Operator: Good afternoon and welcome to Banco de Chile's Q3 2026 results conference call. If you need a copy of the management financial review, it is available on the company's website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer, Mr. Pablo Mejia, Head of Investor Relations, and Daniel Galarce, Head of Financial Control and Capital. Before we begin, I would like to remind you that this call is being recorded and the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risk 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: Good afternoon, everyone. Thank you for joining this quarterly conference call, where we will discuss the performance of the bank as well as the main trends observed in the business environment. We closed another solid quarter, delivering net income of CLP 288 billion and a return on average equity of 19.9%, well ahead of the industry. Over the first nine months of the year, net income reached CLP 947 billion, up 2.2% year-on-year. Today, we are raising our full-year profitability and efficiency guidance. During the quarter, we also regained market share in commercial loans, kept our leadership in local currency demand deposits, and maintained the strongest capital position among our main peers, with a CET1 ratio of 14.1%. In addition, we continue to make progress in digital adoption, new commercial alliances, productivity, and sustainability, which we will cover throughout the presentation.
Rodrigo Aravena: As in previous conference calls, before reviewing our performance, I'd like to briefly discuss the macroeconomic environment. Please turn to slide three. The Chilean economy has experienced a temporary slowdown in 2026. GDP contracted 0.8% year-on-year in Q3 after a 0.2% decline in Q2. As the chart on the upper left shows, this weakness has been concentrated in mining, which fell 12.9% year-on-year in Q3, while the non-mining economy expanded 1.1%. The decline in mining was also affected by weather-related disruptions associated with El Niño, bringing production to its lowest level since the mid-1990s. While declining in the mineral grade remains a structural challenge, the El Niño effect reinforces our view that much of the recent weakness is transitory. The chart on the upper right illustrates how far these two parts of the economy have decoupled.
Rodrigo Aravena: Based on the seasonally adjusted IMACEC, mining activity fell 11.5% between December 2025 and September 2026, while the rest of the economy has increased 0.8% over the same period. Other temporary factors have also affected the economy and the labor market. These include the fiscal adjustment implemented so far this year, with a marked slowdown in government spending growth and a decline in household real disposable income resulting from higher inflation. The labor market, shown on the bottom right, has reflected this broader slowdown with the usual lag. The unemployment rate reached 9.8% in the three months ended in September, 150 basis points higher than a year earlier, as employment fell 1.1%, while the labor force grew 0.3%. Please move to slide 4. Despite the slowdown, there are good reasons to expect domestic demand to recover in coming quarters.
Rodrigo Aravena: On the consumption side, the chart on the upper right shows that consumer imports have accelerated in recent months. Imports of durable goods grew 27.8% year-on-year in the three months to September, an encouraging signal for household spending. On the investment side, shown on the left, gross fixed capital formation is not expected to grow this year, but this weakness is entirely explained by construction. Machinery and equipment investment has remained dynamic since last year and continued to expand in Q2, growing 3.7% year-on-year, while construction declined 2.4%. This trend reflects both the replacement of existing capital goods and companies preparing for a better economic cycle ahead. At the same time, this weaker economic cycle has helped improve macroeconomic balances, particularly by closing the current account deficit.
Rodrigo Aravena: As shown on the bottom right, the current account moved from a deficit of 2% of GDP in the 12 months to Q3 2025 to a surplus of 0.2% in the 12 months to June 2026. This correction provides a more balanced starting point for the recovery in economic activity. Please move to the next slide. We expect investment to lead growth in 2027 for two reasons: our pipeline of projects and the new reconstruction law. On the right, the investment pipeline registered by the Capital Goods Corporation, or CBC, for the next three years has reached a record of almost $100 billion, more than doubling since 2022. Mining accounts for the largest share, accounting for 40% of the total.
Rodrigo Aravena: This is particularly relevant for offsetting the negative impact of declining mineral grades and addressing the structural challenges the mining sector has faced in recent years. Investment in public works has also increased in the pipeline, which could provide a further boost to employment in the years ahead. This pipeline should be further supported by the reconstruction law, which was enacted on 9 October, as summarized in the table on the left.
Rodrigo Aravena: Its main measures include a gradual reduction in the corporate income tax rate from 27% to 23% by 2029, improving project returns, a permitting reform designed to shorten approval time and unlock delayed projects, and a tax invariability regime that removes an important source of uncertainty by protected investment against potential tax increases by future government. The law also includes targeted measures on reconstruction, employment, and capital market taxations. While these measures are not expected to have an immediate impact on activity, they should improve business sentiment and pave the way for a stronger growth for next year.
Rodrigo Aravena: Taken together, we see this investment boost as structural rather than cyclical. By expanding productivity capacity and addressing long-standing constraints, it could lift Chile's trend GDP growth by 50 basis points over time. Please move to slide 6 to review our baseline scenario. We have revised our GDP growth forecast for 2026 to 0.4% from 1.3% in our previous call. This revision reflects the weaker-than-expected mining output this year, rather than a deterioration in the outlook. In fact, our forecast assumes a gradual recovery starting in Q4, and for 2027, we expect GDP to grow 3%, led by investment, which should expand 7.5% and supported by a 2.8% increase in consumption.
Rodrigo Aravena: On prices, annual inflation reached 4.1% in September, above the central bank's 3% target, mainly because of high international oil prices, which lifted the energy component by 10.2% year on year. Core measures, however, remains more contained, with CPI excluding volatile items at 3.2%. We now expect inflation to close 2026 at 4.7%, up from 4% in our previous forecast, and to converge to 3% in 2027 as energy-related effects fade and a slack in the labor market persists.
Rodrigo Aravena: In this context, we expect the central bank to keep the monetary policy rate at 4.5% through the end of this year and during 2027, although uncertainty remains unusually high. The main source of uncertainty continues to come from abroad, particularly the conflict in the Strait of Hormuz, which could keep energy prices elevated for longer, affecting growth and inflation. Locally, the evolution of the labor market remains one of the key variables to monitor. Before moving to the bank's results, I'd like to review the main trends in the local banking industry. Please move to slide 7.
Rodrigo Aravena: The industry continues to generate solid earnings in a context of weak credit demand. In the nine months ended September, as shown on the upper left, the banking system recorded net income of CLP 4.5 trillion, 6.9% higher than the same period of 2025, mainly supported by the effect of high inflation on indexed balance sheet positions. On a quarterly basis, net income moderated to CLP 1.2 trillion in Q3, with a return on average equity of 12.2%, following an exceptional Q2 driven by inflation and due to non-recurring losses recorded by a local bank on the sale of part of its foreign loan portfolio. Asset quality has remained broadly stable. As shown on the upper right, the 90-day NPL ratio stood at 2.5%, with a coverage ratio of 139%, including additional provisions. Credit activity, however, continues to be subdued.
Rodrigo Aravena: The loans-to-GDP ratio on the bottom left stands at 74%, well above the 93% peak rate before the pandemic. As of September, industry loans totaled CLP 260 trillion, growing 5.2% in nominal terms and 1.2% in real terms compared with September 2025. By product, commercial loans grew only 0.4% in real terms, held back by lower trade finance balances, while consumer loans grew 1.2% and residential mortgage 2.2%, the latter supported by government programs for lower and middle-income homebuyers. Looking forward, we have updated our baseline scenario for the industry. Due to high expected inflation, we now forecast nominal loan growth of approximately 5% by December 2026, compared with 4% last quarter, and we have raised our net interest margin estimate to a range between 4% to 4.2% from 3.6% to 3.8%.
Rodrigo Aravena: On asset quality, we expect NPLs at the upper end of the 2.3% to 2.4% range and credit loss expenses between 1.2% and 1.3% on average loans. In this environment, Banco de Chile continues to outperform the industry. Now, I will turn the call over to Pablo to discuss Banco de Chile results.
Pablo Mejia: Thank you, Rodrigo. Please turn to slide 9, which summarizes our strategy built to deliver sustainable results. Our strategy rests on three pillars: customer centricity, efficiency and productivity, and sustainability. These pillars shape the way we work, how we allocate resources, and how we create value for our stakeholders. They translate into six core priorities shown in the center of the slide, from strengthening commercial activity and scaling digital solutions to developing culture and talent. Our midterm targets are shown at the bottom. We aim to lead the industry in profitability, in local currency demand deposits, and in commercial and consumer loans, while keeping a cost-to-income ratio at or below 40%, an internal net promoter score of at least 73%, and a top 3 position in corporate reputation.
Pablo Mejia: As of September, we are ahead of our targets in customer satisfaction with an NPS of 77.5%, and in efficiency with a year-to-date cost income of 35.9%, while remain the leader among local banks, private banks, and local currency demand deposits with a 19.9% market share, and continue to gain market share in commercial loans. Please turn to slide 10, which summarizes our financial and commercial highlights. The metrics at the top of the slide provide an overview of the quarter, which we will discuss in more detail during the presentation. Let me highlight three points. First, loan growth accelerated to 3.5% year-on-year on a pro forma basis, led by commercial loans. Second, the net interest margin reached 4.4%, while cost of risk remained contained at 0.96%.
Pablo Mejia: Third, the efficiency ratio of 39.1% was temporarily affected by a non-recurrent bonus related to collective bargaining process completed this quarter, as well as inflation-driven salary adjustments. As a result, net income reached CLP 288 billion, representing a return on average capital of 21.4% and a return on average equity of 19.9%. In the middle of the slide, we highlight several commercial and operational advances achieved so far this year. Commercial momentum continued to improve. Originations of commercial loans to SMEs grew 18% year-on-year. Outstanding commercial credit balances to SMEs increased 5%, and total commercial loans rose 4%. Customer acquisition also remained strong. Origination of digital current accounts increased 37% year-on-year, and openings of Plan Emprende accounts for small businesses rose 10%, while we launched a fully digital onboarding process for our Plan Emprendedor for SMEs.
Pablo Mejia: We also kept expanding our value proposition through new business initiatives, including B Startup, our service model for startups and technology-based companies, our partnership with fintech Fingo to broaden SME factoring solutions, our alliance with Despegar to enhance our travel loyalty program, and Visa Direct, which enables fast and fully digital international transfers. On efficiency, digitalization continued to drive productivity gains, complemented by strategic negotiations with suppliers, including IT providers and the optimization of our infrastructure with 4.6% fewer branches than a year ago. At the bottom of the slide, we present our updated guidance for 2026. Given the weaker economic environment, we now expect nominal loan growth in the range of 5% to 6%, compared with approximately 6% previously. Due to the higher expected inflation, we have raised our net interest margin forecast to 4.8% from 4.6%.
Pablo Mejia: Cost of risk should reach around 1.2%, including the additional allowances established in May, while our efficiency ratio should improve to around 36% from 37%, previously driven by stronger revenue generation and cost control. As a result, we project a return on average capital and reserves of 22%, compared to the 21% to 22% range we provided last quarter. This guidance already incorporates an income tax charge of CLP 68 billion that we will recognize in October related to the impact of the lower corporate tax on the deferred tax assets, but excludes any potential changes in additional provisions. Please turn to slide 11 to discuss the evolution of our loan portfolio.
Pablo Mejia: Total loans reached CLP 40.8 trillion in September, growing 1.2% quarter on quarter and 2.9% year on year, or 3.5% excluding the one-time credit card migration effect of CLP 210 billion we explained last quarter. The main driver this quarter was commercial lending. Commercial loans increased 2.7% compared to June and 4% year on year, reaching CLP 21 trillion. Compared with December 2025, they grew 7.8%, an annualized pace of 10.5%.
Pablo Mejia: Most of this expansion came from our corporate banking unit, where loans increased 14.1% year to date, supported by commercial credits to concessions, natural resources, and retail sectors, as well as 90% year-on-year increase in factoring loans. As a result, our market share in commercial loans reached 15.7% in September, a gain of 30 basis points since December. In personal banking, growth has been more moderate. Consumer loans rose 4.1% year on year on a pro forma basis, in line with inflation, while residential mortgage loans increased 2.5%, reflecting our selective approach to growth in this product, where we are prioritizing better lending spreads over volumes. The chart on the bottom left shows growth by segment.
Pablo Mejia: SME loans increased 4.5% year-on-year, or 9% when excluding the amortization of FOGAPE loans granted during the pandemic, while wholesale loans grew 4% and loans to individuals grew 1.9% or 2.9% on a pro forma basis. The chart on the upper right shows a balanced composition, with retail banking representing 65.7% of total loans and wholesale banking the remaining 34.3%. In addition, the chart on the bottom right shows that our commercial portfolio is spread across a wide range of economic sectors, with no single sector representing more than 20% of the total. This well-diversified mix allows us to capture opportunities across customer segments and economic cycles without depending on a single source of growth. This quarter is a good example, as a recovery in corporate lending more than compensated for the slower growth in personal banking.
Pablo Mejia: Please turn to slide 12. This growth is supported by a solid funding and capital base, one of the most important competitive advantages that we have. As shown on the upper left, loans represented 72.9% of our total assets. On the funding side, demand deposits accounted for 26% of the total liabilities and equity, complemented by time deposits, long-term debt, and our strong capital base. The chart on the upper right shows that our ratio of demand deposits to total loans reached 35.7%, the highest among our main peers and close to the levels seen before 2020, which is one of the main reasons behind our lower funding costs and superior margins. On a pro forma basis, our demand deposits grew 3.1% year-on-year, driven by retail banking, where they rose 7.9%.
Pablo Mejia: This reflects the strength of our value proposition for current account holders and the growth of our FAN ecosystem, which added 444,000 new account holders over the last 12 months. As a result, as shown on the bottom left, as of September, we continue to lead the industry in local currency demand deposits among private banks with a market share of 19.9%, 120 basis points ahead of the closest competitor. Finally, our capital position remains the strongest among our main peers. As shown on the bottom right, our total capital ratio reached 17.9%, including the CET1 ratio of 14.1%, well above regulatory requirements and the industry average. This gives us ample room to finance the loan growth we expect as economic activity recovers while continuing to create value for our shareholders.
Pablo Mejia: In short, the combination of a leading deposit franchise, a diversified funding structure, and a best-in-class capital position remains a key differentiator for Banco de Chile. Please turn to slide 13. This solid balance sheet translates into consistent revenue generation and superior margins. Total operating revenues reached CLP 758 billion in Q3, a 3% increase compared to the same period last year. Compared with Q2, revenues normalized as quarterly inflation, measured by the UF variation, declined from 2.5% to 0.6%. For the first 9 months, operating revenues amounted to CLP 2.4 trillion, 6.6% above last year. The year-on-year increase in the quarter was mainly explained by higher customer income coming from loans and fees, together with non-recurring income of CLP 10.9 billion, mainly related to the sale of Nexus, our former credit card processor, which more than offset lower treasury revenues.
Pablo Mejia: As a result, our operating margin, shown on the right, reached 6.6% year to date, well above our main competitors. More importantly, this leadership is not a one-off. It has been consistent over the years, reflecting a business model that combines stable and resilient customer income with the ability to capture opportunities from changes in market conditions. Please turn to slide 14. Let me now go into the drivers of our net interest margin. Our NIM reached 4.4% in Q3, up from 4.3% a year earlier, and 4.7% year to date, well above our peers. As shown on the upper left chart, net income totaled CLP 559 billion in Q3, broadly stable year on year, reflecting two opposing trends.
Pablo Mejia: On the one hand, customer financial income increased 1.4% year on year to CLP 477 billion, primarily supported by loan growth. Income from loans rose CLP 14.5 billion, or 5.5%. Consumer loans were again the main contributor, adding CLP 7.3 billion, driven by a 39 basis point increase in lending spreads. Commercial loans added CLP 5 billion, benefiting from a shift in the mix towards higher spread loans.
Pablo Mejia: These drivers more than offset the lower contribution from demand deposits, given lower short-term interest rates. On the other hand, non-customer financial income decreased 9.7% year on year. This was mainly explained by lower treasury revenues, as the increase in local long-term interest rates during the quarter, with five-year peso rates moving from 5.2% to 6.1%, affected the valuation of fixed income securities, together with a high comparison base from the gains on the sale of securities in Q3 2025. The chart on the bottom left shows the evolution of our UF gap in the banking book, which reached UF 9.1 trillion in September. This position includes both our structural exposure, which protects the real value of our shareholders' equity, and the directional positions taken by our treasury.
Pablo Mejia: To put this into perspective, a 100 basis point change in inflation translates into CLP 91.1 billion in net interest income, while a 100 basis point change in interest rates represents approximately 30 basis points in net interest margin once all assets and liabilities are fully repriced in about three years. In summary, growing customer income and a leading funding base continue to support margins that consistently outperform our peers. Please turn to slide 15. Fees are another recurring source of revenues, supported by our growing customer base and the contribution of our subsidiaries. Net fee income reached CLP 174 billion in Q3, an 8.4% increase year-on-year, bringing the nine-month total to CLP 514 billion, up 8.6% from last year.
Pablo Mejia: This performance is rooted in our expanding customer base. We reached 3 million active customers, 2.7 million FAN accounts, and 1.7 million current accounts, while maintaining the highest standards of service quality. The main drivers are listed on the left. Fees from transactional services increased CLP 3.8 billion, or 7.1%, including CLP 2.4 billion from our acquiring and processing business as Banchile Pagos continues to execute its business plan, CLP 0.8 billion from current accounts and overdrafts, supported by 30,000 new current accounts opened during the quarter, among others. Also, mutual fund fees rose CLP 3.6 billion, up 8.2%, in line with an 11% increase in average assets under management, as customers continue to favor balance funds and equity funds.
Pablo Mejia: Likewise, fees from financial advisory services increased CLP 2.3 billion, reflecting our participation in relevant transactions, including M&A advisory in the telecom sector. To a lesser degree, credit-related fees grew CLP 1.3 billion due to higher loan prepayments, and securities brokerage added CLP 0.9 billion. The chart on the bottom left shows the diversification of our fee base, where transactional services represent 32.6% of total fees, followed by mutual funds with 27.4% and insurance brokerage with 15.1%.
Pablo Mejia: Finally, the charts on the bottom right show our fee margin over interest-earning assets, which reached 1.4% year-to-date, ahead of our main peers, reflecting the strength of our cross-selling capabilities. Please turn to slide 16. Prudent credit management continues to keep expected credit losses under control. As shown on the left, ECLs reached CLP 96 billion in Q3, equivalent to a cost of risk of 0.96%, 21 basis points below the industry. Excluding the CLP 50 billion in additional provisions established in May, ECLs declined 16.2% compared to Q2. Compared to Q3 2025, ECLs increased 21.2% from a cost of risk of 0.8%.
Pablo Mejia: This increase was mainly related in retail banking, where delinquency rose from 1.87% to 2.15% over the last 12 months, reflecting higher unemployment and the effect of inflation on household disposable income. To a lesser extent, it also reflected lower-than-normal ECLs in Q3 2025, together with greater exposure to cross-border loans. These effects were partly offset by higher recoveries of written-off loans, which increased 62% year-on-year. Turning to the chart on the upper right, our NPL ratio reached 1.7% in September, below our peers, and remains the lowest among our main competitors. Our coverage level remained robust. Loan loss allowances cover 122% of past-due loans, a ratio that rises to 221% when additional allowances are included, providing a meaningful buffer to absorb potential deterioration without compromising our earnings capacity.
Pablo Mejia: The chart on the bottom right shows our net operating margin reached 5.6% year-to-date, the highest among our peers, reflecting our strong revenue generation and disciplined credit management. Looking ahead, we expect delinquency to stabilize and gradually improve as the economy recovers, although the labor market may continue to weigh on individual portfolios in the coming months. Please turn to slide 17. Cost discipline and digitalization continue to enhance our operational efficiency. Total operating expenses reached CLP 296 billion in Q3, a 7.2% increase year-on-year. This increase was mainly explained by inflation-driven salary adjustments, a non-recurring expense related to the recognition of a part of a special bonus associated with the collective bargaining agreement reached with most of our unions, and a comparison-based effect of Banchile Pagos.
Pablo Mejia: The chart on the bottom left is a breakdown of operating expenses adjusted for these bonuses and the comparison-based effect of Banchile Pagos. As you can see, the rise in expenses is more moderate. Looking at the first nine months, total expenses reached CLP 873 billion, which represents a nominal increase of 4.1% or just 0.1% in real terms. Our year-to-date efficiency ratio improved 87 basis points to 35.9%. These results reflect the benefits of a broad set of initiatives listed on the left. These include the redesign of our service model and branch network with 4.6% fewer branches than a year ago, the automation and digitalization of customer processes, the rationalization of IT infrastructure, cloud and licensing, including 13 technology initiatives deployed this year, and improved vendor management and organizational simplification. Productivity indicators reflect this progress.
Pablo Mejia: Our loans per employee ratio increased 3% to CLP 3.7 billion, and our fees-to-expense ratio rose 245 basis points to 59%, showing our ability to support business growth without a proportional increase in costs. Please turn to slide 18. As we have shown throughout this presentation, our core competitive advantages continue to deliver solid profitability. Net income reached CLP 288 billion in Q3, and for the first nine months, net income amounted to CLP 947 billion, up 2.2% year-on-year. These fundamentals continue to translate into superior year-to-date returns. Our return on average equity reached 21.9%, and our return on average assets, 2.3%, both well above industry levels and among the highest in the Chilean banking system. Importantly, these results do not depend on a single business line.
Pablo Mejia: They reflect a diversified franchise supported by a leading funding base, growing fee generation, sound asset quality, and a steady focus on productivity. Please turn to slide 19. Before taking your questions, I would like to highlight four key messages from this presentation. First, on the economy. We expect an investment-led recovery after a transitory slowdown amid inflation that remains elevated. We forecast GDP growth of 0.4% for 2026, mainly affected by mining, and a rebound of 3% in 2027, supported by a strong investment pipeline and the reconstruction law. We expect the monetary policy rate to remain at 4.5% through 2027.
Pablo Mejia: Second, on profitability, our core competitive advantages continue to drive returns well above the industry. We delivered net income of CLP 288 billion this quarter, with a year-to-date return on average equity of 21.9%, and we raised our return on average capital guidance to 22% for the full year. Third, on efficiency and productivity, ongoing digital transformation and cost discipline are generating lasting gains. Our year-to-date efficiency ratio reached 35.9%, and we have improved our full-year guidance to 36%.
Pablo Mejia: Finally, on growth, superior asset quality and capital adequacy provide the basis to accelerate loan expansion. With a cost of risk this quarter of only 0.96%, the lowest NPL ratio among our peers, and a CET1 ratio of 14.1%, we are well-positioned to capture recovering corporate lending that we are already seeing and that we expect to strengthen in 2027. Our strategy is straightforward: serve our customers well, operate efficiently, manage our balance sheet prudently, and maintain a solid capital position. This quarter's results reflect the consistency of that approach. Thank you, and if you have any questions, we would be happy to answer them.
Operator: Thank you. We will now move to the question-and-answer session. If you would like to ask a question, please press star 2 on your phone and wait to be prompted. If you are dialed in via the web, you can also ask a voice question. Our first question comes from Ernesto Gabilondo from Bank of America. Your line is open. Please go ahead.
Ernesto Gabilondo: Thank you. Hi, good morning, Rodrigo, Pablo, and Daniel. Thanks for the opportunity to ask questions. I have a couple from my side. The first one is on your loan growth expectations for next year. We have seen this year the economy and unemployment continue to be weak, but as you mentioned, there are hopes and expectations that next year the economy could be growing again 3%, especially supported by the execution of the reforms. How do you see loan growth for next year? Do you think it could be returning to the high single digit or low double digit? If you can walk us through the year, it will be very helpful. My second question is on NIMs. There are expectations of low inflation, but at the same time, you have going to accelerate loan growth.
Ernesto Gabilondo: How do you see the evolution for NIMs next year? I was a little surprised that you are expecting stable interest rates despite the war continues, and that maybe could translate into higher oil and gas prices. I just wanted to hear your thoughts on this. Thank you.
Rodrigo Aravena: Hi, Ernesto Gabilondo. Thank you very much for your question. This is Rodrigo Aravena, and I am going to take the first part of the question, and then Pablo Mejia here is going to go to the second part. Let me just put on the table a couple of ideas about the Chilean economy. First of all, we are aware of the lower-than-expected GDP growth this year. However, it is very important to keep in mind that most of the slowdown in Chile has been explained by temporary factors, including, for example, the important adjustment in the mining sector.
Rodrigo Aravena: At the same time, when we analyze the pipeline of investment in Chile, most of the new projects are mining projects, which will be positive for the perspective for the mining activity in the next year, especially considering that the only way to offset the deterioration in the mineral grade is by increasing the investment in the sector. Also, it is very important to be aware about the important fiscal adjustment that we have seen during this year. The total spending growth this year between January and September was 1.2% in real terms, which is well below the levels that we saw in previous years. Also, the important increase in inflation during this year, which has a negative impact in the disposable income for the households. However, for the next year, we are expecting a normalization.
Rodrigo Aravena: Our baseline scenario is based on the expectation of more normalized or lower levels of international oil prices, which has an important impact on inflation. Also, we are expecting a strengthening of the Chilean peso because of the better expectation for the Chilean economy. That is why we are expecting an inflation rate falling to a number of around 3%. We can rule out an upward bias in our forecast for inflation for the next year, but when we consider the normalization in oil prices, the strengthening in the Chilean peso, consistent with a lower inflation rate for the next year. In this environment, we are not expecting changes in the interest rate. We are aware of the higher-than-expected inflation this year. However, we have to remember that the central bank has a target which is based in a 2-year horizon.
Rodrigo Aravena: That is why if this increase in inflation is only temporary, led by supply factors rather than demand factors, we think that there is room to continue waiting for the evolution of the economy for the central bank. My last thoughts on your question is that we have a positive view for the Chilean economy for the next year, mainly in terms of the key driver, because we are expecting that the main driver of the growth in 2027 will be investment. That is why also we have a more positive view about the recovery in loan growth. This is our main basis for the baseline scenario. Pablo.
Pablo Mejia: Thank you, Rodrigo. Ernesto, in terms of loan growth expectations, what we are seeing. Well, I think it is important to take into consideration that we are currently in the process of budgeting, so it is something that we are evaluating at this time. But in the preliminary, what we are seeing is a more active year, like Rodrigo said, in investment and activity in Chile, and this should begin to drive loan growth. Up to date, what we have seen is very weak demand in all customer segments, driven by the high inflation, also in the consumer segment. In the corporate segment, all these years of uncertainty has led to less demand in commercial lending.
Pablo Mejia: For next year, what we are expecting for Banco de Chile is that we should be growing, what we can say is, we should be growing above the level of the industry, gaining market share, especially because of our capital position. This allows us to have a strategic position in order to retake growth in the future cycles, in this current future cycle. In terms of net interest margin, as Rodrigo mentioned as well, we are ending the year at a very high level of inflation, higher than expected, 4.7% versus what we are expecting for next year at 3%. So this has an impact, but it is a limited impact because we are in a year that will have greater volumes, so more activity, a better mix in terms of our total asset mix, improved spreads, and steeper yield curves.
Pablo Mejia: There is a limited impact, which we think will be offset by growth in the portfolio. So, maybe 20 basis points, but no more than that in terms of the impact for or around that range for the impact of lower inflation.
Ernesto Gabilondo: Perfect. Thank you very much, Rodrigo and Pablo. Just a follow-up in terms of your loan growth expectations. Not that you were giving a guidance, but this year, loan growth was around 5%. As you mentioned, you expect this year to be growing above the industry. You are seeing better economic activity supported by reforms. So, should we think it could be more maybe going from a mid to a high single digit next year? Would that be reasonable?
Pablo Mejia: We are currently in the budgeting process, so we are evaluating. What we think is reasonable is more activity in terms of 2027 loan growth and picking up speed in the following years as well. So it should be a gradual improvement.
Rodrigo Aravena: So probably in the long term, it is reasonable to expect a higher acceleration in terms of the loan growth. But we need to see some improvement in the labor market, in activity, the reform that was approved in the Congress. It is going to take a positive impact in the economy in the future. So probably in the next years, we are going to see a loan growth in high single digits, but we are aware about the transitional period this year. But we are more optimistic for the next year because of the recovery in investment. But the trend is clear. We have good reason to expect a positive trend in terms of the loan growth, but we are expecting a better number for the next year for the industry and for us as well.
Rodrigo Aravena: But in the long term, probably, we are going to see a more stable growth of high single digits in nominal terms.
Ernesto Gabilondo: Perfect. Now, very, very clear. So, a gradual improvement trend throughout the year, subject to the labor market and the execution of the reforms. Thank you.
Rodrigo Aravena: Thanks. You are welcome.
Operator: Thank you very much. Our next question comes from Juliana Ohara from Goldman Sachs. Your line is open. Please go ahead.
Juliana Ohara: Hi, Rodrigo, Pablo, Daniel. Thank you for taking my question. I have 2. The first one, if you could share more color on the transition as CEO with Eduardo stepping down and Mr. Edna stepping up next year. I wanted to get a bit more on the strategic thinking and the timing. That is the first one. The second one is you have an efficiency ratio target, a midterm efficiency ratio target of 40%, but you are already running below that level. Is it fair to assume that you have a more aggressive long-term target since you are already below that level, or should we expect maybe an increase in the next few years since you have to invest more from the growth? Thank you.
Pablo Mejia: Can you repeat the second question again? Sorry, I cut off.
Juliana Ohara: The second question?
Pablo Mejia: Yes.
Juliana Ohara: I was just wondering if we should see an increase in the efficiency ratio in the next few years, given that your midterm target is at 40% or below, but you are already running below that level. That is the question.
Pablo Mejia: Okay. So, taking the second question, in terms of the efficiency ratio, what we have been seeing over the last decade and the last period is a significant improvement of Banco de Chile in terms of efficiency and productivity across the bank. So, we have been implementing a lot of AI initiatives, digital initiatives, digitalizing front and back office operations, reducing the branch network. All of this has led to a significant improvement in efficiency, and also one of the main reasons why our bottom line of many incremental gains is generating this attractive ROE. Going forward, it is reasonable to expect that the levels of efficiency that Banco de Chile can maintain are in line with the previous years below 40%.
Pablo Mejia: So, it is reasonable to take that into consideration when analyzing Banco de Chile in terms of efficiency ratios. For next year or the following years, it is reasonable also to expect a cost base growing slightly above the marginally above expenses, and mainly due to this new cycle, which should be much more positive in terms of growth and business activity, which should generate stronger operating income. Rodrigo will take the second question.
Rodrigo Aravena: Yes. Oh, thank you, Pablo Mejia. So, actually, the first question.
Pablo Mejia: Oh, the first question.
Rodrigo Aravena: Yeah, the first question. There will be a transitional period as we announced in the material facts in the last week. As you mentioned, Hernán Arellano, who is in charge of the corporate division today, is going to take office on 2 April. It is very important to highlight here that we have a structure in the bank which has a very strong corporate governance, with a very important involvement of the board in different meetings, committee, and actually in the annual report, we have a very important chapter that describes all the activities where the board is involved. Basically, what I am trying to say is that the strategy of bank, the management, the performance, is not based only in one single person. We have a very important structure in the governance in the bank.
Rodrigo Aravena: That is why we do not have relevant changes in terms of our strategy, which has been based on customer centricity, important advances on efficiency, important improvement in terms of the sustainability, ESG, et cetera. We do not have important changes to announce here. Also, we have to keep in mind that the bank has important long-term strength based on the customer base, the demand deposit base, the liability, et cetera. We can mention here that the bank has all the basis to continue delivering important performance in profitability in the long term.
Juliana Ohara: Got it. Thank you.
Rodrigo Aravena: Thanks.
Operator: Thank you very much. Our next question comes from Daniel Vaz from Banco Safra. Your line is open. Please go ahead.
Daniel Vaz: Hi, Rodrigo. Hi, Pablo. Hi, Daniel. Congrats on the results. I have a couple questions here as well. First, on the mortgage lending, you mentioned a lot of discipline this year, and now you're doing next year expectations of inflation. Do you have any return threshold that would encourage you to accelerate leading to the possibility of the deposits or customer relationship, or is it in any form of acting? That's the first question. The second one, if you can remind us your CET1, right? So your CET1 is at 14.1%. At what capital range do you want to operate within? In that context, what would need to happen for you to increase the shareholder distribution? Thank you, guys.
Pablo Mejia: Hi. Thanks. In terms of mortgage lending, I think the most important things that have been occurring in the mortgage lending product is the different reforms that are being discussed and approved, which is activating this product. Also, the unemployment rate, as Rodrigo Aravena has explained, and what's happened in terms of the financial position of customers, is very important to take into consideration for the demand and growth of this product. We don't have those specific targets that you mentioned, but what we are seeing is that it's a product which should have greater demand in the coming years.
Pablo Mejia: It should be an industry which is reactivating thanks to these different reforms, an industry which has been impacted negatively from the high interest rates, high inflation, and the high unemployment rate, which has made it more challenging for customers to obtain mortgage loans in Chile. Going on in the future, we should see an improvement in the economy with lower unemployment, a stronger wage bill, which should generate greater demand for this product. So it's a product that we're a universal bank, that we attend all segments of the population, but our key target areas is commercial loans, as we've mentioned in the long-term guidance, to be number 1 in commercial loans and number 1 in consumer loans.
Pablo Mejia: So we don't have aspirations to be number 1 in this product. It's a product that we have as we're a universal bank. Daniel Galarce will answer the question regarding capital.
Daniel Galarce: Hi, this is Daniel. Well, as you mentioned, today we have a CET1 ratio of about 15%. Of course, as we have mentioned in the past, we expect to use our current capital buffers to sustain loan growth in the coming years, particularly in a more positive economic environment, as described by Rodrigo throughout the presentation. Saying that, overall, we expect that in the normal course of business to maintain a capital gap of about 2% over regulatory capital limits, while, of course, keeping a sticking to the 60% dividend payout ratio in the long run, which should allow us to grow in terms of balance sheet of about 7% to 8% per year in nominal terms. This is basically the threshold in which we want to float in the long run in terms of capital metrics.
Pablo Mejia: Maybe one thing to add is that the dividend payout ratio. It is dependent on the expectations of each year. Similar to years in the past, when growth has been weaker than expected, below those levels that Daniel mentioned, we can have a stronger payout ratio. We are not limited to what we provision in the balance sheet.
Daniel Vaz: That is pretty clear, guys. Thank you.
Pablo Mejia: Okay.
Operator: Thank you very much. Our next question comes from Andres Soto from Santander. Your line is open. Please go ahead. Andres, your line is open. Please go ahead. Okay, Andres, maybe you can raise your hand again for the question. Just a reminder, if you would like to ask a question, please press star 2 on your phone and wait to be prompted. If you are dialed in via the web, you can also ask a voice question. We will just wait a moment or 2 for any additional questions to come in. I am not seeing any more questions, so perhaps I can hand it back to the Banco de Chile team for the closing remarks.
Pablo Mejia: Well, thank you for listening to our Q3 results, and we look forward to speaking with you on our year-end. Thanks. Bye.
Operator: This concludes the call for today. We are now closing all the lines. Thank you and have a nice day.
