Operator: Good afternoon, everyone, and welcome to Banco de Chile’s Third Quarter 2021 Results Conference Call. If you need a copy of the press release issued yesterday, it is available on the company’s website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Investor Relations Officer; Mr. Pablo Mejia, Head of Investor Relations; and Daniel Galarce, Head of Financial Control & Capital.

Before we begin, I would like to remind you that this call is being recorded, that all the information discussed today may include forward-looking statements regarding the company’s financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company’s press release regarding forward-looking statements. So without further notice, I would like to now pass the call to Mr. Rodrigo Aravena.

Please go ahead, sir. The line is yours.

Rodrigo Aravena: Good afternoon, everyone. Thanks for joining this conference call today. We are proud to present the performance of Banco de Chile during the third quarter.

Once again, our bank was able to post outstanding results, leading the industry in terms of profitability and capitalization, and comprehensive income, which is also an important measure to analyze the overall performance of a bank, even its direct impact on the shareholders’ equity value. This approach is more important than ever, given the increased level of uncertainty and volatility that we are facing. In order to cover this aspect, we have divided this presentation into 3 main sections. First, an analysis of the macro and financial conditions. Second, a review of the main advances and achievements in our key strategic pillars.

And finally, a review of the breakdown of financial earnings. Let me start with a discussion of the macro and financial environment. Please go to Slide #3. Chile has been posting a faster-than-expected economic growth. Generally, this has been driven by the joint contribution of several factors, including a strong fiscal and monetary policy, the temporary impacts from several pension funds withdrawal, and the significant improvement in sanitary conditions that have allowed greater mobility in the country.

The chart on the other left shows the speed of recovery [19.6%] [ph] year-on-year during the third quarter, after expanding a simple 1% in the previous quarter. The breakdown shows that the activity has been led by the material improvement in commerce and services. All the way, because in annual figures was influenced by the weak comparison base as the country was under a national lockdown one year ago. The economy has been growing on a sequential basis. As you can see in the chart on the other right, the activity is 6% higher than the pre-pandemic level.

In fact, the GDP achieved its pre-pandemic level in February, becoming one of the few emerging countries that achieved a complete recovery earlier this year. Nevertheless, it is essential to be aware of the unbalanced recovery, as some sectors like retail have grown significantly faster than the rest of the economy. These sectoral differences are unsustainable and therefore a future slowdown is highly likely. The highest dynamism has been reflected in the labor market. As can be observed in this chart in the bottom left, the unemployment rate has gradually been improving, reaching a figure of only 8.4% in September, well below that 13% seen one year ago.

This has been supported by a recovery in total employment, which went up by 15.3% year-on-year. Although, it remains below its pre-COVID level. The labor force has experienced a similar trend. In line with this recovery, broad expectations have also improved during the last month. This can be seen in the chart in the bottom right, which displays our trends in both consumer and business confidence, the latter reaching levels even better than those observed before the social crisis of 2019.

All in all, the combination between a stronger growth, lower unemployment and better confidence, coupled with the successful vaccination process anticipate a good level of growth in the short-term. However, inflationary pressures have increased, as was seen, especially during the last month. Given the material change of inflation and interest rates, I will now refer to this aspect. I’d like to ask you to move to the next slide, #4. We’ve seen a global shift in policy targets in Chile.

While most of the measures taken last year focus on promoting economic growth, the rapidly increasing inflation has raised several challenges. Even though higher inflation is consistent with better growth. The magnitudes of the actual figure and trends is surprising and concerning. The chart on the other left shows that today, all the inflationary measures are above the policy range set by the Central Bank. Specifically, the headline CPI rose by 5.3% in September, reaching the highest figure since 2014.

While the core CPI, which excludes food and energy prices rose by 4.4% in September, the highest in more than 5 years. This trend have been accompanied by increasing signs of an economy that is overheating and a continuous weakening in the Chilean peso, as you can see in the chart on the other right. These factors are increasing even more the upper risk on overall inflation towards the future. In this environment, they’ve been charged adjustments in local interest rates. On the monetary policy side, the Central Bank began a tightening cycle in September, when the Board decided to lift the overnight rate from 0.5% to 1.5%, a decision that was followed by an additional tightening of 125 basis points to 2.75% in October.

The chart on the bottom left shows. According to the press release of the company decision, further interest rate hike will come in the near future. With inflation and interest rates surpassing any expectations held at the beginning of this year, this unexpected situation in conjunction with the impact of the 3 pension funds withdrawal has led to an unprecedented rise in long-term interest rates, which have increased nearly 400 basis points on average during this year. This chart in the bottom right shows that long-term interest rates have been increasing much faster than the U.S. rates, considering the weight of local factors in this trend.

Having said that, I’d like now to share our baseline scenario for this and the next year. Please go to Slide #5. The table summarizes our forecast. We expect the GDP to grow by 11% this year, led by private consumption. However, we foresee a slowdown in 2022, due to the contractionary monetary policy and the end of several temporary fiscal measures.

We expect that in relative terms, total consumption continues offsetting the weak investment growth. Despite this slowdown, we see an inflation rate above the policy target of 3% for at least until 2023. We save an inflation rate of almost 6% and 4% bps in the next year as a result of lagged effects of the weaker currency, higher inflation expectations and inertia arising from U.S.-linked prices. Due to this, we expect Central Bank to continue increasing the interest rate to 3.75% this year and 5.5% next year. Since there is an upward bias in CPI, we know there is the possibility of higher interest rates in the future.

Despite the slowdown, Chile will continue posting the strongest growth in Latin America, as you can see in the chart on this slide. Also, I’d like to mention some risks, which are more relevant than ever. So factors to pay a special attention

to include: first, the evolution of the global economy; second, the pandemic, as implementation of further restriction could be negatively impact the economy; the last, but not the least important factor, is evolution of the political scenario in Chile. Specifically, it’s important to analyze the results of key events, such that the Presidential and Congressional elections and the outcome from the ongoing constitutional process. Before moving to the bank, I’d like to describe some recent trends observed in the banking industry.

Please move to Slide #6. The last 18 months have been extremely unusual, mainly due to the existence of some decoupled trends between the banking industry and the economy. Despite the damage caused by the pandemic, especially on employment and GDP, the banking industry profitability has improved in part due to the exception of payment behavior from customers, which has been supported by this huge amount of liquidity, high level of inflation, as I mentioned earlier, have also benefited then U.S. net active [ultra] [ph] position of the banking system offset then the impact on reviews consumer loan growth demands. As a consequence of these factors, total net income with Ch$845 billion in the third quarter substantially higher than the same period last year.

Consequently, ROE reached 15%. This was due to inflation, better fee revenues and low cost of risk of only 1.1%, well below historical levels. The end of excess of liquidity should contribute to normalize with ratios in the near future. With regard to loan growth, we’d have begun to see some improvements across the board. At the left chart shows, total loans during the quarter grew 3.6% driven by strong commercial loans and to a lesser extent by consumer lending.

The mortgage portfolios chose the same dynamism of the last quarter that is expected to slow down in the coming quarters, as a result of this chart increase observed in long-term interest rates. After analyze the trends, I’d like to note that Banco de Chile has continuously improved its competitive position in the country. During the rest of the presentation, Pablo Mejia, our Head of Investor Relations, will share the main achievements and results posted by our bank during the quarter.

Pablo Mejia: Thanks, Rodrigo, Please turn to Slide #8 to discuss our main advances and strategic projects. Banco de Chile has demonstrated time, and again that our consistent long-term strategy generating superior and more consistent earnings and value creation than our peers.

In the next slide, we’ll go over our advances in key areas, which are digital transformation, efficiency and ESG. Please turn to Slide #9 to go over our advances in digital banking. Throughout the year, we have worked steadily to create a digital-driven organization. This year, we have deployed many advances in both the front and the back office. In this sense, we’re improving our customer experience by expanding digital channels, adding new products and functionalities.

We’re also increasing sales through these points of contacts, working with advanced analytics, cross-selling our new FAN account holders with insurance, investment and other products, transforming operational processes and IP architecture, and we’re working in their talents in digital culture development. In regards to the advances in our digital onboarding Cuenta FAN account, we have seen an impressive evolution of our new customers reaching 630,000 since its launched one-year ago. This quarter we released a new customer service channel with a chatbot called FANi that answers frequently asked questions, and we’re proud to mention that based on our usage rate, more than half of our FAN clients use this account as their primary account. In the future, this customer base will be an important driver for revenue growth. We’re also continually integrating new digital solutions such as our new self service modules.

At branches, I include several functionalities and save time for our customers, and we launched new payments service, so clients can use their smartphone or smartwatch to pay without their cards among other initiatives. All of these efforts to provide the best digital experience. We have seen continuous improvements in their online channel usage rates, as you can see on the chart on the bottom of the slide. Monetary transactions using our mobile app has grown over 40% year-on-year surpassing by far the growth seen on our website that reached just under 10% growth. The adoption of digital channels for everyday banking needs has resulted in that 89% of all monetary transactions are now being done online.

This huge success for us, and will allow us to continue improving our productivity. Finally, all these efforts have permitted us to be recognized as the most innovative digital bank in Chile by the European, the prestigious international publication. Please turn to Slide 10. Our focus to provide the best customer experiences continue to improve as we have rolled out new digital solutions. This customer centric strategy is always present when we develop new products and services and the results are reflected in many indicators, such as the one shown on the slide.

First, we continued leading the industry in Net Promoter Score, a recommendation indicator. We also ranked significantly all of our peers and other areas as shown on the chart on the right. Where customers consider that we have the most competent account managers in the industry, and the chart on the bottom left that ranks our bank number one in terms of having the highest transparency. These indicators, along with many others, reinforce the conviction that customers prefer Banco de Chile, as you can see on the chart on the bottom right. By focusing on providing customers with first class experience, we have gained more loyal customers that have higher cross sell ratios than our competition.

This is especially relevant in the upper income segment in large corporates and multinational companies, where we are the leaders. As the industry continues to evolve, we strive to maintain and improve our relationships with customers, because we truly believe but this is the best way to differentiate ourselves from the competition. Please move to Slide #11. We’ve continued to diligently optimize and improve how we manage our business in order to use our resources better. As mentioned, we continue automating processes by implementing new tools to make operational processes more efficient.

As a consequence of the new service model that began its implementation a few years ago. This has permitted us to reduce branches from a level of over 400 to 272 branches across Chile. The service model, together with many other initiatives, has not only improved our ongoing expense base, as you’ll see later on the presentation, but has also been achieved with enhanced customer satisfaction levels. And, in addition, we are accelerating these changes to a specialized area that’s implementing across enterprise cost management program that seeks incremental savings gains. The results of these initiatives have been positive as you can see in the chart on the right, where we’ve had continuous advances in total loans to employees increasing by 32%.

Loans per branches by 70%, and total expenses to assets improve 57 basis points to only 1.8%, the lowest level recorded in the last decade. Please move to slide 12. Another key pillar of our strategy is sustainability. This quarter we have continued to advance in various fronts in order to do that we have diverse social and environmental projects that we have developed to generate long-term value for organization stakeholders. Some of these initiatives that were taken during the third quarter are shown on this slide.

In order to promote entrepreneurship and support SMEs, we have granted Ch$1.8 billion in Fogape Reactiva loans. And we launched the 6th National Entrepreneur Challenge, which attracted 1,000s of micro, small and medium businesses across Chile. In terms of community relations, we held up financial education program count on Banco de Chile that benefited approximately 5,000 people including microentrepreneurs, and students from all over the country. In addition, we created a policy to further advance diversity and inclusiveness across our organization. On another front, we understand that to be sustainable over time, banks need to incorporate non-financial risks in its lending practices.

For this reason, we have trained our risk specialists on international standards for best addressing identifying social and environmental risks. These efforts will enable us to accompany our customers on the transition to a sustainable future while minimizing risk. Additionally, we issued a Social Bond to finance female entrepreneurs. Finally, before moving to the next slide, we recently received an unprecedented 3 notch upgrade in MSCI ESG ratings, moving from a B to an A rating, ranking us as the most sustainable bank and Chile. These results among many other awards that we have received during 2021 reflect our commitment to continue being a sustainable bank that incorporates ESG principles and it strategic pillars.

The remainder of the presentation focuses on our financial results. Please move to Slide #14. Net income was impressive this quarter, reaching Ch$184 billion, up from Ch$162 billion last quarter and more than double the level posted the same period last year. Both ROE and ROA was very robust rise in 18.6% and 1.5%, respectively. Through our focus in generating consistent returns in maintaining this prudent risk approach, we have expanded the gap further with our peers in terms of our risk return relationship, as you can see on the chart on the right.

This capital level without a doubt positions Banco de Chile is the best prepared bank to address Basel III schedule of higher capital requirements. Please turn to Slide 15. Operating revenues reported this quarter were very strong up 9.3% over the second quarter of 2021 and 23% versus last year. The quarterly rise was due to both customer and non-customer income. In terms of customer income, we saw greater revenues from lending and deposit margins as well as fee-based products.

Net interest income rose this quarter, versus the second quarter of 2021, primarily due to the expansion of both the loan portfolio and non-interest bearing deposits rising on a sequential basis 2.5% and 1.1%, respectively. I’d like to take a brief moment to discuss the evolution of our fee income. As you can see on the chart on the right, recurrent fees continued to grow strongly up 22% year-on-year, thanks for the improvement activity as well as the economy that has successfully adapted to the new normal. In the third quarter of 2021, most of Chile was under lockdown. This has a positive effect on our transactional revenues.

We especially saw strong income generation from transactional products and wholesale fees especially from the mutual fund business. In terms of non-customer income, results were primarily driven from the management of structural financial positions as a result of higher levels of inflation, which were partly offset by the effective higher interest rates on the trading our investment positions. For the remainder of the year and 2021 were more optimistic due to the improvement in sanitary conditions in Chile, we’ve permitted to lift mobility restrictions. Today, Chile is more open than at any moment of the pandemic, and this should continue to drive fee income. That should also continue to be reflected in terms of loan growth, especially consumer loans and commercial loans.

On the next slide, we’ll go over the evolution of the portfolio in the asset quality. Please turn to Slide 16. We’re proud to report that loans reached Ch$33 trillion rising 2.5% when compared to the prior quarter, or 10% on an annualized basis. Year-on-year, the portfolio grew 6%. This expansion loans permitted us to continue gaining market share, as you can see on this chart to the right where we gained 19 basis points year-over-year.

This quarter, we witnessed better levels of activity and all lending products. Wholesale SME loans were up sequentially 3.2% and 1.1%, respectively. In personal banking loans, we saw an increase of 2.5% quarter-on-quarter, the rise in personal banking portfolio was driven by both consumer and mortgage loans growing 3.6% and 2.3%. Despite the high levels of liquidity in Chilean households, this rebound is in line with the central bank’s quarterly survey, credit survey that reported strong loan demand and lower credit risk restrictions for consumer loans. However, it’s important to mention that mortgage lending rates have also risen in accordance to the higher long-term interest rates that we’ve seen in Chile due to the internal conditions.

As a result, we expect that this should lead to a slowdown the demand for mortgage loans in the coming quarters. Please turn to the next Slide #17. For a strong brand name, and our focus to provide our customers with the highest quality products and services, we’ve grown significantly our demand deposits to represent 36% of total assets and to lead the industry in terms of deposits per account, as you can see on the charts on the left side of the slide. This source of funding provides us with stable low cost financing as an important part comes from retail counterparties. On the chart on the bottom of the slide, you can see the evolution of our mortgage loan funding gap.

The stable evolution of our ratio bonds to residential mortgage loans is particularly important in the context of rising interest rates, since liabilities repriced faster than assets, which could negatively impact net interest margins. Also, in this environment of rising funding costs and weaker demand for long-term bonds from local institutional investors, it’s a positive factor that our bond profile by currency, or in other words, the foreign and local bond holders is less concentrated in foreign markets. This provides us with more room than any other bank to increase our funding from external sources than other banks. In terms of capital, we have – by far the strong CET1 capital base of 12.4% with a substantial difference appears as shown on the top. I know you’re fully loaded Basel III ratio decreased slightly from last quarter due to our portfolio growth reaching 6.2% as of September 2021.

It’s important to highlight that we have room to improve the situation, if we implement internal models for credit risk-weighted assets. They’re permitted by the regulation. Nevertheless, we’re very confident that a strong capital base will allow us to be prepared to advance in the transition and the full implementation of Basel III. Next, I want to go over how we manage risk in the current capital asset quality figures. Please turn to Slide 18.

Loan loss provisions this quarter reached Ch$93 billion, slightly higher than the level recorded in the second quarter of this year, but below the level posted the same quarter one year ago. This figure includes Ch$50 billion in additional provisions, excluding additional provisions, our model recorded only Ch$43 billion of cost of risk, demonstrating once again the strength of our portfolio. This composition of low cost of risk from models higher additional provisions, coupled with our low and stable NPL ratio of only 0.92% further confirms this. The elevated level of liquidity Chile’s producing and partly is unusual indicators, which are well below the long-term levels. As this excess liquidity is used, we expect our asset-quality figures should return to more normal levels of 1.1% for cost of risk in the medium-term.

When compared to peers, our asset-quality and prudent risk management culture is evident. We outrank all of our peers in relationship of risk and return, thanks to these policies. Today, we have accumulated Ch$460 billion in additional provisions with a coverage ratio of almost 4 times. We have seen this quarter as superior risk strategy has permitted us to take advantage of growth opportunities by gaining more market share than all of our main competitors, without fear of affecting their solid asset quality and capital levels. Please turn to Slide 19.

As mentioned earlier, our strict focus on cost control together with strong revenues this quarter permitted us to post solid efficiency ratio of only 40.1%, well below the levels posted in the past and the average in the industry. Total expenses as shown on the chart on the right, reached Ch$218 billion this quarter and includes an extraordinary bonus of approximately Ch$5 billion that we provided our staff and the gratification of the excellent performance we have accomplished in 2021, which would not have been possible without their commitment and dedication during this difficult period. Despite this additional expense, we outperformed our main competitors this quarter. And we continue to show a better track record and the expense evolution as shown on the chart on the bottom right. Specifically, as you can see on the chart on the bottom left, expenses remained relatively flat quarter on quarter and a slight rise year on year.

Excluding the extraordinary bonus, the main driver for cost management performance is due to our focus on implementing effective controls to use our resources more effectively and automate back- and front-office processes. Please turn to Slide 20. As mentioned in prior calls, we think it’s relevant not only to look at net income when analyzing how the industry operates and generates value for shareholders, but also comprehensive income, which takes a more complete view of the performance of financial institutions. As you can see, we performed well, with a year-to-date comprehensive income figure of Ch$542 billion in line with net income. On the chart to the right, you can see the breakdown of OCI for us and our main peers.

One of the key differentiating factors of our business strategy is our emphasis in generating consistent recurring revenue. We are confident that this focus that Banco de Chile generates the greatest economic value for our shareholders in the long run. Please turn to Slide 21. Before ending this part of the presentation, taking your questions, I want to highlight a few key ideas. First, the successful vaccination program and economic policy responses, have worked and reacted quickly the economy.

We expect that unemployment figures should continue improving, and this should help drive loan growth. Under this scenario, we expect GDP growth for 2021 to be around 11%, with a level of inflation of almost 6%. Consequently, Chile will continue posting the highest average growth in the region. And this more dynamic economy, with higher inflation, will assist our bottom-line with adequate levels of risk. In the medium term, we believe that NPLs due to loans, NPLs to loans should creep up slowly when fiscal support programs comes to an end.

This results in a more reasonable – this should result in a more reasonable level of cost of risk of around 1.1% in the medium term, in our baseline scenario. Depending on household liquidity, we expect the consumer loan should be more dynamic in 2022. However, mortgage loans will probably grow at a slower rate. For this year, we expect that total loan growth should be near 7%, slightly below the level next year. We’re also confident that we should continue to pick up market share in our base-case scenario.

Finally, we have successfully been able to face this challenging environment with robust results and outstanding achievements in several areas. We’re certain that our strong competitive advantages will allow us to continue to create value to all of our shareholders. Thanks for listening, and we’ll be happy to answer your questions.

Operator: Thank you very much for the presentation. We will now start the Q&A session.

[Operator Instructions] Thank you. Our first question comes from Mr. Jason Mollin from Scotiabank. Please go ahead, sir. Your line is open.

Jason Mollin: Great. Thank you. Thanks for the opportunity to ask questions. Hi, gentlemen. Hello, everyone.

My question is related to the additional provisions that Banco de Chile has been creating. And they look very robust. And from a balance sheet strength perspective, we really like them. But there is a flipside to that, in that it’s not going to the bottom line. And that limits the payment of dividends in terms of payout of earnings.

So I’m just – if you can frame how management thinks about them, and the need for them. Is the idea really to create them because you see potential problems, or you just want to be in a very strong position the next time? We see problems in the economy and with your clients? And how should we think of that versus showing better net income and paying out more dividends?

Pablo Mejia: Well, in terms of additional provisions, as we mentioned and you saw in the call, we had additional provisions of Ch$50 billion this quarter. And this is a decision that was taken despite that we’ve seen several different signs of recovery since late 2020. But there is still certain uncertainties that are still occurring today in the economy. So – because we have a lot of liquidity, there is all these issues.

But really affecting NPL temporarily. And there is still certain future events that could be occurring related to the economy and the political scenario. So this is the reasons – this is part of the reasons that the Board decided to take on, these additional provisions during the quarter. We can’t rule out, however, that in the future these uncertainties tends to fall. There is more certainty in the future, that we could potentially release a portion of these additional allowances.

This is a decision that has to be taken by the Board. There is not an exact trigger that I can give you or an exact timeframe of when this would happen. In terms of the dividend, Rodrigo, do you want to…?

Rodrigo Aravena: Yeah. Hi, Jason. I have to emphasize the idea that we don’t have any particular concern.

So, basically that decision reflect our prudent decisions. So, basically, we are waiting for having more information in terms of the economic cycle, we would like to see how the ratios, how the asset quality indicator will evolve in the future, because we notice that as a consequence of the excess of liquidity, as a result of some policy measures adopted during this crisis, there we have seen some bias in some indicators. So, basically, we are waiting for more information, the stabilization of economic cycle. But, I like to be clear that we don’t have any particular concern behind the decision. In terms of dividends, I’d like to mention that Banco de Chile has consistently been able to maintain an attractive dividend for shareholders during the last year.

That even though we can anticipate the annual dividend, because it has to be proposed by the Board of Directors, it’s very important to keep in mind that the Board takes into consideration various different factors when determining the annual dividend proposal such as, for example, the existence of our robust capital level, which is superior to our peers, the slowdown expected in loan growth in the future. It’s important to remember that in the past, elasticity between loans and GDP used to be around 2 times. For the future, we are not waiting for that. We’re not expecting, sorry, this elasticity, so we’re aware of the slowdown in loan growth in the future, relative to what we have in the past. And also, we have very good level of our additional provisions, as you mentioned.

So these conditions at the end of the day, to maintain or change dividend payout relative to the levels that we have recorded in the past.

Jason Mollin: Well, I really – I like when you guys create additional provisions. And I think it’s really crucial for analysts and investors to look at book value growth, because I think if you consider that that really does capture both earnings and whatever impact that’s not going through the income statement and going directly to book. So I think that is very valuable. Maybe a second question, based on your presentation.

You show on Slide 10 some very impressive data on the net promoter scores, the most transparent and reliable bank, the most competent account managers and preferred bank to change to. One thing I would ask in that context is we’ve seen some data on account openings for the system throughout the year. And it’s not – we see some of your competitors, or at least one of your competitors, doing much better in getting new accounts. How would you describe what’s going on there? And why this competitor that’s showing – not showing as well in the metrics you’re showing, but when you look at account, or checking account openings, they actually look like they’re growing faster?

Pablo Mejia: And that’s mainly to do with the information that’s available in CMF. So with the information that’s available, you can’t distinguish what’s the digital accounts, what’s not, in terms of this other comparator, which uses the current account, right? There was a lot that was changed.

So today, you don’t need to have – the package doesn’t have to be the same as it was in the past with the line of credit and other additions to the current account. To make a more proper analysis, you need to look at what other banks also offer in terms of the prepaid cards for some banks. And we don’t use a current account, but we use a side account. We use a debit account, which is basically the same thing. It doesn’t have a line of credit.

There we’re growing 630,000 customers year over year. So, you really need to add this information and based on the internal studies, based on the information that we can gather and see the evolution of the growth in terms of balances in these accounts, what we see is that we have by far much higher usage rates and by far we’re the leaders, with a substantial increase in terms of market share across the board. There is a report from the CMF for prepayment cards. And if you were to add that information that we have, unfortunately, without the information of the current account holders, for these other digital accounts, we have well over 50% market share at that point in time. So including what we think that other current accounts, these other banks have in their current accounts for this product, we by far have the highest levels of usage rates.

So it’s not – one thing is to open an account and have money. It’s the other thing that’s more important is to have customers actually use the account consistently. And that’s where we think we’ve seen that we’re the leaders.

Rodrigo Aravena: In fact, in the Slide #17, we clearly show the important differences in terms of the address, current account balance held by – between our customers relative to our main peers. So, as Pablo mentioned, apart from this explanation of the growth, it’s very important to be aware of higher balance held by our customers in the Slide 17 of this presentation.

Pablo Mejia: I think all these other indicators is something part of the past, all these customer service indicators. So Banco de Chile has always been very focused in having the best customer service indicators, and having the brand really stand out in all these attributes. So this really attracts customers more easily to Banco de Chile. And customers really want to be a part of Banco de Chile, and the program itself of Cuenta FAN is very strong with many different benefits that promote the product as well. And that’s why so many customers are coming to ours.

We think our benefit package for the customers are far more superior than what customers can have with other banks.

Jason Mollin: Thank you very much. Congratulations on the high-quality quarter. And I would just summarize it, it captures it in the book value growth. Thanks.

Pablo Mejia: Thanks.

Rodrigo Aravena: Thanks.

Operator: Thank you very much. Our next question comes from Mr. Tito Labarta from Goldman Sachs.

Please go ahead, sir. Your line is open.

Tito Labarta: Hi, Pablo and Rodrigo. Thank you for the call. My question is a little bit, I guess, on the political environment and the potential impacts.

Maybe just give us your thoughts on the upcoming presidential election? What do you see the risk could be there from the different candidates and how you think about that in terms of what that could mean for GDP growth and also sustainable ROE for the bank? Also, I guess, factoring the change, potential changes to the constitution. That’ll be helpful. Thank you.

Rodrigo Aravena: Hi, Tito. This is Rodrigo Aravena.

Thank you for the question. We are aware of more uncertainty in the short-term. So that’s why in the beginning of this presentation, we mentioned some sources of uncertainty. We will have, as you mentioned, a potential election in November, a potential runoff in December of this year, but also there will be a change in the Congress because the lower house will be – it will be changed totally, while the half of Senate, it will be changed as well. And also, the recent ongoing constitutional process with an exit referendum way too far is scheduled for midyear of 2022.

So in the short-term, probably political drivers will be an important factor to pay attention to, because we know that it affects the evolution of the current events. The evolution of expectations, the economy, et cetera, et cetera. It’s not clear what will be the policies adapted for the next President of Chile, because today we have different candidates with different proposals. There are some candidates with some specific proposals. So for example, rise in taxes, while there is another candidate that in his program considers lower taxes for companies, for example.

So I think that it’s too early to provide a more accurate estimate in terms of the specific impact. I think that it’s better to wait for the final result of both the Congress election in November, and the final results of the runoff in December of this year. But begin this discussion, it’s important to be aware that in 2022, there will be a lower economic growth, because we will not have some temporary factors that positively influence the economy during this year. For example, the Central Bank today is rising interest rates. It will affect the economy in the next year, and the government announced an important reduction of the fiscal spending for 2022.

And probably, we will not have the pension funds withdraw as we have this year. And also, we’ve seen weakening of the Chilean peso. So it also will affect the capital inputs, et cetera. So, begin from the political, the political drivers. We are aware of the existence of some risks in the short-term that could affect the economy next year.

It’s also very important to highlight that in 2022, we will likely have high inflation rates with higher interest rates as well. So as I mentioned in the presentation, these factors have an important impact in terms of banking profitability. So that’s why despite a slowdown, despite the political risks that we are observing now for the next year, we will have some positive driver for the banking profitability in the next year. For example, high interest rate, the high inflation. So all in all, when we analyze in relative terms, probably the banking sector, the banking profitability will probably be less affected than other sectors in Chile.

But again, it’s extremely important to analyze the results of 3 key factors. The potential runoff of the presidential elections in December, the final composition of the new Congress in November this year, and very important to analyze the contents and the results of the exit referendum of the constitutional process, which will be held in June on the – by mid-year 2022.

Pablo Mejia: I think just to add, for 2021 ROE will be quite strong, especially in the fourth quarter, because of what Rodrigo mentioned, the higher inflation that were expected for this year and next year. So there’ll be good levels of inflation in the fourth quarter. Higher interest rates that are also benefiting us.

So the fourth quarter will be an ROE that should be over the 20% level for the fourth quarter ROE. For next year, again, it should probably have similar ROEs to 2021. And in the medium term, in our bass-line scenario, obviously, it depends on the outcomes of all these factors that Rodrigo said. We should have around 16% to 18% ROE, so in the medium-term ROE.

Tito Labarta: Okay.

It is very clear. Thank you.

Pablo Mejia: Also this year and next year…

Rodrigo Aravena: About mid-term.

Pablo Mejia: Yeah, yeah.

Tito Labarta: Yeah.

Okay, understood, great. Thanks a lot, Pablo, Rodrigo. It’s very helpful.

Operator: Thank you very much. Our next question comes from Mr.

Ernesto Gabilondo from Bank of America. Please go ahead, sir. Your line is open.

Ernesto Gabilondo: Hi, good morning, Rodrigo and Pablo. Thanks for your presentation and for the opportunity.

My question is on your NIM expectations, but not for the next quarter, but for the next year. Considering we already have like important heights in this year and probably that should continue next year, how do you see the NIM pressure in 2022? And if you think that in 2023, you will be able to reprice your loan portfolio and then see an expansion? And then, my second question is, I mean, how comfortable you are to take market share, considering the political risks, considering that at some point you will go to normality after the liquidity has gone down from the pensions withdrawals, then unemployment rate continues to be high and inflation? Inflation could still be sticky. So how do you see that in terms of loan growth? Thank you.

Pablo Mejia: In terms of NIM pressures, we’re not seeing NIM pressures. If you look at all the figures, everything is positive.

So I wouldn’t say NIM pressures for this year or for the next. We have a higher-level of inflation expected for this year, also high level of inflation for next year. And if you analyze the liabilities of banks in Chile, you can see that the levels of current account balances, non-interest-bearing balances has increased significantly. If we look back 2 years ago or something, it’s a huge level. So the rise in interest rates is positive for Banco de Chile that repricing is taking place much faster.

So we’re starting to see a huge benefit, way quicker than we were in the past. So for next year, there’s no pressure, and then, we will be positive, and in the following years, positive pressures. And then, obviously, as inflation comes down in 2023 and beyond. You have that – would be the pressure and those years. But in the short-term, we see positive events.

If we look at the GAAP on the balance sheet, we have a GAAP on the balance sheet that’s just over Ch$7 trillion, which means for every 100 basis points, that’s just over Ch$70 billion and change in the net interest income. And in terms of rates, if we look at rates, how this positively affects us. And if we think about, as you mentioned, what’s the normalized level of current account balances in banks, maybe that can go down would be maybe for 100 basis point change when everything’s fully repriced, this would be about Ch$100 billion more in net interest income. But if we look at the levels of today of this higher level, if that stays in the balance sheet and the liabilities, there will be Ch$160 billion, so it’s between 25 and 40 basis points higher net interest margins, from a rising rates – for every 100 basis points of rising rates depending on where you believe the funding from noninterest bearing deposits. And in terms of market share growth, we’re focused to continue growing in market share or in our key areas, which is the middle upper income individuals in consumer loans, we see that this is an area that should continue growing in the next year, recovering the losses that we’ve had in the past.

And we’re comfortable to continue growing up, obviously, taking into consideration the risks that are at that moment. But we believe that we still have room and our focus is to continue growing in that area also and SMEs as well in the following years. So, obviously, it depends on what’s occurring locally. But in a reasonable case scenario, we think that we will continue growing in terms of loan market share, especially, it’s important to mention that we have by far the highest level most capitalized bank in Chile, but this actually permits us to continue growing, and we have by far the best customer base in Chile as well. So that combined with additional provisions, permits us to grow, which maybe other banks have to be more cautious.

Rodrigo Aravena: So, Ernesto, at the end when we put all these pieces together, it’s reasonable to stay then ROE for this and the next year, even above to the long-term level. So as Pablo mentioned, despite the slowdown of the economy, the political risk, and specific [syncretic] [ph] factors that we have, there will be a positive impact from the change in inflation interest rate in our final bottom line.

Pablo Mejia: Yeah. And we can continue growing especially, because of the capital base. Since we have the capital base we can continue growing, we can also continue to giving an attractive dividends to our shareholders.

Ernesto Gabilondo: Thank you very much, Pablo. Just a follow-up on means, we have already heard the conference call of your competitors. And they’re expecting in pressure next year, as they say that the long repricing takes around 12 months, so just wanted to understand if it’s different in your case?

Pablo Mejia: I’m not sure why, for our case, in our balance sheet structure, we don’t see them pressures.

Rodrigo Aravena: Ernesto, it’s important to be aware that during the last year – sorry, during the last month, we’ve seen average risk inflation, high interest rates, the guidance from the Central Bank, relative to the interest rate has changed during the last months. So that’s why taxation today are even better relative to that we had a couple of months ago.

Pablo Mejia: It’s also important to look at how we fund the business. So we haven’t had large changes that increase our net interest margin this year, based on funding, for example, long-term assets with short-term liabilities. So we don’t have an issue related to this on our balance sheet. I’m not sure the detail you have for the other banks on why they’re seeing such a drop in net interest margins.

Ernesto Gabilondo: Okay, perfect, thank you.

Just wanted to know how much time takes you to reprice in the loan portfolio, 6 to 12 months?

Pablo Mejia: Today, when you’re looking – today, we start seeing positive. At first, if you look in the financial statements, you can see the maturities of the assets and the liabilities are not 40. But if you do an analysis, you can see that from already month one based on the current structure of the balance sheet with large level deposits that we have today that we’ve accumulated over the last 2 years. We’re already seeing positive impacts. If you look in the slide – positive benefits, if you look on Slide #15, you can see where we have customer income breakdown, we’re already having nearly Ch$10 billion more and income from our deposit margins and from low margins we have Ch$0.5 billion, so we’re already seeing in this quarter benefits from the rise of interest rates.

Ernesto Gabilondo: Okay, perfect. Thank you so much.

Operator: Thank you very much. Our next question comes from Mr. Yuri Fernandes from J.P.

Morgan Asset Management. Please go ahead, sir.

Yuri Fernandes: Hi, Pablo. Hi, Rodrigo. Thank you and congrats on hedging policies on the booking to growth, like when I was very sound, and as everybody mentioned, good to see book very growing? I have some follow-ups in this margin question, because for me, your speech has been surprising of stable margins for 2022, because we always thought that higher rates are negative for the Chilean banks in the short-term, because you have a lot of time deposits.

Liability, basically repriced faster than rise it. And looking here for a balance sheet, I totally get your point on demand deposit. They are staying maybe 65% of total deposits, but historically they were below 50% of their book deposit and 50% is a good number, don’t get me wrong. That’s a very good number for that demand deposit, the ratio of time deposits. The point is, as rates move up, do you believe demand deposits will continue at that amount, because I think there is a cost of opportunity here, higher rates, maybe some of those corpus that were taking for that loans, and trying to protect themselves and had like excess liquidity, they can first use the liquidity or we can move to time deposits.

And the thing about the time was right, like people, I guess the big increase in demand deposits. They were related to the patient withdrawals. So as people have a higher cost opportunity, maybe they will change that for time deposits, right? So that benefit, maybe it’s short lived. So my question is, what do you think about deposits going ahead with higher rates? So, what is your inflation expectation for 2022, because I think inflation will be high, but maybe not as high as the 5.8% inflation you’re seeing for this year, right? So my point is, there are so many headwinds that – for me, again, I’m trying to be pushed here and understand more because SME having fled, if we’re able to get that that’s good news. I think, market is not expecting this.

We are able to understand more, the moving parts, need to tell me you have different portfolio mix or we have a different hedging policy that would be very helpful for us to understand the flatness. And I have a second question regarding Cuenta FAN. Looking to September data, there was a deceleration in that edge versus June, I guess, the acceleration with turning October, you have a short representation showing like the net ad decelerate again. But what happened in September, like why net ads were lower versus June in the quarter? Thank you.

Pablo Mejia: Thanks, Yuri.

In terms of NIMs, and how they will evolve in the future. I think, it’s important to mention that not only, we didn’t only see growth, because of the Fogape. If you look back since 2019, or so it’s pretty even the growth that we’ve seen in both individuals and companies. And, obviously, a portion of that like I mentioned, when I was – I mentioned that the rise the benefits, once everything is fully priced in, couldn’t be if nothing changes, and continues to see increases in the current levels of account balances and current accounts, could be Ch$160 billion more than net interest income. But that’s not reasonable really to expect that.

That’s I was saying that it’s more reasonable to expect a level of Ch$100 million, which would mean a decrease. Now, when that decrease happens, and how much and how long is this? It will depend. But it’s reasonable to expect that we should be able to see a decrease in the future that we shouldn’t continue seeing these increases, because of the higher interest rates because there’s more reasons to invest that money or to spend the money that’s in the current account. And in terms of you also have to take into consideration, inflation and expectations, and how banks position themselves, to position themselves while they’re not, if you looked at our U.S. GAAP position that’s actually increased on the balance sheet.

So, today, we have U.S. GAAP position, over Ch$7 trillion, right? Last quarter, we had a GAAP position that was at Ch$6.6 trillion. And if we look at one-year ago, we had a smaller U.S. GAAP position. That was around the Ch$5.8 trillion.

So this will also help us in terms of if you look at the level of how much income that we generated with the inflation for this year was a lower GAAP position than what we’ll have for the next year. So we’ll have a benefit on that side. And also the funding how we manage the bank like, I mentioned, the next year, we weren’t funding long-term liabilities with short-term funding. So when we start to see, which is reasonable to expect a decrease in current account deposits, we won’t have to go to the market to fund these mortgage bonds, so that shouldn’t have pressure on their line.

Yuri Fernandes: If I may just follow-up here, Pablo.

What is your inflation expectation for next year, because then there’s so like maybe you can have a higher inflation gap. So maybe even if inflation is lower, you can benefit more from that, right, I guess, that’s my point. How much is it will take into next year?

Pablo Mejia: Can you – you have to take into consideration. Sorry, one last thing that I didn’t mention is portfolio growth. So if we look at what happened in 2020, on average, the assets are more focused in 2020 versus 2019.

On lower margin products, right, we started 2020 better, and because everything that we know, 14% loss in the market share, basically across the board for the banking industry and consumer loans. SME loans were focused on Fogape low interest rates. For 2021, we’ve seen the recovery, a slight recovery in terms of consumer loans, 2021 we should have a better growth mix as well. And in terms of inflation…

Rodrigo Aravena: Yeah. It’s very important to keep in mind the different trends that we will likely see during the next year.

So one thing is the average inflation, the average level of liquidity that’s probably, we will have a higher inflation rate in the first half of the year relative to the second half of 2022. So specifically, which stays an inflation rate of almost 4% at the end of the next year after posting an inflation rate of almost 6% during this year. And an environment where the interest rate will continue, right, and so probably the level of liquidity of the economy in the next year, including total deposits, of course, will likely have a negative growth in the next year. If we analyze, for example, a leading indicator with M1 supply money, which is released by Central Bank. A couple of months ago, it was growing 70% during the year.

And today, the total money supply economy is growing around 55% from economic growth. So, it’s important to consider that even though the average inflation of the next year will be above the bullish target of the Central Bank, there will likely be a downward trend during the year with a negative growth of total deposits in 2022, probably, the slowdown will start by – the slowdown of the level of liquidity probably will begin now by April, the second quarter of next year. Pablo, you want to...

Pablo Mejia: Yeah, in terms of the final count, I think the kind of count is something that you can take online, it’s very easy to do. It really depends on the economic situation as well.

We had lockdowns, there’s many different reasons. It can be in some quarters that it’s a stronger driver, if you remember, in between the – we went back into lockdown in the second quarter of 2021. And so, as the basing continue to increase, obviously, we should start to see a slowdown, I don’t expect that these levels will continue growing so strongly, because if you look at the size of our current account holders in Banco de Chile, personal current account holders in the Banco de Chile is about 1 million customers, right? So this is 640,000 customers, it’s a huge number. How height in the score is, workforce in Chile is around 8 million, 9 million. So really, these are very reasonable numbers.

And more than the growth of these numbers in the future, I would say, it’s how we’ll roll out and continue to cross all these customers with new methods and get these customers back to use Banco de Chile is their prime primary bank account. I think that for Banco de Chile has been always very strong with very good customer service levels up times. And if you look at other indicators, that purposes is that we were the leaders in terms of current account deposits in terms of individuals. We have the highest level of current account deposits, and if you start looking at different indicators in other areas, you can see that world leaders also amongst companies et cetera. So customers generally use us as the primary bank account company and individuals.

And hopefully that will translate…

Yuri Fernandes: All right. And, it’s good, because it’s not just on a wallet account, right, just on checking account as you said, so it can cross-sell like the loyalty of the bank, all those things, so like very clear.

Pablo Mejia: So Cuenta FAN customer, the idea of our FAN account was that a customer in Cuenta FAN belongs to Banco de Chile, it’s a part of Banco de Chile, uses the same website, uses the same app. We cross all them. They use the same branches as Banco de Chile.

So it really connects them with Banco de Chile that gives us cross-selling opportunity and it’s a deposit account, it’s not a prepaid account. It’s the same as – more or less the same as a current account. It’s free, has lots of benefits. It’s an interesting account for individuals and there’s new promotions every day that come up for the FAN. So it’s really bringing into a lot of customers.

Yuri Fernandes: It’s kind of a rebranding of the traditional checking accounts, right? Super. Clear, guys, and thank you and congrats again for the strong quarter.

Pablo Mejia: Thanks.

Operator: Thank you very much. Our next question comes from Jorge Henderson from Santander.

Please go ahead, sir. Your line is open.

Jorge Henderson: Hi, Pablo. Hi, Rodrigo. Thanks for the opportunity, and congratulations for the results.

And I have 3 questions. My first question is on our cost of risk guidance. And you mentioned you expect your medium term sustainable level of cost of risk to be around 1% and 1.1%. My question is, do you consider any potential additional provisions on this launch? And my second question is on Fogape loans, just wanted to ask you the data. What percentage of your loan book is currently for Fogape loans? And my third question is on the acquiring business.

So in the context of the implementation of the 4 parts payments model in Chile, would you consider investing in compete on the acquiring business with anytime soon? That would be helpful. Thank you.

Rodrigo Aravena: Hi, Jorge, this is Rodrigo Aravena. Let me say 2 of the 3 opportunities that you mentioned. In terms of the cost of risk, you’re right, we said in the presentation that our guidance around one 1.1%.

But actually what is very important to keep in mind that we are expecting that I will put a freeze will remain below the average of the industry. So what we’re expecting is, it’s an under of the industry or slightly above our cost of risk. So it’s reasonable suspect for the industry a number higher than 1.1%, let’s say 1.2%, et cetera. So basically, our guidance for cost of risk more than a specific number. What is more important to consider is that we’re expecting that the cost of risk relative to the industry will remain in the future, because we are very confident that our quality is much better than most of our peers, we are faced with that.

We will continue leaving the industry in that area. But, of course, it’s very important to analyze the evolution of the economy, the outcome of the elections, the evolution of the employment, et cetera, et cetera. In terms of the different positions we have assessed in different conference calls that in today as well, that is very important to analyze the evolution of the economy, the uncertainty the federal we have a prudent approach in terms of risk management for the banks. So that’s why we’ve been increasing the additional provisions during this year, especially considering the values that we’ve seen in different asset quality indicators as a result of excess of liquidity, as a result of the pension funds withdrawal, et cetera. So we came to now that a portion of these additional provisions will be released in the future, but only in the case that uncertainty will be lower and only if indicates that we have a normalization of the economy and lower political uncertainty, et cetera.

But we are aware that in the short run, we will face more uncertainty than we used to see in Chile. In terms of your third question for the inflation rate, okay, it’s important to consider 2 main factors. The first one is that there is [Sasomite], which is composed by representatives from different entities, including the Central Bank, the Finance Ministry, the CMF and the Chilean anti-trust agency, who are in charge of stating changes of prices, and specifically for the inflation rate. It’s very important to consider that changes in inflation rate will be announced no later than February of the next year. In this environment, since we don’t have announcements so far.

Okay. We continue working with the same season; we haven’t developed a different system; we don’t have any announcement so far. In terms of potential changes in the inflation rate, I’d like to mention that we’re very well prepared for that our business model too dependent on this potential changes in the inflation rate, which will be released by this committee by February of the next year. So in this context, it’s essential to pay special attention to this final outcome, the final decision of these ongoing process specifically to potential changes in the inflation rate, because it will be very critical in our final decision, in terms of adapting or changing or not, our acquire model. So far we don’t have any specific news or changes to announce here today.

Pablo, you have…

Pablo Mejia: So, for your second question, in terms of Fogape, so we have for this year, about 4% of the portfolio of this year is Fogape Reactiva. And about 8% of the portfolio is the Fogape loans from 2020. So total of around 12%.

Jorge Henderson: Very clear. Thank you very much.

Pablo Mejia: You’re welcome.

Operator: Thank you very much. Our final question comes from Mr. Alonso Garcia from Credit Suisse. Please go ahead, sir.

Alonso Garcia: Hello, everyone. Thank you for taking my question. I just want to touch-base on your expectation for loan growth next year, if you could comment on how much you expect to grow by segment? And if you could comment this on both sides. First, on the demand side, considering that next year individuals will not have as much liquidity as they have had over last couple of years. But also considering that the macro outlook is also more uncertain, probably.

And also, on the supply-side, how much appetite is for you to grow in each of the segments? Thank you.

Pablo Mejia: So, well, for this year and the next year, it’s almost the year is over. But for this year, around 7% to 8% for 2021. Growth, for what we have been seeing, which is positive, is better origination from consumer loan. So we had a good quarter this year, the industry, us as well.

For next year, we think that the figures will be better. But if we look in the medium term, it’s important to mention what Rodrigo mentioned. Is that the 2 times elasticity that we saw in the past of loans to GDP, probably isn’t going to be something that we’ll see in the short-term. So it’s more reasonable to expect growth levels that are below that 2 times elasticity in the medium-term when you’re projecting. For 2022, what we’re seeing is an expansion of around 6% to 7% in nominal terms.

And this is really still going to be driven by the expansion in mortgage loans, but at a slower pace than we’ve seen in the past than 2021, because of the rise of interest rates, which will affect the demand side. But there is also a tighter supply side that we’re seeing from banks as well, because it’s more difficult with all these issues that have happened internally in Chile for funding. So obviously, this is affecting the higher interest rates. There is more supply issues for our funding locally and that affects rates and durations of these loans. In terms of consumer loans, we’re seeing this recovery, as I mentioned, from this very weak performance posted last year.

And we’re expecting – we should be seeing somewhere around the 6% growth level. Obviously, it depends on these issues of liquidity, but liquidity continues to how it is today and continues to evolve positively in terms of a more normalized level of liquidity, I mean. We should see something around 6% growth for consumer loans. And then, the commercial side area, it depends on the political obviously, for the demand. So how much – what’s happening internally in Chile, how the short-term events follow through, and that will really have an expectation or changes in expectations.

But in their base case scenario, what we’re seeing – the SMEs should continue to lead commercial loans with a growth level of around 6%, while the larger companies should grow slightly below that. And the larger companies will be probably more dependent on what’s happening internally in Chile. So for Banco de Chile, obviously, we want to be growing above those levels, focused in these high margin products, very focused on the consumer middle- to upper-income individuals, and obviously SMEs.

Alonso Garcia: Very clear. Thank you very much, Pablo.

Pablo Mejia: You’re welcome.

Operator: Thank you very much. It looks like we are showing no further questions at this point. I’ll perhaps pass the line back to the Banco de Chile team for their concluding remarks.

Pablo Mejia: Well, thanks, everyone, for joining our call and we look forward to speaking with you for our full year results.

Thanks.

Operator: Thank you very much. This concludes our call today. We’ll now be closing all the lines. Thank you very much.

Goodbye.