Executives: Rodrigo Aravena – Chief Economist and Senior Vice President-Institutional Relations Pablo Mejia – Head-Investor

Relations
Analysts: Ernesto Gabilondo – Bank of America Merrill Lynch Tito Labarta – Deutsche Bank Alonso Garcia – Credit Suisse Neha Agarwala – HSBC Sebastian Gallego – CrediCorp Capital Gary Fernandes – JP

Morgan
Operator: Hello, everyone, and welcome to Banco De Chile’s Full Year 2017 and Fourth Quarter 2017 Financial Results Conference Call. If you need a copy of the press release, it is available on the company’s website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations; 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 you may proceed.

Rodrigo Aravena: Good morning, everyone and thank you for joining us today on our conference call for the full year and fourth quarter 2017 financial results. 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 fourth quarter 2017 financial results and main and strategic achievements.

Please turn to Slide number 3. During the quarter, the Chilean economy continues to show a strong signs of recovery. The monthly GDP, as seen on the top-left part, grew faster in the second half of last year. In fact, world economy was up only 0.5% in the first half. It completed an expansion of 2.5% between July and November, which is the latest available for the year.

As a consequence of higher than stated 3.2% annual expansion in November, the economy accumulated an annual growth of 2.6% in the quarter ending in that front, the highest figure since April of 2014. This recovery has been a consequence of the diverse factors. One of them is important improvement in external conditions, which is a critical driver for a country like Chile where the trade volume is more than half of GDP. The second growth in favor of our trade partners and the increase in copper prices as you can see on the top right chart has supported various expectations for Chile. Since copper ore expense more than 10% of total GDP hence it is a relevant amount of our fiscal revenues, besides it generates [ph] to different areas of economy.

Our second driver has been the normalization of mining activity after the strike in Escondida, which affected the copper production in the beginning of 2017. Internal factors are also supporting the growth of the Chilean economy. As seen on the bottom left chart, the private expectations have risen significantly. We think that their best level in more than four years, which just indicate for example of consumer confidence. In December, it breached 44 points, accumulating the fifth consecutive improves in achieving the best numbers since May of 2014.

More importantly, expectations concerning the future 12 months has sharply increased to 66 points, the highest since 2010. Other figures are mostly confirming this digital improvement. In December for instance, the improvement rate went down to 6.4% and retail sales posted a strong 5.6% annual increase in November led by a substantial 14.1% year-on-year gain in durable goods. All in these figures reflect that domestic consumption is still supporting the Chilean growth. Another important factor has been the – of inflation, which has been increasing slightly in the margins although the annual rate remains in the lower part of the Central Bank range, which is between 2% and 4%.

As reporting a monthly increase of 3.1% in December the CPI accumulated 3.7% rise in the fourth quarter, higher than the 3.1% observed in the previous quarter. As a result the annual inflation rate ended the year at 2.3% remaining below the policy barrier of 3%. Now I would like to share with you the baseline scenario for this year. Please move to Slide 04. There are important times of recovery in Chile, anticipating a better environment this year.

Actually we expect the GDP to increase around 3% this year, well above the 1.5% observed in 2017. This means the economy is expected to perform its best year since 2015. Over we acknowledge another barrier in our estimate; we will feel that growth is likely to be even faster. Consequently, we expect a slight improvement in the labor market. We forecast a decline in the average unemployment rate from 6.7% last year to nearly 6.5% of this year, with an improvement in quality of growth, as a consequence of respective parts in price demand, particularly investments.

Reserves inflation, we also estimate a gradual increase in the annual CPI from 2.3% in 2017 to nearly 2.8% this year. Even though the economy is a fun factor, the strengthening in the Chilean peso growth is contributing on the opposite side. All in all, we estimate the CPI to convert to the 3% target only in 2019. Finally, our scenario considers that the Central Bank maintains the rate at least until the second half of this year, although the possibility of further tax. In the case of that, inflation remains around this 2% for a longer period of time.

If the economy continues growing, the Central Bank would begin a gradual normalization of interest rate by increasing needs by five to six point this year and possibly more phased out in 2019. Please turn to Slide 6. I would like to go over some of the last trends we have seen in the local banking system. Once again, the Chilean industry achieved solid results despite the existence of some negative factors that were the weak economic growth and the lowest inflation rate. And basically it reflects the existence of strong fundamentals and improving capability to adapt a strategy to changes in the economic cycle.

In 2017, the system also net income of Ch$2.3 trillion, its simply 8% higher when compared to the 2016 year. I think you assumed the start. This improvement was explained by an important increase in net operating income mainly through one-off in many of our competitors. Partially offset by higher risk, a rise in expenses and taxes. In terms of the portfolio for the industry, total loans grew 2.9% in real terms year-on-year, is slightly lower than the 2.4% increase over last year.

The breakdown shows a figure consistent with the GDP. Commercial loans decreased 0.2%, in line with the results in growth investment, while housing and consumer loans increased by 8.2% and 5.3% respectively, consistent with the resilience of service in consumption. However, it is important information that the better dynamics expected for this year in the economy to translate into improvement in loan growth, especially in commercial loans. Please move to Slide 7. Despite the total loans, the GDP, our loan penetration in [indiscernible] over 90% as a percentage of GDP, which is relatively high when we compare Chile to other emerging markets, there is still substantial growth potential to continue expanding retail loans.

When analyzing loans by product and segment we find that loans to corporate and mortgage loans was around 60% of loan to GDP. If you take a closer look at the chart, SME, the middle market companies only represents 58% of total commercial loans, but represents 99% of debtors. This clearly shows the huge potential to continue in placing the SME segment in low and fee-based product. Loans to individuals also have potential to continue increasing. First, consumer loan penetration is in line with our eleventh year.

And, second, even though mortgage loan represents 26% of GDP, this level is relatively low when compared to more developed markets. For example this chart on the bottom of this slide shows a comparison of total household debt to total loans for all OECD countries. As you can see, Chileans have very low debt level when compared to more developed countries, demonstrating that there is room to also continue penetrating this segment. These two segments are specifically what we're focusing as Chile continue to grow However, it is important to mention that the various dynamism expected for this year in the economy would be less by historic comparison should have played in some important improvements in loan growth, especially in commercial loans. For this year, we're expecting that total loan growth in the Chilean banking system will pick up to levels between 5% and 6% in real terms.

This will be driven by mortgage loans and consumer loans, growing above 8%, followed by commercial loans that we expect to grow above 4%. Now I would like to pass the call to Pablo, who will go into more detail about our strategy and our financial results.

Pablo Mejia: Thanks, Rodrigo. Can we turn to the next Slide Number 9 to begin the discussion of Banco De Chile's financial results? Despite that 2017 was sluggish in terms of economic growth, inflation and loan demand, we posted once again strong financial figures. Net income for the year reached Ch$576 billion that was 4.3% higher since 2016.

And we continue to maintain attractive levels of profitability of 19.3%. It's also important to point out that this was obtained despite higher corporate tax rate less that 24% in 2016 to 25.5% in 2017. On a pretax basis, net income for the year was 7.8% higher than 2016. On a quarterly basis, we generated net income of Ch$142 billion, 14.8% higher than the same quarter last year mainly due to lower loan loss provisions. We were able to obtain these figures by developing various commercial strategies and improve our customer experience, and also drive recurring income.

Additionally, we have been concentrating on maintaining adequate levels of risk return, improving productivity and controlling expenses proactively. Please turn to Slide Number 10. We have consistently demonstrated our ability to deliver sustainable and superior profitability for our shareholders, thanks to our long-term customer-centric growth model. The next is few slides we will go how we have shifted our strategy to focus on the retail segment. We will also discuss how our emphasis on strengthening customer experience is helping to build the foundation to success in this more competitive environment.

And we will go over the parts of financial results. Thanks to improvements that we're made that has driven productivity. Lastly, we will examine how we have managed to keep risk at these very low levels that has played an important change in mix. Please turn to Slide 11. Our large and diversified customer base is clearly one of our main of advantages.

First, we have the largest customer base in an industry with a market share of 18.7%, as you can see on the chart on the top left. Also, thanks to business initiatives that’s taken advantage of new technologies as well as how we proactively use business intelligence to target new customers, we've been able to build a large current account customer base that is growing faster than all of our main peers, as you can see on the bottom left. And this is even composed of higher net worth individuals. You can see this through many ways. One way to see this is by examining current account balances, where we maintain Ch$2.9 million per account on average while the closest competitor bank has nearly 40% less average balances.

Additionally, we have an overall market share of 30.1% in personal banking current account balances. It is also important to highlight that not only we're growing in new accounts but also that these customers are taking on other products as well. In only 90 days, new customers reach the average loan share of wallet that overall customer base maintains, as you can see on the chart on the bottom right. The importance of this high net worth customer base is clearly more apparent when we analyze our loan book and deposits. Please turn to Slide 12.

Total loans this quarter grew only by 0.2% year-on-year. Retail loans were far more dynamic than the wholesale segment as a result of the lackluster economic environment that kept corporate loan demand weak and the implementation of our strategy, which prioritizes growth in certain segments. For this reason, it's important to point out the great benefit that we maintain for having a well-diversified loan book. That is, when one segment slows down or when we don't see adequate balance between risk and return in that segment, other segments are capable of offsetting that weak performance. Retail loans in this scenario grew 7%, while the wholesale segment dropped by 9%.

Within retail, SME commercial loans were the fastest growth product at 10.4% whereas loans to individuals grew 6.3% year-on-year, thanks to the mortgage loan book and the middle and upper income loans. Retail SMEs continue – we continue our strategy in the retail SMEs of building long-term relationships with clients. This quarter we held numerous SME conferences across many cities in Chile. These events consists panel discussions and presentations that help customers grow their business and give them a unique chance to network with other entrepreneurs. We also continue reinforcing customer experience by adding new features to mobile app, successfully introducing a new investment management app, launching a new company banking webpage, and entering into new loyalty programs with British Airways and GOL Airlines, which is from Brazil, amongst other initiatives.

We're confident that by providing the best customer experience to our customers through initiatives such as these, coupled with excellent customer service and deeper use of business intelligence, we will be able to continue to taking advantage of new growth opportunities, while maintaining favorable risk-return equation. As for funding, demand deposit accounts grew 6.1% year-on-year, well above loan growth. And we continue to lead the industry in cost of funding, thanks to the solid deposit base. Our leadership in cost of funding, particularly in local currency, as you can see on the chart in the bottom right, of 2.5% is due to our solid demand deposit base from both retail and wholesale customers that choose to bank with us over other competitors, as well as lower spreads reached when we issued debt, thanks to strong risk ratings from – of A from Standard & Poor's and Aa3 from Moody's. Thanks to these strong ratings, we continue placing debt in foreign markets at very attractive spread.

We recently placed long-term unsecured bonds in Germany and Japan totaling nearly $275 million with tenures that went from five to 20 years. It's also important to note that most of these placements were accompanied by cross-currency swap hedge accounting in order to neutralize any effects associated with changes in FX and tenures that hit our cost of funding. Locally, we also issued bonds for an amount approximately of $650 million denominated in U.S. with tenures ranging from four to 12 years. In terms of capital ratios, thanks to a more sustainable dividend policy, those changed a couple of years ago from 70% cash payment to 60%.

Our Basel ratio ended the year with a solid 14.5% level and the Tier 1 capital ratio of 11.5%, both figures higher than our main peers. In terms of adoption of Basel III, the Finance Ministry said mid-year a bill reforming the General Banking Law. In January 2018, the bill was passed by the lower house and is now pending further approvals. There is still a lot of information that needs to be set by the regulator, such as buffers and risk weighting. So based on our estimates we think that we won't require any additional capital compliance to comply with this new standard as long as the new standards are implemented gradually.

Please turn to Slide number 13. Operating revenues decreased 1.5% year-on-year, mainly due to higher comparison given the one-time sales of AFS instruments of approximately Ch$69 billion in 2016 and in a lesser extent to lower inflation recorded in 2017 of 1.7% versus the 2.8% of the year prior. As you can see on the chart on the right, through effective commercial strategies that have leveraged new business intelligence tools to concentrate growth in key market segments, which provides more attractive returns with adequate levels of risk, we're able to grow customer income by 5.3% year-on-year, offsetting almost completely the negative effect of lower inflation and the one-time, as I mentioned earlier. Specifically, strong growth in loans to SMEs and personal banking provide us with higher lending spreads as you can see on the chart on the bottom right. And by effectively cross-selling our customers, we grew fee income by Ch$26.4 billion or 8.2% year-on-year as we can see on the following Slide number 14.

The increase in fees was due to, first, greater use of transactional products such as credit cards, ATMs and checking accounts, which together totaled approximately Ch$15 billion, boosted by one-time expiration of loyalty program that reduced fee expenses. Second, greater contribution from the mutual fund and stock brokerage for about Ch$9 billion. This increase was achieved thanks to greater risk appetite from investors, which translated into higher trading volumes in the stock brokerage business, and an expansion of assets under management. Third, higher fees from insurance brokerage of about Ch$2 billion, associated with higher premiums, thanks to successful sales strategies. And, finally, more deals in financial advisory services which are amounted to approximately Ch$1.4 billion.

Thanks to these proactive commercial efforts to continue growing our fee-based business, we're able to maintain our leadership position in this source of income with a market share of 20%. On the next Slide number 16 is a review of how our digital strategy is bearing fruit of our new digital initiatives. Digital banking platforms continue to increase the importance in everyday banking. Customers are coming to branches less and are using digital channels more intensively. We're continually focusing our efforts in providing our customer experience through these channels and consistently challenging ourselves to come out with new and better apps with more features that customers appreciate.

Saying that we're proud that we're considered to be the best digital platform in the industry based on a wide array of independent surveys for their Net Promoter Score mobile apps. On the chart on the left, you can see that in only one year personal banking online transaction volumes have increased in double-digit rates by 31% and today represent over 50% of total transactions. On the chart on the right, the increasing importance of mobile banking continues. Specifically, transactions have been mainly driven by more of the mobile phone and to a lesser extent the webpage. While branch transactions have seen a reduction of 2.2% year-on-year, we expect this trend to continue.

And for this reason, our efforts are focused on streamlining processes, implementing smart ATMs and gradually beginning to decrease the size and density of our branches while improving significantly our digital contact channels. We're also implementing a new CRM, which would improve customer experience and also the productivity across all segments of the bank. By streamlining processes and using new technologies across the different front and back office areas, we've been able to drive productivity and reduce costs, as described on the following Slide number 18. As you can see on the chart on the left, total operating expenses remained basically flat year-on-year increasing only by 0.1%. Despite negligible growth in expenses, our efficiency ratio increased from 45.4% in 2016 to 46.2% in 2017 due to effect of one-time sale of AFF instruments of approximately Ch$69 billion in 2016 that increased operating income and the negative impact of lower inflation over our operating income this year.

In terms of operating expenses to total average assets, this ratio improved moving from 2.6% in 2016 to 2.5% in 2017. Through projects aimed at improving customer experience and by keeping a permanent focus on cost control, we’ve been able to optimize how the bank, is run. And thanks to this, we have been able to show important advancements in productivity. Moreover, if we compare the growth in expenses this year, as you can see on the chart of bottom right of this slide, we are the only bank that have been able to keep costs low. For the coming years, we are confident that these initiatives continue to bear fruit, which will consequently maintain expense growth at lower than operating income and continue to improve our efficiency and productivity levels.

Prudent risk management is one of the fundamental pillars of our success and continues to be a part of our long-term strategy. We ended another year with low levels of cost of risk, as you can see on Slide 20. Despite another challenging year, we recorded a decrease of 24% in provisions for loan losses, which reduced cost of risk ratio from 1.25% to 0.93%. This reduction was due to mainly two factors. First, in 2016 we recorded additional allowances of Ch$52 billion.

Second, a net credit quality improvement of nearly Ch$42 billion year-on-year, which was related to both the credit behavior of our retail segment and the wholesale segment as it had further improvements in the credit profile of specific customers, while other corporate customers specifically the Chilean industry, reduced their exposure with us. I think it’s important to highlight. We have achieved these levels of risk not only due to improvement in credit behavior of customers as a whole in Chile, but also due to prudent risk management approach that is deeply present throughout the lifecycle of our customers. There is no doubt, assists us in identifying risk and implement strategies to minimize our exposures. Please turn to the next slide number 21.

Before we move on to questions, I would like to go over some key financial highlights for 2017. We finished the year once again with great figures. Net income attributable to shareholders was the highest in the industry with a market share 26%, equal to Ch$576 billion. We grew this figure by 4.3% year-on-year despite the weak economy, low inflation and higher taxes. Pretax income also grew by 7.8% year-on-year.

We also continued penetrating the retail segment and proactively managing lending spreads across all of our business segments. But it really continues to grow sustainable core revenues as customer income expanded by 5.3% year-on-year and net fees grew 8.2% during the same period. Cost of risk also came in at very good levels, which is only 0.93%. And we continue implementing new technologies and streamlining front and back-office operations that permitted us to maintain operating expenses basically flat. These results were essential to reduce the negative impact of lower inflation that affected non-customer income and higher corporate taxes.

Finally, when we look at the year ahead, we’re confident that 2018 will be much more dynamic. Business and consumer confidence has already begun to show signs of improvement. There is a consensus in terms of GDP growth will be more than double than 2017, and inflation should return to the Central Bank’s target range of 3%. All these factors should help us to continue to post attractive results for our shareholders. We expect that strategic priorities, which are deeply focused on digital transformation, will permit us to greater advantage and gain market share during the better economic cycle that is quickly approaching.

Thank you for listening. And if you have any other -- if you have questions, we would be happy to answer them.

Operator: Thank you. The floor is now open for questions. [Operator Instructions] The first question comes from Ernesto Gabilondo with Bank of America Merrill Lynch.

Please go ahead.

Ernesto Gabilondo: Hi, good afternoon, Pablo and Rodrigo. Three questions from my side. The first one, we have seen Banco De Chile losing market share. So how do you see competition? And who you see as the most aggressive competitor? My second question, how do you seeing in expansion grow in 2018? And what will be the assumptions behind in terms of inflation and loan growth? And, finally, how do you see asset quality, particularly the cost of risk? I believe you have done a fantastic job there.

But how much room do you have to improve it? And just considering that you will like to entering in middle, low income segment through retail. And actually when do you expect to have your new platform or model to attend this segment? And finally, any guidance that you can provide in any of the lines, I think will be very helpful. Thank you.

Pablo Mejia: Thanks, Ernesto. I think it’s important to emphasize the strategy due to the sustainable and high profitability.

It’s important to highlight this, for your question. I think first, continue to penetrate the retail segment is very important for us. We’re also trying to continue during this by using the advanced technologies, which will provide new and improved digital solutions for customers and help us leverage business intelligence continue drawing. We are also very focused on cost control, streamlining processes, which should help maintain a good level of efficiency. And we think that good competitive advantages based on these factors should allow us to continue to start gaining market share in 2018 when we see a pickup improvement in the economy.

It’s true that we have seen a deterioration in market share in 2017. But it’s also very important to focus on how we have been growing. We’ve been growing and this is the key segment that we consider to be the most important and the most profitable. If you look at spreads, spreads have been improving at Banco de Chile. If you look at lending interest rates comparative, I don’t think you can say the same for other banks, especially the more middle sized bank, which are the ones that we have seen have been very aggressive.

So I think it’s important to emphasize that for 2018, I think we have the competitive advantages and the strategy that we should be able to leverage well and use this intelligence in order to gain market share in all the key segments that we’re looking at. And one of your questions, you also mentioned entering the low, middle income segment. I think it’s important to emphasize that we’re a universal bank. We’ve always been a universal bank and we’ve never decided to exit the lower income segment. We’re a bank that’s focused on having a long and stable strategy without enter and exit segments from one year to the next.

And I think that’s of our superior competitive advantages at Banco De Chile and it has been – thanks for that we’ve a very successful chapter in growing with this customer-centric. In terms of net interest income on next year, our 2018 inflation is very – obviously very positive for us – for the industry and for us. We’re expecting to return to inflation levels of the Central Bank target of around 3%. This should give us – if you look at the last quarter 2017, we have a net interest margin of around 4.3%. Probably for the next year, it should be around 4.3% – sorry, 4.4% – between 4.3% and 4.5% on the inflation.

The last quarter there was only 0.5% inflation. So there is some room to continue improving in the net interest margin. We’re considering that – we have very good spreads as well. That should also help continuing to improve that margin on next year. And in terms of asset quality, we ended the year just below 1%, between 0.9% and 1%.

If you look at 2018, we should expect cost of risks to be closer to the 1.1% level. And why are we seeing an increase in cost of risk? Basically from what we mentioned in the call, what we had mentioned in the press release, 2017 there is a lot of one-time which – not a lot of one-time. But there are certain customers that we really provisioned because they reduced their debt with us. And we also didn’t grow in the wholesale segment and that made loan loss provision decreased particularly in the segment. We think that 2018 will be more balanced growth.

Therefore, we should see growth in both retail and wholesale. And cost of risk should be returned to more normal levels to be between – around 1.1%. And other guidance, which is probably important to mention, you would like to hear in terms of ROE – long-term ROE with GDP at more reasonable levels and inflation at more reasonable levels, like we mentioned in other calls between 18% and 20%.

Ernesto Gabilondo: Great. Thank you very much Pablo.

Just in terms of CapEx growth, any assumptions for this year?

Pablo Mejia: CapEx growth, we should expect CapEx growth to be less than inflation, with a slight improvement in efficiency ratio. Always, it’s important to mention that for the efficiency ratio as inflation is 3%. So should have an efficiency ratio of 45% and it should be a slight improvement over this.

Ernesto Gabilondo: Thank you very much, Pablo.

Operator: The next question comes from Tito Labarta with Deutsche Bank.

Please go ahead.

Tito Labarta: Hi, good morning. Thanks for the call. I’ll keep to one question so others have a chance to ask others. We recently saw one of your main competitors announce a new product to the middle, lower income segments.

I know you just mentioned that you don’t enter and exit segments. But given the improved macro outlook, is this a segment where you may see more opportunity and you may start to maybe increase penetration there? And how does maybe your product offering potentially compare? I know you talked a lot about digital initiatives. Is this something that you’re using to go after this segment? Just wanted to get sense of how you see the growth there and this potentially new competition in that segment? Thank you.

Pablo Mejia: Like mentioned the Universal Bank and we have always been in that segment. But I think the main difference that we have seen as we compare Banco de Chile today about five years ago as a portfolio.

And Credit Chile, that’s what we call that segment, has remained relatively the same. How we’ve grown? Definitely we control wholesale customers, employees to grow that segment. We’ve adjusted the model accordingly depending on the cycle that we have found ourselves in. And going forward we think that there should be an opportunity there and we’ll continue to adjust our customers below to continue maintaining our position there. And if the case may be that Chile continues to show improvement for overall continue growing in that environment.

Tito Labarta: Great. Thanks, Pablo. And do you think with Credit Chile, like that’s the way to go after it? Do see more opportunity as you move towards more digital penetration? Is that also a way to growing the segment?

Pablo Mejia: Well, I would say in every segment today, Chile is a very advanced economy in terms of digital and how people use mobile apps and the Internet. So through digital solutions, that’s great – one of the ways that we’ll be looking at growing in this segment, as with all the other segments in the bank, it just how we feel that the future is evolving for banking. So the brand name is Credit Chile.

It’s just within the commercial division of Banco De Chile. But it’s a different subsidiary or a different commercial segment.

Tito Labarta: Okay. Thank you very much.

Pablo Mejia: Welcome.

Operator: The next question comes from Thiago Batista with Itau BBA. Please go ahead. Actually, it looks he just left the Q&A. So I will then go to the next participant, who is Alonso Garcia with Credit Suisse.

Alonso Garcia: Thank you.

Good morning, everyone. My question is a follow-up of the previous questions. I wanted to ask you, I mean over the past couple of years, you and also other banks in Chile has been focusing their attention in the mid and higher income segment. So I wanted to ask at this point you are seeing some kind of – or anticipating to acquire soon an overcrowding in the mid and higher income segment, that is together with the better income growth, making you more interested, again, in the consumer finance segment. Thank you.

Pablo Mejia: I would say that we're – like I mentioned, we're an universal bank and we are interested in all segments independent on the cycle. We can grow a little bit more or less in certain segments. So I think over the past year, there has been less demand. And we expect in the future there should be more demand in all segments, including the middle and upper income segment. We are by far the leader in that segment.

And in the lower income segment, which we actually also have a very high market share – market position with the information that's publicly available in that segment. So I think both segments, the lower and the upper, or all three lower, middle, upper are very attractive for growth in the future. And it would just – what would be interesting will be how we service these customers, especially the lower income, which has always been very focused on servicing customers with – in the lowest cost of coming necessary.

Operator: The next question comes from Neha Agarwala with HSBC. Please go ahead.

Neha Agarwala: Thank you for taking my question. We have seen significant improvement in the cost of risk over the past four, five years. Where do you expect this to stabilize going forward in the medium to long-term? Thank you so much.

Pablo Mejia: I – we took a good level of cost of risk for the portfolio that we have today, which is something like 60% retail, 40% wholesale. It's a level of what I've mentioned, between – around the 1.1% is reasonable.

Obviously, if we continue to expand the retail loan book much quicker and Chile continues to grow, GDP per capita continues to grow, you should see Chile as a whole expand presence in the retail segment. There could be changes there, but in the medium term what we can see today, obviously it's closer to that 1.1%.

Neha Agarwala: Thank you, Pablo. If I can ask another question. In terms of NIM expansion with high inflation and slightly higher this year, do you have an estimate of how much NIM expansion you can expect?

Pablo Mejia: NIM expansion? Well, right now we're at a level – we ended the quarter – we just look at the quarter around 4.3% for the year.

It was at the level of 4.24%. Probably with the gaps that we have today in the balance sheet with the spreads that we have today, we should be within a level above that 4.3%. So it's around 4.4%, maybe reaching slightly higher, obviously depending on inflation.

Neha Agarwala: Thank you so much.

Operator: The next question comes from Sebastian Gallego with CrediCorp Capital.

Please go ahead.

Sebastian Gallego: Hi, everyone. Thanks for the presentation. I only have one question actually. You mentioned the 2017 digital achievements and how you're working on your strategy.

Can you tell us what's the focus or what are the key projects or initiatives in 2018 that we should be looking at? Thank you.

Pablo Mejia: There are many initiatives, difficult to mention about in this call, the most important would be the new CRM system that we're clearly working on, and we've launched various or modules of this system. Today, we have the 360-degree view of customers who customers. We understand the customer. All this product.

Everything is on one page. It allows us not to use different systems banks that offers products and services to customers. It gives a more complete view of customer. So customer experience and they contact us through different channel will be much better. What's being launched? Well, what's left to be launched is being able to take on all the products and services through the new CRM and expand this CRM across all the segments.

So today it's mainly in the retail segment that uses the CRM. But our subsidiaries, our wholesale segment also use the CRM. We recently launched the new company webpage. We're continually improving the we provide customers. We're really what Banco De Chile doing that's very different in terms of in our digital banking.

I would say most banks are doing – what most banks offer is pretty similar with the exception of I would say is quite different from Banco De Chile, which is an allows you to do purchases. You can do purchases in retail establishment. You can do instant transfers between customers. You can. I think that payment system is one of the most important – one very important aspect of our digital mobile platform and.

Some more technological way to do purchases than the historical credit cards and cash payment. We're also implementing a new platform for insurance, a new platform for bank. And then business intelligence, we continually improving the use of business intelligence on how we understand the customers following the lifecycle. How we use the information of the customer to provide better customer, so led by – if a customer is using our product less, notice to maintain and improve attrition levels. And recently – recent new IT project is personalized pricing.

We have a personalized pricing model. Rather than segment customers by income or which banking segment they operate in, we actually look at many different factors to see a more precise pricing in terms of the actual risk that they have with us. so the prices are much more accurate.

Sebastian Gallego: All right. Thank you so much.

Pablo Mejia: You’re welcome.

Operator: [Operator Instructions] The next question comes from Gary Fernandes with JP Morgan. Please go ahead.

Gary Fernandes: Thank you, gentlemen. I have a question on your branch strategy.

We note that Banco de Chile has been reducing the number of branches. That is always something should be here and it's a multiyear trend. But given the better macro, do you think it's – branches in the short-term. And I am asking you because main competitor has a plan to start – open more branches in the coming five years. So just to have an overview on your strategy for branch.

That's the first question. And the second question is about banking law. We know it was to Lower House in January and sent to the Congress. But can you just provide an update on it. Like what is the expected provision time, if you had any visibility on the buffers.

And also if you can remainder us the capital impact your base case, we know that there is no capital need for you. But if you can provide a number of view on the potential impact, that would be helpful? Thank you.

Pablo Mejia: Okay, thanks. In terms of the branch strategy obviously, I think the most important aspects for how customers are using banks is more through the digital side. So the digital channels are becoming much more important.

How we're looking at managing the branch network is very important. So how we are adjusting the branch network is we've been optimizing the branch network moving customers from if we close the branch to nearby branch we have seen no impact in terms of net promoter score and how customers receive experience the best. We've been doing this adjustment slowly, always keep in mind how this could impact net promoter score. And we don't expect large changes rapidly. I would say there is a good presence in Chile today for Banco de Chile branches.

And how we're looking to move forward in the future is continue to operating new types of channels in order to for these customers to operate with us with smart ATMs, reducing the size of branches. Today the branches are very large, somewhere around 600 meters squares. We're looking at reducing the size of those branches to around 200 meters squares. But we don't think that we can make the branches, at least today, more interesting in order to get the customer to come back to the branches. Customers want ease of use and to use digital channels in order to bank with us and focus and trying to make those platforms better where a customers can began, for example, take a product on one channel and finish on another channel.

Not all customers are the same and obviously that’s why we need to continue maintaining branches. But I think it's important doing in digital banking for the future. So I'll pass the call to Rodrigo.

Rodrigo Aravena: Hi, with respect to this fortunately we don’t have more information. What we know is that it was passed to the Lower House.

But there are other and new profits in this and other parts of the Congress. But we have to consider that there would be new Congress in terms that in the Lower House, behalf of that. So it's not clear when it finally would be approved. But it's important to highlight here, as Pablo mentioned in the presentation that according to our internal estimate, we won't need more capital in the short-term. But it's very important to analyze from information that with regard with some who further finish in terms of the signing for some who when a bank is depend or not.

So I think it's better to analyze new information, the new in terms of the Congress. After that, the new government would take place in March.

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

Pablo Mejia: Thank you for listening to the call and participating.

We look forward to speaking to you for next quarter financial results. Thanks.

Operator: Thank you. This concludes today's presentation. You may disconnect your lines at this time and have a nice day.