Earnings Call Transcript
BANK OF CHILE (BCH)
Earnings Call Transcript - BCH Q1 2020
Operator, Operator
Hello, everyone, and welcome to Banco de Chile's First Quarter 2020 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 Vice President of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations; Daniel Galarce, Head of Financial Control; and Natalia Villela, Investor Relations Specialist. 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, Chief Economist and Senior VP of Institutional Relations
Good afternoon, everyone. First of all, I hope that all of you are healthy and safe in this challenging time. I would like to start this conference call by thanking you all for joining us this afternoon. Today, we will share our views related to the evolution observed in the macro environment, and then we will present a review of the financial results posted by Banco de Chile during the last quarter, with a special focus on our competitive advantages and our long-term fundamentals. Let me start with our analysis of the new macro scenario. Please move to slide number 3. As you may know, the rapid spread of COVID-19 has had a material impact on the global economy with GDP estimates plummeting in a very short period of time. In only four months, the IMF has reduced the global growth forecast from 3.3% in January to minus 3% in April, with a deeper slowdown in advanced economies, as seen in the top left chart. In this environment, the IMF said the world economy is facing the worst recession in a century. However, this crisis has many differences from any other observed in the past. One is the magnitude, as nearly two-thirds of the global labor force is not working normally in their physical workspaces. Additionally, since this crisis doesn't have an economic root, the role of economic policy is limited to reducing further negative spillovers instead of solving the problem. The greatest impact will be seen in the real factors of the economy, mainly employment and production, rather than in the financial sector, as we saw in the last global crisis. In fact, the sharp increase of the initial jobless claims in the United States reflects a rapid deterioration in the labor market, which will probably be a figure repeated in various countries. Even though there is a lot of information to quantify the size of this shock, we can anticipate a deep recession, at least in the short-term. Undoubtedly, this will have an impact in Chile. Since we are highly integrated into the global economy, the drag on external growth will reduce local growth. In fact, GDP fell by 3.5% year-on-year in March due to the 5.7% monthly drop, despite measures aimed at reducing the spread of COVID-19 being implemented at the end of March. As seen on the bottom left chart, this negative growth interrupted the positive trends observed at the beginning of this year, following the construction seen in the previous quarter. The gradual increase in the unemployment rate is also reflecting the worst economic environment, as the chart on the bottom right shows. Since several sanitary measures have been implemented by local authorities, a double-digit GDP contraction is likely for this quarter. Despite the unusual level of uncertainty, which leads to substantial differences in forecasts, there is a broad consensus in one area, the strong position of Chile relative to any other Latin American countries. This means that Chile should have a shorter recession and a stronger recovery in the future. What is behind this view? Let me explain this in the next slide. Please move to slide number 4. Fundamentals made the greatest difference in difficult times. In this regard, Chile has a unique combination of solid fundamentals and a strong policy framework, which allows for the partial reduction of the negative impact caused by the virus. As you can see in the upper left chart, Chile has important buffers that allow aggressive responses on both fiscal and monetary fronts. International reserves held by the Central Bank are $57 billion or 14% of GDP, while sovereign wealth funds held by the government are equivalent to $23 billion or 8% of GDP. Thanks to this, Chile is one of the few countries with the opportunity to finance an entire fiscal package by using only its own savings. Although fundamentals are relevant, the quality of economic and public policies is even more important. Chile has been recognized for its timely, coordinated, and strong policy responses. Some of them can be seen in the table on the right, which shows the main tools used in these comprehensive and coordinated economic measures. In terms of the government, it has implemented several measures focused on protecting employment, household disposable income, and liquidity to SMEs. The total fiscal plan implies resources of nearly 7 points of GDP, which positively compares with other countries. The greatest part of the spending has been oriented towards injecting resources into the unemployment fund, making direct transfers to vulnerable people, and providing capitalization to both Banco Estado and more recently to FOGAPE, which is a government program that aims to facilitate lending to SMEs by guaranteeing their obligations with banks. By doing so, the government expects that most companies in the private sector might have better access to working capital loans, equivalent to three months of sales with a six-month grace period and paid in a term between 24 to 48 months. The Central Bank has also been taking an active role. Apart from the sharp reduction in the interest rate to only 0.5%, it has been implementing non-conventional policies. These measures include the New Conditional Financing Facility, or FCIC, where banks have access to four-year loans at the current policy rate. This special line has an upper limit of $24 billion, depending on the actual increase in both consumer and commercial loans. The Central Bank is also allowing corporate bonds and commercial loans granted by corporate customers as eligible collaterals for utilizing liquidity facilities, and is purchasing banking bonds up to $8 billion. Other measures include the extension of the FX intervention program until January next year and a temporary easing of liquidity requirements. Finally, the Financial Market Commission has taken diverse measures, such as postponing the implementation of Basel III for one year to 2021. Additionally, the commission announced temporary easing in provision requirements, which permits banks to provide more flexibility to their customers' obligations. The combinations of all these factors have contributed to the optimism for the future of Chilean growth, relative to other countries. In fact, the IMF expects Chile to post the highest growth in Latin America in 2021 as the bottom left chart shows. Now I'd like to present our business scenario for this and next year. Please go to slide number 5. Despite the strong position of Chile, we are aware of the high level of global uncertainty relating to the evolution of COVID-19, which makes it much more difficult to provide any forecast for the future. On GDP, we expect the economy to post negative growth of around minus 3% this year. This might be the result of a deep fall in the second quarter of almost 10% year-on-year and a sequential improvement since the second half. We are confident about the potential recovery next year as a result of economic policies implemented this year. Despite this slowdown, we don't expect a substantial drop in CPI, due to the persistent weaker currency. This is a key factor in the CPI trend, as tradable goods represent nearly 60% of the total basket. Therefore, we expect inflation to drop to 2.5% by the end of this year from 3% last year. We expect the CPI to return to levels of around 2.8% in 2021. Consequently, we don't expect changes in the monetary policy rate at least until midyear 2021. Now, I would like to discuss briefly the evolution of the Chilean banking industry. Please turn to slide number 6. Loans for the Chilean banking system grew about 4% over the last quarter, led by the acceleration of commercial loans. On the other hand, mortgage lending flowed to 2.8% quarter-on-quarter, and consumer loans dropped 1.5% compared to the prior quarter. The full impact on mortgage loan originations as a result of the effect of the COVID-19 pandemic will probably not be fully reflected in the next few months due to the normal delay of the time it takes for homebuyers to agree to purchase homes and the days that the loans are actually paid out. This weaker dynamics in personal banking loans is consistent with the slowdown in the overall economy in the last quarter and also with the negative impact of COVID-19 in March, which affected loan demand during a period that is seasonally strong for consumer loans. In fact, the quarterly central bank loan survey, which was released this week, shows that more than 90% of banks perceived a weaker demand for consumer and mortgage loans in the beginning of this year. On the other hand, there was a strengthening in demand for wholesale loans, particularly from corporations, which are working to improve their liquidity position to deal with the initial effects of the COVID outbreak. Looking forward, there will likely be a similar trend during the following quarter: subdued or negative growth in consumer loans, a steady decline in mortgage loans due to the inertia of these products, and a positive expansion of commercial loans as a result of both the capitalization of FOGAPE and measures taken by the central bank that should increase loans to SME companies and middle-market companies. In terms of results, the Chilean banking industry posted net income of CLP 614 billion in the first quarter, well above the level recorded last year, mainly due to lower expenses. Since economic activity is entering into a negative cycle, we think it's important to note that the temporary impact suffered by the industry in previous recessions. The chart at the bottom of this slide shows how resilient the Chilean banking sector has been in negative periods as the industry maintained positive levels of ROE and only experienced temporary deterioration in asset quality. Although the COVID-19 crisis is different from any other situation observed in the past, it's important to keep in mind the strengthening of most of Chile's long-term fundamentals over time. According to work on the Forum Global Competitiveness Index, for instance, Chile ranked fourth in terms of the robustness of banks. This is attributable to our positive fundamentals, including good capital levels, a strong policy framework, and solid management capabilities to adapt to new scenarios. These factors should contribute to better figures in subsequent years as we've seen in previous crises. Now, I would like to pass the call to Pablo, who will go into more detail about Banco de Chile. Please turn to slide 8.
Pablo Mejia, Head of Investor Relations
Thank you, Rodrigo. Our successful history has been achieved through a consistent strategy and strong fundamentals. All these factors, together with our strategic initiatives, have set the ground to create the sound bank that Banco de Chile is today. A key element of our business strategy and a clear competitive advantage has been our focus on transforming Banco de Chile from a traditional bank to one that delivers superior service with an increased emphasis on digital channels. In this new context, we firmly believe that we must provide the same level of customer service that we have offered in the past through excellent relationship managers, but we must also excel in new digital solutions. Customers are demanding more with less contact and faster delivery times. During the last years, we have implemented many initiatives, such as deeply understanding our customers and their life cycles, based on big data and using this knowledge to increase cross-selling. In this more modern bank, we are also preserving the importance of our branches. Despite that we have been optimizing the network, we believe that branches are an important component of our service model, especially because we are a universal bank that attends to all segments of Chile. A large number of these branches are located in areas outside Santiago, which is precisely where a significant part of GDP is generated, especially in industry, energy, infrastructure, mining, SMEs, as well as personal banking customers. Thanks to this network, we not only have account managers in regions, but we also have risk specialists that are closer to projects, allowing us to understand risks better, providing superior local knowledge that, in turn, helps maintain and reduce the cost of risk, especially in negative cycles. We also have the best brand in the Chilean banking industry. Year after year, we have consistently outperformed our competition in many different attributes, including Top of Mind; when customers are asked if they were to switch to another bank, which bank would they choose; as well as Security and Solvency, all with a significant gap when compared to the next main competitor. A recent report conducted by IPSOS, which is a leading global surveying company, reconfirmed the leadership of our brand, which reached an unprecedented 32% Top of Mind in March, almost 50% above our main competitor. Our scale and the diversification of our business are other strong advantages. We are number one and number two in most of the products and services that we offer, with consistent leadership in demand deposits and the best fee-based business in the industry, thanks to our ability to generate strong and long-term relationships with customers while constantly innovating products and services. Additionally, we are a universal bank with important diversification in terms of customer segments and economic sectors. Thanks to this, we are able to adapt our strategy in different stages of the economic cycle, allowing an additional source of stability to our results. In addition, we have the best funding structure in the industry with an important level of stable retail funding, thanks to a customer base that chooses to use Banco de Chile as their primary bank. Another important and positive aspect that makes a difference is our approach to Credit Risk. We consider that we are the most prudent bank in the local industry in terms of risk management, and this has been demonstrated through our consistent and more stable cost of risk. This is a result of the vast amount of human and technological resources that we use to effectively control and manage risk. This, together with a focus on growing responsibly and applying prudent risk policies, provides us with coverage ratios over two times. Lastly but not least important is our increasing commitment to maintain the best relations with all of our stakeholders, where ESG has become more important in our strategy. A key role is played by our board of directors, which has been successful in controlling, setting, and obtaining our long-term objectives. We have many business and risk committees to achieve these goals, which keep our board members constantly updated and well informed. We have also accomplished important advances in other areas, such as inclusion, support for entrepreneurs, and more recently in the environment. For example, last year we issued our first green bond. These and other initiatives are specified in our annual report, which is available on our webpage. Another differentiated aspect of Banco de Chile has been our permanent commitment to the community, which is especially relevant in difficult times. Please turn to slide number 9. COVID has been a challenging experience for the world and our economy. To face this pandemic, we have developed numerous initiatives that are focused on maintaining the bank’s continuity as well as supporting our customers and society. To begin, our Operational Continuity Plan addresses the stability of our services as well as the safety of our employees and clients. About 200 branches are open, and we are taking all the necessary precautions to provide a safe working environment. We are also continuously encouraging customers to use our virtual channels to satisfy their banking needs with the purpose of reducing the concentration of people within branches. We are proud that the results of these actions, together with that of our employees, have limited the number of cases in our workforce. This change in how we run our business has meant that nearly 28% of employees are working at branches that remain open while the rest are working from home. However, this adjustment poses new risks to our operations in terms of cybersecurity. With this in mind, we have reinforced our cybersecurity measures, ensuring that all of our employees who are working remotely are using platforms with the highest standards. Additionally, we have also implemented a prevention plan for higher health-risk staff, requiring those individuals to work from home until the current contingency is under control. Our commitment to Chile has accompanied our corporation for more than 125 years. In this regard, we are proud that we were the first bank to announce and implement a National Support Plan for our customers. The plan comprehends a series of special measures to support our clients, so they can cover their most urgent financial needs. In the personal banking segment, we provided customers the option of postponing the next three installments of their consumer and mortgage loans to the end of the contract, and we have made available a facility to reprogram credit card debt in installments at preferential rates. We were also the first bank to make these programs available 100% online, processing almost 300,000 requests from approximately 250,000 customers in record time. As for our SME customers, we have provided several support programs, including postponing the next six installments, offering new loans at preferential rates, and implementing a new FOGAPE loan facility for working capital that is guaranteed by the state. We are pleased to inform that we've already supported over 4,000 businesses and granted almost CLP 150 billion in covered loans. Furthermore, we have implemented many actions to soften the consequences of the pandemic for the most vulnerable groups in Chile. For example, we have been delivering personal care and health items for retirement homes across the country, and we have provided 18,000 door-to-door deliveries of medicines, food, as well as telemedicine services to senior adults in vulnerable sectors of Santiago. Lastly, we are honored that we are able to support once again the most important Annual National Teleton Fundraiser for children with disabilities. Unlike prior years, we didn't have any physical locations available to receive donations, and this took place 100% through our digital channels. This event was extremely successful, collecting almost CLP 40 billion, surpassing by far the level collected the prior year. Please turn to slide 10. The impact and unprecedented change that COVID-19 is making to the global economy is astonishing. This is probably adjusting permanently how we live our lives and the use of technology, and banking doesn't escape these changes. In fact, the role of digital banking in the pandemic has probably made huge leaps forward. In this context, we're proud to be considered the best digital bank in Chile as well as to have the best online platforms according to Global Finance. In addition, as a result of our efforts to understand customers' needs, our app, Mibanco, is considered the best in the Chilean banking industry as rated on the Apple Store. In the recent period, we have innovated our digital experience for customers in several fields, including the creation of new online banking platforms for companies and individuals, launching world-class mobile apps, and many other initiatives. We are continually looking for improvement opportunities in all areas of the bank. Along these lines, we want to highlight some projects that we'll be releasing over the next few quarters. We are currently in the final stages of launching a new digital onboarding platform, and we are working on improving the origination process for consumer loans. We'll give more details about these projects as soon as they are officially launched, but we can anticipate that both programs are based on mapping the customer's journey and behavior in order to offer the best experience while significantly reducing delivery times. It's important to mention that we worked on these projects through the agile methodology, which is centered on simple, fast processes with strong interconnections between multi-scenario areas. We're also implementing robotic process automation to streamline our operations, reduce costs, and allow employees to focus more of their time on serving customers with higher-value tasks. It's also important to highlight that the usage rates of our digital channels have been growing significantly. First, 100% of our personal banking customers rescheduled their loans online with relation to the COVID-19 crisis support program, and a significant percentage of our customers are using online banking. I should also mention that the online usage rates continue growing and now represent 76% of total monetary transactions, with an important increase in mobile as shown in the chart on the right. Furthermore, online consumer loan originations continued growing strongly, increasing from 38% of total operations to 47% this quarter. We firmly believe that all these figures demonstrate that we have generated a solid digital platform that our customers appreciate and depend on to perform their everyday banking needs. Please turn to slide 12 to begin our discussion on our results for this quarter. Net income for this quarter was positive, considering the events that we are currently facing as a nation. We ended 2019 with an outlook of weakened expectations on GDP, greater political uncertainty. It was widely agreed that 2020 would be a significantly better year. Nevertheless, COVID-19 reversed these expectations, and now consensus suggests that 2020 will probably be one of the worst recessions that we have seen in the world economy in recent times. Despite that, the impacts of the pandemic occurred during the second half of March, we were proactive in risk management, adjusting risk ratings in the wholesale banking segment for those customers evaluated on an individual basis to consider the recent developments of the pandemic and our corporate risk allowances. Even with these allowances and the higher-than-normal provision expenses that we incurred due to the seasonal effects in our consumer loan book in the summer months of every year, we recorded a bottom line of CLP 137 billion with a return on average equity of 16%, slightly below the figure of the fourth quarter of 2019 and above the level recorded during the same period last year. Nevertheless, it's even more important to consider risk policies and the well-capitalized nature of banks today to face this threat. As you can see on the chart on the right, not only did we record the highest return on average assets for the quarter, but also our capital base is meaningfully higher than when compared to our main peers. It's no surprise to suggest that we're far more prudent than our peers in terms of risk management amid the current context. We are certain that our conservative approach on this matter and our consistent strategy will pay off as it has in the past while continuing to deliver sustainable and superior profitability for our shareholders. Please turn to slide 13. Operating revenues grew 15.4% year-on-year as a consequence of an expansion of customer income that rose 6% year-on-year and non-customer income that jumped 75% during the same period. Customer income grew at attractive levels, supported by fee-based business, as well as a slight rise from interest revenues from loans and better results from the Sales & Structuring desk. Non-customer income was sustained by much higher inflation of 1% in the first quarter of 2020 when compared to the 0% inflation in the first quarter of 2019. Additionally, we had an extraordinary increase of CLP 7.6 billion from treasury activities, mostly attributable to higher results from trading and available-for-sale instruments of CLP 6.2 billion. This performance was concentrated in March 2020 as we benefited from decreases in local and foreign interest rates following sharp cuts in reference rates across the globe in response to COVID-19. In regards to net interest margin, as you can see on the chart on the right, inflation was the main driver of year-on-year increments, reducing the negative impacts of mortgage loan renegotiations at lower rates that occurred mainly during the second half of 2019, as well as a new rule regarding automatic payments of overdraft lines that became effective in January of 2020. In terms of fees, these rose by 21.3% year-on-year and was mostly attributable to the recognition of CLP 20 billion in fees related to insurance brokerage, driven by the joint venture we entered into with an international insurance company, as well as a rise of 5% in written premiums. To a lesser extent, these strong figures were supported by a CLP 1 billion year-on-year rise in fees from mutual fund management, as assets under management rose 29% compared to a year ago. Finally, as you can see on the chart on the bottom right, we were able to post the highest operating margin in the industry once again. This is a result of our responsible growth in loans together with the premium customer base that chooses to use Banco de Chile as their primary bank account and generates the best fee-based business in the industry. Please turn to slide 14. Total loans reached almost CLP 31 trillion this quarter, increasing 9.5% year-on-year and accelerating to 2.8% quarter-on-quarter. The wholesale segment was the main driver, growing 11% year-on-year and 8% quarter-on-quarter. This was due to increased demand for financing from high-rated middle-market companies and corporations who sought financing to improve liquidity in the context of COVID-19. The trends in the SME segment were similar to the other personal banking, recording a 7% annual increase while posting declines of 1.4% when compared to the fourth quarter of 2019. The 12-month period increments are due to the dynamic activity that this segment had prior to the weakening seen since the fourth quarter of 2019. After the events that took place in October of 2019, the business activity of many SMEs was affected, coupled with the rise of uncertainty and lower consumer and business confidence, which reduced the demand for loans and adjusted the supply for this sector. This, along with restrictions put in place by the government due to COVID-19, has further affected the sector's balance sheet. However, as mentioned earlier, the government is implementing a strong stimulus package directly aimed at companies with sales of less than approximately $35 million per year. Specifically, our entire SME portfolio, as well as a growing portion of our middle-market segment, will qualify for this package. The program focuses on providing working capital loans with government guarantees at a maximum preferential nominal rate of 3.5%. We expect that this will be the primary driver for loans in the upcoming quarters. In terms of personal banking, loans increased 9.2% year-on-year while remaining almost flat quarter-on-quarter. The annual rise was mainly due to residential mortgage loans that grew 12%, while in contrast, consumer loans during the same 12-month period decreased 0.2%. On a quarterly basis, mortgage loans remained flat, and consumer loans actually dropped 2%. These weak figures are associated with lower consumer confidence levels and weaker employment figures following the slowdown that took place in the fourth quarter of 2019. This led to reduced household spending and lower demand for home sales. In fact, new home sales dropped 39% in the fourth quarter of 2019 and 50% in the first quarter of 2020 according to the National Chamber of Construction. We expect personal banking loans to continue to show weak performance in the near term, as we should begin to see the negative impact of COVID-19 on the economy, especially in the mortgage loan book that has a lag from the time of the customer's request for the loan and the date that funds are effectively booked on our balance sheet. Please turn to slide 15. We continue to have the best funding structure in Chile, thanks to having the highest cross-sell level with our customers. This is clearly one of our main competitive advantages. A reflection of this is our leading market share position and a 24% year-on-year increase in demand deposits. This, coupled with a superior brand that makes us a flight to quality bank in Chile during times of high uncertainty, as shown on the chart on the left. Since the weakening in activity in Chile began, we increased our gap with our competition, collecting more demand deposits funding than any of our peers, as you can see on the chart on the top right. From October 2019, we grew CLP 1.6 billion, equal to 26% market share of the flow of deposits, above the level of our closest competitor. As you can see on this slide on the bottom right, demand deposits represent 27% of total assets, considerably higher than our main competition, where approximately 50% of this funding comes from the retail segment. This is even more notable when we analyze the average current account balance by personal banking customers that reaches levels of approximately CLP 3 million per account compared to CLP 2.4 million to our closest competitor. This, together with our strong credit risk ratings and debt placements in both local and overseas markets, with spreads below the average of the banking industry, has permitted us to have a lower cost of funding base. Creative risk management and responsible growth have been fundamental to our success and our central long-term strategy. Please turn to slide 16. As you can see on the chart on the left, loan loss provisions grew from CLP 101 billion in the fourth quarter of last year to CLP 126 billion in the first quarter of this year, mainly due to the wholesale loan book. In fact, we grew strongly this quarter in terms of large corporate commercial loans. This expansion explains more than half of the rise in provision expenses. The rest of the increase is exclusively due to the impact of COVID-19 on the financial position of certain large customers. Specifically, as shown on the chart on the bottom of this slide, we grew over $800 billion in loans to high-quality customers. This growth caused a price and provision of CLP 17 billion with no changes in risk classification. On the other hand, the remainder was due to the net credit quality deterioration of certain corporate customers amounting to CLP 12.5 billion, as we took a proactive approach in thoroughly reviewing the segment, which is evaluated on an individual basis for provisioning purposes using a forward-looking approach. As a consequence of this evaluation, we downgraded certain customers due to the deteriorated economic scenario they are facing, which is affecting more in certain economic sectors such as hospitality, transportation, and commerce. As a result of the prevailing provisioning criteria established by regulators, we believe that it's reasonable to expect that the individually reviewed commercial loan portfolio will be the first to see these effects of the COVID-19 crisis in the banking industry. In terms of the retail book, despite having seen a positive trend in our NPL ratio until February, we did observe some signals of impact, particularly in the duration of the 30-day past due consumer loan book as seen on the chart on the bottom left. This is also a direct impact of COVID-19. Mobility restrictions produced by lockdowns in certain neighborhoods, coupled with the temporary shutdown of some of our branches, have resulted in the loan collection processes becoming less effective while affecting the payment behavior of certain customers. We expect that the strong government reactivation plan should provide good support for companies and individuals, and is expected to assist in eliminating the impacts on the Chilean economy and the banking sector. This led to temporary adjustments in the rules regarding the way regulators request banks to provision for renegotiated loans during the next three months. As a result, it's unlikely that we'll see significant changes in the cost of risk in this portfolio during the next few months due to the postponement of monthly installments. We expect to see a deterioration of our retail book and incur higher provisions in the second half of 2020. However, despite this risk, it's still important to highlight that we have a very diversified loan portfolio. Thanks to the fact that we are a universal bank that provides products and services to all segments in Chile, this allows us to be widely diversified in loans as well as in revenues. We continue to be confident that our proven track record in risk management and our prudent approach to growing responsibly over the last few years will set us apart from our competition. We emphasize risk management in Banco de Chile. The significant resources we use to manage risk allow us to have an approach that is deeply present through the entire life cycle of our customers. This undoubtedly supports identifying risks quickly and implementing strategies to minimize those exposures. Please turn to slide 17. Our focus on managing costs is beginning to bear fruit. This quarter is an example of that determination. As you can see on the chart on the right, we managed to maintain total operating expenses flat year-on-year and decreased almost 7% when compared to the fourth quarter of 2019. The drop in expenses was driven by lower variable compensation, partially offset by higher demand and other expenses related to, among others, higher costs on IT infrastructure to facilitate home office for our staff, higher costs related to the enlargement of our ATM network, additional expenses related to the implementation of new service models for the personal and SME banking segments, as well as higher expenses associated with the maintenance and cleaning workforce. In terms of our efficiency ratio, we improved 677 basis points from almost 50% in the first quarter of 2019 to just under 43% this quarter, expanding our gap with the industry, which is at 46%. Additionally, when we measure our total expenses per current account, we have decreased by almost 3% year-on-year. We are confident that the permanent improvement in efficiency of our branches, reinforcing the use of business intelligence, utilizing robotic process automation, and providing better digital contact channels for our customers will allow us to continue improving not only our efficiency ratio but also our Net Promoter Score. Furthermore, we've implemented a purchasing desk that has yielded results, reducing our administrative expenses continually through reviews of operational acquisitions and services hired. We are certain that our focus on providing outstanding customer service and experience will enable us to outperform our peers when activity resumes. Please turn to slide 18. As you can see on this slide, we are the undisputed leader in customer service as measured by Net Promoter Score. Our Net Promoter Score is substantially higher than all of our peers, and we have managed to improve our Net Promoter Score since the beginning of the slowdown that started last October. We are especially proud of the results from our SME segment. This confirms the feedback we frequently receive from these clients regarding how much they appreciate our bank's support for their small business during difficult times and our score in the preferential banking segment shows our ability to meet the highest standards of service quality. This sets us apart from the competition, which has historically focused more on the selling strategy, while we prefer a comprehensive strategy to attract customers to our bank for the quality of our products and services, generating stronger, long-lasting relationships. That is one of the key differentiating factors when we compare ourselves to our peers. These figures are reinforced by our recognition of receiving a significant national award for customer satisfaction in 2019 and being the first bank in top of mind in the Chilean industry during this quarter, as you can see on the right side of the slide. Please turn to slide 19. Before moving on to questions, I would like to highlight a few key ideas. Clearly, the spread of COVID-19 has significantly changed the economic environment across the globe. The sheer magnitude of this shock is unprecedented, with no comparable examples, clearly adding a layer of uncertainty and making it impossible to provide accurate guidance. What's clear is that the deteriorated scenario will likely have a negative impact on profitability for almost all businesses this year and for the Chilean banking industry. Nevertheless, we have worked diligently to implement an effective and successful strategy to maintain operational continuity with the best customer service experience in this challenging environment. For instance, we are the first bank to provide programs designed to help our customers and the first to allow personal banking clients to reprogram their loans 100% online, benefiting almost 250,000 customers since the beginning of this pandemic. We have additionally focused on advancing our projects in digital transformation, which has aided our bank during this time. Nevertheless, high uncertainty remains. Asset quality will most likely deteriorate for the industry as a whole, beginning in the second half of 2020 when the benefits that banks have provided customers of postponing payments come to an end. This undoubtedly will affect the industry's bottom line. However, we are optimistic for economic recovery in 2021, thanks to the strong stimulus package that the government has implemented this year. This should contribute to improving the economy once the pandemic comes to an end. In this scenario, we are confident that we have the strongest fundamentals among Chilean banks and are better prepared to face this crisis since we have focused on growing responsibly, alongside being strict in applying our prudent risk policies during the more positive economic cycles. This has allowed us to maintain the highest coverage ratios, along with the best capital ratios in the industry. Finally, I would like to end the call by emphasizing our commitment to the development of Chile, especially during these difficult times. We are determined to continue providing the best customer experience while taking care of our employees and contributing to the community. Thanks for listening. If you have any questions, we'd be happy to answer them.
Operator, Operator
Thank you. The floor is now open to questions. The first question comes from Claudia Benavente with Santander. Please go ahead.
Claudia Benavente, Analyst
Hi. Thank you for the presentation. I was wondering a little bit regarding Slide 16, like you've made already a downgrade to some corporate loans. And the net impact on reserve is barely unchanged. We hold a strong position on additional reserves. Given the macro environment will continue deteriorating, do you think it's necessary to build more additional reserves? Or do you think with the current level you hold is enough? Thank you.
Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations
Thank you very much for the question. What we can say about that is that Banco de Chile has had a conservative risk policy over time, which is reflected in the strong ratio higher than two times, which likely compares with any other bank in Chile. As the economy begins to face a deep recession accompanied by unusual uncertainty, we can rule out that the bank will increase its additional provisions at some point this year. However, it's important to note that this decision is made by the Board of Directors. So any decisions related to that area must be taken by the Board of Directors.
Claudia Benavente, Analyst
And maybe a follow-up on that respect. I understand that the coverage ratio is a result. Nonetheless, do you feel that there is, like, a minimum level that is comfortable for you? And when considering that, do you add the additional reserve to your guidance estimate or don't you take a look at all at the coverage ratio? Thank you.
Pablo Mejia, Head of Investor Relations
Right now, because of the high level of uncertainty, it's difficult to give guidance for these figures. But it's important to mention that in terms of our coverage ratio, it's more a product of the provisioning model that generates the level of provision. We don't have a target for generating a certain level of coverage.
Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations
There's not a specific target off of that.
Claudia Benavente, Analyst
Okay. Thank you.
Operator, Operator
The next question is from Tito Labarta with Goldman Sachs. Please go ahead.
Tito Labarta, Analyst
Hi, Pablo and Rodrigo, thank you for the call. I guess following up just in terms of asset quality and provisions. I know it's hard to give any guidance in this environment. But just trying to put into perspective, right? If you look at your NPL ratio, it's already 1.4. It's like the highest level it's been in a while. I know this is probably impacted by the process at the end of 2019. So just when you think about the cost of risk today compared to history and previous crises and the NPL ratio where it is, how can we just kind of put that into perspective, right? Because if you look at the cost of risk, historically, you were around 1%. You're already at 1.6% this quarter. Is looking at history helpful at all? I mean, if you go back to the global financial crisis, I think you peaked around 2%. Is that sort of a good example to look at, given the changes in the loan portfolio over the years? So if you could just help us at least put into context how bad things can get in terms of the cost of risk and NPLs, that would be helpful. Thank you.
Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations
Hi, Tito, and this is Rodrigo Aravena. We are going to divide this answer into two parts. First, I think it is very important to keep in mind that this crisis is very, very different from any other crisis we've had in the past. So, today, we don't have enough information to provide any estimate, for example, in terms of the size of the recession in the short term. We don't know how many quarters there will be a negative growth. Therefore, it's very hard to forecast any number about the unemployment rate in the future. That's why there is a very important uncertainty regarding the potential increase in the cost of risk in the future. Of course, we can anticipate a higher cost of risk relative to what we thought at the beginning of this year. So, it's very hard now to make any comparison with the previous recession. Pablo, do you have anything else to add?
Pablo Mejia, Head of Investor Relations
I think one point to mention about previous discussions in the financial crisis and the Asian crisis is that the level of provisions for the industry rose to around 1.8% to 1.9%, if I'm not mistaken, and a similar level during the financial crisis. In Chile, there are two events occurring during the financial crisis: one was the financial crisis, which we saw a rise in unemployment that reached levels of around 11% to 12%. At the same time, we had the salmon industry crisis, which was a virus that affected that industry, impacting the quality of that product and, in turn, affected exports. In 2009, that was very significant for the industry. In terms of how Banco de Chile looked at that point, we had significant participation in that segment similar to our market share. We also had a very important participation in the lower-income segment, meaning that almost one-third of our loans to that lower income sector represented total consumer loans. Today, if we look at consumer loans, due to different regulations and changes that occurred after various events since 2009, the consumer finance portfolio has decreased in size and relative importance within our portfolio, from around 7% to 8% to around 2% today. This should also have a limited factor on the impact that we anticipate on our figures.
Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations
Another important thing to consider here, Tito, is that there will probably be a difference between the economic cycle in terms of GDP growth, unemployment, and the asset quality cycle. Because as a consequence of reprogrammed loans, we can't rule out that there will be a deterioration in quality in the second half and even into the third or fourth quarter of this year, at a moment when the economy may likely be better than now. It is important to keep in mind this potential distinction between the cycle of asset quality relative to the economic cycle.
Tito Labarta, Analyst
Okay. Thank you. That's helpful. And maybe just a follow-up. I guess, in terms of exposures to sectors that are most at risk, I don't know, like tourism or retail, how do you see in terms of your exposures and the sectors that are most at risk?
Pablo Mejia, Head of Investor Relations
We have a widely diversified portfolio, not only in terms of segments but also in sectors. If you look at the portfolio and compare it with the industry, you can see that Banco de Chile has the lowest exposures in the most at-risk sectors. For example, if we look at hotels, restaurants, and retail exposure, we're at a level of around 4% while the industry is around 7%. In transport, we're below 2%, while the industry is around 3%. In terms of other areas, such as education, we don't have anything relevant there. So we're quite comfortable with the positions that we have managed in Banco de Chile.
Tito Labarta, Analyst
Okay. Thank you very much.
Operator, Operator
The next question is from Jason Mollin with Scotiabank. Please go ahead.
Jason Mollin, Analyst
Thank you. Thanks, Rodrigo. Can you hear me?
Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations
Yes. We can hear you.
Jason Mollin, Analyst
Hello?
Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations
Yes, yes, yes. Hi.
Jason Mollin, Analyst
Okay. Great. Thank you. First, maybe a question, Rodrigo, on just a question, maybe an update on the constitutional referendum that we're expecting in the political environment in Chile given the social unrest we had last year. What are your thoughts on how this could impact the bank, if you can talk about costs and long-term strategy? You showed an increase in the use of digital channels. Does this change the long-term strategic objective, for instance, in the value of branches? Could we see some branch closings? And what other factors your efficiency is already looking pretty strong, especially year-on-year? But what could the bank do in this strong environment to improve efficiency going forward? Thank you.
Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations
Hi, Jason, thank you very much for the question. First of all, it's very important to mention that in our baseline scenario, there will be a temporary worsening in the economy. We are aware of the contraction that we will likely see in the short term. In the second quarter, for instance, we are expecting a decline in GDP of around 10% with negative growth of around minus 3% for the whole year. However, we are working with a better scenario for 2021. So if it works, we have attained our long-term strategy. Pablo will go into more details on that. But the key element of our base scenario is that there will be a temporary contraction of the economy. In terms of your question about the constitution and the political discussions, what we have to say is that most of the discussion in the last two months, I would say, has been more related to the countercyclical policies in terms of the growth of social spending, in terms of the support to households, possible income for families, and the same in terms of providing more financial support for SMEs. So what I'm trying to say is that during the last two months, the discussion has shifted from political issues — the new constitution, etc. — to discussions much more focused on the policies that the country needs to face to address this crisis. The referendum was originally scheduled for April this year. It has been postponed due to COVID-19. So far, the date for the new referendum will be in October, but there is uncertainty regarding when the referendum will finally take place, as we don't know the outcome of the contingency regarding the spread of COVID-19 in the future. I believe we are aware of the political uncertainty in some areas remaining; however, during the last month, we have been much more focused on discussing the counter-cyclical policies to have a shorter crisis and a stronger recovery in the medium term. So far, what can we say is that there has been a very important package from the government, from the Central Bank, and from the financial authorities as well. Therefore, we are optimistic about that. Pablo, for the long term.
Pablo Mejia, Head of Investor Relations
In terms of expenses, we've been very focused on continuing to control expenses in Banco de Chile, and it's beginning to bear fruit, as you saw this quarter. This continual focus has had many different projects. If we just name a few, we've improved the credit evaluation system in the past. Banco de Chile made it much more efficient. We improved the personalized pricing system, which not only made the whole process more efficient but also improved the customer experience by enhancing delivery times. Just recently, we implemented a purchasing desk, which basically evaluates all of the purchases that we do as an administration in Banco de Chile related to administrative expenses. This includes reviewing all the services, materials, and advisory services that we employ in Banco de Chile to better control our costs. In terms of digital banking and how this has been changing our business, we have put much effort into this area over the last five years, implementing many different changes to improve the overall customer experience from the point that they log onto our website, as well as by using the app. We've been continuously focused on improving that experience. We have new projects that will be coming out this year, as mentioned in the presentation, which should continue improving that experience for customers. So all this means that we've been improving our customer experience in Banco de Chile. We haven't disregarded the branches. In our branches, we have a new branch model, which basically adjusts the service model within the branches, including much more service and self-service options, more ATMs where customers can perform transactions quickly, and adjusting the responsibilities within the branches to deliver a more appropriate experience based on the new environment for living with digital evolution. This has resulted in renovations of branches and optimizing the network. We have closed branches. If you look at this year, we've closed 17 branches, and this is a project that we should continue seeing as we streamline our branch network moving forward. It's important to remember that Chile is a long country, so outside of Santiago, there aren't that many branches within each city. This has limited the number of branches we could close. This year, we should see an efficiency ratio similar to what we had last year, and we expect a cost base increase to be relatively flat.
Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations
I want to reinforce one idea. We haven't changed our long-term strategy. We haven't altered our main long-term priorities, including digital banking, which is increasingly important.
Operator, Operator
The next question is from Ernesto Gabilondo with Bank of America. Please go ahead.
Ernesto Gabilondo, Analyst
Rodrigo and Pablo, hope you're doing well. I have a follow-up regarding the economic referendum. I believe it will return again at some point in the year as I think social unrest is not showing up because of the lockdown. But if next October the population decides to pursue constitutional changes, I believe this could be an important subject for future economic growth. If it is delayed more, do you think this could be a risk for the economic growth next year?
Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations
Hi. Thank you very much for the question. I think it's crucial to identify the short-term drivers for growth relative to the long-term drivers of growth. In the short term, we've been more focused on the design, discussion, and implementation of countercyclical policies that reduce the size of the impact, the negative impact of the COVID-19 crisis in the economy. In that regard, we can say that Chile has been very successful comparatively with other countries regarding the size of the fiscal response and the timing and coordination of that response. For instance, the first sanitary measures in Chile were taken only 16 days after the first case of COVID-19. So in terms of policies to mitigate this crisis in the economy, we've been very successful. This has been the main area of discussion. In terms of the discussions for new topics or contents or proposals for a new constitution, we've not seen a deeper discussion there. Of course, if there was a new postponement of this referendum, there would be a higher risk of more uncertainty and lower growth. However, given the size and degree of uncertainty surrounding COVID-19, I think it's more important to pay attention to the evolution of the virus, the government’s ability to react, and if further stimulus is needed, etc. So in the short term, I think it's far more important to pay attention to upcoming economic figures and the actions taken by authorities. I would say that the discussion regarding the constitution and the potential results of the referendum will be revisited by the end of this year.
Ernesto Gabilondo, Analyst
Thank you, Rodrigo. Can I have a second question regarding provision charges? Just wondering, when do you expect the peak in provision charges? And what of your portfolio is based on expected losses? Are you building provisions from those clients that apply for the relief programs? Or as they have not defaulted, do you expect to create more provisions by year-end? We have seen U.S. banks, banks in Spain, Peruvian banks, and Colombian banks that are recognizing big provisions during the first quarter. So why not create these contracyclical provisions that Chile can do now?
Pablo Mejia, Head of Investor Relations
In terms of what's happening with provisions, it's true that because of all these benefits received by customers and certain flexibility from the regulator, this changes how banks are provisioning in Chile regarding their loan portfolio. Banco de Chile has been proactive, I can't say we are the most proactive, but we have made efforts— as we mentioned in the call and earnings release, we are proactive in reviewing the corporate book, which will continue to be a focus for us. This proactive approach was part of the significant rise in provision expenses this quarter. When we look at which sectors and how this will evolve in the coming quarters, we should start seeing some level of impact in the second half of this year, likely closer to the end of the second quarter. In provisioning models, most customers have had, or we made available a facility to postpone payments of their loan installments. Thus, the model relies heavily on overdue loans as a base for estimating credit risk. SMEs have also received various benefits from different government initiatives as well as from the banks. Therefore, we expect to observe the first impacts primarily in the wholesale segment, as we did this quarter when reviewing the loan book, followed by the retail portfolio as benefits extended for three months. As banks provided these postponements to customers, we should begin observing the impacts in the retail portfolio as well as in the commercial portfolios as customers begin repayments.
Ernesto Gabilondo, Analyst
Perfect. Thank you very much.
Operator, Operator
The next question is from Yuri Fernandes with JPMorgan. Please go ahead.
Yuri Fernandes, Analyst
Thank you, Rodrigo, Pablo. Thank you, gentlemen. I have a question regarding the amount of renegotiated loans as a percentage of the book, if you have this number. I read in the release, I guess, 25% of retail clients, but I don't know how much of that in the wholesale book you also have. How much do renegotiated loans represent in your total loans? And my second question is regarding the renegotiations you had back during the social unrest. How are those behaving in relation to renegotiated loans now? What lessons learned in that situation are you applying now for the COVID-related renegotiations, if anything you want to share?
Pablo Mejia, Head of Investor Relations
In terms of retail clients, you already know that number. For the SME book, the renegotiated loans were not so significant prior to the COVID loans and represented something less than 2% of customers. If we have over 100,000 SME customers, there would be about 2,500 of them. So this isn't a very relevant number. Regarding COVID loans, this is probably what will be the most relevant, and this just began this week; it commenced on Monday. We have about CLP 300 billion in COVID loans. Four thousand customers have taken those loans, but it's still too early to tell. We expect a rise in demand as most banks have just recently offered customers these COVID loans.
Yuri Fernandes, Analyst
Those numbers appear low, right? When you compare to other countries, we see from 20% to 50% of loans being renegotiated. Any reasons for that number being so low?
Pablo Mejia, Head of Investor Relations
I'm not sure about the other banks; the number of renegotiations for the SME portfolio has not been significant prior to these COVID loans. We didn't have significant demand despite being the first bank to offer these benefits to both our individual banking customers and SMEs. For us, if you review our portfolio, we've always had a very high-quality loan book, which is very much associated with our high net worth individuals. That could also have a beneficial effect in terms of the level of the initial program we offered to customers. Regarding renegotiations we had during last year in October, we did not experience a significant change regarding the level of renegotiations we normally performed.
Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations
But this started just this week.
Yuri Fernandes, Analyst
I was going to ask regarding the delinquencies of those loans: how are those October, November, December loans that were renegotiated last year behaving from an asset quality standpoint? Are they doing well? What can you tell us?
Pablo Mejia, Head of Investor Relations
They are performing similarly to the renegotiations we have always conducted. We did not change our policies for renegotiations during that period.
Yuri Fernandes, Analyst
Perfect. Thank you very much.
Operator, Operator
The next question is from Neha Agarwala with HSBC. Please go ahead.
Neha Agarwala, Analyst
Hi. Thank you for taking my question. If I can follow up again on the cost of risk, it seems like most of the increase in provision would come later in the year, in the second half. Should we expect any spillover in the level of provision from COVID in 2021, or do you expect to cover most of it in 2022? Any indication on how much we can expect on a quarterly basis? Would there be a jump in the third or the fourth quarter? That would be helpful. Do you expect to use your voluntary provisions during this crisis, or do you still think it's not required given the level of crisis at this point? My last question is on your digital platform; you will continue to invest in digital platform as you said, but what are the key areas of strength where you think you have more than peers, and any points where you feel you'd like to improve where your peers are doing a better job? That would be very helpful. Thank you so much.
Pablo Mejia, Head of Investor Relations
In terms of risk and if there's any spillover into 2021, I think it's important to mention that the entire banking industry has been proactive and is being proactive, offering different types of benefits to their customers in terms of postponing loan payments. For us, we offered three months' postponements for consumer loans, mortgage loans, as well as refinancing options for credit cards and certain preferential loans for our customers. And for SMEs, many banks, including us, have offered six months' postponements on consumer loan installments, adjusting payment terms and durations. If we analyze that last figure, we can observe there are COVID loans; under these loans, banks must renegotiate all other loans of customers as well when they take these COVID loans. So, what does that mean? It means that in November, around October, customers will begin paying, and banks will know for many customers if they'll be able to continue paying. Therefore, we should have more information by year's end, and it's highly likely that there could spillover into 2021 since we will be observing the impact in October, November, and December to gather more information on the commercial portfolio. Other banks have provided up to six months' postponements on the retail book, so they'll have more information regarding that at the end of the year. The postponements will lead the 90-day past due into the beginning of 2021. The second question was about additional provisions? We have been the most conservative in terms of our risk policies, and growing responsibly and provisioning, and we consider what has been appropriate for the risk level that we’ve had. For three examples of how this proves that our coverage ratios are appropriate is that when we implemented various standard models in Chile, our impact was minimal compared to other banks, which had a much more significant impact. Regarding voluntary provisions, this is something you can't rule out for any bank, particularly as the industry must remain vigilant in these times of crisis, and it requires the intervention of the Board of Directors. As we are more conservative in that area, given the uncertainty about the future of the economy, we can't rule out that possibility. Finally, regarding digital banking, I think the key strength that Banco de Chile possesses is that our customers utilize our bank as their primary financial institution. We have the highest Top-of-Mind awareness, highest Net Promoter Scores, and the best customer service. Despite the efforts we've made to develop digital banking solutions and provide a good platform, we think we have a great solution today. We are working on that and expect to complete our onboarding solutions and overall improvements later this year, which we think will allow us to provide a well-rounded digital solution for our clients. We don't want to set up separate initiatives; we want to provide these solutions to all of our customers in Banco de Chile under our brand.
Operator, Operator
The next question is from Alonso Garcia with Credit Suisse. Please go ahead.
Alonso Garcia, Analyst
Hello everyone. Thank you for taking my question. My question is on the NIM. I was wondering if you could share some color on the NIM performance you expect for the remainder of the year considering your expectation of 2.5% inflation this year, rates at 50 basis points, and the implications of relief programs for individuals on financing support to SMEs? Thank you.
Pablo Mejia, Head of Investor Relations
I think that you mention that, there are a lot of pressures for net interest margin (NIM) in 2020. We have flattish variation in the U.S. affecting NIM. But there are other impacts that we mentioned, including the change in regulation regarding how customers have their overdraft lines automatically paid off, which affects both funding in terms of deposits and the average outstanding loan balances. Also, we have the impact from the renegotiation of mortgage loans, which is another important factor for us. We're in an environment of very low interest rates. Thus, the low overnight rate is affecting our NIM. If you recall last year, we had reductions. That's caused pricing pressure regarding NIM. Additionally, take into consideration that the COVID loans will influence the mix from our loans in the industry. This will positively impact net interest income. However, we don’t expect to show a bottom-line impact, which is likely to be zero since the interest rates are low, but with costs involved when originating these loans. Overall, we expect some pressure on NIM for next year, net-net. The NIM we recorded and how we calculated NIM ranged from approximately 4.05% to 4.1% this quarter, with a high inflation level of around 1%, which annualizes closer to 4%. Last year, we ended the quarter at 4.17%. Therefore, it is reasonable to expect a decrease in the NIM going forward. That said, inflation changes are what could change that figure; a 100 basis point change in inflation represents somewhere around 16 and 17 basis points of NIM.
Alonso Garcia, Analyst
Understood. Thank you very much.
Pablo Mejia, Head of Investor Relations
You're welcome.
Operator, Operator
This concludes the question-and-answer session. At this time, I would like to turn the floor back to Banco de Chile for any closing remarks.
Pablo Mejia, Head of Investor Relations
Thank you for participating in our call. Stay safe, and we look forward to speaking with you in the second quarter 2020 results.
Operator, Operator
Thank you. This concludes today's presentation. You may disconnect your line at this time and have a nice day.