Earnings Call Transcript
BANK OF CHILE (BCH)
Earnings Call Transcript - BCH Q4 2022
Operator, Operator
Good afternoon, everyone, and welcome to Banco de Chile's Fourth Quarter 2022 Results Conference Call. If you need a copy of the management financial review, it is available on the company's website. Today with us, we have Mr. Rodrigo Aravena, the Chief Economist and Institutional Relations Officer; Mr. Pablo Mejia, Head of Investor Relations; Daniel Galarce, Head of Financial Control and Capital; and Natalia Dele, Investor Relations Specialist. Before we begin, I would like to remind you that this call is being recorded and that the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All the projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements. I will now turn the call over to Mr. Rodrigo Aravena. Please go ahead, sir. The floor is yours.
Rodrigo Aravena, Chief Economist and Institutional Relations Officer
Good afternoon. Thank you for joining this conference call. We will discuss the key achievements of our bank during the fourth quarter and the full year of 2022. This call will also include our business analysis and guidance for 2023. Before we examine the economic environment, I would like to highlight some of our significant accomplishments from last year. Please refer to Slide number 2. 2022 was a remarkable year for Banco de Chile, where we reaffirmed our leadership in the Chilean banking sector, excelling in financial performance and other strategic areas compared to our competitors. Although we will cover our main accomplishments in detail during this presentation, I want to briefly mention a few. Financially, we recorded a historic bottom line of MXN1,409 billion, with a return on equity of 51.4%, well above the industry average. A more normalized ROE, accounting for the transitory effects of higher inflation, would have been 19%, aligning more closely with our historical figures. Our growth in operating income was supported by a historic efficiency ratio of 52%, and strong asset quality metrics positioned us favorably against our peers. Additionally, we further enhanced our capital position, reaching a base ratio of 18%, significantly exceeding both the regulatory minimum and our main competitors. We also increased our additional provisions to an unprecedented MXN700 billion, achieving a coverage ratio of 3.7 times our nonperforming loans, providing us with better preparation for economic downturns. Furthermore, we made strides in our sustainability initiatives, undertaking various environmental, social, and governance improvements that earned us recognition as the top bank in ESG risk ratings in Chile from Sustainalytics, along with several other accolades. Lastly, we made significant progress in our digital transformation efforts, a crucial element in ensuring excellent customer service, boosting productivity, and advancing financial inclusion in Chile. As I mentioned, we will elaborate on these activities during this presentation. Before that, let's explore our economic outlook. Please move to Slide number 4. GDP growth has continued to decline, as illustrated in the chart on the top left. This trend primarily results from three main factors: the removal of several temporary stimulus measures from the pandemic, which included a 52% increase in fiscal standing and the withdrawal of over $50 million from pension funds, leading to decreased disposable income and domestic demand. The second reason is the lingering effects of tightened monetary policy, which raised the rate by 1,075 basis points from July 2021 to November last year. Finally, local factors, particularly political uncertainty, have also hampered economic growth. In this context, the GDP fell by 1.6% year-over-year in the fourth quarter, marking the first negative annual figure since the second quarter of 2020. This decline can be attributed to decreased commerce and industry sectors, which fell by 8.4% and 5.5% year-over-year, respectively. Other cyclical sectors like construction have also been adversely affected. Conversely, the service sector has continued to grow with increased mobility as sanitary conditions eased last year. On a sequential basis, as depicted in the chart on the right, the decline in activity has been evident, with December 2022's activity level being 1% lower than the same month the previous year, indicating the economy did not grow last year. The IMAX, which details the monthly GDP, highlights that all sectors experienced sequential declines throughout the year. While the average unemployment rate for 2022 stood at 7.9%, 130 basis points lower than the prior year, it is important to note the deterioration in the labor market. For example, limited growth in the labor market has resulted in more unemployed individuals. Thus, the lower unemployment rate compared to 2021 is attributed to demographic shifts rather than increased economic dynamism. Additionally, real wages have continued to decline, decreasing by 2.3% year-over-year in November due to higher consumer price index growth outpacing nominal wage increases. The formality rate has remained around 26%, higher than in previous years, indicating potential job quality deterioration. However, this subdued growth is helping to alleviate some macroeconomic imbalances that increased during the pandemic. Specifically, the trade balance has improved, driven by higher exports and lower imports, pointing to a lower current account deficit in the near term. This trend suggests a normalization of external accounts, which is vital for macro sustainability. The adjustment in the business cycle has been accompanied by changes in various prices, which we will examine in Slide number 5. In line with global trends, CPI saw a significant rise last year, ending at 12.8%, the highest since 1991. This surge was due to multiple factors, including high global inflation impacting the Consumer Basket of Chile, where tradable goods comprise over 60% of the total. Additionally, the depreciation of the Chilean peso, particularly in the first half of last year, contributed to this trend, as shown in the bottom right chart. Furthermore, the substantial uptick in domestic demand stemming from pandemic-related measures played a crucial role in non-tradable pressures. The high indexation rates in Chile, where many prices are denominated in U.S. dollars, could also lead to persistent inflation. The rise in domestic prices prompted significant adjustments in local interest rates, particularly in the first half of the year. The central bank's policy rate increased from just 0.5% in July 2021 to a historic high of 11.25% in November last year. Despite this tightening, long-term rates have been declining, suggesting slower growth this year and a potential easing cycle in monetary policy in upcoming quarters. Despite the economic slowdown, the Chilean peso has appreciated in recent weeks, supported by external factors like improved copper prices and the global weakening of the dollar, alongside local factors that suggest slight reductions in certain risks. Notably, the newly defined mechanism for the upcoming constitutional process should include input from both elected representatives and constitutional experts, setting clear boundaries for discussion and thereby reducing institutional risks in the country. It is well known that well-structured contracts can have lasting impacts. Now, I'd like to present our forecast for this year. Please refer to Slide number 6. We anticipate a GDP decrease of 1.4% this year, following a 2.7% growth in 2022. This outlook reflects a U-shaped trend in activity, with negative annual growth from 2022 through the second quarter of this year due to the normalization of temporary growth-boosting factors mentioned earlier. We expect a gradual recovery in activity to commence in the latter half of this year. This slowdown, combined with the recent strengthening of the currency, should help ease price pressures. In our baseline scenario, we project overall inflation to decrease from 12.8% last year to 4.8% this year, with a possible convergence to the 3% policy target by 2024. Given these projections, we expect to see room for lower policy interest rates in the foreseeable future. Although the Central Bank has taken a neutral stance in the last monetary policy meeting, we believe that a combination of lower growth and inflation will provide the opportunity to reduce interest rates to approximately 6% by year-end. All these projections carry risks. Besides global uncertainties, where China's economic performance is a key influence for Chile and geopolitical issues in Eastern Europe might cause fluctuations in international prices, we must also monitor local factors, especially in political and institutional areas. The progress of various reforms under discussion in Chile, including tax and pension legislation and the current constitutional process, will be critical in determining the duration and severity of the ongoing recession. Before we transition to Banco Itera's discussion, I will briefly address the developments within the local banking industry. Please turn to Slide number 7. 2022 was a profitable year for the banking sector, yielding stronger nominal results than the previous year. However, inflation primarily drove this outcome. As will be shown later in the presentation, the actual profitability, adjusted for loss of purchasing power due to the high inflation Chile has experienced, is considerably lower than the reported 21% for the banking industry in 2022. The implications of elevated inflation are also evident in asset quality, with the industry witnessing a consistent increase in loan loss provisions over the last four quarters, as depicted in the chart on the bottom right. Real loan growth has also seen a decline, illustrated in the chart on the bottom left; inflation and several uncertainties have affected demand. For 2023, we anticipate weak real growth of around 1%, driven primarily by mortgage and consumer loans. Now, I will hand the call over to Pablo, who will provide more details on Banco de Chile's strategy and financial performance.
Pablo Mejia, Head of Investor Relations
Thanks, Rodrigo. Please go to Slide number 9. The strong results that we have consistently achieved have been the product of our sound strategic pillars based on customer centricity, productivity, and sustainability. To reach our midterm targets, we have established 6 core priorities. In the next slide, we will review some of these advances that we have been making. Please move to Slide number 10, where I'll highlight some of our digital banking initiatives. Our strategic ambition at Banco de Chile is to deliver the best customer experience and to provide the best digital banking platform to clients in Chile. During 2022, we strengthened existing platforms and continued implementing innovative digital solutions. We are proud to highlight that Quanta fan account has reached over 1 million clients as of December 31, 2022, adding approximately 350,000 customers in this period. Another relevant aspect is that despite the quick growth of this product, we grew our customer base by almost 50% this year without affecting our customer satisfaction levels. Among our other advances in 2022, we launched 3 new digital products to promote customer onboarding and financial inclusion: a digital current account, fund plan, and banana. The new digital current account was launched in the first half of the year and includes the possibility to open other products such as lines of credit and credit cards. Funan is a free digital account for teenagers between 14 and 17 years old with the purpose to build strong relationships early in the customers' life cycle. And FanPrint is a digital account for SMEs that has no entrance or maintenance fees and provides access to exclusive benefits for small businesses. All of these products align with our aspirations of growing our clients and promoting financial inclusion. Furthermore, among other initiatives, we released several upgrades and innovations in our apps. As shown on the right side of this slide, we launched an improved investment tool that allows our clients to invest easily worldwide, and we formed an alliance with other important institutions to facilitate monetary transactions between clients of these two banks using telephone numbers and QR codes. In addition, we made significant upgrades in our main app, Mibanco, such as the ability to withdraw funds from ATMs without the need for a physical card, providing online loan simulations, and also approving these consumer loans online. Likewise, we added new functionalities to our app for enterprises called Mibanco. Finally, we are proud to mention that our advancements in digital banking, along with our permanent focus on providing the best customer experience, led us to be recognized by European entities as the most innovative digital bank in Chile and by a digital newspaper focused on the financial industry and Chilean consumers as having the best digital banking solution in the country. Please move to Slide 11. We continued implementing changes and initiatives to reduce expenses and improve our operations in line with our efficiency and productivity objectives. We introduced a new purchase model that uses electronic auctions and tender processes to increase competition among potential providers while ensuring transparency and cycle times. Additionally, we made several negotiations to fulfill all banking functions proactively through the annual purchase plan, which has generated savings of approximately $20 million. Finally, regarding our cost reduction process, we have developed optimization projects that cover diverse aspects such as our branch footprint analysis, savings in energy costs while optimizing and consolidating service purchases at the corporate level. On the productivity side, through the retail sales excellence plan, we increased consumer credit loan originations by 45% year-on-year while maintaining our account managers' headcount unchanged. This impressive figure results from several improvements such as the standardization of commercial processes, the digitalization of sales, and refocusing intelligence in our commercial campaigns. Due to the successful implementation of the productivity projects in our retail business, the bank decided to extend and adapt these initiatives to the SME banking segment, which promptly achieved good results, such as a 25% increase in originations per account manager. Thanks to these and other actions previously implemented, we ended the year with the best efficiency ratio among our peers in Chile. We also accomplished important advances in ESG, as we'll discuss in the next Slide number 12. During 2022, we took significant steps towards strengthening our sustainability strategy. We proactively reinforced the development of social, environmental, and governance initiatives, some of which are presented on this slide. We developed a sustainability financing framework to issue ESG-related bonds and to finance projects with positive impacts. In addition, we created a sustainability committee, led by the CEO to boost our ESG strategy and launched the Blue commitment program to promote our green products. Last year, we also continued boosting our social and environmental initiatives such as our financial education courses, turning them into programs promoting entrepreneurship, volunteer programs supporting social organizations, and care and support for the elderly. Those programs directly benefited over 44,000 people. It's also worth mentioning that we have the largest corporate volunteering program in Chile, in which almost 10,000 employees participated as volunteers at the Telesto event in 2022. Finally, our permanent focus on improving diverse ESG aspects of our business resulted in our being recognized as the best bank for financial inclusion and the third best company in ESG in Chile according to a corporate reputation monitoring company based in Spain, among other recognitions. We are also very proud to have received a significant upgrade in our ESG risk ratings, which moved from medium risk to low risk, thus placing us first among banks in Chile. This recognition demonstrates that we are advancing in the right direction as a responsible institution contributing to the development of the country and its people. Please turn to Slide 14 to go into detail about Banco de Chile's financial performance. 2022 has proven exceptionally profitable for the bank and the industry in nominal terms, as evidenced by the chart to the left, where we led the sector with over 30% nominal ROE. Our competitive advantages, consistent strategy, and strong governance practices have been key to our success. Accordingly, we took the proper actions during the pandemic that translated into record results we are witnessing today in this environment of high inflation, interest rates, and liquidity. However, it's important to be aware of the transitory impact generated by the high level of inflation on profitability. Since 2009, the nominal effect of inflation under Chilean GAAP similar to IFRS does not take into consideration the full impact of inflation on income or the balance sheet. When we consider the effective inflation on equity to recognize the loss in purchasing power, profitability becomes much more aligned with our long-term figures. The chart on the right demonstrates the inflation-adjusted ROE from the main Chilean banks, considering the impact of inflation on equity by deducting the effective price level restatement of capital in the income statement. In our view, this measure provides a clear perspective of real profitability as it shows the full economic value generated by maintaining the real value of equity after considering the negative impact of inflation on its nominal value. Even after this approach, our adjusted return on average equity far exceeded that of our competitors and surpassed our pre-pandemic track record, showing an impressive competitive edge and consistent long-term strategy. Please turn to Slide 15. Our financial performance in the fourth quarter of 2022 and over the course of the entire year was exceptional. As shown on the chart to the left, net income reached MXN347 billion in the fourth quarter of 2022, 21% higher than the same period last year. For the full year, we grew 78% over 2021. This bottom line surpassed all of our main competitors in both absolute figures and growth, as shown on the chart on the right. The strong bottom line was composed of both temporary and core factors driven by our sound and consistent strategy. Our balance sheet positioning and superior competitive advantages permitted us to greatly benefit from the nonrecurring rise in inflation due to our U.S. GAAP position. Higher nominal interest rates also played a major role in this result due to the higher contribution of demand deposits. Other core factors that supported the bottom line came from higher loan originations and the dynamic fee business, all being boosted even more by the persistent strong levels of asset quality. Please turn to Slide 16 on operating revenues, where we will go into more detail. Our operating revenues experienced a rise of 15% when comparing the fourth quarter to the same period last year and grew 42% year-on-year. The latter grew 74% in noncustomer income and 28% in customer income. In terms of noncustomer income, we generated greater revenues from our U.S. structural GAAP position due to the high level of inflation we experienced this year and, to a lesser extent, higher income from the management of our trading and debt securities portfolio, given the positive changes in both interest rates and inflation. The rise in customer income was the result of stronger demand deposit contribution in a scenario of high local and foreign interest rates and, to a lower degree, a moderate increase in average balances. Likewise, lowered liquidity among individuals also resulted in the reactivation of higher-margin lending products such as consumer loans. Setting aside the temporary revenues that we generated in 2022, the charts to the right show how our overall operating income compared to our competitors. As you can see on the right of this slide, we have outperformed our peers in net interest margin, fees, and total operating margin. We believe that part of this better performance arises from our consistent approach to risk, which is supported by prudent corporate governance standards. Please turn to Slide 17. Our total loans grew by 7.2% as compared to the previous year and 1.7% versus the third quarter of 2022. A large portion of this expansion is attributable to market factors since inflation had a significant uptick this year, particularly as 100% of mortgage loans and 37% of commercial loans are denominated in U.S. dollars. The difference in nominal versus real growth becomes clear in the chart to the right. Nevertheless, consumer loans continued to exhibit higher dynamism, growing 17.5% year-on-year and impressively increasing 6% quarter-over-quarter. This positive outcome is primarily due to strong loan origination figures, which were driven by effective marketing strategies and solid value propositions. We have also seen an important improvement in originations by account manager as a consequence of our successful retail banking sales excellence program. This has been implemented based on best practices across the organization, boosting productivity levels through four key pillars. First, improving the effectiveness of risk models to increase preapproved loans and adjusting risk attribution at the branch level to boost efficiency. Second, leveraging digital tools to enhance analytics; third, expanding our business intelligence and building new propensity models, which are sets of approaches to build predictive models to forecast the behavior of a target audience by analyzing their past behaviors. And finally, developing a disciplined methodology through the implementation of management and training procedures, branch by branch. Through this program, we have been able to increase not only our origination of consumer loans that grew 45% year-on-year but also our market share in this product, which grew 76 basis points to reach 17.4%. A similar program is being implemented in the SME segment, and we are already seeing strong improvements in originations with a rise of 25% this quarter compared to the same quarter in 2021. For 2023, we expect that loans in the industry should grow in line with expectations for inflation and that loan growth should be driven by consumer and mortgage loans. We expect that commercial loans will continue growing below inflation due to low business confidence, rising uncertainties, and the current recession we are experiencing. As for our loan portfolio, this should follow a similar trend of moderate growth. Please turn to Slide 18. We have adjusted our balance sheet structure accordingly for the changes we anticipate regarding falling interest rates and inflation. Consequently, this led to a change in our funding strategy by proactively placing U.S. bonds in the local market and increasing our source of funding by 8% year-on-year and 5% in the quarter. This increase in the duration of our liabilities reduced price risk in the banking book by decreasing our exposure to inflation, as shown on the chart on the bottom right and refining the scheduled amortization of outstanding bonds. The timing of the issuances was especially important given the expectations that the local bond market may become very active in debt placements in light of the financing needs from the scheduled amortization of FCIC financing beginning in 2024 and the expected behavior of demand deposits, among others. Regarding demand deposits, we continue to see a normalization this quarter in terms of the source of funding, decreasing by 6.4% during this quarter and 27% year-on-year from the unsustainably high levels of 2021 due to the pension fund withdrawals and relief programs. As can be seen in the chart on the upper right, the relationship of demand deposits to time deposits has been moving quickly to a more normal level, given the extraordinary high levels of short-term interest rates implemented to control inflation and normalized liquidity levels in the economy. Nevertheless, we expect that our current level of demand deposits, equal to 36.5% of total loans, remains relatively in line with our long-term levels from this source of funding. We expect that demand deposits will remain relatively flat throughout 2023 compared to 2022. We are also confident that our premium customer base should continue to support our strong funding mix. Additionally, during 2023, we'll keep assessing funding alternatives depending on market dynamics, the evolution of time deposits and demand deposits, and loan growth. Likewise, we can't rule out that we will continue to reduce price risk exposures in the banking book. For instance, in terms of the inflation gap, all of which will determine the steps we will take to finance our balance sheet. Please turn to Slide 19 to discuss our superior capital levels versus our peers. As shown on the slide, our profitability track record has consistently outperformed our peers, including return on average equity despite our larger capital base. We finished the year with a capital ratio of 18%, significantly higher than our peers, as shown on the chart on the top left, and the positive direction of our CET1 ratio over the past few years has meaningfully surpassed both of our main competitors, as shown on the chart on the bottom left. This position of high return, high net income, and high CET1 is truly unique, as shown on the chart to the right. We have achieved this through a customer-centric business strategy and an appropriate balance between risk and return. This has allowed us to sustainably grow our portfolio and bottom line. Additionally, we have been able to continue providing an attractive dividend without affecting this leadership position, all while maintaining the largest gap of our capital over regulatory limits to easily comply with Basel III regulations. Please turn to Slide 20. Undoubtedly, core expected credit losses are in the process of normalization. This quarter, expected credit losses reached PHP123 billion, down from PHP138 billion posted 1 year ago with a lower amount of additional provisions established. For the full year, we recorded COP 435 billion of expected credit losses, up 22% from 1 year ago. This rise is attributable to the normalization of asset quality after a period of high liquidity that maintained risk indicators transitorily low. As shown on the chart on the bottom left, the expected credit losses rose from a very low level of 0.5% in the fourth quarter of 2021 to a still lower than pre-pandemic level of 1.08% this quarter, a rise that was significantly lower than those posted by our main peers. Excluding the decrease of PHP65 billion of additional provisions, the Retail Banking segment contributed the most expected credit losses with an annual increase of PHP31 billion, while the wholesale banking segment rose MXN13 billion due to high inflation and a weaker economy affecting individuals and businesses alike. Nevertheless, the quality of our portfolio and our risk management culture is evident when compared to our peers, as you can see on the chart on this slide. Not only do we have the soundest portfolio, but we also have the highest coverage ratio of 3.7 times and the most additional provisions amounting to PHP700 billion, as shown on the chart to the right. This clearly positions us better than our peers if the economy worsens beyond our baseline scenario. Lastly, it's important to stress the relevance that controlling risk has on our bottom line. This is truly a competitive advantage where we have demonstrated a superior track record compared to our peers, as shown on the chart on the bottom right. Since 2021, we have continued to widen the gap with our peers despite our significantly larger coverage ratio, demonstrating our excellence in managing our business. Please turn to Slide 21. Expenses have grown this quarter, 19% nominal over the same period last year and 14% nominal in 2022 over 2021. This rise is primarily due to the high inflation that reached 12.8%, which has impacted most of our expense line items, including salaries, advisory services, and IT expenses that are indexed to the consumer price index. We also recorded higher variable compensation due to the strong results during 2022. Nevertheless, the annual rise in real terms reduced significantly to only 2.8% due to our effective cost control efforts. In terms of the efficiency ratio, we reached a ratio of 33.1% this quarter and 31.9% for the full year, both significantly below the levels recorded in 2021. When compared to our peers, we continue to lead and widen the gap in efficiency, as shown on the chart to the right. We are confident that through our firm focus on strengthening cost control, boosting productivity, and using technology to improve how we manage our business, we should continue to achieve strong normalized efficiency levels that are better than what we recorded in the past. Nevertheless, it's fair to mention that our current level of efficiency has clearly been driven by market factors such as inflation and interest rates that transitorily increased operating revenues. However, we are confident that we will continue to reach sustainable levels below 45% in the medium term. Please turn to Slide 22. The last few years have been turbulent. Despite this, we have managed the bank well throughout this cycle, posting historic results in 2022, well above all of our competition. We outperformed in total profitability measured by ROE and ROA, and at the same time in capitalization. We posted the highest net interest margin, the highest fee margin, and the highest operating margin. We recorded the best asset quality indicators and set the highest level of coverage to face possible uncertainties that could have occurred or that may lie ahead. Not only that, we also posted the best efficiency ratio in the industry, taking away this recognition that has historically been held by our main competitor. Overall, we believe that through a superior customer-centric strategy, combined with our uncompromising approach to risk management, are the main pillars of our solid track record. This is especially relevant as we are currently in a recession. We expect that recovery should begin in the second half of 2023, and we are well-positioned to take greater advantage of this environment than our peers. Our short-term guidance sees NIM decreasing to a sustainable level of around 4.3%. Cost of risk should normalize this year to around 1.2% and efficiency should reach a level around 40%. As for ROE, we anticipate it to converge to a range around 18%, while also maintaining a solid capital base. Thank you for listening. If you have any questions, we would be happy to answer them.
Operator, Operator
Thank you for the presentation. We will now proceed to the Q&A segment of the call. Our first question comes from Mr. Tito Labarta from Goldman Sachs.
Tito Labarta, Analyst
Pablo, a couple of questions. I guess just on your expense outlook, I know efficiency is deteriorating a bit as margins normalize. But how do you think about expense growth from here? I know inflation has been high as inflation comes down, but you're still growing a bit above inflation. Is that what we should expect: slightly above inflation? Or is there other room where you can improve efficiency on the cost side? And then a second question on your capital ratio, very strong at 13.7%. Just help us understand what you think is the right level of capital where you feel comfortable operating? And what could that mean for your dividend payout?
Pablo Mejia, Head of Investor Relations
Yes. So in terms of efficiency, what we're seeing is that the strong inflation growth of 2022 has an important effect in terms of the variation of costs in 2023. So, it will probably start to see a level of around a couple of points above inflation in terms of cost because most of our costs are indexed to inflation, right? So we have some things that we've been doing throughout the year and prior years, like digital transformation. We've been improving everything related to our digital products, services, and tools that we provide online, the onboarding process that we're giving customers. We had a reduction in our branch level. We optimized the branches across Chile. Today, we have 266 branches. Half of those branches are located in Santiago, and the other half are located in regions outside of Santiago. In regions outside of Santiago, there's only 1 or 2 branches in those cities and towns, so there's not much room for improvement there or improvement in the footprint. In Santiago, it will all depend on the growth and how many customers use the branches. But today, the level that we have of the branch network is optimal as of today. And we've also been implementing improvements in efficiency through our efficiency program, where we've seen different improvements across the company in terms of how we purchase goods within the bank, implementing new tools, and optimizing purchases to get better deals and also how we're doing training within the branches in order to improve productivity and increase the originations per account manager. So basically, in summary, for 2023, one of the main drivers for us is the effect of inflation through 2022, which is affecting the comparison base. So in the medium term, we should think that Banco de Chile will grow in line or slightly below inflation, but for 2023, the primary driver is 2022 inflation. For capital, Daniel Galarce will respond to your questions.
Daniel Galarce, Head of Financial Control and Capital
Hi, everybody. Well, regarding capital ratios, in fact, we are still quite confident and pretty comfortable with the levels we have today, particularly in terms of CET1. And in terms of the dividend payout, as you probably know, the Board decided to propose a 100% payout ratio for 2023 over the net distributable income, which, in fact, is an effective payout ratio of approximately 68%. It's important to consider that we, as every year, retain the effect of inflation on the shareholders' equity, of course. So we normally distribute over the rest of the earnings. In this case, there is due to double earnings. So basically, we will continue to reinforce our capital base. And in the future, we will probably come back to the same payout ratio we normally have every year, which is approximately 60% of the net distributable income.
Tito Labarta, Analyst
That's very helpful. Just in terms of the…
Daniel Galarce, Head of Financial Control and Capital
Just a correction: the effective payout ratio is 62% of our net distributable income over the total net income. The last year, 2022 was 68%.
Tito Labarta, Analyst
Great. And just in terms of what the optimal level of capital is where, we think you should be operating?
Daniel Galarce, Head of Financial Control and Capital
Yes. It will depend on the balance sheet growth, of course, but we feel pretty comfortable with the level we have today. We will probably use some capital over the next 3 years, but basically, it will depend on how that will expand in the medium term. Today, we have room to grow in terms of the balance sheet, of course, and probably levels of CET1 of 12% to 12.5% is something that is reasonable for us.
Tito Labarta, Analyst
Thank you very much.
Operator, Operator
Our next question comes from Mr. Andres Soto from Santander.
Andres Soto, Analyst
To everyone, my question is related to your NIM sensitivity and outlook for Chile's inflation and interest rates. Can you please remind us what is the sensitivity that you have regarding net interest margin to interest rates and inflation? And I would like to understand what changed in your expectations when I compare this guidance that you're providing with the one you provided 3 months ago; I see that both for net interest margin you are guiding now to the upper end of that range that you guided before and the lower end, sorry, and for cost of risk, you are guiding for the upper end. So I would like to understand what changed in your view of Chile over the past few months to provide this more cautious guidance.
Pablo Mejia, Head of Investor Relations
I'm sorry, the volume is very low. Could you repeat the question?
Andres Soto, Analyst
Sure, Pablo. Basically, I would like to understand your updated sensitivity to interest rates and margins.
Pablo Mejia, Head of Investor Relations
Okay. So in terms of our net interest margin, you can hear me, right?
Andres Soto, Analyst
Yes.
Pablo Mejia, Head of Investor Relations
Okay. So in terms of net interest margins, what we're seeing today is a level that goes somewhere around 4.3% for 2023. And the main driver there is really for us the evolution of inflation. So depending on inflation's evolution will be the main driver in the short term for where that level finishes for the end of the year. What we're seeing some other drivers, but less of an impact is how we're growing the retail base loans. So the evolution of the growth in loans that we're seeing shows that retailers are a little bit healthier than wholesale, but still, it's not significant as inflation. So for every 100 basis point change of inflation, it's about the PLN60 billion change in net interest income or more or less, and then around 13 basis points with the gap that we have on the balance sheet today. If we look at the sensitivity to the overnight rate, once everything reprices after 3 years, a 100 basis point change in the overnight rate is about a 30 basis point change in net interest margins. So that would be the main driver for 2023 for net interest margin is inflation. And there are some positive effects on loan growth, but we are seeing a relatively flat trend overall, with slightly higher growth in terms of retail loans above inflation.
Andres Soto, Analyst
Thank you, Pablo. And regarding your additional provisions this correcting this with the updated model for the standardized model for provisioning in consumer loans. Do you have any updated estimates of how much of your excess provisions will be used for this updated model? And if I assume it's not a full amount, will you consider releasing some of those provisions in case the cost of risk this year at some point exceeds the 1.2% that you are forecasting now?
Pablo Mejia, Head of Investor Relations
Today, we have the highest level of additional provisions at $700 billion, providing us with a strong coverage ratio of 3.7 times. If you look at the presentation, you’ll see that in recent quarters, the provisions recorded in the income statement have been largely based on models and additional provisions. In the last quarter, we only set aside MXN15 billion in additional provisions. The reasons for our additional provisions reflect the evolution of the economy and its potential impact on our portfolio, rather than changes in our models. We anticipate a cost of risk of about 1.2% for the coming year, aligning with our base scenario. We have not discussed the impact of the new provisioning model, but it is not particularly significant to us, as there are no clear guidelines on its implementation yet, since the consultation period has just concluded, and we still need to finalize the draft.
Rodrigo Aravena, Chief Economist and Institutional Relations Officer
So, it's important to recognize that there are still uncertainties for Chile. The long-term impact of various measures taken last year remains uncertain, including the withdrawal from pension funds and the lower savings rate. This creates doubts about the long-term GDP growth and the future level of monetary policy rates. This year, we need to be particularly aware of these uncertainties, especially considering upcoming discussions on taxes, pension reform, and the constitutional process. The evolution of these risks will be crucial for future provisions. Additionally, we must closely monitor the exchange rate in Chile due to its significant effect on inflation; for example, a 10% change in the exchange rate can influence overall inflation by about 150 basis points within a year. Thus, it's essential to be mindful of these uncertainties and give them special attention this year.
Andres Soto, Analyst
Thank you so much for your answers.
Operator, Operator
Our next question comes from an analyst at Scotiabank.
Unidentified Analyst, Analyst
Pablo, Rodrigo, congratulations on the strong results. My question is related to the guidance. I wanted to understand what are the upside risks that you see and what are the main sources for upside risk to your guidance? And what would be the main ones for the downside risks as well?
Pablo Mejia, Head of Investor Relations
I think the main upside risk that we're seeing today is in recent economic figures, which are better-than-expected results of the economy, and maybe how that will transfer into 2023 with stronger GDP growth. That would be positive and the evolution of the unemployment rate is also a positive factor that can continue benefiting different line items in the balance sheet, for example, stronger growth in the portfolio and more higher-margin products. We also have the benefits of lower cost of risk than could be expected if the economies are stronger, and we continue to see very good payment behavior from our customers. I think those are the main upside factors. But the main downside is also probably in the same line, as well; if the economy grows slower, there's more uncertainty, and business confidence levels are weaker. That can impact the growth of the portfolio and the evolution of risk, but it's important also to mention that we have a substantial amount of additional provisions. So if something were to occur, such as a slightly higher nonperforming loan in our baseline scenario or if the situation gets complicated in 2023, we still have a large amount of additional provisions which the Board takes into consideration on a monthly basis regarding the evolution of those provisions and how they should be utilized.
Rodrigo Aravena, Chief Economist and Institutional Relations Officer
The key sources of potential changes in our bottom line are related to macro drivers. Therefore, we are not particularly worried about any figures or specific factors related to the industry sector or Banco de Chile. Ultimately, the risks to the bottom line are mainly tied to economic growth, changes in interest rates, and consumer prices, as Pablo mentioned. The potential difference between our guidance today and the final results for the end of this year will be closely related to macro factors rather than specific aspects of our bank or the financial industry.
Unidentified Analyst, Analyst
Understood. So the changes in interest rates wouldn't have a direct impact on your guidance; they would be more indirect through economic growth expectations and inflation. Would that be correct?
Pablo Mejia, Head of Investor Relations
Our baseline scenario for interest rates is that they will be relatively on average, similar in 2022 and 2023. If the evolution of that changes or the evolution of inflation changes, that would have an effect on our net interest margins.
Rodrigo Aravena, Chief Economist and Institutional Relations Officer
At the end of the day, the most relevant figures to monitor this year are inflation and the evaluation of the monetary policy rate because that is the variable where we have the greatest uncertainty. In fact, we acknowledge some downward risk today in the evolution of the monetary policy rate. Just to give you an idea: our forecast of inflation for this year is consistent with a rate of around 800, 850 basis points. So if the monetary policy rate continues to hover at the current level, this could potentially create a downward risk in terms of inflation and, consequently, affect the bottom line. Thus, the most relevant figures for this year concerning the bottom line evolution will be inflation.
Unidentified Analyst, Analyst
Got it. Thank you for your comments, Rodrigo.
Operator, Operator
Thank you very much. Our next question comes from Mr. Yuri Fernandes from JPMorgan.
Yuri Fernandes, Analyst
Pablo, congrats on this incredible year. I have a question regarding fees. If you can provide some outlook. I guess this year was growing like 9%, 10%. And with lower inflation, should that line be slightly weaker in 2023? Or if all those new initiatives, should we see more supportive fee growth for 2023? And also regarding the nonperforming loans, you have in your guidance, 1.2%, 1.3%. That is some 20 basis points increase versus 2022. But in the release, you mentioned that maybe during the year, you could see some peak on like higher nonperforming loans during the year. What do you mean by that? Like are you waiting for some kind of corporate cases? Is it just a more cautious macro environment by the half of the year? As you charge off, or would the nonperforming loans come down? So basically, I'm trying to understand the curve of the nonperforming loans: should we start to see the peak in June 30 and then gradually improve in the fourth quarter? What is the message here? Thank you.
Pablo Mejia, Head of Investor Relations
Thank you for your question. Regarding our expectations for fees, historically, fees increase primarily due to customer growth. Over the past decade, we've seen an average growth of about 6% to 7% in current account customers. Recently, this growth has been slightly higher because of the new products we've launched and the significant rise in current account openings driven by our digital onboarding platforms. Customer growth is a key factor here. Inflation also impacts fees, as most are tied to inflation rates. If we assume long-term inflation around 3% to 3.5% and customer growth in current accounts at approximately 7%, we can anticipate high single-digit fee growth, which has been the average in recent years, so we expect something similar for 2023. Significant contributors to this growth include a strong ATM business in prime locations, credit cards, mutual funds, and current account administration fees. As for nonperforming loans, we expect them to remain at current levels. Analyzing different segments, we find that corporate NPLs are stable compared to previous years. However, there may still be fluctuations in retail or mortgage NPLs. Overall, we continue to observe good payment behavior and a quality loan portfolio, which we expect to stabilize along with improvements in liquidity. The progression of NPLs will depend more on broader economic factors, such as unemployment and overall economic performance, which influence retail NPLs and the risk landscape for wholesale businesses. Currently, we have a strong portfolio across all sectors. Real estate companies are in good shape, and we haven't encountered significant issues there. Our focus in the retail sector remains on upper-income customers who exhibit strong payment behavior, so any changes will largely be a reflection of macroeconomic trends.
Yuri Fernandes, Analyst
No, perfect Pablo. That was very clear. And just to clarify, I believe you grew about 14% to 15% in fees, not 90%. It was more in the mid-teens.
Pablo Mejia, Head of Investor Relations
Yes. So those fees are indeed driven by customer growth, but one of the important factors is inflation.
Operator, Operator
Thank you very much. Our final question today comes from Mr. Carlos Gomez from HSBC.
Carlos Gomez, Analyst
I have a question also on fees, and you referred to the placement of regulation. You don't refer to competition. Do you think that with the new open banking environment and more competition from digital banks, might there be present in the future? Or do you think it will not momentarily change the structure of the market? And then going forward, in terms of the group within you still see yourself strictly constrained to Chile? Or would you consider international opportunities or perhaps going into the pension fund business if that opens up?
Pablo Mejia, Head of Investor Relations
In Chile, the banking industry is a highly competitive environment. We have 18 banks operating in Chile, including local and international banks. There are numerous regulations set that maintain fees relatively low. For example, there are no charges for current account, as customers pay nothing for their current accounts, and charges for transactions like electronic transfers are eliminated or nominal. The banks charge each other for using ATMs, so there's less customer loyalty. Fees have been historically low due to this competitive pressure. There are areas, such as mutual fund administration fees, that have decreased over the years. Significant changes in fee structure are not expected; the competitive landscape remains stable despite the presence of many banks. As for Banco de Chile, our focus remains strictly in Chile. Obviously, any new deals or business opportunities are evaluated, but our aim has been to grow and operate in Chile and support our customers. There are currently no updates regarding any changes. However, we will evaluate any opportunities in the pension fund if they arise, ensuring we maintain a balanced focus on risk and return.
Operator, Operator
Thank you very much. It looks like we don't have any further questions. I'll pass the line back to the Banco de Chile team for concluding remarks.
Pablo Mejia, Head of Investor Relations
Thank you for listening, and we look forward to speaking with you on our first quarter results for 2023.
Operator, Operator
Thank you very much. This concludes today's call. We'll now be closing all lines. Thank you very much. Goodbye.