Hello, everyone, and welcome to Banco DO 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 Arevena, 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 Arevena.
Please, you may proceed.
Thanks. Good morning, everyone, and thank you for joining us today on our conference call for the Q1 'fifteen 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 Q1. After that, Pablo Mexia, our Head of Investor Relations, will review the financial results of Banco De Chile in that period. Please turn to slide number 3.
In general, the Chilean economy continues displaying positive signs of recovery. This improvement has mostly been explained by 3 main factors. 1st, better perspectives for the global economy, which is critical for a small and open economy like Chile. 2nd, high copper prices creating positive terms of trade. And third, the improvement in business confidence, which has returned to the optimistic phone for the first time since the beginning of 2014.
Specifically, the GDP growth has reached the highest level in more than 4 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 February respectively with an average of 3.3% in the last 6 months. The breakdown shows a recovery across different sectors. Mining activity, for instance, grew 16% in the Q1 as a consequence of both a low comparison base due to the strike in the mines of Colombia and their perspective for these sectors. 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 effect, the GBP has grown at an annualized rate of 3.4% in the last 3 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 GD 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 constant measures have also risen to highest levels in 4 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 with 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, investments and exports 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 PBI, which is the measure that excludes food and energy, stood at 1.6%. The downward trend in Chile's CVI has mostly been explained by the stability in the exchange rate, tradable inflation is solely 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 our global 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 4. 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 ARPU gap in the future. Additionally, we think that economic growth would be even better in 2019 indicate that both supporting 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 4 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 in 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 will be the result of 2 opposite forces.
On the positive side, higher pressures from the pickup in growth. On the other hand, the stability in the churn rate would contribute to maintain tradable 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 we see at 2.5% now. In the case that the economy continues its positive trends, the Central Bank will 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 6. Once again, the industry was able to achieve solid results demonstrating the existence of solid fundamentals and a strong management capability to adapt strategies in different economic cycles. During the Q1, the industry recorded a net income of ARS 630,000,000,000, which was 2% higher in comparison to the fee posted 1 year ago. On the whole, as seen on the chart, this result was largely explained by higher operating income, if 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 15.6%, 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% during the year in the Q1, 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 subject since they rose only 1% year on year. These figures are consistent with the GDP breakdown where private consumption is supporting the economic activity and private investment remain 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 Paolo Mejia, Head of Investor Relations, who will discuss Banco Bictea results for the Q1 of 2018.
Paolo?
Thanks, Rodrigo. Please press the slide number 8. Net income for the quarter reached MXN 143 1,000,000,000, 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 U. S.
Asset exposure that provided higher revenues from inflation and lower cost funds in the quarter. These effects were partially offset by higher loan loss provisions due to a low comparison base, higher corporate taxes and the onetime expense related to the end of a negotiation with 1 of our trade unions. When adjusted for this onetime expense, net income for the quarter would have reached MXN 147 1,000,000,000, 5% higher than the same quarter last year and just over 3% with respect to the Q4 of this year. We are confident that the improved economic scenario and their 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 9.
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 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 restate growth and to continue to record attractive returns for our shareholders. Please turn to Slide 10. Total loans, this quarter grew 1.8% year on year and 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, whilst 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 Q4 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 levels 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 is 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 and in particular, due to our deposit base from our retail customers as well as low spreads reached when we issued long term debt. DDAs grew almost 8% year on year, as you can see on the chart on the bottom of this slide.
This performance also allows us to continue leading the market in terms of DDAs and 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, but 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, but 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, and 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 MXN 445 1,000,000,000 this quarter, up 5.3% year on 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 on year as a result of the positive inflation impact on the contribution of our structural U. S. GAAP 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 Q1 of 2018 as compared to the Q1 of 2017. On the other hand, retail customer income expanded at a pace of 3% year on year.
This level of growth is explained by onetime lower commission expense posted in the Q1 of 2017 related to a change implemented in our credit card loyalty program. If we exclude this, customer income would have grown 6.1% year on 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 then improvement in recurring net fees of 13% as detailed on the chart to the right of the slide. This increase was chiefly due to higher net revenues from stock brokerage, which almost doubled in traded volumes, mutual fund management, insurance brokerage and transactional products because of greater cross selling and a growing customer base due to effective commercial strategies that pursued the increased penetration of high income individuals. In terms of wholesale customers, we posted a slight year on year increase of 0.7% despite the reduction of loan volumes in this segment.
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 14. At Banco Beach 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 1 to 7. We are proud to say that over the last few years, we have improved our ranking significantly, placing us 1st 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 BOB 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 marked a difference with our closest competitors. This is the basis of our competitive advantages that allow our powerful brands 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 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 web page are increasing nearly 17%.
We expect that this trend will continue and 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're 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, but 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 onetime effect of a payment of MXN 5,000,000,000 related to the bonus that is paid to staff when the negotiation with a trade union is completed and an increase of MXN 5 MXN5 1,000,000,000 related to other diverse administrative expenses. As a result, our efficiency ratio reached 45.9% this quarter. Excluding this onetime expense, operating expenses only grew 3.5% year on year and their adjusted efficiency ratio reached 44.7% this quarter, 73 basis points lower than last year. We are committed to continue optimizing 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 18 to discuss this. This quarter, we posted a loan loss provisions ratio of MXN 70,900,000,000. The year on year increase is mainly due to the normalization of the wholesale segment and the change in loan mix that is geared more towards retail wholesale loans when compared to the mix 1 year ago. The charts on the right show this, where the extraordinarily low level of cost of risk in the wholesale portfolio in the Q1 2017 is due to the provision releases from prepayments of certain loans to customers in the fishing and retail industry, shown now in the chart is the duration 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 showed a downward trend over the last quarters and registered the lowest figure in the Q1 of 2018 of 1.17 percent versus 1.22 percent 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 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 Q1. Nevertheless, I have to emphasize that we are committed and growing responsibly and that these changes have been made in line with the 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 and this quarter should be reflected and 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 1 of our trade unions and the one time lower expense in fees in the Q1 of 2017. We also continued posting good growth in retail customer income that was offset by the slower growth experienced in the wholesale segment. This was sustained by impressive growth levels in recurring net fees and consumer loan sales, which expanded 13% 26%, respectively. As for risk, NPLs decreased 5 percentage points, thanks to the good performance of our retail book.
And their efficiency ratio adjusted for onetime expenses improved 73 basis points from the same period last year. Finally, our Basal ratio remained above 14%. Before moving on to questions, I want to highlight that we firmly believe that our consistent customer centric strategy that is focused on providing the best customer experience, leveraging the use of technology to grow and to prepare 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. The first question comes from Ernesto Gabilondo with Bank of America Merrill Lynch. Please go ahead.
Hi, good morning guys and thanks for taking questions. I have 3 from my side. The first one is in terms of loan growth. The economy is recovering, but we continue to see modest year over year growth in the loan portfolio, and this is mainly due to the wholesale segment. As you have mentioned, this segment had a sequential improvement during the quarter, but we continue to see inactivity of investment projects and we see that the bank strategy has been in not engaging in low margin deals.
And this has resulted in the loss of some market share. So how do you perceive competition? And when should we expect loan growth to reflect double digit growth? Secondly, on your effective tax rate, I think it was close to 17% in the quarter, lower than what we saw in 2017. So how should we think about effective tax rate in the next quarters?
And finally, when you expect that we can start to see net earnings delivering double digit growth in the next quarters? Thank you.
And that's Tom. 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. And we expect in the coming quarters, there's generally a lag between the business confidence and improvement in GDP for corporates. So 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.
And for us, we're expecting to grow above that with a focus in middle and upper income consumer loans, SME loans and we're expecting that once the pickup from corporates is occurs, that we should also continue to grow above the industry in corporates and we should see better loan growth figures. If you look at the 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 effective loan growth was, it was from commercial loans and consumer loans. Consumer loans grew 1 point 7%, annualized, it's about 7%.
We should continue to see an improvement there, probably with the better economy, better employment figures, etcetera. And if we break down commercial loans, SMEs grew 3.4% on a sequential basis and wholesale segment grew 1.6%. In terms of annualized basis, SMEs grew well over 10%, 13.6% percent 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 the level around 20%.
And 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. So depending on what happens with inflation from 1 quarter to the next, it can adjust that figure. But if we look at the levels for 2018, we're expecting inflation around the 2.5 percent and maybe a little bit higher, around that level, we should expect an effective tax rate of 20%. And in terms of net earnings, what I can say is what you should expect for the long term for Banco Beach Chile is ROEs that should run around 19%, some years between 2018 and others 20% depending on what happens with inflation in the economic cycle.
Obviously, with more positive economic cycles, we should have better results.
Thank you, Pablo. Just a follow-up in terms of the loan growth. So you're saying that the higher GDP, better employment and better business confidence should help the corporate lending in the next quarters. But what about competition? Any concerns about it?
As you mentioned, you are not engaging in low margin deals. So you 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's 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, when if you look at the last couple of years, commercial loans in real terms haven't grown, and that's been affecting. So 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.
Just want to add something regarding the effective tax rate. As Paolo said, the effective tax rate is impacted by inflation but also by the tax benefit we received 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 Q1 that was approximately 17%. Probably you will have something similar during the Q2, but
over the rest
of the year, probably the effective tax rate over the 3rd and the 4th quarter will be something more similar to 23%. So in average, you will have an effective tax rate for the full year of approximately 20%, okay? And this will be 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 Itau 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 Michelin economy or the bank made any change in the strategy to explain this huge increase in the clients? And second question about the branch, the strategy on the bank's branch. 1 of your main competitors is doing a kind of different strategy in the branch network. So they put the cost 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 bridge network in the future?
Thiago, well, 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 800 and 837,000 customers where that's personal banking 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. And the 26,000 customers' growth is gross. So what does that mean? It means all the accounts that we opened, and it doesn't take into consideration accounts that are closed either by us or by a customer. We have very low attrition very good attrition rates, which are 7%.
So basically half of that figure is us closing the accounts and the other half is customers leaving Pancho de Chile. So what have we done to continue growing at those levels? Well, one of the things and 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. And 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've put our emphasis.
So we've implemented a new web page 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, we earlier or late 2016, we implemented a new system. Basically, we analyzed a huge pool of potential customers and preapproved those customers' products and services and 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 were much more which was a method of selling to customers that 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 the for customers based on their actual risk. So in general, what we've been doing is we've been focusing a lot in the digital transformation of the bank, 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, and that's how we've been focusing our growth. And that's the way that as we sponsor the Chile sees how we should continue growing in the future by implementing new digital, digital transformation to channels and 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 Arena. 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's 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. And therefore, there are more room for higher income supporting higher levels of debt and number of clients. And 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 SMEs companies, for households as well. In other words, we have several reasons from the macro side, from structural aspects of the Chilean economy that support the idea of further growth in the future in terms of number of times customers that are towards the total debt ratios, etcetera.
The next question comes from Yuri Fernandes with JPMorgan. Please go ahead.
Thank you, gentlemen. I had a question on expenses about the collective bargaining bonus. You paid those ARS 5,000,000,000 this quarter. Do you expect additional payments in the future? I'm asking this because when you look to 2014 from, I guess, more unions, you paid ARS 45,000,000,000.
So I'm not sure if we should expect additional events here. And also on expenses, I remember in the previous call you mentioned like that expense should grow more close to inflation, likely below 3%. But even adjusted by this, we do see like expenses growing slightly above 3%, 3.6% to be more precise. So how do you see expenses behaving? And in particular, administrative expenses that I think are the one pushing the increase on expenses?
And after this, I'll 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 3.5% year on year, and we should expect for in the coming for the full year levels that are similar to inflation on a recurring basis. What we've been doing is implementing new technologies. Obviously, that should reduce make the bank much more productive and efficient, and that should allow us to continue maintaining more efficient cost base of the bank. I mentioned a lot of the projects in the prior question.
All these projects are somewhat a more front office commercial base, but these projects also provide the banks with a much more productive and much more efficient way on how to sell different products and services, and this should continue allowing us to streamline the processes of effect.
The bank reached an agreement with 1,000,000,000, but there are still remaining other in relation with other units, but it's impossible to anticipate an amount. What we can say is that the remaining negotiation represents the headcount represents nearly 48% of the total headcount of the bank, But 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 onetimer impact on cost that was BRL 45,000,000,000. But 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. And regarding the banking law in Chile, do you have any updates there?
Unfortunately, there is not for the news, but 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 rate with AFFA, the aspart of the definition for a systemic relevant bank, etcetera. But unfortunately, we don't have more news on that law.
Okay. Thank you. Thank you.
The next question comes from Alonso Garcia 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 estimate, 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. And 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 provision the new provisioning model that was mentioned by the superintendency, it's a model that still hasn't been implemented. There's still we're still waiting on more information from the government, from the super 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 haven't had we've been able to implement these new changes in the models 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. So 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 as a branch. We don't expect slight 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.
But obviously, with an improving economy with a better employment figures and better business confidence, we should see improvements in that segment of the banking industry. Perfect. Thanks
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, the extended reach of the digital banking, which sectors or segments do you believe are more receptive to growth through online and web page means? And do you have a rough percentage of how much of the loans approved in any particular segment is done through the online platform? And 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.
So this year, you still have about 5 percentage points benefit throughout the year from the subordinated debt. And my last question would be on the dividends. Do you expect to change your dividend your expected dividend payout rate next year once the debt is paid off? Thank you so much.
Hi, Neha. In terms of the digital platforms and 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. But as you know, in our portfolio, the lower income segment only represents 3% of total loans. The rest of the other 60% is or just under 60% is represented by SMEs and middle and upper income individuals. But 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, whereas on average, about 30% of consumer loans are sold online in that segment. For SMEs, it's difficult. And 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 shareholders owes today and it's a tax benefit for us, it's about 90. Percent.
It's approximately half that we normally pay every year with charge to our earnings. So basically, we will have this year half of the benefit that we normally have every year. So in terms of the effective tax rate, as Pablo says, we will have approximately 3 percentage points, something like that.
Okay. So the benefit this year is only 3%, it's not 5% this month?
No, no, no. Only 3%. Exactly. That's why it's 20% effective tax rate.
Okay. That's correct.
And then in terms of the dividend policy, there's no news today in terms of changes to the dividend policy. It's something that it's promoted at the Board of Directors and approved by the shareholders. But we can't roll 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.
And also, we have much more capital than we've had in the past. Nevertheless, Victoria mentioned that we still have all the information of the new general banking law, which we need to find out in order to give a more accurate outlook on how that will fall.
And your operating the core Tier one level at which you would like to operate, your comfortable level would be?
Can you repeat the question, please?
At what sort of Tier 1 level would you like to operate?
At what Tier 1 level?
Yes.
Right now, we have a Tier 1 level of 11%, and we're comfortable with that Tier 1 ratio today. So we need to see what happens with Basel III implementation in Chile and how that will affect these ratios in the future.
Okay. Very clear. Thank you so
much. 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.
Thank you. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.