Executives: Rodrigo Aravena - Chief Economist and SVP, Institutional Relations Pablo Mejia - Head, IR Cecil Diaz - IR, Officer Daniel Galarce - Head, Financial

Control
Analysts: Carlos Macedo - Goldman Sachs Alonso Garcia - Credit Suisse Sebastián Gallego - CrediCorp

Capital
Operator: Good afternoon, everyone. And welcome to Banco De Chile’s Third Quarter 2017 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; Mr. Cecil Diaz, Investor Relations Officer; and Daniel Galarce, Head of Financial Control. Before we begin, I would like to remind you that this call is being recorded and that information discussed today may include forward-looking statements regarding the company’s financial and operating performance. All projections are subject to risks and uncertainties and actual results may differ materially. Please refer to the detailed note in the company’s press release regarding forward-looking statements.

I will now turn the call over to Mr. Rodrigo Aravena. Please go ahead.

Rodrigo Aravena: Good afternoon, everyone, and thanks for joining us today on our conference call for the third quarter ‘17 result. It’s a pleasure for me to share with you our comments regarding the Chilean economy and the results of the banking industry during the quarter.

Finally, Pablo Mejia, our Head of Investor Relations, will review our third quarter financial results. Please turn to slide number 3. In general, there are several signs of recovery in the Chilean economy, suggesting that GDP growth will likely increase significantly in 2018 after having full year with average rate of only 1.5%. Improvement in the Chilean activity can be seen in the chart on the top-left section. The monthly GDP, Imacec in Spanish, grew by 2.4% year-on-year in August, which is higher than the 0.5% of service in the first half of this year.

This recovery has been a consequence of the higher dynamism in the mining sector, which posted a strong 9.2% annual growth in August. It is worth mentioning that the economy is also improving on a sequential basis, seems the Imacec grows 7.3% in the quarter ending in August, with an impressive price of 50% in the mining activity. In addition to these good numbers, several leading indicators are anticipating as far as the recovery. For example, the breakdown of trade balance, as seen on the top-right chart, have shown an upward trend in both exports and imports with durable against capital input growing at a double-digit rate. Following this idea, several surveys are suggesting an improvement in local sentiment as you can see in this chart on the bottom-left section, specifically.

The consumer confidence posted its best level since the beginning of 2016, returning to the optimistic sound. Business confidence also hit its highest level in more than two years, in line with a very positive year for the Chilean stock markets. In spite of this, we think the most relevant adjustment during the last month has been the chart reduction in the annual inflation rate, which decreased to only 1.5% in September. Consequently, the rate inflation has remained below the target of the Central Bank since October of last year. This solution can be seen on the bottom-right chart.

This trend is in part explained by the stronger Chilean peso, reflected in a tradeable inflation of 0% year-on-year, but also due to the low trend growth that our economy has experienced during the last quarters, reflected in a lower nontradable CPI. On monetary policy, the interest rate has been reduced by 100 basis points this year to 2.5%. Despite the Central Bank baseline scenario does not consider any change in the reference rate until the next year, it acknowledges the existence of a downward risk in the short-term CPI. Therefore, a new negative surprise inflation could lead to an additional cut in order to keep inflation affectations anchored to the Central Bank target figure. Now I would like to share with you our baseline scenario for the next year.

Please turn to Slide number four. The positive trend in most leading indicators, the rise in cover prices, and improvements in the global growth are consistent with a higher GDP growth rate. Specifically, the stake, it’s improved from 1.5% this year to nearly 3% in 2018. Our scenario also considers a slight decrease in unemployment rates as seen on the second chart. On prices, we expect a gradual convergence of the CPI to the Central Bank target by the end of 2019.

Specifically, the indexation of non-tradable goods with assumption of a stable exchange rate towards the next year and this low narrowing of the output gap as the main reasons behind our estimate of doing 3% for the next year. Finally, we think the Central Bank maintains the rate in the expand scenario level of 2.5% until the second half of 2018, unless the rate lower than expected inflation comes true. Please turn to Slide number six. Briefly, I would like to mention the last trends in the Chilean banking industry. As of September, total loans grew 4.9% year-on-year, a figure that is well below consensus for this year in our estimates but were closer to 7%.

This weak dynamism is consistent with low GDP figures seen during this year, poor business confidence and with the result from the bank rate survey conducted by the Chilean Central Bank for the third quarter of 2017, which indicates that the conditions of supply remains restrictive for both the retail and food sales segments. However, the most important highlight of the survey was that no financial institution observe weaker demand from individuals, which was the gauge in the prior 2 quarters. And some even found that demand was improving. In terms of risk. Nonperforming loans for the system remains relatively stable at 1.96% as of September when compared to a year ago of 1.9%.

We expect this level of NPLs to continue for the rest of the year with a positive slight improvement in 2018 when the economy is expected to recover. In terms of net income. During the third quarter, the banking industry reported a 3.9% decrease when compared to the same period last year. This was mainly due to a rise in other rates expenses that grew 0.1% year-on-year and to higher corporate taxes, which were partially offset mainly by higher other operating income and net fees. It’s important to highlight that were stated based on the recent minus 0.2% inflation figure posted in September, that the full quarter will look similar to this quarter in terms of net income because of the low inflation expectations.

It is also important to note that the variation of the U.S. has a lag of about 1 month to the CPI rate. This means that the low inflation figures of September will affect fourth quarter operating income. Moving on the last chart on this slide, return on our equity for the system as of September reached 16.1%, reflecting a [indiscernible] banking industry despite the weak economy and lower inflation. Now, I will pass the call to Pablo Mejia, Head of Investor Relations, who will discuss Banco De Chile results for the third quarter of 2017.

Pablo Mejia: Thank you, Rodrigo, and please turn to Slide number 8. Net income for the quarter reached CLP 134 billion, currently 5% less than the same quarter last year, and 6.2% lower than the second quarter of this year. The main driver for those figures were surprisingly low inflation rate that we experienced this quarter as measured by the U.S. of minus 0.03%, and the higher corporate taxes. Despite this negative effect in inflation on our results, our 9 months 2017 net income is 1.3% higher than the 2016 figure.

And on a pretax basis, it increased 4 -- by 4%. This shows that we are able to face the scenario by continuing to grow recurring income from our target segment, a greater contribution of our subsidiary and keeping cost of risk and expenses at low levels. We are confident that regardless of this quarter’s lower net profit level, we are on track to post full year figures in line with last year, and we expect that 2018 will be slightly better, especially when accompanied by an improved economic scenario, higher loan growth and normalized inflation, as mentioned earlier by our Chief Economist, Rodrigo. Please turn to Slide number 9. As we have mentioned in the past, the key to our successful track record is the results of our customer-centric strategy that focuses on delivering sustainable and profitable growth.

In the next few slides, we will discuss how we have shifted our strategy in recent years to focus on the retail segment, especially in high-income individuals and SMEs, which is providing the most attractive growth opportunities in the banking industry. Our emphasis on customer experience is bearing fruit. Our productivity is improving, thanks to an emphasis on streamlining processes and investments in technology and how we have managed to keep risk at low levels despite an important change in mix. Please turn to Slide number 10. One of our main competitive advantages is our large and valuable customer base.

We fully understand the importance of this advantage and, for the same reason, we are continually reviewing and enhancing our product offerings in order to maintain this leadership position and, of course, to continue expanding our customer base. As you can see on the chart on the left, current account customers are growing at a rate of almost 6% year-on-year, well above our main competitors. We’ve achieved this growth through different initiatives and excellence in customer service that helps drive attrition. In addition to this, we’ve been very proactive in taking advantage of business intelligence to identify and preapproved products to over 1 million potential customers. We have also made the confirmation available in the cloud and provided access to our relationship managers.

This initiative, together with an appropriate incentive system, has permitted us to grow more efficiently, lower cost per account openings and become more effective in terms of acquiring better customers that take on more products within the first six months of becoming a Banco de Chile customer, as you can see on the charts on the right. The first chart shows our superior personal banking customer base that represents a market share of 29.8% of total current account balances, well above our peers. Also, on a per-customer basis, our customers have 40.7% and 34.3% more funds per account when compared to BCI and Santander current account holders. The chart on the middle shows that average share of wallet of our customers, which is an outstanding 44% for personal banking consumer loans and 35% for SME commercial loans. What’s even more striking is the chart on the bottom right that shows how quickly a new customer, on average, reaches the same share of wallet as our mature customer base in loans.

As you can see, within 90 days, customers, on average, reach a similar level of penetration to our overall client base. And in the case of SMEs, it even surpasses those levels. Also thanks to this important growth in new customers. This provides the foundation for future sales initiatives to cross-sell these clients with other products and services such as mutual funds, stock brokerage and insurance brokerage. As this slide demonstrates, we are a bank that has a great track record of getting customers to choose us as their primary bank account.

If you flip to the next Page number 11, you can see what this means for loan growth and DDA balances. Total loans for this quarter grew 1.8% year-on-year, completely driven by the retail segment, increasing by 8% year-on-year, while wholesale loans decreased 6.5% year-on-year. This breakdown is consistent with our focus of growing faster and more profitable segments and with both an attractive growing conditions and specific credit behavior trends in the corporate sector. Within Retail, SME commercial loans were the fastest-growing product at 11.2%, whereas loans individuals grew just over 7% year-on-year. Thanks to the mortgage loan book and middle -- and operating income commercial and consumer loans.

Regarding SMEs and in line with our customer-centric strategy in the Retail segment, we continue the approach in promoting long-term relationships. This quarter, we continue to hold SME conferences in several cities across the country, which we have had a very important turnout rate from customers. At these events, we bring together our SME customers to share and discuss important topics for their business presented by local industry leaders, success stories from our own SME customers as well as present benefits that we can provide them through diverse alliances that goes from education to discounts on certain products and services. Additionally, these events provide the segment important networking opportunities where clients have the opportunity to meet with Banco De Chile representatives and other business owners. We are confident that by providing the best customer experience through our SMEs through initiatives such as these events, coupled with excellent customer service and deeper use of business intelligence, we’ll be able to continue taking advantage of new growth opportunities while maintaining a favorable risk return equation.

On other hand, we expect that the dynamism of the mortgage loans that grew 9% year-on-year, in line with the average of the industry, should continue decreasing marginally and stabilize around 7% in real terms for us and the industry next year. As for middle and upper income consumer in commercial loans, this grew by 6.9% year-on-year, while loans that carry Chile customers to consumer finance area decreased during the period, in line with our prudent approach to grow in this segment. In terms of wholesale loans, this segment decreased 6.5% year-on-year, mainly due to sluggish investment, very strong competition that drove down spreads and made it more difficult to grow with an adequate level of risk and return, along with certain prepayments from customers in the salmon industry, which also affected positively loan loss provisions for the quarter. By customer segment, corporations with sales above $140 million per year represented over 70% of the speakers. We expect that as the economy improves, we should see a rebound in commercial loan growth from this segment, given the scenario of improving expectations and historically low interest rate such as promoting new investment projects.

As for funding, we continue to lead the industry in cost of fundings, thanks to our solid deposit base, and in particular, our demand deposits from retail customers as well as lower spreads reached when we issued debt through the initiatives I have described earlier and by having a focus on delivering excellent service quality, improving attrition levels and concentrating on providing better benefit programs to promote product usage rates and our customers preferring Banco de Chile to other banks in saving their funds. This has resulted in important decreases in DDA growing 7.1% year-on-year, mainly current account balances associated to personal banking, which were up 7.9% year-on-year. This performance keeps us as a leader in DDAs in the banking sector with a market share of 22.6% as of September 2017. This, coupled with an outstanding rating from the risk agencies, which report better funding spreads when we placed bonds, and time deposit has provided us with the lowest cost of funding in the industry of 2.5% in local currency, as you can see on this chart on the bottom right. Please turn to slide number 12.

Operating income came in at CLP404 billion this quarter, down 5.5% from a year earlier on an adjusted basis. However, this result was mainly due to impact of negative inflation this quarter of minus 0.03% on our structural GAAP of U.S. index assets. This effect can be clearly seen on the chart on the left under noncustomer income, and the NIM as shown on the top right chart. However, it’s important to point out that we achieved a noteworthy year-on-year increase in customer income from our Retail segment, which grew 5.7%.

This clearly demonstrates the results of our efforts to grow in the most profitable segments that despite the high competition, has permitted us to maintain higher spreads for the last year, as you can see on the chart on the top right. This improvement allowed us to partially offset the negative effect of lower inflation. Our efforts to achieve greater customer experience and improvements in their loyalty program are clearly reflected in the evolution of fee income, which continued growing at positive rates. Fees were up 4.6% year-on-year, particularly due to the higher net revenues from transactional products because of greater cross-selling and a growing customer base. In addition, this quarter was particularly favorable for us [inaudible] and important increases in fees related to mutual fund management and insurance brokerage.

Overall, our 9-month year-to-date fee income posted an increase of 8.8%, which allows us to continue leading the Chilean industry with a market share of 21%. During the third quarter, we also signed an alliance with GOL Airlines, which allowed our customers to accumulate travel rewards on credit card purchases. Previously, the bank signed alliances with Delta, Sky, Iberia and British Airways. Therefore, based on this, we believe that we have the best loyalty program in Chile, which has been a key part of our value proposition. Before moving on to the next slide, I believe it’s important to highlight, the negative effect of inflation on our numbers is temporary.

And that we’re estimating that in 2018, inflation should gradually converge the Central Bank target, which is 3.3%. We expect that the fourth quarter, we’ll also have a low inflation rate that could affect temporarily our numbers. Nevertheless, we have made important progress in line with our long-term business strategy and key projects that should permit us to keep a sustainable and consistent growth in customer revenues in the future. Undoubtedly, the clear trends shown by our retail customer income has been the consequence of a business strategy focused at reinforcing customer experience, improving digital contact channels and taking advantage of business intelligence tools. On the next slide number 14, you can see how our emphasis on customer experience is bearing fruit.

Our focus over the last few years has been centered on improving our customer experience by providing better benefits, improving virtual contact channels, empowering relationship managers and implementing suitable incentive systems that put the customer first. These changes among with many others have resulted in a positive trend of our Net Promoter Score, which reached, this quarter, 75%. As you can see on the chart on the top left, this clearly marks the difference with our competitors. This emphasis, together with a powerful brand, as you can see on the chart on the top right, allows us to be in a superior position when attracting new customers and growing our loan book in fee-based services. Specifically, the brand asset valuator measures the value of a brand based on four pillars differentiation, relevance, esteem and knowledge.

According to this measure, Banco de Chile has the strongest brand in the industry, as seen on the chart on the top right. Our bank is in line with, is within the 14% of the strongest brands in Chile, which is well above any other bank in Chile. The, this combination of a powerful brand, coupled with excellent customer service, has also allowed us to record low levels of attrition. When we combined this competitive advantage with business intelligence, we’ve seen new and important growth opportunities that continued penetrating the retail segment and improving cross-selling. As we have said in past calls, digital banking platforms have moved from being novelties to necessities.

We’re proud to say that have the best digital platform in the industry based on the wide array of independent surveys and the Net Promoter Score on mobile apps. The importance of having the robust digital platform is clear when we look at how online and bank transactions have been evolving. On the chart on the left, in the row named digital banking, you can see how in only one year, personal banking online transactions volumes has increased by 30% and, today, represent over 50% of total transactions. On the chart on the right, you can see how important mobile banking has become. Specifically, what we see is that the growth of the transactions has been mainly driven by the mobile phone, and to a lesser degree, the webpage of brands transactions have seen a reduction of 6.4% year-on-year.

We expect the trend of customers going less to branches to do their everyday banking needs will continue. For this reason, today, our efforts are focused on streamlining processes, implementing smart ATMs gradually beginning to decrease the size and density of our branches while improving significantly our digital contact channels. In terms of business intelligence, we are focused on implementing new initiatives in order to continue growing at attractive levels but within our adequate relationship between risk and return. For this reason, our risk department has improved their preapproved consumer loan mobile model for the middle- and upper-income segment, which reinforce its risk intelligence tools. These improvements will generate a series of benefit such as more efficient admission processes, better management of pre-approved loans and improved collection management.

This new model has also shown excellent results from back-testing the historical information. It is very flexible, and it can be adjusted very easily based on the risk appetite that we wish to assume. Additionally, we continue streamlining processes and implementing new technologies that have translated into improved productivity and cost reductions, as described on the following slide number 16. Total operating expenses remain relatively flat year-on-year, decreasing by 0.1%. Despite the slight growth in expenses, our efficiency ratio increased from 46.2% in the third quarter of 2016 to 48.8% in the third quarter of 2017 due to the impact of negative inflation on operating income.

This is even more-clear when we look at the ratio of operating expenses to total average assets, which improved 11 basis points year-on-year and in the quarter with a level of 2.45%. The main driver for this reduction in expenses was a result of lower personnel expenses that dropped by 2.5% due to a lower headcount from the optimization of our branch network and the merger of our external sales force subsidiary into the bank, which occurred in the first quarter of 2017. This was partially offset by higher severance indemnities. On the other hand, administration -- administrative and other expenses increased by 2.2% year-on-year. This was mainly due to an increase in IT expenses and costs related to leasing operations and outsourced activities, mainly related to credit evaluation and data processing.

This was partially offset by important cost reductions in marketing and in the distribution network, in line with the reduction of branches and less maintenance on the recently renovated ATM platform. We firmly believe that our commitment to operational excellence and productivity are completely in line with our customer experience goals. This means that by improving how we interact these customers through better service channels and delivery times, we improve, in the medium-term, our productivity and efficiency levels. For example, by providing a platform that has a high uptime and solves customers’ problems that have entered into the branch and waiting in queues, we improved both customers’ experience and operating expenses. This means that the strategic projects that are being undertaken in IT should continue to help us improve our Net Promoter Score and control costs better.

The important investments in IT have been made. One of the main reasons how we have been able to continue growing without increasing our headcount are branches. In fact, as you can see on the charts on the right, we reduced our headcount by 4.9% year-on-year and continued optimizing our branch network with a reduction of 19 branches year-on-year. This was done with the customer in mind, and we saw, during the same timeframe, an improvement to the Net Promoter Score. Going forward, we’re confident that our permanent focus on cost control and superior commercial and operational initiatives will continue boosting productivity in customer service, resulting in better efficiency and lower attrition levels.

Risk management has also been one of our -- one of the main pillars of our success, and we are confident that this will continue in the future, thanks to our long-term sustainable risk management approach. Please turn to Slide number 18. Despite the challenging environment, we recorded another quarter of low attrition -- sorry, of low levels of loan loss provisions, reaching only CLP50.4 billion, and loan loss provisions ratio of nearly 0.79%, both figures well below those posted last year. As you can see, the main reason for the sharp reduction in loan loss provisions over the same period last year was principally the effects of an improvement in the good credit performance of the wholesale segment. Specifically, some customers in the salmon industry that were classified in riskier categories repaid their debts with us, thus also reducing significantly allowances for loan losses related to those loans, and others have improve their credit profile.

In a lesser degree, depreciation of the Chilean peso affected our allowances denominated in foreign currencies possibly by CLP3.2 billion. This effect is hedged in the P&L line net foreign exchange transactions. Before going into our closing remarks, I think it’s important to highlight, this lower figure of customers is not only a result of an improving economy but also the proven capability of managing risks throughout the entire credit risk and economic cycle. At Banco de Chile, we invest substantial human and financial resources to develop our credit risk management approach. This, together with a high level of involvement of the board in risk and business decisions, help us to identify risks more easily before they surge, and then from adjustments, to minimize their exposures.

And this ability to manage risk effectively should assist us to continue posting consistent returns our shareholders have come to expect from us. Please turn to the next slide, number 19. Before we move on to questions, I would just like to go over a few key ideas we mentioned in this call. The customer business results for the 9-month period were outstanding. This is aligned with our historical approach of being a traditional bank that prioritizes initiatives to create sustainable core revenues in the long run.

Thus, we continued posting good growth in customer income that expanded 6% year-on-year, thanks to proactively managing our lending spreads and expanding our retail customer base, which also drove the income. Furthermore, we recorded very good levels of cost of risk at 0.92% and controlled operating expenses effectively. Meanwhile, we continue to invest in technology and business intelligence initiatives. These results were crucial to offset the negative impact of low inflations of the affected noncustomer income and higher corporate taxes due to the tax reform during this period versus the same period last year. Accordingly, our track record of generating a consistent bottom line is demonstrated once again this quarter by posting a slight increase in net income of 1.3% year-on-year and almost 4% if we look at this before taxes and a -- and record ROE of nearly 20%.

Finally, I think it’s important to highlight that this last quarter of the year will also be challenged in terms of net income, completely due to the temporary negative effect of nonrecurring low-inflation figures. Nevertheless, as you can see in our track record, I would like to emphasize that Banco De Chile is committed to a strategy, which its main goal is to create value in the long run through stable customer revenues. We firmly believe that our competitive advantages, coupled with our superior business intelligence and our robust long-term customer-centric initiatives, will permit us to continue with this successful business approach and take greater advantage of the better economic cycle that lies ahead. Thank you for listening. And if you have any questions, we would be happy to answer them.

Operator: [Operator Instructions] Our first question comes from Carlos Macedo with Goldman Sachs.

Carlos Macedo: A couple of questions. First question, looking at that improvement that you had in your cost of risk, and thank you for giving us the detail here that a lot of it was driven by better quality in the commercial sector, how sustainable is this going forward? I understand economy is getting better, and you’re probably going to see more loan growth and -- but the cost of risk this quarter was the lowest in seven years. Is that something that you think is sustainable? Is that something that you think you can keep for the next few quarters? Or do we see a little bit of a normalization in the upcoming quarters? A second question. I just want to get ahead of little bit.

Thank you for putting the text at the end of your release, commenting on the final steps for the dissolution of SM-Chile and the impact that will have on your free flow and your tax rate, plus 5 percentage points. Is the timing of that, the first quarter 2019, what’s the exact timing for that? And what’s the process for that to happen?

Pablo Mejia: The first question in terms of cost of risk, it’s true. You could say that we’ve had a very low level of about 0.8% this quarter, and that’s mainly due to the effects, those you mentioned that we had a very good quarter in terms of the wholesale book. In terms of how sustainable is that, we think that a sustainable level for Banco De Chile and a good economic cycle we’re expecting for 2018, for example, is a lever closer to 1%. And why? Because we think there should be more normalization in terms of the wholesale book.

What we’ve seen in this provision release this quarter and this year the last few quarters shouldn’t continue. And what we’ve seen in the consumer book, we should see a possible slight improvement in line with the expectations that Rodrigo mentioned earlier. So net-net, the effect should be slightly higher and a level closer to 1%, which should be more sustainable than the 0.8%. In terms of SM-Chile, I think if you look at our earnings and how that’s evolving this year and next year, by just doing simple math, we should expect that by April -- by March 2019, the dividends that are paid to SM-Chile and SAOS should be enough to create -- to completely pay off this debt. By the end of April is when the dividend that transferred from SAOS to the Central Bank, and that’s when the process of the dissolution of SM-Chile and SAOS begins.

And what does this mean for throughput? Today, we have a level of throughput of around 27%, and this should move our throughput to around 44%.

Carlos Macedo: And that’s when you say, middle of the second quarter of 2019 is when the tax rate should go up as well, right? Because then you won’t be paying the additional dividends that are tax-deductible.

Pablo Mejia: Middle of which year? Sorry, I couldn’t hear.

Carlos Macedo: The second quarter of 2019.

Pablo Mejia: In 2018 is when the -- we’d have a lower effective tax rate in 2018.

By 2019, there’d be no benefit.

Carlos Macedo: Okay. Perfect.

Pablo Mejia: We’re expecting something around 19% for the effective tax rate for 2018.

Carlos Macedo: Okay.

So that would mean if it’s 5 percentage points, you go up to a close of 24% for 2019, correct?

Pablo Mejia: 20 -- how much, sorry?

Carlos Macedo: 24%.

Pablo Mejia: Yes. 24%.

Operator: [Operator Instructions] Our next question comes from Alonso Garcia with Credit Suisse. Please go ahead.

Alonso Garcia: Good morning everyone, thanks for taking my question. My first question is regarding your loan growth expectations for next year, considering the positive news on the macro front. If you could also break it down by segment. Are you expecting a significant improvement in the wholesale segment? And my second question is regarding competition. How is competition evolving across the different segments considering also the better macro? And also how you think a potential consolidation of the Chilean banking system can affect this competitive landscape?

Rodrigo Aravena: For the loan growth in the industry, what we’re expecting is a level of around, in real terms, 5 -- between 5% and 6% for next year.

We’d have to add inflation to that. That’s the overall. In terms of commercial loans, we’re expecting an improvement. We’re expecting also to be just maybe slightly below that level that I mentioned, between 4% and 5% in real terms. And how is that composed? We think that this number will be more driven by SMEs, which should grow near the -- or just under 7%, and larger companies, which should be around the 4% level.

In terms of consumer loans, again, just to remind you, this is all real numbers in real terms. In consumer loans, around 6%, where this would be driven by middle and operating income individuals. And for mortgage loans, like I mentioned, the level of around 7% is what we’re expecting for next year, more of a normalization level.

Alonso Garcia: All these [indiscernible], correct?

Rodrigo Aravena: Sorry?

Alonso Garcia: All these for the system as a whole?

Rodrigo Aravena: For the system. And for us, where we’re concentrated in growing is SMEs and upper and middle income segments in consumer loans.

So we should continue to see improvements in that. And depending on how the economy evolves and the business confidence and investment demand evolves, we should possibly see improvements in the corporate sector as well. But that’ll really depend on the economy and how spreads evolve.

Alonso Garcia: The competition.

Pablo Mejia: In terms of competition, obviously, in the short-term, these mergers of the banks that you mentioned, there’s some opportunities, but in the medium-term, this obviously consolidates through all a bit more for the systems and it’s a new competitor that we have to -- that, in reality, we’re used to having competition in Chile, it’s a very competitive industry if you look at the wholesale segment, there’s 20 banks that we compete with today who are our main competitors in the retail segment, is two other larger banks in Chile.

So it something that we’ve been used to in the past, and we think that it’ll continue, but we don’t think that will be a huge disruption of this new competitor.

Operator: Our next question is from Sebastián Gallego with CrediCorp Capital. Please go ahead.

Sebastián Gallego: Hi, everyone, thanks for the presentation. Just one question.

Can you comment on what you expect for next year in terms of OpEx productivity, particularly when you look at employees and branches declining roughly 5% year-on-year? What can we expect going forward, particularly in 2018? Thank you.

Pablo Mejia: In terms of operating expenses, you can expect for Banco de Chile is its continued focus on controlling cost. We’re looking to continue to improve productivity, this means that we’re looking at continuing to optimize the branch network and introduce new digital initiatives across all the banks, as mentioned throughout the presentation. What does this mean for next year? Probably what we’ll see is operating expenses growing slightly above inflation. The efficiency level improving, in part.

Because of our operating net expenses are growing slightly above. Inflation and then on other hand, inflation normalizing, which should also help that indicator.

Operator: This concludes our question-and-answer session. At this time, I would like to turn the floor back to Banco De Chile for any closing remarks.

Pablo Mejia: Well, thank you for listening and we look forward to speaking with you on our next quarter full year-end results.

Thanks.

Operator: This concludes today’s presentation. You may disconnect your line at this time. And have a nice day.