Earnings Call Transcript - BCH Q3 2023

Operator, Operator

Good afternoon, everyone, and welcome to Banco de Chile's Third Quarter 2023 Results Conference Call. If you need a copy of the management's financial review, it is available on the company's website. With us today, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer; Mr. Pablo Mejia, Head of Investor Relations; and Daniel Galarce, Head of Financial Control and Capital. 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 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.

Rodrigo Aravena, Chief Economist and Institutional Relations Officer

Good afternoon, everyone. Thank you very much for joining this conference call. We are pleased to present the performance of our bank during the third quarter. Once again, Banco de Chile demonstrated its unquestionable leadership. Some achievements include a solid net income of CLP 260 billion in the quarter, equivalent to an ROE of 21%, remaining the most profitable bank among peers. We also led the industry regarding capital, asset quality, and margins, achieving significant accomplishments in other nonfinancial areas. I want to remind you that further details are shown in the management discussion report released this week and available on the bank's website. Before moving to our presentation, we are very proud to mention that recently, Banco de Chile completed 130 years of history offering comprehensive solutions for our customers and promoting the development of the country and its people. I'd like to begin with an overview of the competitive environment and our forecast for the following year. Please go to Slide #3. Chile is a small and open economy, highly integrated into the rest of the world, which is why it's critical to monitor the evolution of global drivers that could potentially affect our economy. As the upper left chart shows, we've seen lower dynamism in the global economy, reflected in the downward adjustment in global GDP forecasts. As the IMF mentioned in its report, this negative trend is attributable to the weaker-than-expected growth in China, which represents nearly 40% of Chilean exports. In addition to this, the chart on the upper right displays a further slowdown in most countries during this year. These trends have affected economic activity, which has declined annually since the second half of last year, as seen in the chart on the bottom left. This negative trend is explained by several factors, including the partial normalization of liquidity seen last year, the lag effect of the 1,075 basis point interest rate hikes between 2021 and 2022, and the subdued growth in our trade partners. This recession, however, has contributed to reducing the macroeconomic imbalances that were still present during the pandemic. One of them is the improvement in the current account deficit from 9% in 2022 to 4.2% last 12 months, in the second quarter this year, due to the trade balance surplus compared to the last year. The adjustment in local spending has also influenced the lower inflation and interest rates as we will see in the next slide, number four. The annual inflation fell to 5.1% in September from the peak of 14.1% in 2022, posting the lowest figure in over two years. The core CPI, which is the measure that excludes food and energy prices, went down to 5.2%, also the lowest since mid-2021. Along the same lines, the unemployment rate has slightly increased, reflecting the existence of spare capacity in the economy. In this environment, the Central Bank reduced the interest rate by 225 basis points in the meetings held in July, September, and October and has signaled further cuts in the near term. It's important to note that in October, the Central Bank dropped the interest rate by 50 basis points when the market was expecting a 75 basis point cut. Additionally, the Central Bank ended its FX reserve accumulation program and the gradual reduction of its forward position. This led to a strong drop in the value of the CLP against the dollar. Nevertheless, the peso continues to be weak, driven by lower local rates and a stronger global dollar, as seen in the chart on the bottom right. I'd like to move to our baseline scenario for this and the next year. Please go to the next slide. Despite the expected positive growth in the fourth quarter, 2023 will likely fall by nearly 0.2%. For 2024, we forecast a recovery towards 1.7%, driven by the positive effect of lower inflation and a more expansionary monetary policy. However, the deterioration in global conditions will partially offset the impact of these factors. Regarding prices, the CPI should continue falling from 12.8% last year to 4.2% in 2023, and to 3% in 2024. Based on this trend, we see room for further rate cuts. The chart on the right shows our quarterly rate expectations for the following period. The evolution of these macro drivers has impacted the bank's bottom line, as we will see in the next slide. The banking industry posted a net income of CLP 949 million, 29% lower than the same period last year, reducing ROE to 12.7% from 20.6% in the third quarter of 2022. This decrease is attributable to a combination of factors, such as a significant reduction in inflation, leading to a 37.8% reduction in net interest income for the industry. Additionally, a 7.2% increase in the cost of risk resulted from the normalization of asset quality, as shown on the chart on the bottom left, and a 5.1% rise in operating expenses slightly surpassing the inflation rate. The ongoing impact of the current economic environment is clearly reflected in the chart on the right. Total loan growth decelerated to 2.8% in the current quarter, mainly due to subdued demand for commercial loans, and to a lesser degree, consumer loans. Mortgage loans continued leading loan expansion. Despite these factors, Banco de Chile has been able to post solid figures surpassing the rest of the industry. Now Pablo Mejia will present the main achievements of our bank during the period.

Pablo Mejia, Head of Investor Relations

Thank you, Rodrigo. I would like to begin with advances in our main strategic focus. Please go to Slide #8. Our impressive track record is the result of our consistent long-term strategy that places customers, efficiency, and sustainability at the center of everything we do. We've put these pillars into action through six key goals, and we've surpassed all of our midterm targets, as you can see on the right of this slide. In the upcoming sections, we'll take a closer look at how we've been thriving in digital transformation, productivity, and sustainability, and how this has translated into posting remarkable financial results. Let me start with digital banking. Please move to Slide #9. In terms of digital banking, our initiatives are focused on offering customers an innovative value proposition that is simple and tailored to their needs, providing the best experience. To achieve this, we have developed a comprehensive digital ecosystem that includes virtual accounts for diverse segments such as individuals over 18 years old, SMEs, and teenagers. This initiative has resulted in over 1.3 million digital accounts and has registered solid growth quarter-on-quarter, as detailed in this slide. One noteworthy advance we have recently undertaken is the integration of contactless mobile payment functionality through Apple Pay Wallet. On the productivity and efficiency front, our efforts are centered on building an agile and modern bank through innovative, effective, automated, and secure digital front-to-back processes. This quarter, we have made significant progress in this area, including the enhancement of CapEx budgeting planning process to ensure a precise alignment of organizational resources with the strategic objectives while optimizing the returns from all our investment projects. Concurrently, we also implemented new tools to reduce customer service delivery times. And to further maximize returns, we implemented a new deposit pricing strategy that resulted in improved margins. In summary, we are continuously seeking new ways to improve revenues and optimize costs. We are confident in our ability to maintain our leadership position within the industry. Finally, as part of our commitment to the development of the country and its people, we continue strengthening our ESG initiatives to create long-term value for our stakeholders. We are proud that our efforts have been recognized by different institutions, including our first-place ranking in the National Customer Satisfaction Award. Additionally, we've been honored as a leading bank in attracting and retaining talent according to medical talent. Among many actions towards sustainability that we have implemented during the quarter, we can highlight that we launched new national entrepreneurship contests and continued volunteering initiatives aimed at reforestation, education, and financial literacy. Furthermore, we're glad to announce that our sustainability and procurement teams are working together on a project that will promote lower carbon emissions and energy savings, marking an important step in our journey to contribute to society and the environment. All of these actions have taken place in a setting where we remain the strongest bank in ESG according to sustained analytics. Please turn to Slide 11 to begin our discussion on our results. We achieved another quarter of strong earnings with a notable ROE of 21%. Our net income of CLP 260 billion was significantly above all of our peers, as shown on the chart in the middle of this slide. These accomplishments are a testament to our dedicated team and a superior long-term strategy that emphasizes sustainable growth with a balanced consideration of risk and return, as exemplified by our leading positions in capital adequacy and delinquencies. This has firmly established Banco de Chile as the most profitable and sustainable bank in Chile. Please turn to Slide 12. Despite the weak economic and business environment, our core customer income has continued to steadily recover by growing 8% year-on-year, supporting operating revenues, as you can see on the chart on the bottom left. This growth in core revenues has partially offset the lower revenues from non-customer income that fell 50% year-on-year, primarily due to the normalization of several market factors, especially the sharp decrease in inflation. Customer interest income from loans, demand deposits, and time deposits rose by 13.4% year-on-year, due to an improvement in loan mix and further enhanced loans with lower lending spreads from the pandemic. In fact, loan spread originations have been rising across the majority of product families. These results translated into a robust net interest margin of 4.2%, despite the significant drop in inflation during the period. Another relevant component of customer income is net fees, which decreased by 3.9% year-on-year. However, it's important to consider that this was attributable to two temporary factors: first, the reclassification of income from collection services for overdue loans, which is currently recognized in other income; and, additionally, the impact of foreign exchange rates on our loyalty program provisions. Nevertheless, the latter effect is hedged through trading positions that are booked as net financial income. Excluding these factors, core fees have continued to grow well at 6.4% year-on-year. This growth was driven by retail fees, including insurance premiums, which grew 20% year-on-year, checking accounts and overdrafts, up 13% in the same period, and site accounts and ATM fees rising 8% year-on-year. In the third quarter, non-customer income decreased 50% year-on-year, as I mentioned earlier. This was primarily due to the strong reduction in inflation. Specifically, the U.S. variation dropped from 3.5% in the third quarter of 2022 to only 0.3% in the third quarter of 2023, or from 14% to 1.2% if we annualize these numbers. As a reminder, a change of 100 basis points in inflation is roughly CLP 80 billion in operating income. In fact, when considering our structural U.S. GAAP and directional positions taken by treasury on U.S.-denominated securities, the change in inflation resulted in lower income by approximately CLP 250 billion year-on-year. This amount was partially offset by other than inflation income from both ALM and our investments in trading portfolios that surged by approximately CLP 110 billion on an annual basis, as a consequence of both the positive impact of higher-than-normal nominal short-term interest rates on short-term assets and the comparison base effect related to the sale of AFS securities in the third quarter that accumulated fair value losses of CLP 58 billion. Please look at the chart on the right as they demonstrate how our performance compares to our peers. This quarter, our NIM reached 4.2%, significantly higher than our closest competitors. We also outpaced our peers in fees as well as operating margin. This exceptional performance is due to our superior business strategy together with prudent risk management practices, all underpinned by robust corporate governance standards. This prudent approach has allowed us to benefit from the changes in market factors better than our peers as a consequence of a consistent business model focused on commercial banking. Please turn to Slide 13. We offer financial solutions to clients across all segments in retail and commercial banking. As illustrated in the chart, 64% of our loans are focused on the retail segment, while the remaining 36% serve the wholesale sector. In wholesale, we have a diverse portfolio, as you can see in the chart on the bottom left. This diversity in our total loan book allows us to continue growing even when there are varying economic cycles or challenges affecting different segments, aiming to mitigate, reduce demand or credit risk. During the pandemic, our growth was centered on low-risk and low-margin products. This resulted in a significant transformation in the structure of both our loan portfolio and our balance sheet. However, this has begun to change. And as I mentioned, our spreads are already improving. We anticipate that in the coming periods, we will gradually bring the loan portfolio back to the mix that we had prior to the pandemic. As you can see in the charts to the right, total loans are growing 1.9% year-on-year. Loans to individuals are driving growth and consumer loans are rising, followed by mortgage loans, which are expanding at 7.6%. In the case of consumer loans, growth was primarily fueled by credit cards, followed by installment loans. This has been driven by greater use of electronic payments, a legacy of the pandemic, and an improved segmentation of customers that has been supported by business intelligence tools while enabling us to maintain credit risk at low levels. In turn, mortgage loans expanded by 7.6% during the 12-month period. Despite this figure still being below pre-pandemic levels, loan growth has been driven by both inflation and proactive commercial campaigns focused on specific customer segments that have permitted us to gradually recover market share in the strategic product that allows us to achieve long-term relationships with clients. In this regard, it's worth mentioning that origination of residential mortgage loans has significantly increased from last year, as depicted by a 73% annual growth in September 2023 compared to the same period last year, demonstrating the effectiveness of our campaigns and competitive funding costs. Commercial loans, on the other hand, decreased 3% year-on-year. High interest rates, together with a weak economy and high uncertainty, have taken a toll on this segment. In the case of SMEs, higher debt levels from the quick penetration of these customers during the pandemic have further reduced the possibility of recording stronger expansion levels. Currently, originations are only offsetting the amortization of these loans. But on a positive note, loan origination is contributing with higher lending spreads than the stock that is being amortized. Thus, we are seeing a gradual normalization in spreads that should continue in the coming quarters. Also, we're confident that as long as some sources of uncertainty begin to fade, total commercial loans will continue to return to positive growth levels. Please turn to Slide 14 to discuss our strong balance sheet structure. Our asset and liability structure exhibits robust diversification, as illustrated in the upper left chart. Our core focus remains on commercial banking, where loans constitute the primary revenue driver, representing 67% of our total assets as of September 2023. It's also noteworthy that before the pandemic, total loans typically accounted for a range closer to 80% of our total assets. The most likely scenario is that we should return to these figures once the funding is totally paid off by mid-2024. As our extra liquidity will quickly decrease from the extremely high levels we currently have, as shown on the charts to the right. Nevertheless, we will continue to have much higher liquidity ratios than the established limits. Additionally, we have managed our balance sheet positions appropriately for the economic cycle. This has provided stability in our results with lower sensitivity to changes in market interest rates. We've also managed our U.S. position appropriately to optimize margins, as you can see in the chart on the bottom right. Please turn to Slide 15. Banco de Chile is by far the most capitalized bank amongst peers. We have a total capital ratio of 17.7%, well above all of our peers and fully loaded Basel III requirements. CET1 stands at an impressive 13.5%. That allows us to easily comply with the requirements of this new regulation. The phase-in period is shown on the table to the right. Recently, the regulator defined a countercyclical buffer of 0.5% and is in the process of determining the need to establish Pillar 2 capital charges, if any, depending on each bank's capital position and risk management framework. Our long-term strategy and prudent approach to managing market risk and credit risk have played a pivotal role in progressing through this economic cycle, setting us apart from other banks in both revenue generation and the quality of our balance sheet in terms of market and credit risk. Please turn to Slide 16. Expected credit losses remained low by posting only CLP 60 billion this quarter, representing a 43% reduction compared to the same period last year. The decline is mainly due to the CLP 35 billion of additional provisions established in the third quarter of 2022 compared to this quarter, where we did not set any additional provisions. This, coupled with a reduction of credit risk expenses coming from provisioning models due to better-than-expected credit behavior and improved financial condition of wholesale customers participating in industries that faced uncertainty last year, specifically, commercial loans posted lower provisions due to slowed loan growth and the release of allowances related to FOGAPE loans, partially offset by a gradual return to more normal levels of cost of risk in the mortgage and consumer loans. The latter is in line with a rise to more normal levels of delinquencies in the loan portfolio, as shown in the chart on the bottom left. We have full confidence that our top-tier coverage ratio, combined with the highest level of additional provisions, remains at CLP 700 billion, offers sufficient protection to deal with a longer-than-expected economic downturn. As the level of these additional provisions proves unnecessary, our intention is to subsequently reverse a portion of them at some point in the future. Furthermore, we are proud to have an exceptionally healthy loan portfolio, as depicted in the lower left chart, showcasing a low nonperforming loan rate of 1.35%, outperforming our peers. This accomplishment is in line with our long-term expectations and reflects our diligent risk management practices and commitment to a sustainable growth strategy. Through the risk assessment and mitigation, we aim to uphold the strength and resilience of our loan portfolio, resulting in consistent performance and continued trust from our stakeholders. These results are shown on the lower right chart on the slide, demonstrating our leadership and widening gap with the competitors in operating margin net risk, which reached an impressive 5.2% by the end of the third quarter of 2023. Please turn to Slide #17. Expenses totaled CLP 270 billion in the third quarter of 2023, increasing 4.3% from the previous year. This rise primarily stems from disbursements intended to enhance our digital capabilities while fortifying our IT infrastructure. It's worth noting that a significant part of our expenses is linked to inflation in the U.S. dollar, further contributing to this annual increase. Furthermore, the implementation of VAT on services this year also contributed to the increase in the cost base. It's also noteworthy that through our diverse initiatives, we generate efficiency gains that help fund the necessary investments in digitalization, IT infrastructure, and cybersecurity, which are crucial to address the transformative changes in the banking industry. In terms of efficiency ratio, we reached 39.6% this quarter, well below our peers, as shown in the chart on the bottom. Our strong cost control is thanks to our robust productivity plan and continuous focus on searching for new savings and synergy opportunities. We are confident that the progress we have made will allow us to post long-term efficiency levels below 42% when inflation stabilizes. Please turn to Slide 18. Before we move on to the question-and-answer session, I'd like to share a summary of other key takeaways and provide some guidance. After a period of strong growth and record levels of inflation in 2022, the Chilean economy is gradually adjusting to more normal levels of activity. We expect that GDP will return to positive year-on-year growth rates in the fourth quarter of this year, and we also see a slight recovery in 2024. Accordingly, we are estimating a GDP contraction of about 0.2% for 2023 and a recovery of around 1.7% for next year. However, we recognize the existence of some downward risks in these forecasts. In this environment, we are confident that our bank will distinguish itself from our peers. Our prudent and consistent strategy, together with our strong management team, has positioned us as a leader in the industry in profitability, capital, risk, and efficiency. In terms of the main indicators for 2023, we expect a cost of risk of around 0.9%, an efficiency ratio of around 38%, and ROE of 23%. Regarding capital levels, we're the best-capitalized bank among peers with a CET1 of 13.5% as of September 2023. We feel strongly convinced of our capabilities to sustain levels of ROE around 18%. Thank you for listening. If you have any questions, we would be happy to answer them.

Operator, Operator

Our first question comes from Mr. Tito Labarta from Goldman Sachs.

Tito Labarta, Analyst

I guess my question is on sort of the evolution of ROE. I know you said 23% for this year and sustained 18%. But just sort of over the next year or so, you have excess capital, you mentioned you have excess provisions and with more normalized levels of inflation rates coming down, how do you think that ROE sort of evolves from the 23% to 18% over the next year or two? And kind of related to that with that core Tier 1 at 13.5%, you mentioned you're well above peers, well above requirements. Is there room to return capital there? And what is the normalized sort of core Tier 1 that you should operate with?

Pablo Mejia, Head of Investor Relations

Sorry. As I was trying to mention, there are many factors affecting revenues at this time. Due to the pandemic and other circumstances, our loan portfolio is focused on lower income and lower margin products. While this carries lower risk, we expect to see a normalization. Additionally, other factors are unwinding on both the asset and liability sides. Looking ahead to the next year and beyond, we anticipate these areas and factors will continue to adjust, allowing us to gradually approach an 18% return on equity. We believe that 18% represents our long-term return on equity target, and with the normalization of key economic indicators, we see this as achievable in the next couple of years. It will be a gradual process to reach that level.

Rodrigo Aravena, Chief Economist and Institutional Relations Officer

Tito, this is Rodrigo Aravena. I'd like to add some additional ideas. We're expecting a different contribution from the main macro drivers toward the future. On the one hand, we are aware of the lower potential capacity growth of Chile, so probably we are going to see next year an economic growth of around 1.5% to 1.7%, something like that. We are aware that this number is lower than the number of around 3% to 5% as we used to see in the past. But on the other hand, probably, we are going to have higher structural levels of interest rates in Chile. We think that the neutral level of interest rates in Chile is higher than before in our baseline scenario, and in the long term, the interest rate in Chile will be around those levels, which is higher than the level of 3% that we used to see just a couple of years ago. So that's why we are trying to say that we are going to have opposite forces between real activity compared to the positive contribution from higher inflation and higher levels of interest rates. So that's why we have maintained our long-term guidance of ROE at 18%.

Tito Labarta, Analyst

Okay. Just following up on the question on core Tier 1 and what the right level should be?

Pablo Mejia, Head of Investor Relations

So in terms of core Tier 1, there are a lot of factors as well that we have to take into consideration. We have a prudent, consistent strategy in the long term. Our decisions are always based on having a good risk return level and preserving the economic value of Banco de Chile. That's why we've placed before the pandemic a dividend policy that's closer to around 60% of distributable net income. In the last two years, because of different factors in the evolution of the economy, we've paid 100% of distributable net income, but the proposal of the dividend is reviewed and defined each year by these economic factors and the capital needs to sustain growth in the environment. In 2022, we saw an economy of political uncertainty which reduced the expectations of growth for the following years. So we had a higher dividend pay-out than our policy. So we take all this into consideration. It's important to mention that there are still a lot of factors that we need to see being implemented. For example, Basel III requirements, including Pillar 2. So for today, the policy of our dividend payout is 60%. In the moment that the annual dividend is decided, it is in January of every year and proposed by the Board of Directors. So in this environment of low growth, we have ruled out that future dividends would be different from the historical distributions, and that we have to use our capital efficiently for risk and return, but the proposal as I mentioned is in January.

Tito Labarta, Analyst

Okay. I guess does that mean for now that we should expect the core Tier 1 to remain around that? I'm not clear if there is some target or if it depends on several different factors, as you mentioned.

Pablo Mejia, Head of Investor Relations

It should be around those levels.

Operator, Operator

Our next question comes from Mr. Daniel Mora Ardia from Credicorp Capital.

Daniel Mora Ardia, Analyst

I have a couple of questions. The first one is a follow-up on ROE. I would like to understand if 2024 should be considered a transition year for Banco de Chile, considering that we continue to observe profitability figures above 20%, but the long-term target is around 18%. So do you still believe that ROE could be between 18% and 20% in the next year? Or should we see already normal figures close to the 18% for 2024? That will be my first question. And the second question is regarding margins. Considering the new guidance of inflation, interest rates, and the fact that Banco de Chile is rebuilding the loan mix similar to the one that you had before the pandemic, what will be the path or performance of margins from this quarter going forward in 2024? Thank you so much.

Pablo Mejia, Head of Investor Relations

Yes, we anticipate a normalization of ROE. Currently, our ROE figures are significantly above our long-term historical averages, with last year's figure exceeding 30% and this year's exceeding 20%. Looking towards year-end, in line with our guidance shared in the press release, we expect approximately 23% ROE. Next year, we foresee a decrease in overnight rate changes affecting both our asset and liability structures, which will have both positive and negative impacts on margins. This situation should lead to a decline in operating income, which is expected as our current revenue generation levels of over 20% ROE are not sustainable. Therefore, it’s reasonable to project that we will move closer to the 18% level, which represents our long-term target. Regarding margins, we predict a normalization in economic figures that will affect these levels. While this normalization could reduce net interest margins, we continue to experience growth in originations that help counterbalance amortizations across various product lines. We're noticing improvements in spreads, although we are facing a combination of favorable and unfavorable factors. For 2023, we expect a net interest margin near 4.4%. For the following year, a slight reduction is reasonable, taking into account factors that may unwind, suggesting net interest margins could be about 20 basis points lower than what we anticipate this year. This is part of a normalization process. In the long run, we expect net interest margins, considering competition and long-term overnight rate expectations, to resemble levels we had before the pandemic.

Operator, Operator

Next question comes from Yuri Fernandes from JPMorgan.

Yuri Fernandes, Analyst

I have a first question for Rodrigo. Just his view on the constitution process if this can be a catalyst or not, if this is not approved, if we will keep discussing a new constitution in Chile for or if the story will be over. So just a stake on this new constitution process 2.0? And I have a question for Pablo, I guess, on loan growth. What is the outlook? The industry is growing very little, Banco de Chile also around the industry, 2% year-over-year. But in the past years, you lost some market share, right? Like Banco de Chile used to have 19% to 20% share 10 years ago. And now the bank is running at 16%, 17% share. So my question is, why not accelerate more the growth for 2024, regain some market share or know the scenario is to certain because you have more capital than peers, you have more coverage than peers. So why not getting a little bit more aggressive on this front? Thank you.

Rodrigo Aravena, Chief Economist and Institutional Relations Officer

This is Rodrigo Aravena. Thank you very much for your question. We have to consider several things. We are aware of the existence of different sources of uncertainty on the political side in Chile, one of them being related to the constitution, as you mentioned before. It's too early to anticipate one specific impact from the constitutional process. According to different surveys, the different options for or against the new constitution are narrowing, but there are still some differences, and we have to see how it will evolve in the future. But despite that, we have to pay special attention to the evolution of some reforms in Chile. One of them, for example, is related to taxes. This year, there was a proposal from the government, which was rejected in the early stages in Congress. Probably, we are going to have some discussion on taxes next year. Also, Chile is discussing some changes in the pension system. Today, what is on the table is an increase in the mandatory saving rate by 6 additional percentage points, but note how it will be distributed from that saving oriented toward personal savings against a more solidarity approach. We also have to identify the different discussions related to the political situation concerning the constitution, etc. But when we consider all these aspects, we are aware that the political uncertainty is one of the reasons that reduce our expectations for investment for the next year. That's why we're expecting 1.7% economic growth for the next year with a negative contribution from investment. On the other hand, we are possibly looking for consumption to increase. But all in all, the political uncertainty is one of the reasons we still expect below-trend economic growth for the next year. However, it's too early to anticipate any accurate impact from the constitutional process, even though this is one of the relevant factors related to our expectations for the next year.

Pablo Mejia, Head of Investor Relations

And in terms of loan growth, we have been growing quite well in terms of the areas where we're focused on growing, but always taking into consideration a good relationship between risk and return. So we want to grow responsibly, not just in market share. Where we have grown, which is where we are interested in is in retail loans. In retail loans, we've been actually growing market share this year in consumer loans, for example, where we have close to 60 basis points higher market share. This is an area that we're very interested in growing. So if we look at our key focus areas, the retail segment includes SMEs and consumer loans, which are the most profitable and areas that we want to continue growing. In terms of areas that we've had lower dynamism in the past, this has been corporate loans. It's an area that we would like to continue being involved in, and we think it can keep growing. However, the demand today isn't there. So what we've seen is a much lower demand in this area. Nevertheless, we think that we can return to growth in this product. If we think of next year’s expectations of loan growth for the industry and us, the industry, we're expecting somewhere around 6% to 7% nominal growth, and our intention is to grow above that in terms of market share, responsibly, and we should continue growing in this key area that we're focused on, especially in consumer and SME loans.

Yuri Fernandes, Analyst

Pablo, anything special you're doing in retail, like we see some peers with partnerships with retailers. Like we have retail banks in Chile also growing in certain areas of retail, right, on credit cards. Are you doing something in particular, I don't know, like on SME, do you have any special approach? What are you doing to grow on the retail side of things?

Pablo Mejia, Head of Investor Relations

We're implementing different commercial strategies to improve relationships with customers and offer different products and services through the channels that the customers are demanding by having the appropriate marketing campaigns directed to each one of the customer segments. By implementing this strategy, we've seen stronger growth levels and originations across our retail product segments. For example, mortgage loans had very strong growth in terms of originations versus last year, thanks to our proactive approach for these targeted segments. So there are a lot of internal changes being made to improve commercial strategies and implement the best practices across all branches and employees to drive growth at the customer level, and to use digital accounts to continue increasing the customers available for cross-selling other products and services. These digital accounts are very important to us, and we've seen a very high cross-sell ratio and growth in terms of other products and services from these customers into the bank.

Operator, Operator

Our next question comes from Mr. Ernesto Gabilondo. Please go ahead, sir.

Ernesto Gabilondo, Analyst

Thank you. Hi, good morning to Rodrigo and Pablo. My first question is on your reserve coverage ratio. Can you remind us how much additional provisions Banco de Chile continues to have, and when do you expect to have a more normalized level in your reserve coverage ratio? My second question is on asset quality. You're guiding a cost of risk of 0.9% for '23. So how should we think about this ratio for 2024? And my last question is on your effective tax rate. How should we consider it with the lower inflation levels?

Pablo Mejia, Head of Investor Relations

So the coverage ratio that we have today is close to three times long-term levels, which is closer to two times. What's driving this high level, or higher than peers' coverage ratio, is that we have the leading level of additional provisions in the industry. You can see this on Slide 16, and this amounts to CLP 700 billion. So it's reasonable to expect in the long term or the medium term that we should probably return to levels similar to what we've had in the past, which is closer to the two times. The second question, can you repeat the second question, please?

Ernesto Gabilondo, Analyst

Yes, of course. The second question was on your cost of risk. So for this year, it's 0.9%. How should we think about this ratio for 2024?

Pablo Mejia, Head of Investor Relations

So cost of risk. We have to continue to see how the pandemic and customer behaviors affect the long-term behaviors in terms of repayment and payment behaviors, as well as how the evolution of the economy continues. If we look at the baseline scenario that we're expecting, it's below trend growth, I would say below 2%, as you saw in the presentation. This should translate into a return that should slowly be returning to long-term levels that we've seen in the past, around 1.1% to 1.2%. We think that's a reasonable level, but we always have to consider the permanent impacts of the pandemic and customer behaviors and the evolution of the economy regarding that figure.

Ernesto Gabilondo, Analyst

Okay. Understood. So 1.1% to 1.2%. And if you release provisions, could it be more at 1% or closer to the 1.1%?

Pablo Mejia, Head of Investor Relations

I would say the 1.2% would be closer to the 1.1%. Normalization throughout the remainder of next year seems reasonable. Provisions are determined at the Board level based on various economic factors. There is CLP 700 billion involved, which may affect the relationship between cost of risk and the release of those provisions if that happens in the future. Regarding the effective tax rate, with inflation around 3%, it should be around 23% for Banco de Chile.

Operator, Operator

Okay. Thank you very much. It looks like we have no further questions at this point. I'll pass the line back to the team for the concluding remarks.

Pablo Mejia, Head of Investor Relations

Thank you for listening, and we look forward to having our next conference call with you. Bye.

Operator, Operator

Thank you very much. We'll now be closing all the lines. Thank you very much, and goodbye.