Banco De Chile (BCH) Q2 2021 Earnings Call Transcript

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Banco De Chile (BCH 0.27%)
Q2 2021 Earnings Call
Aug 6, 2021, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone, and welcome to Banco de Chile's Second Quarter 2021 Results Conference Call. If you need a copy of the press release issued yesterday, it is available on the company's website. Today with us we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer; Mr. Pablo Mejia, Head of Investor Relations; and Daniel Galarce, Head of Financial. Control and Capital. [Operator Instructions]

The information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements.

I will now turn the call over to Mr. Rodrigo Aravena. Please go ahead.

Rodrigo Aravena -- Chief Economist and Institutional Relations Officer

Good afternoon, everyone. Thanks for attending this conference call today where we will discuss the financial earning posted by Banco de Chile during the second quarter. As we made in previous call, we will share presentation divided into three parts. first, an analysis of the economic and financial environment, followed by a review of the main advances in our key strategic initiatives and finally, I'll review our outstanding results achieved during the period. I want to start with a macro discussion and then Pablo Mejia, our Head of Investor Relations will continue with an analysis of the bank.

Please move to the Slide number 3. Generally, the Chilean economy has had a positive trend outperforming the expectations held at the beginning of this year. All data presented in this slide show the significant improvement observed in the activity and to a lesser extent in the labor market. Specifically, as you can see in the figure on the upper left, growth has posted an impressive figure during the year. In the second quarter, the monthly GDP expanded by 17.4% year-on-year after increasing by 0.3% year-on-year in the previous period.

On the growth front, this positive trend can be attributable to the given contribution of three main factors, first, very strong economic policies adopted since the beginning of the pandemic, which have positioned Chile as one of the most healthy countries, not only in the region but also in the world. Second, a temporary impact from the three partial withdrawals from pension funds which have increased private consumption. Third, the improvement in external factors, such as higher copper prices and the acceleration in key trade partners. I will refer to these factors later in this presentation.

Additionally, it's relevant to be aware that the annual growth rate increased even more due to the weak comparison base from one year ago when the activity plummeted more than 40% on a sequential basis. This means that the two-digit growth rate will not last for a longer period of time. As a consequence of the faster growth, activity has reached its pre-pandemic level. The growth figures suggests that GDP has been led by the start in consumption, for example retail sales and durable goods rose by 61% and 118% respectively.

Endurance along with the commerce sector to be 26% above the pre-pandemic level. On the other hand services remain subdued, seem they haven't recovered the pre-COVID levels. Overall, it's worth mentioning that Chile was the first Latin American country to recover all the production lost during the crisis. In line with the robust growth, the CPI has shown a steady rise, a trend that is reflected in the upper right chart. In June, the headline inflation rose to 3.8% year-on-year and all the different core measures have followed a similar type -- sorry the core CPI, which is the index that excludes energy and food prices rose 3.1% year-on-year achieving the highest rate since 2015. As a result of this trend, the central bank began a tightening cycle in the monetary policy meetings held in July, when it increased interest rate by 25 basis points to 0.75%. According to the press release of the meeting, further adjustment in the near future are likely.

Price is continued increasing in July. Since the annual inflation rate rose to 4.5% while the core CPI increased to 3.6%, the highest figure since mid-2016. These figures that were released this morning confirmed the material increase in inflationary pressures in the Chilean economy. In this environment, long-term interest rates have been increasing at the chart in the bottom left clearly shows. This trend can be explained by several cyclical factors including the up -- the upward trend in global rate, expection for higher monetary policy rate and inflationary pressures. This is also explained by some instrumental changes in the Chilean economy, such as the increase in supply of bonds due to the higher fiscal deficit coupled with the decrease in demand for bonds due to the pension funds withdraw.

The new structure of interest rate in Chile, also have several impacts for available for sale financial instruments that affect comprehensive income for bank. Since would been aware about inflationary risks and their potential impact on interest rate, we have avoided taking risks in our financial portfolio, especially in our value for sales instruments given its negative impact in the economic value of shareholders' equity. We will go over these aspects in more detail later in this presentation.

The labor market has also posted a positive trend, although at a low -- at a slower pace, In June, the employment rate fell to 9.5% following the downward trend that began last year as the chart in the bottom right shows. The lower employment level is explained by the partial recovery into the payroll, even though it remains below the pre-pandemic number. A similar trend can be seen in the labor force.

Undoubtedly, the strong capacity of recovery tone by the Chilean economy has been a differentiating factor. That's why I would like to analyze the key drivers that have made possible fastest speed of growth.

Please move to Slide number 4 to discuss them. Beyond the positive figures that I described in the previous slide, it's essential to identify and understand the critical factors behind this improvement. Generally, we can highlight the following two. First, with improvement in sanitary conditions. At this chart in the upper left shows, there has been a successful vaccination process as more than 70% of total population have been immunized exceeding any country in Latin America and becoming reference a globally.

Thanks to these advances and the restriction implemented early this year, we've seen a substantial drop in active cases of infection as you can see in the chart on the other right. In fact the positivity rate has also fallen to less than 2% post in the lowest level since the beginning of the pandemic. Undoubtedly, this improvement is a key piece that allows normalization of mobility and activities in the country.

A second element has been the first event fiscal stimulus. According to future estimate, the government has implemented 9 points of the GDP indirect transfer and added 9 points in indirect measures, such as capitalization of FOGAPE and their unemployment funds. The magnitude of fiscal stimulus can be seen in the bottom left chart which shows the strong pickup of fiscal spending during the year. In fact, total expenditure of the government was probably increased to around 30% this year after growing by 17% in 2020.

Given the size of fiscal stimulus, it's worth mentioning that Chile has a gross debt of 53% of the GDP last year, well below the average global debt seen in the chart on the bottom right. It comprehends that Chile could implement fast fiscal response without compromising fiscal sustainability, a situation that's been possible in only a few countries in the world.

Now I would like to share with you our baseline scenario for this and the next year. Please go to the next slide, number 5. Probably 2021 will be marked by the strong recovery of Chile. We expect the economy to grow by 8.4% after falling by 5.8% last year. Due to this, Chile would be the country with the highest average growth rate between 2020 and 2021, a comparison that this chart of this slide clearly shows.

Additionally as can be seen in the table GDP growth this year will be driven by substantial increase in private consumption followed by a cyclical recovery of investment. For 2022, we foresee a slower growth due to the spectrum normalization of the expansionary policy that were implemented during that pandemic. We see an inflation rate of 4.4% at the end of this year due to the stronger domestic demand. For the next year, however, we forecast an inflation rate of 3% with announced upward bias. In this environment, we predict that the Chilean Central Bank will continue to rise in the interest rate to 1.5% and 2.75% by the end of this and the following year.

I want to finalize the section by mentioning a couple of risks which today are more important than ever. One of them is the evolution of the pandemic, especially in terms of the potential impact of new variant. On the local side, the main ways with evolution of the political scenario, this year there will be important and events including the presidential and congressional elections in November, the run-off of the preferential race in December and the exit referendum scheduled for mid-year of 2022 where people will decide to approve or reject the proposal of the new constitution. We know that unexpected developments in this area, could have an important impact in the economic perspective for Chile.

Before moving to the bank, I'd like to review the main trends in the banking sector. Please move to Slide number 6. The evolution of the banking industry is a good reflection of the overall economy, in line with a greater dynamism we've seen a recovery in profitability, although loan growth remains the same.

Net income with CLP154 billion in the second quarter, 4% below the previous quarter, but substantially higher than the same quarter last year. Consequently, profitability with almost 16%. This positive result was a consequence of the following factors. First, asset quality indicators remain low, particularly in the cost of risk was a ratio of only 0.8%, well below historical levels. NPLs also remained very low at 1.5%, similar to prior quarters.

Despite the positive evolution of the economy, we are aware of some temporary factors affecting these measures such as the higher disposable income, transfers made by the government in excess of liquidity. Hence, the normalization of these ratios in the future is highly likely, once financial aid from the government's expire. On the other hand, we continue seeing mixed loan growth trends as shown on the chart to the left. So, the loans during the quarter grew 1.5% driven by from mortgage loan growth and partially offset by the contraction in consumer lending.

The commercial portfolio activity is consistent with the light investment and the higher uncertainty of the economy, while consumer loans were affected by the temporary disposable income and the partial withdrawal from pension funds.

Looking forward, risk will be an important factor to pay attention to mainly those related to the evolution of the economy and changes in the business environment. Nevertheless, it's worth mentioning the resilience that the industry has shown through the cycles. After analyzing these improved scenario, I'd like to note that Banco de Chile has continuously improved its competitive position in the country.

During the rest of the presentation Pablo Mejia, our Head of Investor Relations, will share the main achievements and results posted by our bank during the quarter.

Pablo Mejia -- Head of Investor Relations

Thank you, Rodrigo. Please move to Slide number 8 to begin our discussion on our main advances in strategic projects.

Over the years, Banco de Chile has proven it's consistent and long-term strategy has allowed us to post superior profitability for our shareholders. To continue doing so, we continually reinforce three key areas in our strategy which are, digital transformation, efficiency and productivity, and sustainability. Over the next few slides we will look at the advances we have made during this quarter with regards to these areas.

Please go to Slide number 9, where we highlight some of our initiatives and advances in digital banking. The pandemic has been an important driver for us in the economy as a whole to increase the use of technology in order to reduce the strain that the crisis has had on us as individuals and to our businesses. We have advanced early during the pandemic, launching new products that our customers value.

In our corporate segment, we recently launched a new app for businesses which has been installed on over 44,000 smartphones since February 2021. We are also proud that we are the leading in -- we are leading the industry in reactivating the economy through the government SME loan guarantee program, Fogape Reactiva, with over 20,000 loans provided and over half of these loans have been originated 100% online.

We also implemented a new feature in our personal banking webpage that allows customers to transfer internationally in different currencies. In addition, we successfully implemented new innovations to our payment platforms where we have hundreds of thousands of transactions of customers using their smartphones or smartwatches to make purchases at businesses, and we also reinforced this project plans to an agreement with Transbank, the main acquiring business in Chile, to accept payments using Mi Pago mobile app on their iOS platform. We are certain that these projects will make a real difference for our customers and strengthen our relationship.

In terms of our advances in our digital account Cuenta FAN, we continue to see strong growth. We are delighted to share with you that we have over 5,000 new customers and that we have seen that our Cuenta FAN customers are actively using our account, not just opening it because it's free. As we have seen that has occurred with some competitors. Based on internal studies, our accounts have substantially higher balances and experience in greater usage level.

Please turn to Slide 10. A key part of our success has been a customer-centric strategy. We continuously strive to improve our operations and we always keep customer experience in mind when developing new products and services. The results of these ambitions are absolutely reflected in many different customer preference indicators as shown on this slide. We continue to lead the industry in Net Promoter Score, top-of-mind in bank preference. We also outranked all of our peers and other indicators such as the ones shown on the bottom where customers chose us as the bank with the best security and solvency, as well as selecting Bank of Chile as the most transparent and reliable.

I'd like to highlight that all these measures we released by Adimark which are leading surveying companies in Chile and that considered a representative ballot of customers from all banks in Chile, reducing potential buyers that would appear if we only pulled our own customers. By doing so, we can reaffirm the Bank of Chile definitely has the best customer service and net recommendation in the Chilean banking industry.

By focusing on customer -- by focusing on providing customers first-class experience we can gain more loyal customers and higher cross-sell ratios. This is especially relevant in the upper-income segment where we lead the industry. These customers demand more but also provide a higher profitability with a very low risk. It's also important to mention that through digital evolution, it easier for customers to switch banks and it will be even easier in the future as new advancements develop. For this reason, we must be aware of the changes and provide continuously improvements to give the highest level of customer experience that clients require.

Please turn to Slide 11. Optimizing and improving operations is even more relevant today where banking -- where the banking industry faces a challenging environment with rising competitive pressures that can have an impact on profitability. In view of this, we have been persistent in our advancements and optimized our resources, automating processes by leveraging technologies and simplifying procedures. As you can see on the chart on the top, we've seen continuous advancements in total expenses to assets, loans per employees and loans per branches.

We are also finishing the implementation of the new service model that includes merging the consumer finance network into Banco de Chile offices, implementing new self-service terminals, and adjusting responsibilities of our staff to improve customer experience. In this quarter, we reduced the size of our network by 35 branches or almost 20% year-on-year. In the last 18 months, we have optimized our branch network by 90 branches, reducing the total number of branches to 277, which is lower than our main competitor.

Another relevant change that has accelerated optimization of our cost with the creation of the productivity and efficiency division in 2020 that has focused on implementing cross-enterprise cost management strategy. This area is implementing best market practices throughout the bank which gives incremental savings gains throughout all the procurement value chain. These initiatives are bearing fruit and we expect these enhancements on how we run our business should lead to efficiency ratio gains in the medium-term to around 40%.

Please to Slide 12. Our commitment to sustainability is a relevant part of our strategy. On account of our responsibility to the stakeholders, we are reinforcing our efforts to take our bank to another level of sustainability and in turn increase our long-term value. In this context, during 2021, we developed several initiatives in order to strengthen the relationship with our stakeholders. One of the hardest hit sectors during this pandemic has been small and medium-sized businesses. We are proud their permanent commitment to entrepreneurship has allowed us to lead and assist many customers to set the stage for a new cycle of growth, granting more than $1.5 billion in Fogape Reactiva loans since February.

Along these lines, in the alliance of digital country foundation we presented at Technology Adoption Conference for SMEs to support the digitalization of their businesses. We also implemented free financial education courses, donated computers to improve connectivity for students, we launched the inspiring women recognition that reward women that managed projects with positive impacts for the community. Within the actions related to the environment, we launched a sustainable banking kit for new clients that include a biodegradable banks and recycled plastic cards as well as the green leasing products that provides special conditions for financing solar project and electric cars. In addition, in order to provide our stakeholders with the relevant sustainability information, we adopted for the first time the salary disclosure framework and it's available for your review on our website within the sustainability section. This is another step taken in order to improve even more the levels of transparency and quality of information available to the market.

Finally, as a result of our commitment to sustainability has built a solid corporate reputation. We received recognitions from local and international institutions including the European that recently considered us as the best Bank of the Year: the Most Innovative Digital Bank and the Best Bank for financial inclusion.

Please turn to Slide 14 to begin our discussion on our financial results. Once again we posted strong figures this quarter in terms of loan growth and net income despite the challenging environment of the pandemic has produced. We are pleased by our customer centric strategy is long with a prudent approach to risk and cost discipline has produced this excellent part of line of CLP162 billion, which includes additional provision by CLP50 billion in the quarter. This translates into strong return on average equity of 17%, especially when we consider a solid Tier 1 capital ratio as shown on this chart to the right.

Our capital strength, and that was really allows us to be the bank in the best position to address the base of reschedule of higher capital requirements.

Please turn to Slide 15. Operating revenues continued showing the recovery, driven by customer income. This confirms our revenues are generated from a more stable sources of lending and fee-based products, which is the core business of our commercial bank. Along these lines, our financial risks and revenues have remained more stable as our goal is to provide excess volatility in their bottom-line and to reduce the risk and the economic value of our capital base which is relevant since rates are increasing. Especially as can be seen in the chart on the left, operating revenues posted a sequential growth rate of 3.4% over the first quarter of 2021. This was driven by a 3% rise in customer income generated from fees as well as interest revenues as broken down on the chart on the top right.

Fee income rose, thanks to the better economic activity in an economy that has evolved and successfully adapted to the new normal. Despite that we had new lockdowns in the second quarter 2021, we saw strong income generation from transactional products, stock brokers, mutual fund and wholesale fees, especially relevant to highlight that we have witnessed a consistent improvement in fee income generation since the fourth quarter of 2020 as shown on the chart on the bottom right, posting a 15% increase over the same period last year, when we exclude revenues generated from the upfront fee from a joint venture with an international insurance company.

Net interest income also rose this quarter versus the first quarter of 2021, primarily due to the expansion of both the loan portfolio and non-interest bearing deposits, the Ladder rising 11% to a sequential basis. Before moving on to the next slide, I want to highlight that we are more optimistic as a result of the recent improvement in the sanitary conditions. As the economy continues to open, it should be further reflected in fee income and begin to be reflected in the growth of our portfolio, especially in consumer and commercial loans.

On the following slides, we will discuss how our portfolio has changed during the quarter and go over the evolution of our asset quality. Please turn to Slide 16. Total loans reached CLP32 trillion this quarter increasing by 1.6% when compared to the prior quarter equal to 6.4% rise on an annualized basis. Year-on-year, the portfolio has grown 5%. Nonetheless, we saw mixed growth trends this quarter. As you can see on this chart, on the right, we're happy to mention that we gained despite the fact 85 basis points in market share over the last 12 months.

We grew actively in commercial loans, although at a slightly lower for losses in the first quarter. And most of this growth was focused in the SME segment, as you can see on this chart on the bottom, which grew 3% in the quarter. This dynamism continues to be driven primarily by the new government guarantee program that is directed to the SMEs and middle market companies. Year-to-date, we have paid $1.5 billion in loans, and we have the highest market share of 24% in this program.

These originations also helped improve our loan spreads for commercial loans and has permitted us to reduce our risk through the government guarantees. As personal banking loans, we saw an increase of 1.5% quarter-on-quarter. This was driven by mortgages, the continue to grow strongly as opposed to consumer loans, which decreased by 1.5% quarter-on-quarter, in line with the industry. We believe that the sluggish consumer figures is still muted still low consumer confidence, as well as higher temporary liquidity.

However, we think there is a consequence of the recent results of the vaccination campaign we should begin to see a reversal of this trend and commence a period of gradual growth in consumer loans and then near future. Please turn to Slide 17. We pride ourselves by providing our customers with the highest quality products and services in the industry. This determination has been key and providing us with low cost funding base and for driving demand deposit growth. Today DDAs represent 37% of assets, which is substantially higher than all of our peers. Thanks for the brand. This mean and soundness, we have seen a strong increase in demand deposits during the crisis from our customers. This preference that used our bank as the our customers preferred Bank as reinforced in the chart on the bottom left, where you can see the strong rise in average balances per account versus our peers.

In terms of funding gap in strategy, we are proud that we are a prudent bank that does not take large risk to generate short-term gain. In-line with this, we've managed our term gap in appropriately as depicted on the chart on the bottom right. As you can see bonds fund 89% of our residential mortgage loans, similar to the industry average, but quite different to other competitors. This is important, especially in light of our upward trend expected for interest rate as we mentioned in the beginning of this presentation. We expect that the interest rate given the economic scenario for Chile continue to rise, and this may have a negative effect for some banks holding significant term spread mismatches or another words those funding long term exposures in the banking book with short-term liabilities, which repriced faster than assets.

In terms of capital, we have the strongest Tier 1 capital base of 12.5% with a substantial difference to our peers as shown on the top. This together with the excellent credit risk ratings further assistance in continuing to diversify our funding base through the placement of bonds and growth in DDAs. Our fully loaded Basal III ratio was 16.6% in June 2021 with room to improve as we implement internal models for credit risk weighted assets they're permitted to the regulation today under some considerations.

It's also important to note that some of the regulatory thresholds are not yet in effect. But we are confident that our capital base and the optimization of our risk weighted assets should enable us to successfully overcome this new framework. Also, we are one of the 6 systemically important banks in Chile and then our opinion and based on the current methodology we should be subject us with systemic risk buffer of around 1.3% beginning in December 2021. In general, we are pleased that our strong capital base allows us to be well prepared for the transition to Basel III with no special actions needed to comply with this new standard.

Another driver for our bottom line during this crisis has been achieved through policies and prudent risk approach that focuses on growing responsibly and sustainably. Please turn to Slide 18. As you can see on the chart on the left, loan loss provisions remained lower at CLP77 billion this quarter, slightly above the level close to the prior quarter. Nevertheless, provisions from risk there amounted only to CLP27 billion and additional provisions represented CLP50 billion during the quarter. This competition together with our very low NPL ratio confirms the high quality of our loan book which resulted once again with a low loan loss provisions ratio of only 0.96% this quarter, well below the average running rate prior to the pandemic.

It's important to note that the CLP50 billion of additional provision we established this quarter allows us to mitigate the transitory a positive effect of the better behavior of overdue loans and provisioning models while taking into account some uncertainties for the long-term. The second quarter with highly uncertain for Chile with the rise of COVID cases in mobility restrictions. Nevertheless, the successful vaccination process deployed by the government has reduced cases and we're confident that we may finally see improved conditions in the following months. This is an area that's maintained. We can't rule out that we may release additional allowances in the future quarters, the positive evolution of the economy is confirmed and there is a reduction of uncertainties.

Finally, please take a look at the chart to the right. I think it's important to highlight that some policies have permitted us to continue showing attractive results combined with the best risk position in Chile. During our history, we have been the most profitable bank especially when adjusted by capital and we have managed to accumulate CLP410 billion in additional provisions with a coverage ratio of over three times. We are by far the leader in asset quality. We are confident that when growth recovers, the solid position should enable us to take most advantage of that cycle.

Please turn to Slide 19. All expenses this quarter dropped by 2% year-on-year and 3.2% quarter-on-quarter as shown on the chart on the top left. The main drivers for the sequential reduction in personnel expenses are related to lower variable compensation and administration expenses due to a reduction in maintenance of services among other general expenses. Through our strict cost management, our efficiency ratio reached 43.6%, well below the level posted last quarter and the level recorded by the industry.

To the right of the slide, you can see that total expenses -- that in total expenses, we substantially outperformed their main competition and that we continue to beat our peers and improvements in productivity, as shown on the bottom right.

Please turn to slide 20. It's relevant to understand how the industry operates and generate value for shareholders, which is not the only form of net income, but also incomprehensive income. It's essential to review how different market factors and funding strategies affect diverse lines of our balance sheet and for this reason, we think it's necessary to take a more complete view of the performance of financial institutions and supplement the traditional analysis of net income, with the results recorded incomprehensive income, which includes unrealized gains and losses from the fair value of available for sale portfolio and derivatives for cash flow accounting hedges, that are accounted directly against equity.

In other words, only part of the bank's treasury strategy is immediately recorded in net income. As you can see, we once again outperformed all of our peers with the year-to-date comprehensive income figure with CLP350 billion, report a return on average equity ratio of 18%. This is significantly higher than all of our peers as you can see on the chart on the left and the table on the bottom. It's also important to highlight that losses in OCI increase ROE are reducing shareholders equity. We believe that it's important to take this sincere approach when considering, analyzing total profitability for shareholders, particularly in more volatile period that can increase the risk appetite and impact adversely shareholders' equity.

A key difference of our business strategy with our main peer is our focus on commercial banking services that deliver solid customer income rather than treasury revenues, which usually involves higher risk. This can be seen on the chart on the right. It's clearly show them all the difference in terms of stock of AFS instruments that despite the potential short-term revenues, can add more volatility to the bottom line and economic value for shareholders.

Please turn to Slide 21. Before moving on to questions, I want to highlight a few key ideas. First, we are convinced of the successful vaccination program and government initiatives are bearing fruit, which has translated into better figures of activity, employment and loan volume. We expect that this scenario will generate GDP growth for 2021 of about 8.4% with a level of inflation of 4%. The better economic activity should permit us to continue posting attractive results with adequate levels of risk. Nevertheless, we think it's reasonable to expect the long-term level of NPLs to loans will cost to 1.1% or 1.2% when the fiscal support programs come to an end. We expect in terms of cost of risk to settle at around 1.1% for us in the medium-term, with a more normalized economic scenario. Due to this relief program, we expect that loans book grow around 7% for the industry, but we are confident that we should pick up market share in our base case scenario.

Finally, in terms of profitability, we are optimistic that our strong competitive advantages should continue to position us as the best long-term investment for our shareholders with the return on average equity reaching similar levels prior to the pandemic, obviously depending on the permanent impact of the crisis on the economy.

Thank you for listening and if you have any questions, we'd be happy to answer them.

Questions and Answers:

Operator

Thank you, Pablo. We will now proceed to questions-and-answers. [Operator Instructions] So our first question comes from Jorge Henderson at Santander. Caller, please go ahead.

Jorge Henderson Cubillas -- Banco Santander, S.A. -- Analyst

Hi, thank you for taking my question. It's Jorge Henderson. I only have one question, it is regarding asset quality and NPL ratio of greater companies has been increasing a little but about 1.02% there as of March, now you have 1.14%. I just wanted to know if I can get a little bit more detail on, what's happening behind this number, because I think that the industry actually stayed flat for the period, so just wanted to get some more color on that, Pablo.

Pablo Mejia -- Head of Investor Relations

In general, the asset quality of the loan book is very high and we've seen very good figures over the quarters with very good payment behavior. And all the segments, including in the segments I had loans that were renegotiated, we've seen very low levels of cost of risk and of NPLs in the terms of, for example, if we look at NPLs of customers and they had their loans reprogram, the 90-day over day loan book, it's very low, it's below 1%. So, in general, we've seen high quality loan book that can be set in operations that can increase the payout ratio. But what we think is reasonable is that the NPL ratio in the medium term should return to a level of around 1.1%. Also, if we think of cost of risk, our models are quite sensitive. So, if we exclude the additional provisions, you can see that our cost of risk is very low this quarter. So it's an important factor to take into consideration that the NPL is actually a lag indicator rather than the forward-looking indicator for the bank.

Rodrigo Aravena -- Chief Economist and Institutional Relations Officer

And hi, Jorge, this is Rodrigo Aravena here. It's important to be aware about evolution of the economy in the few days of the potential recovery of the labor market, economic growth, but also it's important to pay attention to the evolution of new measures that would be announced by the government in terms of more transfers et cetera. So that's why we've seen -- we have mentioned several times that 2021 several aspects will be a transitional year.

Jorge Henderson Cubillas -- Banco Santander, S.A. -- Analyst

Okay. Thank you.

Pablo Mejia -- Head of Investor Relations

So it was...

Operator

Thank you. So our next question -- our next question comes from Yuri Fernandes at J.P. Morgan Chase.

Yuri Fernandes -- JPMorgan Chase & Co. -- Analyst

Hi, Pablo. Good morning, everyone. Thank you for opportunity. I have a question regarding the interchange law. I guess today are the news that President Pinera has signed it, we kind of knew we had best the Congress, but what should be expect now? I guess it's about the commentary to meet and decide what mechanic it will be, but if you have any preliminary view here, how this -- what are the risks for your line here coming from the interchange? And if you have no clue, what is the amount of interchange where it is making the change today? Like what prestige or fees are coming with these from credit cards. Thank you.

Rodrigo Aravena -- Chief Economist and Institutional Relations Officer

Hi, Yuri. In several aspects, it's too early to have a more accurate estimate in terms of the final impact of new interchange rate. There was a discussion in the in the Congress and now there will be a group composed by different actors and different authorities, including the Central Bank and others. So we have to see what will happen in the future in terms of the final decision in terms of the final rate. So far, we don't have a new announcement in terms of our business model, etc., but of course, we are always analyzing different alternatives in order to continue providing the best service in terms of -- to our customers.

It's very important to analyze at the end of the day, how will be the final level of that interchange rate in order to take a final decision of new initiatives. But so far we continue working with the same model in terms of continue working with Transbank as you know very well.

Yuri Fernandes -- JPMorgan Chase & Co. -- Analyst

Perfect. And what is the amount of fees coming to you from interchange?

Pablo Mejia -- Head of Investor Relations

Can you repeat the question please?

Yuri Fernandes -- JPMorgan Chase & Co. -- Analyst

What is the amount of fees coming from interchange for you, like how much -- what is amount of revenue -- coming from revenue that is coming interchange revenues?

Pablo Mejia -- Head of Investor Relations

Total card fees -- one of the -- what I can say is total card fees in the bank should be around I mean, just one second -- as a percentage of income before taxes. It's around -- total card fees, which includes credit cards and ATMs. debit cards, and expenses related to those card fee is about 23% of net income -- sorry, of fees.

Yuri Fernandes -- JPMorgan Chase & Co. -- Analyst

Super clear, Pablo. If I may a second question on your presentation already discussed these and thanks for the detailed explanation on OCI, but regarding available for sale why do you think there is such a different strategy between you and your main peer regarding available for sale and as a result, the OCI results.

Pablo Mejia -- Head of Investor Relations

In terms of our strategy of Banco de Chile, Banco de Chile has always been the bank that's very focused on managing the bank with a strong focus on risk return and managing the bank in terms of focusing the strategy based on the core product, which is the loan -- loans, the deposits fees rather than more treasury activities. So and more cyclical periods there is periods where you can be -- some banks can take a more aggressive approach than others. We've always considered that we want to continue to grow in those core revenues, which is the customer income revenues of Banco de Chile, as we showed in the presentation. Do you want to?

Rodrigo Aravena -- Chief Economist and Institutional Relations Officer

Basically, our main intension is to continue growing in the core business revenues because it's very important for us to review the volatility of our equity value. So that's why we are more focused on continue grow in terms of revenues, in terms of net income basically from loans, from the core business without having more volatility in our net income and our equity shareholder as well.

Pablo Mejia -- Head of Investor Relations

Yeah. So I think this is important for us and everything on how we run the business. So we're very focused in the core of the business, which is lending and funding and in the size of the funding. We're also focused on maintaining low levels of risk. So trying to maintain smaller term gap in, not taking large risks, also on the funding side. So not funding long-term assets with short-term liabilities. So I think that's a clear different. So our -- we feel that our strategy is more consistent and generate greater value for our shareholders in the long term.

Rodrigo Aravena -- Chief Economist and Institutional Relations Officer

And which is especially important today considering the adverse trend that we've seen in interest rate in the market, which is even more important than ever.

Yuri Fernandes -- JPMorgan Chase & Co. -- Analyst

Got it. But looking at your balance sheet, now you start to move a little bit more security available for sale is to below your peer, right. I guess there was an increase quarter-over-quarter. Is that a change in strategy or you just well as much within the for sale and benefit from our mark in the short term because don't know higher risk. What is the rationale there like are you changing to basically say well, maybe the depreciating these marketing from our competitor, let's try to benefit more or this was a non-event, was just like a quarterly change on the available for sale this quarter?

Daniel Galarce -- Head of Financial. Control and Capital

Hi. This is the Daniel Galarce speaking. Well, basically we were waiting for a right moment in order to invest in this kind of instruments. Also, I would also very molded in relation with other competitors and other players in the banking system. So we have all of our risks, very well controlled and we are not worried about that. And in addition, this kind of investment also give us some important clarity in terms of interest rate margins. So we believe that if it's a win-win for our -- for us as well in the long run.

Yuri Fernandes -- JPMorgan Chase & Co. -- Analyst

Perfect. Thank you guys.

Daniel Galarce -- Head of Financial. Control and Capital

Thank you.

Operator

Thank you. We also have a question from Alonso Garcia, Credit Suisse. Please go ahead.

Alonso Garcia -- Credit Suisse -- Analyst

Good morning everyone and thank you for taking my question. I have two questions. My first one is on regulation. And if there is anything else besides the theme on interchange fees, if there is anything else worth mentioning on the regulatory pipeline either coming from the CMS or the current congress or even coming from the constitutional assembly and I think the question is on sustainable ROE. Year-to-date, you are at 17% in ROE, I think your guidance for the full year was 17.5%, which basically puts you at the same pre-pandemic level of 2019. So I was wondering what level you see as sustainable ROE in the coming years. And where is the potential upside or downside coming from? Thank you.

Pablo Mejia -- Head of Investor Relations

Okay. So we will start first with ROE. So we're still facing certain uncertainties for this year and factors that could affect profitability in the future. We're not sure where the critical areas for example for employment, potential growth could evolve and what could be the permanent impacts in Chile. But we're confident that we should return to pre-pandemic levels of ROE in the medium term. For this year, since we have this new higher inflation figure and for this reason, now, we're expecting a higher level of inflation. For 2021, we're optimistic that we can achieve a similar ROE that we posted in the past, which is around 18% for this year. So, I would say -- so the inflation, but also the implementation of our strategic projects that allowed us to offset some of the negative forces of extend this year. So it's not only the measure of inflation, obviously the inflation is helped increase this up our optimism to have a higher level of ROE for 2021, but it's also the result of everything we've done to offset the negative forces of lower interest rates and still we can employment. So we've been very proactive in terms of managing our cost and managing our risk, growing portfolio where we can and high-quality lower risk products such as SME loans with physical guarantees and obviously we've been affected a little bit in terms of the mix because still with all this liquidity in Chile, there has been lower demand have been anticipated in terms of consumer lending, for example, but we have seen a positive figures in terms of fee growth as well. So, that's also helping achieve this 18%. So, for the medium-term, we think it depends a little bit on the permanent impact of the crisis, but we think that we can return to the pre-pandemic ROE levels that we've had. And we'll still be the most profitable bank in Chile.

Alonso Garcia -- Credit Suisse -- Analyst

Okay. When you mentioned pre-pandemic, I mean, you referred to 2019, which it was around 17.5% or previous years where it was closer to the 19%, 20% levels?

Pablo Mejia -- Head of Investor Relations

It really depends on capital. So, you have to take into consideration what capital level because if we adjusted our capital levels in terms of prior years when we had smaller Tier 1, obviously, it can be higher, but 17%, 18% is what we're thinking.

Rodrigo Aravena -- Chief Economist and Institutional Relations Officer

I'd like to reinforce one idea, in terms of that, 2021 is not a normal year, right? So basically, we have some factors that have affected the net income, the level of risk, for example, we have extraordinarily low-level of cost of risk because we have seen a mix of the liquidity. As I mentioned in the beginning of the presentation, now we have more inflationary pressures as well. You know that the -- a normal year for Chile, in terms of inflation, is 3%. This year, we will likely have an inflation of around 4.5% or 4.4% or 4.5%. So, that's why it's important to identify the -- how important these factors have been for the bottom line of the Bank. Looking forward, we have some levels of uncertainty to discuss in terms of the potential impact of this crisis, in terms of the potential growth of the economy is not clear, what will be the level of interest rate in the future, etc.? So, what we can say now is that a range between 16% and 18% is reasonable for the long-term this year, as our Parliament, 18% is very reasonable. But what -- we'll see what's happen in the future. Not too far, our number in between 16% and 18% is reasonable.

Alonso Garcia -- Credit Suisse -- Analyst

Understood. Thank you.

Rodrigo Aravena -- Chief Economist and Institutional Relations Officer

You're welcome.

Alonso Garcia -- Credit Suisse -- Analyst

Regarding the -- bearing in mind, I mean, coming from the CMF, or current discussions in Congress or something at the Constitutional Assembly being discussed?

Rodrigo Aravena -- Chief Economist and Institutional Relations Officer

Okay. First of all, we heard the word that probably these in the next year, we will have a higher level of uncertainty, because as I mentioned at the beginning of the presentation, there will be important events where we have to pay special attention and election for a new President of Chile, election for new Congress, etc. Today there are some discussions for new regulations. One of them, for example, related to fintech, one other with open banking. We are in the process of implementation of phase-3, etc. But it's too early to provide a more accurate estimate of the impact of new regulation because most of them are still under under discussion, but in any case, we are very confident about our main strength. We have to face some more challenging scenario for the future.

Alonso Garcia -- Credit Suisse -- Analyst

Thank you.

Rodrigo Aravena -- Chief Economist and Institutional Relations Officer

You're welcome.

Operator

Thank you. [Operator Instructions] Our next question comes from Sebastian Gallego at Credicorp. Please go ahead.

Sebastian Gallego -- Credicorp Capital -- Analyst

Thank you. Good afternoon to everyone, and thank you for the presentation. I have three questions today. The first one, just a follow-up on asset quality. During the presentation, you mentioned a potential room to release provisions going forward given a more optimistic view on the Chilean economy. Could you provide a bit more detail on the specific timing on those potential revision of provisions, also considering you're -- that you have the highest coverage ratio today? Second question is if you could discuss the outlook for customer income and particularly also on NIMs? We have seen much lower NIMs for Banco de Chile compared to 2020 levels even in an environment of higher inflation. So, I'm just wondering if there could be structural reasons behind lower NIM, particularly when you're compared to your biggest competitor? And my final question is about capital and potential dividends going forward. You're clearly outpacing peers in terms of capital, in terms of coverage. Can we expect or can the market expect a higher dividend payout ratio going forward? Thank you.

Pablo Mejia -- Head of Investor Relations

Hi, Sebastian. In terms of additional provisions. So, as I mentioned in the call, we continued setting additional provisions in the quarter, CLP50 billion this quarter. Just taking the environment this quarter, where there are several signs -- where there is still a lot of uncertainty remaining, new lockdowns, etc. and we have still seen a poor levels of or high levels of contagious event, in terms of COVID. Nevertheless, as we mentioned in the presentation, if there is -- if we continue to see the signs as permanent and uncertainties tend to fall, we cannot rule out that we would released a portion of these additional allowances in the future. This has to be something that's taken as the Board of Directors and there is no exact timeframe that we can give you today as when we would release these additional provisions. So, I think -- you want to answer? Okay.

Rodrigo Aravena -- Chief Economist and Institutional Relations Officer

Sorry. Yes. Just to clarify, in terms of the potential release of this provision, we don't have a SEC base for that. It is still under evaluation. It is a decision that has to be taken by the Board of Director. So, we don't have a specific target, specific timeline, sorry for that.

Pablo Mejia -- Head of Investor Relations

Well, I think what's important is to see permanent improvements. And the economy globally, locally and reduce reductions of uncertainty and normalize levels of risk.

Rodrigo Aravena -- Chief Economist and Institutional Relations Officer

Basically, we have more information in order to estimate the consolidation of a different trend to take the decision. So, that's why we don't have a specific date for production.

Pablo Mejia -- Head of Investor Relations

And in terms of your second question of net interest margin. What we've seen is a period of low growth where our -- since 2020, the entire industry has been impacted in terms of consumer loans, higher margin price have decreased in size and proportion of the total loan portfolio affecting the spread. Also the overnight rate affects the funding in terms of our demand deposits. So, that has a negative effect as we pricing in the portfolio. And also I think it's very relevant to take into consideration what we mentioned earlier, in terms of risk management. So, in terms of risk management, it's not only how the assets move, but also how we decide to fund and manage the risk in our Bank. So again, in terms of OCI one way that you could increases by taking large provisions and available-for-sale securities have increased your net interest income during this time, with very low cost of increases, NII at least, in terms of -- when you take into consideration the low cost of funding, but it can have a negative impact in terms of equity, but also the term gapping. So, we also presented in the slide that we've managed our term gapping during the year in order to maintain our gaps in terms of how we fund our portfolio, the longer-term assets, with longer-term liabilities, which is more expensive but it's lower risk. I think those are relevant to mention. Going into the future, I think it's important to mention that we're the bank that has the strongest relationships, the best customer segment in Chile, which should continue outperforming our peers in terms of our key market segments where we want to continue growing in SME loans and upper-income individuals. And having a very good funding base for our bank, a diverse funding base locally and abroad in terms of institutional investors for the bond market.

Rodrigo Aravena -- Chief Economist and Institutional Relations Officer

Yeah. To reinforce one idea that, since we are a commercial bank and since we are expecting stronger consumption growth in the Q2 which should translate into a better consumer loans as well, it could have a positive impact as well in the -- in that -- in the medium term. Also important to keep in mind that the central bank began as a cycle, since it began normalization of the interest rates. So, it's very likely that the final picture for the next year will be market by bidders and sanction growth in terms of loan, higher level of interest rate. Probably as I said in the beginning of the presentation, there is an upward bias in terms of inflation, which could also have a positive impact in terms of NIM. So, that's why we are confident in terms of preserving our robust level of mean in the near future.

Pablo Mejia -- Head of Investor Relations

Okay. In terms of the dividend policy, we think that we have an appropriate level of payout ratio, based on our base case scenario for the future. Obviously, this can be evaluated. But today, we think it's an appropriate level of payout.

Sebastian Gallego -- Credicorp Capital -- Analyst

Perfect, thank you very much.

Pablo Mejia -- Head of Investor Relations

You're welcome.

Operator

Thank you. We have no more questions, so I will now hand back to the Banco de Chile team for closing remarks.

Pablo Mejia -- Head of Investor Relations

Thank you for joining the call and we look forward to speaking with you on our next quarter results. Thanks. Good bye.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Rodrigo Aravena -- Chief Economist and Institutional Relations Officer

Pablo Mejia -- Head of Investor Relations

Daniel Galarce -- Head of Financial. Control and Capital

Jorge Henderson Cubillas -- Banco Santander, S.A. -- Analyst

Yuri Fernandes -- JPMorgan Chase & Co. -- Analyst

Alonso Garcia -- Credit Suisse -- Analyst

Sebastian Gallego -- Credicorp Capital -- Analyst

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