Earnings Call Transcript - BCH Q1 2024

Operator, Operator

Good afternoon, everyone. Welcome to Banco de Chile's First Quarter 2024 Results Conference Call. If you need a copy of the management financial review, it is available on the Company's website. With us today, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer; Pablo Mejia, Head of Investor Relations; 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 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 for attending this webcast today, where we will present the financial results and achievements of Banco de Chile during the first quarter of this year. We are proud of our overall performance during the quarter. Once again, we led the industry in net income and profitability, capitalization and risk, among other figures, demonstrating our capacity to generate consistent and solid results over time. Following the thorough view of the previous quarterly call, we will begin our presentation with a brief analysis of the macroeconomic conditions and competitive landscape we faced. Then, we will present the most relevant achievements in our strategic initiatives and finalize with a deeper analysis of financial results. Please go to Slide number 3 to begin the macro environment discussion. The Chilean economy is growing again. The activity posted a significant cyclical recovery at the beginning of this year, after the macroeconomic adjustment mainly in 2023 when the economy grew only 0.2%, one of the lowest figures in the region. Nevertheless, it is important to be aware of two main aspects related to the recession seen last year. First, the subdued growth resulted from the tightening of monetary and fiscal policy especially between 2022 and 2023. This adjustment was necessary to correct the macroeconomic imbalances that occurred during the pandemic, such as increases in inflation, domestic demand, and external savings among others. Second, the Consumer Price Index in 2023 returned to their policy ranges. The current account deficit declined to pre-pandemic levels and fiscal debt remained below 40% of GDP. The normalization of these figures provides further reasons to expect a more sustainable recovery for the country. Undoubtedly, the macro scenario looks better today. According to the monthly GDP figures, the economy went up by 2.5% year-on-year in the first quarter, posting the highest expansion since the same period of 2022. This figure followed the 0.6% and 0.4% year-on-year growth in the third quarter and fourth quarter of 2023, respectively. As a consequence of this recovery, the GDP surpassed the level of activity posted in 2021, which was the previous peak as the chart on the left clearly shows. The breakdown shows that activity was driven by a positive dynamism in mining, which went up by 6.9% year-on-year, and services, which expanded by 2% year-on-year. The trend of these sectors can be seen in the chart on the top right. On a sequential basis, the recovery has also been evident. In the first quarter, the seasonally adjusted GDP posted a 2% quarter-on-quarter rise or 8.2% on an annualized term. This was due to a substantial monthly rise of 2% in January, a number that was followed by a solid 0.8% increase in February. This better-than-expected expansion has been one of the, if not the most important reasons behind the other revisions in GDP forecast for this year. In this environment, the Central Bank raised its official GDP estimate from the range centered at 1.75% in the Monetary Policy Report released in December to 2.5% in the report released in March. Before finalizing this slide, I would like to highlight the improvement in external accounts. As you can see in the chart on the bottom right, the current account deficit fell from 8.7% of GDP in 2022 to 3.6% at the end of last year, which is sustainable and consistent with the fundamentals of the Chilean economy. As we will see in the next slide, the normalization in overall activity has impacted prices and interest rates. Please go to Slide number 4. As we've discussed, the substantial decline in domestic spending has been a critical driver for the downward trend in local inflation, as the chart on the upper right shows. In 2023, the headline inflation dropped to 3.9% after posting a yearly rise of 12.7% one year ago, returning to the tolerance range set by the Central Bank for the first time in almost two years. However, there have been higher-than-expected monthly figures at the beginning of this year, as the CPI accumulated a 1.6% rise in the first quarter of this year. In the fourth quarter of 2023, the CPI rose only by 0.6%. Some of the main drivers for this trend include the weakening of the Chilean peso, the persistence of a high inflation rate in trade partners, and the acceleration of the economy as discussed in the previous slide. Nevertheless, it is essential to be aware of the high volatility of local inflation, which has been exacerbated by implementing a new methodology that includes the introduction of a new reference basket. In this environment, the labor market has remained stable. In the first quarter, the unemployment rate was 8.7%, in line with the 8.8% posted one year ago. It is worth mentioning that the still-high unemployment compared to the pre-pandemic figures has been explained by a greater dynamism in the labor force, which expanded by 3.2% year-on-year in the first quarter, in line with the expansion observed in total employment, which went up by 3.4% year-on-year in the same period. As a result of this, the participation rate rose to 62.4%, in line with the levels observed before the beginning of the COVID-19 crisis. In this scenario, the Central Bank continues reducing the interest rate, following the easing cycle that began in July last year when the rate was 11.25%. Specifically, the Board reduced the interest rate by 100 basis points in January and 75 basis points in April to 6.5%, and has maintained an expansionary bias anticipating further cuts during the rest of the year. This policy has been one of the main drivers of the multilateral weakening of the Chilean peso as the chart on the bottom right shows. I'd like to share our baseline scenario for this year with you. Please go to the next Slide number 5. We have implemented several changes in our baseline scenario. Specifically, we have raised our GDP forecast for this year from 1.5% in the previous earnings call held in February to 2.4% now. As seen in the table of this slide, we foresee a recovery in domestic demand, mainly consumption, due to lower inflation and interest rates. Nevertheless, we still expect subdued growth in total investment due to the high interest rates and the persistence of uncertainties related to potential factors. Regarding prices, we increased our CPI forecast for this year from 3% to 3.7%, mainly due to the depreciation of the Chilean peso and the higher-than-expected growth in the first quarter of this year. Based on this trend and considering the probable trend in external rates, mainly in the United States, it is likely that the peso will continue to be weak. Consequently, the CPI will only reach the policy target by 2025. On monetary policy, we now expect an overnight rate at 5% by the end of this year from the 4.5% we forecasted last quarter. We acknowledge the existing risks that could affect the macro scenario. From the external front, the growth in the main trade partners of Chile and the evolution of several geopolitical conflicts are worth paying attention to. Internally, apart from the evolution related to the discussion of some reforms, such as taxes and pensions, it will be important to analyze the results of municipal elections, since they have historically been a solid leading indicator of the Brazilian Congress elections. The table on the right summarizes the key dates and political events to monitor. As we mentioned in previous conference calls, banks are a perfect reflection of the economy. Having said that, I'd like to move to the next Slide number 5, to analyze how the economy impacted results in the financial industry in the first quarter of 2024. Total loan volumes remain subdued, as they are still posting below-trend figures. Loans expanded by 4.1% year-on-year in nominal terms, which is only slightly above inflation due to overseas forces. On the weak side, consumer loans posted a 2.5% year-on-year expansion in nominal terms, remaining in negative territory in real terms. A similar situation is observed in commercial loans, as they expanded only 3.2% year-on-year nominal, consistent with the fall observed in total investment during the last quarters. Conversely, mortgage loans continue supporting the expansion, increasing by 6.9% year-on-year nominal. Despite these figures, it is essential to be aware of the negative trend in nominal loan growth, as seen in the chart on the bottom right, which has been influenced by the normalization in the annual inflation, which declined from 11.1% in the first quarter of 2023 to 3.7% in the first quarter of this year. Overall, the still-low dynamism in loans is consistent with the result from the first quarter loan survey conducted by the Central Bank, which showed a weaker demand across most sectors, mainly in personal banking without changes in supply from banks. Considering this scenario, we expect loans to increase by nearly 6% by the end of this year, as long as the economy continues showing a recovery during the next quarters. In this context, the industry reported a net income for the first quarter of CLP1,172 billion, equivalent to an ROE of 14.5%. When compared to the prior year, quarterly net income grew by 12%. This was attributed to a 15% increase in operating income and a decrease of 8% in expected credit losses. This was partially offset by an 18% rise in operating expenses. In terms of delinquencies, the weak economic environment has affected non-performing loans and these continue to rise. The industry reached 2.4% this quarter, up from 1.9% in the same period last year and 2.2% from the fourth quarter of 2023. We expect that credit risk will remain as the main concern for the banking industry in the short term until we see further improvement in the economy and the job market. Now, I'd like to pass the call to Pablo, who will go into more detail about Banco de Chile's advances and financial performance.

Pablo Mejia, Head of Investor Relations

Thank you, Rodrigo. I would like to begin with our strategic advances. Please go to Slide number 8. The strong results that we are consistently posting are the fruit of sound strategic pillars based on customer centricity, productivity, and sustainability, which we deployed through six core priorities as listed in the middle of this slide. Through these priorities, we are sure that we can meet our midterm goals as shown on the right of this slide. First, we have a Net Promoter Score of 76.4% as of March 2024, which is 340 basis points above our goal, and our corporate reputation is amongst the top three in Chile. These metrics are assessed by reputable external firms that are independent from us. In terms of market share, we aim to be the leader in both commercial and consumer loans as well as demand deposits denominated in local currency. In cost to income, we have performed much better than our target, although this has been partly fostered by our solid top line; we should be able to keep on improving our efficiency through the productivity initiatives that we will explain later in the presentation. Lastly, we are confident that we'll keep leading the industry in terms of return on average capital and reserves in the long term. In the next slide, we'll review some of our main accomplishments in key strategic areas: digital banking, efficiency, and ESG. Let me start with digital banking. Please move to the next slide. In our commitment to being the best bank for our customers, we continue to make significant strides in digital innovation. This quarter, we launched the new digital savings account, FAN Ahorro, that allows customers to make profits from their cash balances, widening the investment alternatives for current and new customers. Furthermore, we have implemented digital tools to improve customer experience at branches, ensuring faster and more efficient service, and we have renewed our mobile app, Mi Pass, for easier and more secure financial transactions. In addition, we have made significant progress in digitalizing key sales processes in retail banking that enhance the sales experience and will at the same time foster higher efficiency and productivity levels. The percentage of digital process variance and their adoption has importantly increased in the recent year. Today, more than 80% of digital consumer credit applications and more than 30% in digital current account applications are processed through digital channels, reducing wait times, process application costs, and as a result has increased originations. In terms of efficiency and productivity, we continued to implement several initiatives to optimize our operations. This quarter, thanks to increased digital adoption, we worked on simplifying functions and roles at our branches and other distribution channels. We also initiated the implementation of a new system that will automate and centralize procure-to-pay activities. Moreover, we introduced a new process to streamline infrastructure investment flow, ensuring a more efficient use of resources. Also, through structural optimization, we have improved our synergies with some of our subsidiaries. On the ESG front, our commitment to sustainability and social responsibility remains unwavering. This quarter, we published our 2023 annual report, which covers our financial and sustainability performance and makes significant advances to accomplish local and international standards, such as SASB and GRI. Furthermore, to better integrate ESG risks and opportunities into our business, we initiated the measurement of our loan portfolio carbon footprint, the results of which are expected to be released early next year. Additionally, as part of our commitment to Chile, we have held several corporate volunteering activities such as the solidarity campaign in response to the wildfires, waste collection days, financial education courses, scholarships to develop tech talent, and contests to promote entrepreneurship. Please turn to Slide 11 to begin our discussion on our results. Net income once again soared this quarter, posting CLP298 billion, equal to return on average equity of 22.6% as shown on the chart on the left. When compared to our peers, we outranked all of them with a huge gap in both net income and return on average equity, as illustrated in the charts on the right. Our strong financial results reflect our effective customer-focused strategy over the long term and our commitment to building a sustainable bank as evidenced by steady growth in customer income. Our long-term ROE target is about 18%, but we foresee that ROE will stay higher than this level in the near term around 19% in 2024. Please turn to Slide 12. Operating revenues grew 11% year-on-year, which is in line with the economic and business recovery that we have been witnessing. More importantly, this expansion was driven by customer income, which rose 14% year-on-year, while noncustomer income remained relatively flat, expanding by 3% year-on-year. Customer income growth was driven by a strong increase in loan margins and higher commercial margins from deposits, given our solid position in core demand deposits and active pricing management in time deposits. Concerning income from loans, consumer loans were the main driver of this rise, thanks to an expansion in spreads and a 5% increment in average loan volumes. Mortgage loans also improved customer income, primarily due to an annual increase of over 7% in average loans. On the other hand, commercial loans were a drag on income expansion as average balances decreased year-on-year due to external factors mainly related to the still high interest rates and economic environment. The charts on the right show how we have performed relative to our competitors. We achieved a net interest margin of 4.7% this quarter, much higher than any of our peers. We also had a comparable advantage in net fee margins and in our total operating income as shown on the chart on this slide. Our outstanding performance reflects a consistent business strategy and how we have been able to provide our premium customer base with improved value offerings over time in lending and non-lending products, which has resulted in a solid track record in customer income regardless of the economic backdrop. Concerning noncustomer income, which was a revenue-generating driver last year, the tempered year-on-year growth had primarily to do with the decrease in inflation in the first quarter of 2024 when compared to a year earlier, an effect that was also to some extent offset by the positive impact of lower short-term interest rates on both our funding through time deposits and revenues from trading activities. Please turn to Slide number 13. As the chart on the left shows, total loans increased by 2.8% year-on-year and 1.3% quarter-on-quarter. The main driver of this year-on-year growth was retail loans. Mortgage loans went up by 7.8% in the 12-month period, mainly due to inflation, but also some sustained demand. Consumer loans expanded slowly by rising 4.5% in the same period. We should mention that we are noticing a slight improvement from previous quarters in commercial loan activity, and we anticipate this to persist as the economy improves and interest rates come down. It is important to highlight that one of the strengths of Banco de Chile is its highly diversified loan book as shown in the breakdown of the chart on the top right by product and in the chart on the bottom right detailing our commercial loan portfolio by economic sector. Generally, what we have seen in the past is that when one part of the economy is weaker, we can partially offset this negative impact by growing another part of our portfolio. Today, 64% of loans are concentrated in the retail segment, including SMEs, and the remaining 36% in the wholesale segment. This distribution has not changed much in recent quarters, but during the pandemic, our growth was focused on low-risk and low-margin loans and securities, leading to a significant change in asset mix affecting our NIMs. However, we expect their growth in the next periods will continue advancing as we have seen in the first quarter of 2024, from which we should return to the composition seen before the pandemic that should enable us to achieve similar levels of NIMs as well. From the perspective of concentration, it is important to mention that our commercial loan portfolio is spread out in a broad range of economic sectors, as shown in the chart on the bottom right. As such, we do not have a high reliance or concentration risk in any industry, which allows us to reduce the possible impacts from economic downturns in certain sectors such as real estate, construction, or the current situation affecting the private health industry, among others. For 2024, we expect total loans to grow slightly above the industry average. As mentioned earlier, the main year-on-year change refers to a lack in commercial loans to grow slightly above inflation, and we expect that consumer loans and mortgage loans will be driving total loan growth. Please turn to Slide number 14 to discuss our superior balance sheet structure. As shown on the charts on the top left, our asset and liability structure is robust. Our business strategy is concentrated on commercial banking, and our main revenue stream comes from loans, which accounted for 67% of our total assets as of March 2024. However, it is important to note that, starting from April, the density of loans will increase, as we will use part of our debt securities portfolio to repay two-thirds of the obligation. Specifically, our portfolio in financial instruments has changed since December 2023, as we have reinvested proceeds from the scheduled maturity of and longer-term bonds issued by both the Chilean Central Bank and the Chilean Government in the Liquidity Deposit Program provided by the Central Bank to facilitate the repayment of the obligation. The deposits are booked as financial instruments that measure the amortized cost and earn the monetary policy rate while held in the portfolio. By using these funds, we paid the first tranche of the obligation on April 1st, 2024. The rest of the obligation is coming due on July 1st, 2024. This will lead to a reduction of our balance sheet and financial instruments. On the liabilities side, deposits are the main source of funding, representing approximately 51% of our assets. Within deposits, time deposits are the most relevant financing source on our balance sheet, as you can see on the chart to the right. During the pandemic, demand deposits took a more important role in funding, but this has returned to normal in line with long-term levels. This is especially important because we are recording lower costs of funds due to the sharp drop in the monetary policy rate. Bonds are the next most important liability, representing 17%. We use these to finance our mortgage loan portfolio, which reduces both liquidity risk and repricing, as they are more similar from the perspective of term and currency gapping. We expect that bond issuances will rise when mortgage loan growth resumes to long-term growth rates. Currently, new bond offerings are mostly used to repay scheduled amortizations. As you can see on the table on the bottom left, we keep a high level of liquidity that largely exceeds the limits set by the regulator. Our liquidity coverage ratio reached 237% as of March 2024, 137 basis points higher than the regulatory limit, and the net stable funding ratio attained a level of 125%, 45 basis points higher than the limit during the same period. This is a consequence of both proactive management of asset and liability term mismatches and also a sound liquidity buffer that remained above CLP6.5 trillion in the first quarter of 2024. More importantly, these figures already reflect the repayment of the obligation tranche, which affected our liquidity position. Finally, our sensitivity to inflation is about CLP80 billion for a 1% change in inflation. Please turn to Slide 15. Banco de Chile is the best-capitalized bank amongst peers in the industry. As of March 2024, our Basel III ratio was 16.9%, well above the fully loaded limit of 12.75% that applies to us, as shown in the table on the right. Regarding CET1, we reached 13.3% this quarter, 40 basis points lower than December 2023. This decrease is mainly explained by a dividend distribution that was higher than the dividend provision in equity as our shareholders agreed to distribute 80% of net distributable earnings for the full year 2023 instead of the 60% already provisioned. Nonetheless, our CET1 trend over the last few years has significantly outperformed both our main competitors as shown in the chart on the bottom left and well above the limit established by the regulator. With these capital levels, we are easily complying with both phase-in and fully loaded Basel III requirements, while feeling confident to address the pending steps in the implementation of Basel III. Please turn to Slide 16. In the first quarter of this year, expected credit losses reached CLP113 billion, 7% higher than the same period last year and 12% lower compared to the fourth quarter of 2023. The cost of risk for the period was the same level as our long-term rate of 1.2%, mostly generated by the wholesale banking segment. As we mentioned in prior calls, delinquencies have been gradually increasing since 2021 from a low level of 0.9% to 1.5% in this quarter, but significantly below the levels of our main peers as shown on the chart on the top right. This increment is mainly due to the normalization of the abnormally low levels recorded during the pandemic. Also, most of our rise has been due to some specific wholesale customers that have defaulted, although exposures to them are collateralized. This has translated into a rise in non-performing loans, but only a slight rise in the cost of risk, as you can see on the chart in the middle right. However, we expect the non-performing loans will gradually decrease with the expected improvement in the economy and job market this year. It is also important to note that consumer loan non-performing loans are at similar levels we recorded prior to the pandemic. Finally, the chart on the bottom right indicates that we have the best loan portfolio and the highest coverage ratio at 2.6x, including additional provisions of CLP700 billion compared to our peers. This puts us in a favorable position for handling unexpected risk deterioration. In line with this, I should also mention that the standard model for provisioning consumer loans must be implemented by January 2025. As a reminder, this model establishes a new methodology to calculate the probability of default and loss given default. Likewise, we've decided to use part of our additional provisions to address the expected impact, which is anticipated to be in the range of CLP60 billion to CLP65 billion. Please turn to Slide 17. This quarter, expenses amounted to CLP284 billion which is 8% more than the same period last year and 11% less than for the fourth quarter of 2023. The main reason for the yearly increase is inflation that reached 4.3% year-on-year, which affects most expense items such as salaries, rent, external services, among others. It is also worth noting that the significant improvements in efficiency that we have made recently have enabled us to cover the most important increases in operating expenses aimed at implementing the progress in digitalization, IT infrastructure, and cybersecurity that are required to deal with the deep transformation process that the banking business is facing. On the chart on the top right is a more detailed breakdown of expense growth. Personnel costs increased 5.5% year-on-year because of a rise in salaries, mainly due to inflation adjustments on wages; employees have their salaries indexed to inflation at least twice a year and to a lesser degree, a rise in wages and benefits as a result of the collective bargaining process carried out during the fourth quarter of 2023 with the Bank's unions. In addition, administrative expenses rose by 10% during the same period, driven by an increase in IT expenses related to software licenses, updates, and technological infrastructure services, as well as higher expenses in the maintenance of fixed assets, primarily related to improvements focused on facing the challenges of self-service and digitalization in branches. Depreciation, amortization, and other expenses also rose during the period, primarily as a result of higher operational risk write-offs related to external fraud and payment channels. Regarding the efficiency ratio calculated as total operating expenses to total operating income, it achieved 36.4% in the first quarter of 2024. When compared to our competitors, we continue to lead with a wide gap in efficiency, as shown in the chart on the bottom right. We believe by controlling our costs, improving our productivity, and employing technology that we will maintain strong efficiency levels in 2024 at a level close to 40% and in the long term under 42%. Please turn to Slide number 18. Before we go into the Q&A session, I want to briefly recap the main points. We have raised our GDP and CPI forecast for 2024 to 2.4% and 3.7%, respectively, based on actual information for the start of the year. We also think that the Central Bank will slow down the pace of rate cuts to 5% by the end of the year. Our outstanding long-term strategy together with strong management of market and credit risks is the basis of our success. This has enabled us to be the leaders in the industry consistently in profitability, operational income, asset quality, productivity, and capital adequacy. We are confident that we'll continue to provide the best performance amongst our peers in Chile, with a long-term ROE of 18%. Thanks for listening. If you have any questions, we'd be happy to answer them.

Operator, Operator

Thank you for the presentation. We will now move to the Q&A portion of the call. Our first question comes from Mr. Ernesto Gabilondo from Bank of America. Please go ahead, sir. Your line is open.

Ernesto Gabilondo, Analyst

Thank you. Hi, good morning, Rodrigo and Pablo. Congratulations on your results and thanks for the opportunity. My first question will be regarding your reserve coverage ratio. You'll be expanding the loan book above the industry levels. You'll be growing again in consumer loans and then you will have to recognize these new credit reserve requirements methodology next year. Just wondering, where should we expect the reserve coverage ratio in the medium term? My second question is on market-related revenue. This line has been very volatile. What should we expect for this line, if we consider this, if the IC payment, would that be impacting this line? Or what should be the net impact in Chilean pesos of these FCIC payments overall? And then, my last question is on FAN. We have seen it has been growing nicely in terms of digital deposits. But how much are you doing in terms of digital loans with FAN? Thank you.

Pablo Mejia, Head of Investor Relations

Hi. Thanks for the questions. In terms of the coverage ratio, today, we have a higher coverage ratio than we've had in the past because of the additional provisions that we've maintained on the balance sheet. In the long term, we should consider that the levels of the coverage ratio, considering everything that is going on and considering an improvement in the economy etc., should tend to return to the levels that we had prior to the pandemic, which is around 2x, maybe slightly lower, but around the long-term levels that we had prior to the pandemic. We don't think that we should have what we had during the peaks of the pandemic, which was 3x or 3.5x; that's very high. We should return to those levels. In terms of the market revenues, I'll pass the call to Daniel Galarce.

Daniel Galarce, Head of Financial Control and Capital

Yes. Hi. In terms of the market revenues, you have to consider that there are some line items in the profit and loss that you should consider jointly. For instance, the effects of the exchange rate that you can see in our profit and loss are also very related to the effects that you are seeing in trading derivatives, for instance. Since trading derivatives have FX exposure too. So, when you look at the core business in terms of the effects, you shouldn't see very important volatility. Actually, we are seeing some more midterm figures in terms of FX spot, for instance, and also the management of our intraday and overnight position as well. So, there is no issue related to the market revenues. And in terms of the FCIC, the guidance that we provided in our press release already considered the effect of the repayment of the FCIC. And actually, the FCIC, of course, will translate into lower revenues. However, considering the FCIC standalone, you have to consider that we are also benefiting from the decrease and the expected decrease in short-term interest rates on the funding of our position and our asset position. In addition, the net interest margin in loans, basically lending spreads should also increase a little bit considering that some of the former loans are maturing as well with lower spreads. So, all-in-all, we are going to have an effect in our profit and loss from the FCIC, but it's basically offsetting some other effects that will benefit our net interest margin as well.

Pablo Mejia, Head of Investor Relations

And in terms of our strategy and overall strategy for growth in Banco de Chile. We're a universal bank that's in all segments of the economy. One of those areas obviously is consumer loans, and we've been growing quite strongly over the past few years. We've been gaining market share in this area. Today, we have a market share of almost 19%, and we expect to continue growing in the segment because it's a very attractive segment for us, it's a segment that we want to be in, a segment in the middle and upper-income individuals, and we're using the FAN account to continue expanding our customer base. So, by using these, the strategy, the focus in this area, where we have maybe I can say four pillars to obtain success to continue to grow. So, the adoption of digital solutions in order to improve customer service and for customers to receive their products quickly, also more intelligence in commercial campaigns and accurate business analytics in order to provide the customers with the products and services that they want, the challenges that they need, and understand their needs. We're also very active in pre-approved loans. And we've been implementing controls and procedures in order to improve the commercial discipline across the entire bank. So, that's been helping drive sales within the bank originations of consumer loans, and it is one of the reasons why you can see that we continue to grow in consumer loans, but we've maintained a very good non-performing loans ratio during this time. We haven't seen a significant growth in non-performing loans for this product over the past year. It's worthy to mention that we have a fantastic loyalty program in the credit cards. So, customers using our credit cards receive fantastic benefits, and this has been driving the usage of our cards, especially in this time of higher digital use of more digital channels rather than cash.

Ernesto Gabilondo, Analyst

Thank you very much, Pablo. Super helpful. Just a follow-up on FAN. As you mentioned, you are using a lot of these digital savings accounts on FAN to leverage that on the consumer portfolio. But just wanted to understand, if those loans are digital or are the traditional ones. Just wanted to understand how much is going on digital loans.

Pablo Mejia, Head of Investor Relations

You have to take into consideration that after the pandemic, most customers are very active in using digital channels. Even before the pandemic, more than half, if I'm not mistaken, were originated online and that continues, that's by far the case today. Most of the consumer loans are originated online, and through these new digital channels, it provides us with a new customer base to increase the level of customers. If we look at, for example, the digital consumer credit loans, we have 84% being done online. If we look one year ago, we had 66%. We look at time deposits, for example, which is a product that customers are using more actively today because they understand the benefits that they receive and because of the higher interest rates. It was 75% that were being done online one year ago, and today it's 81%. This is not only better for customers but it's also better for efficiency and productivity. That's one of the areas that we've been focusing on in our productivity in the bank to continue improving cost savings.

Operator, Operator

Our next question comes from Mr. Tito Labarta from Goldman Sachs. Please go ahead, sir. Your line is open.

Tito Labarta, Analyst

Good afternoon. Thank you for the call and taking my question. Two questions. I saw you increased a little bit the ROE guidance for the year, but with inflation running a little bit higher and the economy is doing relatively well, do you think there could be some upside to that? I mean, your ROE this quarter was still well above 20%. Do you think that ROE could maybe remain above the 20%, maybe a bit longer than expected, given that inflation is still a little bit higher in general? And then the second question in terms of your capital ratio, as you show, you're better capitalized than your peers; you have higher ROE loan growth still in the mid-single digits. Is there room to increase the payout even more? Or what's the right capital ratio? Why do you feel you need to have more capital than your peers? Thank you.

Pablo Mejia, Head of Investor Relations

I think on our baseline scenario for ROE is that Daniel Galarce touched on this a little. The main drivers there are what's occurring in terms of our interest-earning assets and how this is evolving. What we're seeing is a reduction in the second half or actually beginning now in April in our balance sheet because of the reduction in our liquidity on our balance sheet through the payment of the obligation. Since this is reducing, we're generating less net interest income. The ROE should trend down in the second half of the year because of this reduction. Inflation, actually, it's a little bit up, but it's also a negative impact if we compare year-on-year. Our estimates for the end of the year are around 3.6%, 3.7% for the variation in the U.S., which is negative when considering last year around 4.7%, 4.8%. But we have some positive factors. We have the reduction of the overnight rate that also affects us positively in terms of funding. We're being more proactive in terms of the commercial activities to manage the time deposit pricing better as well. We're seeing improvements in all the lines of products in terms of spreads and repricing as older loans are requesting higher interest rates. There are some negative factors as well. Fees, we don't see fees growing that strongly; it's low single-digits. Costs of risk, we expect the economy to be improving, but generally, there is a lag between the economy improving and when we see that pass-through cost. Around 1.2% is reasonable in terms of our long-term level and costs. We expect to be around that mid-single digit range. So, you could argue that maybe with a change in inflation or a little bit stronger economy, maybe we can grow stronger. But in our baseline scenario, it's what we mentioned in the call, slightly higher growth than the industry in terms of consumer loans. In terms of consumer loans and mortgage loans, and overall loans growing slightly above as well, but less so in larger corporates. In terms of capital, I'll pass the call to Daniel Galarce.

Daniel Galarce, Head of Financial Control and Capital

Yes. Regarding capital, as we have discussed in previous calls, we are comfortable with our current positive GAAP in relation to regulatory limits. Concerning the payout ratio, despite this positive gap, we recognize that the regulatory framework is still developing. We expect to have fully loaded limits and thresholds by around 2027. At this stage, we do not intend to make significant changes to our past practices. Essentially, for the payout ratio, we plan to maintain the typical payout levels we have sustained over the last decade. The past two years have been somewhat unique in this regard, and we believe we will return to our midterm levels in the near term.

Operator, Operator

Next question comes from Mr. Yuri Fernandes from JPMorgan.

Yuri Fernandes, Analyst

I have a follow-up on FCIC. I'm sorry for coming back to this topic. I know it has been almost two years discussing the end of FCIC, and we still have questions on this topic. But I was trying to estimate the impact of your ROE of this payment. And with some information you gave us, I guess it may be possible. So, basically, you paid CLP3.1 trillion now, right, on your total CLP4.5 trillion, CLP4.6 trillion exposure. And you also mentioned kind of this, if I'm not mistaken, during the presentation, that given you should pay the second tranche in July, that this is mostly cash, right? It's so it could be yielding closer to the benchmark rates around 6.5%. And if you have to pay the 0.5% cost on that fixed line, we are talking about 6% spread. When we apply this spread on the balance, the CLP4.5 trillion, CLP4.6 trillion is about a 4% ROE on an annualized basis, but you don't, you are not going to have this for the entire year, right? You just paid one tranche now. You pay a second tranche in July. So, I'm getting here something a little bit around 2% of ROE headwind going forward, like 2025 versus 2024. I know your guidance for this year already includes that effect, like maybe moving parts. But I'm trying to get here, what would be the normalized ROE for you in 2025 without this design? So just checking with my math, like, it's a long question. I'm trying just to get your color of how relevant should be the payment of this line for the next year, like the kind of the adjustment. And then I can ask a second question after this one. Thank you.

Daniel Galarce, Head of Financial Control and Capital

Hi, this is Daniel Galarce again. As we mentioned earlier, of course, the FCIC will have an impact on our P&L, that is pretty clear. But you also have other effects that are offsetting this negative effect importantly. As Pablo mentioned earlier, the overnight rate is expected to continue to decrease. So, the effect of lower revenues from the FCIC will be offset by the lower cost of funds, particularly in terms of our time deposits. So basically, you will finally have a net-net that probably will be a little bit negative. However, that is already incorporated in the guidance we are giving you in our press release for our NIM and also for our ROE. In terms of math that you can do, you are right. However, you have to consider everything together and not only the effect in isolation from the other effects we are going to see in our balance sheet.

Yuri Fernandes, Analyst

Super clear. ROE, I understand, is also related to your excess capital. This could be higher or lower depending on paying more dividends or not. ROE can also be management of how much capital allocated to the business.

Daniel Galarce, Head of Financial Control and Capital

Our forecast for ROE is considering our normal scenario in terms of dividend payout. Our normal scenario in the past has been 60% of our net distributable earnings.

Operator, Operator

Thank you. Our next question comes from Ms. Neha Agarwala from HSBC Global Research. Please go ahead, ma'am.

Neha Agarwala, Analyst

Hi. Congratulations on the results, and thank you for taking my question. Just a quick one in terms of your digital initiatives. All the banks are trying to put out the digital initiatives that are offering more and more features on their app. Where do you think Banco de Chile stands versus peers? What are the strengths versus your competition? What are you doing better and where do you think are the gaps in terms of your digital offerings, which you would like to implement in the coming months? Thank you so much.

Pablo Mejia, Head of Investor Relations

The banking sector in Chile has established a robust digital presence and offers strong digital products. Having these capabilities is essential, not optional. There's a continuous evolution in the advancements of these products. As one of the larger banks, we were relatively late in launching our digital product, Cuenta FAN. We've rolled out several new initiatives in digital offerings, including a current account, funds for teenagers, and funds for small and medium-sized enterprises. We are actively working to expand our digital base. In comparison with other banks, it's evident that having strong digital products is crucial. You must be proactive and offer high-quality products that meet customer needs through preferred channels, which today means focusing on digital solutions. I believe that large banks are competitive in this space, and we have a high-quality product that will continue to evolve with changing demands. For instance, our Cuenta FAN currently has a higher Net Promoter Score than the bank's overall score, which is over 75%. We're pleased with the levels of digitalization we have achieved so far.

Operator, Operator

Our final question comes from Mr. Andres Soto from Santander. Please go ahead, sir.

Andres Soto, Analyst

This is related to asset quality in your mortgage portfolio. You mentioned you provided a very interesting breakdown in your provisions that pertain to mortgages. I'm doing simple math. We can see that the cost of risk of the mortgage portfolio is now at 1.2%. It used to be 0.7% just one year ago. So that suggests a rapid deterioration. Do you see room for additional deterioration in this segment? And what is really needed for this to start to improve and when are you expecting this improvement to happen?

Daniel Galarce, Head of Financial Control and Capital

In terms of NPLs and the cost of risk, what we can see is that what's important to mention is that we are in negative, coming out of a negative cycle. We see some improvements, but generally, there's a lag between the improvements and what we see in the loan book in terms of demand and also in terms of credit quality. So, as you mentioned, there has been and it's something that we've seen in other industries as well or other banks as well, a rise in non-performing loans in different segments. And why has this happened? This has happened because households have less disposable income because of the rise of the cost of living because of weaker employment opportunities. We think that this is something that should trend down as long as the economy improves. It has a high coverage ratio, these mortgage loans. So, we don't see an issue there, but it is a little bit more difficult situation for individuals today in Chile because of the high inflation that we've had over the past few years and the weak economic scenario.

Rodrigo Aravena, Chief Economist and Institutional Relations Officer

Yes. Hi, Andres, this is Rodrigo Aravena. I'd like to highlight that today for the first time in several quarters, we are raising our GDP forecast for the future. So basically, we're aware about the improvement of expected macroeconomic conditions for the future. But still, the economy is facing some challenges, some pressures. For example, it's very important to keep in mind that the interest rate today at 6.5% remains in more net territory and more for the economy. The same for inflation, today, we have an inflation rate which is close to 4%, which is still above the more normalized level for Chile, which is around 3%. So my point here is that we're expecting for the future improvement in terms of economic conditions, especially those that are relevant for disposable income for the people. But the economy today is still under some pressures and there are uncertainties for the CMF. For example, on the political side, there's going to be important elections to monitor by October this year, the municipal election. Some reforms are being discussed today as well. So that's why given our scenario, the economic conditions would be better in the future. That's why we're expecting a normalization and an improvement in terms of asset quality indicators, NPLs, etc. But in an environment where today the economy is under pressure with below-trend growth with still higher inflation, it's important to analyze how fast the economy will convert to the more normalized condition.

Andres Soto, Analyst

Thank you, Rodrigo. Do you have any timeline? I mean, do you expect this deterioration to get worse before it gets better, and when will you be forecasting a turning point for non-performing loans in Chile?

Rodrigo Aravena, Chief Economist and Institutional Relations Officer

It's reasonable to expect in the second half with better figures compared to the first half. That again is very important to analyze the evolution, for example, the monetary policy and also investment, because there are going to be important events to monitor in Chile. But in our baseline scenario, when we consider that in the second half, the interest rate will be lower, the inflation rate will be lower as well with better economic growth. All these conditions are consistent with better asset quality at that time. That's why given the current information, I would say that it's reasonable to expect improvements in the second half of this year. I mean, probably today, we are at the turning point, an inflection point in terms of non-performing loans and asset quality indicators during this first half of the year.

Pablo Mejia, Head of Investor Relations

Thank you, Felicia, and we hope to have you with us for our next conference call results. Thank you very much.

Operator, Operator

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you and goodbye.