Hello, everyone, and welcome to Banco de Chile's first quarter 2018 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 Aravena, Chief Economist and Senior VP of Institutional Relations, Mr. Pablo Mejia, Head of Investor Relations, Daniel Galarce, Head of Financial Control, and Cecil Diaz, Investor Relations. Before we begin, I would like to remind you that this call is being recorded and that information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements. I will now turn the call over to Mr. Rodrigo Aravena. Please, you may proceed.
Thanks. Good morning, everyone, and thank you for joining us today on our conference call for the first quarter 2018 financial results. It's a pleasure for me to share with you our comments regarding the evolution of the Chilean economy and the banking system during the first quarter. After that, Pablo Mejia, our Head of Investor Relations, will review the financial results of Banco de Chile in that period. Please turn to slide number three. In general, the Chilean economy continues displaying positive signs of recovery. This improvement has mostly been explained by three main factors. First, better perspectives for the global economy, which is critical for a small and open economy like Chile. Second, high copper prices creating positive terms of trade. Third, the improvement in business confidence, which has returned to the optimistic zone for the first time since the beginning of 2014.
Specifically, GDP growth has reached the highest level in more than four years, as seen on the top left chart. After posting a disappointing growth of only 1.5% in 2017, the activity expanded 3.9% and 4% in January and February respectively, with an average of 3.3% in the last six months. The breakdown shows a recovery across different sectors. Mining activity, for instance, grew 16% in the first quarter as a consequence of both a low comparison base due to the strike in the mine at Escondida and better perspectives for this sector. Retail sales were also growing since they expanded 2% in the same quarter, led by the 21% rise in car sales. Manufacturing activity has also grown after falling several years.
It is worth mentioning that on a sequential basis, it is after adjusting by seasonal effects, the GDP has grown at an annualized rate of 3.4% in the last three months, suggesting that the economy is accelerating even in the margin. In other words, the higher growth has not been a consequence of only a weak comparison base. One of the main factors behind the improvement in the Chilean economy has been the rise in business confidence, which has a strong correlation with the GDP growth, as shown in the top right chart. In this context, the pickup in growth does not appear to be surprising. The better sentiment has also been observed in consumers as their confidence measures have also risen to the highest levels in four years.
This improvement has been led by different factors, such as the positive trend in the labor market in terms that recently job creation has been driven by salaried workers instead of self-employment jobs, the low inflation rate, which increased real income, and the actual improvement observed in several economic figures. In summary, it's likely that all components of the GDP, it is consumption, investment, and export, will be stronger this year. On inflation, the CPI remains below the central bank target of 3%. In March, it posted a lower than expected 0.2% monthly change, reducing the annual inflation rate from 2% in February to 1.8% now. The core CPI, which is the measure that excludes food and energy, stood at 1.6%.
The downward trend in Chile's CPI has mostly been explained by the stability in the exchange rate, tradable inflation is only 0.9%, and a negative output gap, which is the difference between GDP and potential GDP. In this context, the central bank has adopted a neutral bias in the monetary policy guidance. Specifically, the board has maintained the interest rate at 2.5% since May of last year. In its last monetary policy report, the board mentioned that the interest rate would remain unchanged until the next year due to the assumption of a gradual convergence of the CPI towards the policy target of 3%. Now, I would like to share with you our baseline scenario for this year. Please move to slide number four. We expect the positive cycle to continue at least until the next year.
Specifically, we forecast an economic growth of 3.7% this year, which is consistent with a lower output gap in the future. Additionally, we think that economic growth would be even better in 2019, indicate that both supportive global conditions and positive expectations in Chile will last for a longer time. We expect an important recovery in gross investment this year. Specifically, as shown on the top right chart, the market expects an increase close to 4% this year after declining for four years in a row. Therefore, investment would be the component of the GDP with the highest increase in its annual growth rate. According to several surveys and estimates, investment growth will be led by different sectors such as energy, infrastructure, and mining, among others. In relation to inflation, we expect it to continue in the lower bound of the central bank range.
It would be the result of two opposite forces. On the positive side, higher pressures from the pickup in growth. On the other hand, the stability in the exchange rate would contribute to maintain credible inflation status. In all, it is reasonable to expect an inflation close to 2.5% this year after posting 2.3% increase in 2017. Given this macro scenario, we do not expect changes in the monetary policy rate, which is at 2.5% now. In the case that the economy continues its positive trends, the central bank would evaluate a normalization in the monetary policy, although only in 2019. Now, I would like to go over recent trends observed in the Chilean banking system. Please turn to slide number six. Once again, the industry was able to achieve solid results, demonstrating the existence of solid fundamentals and strong management capabilities to adapt strategies in different economic cycles.
During the first quarter, the industry recorded a net income of CLP 630 billion, which was 2% higher in comparison to the figure posted one year ago. On the whole, as seen on the chart, this result was largely explained by higher operating income. It expanded by 15.5%, driven by the higher inflation rate, provisions remaining in low levels, and operating expenses rising by 5.3%. As a result, the system posted an average ROAE of 13.6%, similar to the 14% observed the same period of last year. In terms of the portfolio of the industry, we have seen a slight recovery of total loan growth, in line with the higher dynamism of the domestic activity. This trend can be seen on the left chart. Specifically, total loans grew by 3.6% year-over-year in the first quarter, which is higher than the 2.9% observed last quarter.
Once again, mortgage loans led the growth, as they expanded by 10.7%, although at a slower pace when compared with the previous quarter. Consumer loans remained strong. They grew 5.2%, but commercial loans are still subdued since they rose only one% year-over-year. These figures are consistent with the GDP breakdown, where private consumption is supporting the economic activity and private investment remains weak. However, it is worth mentioning that we expect to see higher growth in the coming quarters due to the positive economic scenario, as previously mentioned in this conference call. Now, I will pass the call to Pablo Mejia, Head of Investor Relations, who will discuss Banco de Chile results for the first quarter of 2018. Pablo?
Thanks, Rodrigo. Please flip to slide number eight. Net income for the quarter reached CLP 143 billion, 2% higher than the level recorded in the same quarter last year. The increase in net income was driven by focusing our growth in segments with higher profitability, a moderate increase in volumes, improved spreads, and a proactive management of our UF asset exposure that provided higher revenues from inflation and lower cost of funds in the quarter. These effects were partially offset by higher loan loss provisions due to a low comparison base, higher corporate taxes, and a one-time expense related to the end of a negotiation with one of our trade unions. When adjusted for this one-time expense, net income for the quarter would have reached CLP 147 billion, 5% higher than the same quarter last year, and just over 3% with respect to the fourth quarter of this year.
We are confident that the improved economic scenario and our strong competitive advantages should deliver better dynamism in loan volumes and cross-selling opportunities that should drive customer income growth in the coming quarters. Please turn to Slide nine. Our consistent and very successful track record has been a result of our customer-centric strategy that focuses on delivering sustainable and profitable growth by promoting greater penetration in the retail segment, strengthening customer experience, and improving productivity while taking appropriate levels of risk for the returns that we aspire. In the following slides, I will go over the results we have obtained in each of these strategic pillars, and we will discuss how the improvement in the cyclical conditions of the economy, combined with the competitive advantages, will provide the foundation to regain growth and to continue to record attractive returns for our shareholders. Please turn to Slide ten.
Total loans this quarter grew 1.8% year-on-year, on a sequential basis, we grew 1.7%, which is in line with the improved confidence levels experienced by both companies and individuals. The year-on-year growth figure was driven by the retail segment increasing 6.9% year-on-year, while wholesale loans decreased 5.5% year-on-year. This breakdown is consistent with our focus of growing faster and more profitable segments and with the lag that is common when companies begin to become more positive with the economic environment and the time it takes to reactivate postponed projects. In fact, when compared to the fourth quarter of 2017, our wholesale segment showed an improvement, growing 6.4% on an annualized basis. Within the retail segment, SME commercial loans were the fastest-growing product, increasing 10.9% year-on-year, whereas loans to individuals grew almost 6% year-on-year, thanks to mortgage loan book and the middle and upper income loans.
We expect that SMEs will continue to lead growth in their loan book, especially since this segment in Chile has very low banking penetration. Within personal banking, we expect that the better consumer confidence level and improvement in the quality of jobs should continue to increase the demand for consumer loans. In fact, figures for March 2018 already showed an important increase, where we grew our consumer loan book by 2.2% over the prior month, which is also significantly higher than the level posted in the same month last year. As you can see on the chart on the top right, quarterly consumer loan sales have grown by 26% year-on-year. This clearly is showing how the better economic environment is helping support better balance sheet figures.
As for financing, we continue to lead the industry in cost of funds, thanks to our robust deposit base, in particular, due to our deposit base from our retail customers, as well as low spreads reached when we issue long-term debt. DDAs grew almost 8% year-on-year, as you can see on the chart on the bottom of the slide. This performance also allows us to continue leading the market in terms of DDAs, consequently permits us to deliver a lower cost of funds of only 2.5% in local currency. These excellent results are largely due to our effective business strategies that have permitted us to grow our customer base strongly. Please turn to Slide 11. As you can see, we have continued to expand our retail current account holders at attractive levels of 6.4% year-on-year.
This growth has been possible thanks to effective initiatives that leverage business intelligence to not only grow accounts strongly, to also retain customers better and expand our customer base effectively with clients that use Banco de Chile as their primary account. If we analyze our customers, we have built a bank with the highest net worth of personal banking clients. There are many indicators that show this, one way to look at this is through the metrics on the chart on the right. The average balance per account is significantly larger than any of our competitors, this advantage not only provides us with customers that have a higher profitability potential but also gives us a better funding structure. Additionally, we have the largest number of debtors in Chile, as you can see on the chart on the bottom right, where we clearly stand out from our peers.
This successful strategy of attracting profitable customers and developing a high net worth client base has been the driver of operating revenues as you can see on the next slide number 12. Total operating revenues came in at CLP 445 billion this quarter, up 5.3% year-over-year and 2.4% on a sequential basis. As you can see on the chart, this growth was driven by non-customer income, which grew 15.5% year-over-year as a result of the positive inflation impact on the contribution of our structural UF gap on our balance sheet, together with higher revenues from trading and available-for-sale instruments, primarily explained by favorable shifts in interest rates and inflation in the first quarter of 2018 as compared to the first quarter of 2017. On the other hand, retail customer income expanded at a pace of 3% year-over-year.
This level of growth is explained by a one-time lower commission expense posted in the first quarter of 2017 related to a change implemented in the credit card loyalty program. If we exclude this, customer income would have grown 6.1% year-over-year. The main drivers for this growth were a result of the improvements in credit lending spreads, together with the change in loan mix that is geared more towards profitable segments and an improvement in recurring net fees of 13%, as detailed on the chart to the right of this slide. This increase was chiefly due to higher net revenues from stock brokerage, which almost doubled in traded volume, mutual fund management, insurance brokerage, and transactional products because of greater cross-selling and a growing customer base due to effective commercial strategies that pursue to increase penetration of high income individuals.
In terms of wholesale customers, we posted a slight year-over-year increase of 0.7%, despite the reduction of loan volumes in this cycle. We are confident that the wholesale segment income should begin to show a gradual improvement in the coming quarters as soon as companies begin to increase demand for commercial loans. Undoubtedly, the clear trend shown by retail customer income has been the consequence of a business strategy focused at reinforcing customer experience by providing the best products and services through the channels that clients demand. Please turn to slide number 14. At Banco de Chile, we work vigorously to enhance the products and services that we offer by implementing effective changes in service models in branches, improving customer contact channels, such as the implementation of world-class mobile apps and new online banking platforms for retail and wholesale customers, as well as streamlining processes, among other initiatives.
These changes have resulted in improving our Net Promoter Score, which is a very critical test that measures customer service. Through an independent research company, banking customers are contacted to rank their overall experience with their bank based on a scale of one to seven. We are proud to say that over the last few years, we have improved our ranking significantly, placing us first amongst our peers with a ratio of 73%, as seen on the upper left chart. We also have the strongest brand name measured by different metrics. On the top right chart is the Brand Asset Valuator or BAV for short. This measures the value of a brand based on brand vitality, which refers to the current and future potential a brand holds in it, and brand stature, which refers to the power of the brand.
As you can see, our brand reached the highest percentile in the local industry, clearly marking a difference with our closest competitors. This is the basis of our competitive advantages that allow our powerful brand to attract new customers more easily and in turn, grow their loan book and fee-based services. In terms of digital banking, online monetary transactions are continuing to take a more important role and are growing in double-digit rates. What's even more impressive is the role that mobile banking is taking. Branch monetary transactions are growing only 1% per year, reflecting that clients are beginning to prefer to interact with the bank using remote channels, as you can see in the breakdown on the chart on the right, where mobile transactions are growing 61% year-on-year and internet transactions through the webpage are increasing nearly 17%.
We expect that this trend will continue. For the same reason, we are adjusting the services offered by our branch network in order to capture synergies and to promote and sell more complex products and services, or to provide personalized financial advisory of our account managers to customers that require it. Additionally, we have mentioned in previous conference calls we are developing a new CRM platform which is being made in-house, and the first release is expected to be implemented during the last quarter of this year. This new platform should not only allow us to improve service quality and customer loyalty, also productivity, and in turn, should benefit our efficiency ratio in the future in line with our strategy. Furthermore, we are convinced that we must continue optimizing and streamlining processes in order to improve productivity in both front office and back office activities.
Please turn to slide 16 on operating expenses. Total operating expenses increased 6% year-on-year, which was mainly due to the one-time effect of a payment of CLP 5 billion related to the bonus that is paid to staff when the negotiation with the trade union is completed, and an increase of CLP 5 billion related to other diverse administrative expenses. As a result, our efficiency ratio reached 45.9% this quarter. Excluding this one-time expense, operating expenses only grew 3.5% year-on-year. Our adjusted efficiency ratio reached 44.7% this quarter, 73 basis points lower than last year. We are committed to continue optimizing the operations of the bank by streamlining processes and implementing new technologies to automate labor-intensive tasks. We are also working on improving both the selling process and the distribution network.
Based on a value offering that is increasingly incorporating digital banking, we have restructured our branch network, reduced headcount, and automated certain services and back-office tasks. Nevertheless, we have been implementing these changes gradually in order to ensure that our customer experience remains high. In fact, we have been able to implement these changes while improving our Net Promoter Score. Going forward, we are confident that our focus on cost control and new projects will translate into better productivity, customer experience, as well as higher levels of efficiency. We pride ourselves on having a solid track record of risk management and prudent risk policies. Please turn to slide number 18 to discuss this. This quarter, we posted a loan loss provisions ratio of one, and a cost of risk of CLP 70.9 billion.
The year-on-year increase is mainly due to the normalization of the wholesale segment, a change in loan mix that is geared more towards retail than wholesale loans when compared to the mix one year ago. The charts on the right show this, where the extraordinarily low level of cost of risk in the wholesale portfolio in the first quarter 2017 is due to the provision releases from prepayments of certain loans to customers in the fishing and retail industry, shown as in the chart as during this quarter, completely offsetting the good performance that we have experienced in personal banking loans, as you can see in the chart on the bottom right.
Thanks to the good performance, especially in the retail segment, NPLs show a downward trend over the last quarters and registered the lowest figure in the first quarter of 2018 of 1.17% versus 1.22% a year earlier. It's important to mention that a key part of our risk management strategy is centered on the high involvement of the board of directors and upper management, as well as the important human and financial resources allocated to develop strong credit acceptance, collections, and monitoring practices. During the last quarters, we've been working on updating our admission models in personal banking and fine-tuning our pre-approved risk model. Both of these adjustments, together with higher demand from customers, have contributed to accelerating the consumer loans that we have seen this first quarter.
I have to emphasize that we are committed in growing responsibly and that these changes have been made in line with a proven track record of prudent risk management policies. Please turn to the next slide, number 19. I think it's important to mention today that we are more confident about the economic outlook than in previous quarters. As Rodrigo mentioned, 2018 is looking very positive, this should be reflected in our performance. Some key results for this quarter were our ability to grow net income despite the normalization of loan loss provisions, higher corporate taxes, and the one-time expense related to the negotiation with one of our trade unions, and the one-time lower expense in fees in the first quarter of 2017.
We also continued posting good growth in retail customer income that was offset by the slower growth we experienced in the wholesale segment. This was sustained by impressive growth levels in recurring net fees and consumer loan sales, which expanded 13% and 26% respectively. As for risk, NPLs decreased five percentage points thanks to the good performance of our retail book, and their efficiency ratio adjusted for one-time expenses improved 73 basis points from the same period last year. Finally, our Basel ratio remained above 14%. Before moving on to questions, I want to highlight that I firmly believe that a consistent customer-centric strategy that is focused on providing the best customer experience, leveraging the use of technology to grow, and their superior competitive advantages would permit us to continue delivering solid and reliable results.
This, without a doubt, ought to contribute to preserving our profitability figures and to continue creating value for our shareholders. Thank you, 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 one on your touch tone phone at this or any time. If at any point your question is answered, you may remove yourself from the queue by pressing star two. Questions will be taken in the order they are received. We do ask that when you make your question, that you pick up your handset to provide optimum sound quality. Please hold while we poll for questions. The first question comes from Ernesto Gabilondo with Bank of America Merrill Lynch. Please go ahead.
Hi, good morning, guys. Thanks for taking questions. I have three from my side. The first one is in terms of loan growth. The economy is recovering. We continue to see modest year-over-year growth in the loan portfolio. This is mainly due to the wholesale segment. As you have mentioned, this segment had a sequential improvement during the quarter. We continue to see inactivity of investment projects. We see that the bank strategy has been in not engaging in low-margin deals. This has resulted in the loss of some market share. How do you perceive competition? When should we expect loan growth to reflect double-digit growth? Secondly, on the effective tax rate, I think it was close to 17% in the quarter, lower than what we saw in 2017. How should we think about effective tax rate in the next quarters?
Finally, when do you expect that we can start to see net earnings delivering double-digit growth in the next quarters? Thank you.
Hi, Ernesto. In terms of your first question, what we're expecting in terms of loan growth for the system and the expectations of the commercial loan portfolio, what we're seeing today is total loan growth growing around 9%, which is in line with the improvements in the expectations of the economy, the higher GDP figures, the better consumer and business confidence. We expect in the coming quarters, there's generally a lag between the business confidence and improvements in GDP for corporates. We expect in the coming quarters to be more higher demand in that segment. What we're expecting is something around commercial loans to grow around 8%, nominal consumer around 9%, mortgage loans around 7% for the system. For us, we're expecting to grow above that with the focus in middle and upper-income consumer loans, SME loans.
We're expecting that once the pickup from corporates occurs, that we should also continue to grow above the industry in corporates, and we should see better loan growth figures. If you look on a sequential basis, you mentioned it briefly, we grew very strong. We grew 1.7% on a sequential basis, and if you look at where that most of that loan growth was, it was from commercial loans and consumer loans. Consumer loans grew 1.7%, annualized it's about 7%. We should continue seeing improvements there, probably with the better economy, better employment figures, et cetera. If we break down commercial loans, SMEs grew 3.4% on a sequential basis, and the wholesale segment grew 1.6%. In terms of annualized basis, SMEs grew well over 10%, 13.6%, and wholesale 6.4%.
Obviously, what we're expecting, like I mentioned, is a pickup in demand should occur in the coming quarters as postponed projects are initiated by companies, and they demand more for loans. In terms of the effective tax rate for 2018, what we're expecting is a level around 20%. As you know, the effective tax rate is related to, in part, has an effect of inflation. The tax authorities use inflation accounting to calculate taxable income. Depending on what happens with inflation from one quarter to the next, it can adjust that figure. If we look at the levels for 2018, we're expecting inflation around the 2.5% and maybe a little bit higher. Around that level, we should expect an effective tax rate of 20%.
In terms of net earnings, what I can say is what you should expect for the long term for Banco de Chile is ROEs that should run around 19%, some years between 18% and others 20%, depending on what happens with inflation in the economic cycle. Obviously, in more positive economic cycles, we should have better results.
Thank you, Pablo. Just a follow-up in terms of the loan growth. You're saying that the higher GDP, better employment, and better business confidence should help the corporate lending in the next quarters. What about competition? Any concerns about it? As you mentioned, you are not engaging in low-margin deals, so just want to know your perception on this.
In terms of competition, well, obviously competition in Chile is very strong. Historically, Chile has been a market with a lot of competition. There are 20 banks in Chile. If you look at the commercial portfolio, we compete with 20 banks, so it's a segment that's very competitive. Obviously, if you look at the last couple of years, commercial loans in real terms haven't grown, and that's been affecting. Companies are very price sensitive. We're expecting that in the next quarters, there should be more demand for loans, and that should increase loan growth for the industry, and that should be something that should be reflected in our results.
Perfect. Thank you.
This is Daniel Galarce. Just want to add something regarding the effective tax rate. As Pablo said, the effective tax rate is impacted by inflation, but also by the tax benefit we receive from the payment of the subordinated debt. As you know, probably we will finish, or we will totally pay this subordinated debt over the next year, but actually, the tax benefit will expire by the mid of 2018. Accordingly, the effective tax rate during the first quarter, that was approximately 17%, probably you will have something similar during the second quarter. Over the rest of the year, probably the effective tax rate over the third and the fourth quarter will be something more similar to 23%. In average, you will have an effective tax rate for the full year of approximately 20%. Okay? This will be.
Perfect. Understood
for 2019, probably you will have something more similar to 23% or 24%, which is the corporate tax rate less the effect of inflation.
Perfect. Thank you very much.
The next question comes from Thiago Batista with Itaú BBA. Please go ahead.
Hi guys. Good morning, and thanks for the opportunity. I have two questions. The first one regarding the number of new clients. In the press release, you have mentioned that the number of new clients or new bank account increased by 26,000 clients this quarter. Can you comment what has caused this big increase in the number of clients? This was the improvement in the Chilean economy or the bank made a change in the strategy to explain this huge increase in the clients? The second question about the strategy on the bank's branch. One of your main competitors is doing a kind of different strategy in the branch network. They're putting the cafes, the coffee inside of the branch. What are you thinking in your branch network? Are you planning to do something similar? What you can expect to see in your branch network in the future?
Hi, Thiago. In terms of the new clients, if you look at the level of growth that we showed also on the slide, in one of the first slides of the presentation, you can see their customer base is around 837,000 customers. That's personal banking and SME banking, where there's 732,000 customers in personal banking, 105,000 customers in SME banking, and that we normally have been growing, if you look at the last few quarters or years, around the 6% level. The 26,000 customers growth is gross. What does that mean? It means all the accounts that we open, it doesn't take into consideration accounts that are closed either by us or by a customer. We have very good attrition rates, which are 7%. Basically half of that figure is us closing the accounts and the other half is customers leaving Banco de Chile.
What have we done to continue growing at those levels? One of the things, this kind of ties into your second question, is that we've been very active in using business intelligence in order to grow. This is our main focus, where we think that how customers want to interact with the bank and do transactions with the bank is more geared towards digital banking through these more alternate new channels rather than going to the branches. Like we showed in the presentation, branch transactions have been growing at a very low rate, while mobile and online have been growing much faster, and that's where we put our emphasis. We've implemented a new webpage for companies, for individuals. There's world-class apps. We're implementing a new CRM system which will be better than our world-class CRM system.
In terms of sales, late 2016, we implemented a new system. Basically, we analyzed a huge pool of potential customers and pre-approved those customers as products and services, put this in the cloud and made this information available for our account managers, which provided them access to customers, which were customers that we wanted in the bank, which was a method of selling to customers which were much more effective and would actually use our products and services in a more likely manner. We also implemented a personalized pricing model, which this personalized pricing model provides better or more accurate interest rates for customers based on their actual risk. In general, what we've been doing is we've been focusing a lot in the digital transformation of the bank to offer new channels in the correct life cycle of the customer through the channels that the customers want.
We've been using business intelligence to understand these customers better. That's how we've been focusing our growth. That's the way that at least Banco de Chile sees how we should continue growing in the future, by implementing new digital transformation to channels. Then changing a little bit the service model within the branches by implementing more automated services at the branches so that we can reinforce selling the main business of the bank at the branch.
Hi, Thiago. This is Rodrigo Aravena. I would like to add some ideas regarding some structural aspects of the Chilean banking industry that support our idea of further growth in the future. First of all, it's important to mention that the labor market in Chile is changing. You can see, for example, that the participation rate, especially from the women side, is increasing faster. Additionally, recent figures from the labor market are showing a strengthening in the quality of jobs, specifically in the last month, for example, the wage employment grew faster than self-employment. Therefore there are more rooms for higher income supporting higher levels of debt and number of clients. Additionally, it's important to mention here that the total debt ratios in Chile, in comparison with other OECD countries, are still low, which is especially relevant for SME companies, for households as well.
In other words, we have several reasons from the macro side, from a structural aspect of the Chilean economy that support the idea of further growth in the future in terms of number of clients, customers, debt source, the total debt ratios, et cetera.
Okay, perfect.
Thank you.
The next question comes from Yuri Fernandes with J.P. Morgan. Please go ahead.
Thank you, gentlemen. I had a question on expenses about the collective bargaining bonus. You paid those CLP 5 billion this quarter. Do you expect additional payments in the future? Not sure if we should expect additional events here. I'm asking this because when you look to 2014, from, I guess, more unions, you paid CLP 45 billion. Also on expenses, I remember in the previous call you mentioned that expense should grow more close to inflation, likely below 3%. Even adjusting by this, we still see expenses growing is likely above 3%, 3.6% to be more precise. How do you see expenses behaving, and in particular, administrative expenses that I think are the one pushing the increase on expenses? After this, I make my second question. Thank you.
One second, please.
In terms of expenses that we're seeing today, a large part of that was due to the negotiation with the trade unions. If we exclude that, the growth that we saw was about 3.6%, 3.5% year-over-year. We should expect, for the full year, levels that are similar to an inflation on a recurring basis. What we've been doing is implementing new technologies. Obviously, that should make the bank much more productive and efficient, and that should allow us to continue maintaining a more efficient cost base of the bank. I mentioned a lot of the projects in the prior question. All these projects are in somewhat a more front office commercially. These projects also provide the bank with a much more productive and much more efficient way on how to sell different products and services.
This should continue allowing us to streamline the processes at the bank.
Can you repeat it for the 2nd bonus?
Sorry. Collective bargaining. Yeah. The bank reached an agreement with one union. There are still remaining other negotiations with other unions, but it's impossible to anticipate an amount. What we can say is that the remaining negotiation, the headcount represents nearly 48% of the total headcount of the bank. It's impossible to anticipate a specific amount in terms of the impact of cost. Just to have a reference, in 2014, there was a one-timer impact on cost that was CLP 45 billion. Again, it is only a reference. It's not possible to anticipate a specific amount coming from the future negotiation with the trade unions.
Okay, no. Super clear. Thank you. Regarding the banking law in Chile, do you have any updates there?
Unfortunately, there is not further news. The government said that it will be a priority, it will be very important, but we don't have further details in terms of the timeline for the Congress. We are aware that it is very important for the market because there are some important details to define, for example, the changes in the weighted assets, the further definition for a systemically relevant bank, et cetera. Unfortunately, we don't have more news on that law.
Okay. Thank you.
Thank you.
The next question comes from Alonso García with Credit Suisse. Please go ahead.
Thank you, and good morning. My first question is regarding the provisions. I know it might be still early because this is still a project, and it's something preliminary, but do you have an initial estimate on the potential impact to your cost of risk from the change in provisions that the SBIF is planning on commercial loans that are analyzed on a group basis? That would be my first question. My second question is just if you could provide some update on your strategy that you announced or that you communicated in the last conference call to accelerate growth in the consumer finance segment. Thank you.
In terms of the new provisioning model that was mentioned by the superintendency, it's a model that still hasn't been implemented. We're still waiting on more information from the government, from the regulator. What I can say is that we're one of the banks with the highest coverage ratios. We have very prudent risk policies, and in the past, we've been able to implement these new changes in the model without difficulties. In terms of the update on our strategy, what we mentioned in the last conference call is that we're a universal bank, that we're a bank that historically has attended all segments of the population, and that we haven't exited any segment. We offer products and services from consumer finance to the middle and upper-income individuals, SMEs to the largest corporations.
How we're planning to continue banking all the entire retail segment of individuals, personal banking, is by what I mentioned earlier, implementing new technologies, new channels and sales services, and updating our branch service models. We haven't left any segment, but we plan to continue growing these segments using these digital channels and an improved service channel at the branch. We don't expect large changes in the size of our lower income or consumer finance division, which has been relatively flat over the last few years because of all the changes that you well know that occurred a few years ago. Obviously, with an improving economy, with the better employment figures and better business confidence, we should see improvements in that segment of the banking industry.
Perfect. Thanks, Pablo.
If you have a question, please press star then one. The next question comes from Neha Agarwala with HSBC. Please go ahead.
Hi. Thank you for taking my question. My first question is on your digital banking initiative, the extended reach of the digital banking. Which sectors or segments do you believe are more receptive to growth through online and webpage means? Do you have a rough percentage of how much of the loans approved in any particular segment is done through the online platform? My second question is to get more clarity on the effective tax rate. If I understand correctly, the benefit of the subordinated debt extinguishes by mid next year. This year, you still have about five percentage points benefit throughout the year from the subordinated debt. My last question would be on the dividends. Do you expect to change your dividend payout rate next year once the debt is paid off? Thank you so much.
Hi, Neha. In terms of the digital platforms, in which segments they will be used the most, I think today it's most likely that the segments that use the digital platforms the most is the middle upper income segment and also expanding to the lower income segment. As you know, in our portfolio, the lower income segment only represents 3% of total loans. The other 60%, or just under 60%, is represented by SMEs and middle and upper-income individuals. For SMEs, obviously, there's a lot of things that customers still have to go into the branches to do, and the driver or the area that will be most used in terms of the online digital banking and taking on loans online is the middle upper income segment, where on average, about 30% of consumer loans are sold online in that segment. For SMEs, it's difficult.
For larger companies, obviously, it's more related to their account managers. In terms of the sub-debt, the benefit of the tax benefit for this year is about 3% because what's owed today, what our shareholder owes today, and as a tax benefit for us, it's about 90-
It's approximately half that we normally pay every year. We charge to our earnings. Basically, we will have this year half of the benefit that we normally have every year. In terms of the effective tax rate, as Pablo says, we will have approximately three percentage points, something like that.
Okay. The benefit this year is only 3%? It's not five percentage points.
No.
No.
Only 3%.
Exactly.
That's why it's 20% effective tax rate.
Okay, that's clear.
In terms of the dividend policy, there's no news today in terms of changes to the dividend policy. It's something that is promoted at the board of directors and approved by the shareholders. We can't rule out any changes. Today, we have a much more sustainable dividend policy than we've had in the past, and after the subordinated debt, we'll capitalize a little bit more. We have much more capital than we've had in the past. Cecilia mentioned that we still have all the information of the new General Banking Act, which we need to find out in order to give a more accurate outlook on how that will fall.
Your operating, the Core Tier 1 level at which you would like to operate, your comfortable level would be?
Can you repeat the question, please?
At what Core Tier 1 level would you like to operate in the new year?
At what Tier 1 level?
Yeah.
Right now, we have a Tier 1 level of 11%, and we're comfortable with that Tier 1 ratio today. We need to see what happens with Basel III implementation in Chile and how that will affect these ratios in the future.
Okay. Right. Thank you so much.
Thanks.
This concludes the question and answer session. At this time, I'd like to turn the floor back to Banco de Chile for any closing remarks.
Thank you for listening to our conference call, and we look forward to speaking again in the next quarter.
Thanks.
Thank you. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.