaries and also had a reduction in severance payments and loan loss provisions on cross border loans due to higher appreciation of the Chilean peso this quarter as compared to the Q2 of 2019. In addition to this, we lowered our outsourced sales for services by absorbing these functions internally during the second half of last year and we lowered marketing expenses by reducing media expenses, market research and adjusted loyalty programs. These reductions were also partially offset by higher IT expenses related to software licensing to adjust the bank quickly in this environment. Also, we incurred higher expenses linked to fixed cost maintenance related to sanitation, new safety measures related to the pandemic as well as costs associated to updating our branches to the new service model among others.
On a year to date basis, we recorded improvements in efficiency as shown on the chart on the bottom right, reaching 43.6%. Please turn to Slide 24. Before moving on to questions, I would like to highlight the favorable comparison of our stock versus our main peers in Latin America. Sorry about the technical difficulties. If you please turn to Slide 24.
Before moving on to questions, I would like to highlight the favorable comparison of our stock versus our main peers in Latin America. As you can clearly see where the stock price has been the most resilient in this crisis. We have recovered part of the drop from pre COVID level. This is clearly a result of the market understanding that we're not only the most profitable bank in Latin America, as shown on the chart on the bottom left, but this is accomplished in a dependable manner throughout all of the cycles. It's also important to mention that we may have recovered the post or near post COVID levels, but we still have multiples that are well below the levels that we've had in the past.
Despite the current economic environment, we are confident that the better perspectives for the economy coupled with our strong fundamentals and strengthening of key aspects of our long term strategy will allow us to continue being the best long term alternative for our investors. 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. Our first question will come from Ernesto Gabilondo with Bank of America. Please go ahead.
Hi, Rodrigo and Pablo. Thanks for taking questions. My first question is on the reprogramming portfolio and the FODMAP program.
Can you
give us an idea of how much both the reprogramming and the FOGAPE represented of your total loan portfolio? And why do you think the percentage of reprogrammed portfolio seems significantly lower when compared to Santander Chile? And then my second question is on credit provisions. Considering that you have created additional provisions of COP 70,000,000,000 during the quarter, do you think this was a peak in provisions? Or do you continue to see higher provisions by year end once you start to see NPL showing up after ending the relief programs or from the exposure to high risk economic sectors?
Thank you.
Thanks. Well, if we look at
the participation, the most recent information, we have similar levels of COVID loans as our competition. We're a bank that approved a significant amount of the loans today in dollars we have as of July 24, about $1,900,000,000 issued to companies, a large proportion of those to SME customers and it represents somewhere close to 30,000 customers today. In terms of that I think our levels are very similar to what our main peers have been issued. If we move to the levels of provisions, It's difficult to have a clear understanding of how the economy will recover and the current position of our customers. What we can see today is that
the portfolio
is still in relatively good shape, but we have a limited amount of information. What we do know and we've seen is good payment behavior in the recent information. But we can't rule out that in the future months, there could be levels of provisions similar to what we've seen in the past months quarters. So it's something that we have to continue seeing.
Okay. Thank you, Pablo. And then just to follow-up on the reprogrammed portfolio. When looking to Santander Chile, they mentioned that close to 30% of the loan book was reprogrammed, including the Fohrabi loans. Do you see the same proportion to your loan book?
Hello, sorry about that again. So just finishing up in terms of the provision, one of the important things, unless there are you there?
Yes, I'm here.
Okay. So I think one of the important things to mention as well is that the what we've seen in the month of July is good payment behavior of the customers that did take on these reprogramming of loans. So a large portion of the customers took on reprogramming in April. And what we've seen in the behavior of that folks is positive results, but we can't confirm that this will continue in the future. So we do need more information to understand, and that will allow us to know if we'll have the same level or changes in what we've seen in the prior quarter.
I would like to add Juan Mexia. This is Rodrigo de Arrena. It's important to keep in mind some factors that they will likely affect the future. For example, the impact at the end of the growth period, for example, the potential increase in the unemployment rate. So basically, we've seen an increase of unemployment rate from 7% to 12% last month.
We can't rule out that increase even more. But more importantly is that we have a very important uncertainty in terms of the final impact of this crisis in the economy. We don't know how deep was the recession. And more importantly that we don't know about the length of the recession. We don't know when the economy will take the economic growth, etcetera.
So that's why we are not providing more guidance in terms of the cost of risk for the future. It's important to
keep in mind these drivers,
but unfortunately, we don't have enough information as to provide a more specific guidance
for the future. And maybe a follow-up on the first question. So the market share in loans, we have 18.4%, which information as of this information was as of July. But it's important to mention that this level of low market share is actually higher than our market share in commercial loans. So it makes sense this level of market share for our customer base.
Perfect. Thank you. And I was looking to your presentation on Slide 18, and I was looking to the volume of loans reprogrammed. And as of July, as you mentioned, you have around 35%, right? And I'm looking that Santander has around 41%.
So what do you think will be the difference of your competition having a higher market churn than yours?
Well, the market share in terms of the loan reprogram, it's important to mention one very particular thing of the Chilean banking industry. The reprogramming of these loans isn't a lead indicator
of the cost of risk.
Some of these loans obviously have could be more problematic, what we've seen is positive results in this 1st month. But it's not a lead indicator because there's certain characteristics which customers had to comply in order to be able to have these laundry programs at Banco de Chile and many banks were similar. But one of the requirements wasn't a requirement that you have a loss of income. It was that you are a good customer, you're paying on time. And due to that reason, it's not a good lead indicator for cost of risk.
So what it is, I would say, indicator is how well each bank, if there's a very large difference, if there's a bank of 20% of their book reprogrammed is how they provided this to their customer base and how easy was it to do it online. With the larger banks, it was a simple process that was done online. In the case of our bank, you can see which loans were reprogrammed. Each bank has a little bit different composition of those reprogramming. And then we included the credit card option to reprogram those into installments.
So it just depends it's not a very it's not
a lead indicator, that's what
I want to say. It doesn't show that automatically if you have 35% or 20% level of reprogrammed, is a lead indicator for the future. It's how the banks implemented this.
Okay, understood. Perfect. And then considering the additional provision that you're creating in this quarter, it seems that it was the quarter with the highest provisions. Do you think this was the peak of provisions, including these additional provisions? Or do you think we should continue to potentially have another one like this one by year end or in the next year once we finish the reprogramming of the portfolios?
It really depends on the evolution of the economy and how the economy begins to open and the impacts in the overall economy, so in the companies and individuals and employment. So that will be a key area that we have to see today. What we're seeing is the lockdown. Starting to see better information regarding the virus in Chile. That could be positive.
We need to see how this evolves in order to have a clear understanding on if this is the worst month, if it's the next month. It really depends on the evolution of the virus and then tax on the economy.
So basically, we can roll out more provisions for example if it indicates that the economy gets worse. So it's very important to keep in mind that this crisis is different to any other crisis that we saw in the past. So that's why it's very important to highlight our very robust position in terms of the agua quota ratio. So as we mentioned in the call, we are probably the best time to prepare for next cycles. So we can't allow more provisions in the economy remains weak.
Perfect. Thank you very much, Pablo and Rodrigo.
Thank
you.
Our next question comes from Claudia Sannaventes with Santander. Please go ahead.
Hi. I have two questions. The first is, how much should we expect to be provisioned for the COVID loans deductibles? Have you started to provision this? Or if not, when should we expect this impact?
And the second question is maybe a little bit of a follow-up to what you were saying. Within the clients that have reprogrammed loans, can you provide some color on how much actually reprogrammed the loans as a necessity versus those that took it as an opportunity? Probably you have many of these customers that have their current accounts with Banquet Teles. So probably you can have a better idea of maybe who were the most troubled one versus those who took it as an opportunity? Thank you.
Mainly, just in case someone is not aware, so the provisions for the COVID loans basically, what happened is that the regulator for all the loans that were for GATE guaranteed, the regulator indicated details in terms of the constitution of provisions related to the deductibles of the COVID guaranteed loans. So specifically, according to the current regulation, banks must provision the deductible of the loans that were originated opposed to when the guarantee is exercised. So, specifically, what the regulators stated was when the expected loss, excluding the Pagalpa guarantee, is lower or equal to the deductible, the provision should be determined without the guarantee. When the expected loss, excluding the full CapEx guarantee, is greater than the deductible, the provision should be determined based on the aggregate of the deductible plus the expected loss using the total CapEx guarantee. So therefore, what we're expecting is that there should be more provisions in the calculating the impact of this change and we'll be recording it in our books from September 2020.
So, that's what I can say regarding that. And in terms of the installments that were reprogrammed, like I mentioned, most banks, what they did was provide made certain guidelines, which customers could have be a part of these reprogramming undertake these grace periods. So you could have very good customers or customers that need these grace periods. So it's not a good lead indicator on how the loan the quality of the loan book is. Also, since it wasn't a requirement that we would request customers to show us information regarding if they have an impact in their salaries, it's not clear what percentage of the customers needed to use grade spirits and which they didn't.
What is clear, and I think it's very important to mention is that the level of deposits in Banco DO Chile have grown by over between around 35% for individuals. So our individuals have more deposits in their account. There's different reasons for that, but that's something very important to mention. Our customers are high income individuals. So they're not they're a little bit less susceptible to these volatilities in the economic cycle.
And what we've seen today of customers is that we've had a very good payment behavior in the 1st month of paying of installments that we're due. So that's very positive for what we've seen so far. Claudia, are you there?
Yes. Is it possible to have an idea of maybe within the reprogram loans, how many of the customers have taken account with Banco Vertigo?
Basically, when a customer enters Banco DO Chile, they have a package of products. Most of our customers use Banco DO Chile as their primary account. So most these customers have a current account. So it's not it's very uncommon that a customer will have a product that isn't is in the current account customers. So most of the customers should be current account holders.
But basically for the consumer group, then you can identify those that have seen their salaries at least reduced. So therefore, there you can see maybe the proportion of those that may could have a higher probability of having a default?
Again, not necessarily. Since you can have more than one bank account, so not necessarily you have your savings in one account versus another. So it's information that we have. It's not public. But what we do have and what I can say is that the 1st month or the most important month of reprogramming that we did was in April and that was due in July.
We had very good levels of payment behavior.
Okay. Thank you.
Hello.
Our next question comes from Sebastian Gallego with Credicorp Capital. Please go ahead.
Hi. Thank you for the presentation. I have three questions. The first one, a follow-up on more of the same in terms of asset quality. I just want to get a sense on when should the benefits provided to customer start to fade and actually if you are providing more extensions to those benefits?
That will be the first question. The second question is regarding the pension fund withdrawal in Chile. I would like to know if you can comment on the behavior of clients on whether you can comment if those clients are repaying debt or not. How are you seeing those clients so far with the information we have as of now? And third, considering that also Rodrigo is in the call, I just want to have his perspective on the upcoming vote for the new constitution in Chile and how this should play out going forward?
Should we expect more I mean, some more of the same that we saw in October last year? Or do we should we expect a more calm and stable outlook in terms of the social crisis? Thank you.
Thanks Sebastian. In terms of the asset quality, for the consumer book, most of that is coming in, in July. April was the most important month for the consumer's book to take on these rate periods. And what we've seen is in the overall of these customers that took on these rate periods, a very good level of payment behavior. It was a very positive information that we've seen so far.
In terms of there is more benefits, there was, we announced for the mortgage loan book, 3 additional months that customers could postpone. Again, the reprogramming of loans, customers can take these benefits if they need them or if they see it as an attractive rate. So it's a there's certain characteristics that the customer must comply, which is being on time, further low and etcetera, and then they can take on these loans. So it's not a lead indicator in terms of the book. And it's important to mention that there's 2 ways to analyze this.
The one way is what's publicly available, and you can analyze all the banks, which is the total volume of the loans that have some relation of an installment reprogram, which is available on the website of the CMS or what we showed on Slide, I think it was 18, which is only the installment of the 3 programs. So 3 months installment represent today, ARS 490,000,000,000, which is 1.6 percent of total loans. So it's not a very significant amount of installment that has a new loan associated with it. In terms of the 10% of the pension funds, I guess that would be the main new benefit. And so right now, we have 3 more months.
6 months as of April, SMEs have 6 months since they take on their SME COVID loans. So we should see a gradual fading throughout now and the end of this year and the beginning of next year amongst first starting with consumer loans, mortgage loans and then commercial loans, grass and methasties. And for the 10% of ASP, it's something that's being discussed while it was approved, but the funds haven't been issued. So it's very hard to know or identify where those funds will end and which customers will take on those funds. I think it's important to mention that one of the things that Banco de Chile has been very strong in the past is getting customers to use us as their primary bank account.
So generally, the customers that work with us use Bancaratechila as their primary bank account. So that should be something positive as well. If there is funds that flow into Banco da Ciela, Rodrigo?
Yes. I'd like to add one idea to that. Pablo mentioned that this 10% of the withdrawal from pension funds will likely contribute to increase in the short term private consumption. So that's why we are expecting a better growth in GDP in loans as well by the end of this year because the temporary impact increase private consumption as a result of this they would draw this 10% from the pension fund. So what basically we are highlighting here is that this is one additional factor supporting our better outlook for the future, especially for the impact in private consumption in the
short term. With respect to your third question,
it's too early as to provide more accurate estimate in terms of the potential changes in constitution and what will be the impact in the economy, etcetera. And I'm saying this because we are aware that the main challenge in the short term of the economy is to recover the economic growth. So that's why now there is an important discussion in Chile in terms of the main policy. The government has been, for example, very active in terms of implementing as far as fiscal spending. If you make a comparison with Chile relative to other countries would be more aggressive in terms of increasing the fiscal spending in order to recover the economic growth.
So that's why in part when you compare the GDP estimates for 2021 in Latin America, Chile should have one of the best economic growth in the next year. After the recovery, where we expect it to be by the end of this year, there will be several discussions on the political side. We know that we will likely have a discussion for the constitution. We will likely have a future election for the next year. So we are aware about the potential impact on the economic growth.
But all in all, we are positive for the future in Chile. We are confident that the Q2 was the bottom of this negative cycle. We are expecting a positive growth on a sequential basis for the Q4 of this year. And all in all, we expect an economic growth of nearly 4% for the next year.
Perfect. Thank you very much.
Our next question comes from Neha Arghawala with HSBC. Please go ahead.
Hi, thank you for taking my questions. Following up on Claudia's previous question on the deductibles for the FOCAPE loans, I understand that you start making these provisions in September. But could you give us a sense of the magnitude of these provisions that might be needed? RMB30 1,000,000,000 to RMB40 1,000,000,000, does that sound reasonable or should be more or less? And related to that is there was a change in the treatment of filgotinone guarantees for the capital calculation.
What would be the impact on your Tier one ratio from that? Is it only included in the numbers that is presented? Or would that change impact your 3Q levels? I'll ask my other questions later.
So, in terms of Claudia's question, what we can say is that how this is calculated is basically when the expected loss excluding the full GAAPA guarantee is lower or equal to the deductible, the provision should be determined without the guarantee. And when the expected loss excluding the full CapEx guarantee is greater than the deductible, the provision should be determined based on the aggregate of the deductible and the expected loss using the program guarantees. So what we can say is this this is being calculated and there's something that will be attributed to this beginning in September, but we don't have a number that we can give you at this time. And can you repeat the second question, please?
My second question is on the accounting treatment of the filgotinone guarantees. There was a change in the treatment of these guarantees, which would positively impact capital ratios. So is that change already being accounted for in your numbers for 2Q or would that impact the 3Q number?
Hi, this is Daniel DelArce. Actually, the impact for us is not relevant. Actually, we don't have any impact due to this new treatment for gutter bombs. It's just a change from the risk weighted asset to from capital to risk weighted assets. So it's not a big change.
And for us, it is not further down at all.
Okay. Then the next question is on the trends that we can expect in terms of NPL ratio and cost of risk. I believe you Jide, we don't have a very aggressive charge off policy. So should we expect the NPL ratio once it starts increasing to remain at the relatively high levels for a few quarters and gradual write off? Or will you be more aggressive in writing off loans as you learn about the quality of the portfolio?
And in terms of cost of risk, should we expect bulk of it to be in 2020 or more evenly distributed between 2020 2021? And any particular quarter in which you think the cost of risk should peak? My second question is additional provisions. You showed that you have very high level of additional provisions versus your peers. But you mentioned in the previous calls that you will probably not be using it in the current crisis.
So has that view changed? And do you think that you would probably trigger the use of these provisions if required in the coming quarters? Or would you like to just maintain them at these levels? Thank you so much.
Okay. In terms of of write offs, there's regulations that determine when a loan should be written off, then when there's certain characteristics such as a consumer loan is after 6 months, mortgage loans are a
much longer period of time frame, a few years.
And there's certain conditions that you can write off loans before that. But probably what we should see today is something in the normal write off period. There could be a decision. We can't rule it out that there is an extraordinary write off, but it's not something that we could give guidance at this time. In terms of cost of risk, the cost of risk that we should be seeing is something that in this year, obviously, the peak of the pandemic should be affecting the banking industry.
And for next year, it's difficult to determine a number because it's not clear the economic outlook of the pandemic. We don't know if or when vaccine or medicine will be made in order to combat the pandemic. And I think that's the biggest uncertainty and the reason why we can't give guidance for 2021.
So I guess to add on EMEA, in the case that the economy falls 6% this year, for example, and the economy to grow by 4%, for example, next year, it should be consistent with an unemployment rate in double digit until 2022, for example. So that's why it's very hard to make any comparison with various crises because big time is really, really different. So that's why we don't know the length of this crisis. We don't know what is the actual impact in terms of the output gap, the economic cycle, so that's why we don't have more accurate guidance in terms of cost of risk and that's why as well we can't allow more additional provisions for example because there is a big, big uncertainty in terms of the future evolution of the economy. And we are aware as well that we can compare these crises from any other crisis in the past.
Also, I think it's important to mention that we can't rule out additional constitutional additional provisions or releasing provisions because it's not clear to outlook. So we have to see how this evolves. So it's not clear on how when these provisions can be used.
Our next question comes from Alonso Garica with Credit Suisse. Please go ahead.
Hello, everyone. Thanks for taking my question. My first question is actually just a follow-up as to the requirement for clients to adhere to reprogramming. I didn't get quite right if you asked for documentation for plans demonstrate that they had an impact on their income from the pandemic or if you did not ask for documentation? And my second question is on Basel III implementation.
Recently, Chile, the regulator put forward consultation details for the risk weighted factor for market risk. So I just wanted to hear your thoughts if based on that new information, what's your new expectation for Basel III impact on your capital ratios? Thank you.
So and then I think it's important to give more clear understanding
of the reprogramming of loans.
So basically, in Chile, what happened different from other countries, and there are many different ways how different countries and banks operate in even in terms of most of them, the large banks in Chile. What did they do and what did we do specifically for 2nd shift after the Q is that we offer this reprogramming of loans that I was taking into consideration or requesting that customers send us information regarding if they had a significant impact. There was an opportunity to build stronger relationships with customers. We used our digital initiatives to offer these products quickly online, 100% digitally, they then have to come to the branches. And customers, regardless if they have more income than last year, less income than last year, they're rich, they need this benefit, had an opportunity, and we'll have the same opportunity to receive a reprogram of their loans.
So this is the reason why it's on a very good lead indicator of risk. What is positive is what we're seeing today in terms of the pain and behavior. So the pain and behavior has been very positive in the July figures, which is the bulk of the consumer loan book, which is being repaid, versus beginning the repayments today. So it's customers taking advantages, some need it, some the specific needed.
Okay. And just could you just repeat the fears of payment fears in July? Could you get a sense on how much of your reprogram portfolio is back in time with your payments?
The consumer loan book is the one that has 3 months repayment, which is being paid today. So most of that consumer loans that have been reprogrammed were done in April. So most of that is being repaid today in the month of July. We're in the 2nd month. And the other question was Phase III.
I didn't quite could you repeat the question, please?
Yes. I mean, there was one of the uncertainties regarding Basel III implementation in Chile had to do with the risk bearing factor for market risk. I believe the CMS put a full consultation details on that recently a month or 2 weeks ago. So I wanted to hear your thoughts on what was good presentation. And based on that, what's your expectation for the impact of Basel III implementation on your capital ratios?
I believe last time, you're talking about an impact probably negative figure at this point from implementation of the Transfisto. I don't know if that's still the case or if that's changed.
Hi, this is Daniel Doss again. Regarding battery free, actually, we will see the new methodology on market risk
related assets from the regulator.
We are actually analyzing now this new methodology. And as far as we have estimated, I think that the impact is similar to the rest of the rules. Some there, some worse. But I would say that on average, they are quite aligned with what we expected before. So basically, we believe that we will have an impact in our capital ratios due to Basel III, the transition to Basel II, of course.
But this is not different than we have disclosed in previous calls. So basically the impact I would say will be in the range of 80 to 100 basis points in the capital ratio. And this is including this new methodology for market risk related assets.
This concludes our question and answer session. At this time, I would like to turn the floor back to Banco Chile for any closing remarks.
Okay. Thank you for the comments and for the quarter's comments.
Thank you.