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Banco de Chile (BCH 0.64%)
Q2 2020 Earnings Call
Aug 7, 2020, 12:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Hello, everyone, and welcome to Banco de Chile's 2Q '20 Financial Results Conference Call. If you need a copy of the press release, it is available on the company's website. Today with us we have Mr. Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations; and Mr. Daniel Galarce, Head of Financial Control.

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. You may please proceed.

Rodrigo Aravena -- Chief Economist and Senior Vice President of Institutional Relations

Good afternoon, everyone. Thank you very much for joining us on this conference call.

Today, we'd like to present our analysis of three main areas. First, the evolution of the macro environment with a special emphasis on the role of economic policies and excellent fundamentals, as key factors in the potential recovery in the future. Then, we will present the main advances in critical strategic areas of our bank. Finally, before moving to the Q&A section, we will go over our financial results for the second quarter of 2020. I'd like to start with an overview of recent developments on the macro side. Please move to slide three. Chile has been experiencing an ongoing contraction since March, in line with the trend observed in most countries. This downturn has mostly been explained by the strict social distancing measures which aim to reduce the spread of COVID-19.

This has led to a sharp drop of 14% in the GDP during the second quarter as seen in the chart on the left. The breakdown shows a significant deterioration in sectors more intensive in social activities, such as hotels, restaurants and transportation. On the other hand, the positive growth posted by mining production has offset the sharp decline in the rate of the economy. The overall CPI has also been falling. As seen on the other right chart, CPI went down to 2.6% in June, from 3.9% in February before pandemic. This trend has been driven by the slight growth reflected in the lower non-tradable operation and the stability in the Chilean peso which has reduced tradable prices.

The labor market has also been affected by subdued growth. The bottom left chart shows the increase in the unemployment rate to 12.2% in June, led by the annual decline of 20% in total employment and 15% drop in the labor force.

I'm aware that this scenario described so far is not entirely encouraging. However we are pessimistic about the future especially relative to other countries in the region. In fact, the lower depreciation of the Chilean currency as shown in the chart on the bottom right confirm the better outlook for Chile. Therefore the network question is what is behind this positive view? Let me try to answer this question on the next slide.

Several factors support the positive view of Chile in the future. One of them is existence of the sound fundamentals, which make Chile the strongest economy in Latin America. Apart from having the highest per capita in GDP, and the most stable economy will also have a unique combination, the lowest vulnerability and the most significant room to implement countercyclical policies. As the table shows, Chile has the best country risk reflected in the lowest sovereign credit default swap among peers. Thanks to these, the government has issued bonds in foreign markets with very favorable conditions. Additionally, Chile has important buffers that made possible implementation of further fiscal and monetary measures.

Resources available from the Central Bank including international reserves and the credit line with the IMF are nearly 20% of the GDP while the net fiscal debt was only 14% at the end of 2019 due to $22 billion, held in sovereign wealth funds.

Chile is also less vulnerable to external shock. According to the statistics released by the IMF for investors represent only 10% of the local equity market, due to the strong base of domestic institutional investors. Consequently, Chile would experience lower impact if there were capital outflows from emerging countries. That's why typically the Chilean markets have been more resilient in negative cycles. These fundamentals are even more relevant when they are supplemented by a strong countercyclical policies as we've seen in Chile. The magnitude of the fiscal policy can be seen in the significant right in the fiscal deficit as the left chart shows. Chile can implement these policies because of the solid position had before the pandemic as shown in the chart on the right due to the low public debt relative to most countries in the world.

The improvement in GDP growth will likely take place in the short term. Let me explain why in the slide five. Chile is easing the social distancing measures adopted in this pandemic as a result of the improvement in the number of active cases of COVID-19. The other chart shows the continuous downturn of them while the number of recovered people has risen significantly. Based on these positive trends, the government reduced zones in quarantine making possible the beginning of gradual normalization. Detained follows a period marked by very straight social distancing measures where at the chart on the bottom shows more than half of the population was under quarantine. In fact the Curency Index, which is released by Oxford University confirms that Chile applied its strict measures due to the temporary suspension in schools and commerce as well as constrained to their mobility.

These changes should be as augmented by the economic measures adopted in this crisis. As we mentioned in the previous conference call, Chile has been recognized by having a coordinated timely and robust response from different economic authorities, at the table on the right shows. The government has announced measures to equivalent to nearly 11% of the GDP including the fund of $12 billion to finance-transfer to vulnerable people and public investment for the next year.

These results supplemented the measures announced before sets up the capitalization of both FOGAPE and the unemployment fund. The Central Bank has even-more the monetary policy in addition to the interest rate cut to 0.5%, the Board implemented a forward guidance anticipating that the interest rate will likely remain at 0.5% for the next couple of years and also announced an expansion of the FCIC program by further $16 billion, and asset purchases in the open market by 8 billion. Finally, congress approved a appeal that allows withdraw of upto 10% of personal savings held in pension fund.

Despite the long-term impact, this measure will contribute to an increase in private consumption this year, additionally, they will discuss attained in the constitution that will allow the Central Bank to buy and sell treasury bonds in the open market, providing an additional tool to stabilize liquidity in the threshold scenarios.

All in all, we expect a recovery for the next yea which I'd like to discuss in the next slide. Please go to slide six. This table summarizes our macroeconomic forecast. We paid the GDP to the client by 6% this year since the GDP plummeted by 14% in the second quarter, this estimate is consistent with better growth ahead which is more likely after the recent easing in social distancing measures announced by the government.

In this environment, we estimate a 4% growth in 2021 as a result of expansionary policies, the better outlook for the global economy and favorable corporate prices. Nevertheless, we are aware of the unusual uncertainty, mainly that related to the future evolution of the pandemic, as well as internal factors. We expect the CPI to be at 2% this year and 2.2% next year due to this growth and the stable currency. This changes in the macro conditions have had a direct impact on the banking sector. Please move to slide seven to analyze them. Undoubtedly sluggish growth weaker employment and lower inflation have affected the result of the banking industry. Total net income adjusted by-all figures posted CLP457 billion in the second quarter, which is 7% lower than the previous quarter and almost 50% down relative to the same period last year.

In a broad sense, this decrease is mainly explained by the pickup in provisions, lower dynamism in loans and to a lesser extent, the lower NIM due to the reduced CDI. As shown in the chart on the right, there was a lower nominal growth into the loans mainly in those related to more profitable product, as reflected by consumer loans declining 6.8%.

In the case of mortgage loans quarter-on-quarter growth is slowed to 1.4% during the quarter. The changes are explained mainly by lower disposable income and lower consumer confidence. On the other hand, commercial loans maintained the pace of growth increasing to in 3.7% quarter-on-quarter as a result of the implementation of COVID loans program. Total provisions increased doubling the level observed in the same period last year. This increase is mostly attributable to the considerable deterioration in commercial loans, so commercial sectors affected by the pandemic and the weak employment outlook, resulting in banks recording an important level of additional provisions during the quarter.

Due to these, the cost of risk for the industry increased to 2% from 1.15% last year. It is essential to keep in mind that these figures have not reflect does not reflect the total impact of the weaker economy an asset quality gets particularly for loans evaluated on a Group basis, due to the deferral of housing and consumer loan installments that had been implemented during the crisis.

Therefore, as part of deterioration over the next month is likely for these types of loans instead cost of risk for individually evaluated loans should have already been part of the outlook for the economic sector in which those companies participate. I would like to finalize this part by highlighting the important role that the banking industry explains in the current crisis.

We know about the positive correlation between GDP and total loans which tend to be higher in the case of commercial loans. This means that in positive cycle, loans to companies grow even faster than the overall economy while in negative cycle, we need to see a contraction, as was the case in 2009.

The chart on the bottom shows the strong correlate-the strong relationship between them. However, to date, the story difference despite the fall of-before 14% in the GDP during the second quarter, commercial loans increased by 3.7%. This recovery has been attributable to the pickup in loans with a big guarantee mainly to SMEs which are known as COVID Loans. This confirms the strong countercyclical role that our authorities and the banking sector are planning in this crisis, which will contribute to a faster and healthier recovery, after the pandemic. It's important to highlight this has been possible, thanks to the solid position of Chile as well as the robust position of Chilean banks, especially in terms of capital.

Now we would like to move to our advances in key for the pillars and the financial results posted in the last quarter. Please flip to slide nine. Banco de Chile has been recognized by its ability to post consistent and robust results over time. Since we aspire to continue being the most sustainable and profitable bank we have reinforced three main aspect of our long-term strategy. Detailed information, efficiency and productivity and increasing commitment to ESG standards. We strongly believe that frankly in these areas will be critical in transforming Banco de Chile according to the timing that are right in the new business and social environment.

Now, Pablo Mejia, our Head of Investor Relations, will share with you the bank has accomplished in this area. Pablo, please go ahead.

Pablo Mejia -- Head of Investor Relations

Thanks Rodrigo. Please move to slide 10, where we will highlight some of our initiatives in digital banking. The pandemic, we are facing is changing the way we live, especially in terms of using technology to fulfill our needs. In this sense, digital initiatives that we have implemented in the last years have allowed us to understand our customers' behavior further and has build a solid basis to provide 100% online solutions for most of the requirement during the sanitary crisis. Even though we already had robust platforms, we recognize that the pandemic challenged us to accelerate our digital transformation as we provided an essential service and the role is critical to support our clients' financial activities. As you can see in the timeline, we have innovated in our digital experience for our customers in several fields, focusing on delivering the best customer experience through the incorporation of business intelligence, data mining, analytics, digitalization of our processing branches. In order to continue to provide the best customer service for our customers, we're working on launching a new digital onboarding platform that will give us significant improvement with the possibility of opening a new account 100% online at a very low cost for us.

This will also allow us to gain a greater number of customers, particularly within the younger segments as we will promote financial inclusion as far as we will promote financial inclusion. Another recent advancement in our front office digital platforms is our new web page that offers improved customer experience and incorporate analytic tool, it's more modern, secure and intuitive and has inclusive features for the visually impaired.

We also included a heat map that will provide us with valuable information to understand even better customers' preferences. Those add effort contributed to establish the best digital bank in Chile, as well as having the best online platforms, according to Global Finance. All the investments we have made in the previous years allowed us to undertake high digital demands of Financial Services in the current crisis. During the pandemic, we processed over six times number of loans pre- COVID using robotics and through agile developments we were the first bank in the market to provide a facility to postpone installments for personal banking customers 100% online and to offer COVID loans to SMEs through our digital channels.

On the other hand, we also noticed that usage rates at digital channels have been intensifying significantly. As we can see on the bottom of the slide, online consumer loan originations increased from 37% during the first half of 2016 to 46% of total operations in the first half of this year.

On the right side, the activities done through our online platforms continued growing and now represent 88% of total monetary transactions, and important rise in mobile transactions represented an increase of 16% year-on-year. Although we acknowledge that the lockdown mostly explains a higher digital channels preference, we believe that this trend will continue after the pandemic has finished. Please turn to slide 11. The successful implementation of our digital transformation has played a critical role in providing the best experience to our customers. Despite this challenging period, we've continued to show excellent indicators.

As you can see, we posted once again the highest brand recognition in the Chilean Industry and top of mind for the higher income segment with a very wide gap with our closest competitors. Along with our superior brand recognition, we are also the leader in customer satisfaction, as measured by net promoter score.

It is important to note that we have historically been recognized as the bank with the best customer experience levels according to many different sources. We attribute the success of the quality of our services and products which have helped to generate stronger long lasting relationship with customers.

These figures are reinforced with the recognition of receiving a distinguished National Award for customer satisfaction in 2019. Another relevant point I want to mention is the strength of our brand. And in one survey, customers are asked if they were to switch to another bank which bank would they choose. As you can see on the chart in the middle, we are the most preferred bank in Chile. Another key aspect, we highlighted related to security and solvency where we lead the perception with a large gap when compared to the next main competitor. This position and survey is especially relevant in the context of new regulations, will be much easier for customers to switch from one bank to another. This customer satisfaction is most clearly demonstrated by our low attrition rate, where you can see has remained historically low on the chart on the bottom left which we believe that it's not the best. It's one of the best in the Chilean banking industry.

Please turn to slide 12. Another aspect of our long-term strategy is efficiency and productivity. Our combined focus of digitalizing in the bank by implementing technologies are increased productivity and streamlining processes together with identifying savings areas and implementing better cost controls has begun to bear fruit.

In addition to these improvements, in 2019, we started a process of optimizing our branch network which includes a new service model that was, that has resulted in decrease in branches. We have reduced our network to 336 branches, almost 50 less when compared to a year earlier. The new office model should not only permit further improvements in efficiency, but also increased client experience which is even more important in this context. We have implemented for instance new intelligence self service machines to provide more services that traditionally had to be executed by the service carriers. Another measure that contributes to reduce their cost is our purchasing desk which had shown excellent results due to the reduction in expenses in areas such as acquisitions and services hired. Through all of these initiatives, we have been able to show consistent and significant improvements in our productivity as measured by loans per employee, and total assets to expenses as seen on these charts.

We expect that through these projects, we continue improving our productivity and delivering a better customer experience. We strongly believe that through the greater use of technology across our business, we should continue to see improvements in efficiency in the long term.

Please turn to slide 13. The final aspect I would like to share before moving on to our second quarter results is advances we have made in our commitments to sustainability. Today we are witnessing an unprecedented health crisis, that is still impossible to quantify the effects that we will have in the long term, we are aware of our role in supporting the recovery of economic and social development especially in challenging times and now this is not an exception. During the pandemic, we strengthened our commitment with the society and implemented a National Support Plan. We took several measures to support our customers, apart from being the first bank to offer the option of reprogramming loans, 100% online. We are the first bank to offer SME customers COVID Loans.

For this segment, we went beyond providing liquidity and hosted for the four time, our national entrepreneurial challenge where we achieved a record of 56,000 applications and we promoted a virtual fair for 60 entrepreneurs where they were able to exhibit their product.

Furthermore, we have also implemented many actions that aim to reduce the consequences of the pandemic for vulnerable groups in Chile, we delivered packages with essential groceries for people with disabilities and their families, offering food and medicine and telemedicine services to senior adults as well. All of these efforts rewarded our bank to be recognized as a financial institution that did a best job in taking actions during this health crisis as seen on the chart on the right.

Please turn to Slide 15 to begin a discussion of this second quarter. During this quarter, we recorded a bottom line of CLP112 billion with an ROE of 12.5%, a level we consider reasonable given the magnitude of the crisis we are facing globally and the low level inflation for the period. We also outperformed their peers apart from having the highest profitability indicators and coverage ratio, we maintain the best capitalization level as shown on the chart on the right. We are confident they are prudent risk management approach strong capitalization and our consistent strategy will allow us to continuing delivering sustainable and superior profitability for our shareholders.

Please turn to Slide 16. Operating revenues dropped 6% year-on-year due to the fall of inflation from 1.2% to 0.% impacting non-customer income and to a lesser extent a slight decline in customer income which even though remains strong when taking into consideration of the weaker environment.

In this context NIM fell 4.5% last year to 3.5% this year as you can see on the table on the bottom left, about 50% of this decrease was caused by lower CPI. we had this quarter and the effect of the lower contribution of demand deposits to our cost of funds given the sliding interest rates. To the lesser extent these factors coupled with the negative impacts of mortgage loan rate, renegotiations at lower rates in the second half of 2019 and the new regulation regarding automatic payments of overdraft lines, which became effective in January 2020, both partly offset by higher income from loans.

The rest of the decrease in NIM is explained by higher exposure to low-margin and low-risk assets such as the Central Bank short-term borrowings used to comply with the reserve requirements link to boost-in demand deposit balances and other as the chart on the upper right shows customer income remained relatively stable as a result of opposite forces. The lower overnight rate, interest rates sharply reduced the contribution from deposits, even though the impressive growth and balances seen during the last month. On the other hand, as mentioned, there were a positive contributions from the increase in commercial loans higher sales in the Distribution desk from the Treasury Division and higher fee income.

Most of the rise in fees was associated to a 9.3 billion increase in insurance brokerage linked to the partnership with an international insurance company. Unfortunately this was partly offset by a substantial decrease in economic activity amid the strict lockdowns at lower transactional fee income from other sources such as cards. Market volatility also affected revenues from mutual fund and stock brokerage business due to customers moving to their AUMs, the fixed income funds that generate lower fees and as well as lower transactions and stock trading.

I think it's also important to note that our fee business is chiefly related to the retail segments. Although we had some drawbacks this quarter as a result of the weak activity that exceeded the aggregate demand from customers and therefore transactionality, we believe that this is temporary. Despite this impact we continue leading the industry in net operating income and fee margin. As you can see on the charts on the right, our margin as a percentage of average interest earning assets reached 3.8% and 1.2%, well above the average level of our peers.

Please turn to Slide 17 total loans reached almost CLP31 trillion in this quarter increasing 7% year-on-year and remained basically flat quarter-on-quarter. Demand except for COVID loans was weak across all segments this quarter, in the Wholesale segment, we posted a year-on-year growth of 5% of the quarter-on-quarter, dropped by 3%. There was a similar trend in personal banking loans, increasing 5% year-on-year and following by almost 2% quarter-on-quarter.

The annual rise was mainly due to residential mortgage loans that grew 8% while in contrast, consumer loans during the same 12-month period decreased to 6%. On a quarterly basis, mortgage loans remained flat and consumer loans actually dropped 6%. These results were attributable to this strict lockdowns and the weaker economy as we discussed in the beginning of this call. This resulted in reduced household spending as well as lower demand for home sales. In fact, the expectation of the National Chamber of Construction is that new home sales will actually dropped by 40% in 2020, and this sector will only return to normal business levels, mid 2021.

We expect that the dynamism of the personal banking should continue weak throughout the remainder of the year. These results were almost offset completely during the quarter by the strong growth we experienced in COVID loans for the SME book, which grew 19% year-on-year and then impressive 14% quarter-on-quarter.

Please turn to Slide 18. As mentioned, a strong result in the segment was attributable to the government stimulus package for companies that provided guarantees of up to 85% for working capital loans. We are proud that we have been able to assist our customers and the country by taking part in this program.

We placed during the quarter over CLP1 trillion equivalent to 3.7% of total loans as of June 30th. Most of these loans were directed to provide liquidity for small and medium sized enterprises and as of July 2nd, we granted almost 25,000 loans with a market share of 18% which is similar to our markets in the sector and aligns with our risk appetite.

In terms of total loans reprogrammed and taking into consideration the total value of the loan, we are the bank with the lowest proportion of the total loans among our peers, as shown on the chart on the bottom right. Finally, if we only look at the installments that have been reprogrammed and of the loans granted, this reaches only CLP495 billion or 1.6% of total loans as the chart on the top right side of this chart as this slide demonstrates. I think it's very important also to highlight that the banking industry has made an important effort to assist those customers. We believe that the efforts combined with all of the programs that the government has provided, planned should make a difference during the economic recovery post COVID.

Please turn to Slide 19. We continue to have the best funding structure in Chile. This has been possible thanks to our customers using us as their primary bank account. This is clearly demonstrated by the strong increase we had in demand deposits which rose 37% year-on-year and 11% on a quarterly basis. Also important to note the significant change of the rise in DDAs has for our funding structure, today our demand deposits represent 28.5% of total funding up from last year, 25.7% and significantly higher than our peers as shown on the bottom right chart.

More importantly, approximately 75% of our DDAs come from non-financial counterparties which represents a stable source of financing. Aligned with this, we have been able to replace-we have been able to replace time deposits from financial counterparties with DDAs. We also have a well diversified funding base which is very relevant today as can be seen on the chart on the left and in the other way, this makes it another positive difference of Banco de Chile. All in all our own brand coupled with our leading risk indicators and their strong Tier 1 capital base of 10.9% allows to place debt at favorable conditions and have permitted us to maintain a leading level of cost of funding of only 2% in the local currency.

We are confident that this crisis will open new opportunities to strengthen our already solid relationship with our customers and continue to increase in our share of wallet. Our long history of prudent risk policies and very reasonable growth have been fundamental to our sustainability over time now into claims toward long-term strategy.

Please turn to Slide 20. Managing risk globally across all levels of the corporation is a key component to our consistent and attractive results. Our Board of Directors play a vital role actively participating in establishing policies and guidelines for accepted risk levels, for developing and validating provision models, as well as to define additional provisions. Management is responsible for controlling and compliant with the mandate to the board especially in terms of control of different types of risks.

As you can see on the chart on the right, cost of risk this quarter jumped to CLP139 billion, up from only CLP68 billion last year and CLP126 billion from the first quarter. However, our net promoter-net, NPL ratio dropped 1.4% in the first quarter of 2020 to 1.3%. This combined combination of higher cost but lower NPLs was principally due to two factors. Please take a look at the chart on the bottom right. First CLP70 billion of the CLP139 billion posted in the second quarter was due to additional provisions. These provisions were recorded to protect the bank against unforeseeable economic fluctuations, in line with this, the pandemic has brought forth many uncertainties such as Citywide locked down, deterioration in employment and financial stressing companies. These uncertainties have made it extremely difficult for traditional risk models to properly gauge credit risk and as a result, our Board approved the establishment of these general provisions.

It's important to note that these allowances are not for any student segment sector customer but they for the entire portfolio implemented in different circumstances such as the one we are facing today.

Second, the remainder of the quarterly provisions was chiefly due to the impact of COVID-19 on the financial position of certain large customers, which have suffered a deterioration in their business environment and income-generating capacity. As a remainder, large companies are evaluated on an individual basis for provisioning purposes using a forward-looking approach. In terms of retail book, the retail book composed by consumer mortgage and commercial loans evaluated in the group basis, delinquency levels remain-have remained relatively stable.

Nevertheless, this was mainly due to the support measures we provided in this segment which included grace period, loans at preferential rates and government-backed COVID commercial loans for SMEs. In addition, as a way to promote lending and assistance to banking customers, the local regulator gave a special treatment to reschedule loans in terms of provisioning which has a positive effect on cost of risk when compared to normal period even though we expect deterioration in the portfolio in the next few months.

In this regard, we are confident there are prudent risk policies have made the-of the most preferred banks have faced negative cycle as shown on the next Slide 21. As you can see our coverage ratio reached 235% as of June 30th, significantly higher than our peers and we recorded the lowest delinquency ratio of 1.3%. Our prudent risk culture has also contributed to creating the highest level of additional provisions in the industry reaching CLP283 billion as you can see on the chart on the bottom right.

All of these figures demonstrate the soundness and quality of our portfolio and our prudent management when it comes to risks. Our consistent and successful strategy has been sensitive to grow our portfolio responsibly and this has allowed us to portray a solid track record of dependable results. As shown on the following Slide 22, a well diversified portfolio with lower overall exposure to risks-the riskier segments also contributed to these results. Our portfolio is highly diversified and concentrated in lower risk factors. Despite this, we are the most profitable bank in Chile, because our customers choose to use us as their primary account and this provides many additional benefits, I'm sure you're all aware. As you can see on the chart on the top left, retail segment represents 63% of our portfolio and this is divided into three main areas. First, consumer loans to middle and upper-income individuals, as well as mortgages, our focus to the low risk individuals. We have the highest market share and high-income individuals which are low-risk in nature. Second, our exposure to consumer finance through our Credit Chile brand is only 2% to date, significantly lower than the level we had in 2009 during the subprime crisis, which represented nearly 7%.

And lastly, our SME book is a very high quality portfolio that has had historically low levels of cost of risk and it's closely related to our upper-income individuals. We may not have the largest market share in this segment, but we assume we have the best portfolio in the industry. The remaining portion of the portfolio is the wholesale book that represents 37% of total loans. We work with the largest companies and multinational corporations in Chile and by nature, this segment is at lower risk. For this reason we are proud that we had historically-solid performance when it comes to wholesale risk. The pie chart on the bottom of this slide shows our exposure to different sectors in Chile as you can see our penetration in the highest respect, this is lower than our peer group. In retail hotels and restaurants, we have an exposure of 9% versus our peers of 11%, in construction, our exposure is 7% versus the competition 10%. And lastly we compare peers in transportation. But it's important not that we don't have any important loans to the airline industry. We are confident that our prudent approach to risk management should set us apart in the coming months when banks have more information regarding the quality of portfolio and how this will translate into cost of risk.

Please turn to Slide 23. More important than ever is our focus on managing costs, as you can see on this chart, on the left, we managed to maintain total operating expenses basically flat quarter-on-quarter and decreased 4.4% year-on-year. The yearly drop in expenses was driven by lower salaries and other expenses as shown on the chart on the right.

Specifically, if we were able to increase our business activity without increasing significantly our salary and also had a reduction in severance payments and loan loss provisions on cross border loans due to higher depreciation of the Chilean peso, this quarter as compared to the second quarter of 2019. In addition to this, we lowered our outsourced salesforce services by observing these functions internally. During the second half of last year and we lowered marketing expenses by reducing media expenses, market research and adjusted loyalty program. These reductions were also partially offset by higher IT expenses related to software licensing adjust the bank quickly in this environment, also, we incurred higher expenses linked to fixed asset maintenance related to sanitation, new safety measures related to the pandemic, as well as cost associated to updating our branches to the new service model among others. On a year-to-date basis, we recorded an improvement in efficiency as shown on the chart on the bottom right, reaching 43.6%.Please turn to Slide 24. Before moving on to questions, I would like to highlight the favorable comparison of our stock versus our main peers in Latin America. As you can clearly see, we're the stock that has


Pardon me ladies and gentlemen, it appears we have lost connection to our speaker line. Please standby while we reconnect. Thank you for your patience.

Pablo Mejia -- Head of Investor Relations

Sorry about the technical difficulties. If you please turn to Slide 24, before moving on the questions, I would like to highlight the favorable comparison of our stock versus our main peers in Latin America. As you can clearly see, where the stock price has been the most resilient in this crisis.

We have recovered part of the drop from pre- COVID level, this is clearly a result of the market, understanding that we're not only the most profitable bank in Latin America as shown on the chart in the bottom left, but this is accomplished in a dependable manner through all of the cycles. So, it is also important to mention that we may have recovered the post or near post COVID level, but we still have multiples, where we are very well below the levels that we've had in the past. Despite the current economic environment, we are confident that the better prospectus for the economy coupled with our strong fundamentals and strengthening of the key aspects of our long-term strategy will allow us to continue to be in the best long-term alternative for investors. Thanks for listening and if you have any questions, we'd be happy to answer them.

Questions and Answers:


[Operator Instructions] Our first question will come from Ernesto Gabilondo with Bank of America. Please go ahead.

Ernesto Gabilondo -- Bank of America -- Analyst

Hi, Rodrigo and Pablo. Thanks for taking questions. My first question is on the reprogramming portfolio and the FOGAPE program. Can you give us some maybe how much both the reprogramming and FOGAPE represented of your total loan portfolio and while you're seeing the percentage of reprogram portfolio, seems significantly lower when compared to Santander Chile? And then my second question is on credit provisions considering that you have created additional provisions of CLP70 billion during the quarter, do you think this was a peak in provisions or do you continue to see higher provisions by year end once you start to see NPL showing up after ending the relief programs or from the exposure to high-risk economic sectors. Thank you.

Daniel Galarce -- Head of Financial Control

Thanks. Well, if we look at the participation in the most recent information, we have similar levels of COVID loans as our competition. Where bank approved a significant amount of the loans today in dollars, we have as of July 24th, about $1.9 billion, issued to companies, a large proportion of those to SME customers and represents somewhere close to 30,000 customers today. You want to add?

Pablo Mejia -- Head of Investor Relations

In terms of that I think, our levels are very similar to what-what our main peers have issued. If we move to the-the levels of provisions, it's difficult to have a clear understanding of how the economy will recover and the current position of our customers. We can see today is that the portfolio is-in relatively good shape.

But we have a limited amount of information, but we do know and we've seen good payment behavior in the recent information. But we can't rule out that in the future months, there could be levels of provisions, similar to what we've seen in the past months, quarters. So it's something that we have to continue to see [Technical Issues]

Daniel Galarce -- Head of Financial Control

Okay, thank you, Pablo. And then just a follow-up on the reprogram portfolio. When looking to Santander Chile, you mentioned that close to 30% of the loan book was reprogram, including the FOGAPE loans do you see the same proportion to your loan book?


Ladies and gentlemen, it appears we have lost connection to our main speaker line again. So please standby, while we reconnect.

Pablo Mejia -- Head of Investor Relations

Sorry about that again. So, again just finished nothing in terms of the provision. One of the important things, is Ernesto you there?

Ernesto Gabilondo -- Bank of America -- Analyst

Yes, I'm here.

Daniel Galarce -- Head of Financial Control

Okay. So I think one other important things to mention as well as the-what we've seen in the month of July is the payment behavior of the customer, take on these reprogramming of loans. So a large of portion of the customers to reprogramming in April and what we've seen on the payment behavior is a positive result, but we can confirm that this will continue in the future. So we do need more information, I understand and that will allow-lower, we will have the same level or changes in what we've seen in the prior quarter.

Pablo Mejia -- Head of Investor Relations

And I would like to add one thing here. This is and it's important to keep in mind from factors that they will likely affect for example, the impact at the end of the for example, the potential increase in the unemployment rate, so basically, we have seen an increase of unemployment rate from 7% to 12% in that month. So we can rule out that it will increase in a more-but more important is that we have a very important uncertainty in terms of the final impact of this crisis in the economy., we don't know how what the recession and more important is that we don't know about the length of the recession. We don't know when the economy will-economy grow, and that's why we are not providing more guidance in terms of the cost of freight for the future.

It is important to keep in mind, this driver, but unfortunately we don't have enough information as to provide a more strategic guidance for the future. And maybe a follow-up on the first question. So the market share and loans, we have 18.4%, but the information as of-this information as of July, worth to mention that this level of grown market share is actually higher than market share in commercial loans. So it makes sense this level of market share for our customer base.

Ernesto Gabilondo -- Bank of America -- Analyst

And I was looking through your presentation on Slide 18 and I was looking to the volume of loans reprogrammed and as of July, and you mentioned you have around 35%, right. And I'm looking that Santander has around 41%. So what do you think will be the difference of your competition having a higher market share than yours?

Pablo Mejia -- Head of Investor Relations

No, the market share in terms of the loans reprogram, it's important to mention one very particular thing-that's banking industry. The reprogramming of these loans isn't a lead indicator of the cost of risk. Some of these loans obviously have-could be more problematic, we've seen this positive results in this first month.

But it's not the lead indicator, because there are certain characteristics which customers had to comply in order to be able to have these loans reprogrammed at Banco de Chile and many banks of similar. But one of the requirements wasn't a requirement, when you had the loss of income. You are a good customer you're paying on time and due to that reason, it's not a good lead to the cost of risk.

So what it is, I would say indicator is how well is each bank, if there is a very large difference, is the back of 20%. The book-reprogram is how-how we provided this to their customer base and how easy was it to do it online. With the larger banks, it was a simple process that we spent online and in the case of our bank, you can see which loans were reprogammed, which bank has a little bit different composition, of those reprogramming and we included the credit card option to reprogram those in two installments.

So it just depends-it's not a lead indicator, that's what I wanted to say, it doesn't show automatically if you have a 35% or 20% level of reprogram is a lead indicator for the future, it's how the banks implemented this.

Ernesto Gabilondo -- Bank of America -- Analyst

Okay, understood. Perfect. And then considering the additional provisions that you created in this quarter, it seems that it was the quarter with highest provisions. Do you think this was the peak of provisions, including these additional provisions or do you think we should continue to potentially have another one like this one by year-end or-in the next year, once we finish the reprogramming of the portfolios,

Pablo Mejia -- Head of Investor Relations

It really depends on the evolution of the economy and how the economy begins to open and the impacts in the overall economy. So in companies and individuals and employment, so that will be a key area that we have to see today what we're seeing is a lot-starting to get better information regarding the virus in Chile. That could be positive. But we made see how this evolves above in order to have a clear understanding, this is worst month, if it's the next month, it really depends on the evolution of the virus and then back in the economy.

Daniel Galarce -- Head of Financial Control

So basically we can't allow more provisions for example, if-in the case if the economy get worse, so it's very important to keep in mind that this crisis is different to any other crisis that we saw in the back. So that's why it's very important to highlight our very robust position in terms of the coverage ratio. So, as we mentioned in the call, we are the first bank to sell mode of cycles. So we tend to allow more provisions if the economy remains weak.


Your next question comes from Claudia Benavente with Santander. Please go ahead.

Claudia Benavente -- Santander -- Analyst

I have two questions. The first is, how much should we expect to be provisioned for the COVID loans deductibles. Have you started to provision this or if not, when should we expect this impact? And the second question is maybe a little bit of a follow-up-a follow is what you were saying. Within the clients that have reprogrammed loans, can you provide some color and how much actually reprogram belongs a necessity versus close to get us an opportunity. Probably you have many of those customers that have the current accounts with Banco de Chile, so probably you can have a better idea of maybe you who were the most trouble one versus those who to give us an opportunity. Thank you.

Pablo Mejia -- Head of Investor Relations

Mainly testing phase, [Indecipherable] so the provisions for the COVID loans basically, what happened is that the regular products loans that were-FOGAPE guarantees, the regulator indicated detailed in terms of the constitution of provisions related to the deductibles of the COVID guaranteed loans.

So specifically, according to the current regulation, customers provision in deductible loans that were originated opposed to when the guarantee is exercised. And so specifically what the regulator says when the expected loss excluding the FOGAPE guaranteed loan is lower or equal to the deductibles, the provisions should be determined without guarantee.

When the expected loss-excluding the FOGAPE guarantee is greater than deductibles that provision should be determined based on the aggregate of the deductible plans, the expected losses in the FOGAPE guarantee. So therefore, we're expecting that there should be more provisions in the banking sector, beginning in September. We're currently calculating the impact of this change and will be recorded in our books from September, 2020. So that's what I can say regarding that.

And in terms of the installments of the reprogram, like I mentioned most banks what they did was provide late-sitting guidelines which customers could have part of this reprogramming, undertake this grace period and so you could have very good customers, or customers that need this grace period, so they could have lead indicator and how the loan-the quality of the loan book is.

Also since it wasn't a requirement that we would request customers to show us information regarding they had a impact in the salaries, it's not clear, what percentage of the customers need -- needed these grace periods So it's not a good. And I think it's very important to mention that the level of deposits in Banco de Chile had grown by over between 30%-around 35% for individuals.

So our individuals have more deposits in their account, there are different reasons for that. But that's something very important to mention, that customers are high-income individuals. So they're not-they are little bit less susceptible to these volatility in the economic cycle and what we've seen today of customer instead we've had a very good payment behavior in the first month of paying-of installments that you. So that's very positive from what we've seen so far.

Claudia Benavente -- Santander -- Analyst

Yes. Is it possible to have an idea of maybe within the reprogram loans, how many of the customers have taken account with Banco de Chile.

Pablo Mejia -- Head of Investor Relations

Basically, when the customer enters Banco de Chile they have a package across most of our customers use Banco de Chile as their primary account. So most of these customers have a current account, so it's not, it's very uncommon customer will have a product that is in the current account customers so most of the customers should be current account holders.

Claudia Benavente -- Santander -- Analyst

But basically for the consumer group then you can identify those that have seen their salaries at least reduced. So therefore that there you can see maybe the proportion of those that may could have a higher probability of having it hold.

Pablo Mejia -- Head of Investor Relations

Again not necessarily since you can add more than one bank account. So not necessarily you have the savings in one versus another. So it's information that we have. It's not public but what we do have and what I can say is that the first month is the most important month of reprogram that we did was in April and that was due in July, we had very good levels of payment behavior.


The next question comes from Sebastian Gallego with CrediCorp Capital. Please go ahead.

Sebastian Gallego -- CrediCorp Capital -- Analyst

Hi, thank you for the presentation. I have three questions, the first one a follow-up on more of the same in terms of asset quality. I just want to get a sense on, when should the benefits provided to customer start to fade and actually if you are providing more extensions to those benefits that will be the first question.

The second question is regarding the pension fund withdrawal in Chile. I would like to know if you can comment on the behavior of clients on whether you can comment if those clients are repaying debt or not. How are you seeing those clients so far with the information we have us as of now?

And third, considering that also Rodriguez is in the call, I just want to have his perspective on the upcoming both for the new constitution in Chile and how this should play out going forward. Should we expect more-I mean some more of the same that we saw in October last year or do we-should we expect more account and stable outlook in terms of the social crisis. Thank you.

Pablo Mejia -- Head of Investor Relations

In terms of asset closure for the consumable, most of that is coming in July. April is the most important month for the consumer but Take on these rates. what we have seen is in the overall of these customers that took on this grace period a very good level of payment behavior. It's was a very positive information that we've seen so far. In terms of there is more benefits there was, we announced for the mortgage loan book, three additional months that customers could postpone. Again the reprogramming of loans, customers can take these benefits if they need them or if they see it as an attractive rate. So it's-there is certain characteristics that the customer must comply, which is being on time for the loan etc, and then they can take from these loans.

So that's a lead indicator in terms of the book and this is for instance, as mentioned, there is two ways to analyze this. The one way is to be publicly available and we can analyze all the banks which is the total volume of the loans that had some relation of an installment reprogram, which is available on the website of the CMS, or what we shown on Slide I think it is 18, which is only the installment of these three programs.

So, three months installment represents today, CLP490 billion, which is 1.6% of total loans. So it's not a very significant amount for installment that has a new loan associated with it. In terms of the 10% of the pension funds, I guess that would be the main new benefit. And so right now, we have three more months, six months as of April, SMEs have six months since they take on the SME COVID loans.

So we should see a gradual payment as of now and-the end of this year and the beginning next year among first volume of consumer loans, mortgage loans and then commercial loans for SME companies. And for the 10% of ASP, it's something that's been discussed all with the group. But the funds haven't been issued. So it's very hard to know to identify where those funds will end and which customers will take on those funds.

I think it's important to mention is that one of the things that Banco de Chile has been very strong in the past is getting customers to use that as their primary bank accounts. So, generally the customers work with us Banco de Chile as their primary bank accounts. So, that should be something positive as well if there is funds that flow into Banco de Chile. Daniel?

Daniel Galarce -- Head of Financial Control

Yes, I'd like to add one idea to that Pablo that it is 10% of the withdrawal from pension funds will likely contribute to increase in the short-term, private consumption. So that's why we are taking at a bigger role in loans as well by the end of this year because the Cincinnati tax increase in private consumption as a result of this, the withdrawal of the 10% from the pension fund.

So what basically we are highlighted here is that this is one additional factor supporting better outlook for the future especially impact the consumption in the short-term. With respect to your third question, it's too early as to provide more accurate estimate in terms of the potential changes in constitution and what would be the impact in economy further. And at same we because are aware that the main challenge in the short-term for the economy is to recover the economic growth.

So that's why now there is an important discussion in Chile in terms of the main policy. The government has been for example is very active in terms of implementing a strong stimulus, it will make a comparison with Chile related to other countries would be more aggressive in terms of increase in the future stimulus in order to recover the economic growth. So that's why in part when you compare the GDP estimate for 2021 in Latin America, Chile should have one of the best economic growth in there for next year.

After the recovery where we expect it to be by the end of this year, there will be several discussions on the political side. We know that we will likely have a discussion for the constitution we will likely have fresh elections for the next year. So we are aware about the potential impact on the economic growth. But all in all, we are positive for the future in Chile. We are confident that the second quarter was the bottom of this made cycle. We are facing a positive growth on a sequential basis for the fourth quarter of this year and all in all with an economic growth of nearly 4% for the next year.


Our next question comes from Neha Agarwala with HSBC. Please go ahead.

Neha Agarwala -- HSBC -- Analyst

Following up on Claudia's previous question on the deductibles for the FOGAPE loans, I understand that you will start making these provisions in September, but could you give us a sense of the magnitude of these provisions that might be needed CLP30 billion to CLP40 billion does that sound reasonable or should be more or less?

And related to that is, there was a change in the treatment of FOGAPE loan guarantees for the capital calculation. What would be the impact on your Tier 1 ratio from that? Is it already included in the numbers that is presented or would that change in fact your 3Q capital levels? I'll ask my other questions later?

Pablo Mejia -- Head of Investor Relations

And so in terms of Claudia's question, what we can say is that how the FOGAPE is basically when expected loss excluding that FOGAPE guarantee is lower or equal to the deductible, the provisions should be determined without the guarantee. And when the expected loss excluding the FOGAPE guarantee is greater than the last quarter, the provisions should be the seven days from the aggregate of the deductible and expected loss, using the FOGAPE guarantee.

So what we can say is-this is being calculated. And there is something that will be attributed to this, beginning in September, but we don't have a number that we can give you at this time. And can you repeat the second question, please?

Neha Agarwala -- HSBC -- Analyst

And my second question is on the accounting treatment of FOGAPE loan guarantees. There was a change in the treatment of these guarantees, which would positively impact capital ratio. So is that change already been accounted for in your numbers for 2Q or would that impact the 3Q numbers?

Daniel Galarce -- Head of Financial Control

Hi this is Daniel Galarce actually the impact for us is not relevant. Actually, we don't have any impact due to this new treatment for that amount. This is just a change from the risk weighted assets due to-from capital weighted assets. So it's not a big change for us, it is not further down at all.

Neha Agarwala -- HSBC -- Analyst

Perfect. Then the next question is on the trend that we can expect in terms of NPL ratio and cost of risk. I believe you-and today we don't have very aggressive charge-offs policy. So should we expect the NPL ratio once it starts increasing to remain at relatively high levels for a few quarters and gradual write-off or will you be more aggressive in writing of loans as you learn about the quality of the portfolio?

And in terms of cost of risk, should we expect bulk of it to be in 2020 or more evenly distributed between 2020 and 2021 and any particular quarter in which you think the cost of risk should peak? My second question is on additional provisions. You showed that you have very high level of additional provisions versus your peers. But you mentioned in the previous calls that you will probably not be using it in the current crisis. So haven't you changed and do you think that you would probably trigger the use of these provisions if required in the coming quarter or would you like to just maintain them at these levels? Thank you so much.

Daniel Galarce -- Head of Financial Control

In terms of a write-off, there is regulations that determines when loan should to be written off-when there are certain characteristics, such as a consumer loans it lasted six months, mortgage loans very much longer period, timeframes the period. And there are certain conditions that you can write-off loans before that.

Probably what we should see today is something in the normal write-off period, there could be a decision, we can't rule it out because-there is a closer write-off, but it's not something that we could give guidance at this time.

In terms of cost of risk, the cost of risk should be same, it is something that in this year, obviously-the peak of the pandemic, should be effective the banking industry and for next year it's difficult to determine a number because it's not clear the economic outlook of the pandemic. We don't know as for when vaccine or medicine will made or a second come back of the pandemic and I think that's the biggest uncertainty and the reason why we can't give guidance for 2021.

Pablo Mejia -- Head of Investor Relations

That's right. Neha in the case that the economy for 6% this year for example in the economy to grow by 4% for example, next year it should be consistent with an unemployment rate and that would it until 2022 for example. So that's why, very, very hard to make any comparison with base prices because this time is really, really defensive, that's why we don't know the length of this crisis we will know what is the actual impact in terms of the output that the economic cycle.

So that's why we don't have a more accurate guidance in terms of cost of risk and that's why as well we can rule out more additional provision. For example because there is a big, big uncertainty in terms of the future evolution of the economy and we are aware of course that we can compare this crisis from any other crisis in the back.

Daniel Galarce -- Head of Financial Control

Also, I think it's important to mention that we can't rollout additional constitution of additional provisions or releasing provisions because it's not clear the outlook. So, we have to see how this evolves. So it's not clear on how, when these provisions can be used.


The next question comes from Alonso Garcia with Credit Suisse. Please go ahead.

Alonso Garcia -- Credit Suisse -- Analyst

My first question is actually just a follow-up as to the requirement for clients to adhere to reprogramming and I guess quite right of you asked for documentation for that sort of claims demonstrate that they had an impact on the income from the pandemic, or if you did not ask for such documentation. And my second question is on Basel III implementation recently in Chile, the regulator put for consultation details for the risk weighting factors for market risk? So I just wanted to hear your thoughts, if based on that new information, what's your new expectation for Basel III impact on your capital ratios? Thank you.

Daniel Galarce -- Head of Financial Control

So I think it's important to give more clear understanding of reprogramming of loans. So basically in Chile, what happened, different from other countries, and there has been many different ways how different countries and banks upgrade and even in Chile, that most of the large banks in Chile. What do they do and what did we do specifically in the second half of this year is that we offered this reprogramming of loan without taking into consideration or requesting that customer send us information regarding if they have a significant impact.

There was an opportunity to build stronger relationships with customers, we use a digital estimates to offer these products quickly online, and 100% digitally, then don't have to come to the branches. And customers regardless, if they have more income than last year, less income than last year through which they need this benefit, have an opportunity, everyone have the same opportunity to receive a reprogram of their loans.

So this is the reason why it's not a very good lead indicator of risk. What is positive is what we're seeing today, in terms of the payment behavior. So the payment behavior has been very positive, in the July figures which is the bulk of the consumer loan book which has been repaid, which is beginning the repayments today. Those customers taking advantage, some that need it, some that-doesn't need it.

Alonso Garcia -- Credit Suisse -- Analyst

Okay and just could you please repeat the figures of payment figures in July to get a sense on how much of your reprogram portfolio is back and in time with their payments?

Pablo Mejia -- Head of Investor Relations

The consumer loan book is the one that has three months repayment, which is being paid today. So most of the consumer loans that have been reprogrammed was done in April. So, most of that has been prepaid today in the month of July, we are in the second month now. And then the other question was Basel III-I didn't quite, could you repeat the question please?

Alonso Garcia -- Credit Suisse -- Analyst

Yes, I mean there was one of the uncertainties regarding Basel III implementation in Chile had to do with risk weighting factor for market risk and I believe the CMS for consultation details on that recently one or two weeks ago. So I wanted to hear your thoughts on what was put for presentation and based on that, but your expectation for the impact of Basel III implementation on your capital ratios. I believe last time you're talking about, I mean but probably negative 50 basis points from implementation regarding Basel III so I want to know and if that's still the case or if that's changed?

Pablo Mejia -- Head of Investor Relations

Hi Alonso, Pablo Garcia again. I think Basel III accelerated the new methodology on market risk-weighted assets from this later. We are actually analyzing now this new methodology and as far we have estimated I think that the impact is similar to the rest of the rules some of in there, some but I would say that average, there quite aligned with what we expected before..

So basically, we believe that we will had an impact on our capital ratios due to Basel III the transition to Basel III of course, but this is not different than we haven't disclosed in previous calls. So basically the impact, I would say will be in the range of 80 basis points to 100 basis points in the capital ratio. And this is including this new methodology for market risk-weighted assets.


This concludes our question-and-answer session. At this time, I would like to turn the floor back to Banco de Chile for any closing remarks.

Pablo Mejia -- Head of Investor Relations

Okay, thank you for our calendar quarter conference.


[Operator Closing Remarks]

Duration: 86 minutes

Call participants:

Rodrigo Aravena -- Chief Economist and Senior Vice President of Institutional Relations

Pablo Mejia -- Head of Investor Relations

Daniel Galarce -- Head of Financial Control

Ernesto Gabilondo -- Bank of America -- Analyst

Claudia Benavente -- Santander -- Analyst

Sebastian Gallego -- CrediCorp Capital -- Analyst

Neha Agarwala -- HSBC -- Analyst

Alonso Garcia -- Credit Suisse -- Analyst

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