Banco de Chile (BCH) 2012 Q2 法說會逐字稿

Good morning everyone and welcome to the Banco de Chile Second Quarter 2012 Results Conference Call. If you need a copy of the press release issued yesterday, it is available at the Company's website at www.bancochile.cl. Today with us we have Mr. Arturo Tagle, Chief Executive Officer and Mr. Pablo Mejia, Head of Investor Relations.

Before we begin, I would like to remind you that this call is being recorded and that the information discussed today may include forward-looking statements regarding the Company's financial and operating performance. All projects are subject to risks and uncertainties and actual results may differ materially. Please refer to the detailed notes in the Company's press release regarding forward-looking statements. I would like turn the call over to Mr. Arturo Tagle. Please go ahead, sir.

Thank you operator. Good afternoon everyone and welcome to Banco de Chile Second Quarter 2012 Conference Call. It is a pleasure for me to share with you, our clients, on this quarter's financial results. Also with us today is Mr. Pedro Samhan, our Chief Financial Officer.

To begin, I would like to mention that this was another positive quarter in terms of activities in the Chilean economy, and in the banking sector. For us, we maintain a solid performance that allowed us to continue leading the banking industry in net income, posting solid earnings of CLP107 billion in the quarter despite the lower than normal inflation.

This was a product of solid results from our core businesses, strong, loan growth which allows us to rank first in the banking industry and our efforts to continue to control expenses proactively. During the quarter, we were also very happy in terms of funding, taking advantage of Banco de Chile's excellent credit rating which Standard & Poor's recently upgraded by one notch from A to A plus, thanks in part to our robust risk policy, which has permitted us to post consistently lower risk ratios than the industry.

With that, let me turn the presentation over to Pablo, and I will be available at the end of the call, to answer questions in the Q&A session.

Good afternoon, thank you Arturo and thank you all for joining us today. Please turn to slide number three. I would like to begin by reviewing the macro-economic figures.

During the quarter, the Chilean economy has maintained robust economic growth amidst the financial tensions that developed in countries and slowed down in emerging economies. This performance has surprised even the Chilean Central Bank, which has pointed out that the expected deceleration in our economy has been more moderate than anticipated at the end of the last year.

During the quarter, the economy is estimated to have grown by 5.4% year-over-year, after an expansion of 5.6% during the first quarter. At this aggregated level, the sectors which have most positively affected growth have been those related to domestic demand such as commerce, services and construction.

The aforementioned has been crucial to sustain levels of unemployment below 7% and maintain good prospects for the economy in the medium term. In terms of prices, after a sharp rise in inflation during the fourth quarter of 2011, annual CPI growth has returned to the Central Bank's target range, mostly as a consequence of the fall and the prices in tradable goods such as food and fuel.

At the end of the first semester, CPI has accumulated growth of only 0.4% and 2.7% year-over-year. According to the latest figures of the economic expectations prepared by the Central Bank, inflation is expected to close near to the lower range of the Central Bank's target.

Regarding the monetary policies, the Central Bank has closely monitored developments in the international and local economy, taking a neutral position since the beginning of the year, and maintaining the monetary policy interest rate unchanged at 5%. This approach permits to develop an expansionary monetary policy if it's needed, or if it's not, if inflation rises substantially. However, and according to consensus, the expectations [operate] at the rate will remain fixed at this value for the rest of the year.

Please turn to slide number four. Despite the solid after the economy has demonstrated regarding activity, there are signs that estimate a slowdown during the rest of the year that we would like to share with you.

In terms of aggregate demand, private consumption has experienced a downward trend in recent quarters, consistent with GDP growth and historical patterns. Investment during the first quarter experienced a higher slowdown as a consequence of a sharp decline in investment in machinery and equipment. Only construction investment continues to grow around 11% year-on-year, in line with the sector's GDP and with the lag which the sector commonly maintains with respect to economic cycles.

On the side of international trade, there is also a slower growth in exports due to lower prices of our main export products such as copper and lower international demand associated with slowdown in the global economy. Imports have also decreased expansion, associated with normalization and spending patterns of individuals and companies.

These patterns allow us to estimate that for the second half of the year the economy should reduce its growth rate, but moderately, assuming a scenario where the Euro Zone does not continue to deteriorate. Thus, we expect an expansion of about 4.8% for GDP in 2012, a figure above our previous estimates at the beginning of 2012.

Notwithstanding the volatile global economy, it's important to point out that Chile continues to maintain very strong and sovereign figures. First, Chile has great access to financial and debt markets, due to its low sovereign risk with a CDF spread of about 100 basis points and a moderate of [coverage] debt of levels slightly above 10% of GDP which permits the implementation of counter-cyclical policies without deteriorating public finance.

Second, Chile is an open and diversified economy with an important participation in emerging markets which are those countries that show the greatest potential in terms of growth and finally, both the government and the Central Bank have substantial savings and reserves which together, in May 2012 represent 26% of GDP.

In summary, Chile is in an excellent financial position. This turn will assist considerably to mitigate the potential negative effects of a more complex international environment. Please turn to slide number five.

Regarding the Chilean banking system, if we exclude Corpbanca Colombia operations, global loans grew by 4.3% in the second quarter of 2012, an annual increase of 16.1% in nominal terms. Among the reasons for the higher growth when compared to the prior quarter, we can mention the good performance of our economy in the first half of 2012, the expectation of companies which are still optimistic and the positive effect of a higher exchange rate on US denominated loans, all of which contributed to expand commercial loans by 5.5% in the quarter.

On the contrary, individual loans grew at a slower pace despite a strong labor market as a result of a more cautious approach from both demands from customers and supply from banks according to the Chilean Central Bank Credit Survey.

In line with previous quarters, we expect a moderate loan growth in the following quarters due to the expected slowdown in the local economy and persistent uncertainty in the global financial market and the way the Euro Zone crisis will be solved. Accordingly, we accept total loans to grow at a rate of 13% in nominal terms by year's end.

In terms of results, quarter-on-quarter net income required a decrease of CLP31 billion, reversing that which trend showed in the recent quarter. In terms of the variation when compared to the same period last year, net income decreased by CLP89 billion, associated with greater operating expenses and higher loan loss provision charges, as a result of an economic environment with greater activity, which more than offset the negligible annual increase of operating revenue.

It's important to point out that the modest change in operating revenues is due to the spectrum co-inflation experienced during the quarter, when compared to the same quarter last year, and prior quarters.

In terms of profitability, return on average capital reach 16% since the second quarter of 2012, slightly below that achieved in the first quarter of this year.

On the next slide, number six begins a discussion of our consolidated results. The second quarter remained very profitable despite the lower than average inflation posting earnings of CLP107 billion, a decrease of 6% as compared to the same period last year, and a decrease of 12% quarter-on-quarter.

Notwithstanding, we continue to consolidate our leadership position in the Chilean banking industry, recording the highest quarterly and accumulated net income figure for the year, and the highest return on average capital of over 25%. This translated into a market share of almost 28%, which is almost 300 basis points higher than the same period last year, demonstrating an outstanding performance reach as compared to our peers.

In terms of operating revenue, slide number seven, we posted CLP326 billion in the second quarter of 2012. This figure is very noteworthy because we have been capable to post these results despite the low second quarter inflation of 0.42% when compared to the previous quarter of 1.07% and especially when compared to the second quarter of last year when inflation was at 1.44%.

Fees from our mutual funds and stock brokerage business continue to put pressure on all of fee revenues. Due to the still volatile environment which has investment more conscious translated into less stock brokerage transactions and higher volumes and fixed income funds which are less profitable.

Nevertheless, we have achieved these results which are comparable to last year's figures through a solid loan growth expansion in profitable segments without sacrificing strength, higher contribution of our non-interest bearing deposits and a strong fee growth from traditional banking products as we continue to grow our core business.

We are confident that our retail and wholesale segments will continue to deliver good results in the second half of the year, which should reach a large extent the impact of the expected lower inflation figures, particularly during the third quarter of 2012.

On the following slide, number eight, we have a closer look at the loan volumes, which continue the upward trend, with double-digit growth rates year-on-year, although at a slower pace. Actually, our loan book increase 16% on a 12-month period, a 3.5% quarter-on-quarter, demonstrating a moderate uptake in the quarterly expansion regarding the 2.2% posted in the first quarter of 2012.

The above-mentioned year-on-year expansion was fuelled by a higher growth in retail banking, rather than wholesale banking. As shown on the charts on the right, our retail banking component continues growing strongly at a rate of 18% year-on-year, although at a lower quarter-on-quarter pace.

The annual performance has to do with significant advances in middle and upper-income individuals, as well as SMEs, based on a differentiated commercial strategy to focus a variety of products and services that fits our customers' needs.

In this light, I would like to highlight our successful initiatives to increase penetration of credit cards and mortgage loans. In terms of credit cards, we are continuously improving customer loyalty programs. We have achieved an increase and outstanding balances of 26% year-on-year, as well as an important increase of fees.

Similarly, we have succeeded in increasing a presence in residential mortgage loans, based on a comprehensive plan to reach customers as well as their competitive rates. As a result, we also maintained a solid performance in this product with a 22% year-on-year advance. Both these products are very important to our strategy as they generate (inaudible) with customers.

As for SMEs, we have designed a relationship-based service model and tailor-made financial services that prosper especially in regions outside of Santiago. This quarter, we also became the leading supplier of government-secured financing granting during the first semester the largest amount of [Pogato] loans within the Chilean banking industry.

In terms of all the consumer loans, it's continued to grow strongly, posting attractive year-on-year growth of 14% despite strict credit risk controls.

Regarding our wholesale loan books, we have recorded a 13% year-on-year growth and a significant quarter-on-quarter uptick of 4.1%. This is a consequence of a still dynamic commercial activities based by large companies especially in regions where we have recorded a 17% year-on-year increase in loans.

In this segment, we've been especially active in loans related to foreign trade and leasing, which have increased both above 20% year-on-year. Our strategic aim is to continue consolidating our leadership positions in both retail and wholesale banking. We have put forward an important effort to increase our nationwide distribution network, improve result channels and automated processes to better service our customers.

Our recent strategic decision is intended to maintain a suitable risk-return relationship in order to assure profitable growth in these segments. This objective has resulted can be the largest bank in the industry in terms of total loans with a market share of 19.2% but most importantly, we have been able to expand our loan books without sacrificing the lending script.

In connection with asset quality, as shown on the next slide, number nine, loan loss provisions have increased from CLP37 billion in the second quarter, 2011 CLP50 billion, in the second quarter of 2012. The annual increase is mainly explained by volume growth, especially in the retail books, down credit quality related issues such as that expense associated to that variation in exchange rates in both quarters, and higher levels of delinquent loans.

Actually, as shown on the chart on the lower left-hand side, an improving trend in delinquencies was observed in the first half of 2011. This translated into very low loan provisions during last semester. This tendency was followed by a more moderate rise beginning in August 2012 in line with delinquent loans, began to increase, reaching a peak of 1.35% in April 2012 or 23 basis points increase regarding the lowest point obtained in 2011.

This increase in trends in the past due loans was a result of a moderate slowdown in the local economy after a period of high growth, and negative payment behavior in the lower income consumer market following the loss of [ISM], also the effects of a bicentennial trade-off promoted by the Chilean government which determined the credit bureau must eliminate all negative information, presents below of approximately $5,000 for historical records, and finally seasonal factors historically, collection efforts are less effective during the holiday period.

As a result, our management adopted diverse measures in order to resist the ratio of delinquent loans such as paying acceptance criteria during the credit assessment for the lower-income segment, adjusting pricing in the commercial model in order to compensate for higher level of risk, and most importantly, implementing different initiatives intended to enhance the collection process.

The latter included a rise in specialized personnel for collection duties, changes to the collection strategies and procedures by incorporating new methods to approach past due customers as well as guidelines for the different stages in the collection process.

All of these initiatives assisted in controlling delinquencies in loans for individuals by 13 basis points during the second quarter of 2012, reaching 1.2% as of June 2012, substantially below our peers of 2.8% and the rest of the banking sector of 2.7%.

We are confident that these measures should contribute to maintain a superior and efficient risk return relationship with both our retail and wholesale segments. While our loan-loss provisions ratio, as demonstrated on the next slide number 10, should remain below the average posted by peers and the local banking industry.

Moreover, we can say that we remain as one of the safest banks and the most prudent bank in the local industry with a past due loans coverage ratio of about 2 times and counter-cyclical allowances that amount to CLP95 billion, which is the highest level amongst privately owned institutions and is equal to 48% of our total past due loans.

Also, as you can see on the chart on the right, the rating agency Standard & Poor's raised our long-term foreign currency credit rating by one notch from A to A plus. This upgrade has been mainly due to a strong risk position, which in turn is supported by our ability to consistently post superior credit figures than our peers, and based on our operating revenue, which are more focused on the core banking business, rather than proprietary trading.

Thus, we are honored to have the highest credit issued by Standard & Poor's amongst large and privately-owned banks.

Moving on to slide number 11, we can see that operating expenses remained controlled, recording a 5% decrease over the same quarter last year. Before I explain the main drivers behind this variance, I would like to highlight the stabilities we have achieved in our cost-base, especially in the last four quarters, with charges that are around [CLP155 billion] per quarter.

This variance, compared to the same quarter last year, was the result of greater personnel and administrative expenses, whereas the rise of personnel expenses were associated with a 12 month accumulated inflation, since wages are invested in the CPI rate, solid increases related to collective bargaining process carried out in 2011, and a moderate increase of headcounts in our call center and collection areas to cover our growing commercial activities.

In terms of administrative expenses, this rise was mainly prompted by the expansion of our distribution network that translated into greater expenses related to rentals and maintenance. These factors more than offset by lower other operating expenses, due to the recognition of about CLP23 billion in the second quarter of 2011, associated with a contingency provision established to reflect the impact of our collective bargaining process.

In terms of efficiency, our cost-income ratio dropped by more than 3% as compared to the figure posted in 2011, whereas the cost-to-assets ratio decreased roughly 20 basis points in the second quarter of 2012 with respect to the second quarter of 2011. Our improvements in efficiencies are not only related to strict cost-control policies, but also to economies of scale that we have obtained as a result of our loan growth and increasing productivity in our branches due to our customer base, that increased 5.3% year-on-year.

Also worth noting is that the result of lower inflation recorded a lower contribution from our US asset -- net asset position which is translated into an increase in efficiency ratio of approximately 150 basis points in the second quarter of 2012.

When compared to the industry, as you can see on the bottom left side, we continue to compare very favorably to the average cost-income ratio of 52% posted by the industry, excluding Banco de Chile. It is important to mention that we have continued to effectively manage our core expense base which is growing at a slower rate than our active and operating revenues.

We believe that we can continue to improve these efficiency ratios by increasing productivity, controlling expenses and taking advantage of economies of scale. We plan to achieve these through initiatives which are listed on the right side of the slide.

On the following slide, number 12, is a closer look at funding and capital ratios. In terms of non-interest bearing deposits, we have grown almost 7% over the last year, maintaining our leading market share of 23%. This growth was driven by a solid year-on-year expansion of 16% in the individual deposits, far above the negative growth posted by the industry, excluding Banco de Chile and Corpbanca with respect of Colombia with these figures.

Another very important point to mention in terms of funding, is a strong increase in bonds, representing about 9% in 2011 and 14% of total funding. Specifically, during 2011-2012, we issued around $3 million in bonds in the local and foreign markets which included around $110 million in Mexican bonds, $400 million in commercial papers in the US market and $2.3 billion in local peso denominated funds.

With these deposits, we have increased the duration of our funding. (Inaudible) we have increased the duration of our funding books which is very important for liquidity. Our large volumes and demand deposits together have an excellent credit rating and very large retail customer base have allowed us to continually post the lowest average cost of funding in the Chilean banking industry of only 3.8%, as of June 2012, as you can see on the bottom left side of the slide.

When compared to our peers in the banking system, we maintained an advantage of almost 50 basis points in costs of funding.

Regarding our capital base, our capital ratios remain strong and significantly of the regulatory, the high growth in loans during the last year. As a result, a tier one ratio has reached 8.7% at the end of the quarter offsets, our total capital ratio, amounted to 12.4%.

Now to finish off, I would like to briefly go over our superior performance during the first half of 2012 in terms of [this and] indicated, as demonstrated on the next slide, number 13. The bars on each chart, except the last chart, on return of average assets, represents market share as of the first semester and the column to the right of each chart represents the change in basis points with respect to last year's figures for the same period.

In terms of operating income, net of loan-loss provisions, we continued our trend and ranked first with an impressive market share of 22%. This is especially favorable and contains that our overall market share of loans is about 19%. This has been achieved through a profitable product mix, a strong fee-based business, which is the highest in the industry, our leadership position in non-interest bearing deposits, and our high credit rating leading to the lowest cost of funding in the banking sector. And lastly, a superior credit quality as a result of our prudent risk approach.

On the next chart, operating expenses, we obtained a market share of 19.6% which is similar to our loan market share and 156 basis points below last year's figures, growing significantly less than all our main competitors.

In net income, for the second consecutive quarter, we placed first with a market share of almost 28% in the first half of 2012 and a gain of 278 basis points. And finally, where we continue to stand far apart from the competition, and the average in the industry is in return on average assets, which continues to reach outstanding levels of about 2% in the semester, far exceeding all of our competitors.

Now, if you have any questions, we would be happy to answer them.

Thank you. (Inaudible) questions. (Operator Instructions). The first question is from the line of Tito Labarta of Scotiabank.

Hi, good afternoon everyone, thanks for the call. I just have a couple of questions. One, if you can give me some guidance in terms of the outlook for inflation for the rest of the year and how you think that will impact the net interest margin going forward?

And then a second question in terms of are your provisioning level, provisions have been rising faster than loans, even though asset quality has remained pretty much under control. So I just -- do you have any concerns about asset quality going forward or why the provisions [point] fact, maybe if you can just give some more color and guidance where you see the level going up for the rest of the year? Thank you.

Hello Tito, Arturo speaking. Regarding your first question, our expectation for the rest of the year or for the whole 2012 year in terms of inflation is to a risk something closer to 1.8%, or very likely below 2% which is, I must say, below our initial expectations for this year. And as you know, is our strong dependence on non-interest bearing liabilities.

It has an impact on our net interest market. Although, having said that, it is important to mention also that because of the growth we have seen in our loan portfolio, we feel that the impact of that growth can compensate the impact of a lower inflation in terms of NIM for the rest of the year. Although taking into consideration also that in the first half of the year, inflation has been 0.4% in spite of the low rate that we are expecting for the rest of the year, it's higher than what we have seen in the whole first semester.

In terms of risk for the loan portfolio, we expect to see similar levels of what we have seen on average for the first half. So it means that the negative effects that Pablo mentioned in his speech will be still present and although our strengthening of our collection procedures and some tightening of our loan granting policies, we see how the impact that [will skip] similar levels for credit risk compared to total loans. That the allowances for loan losses -- to total loans will stay slightly above 1% for the rest of the year. That's our expectation today. Does that answer both of your questions?

Yes, thank you very much, Arturo.

The next question is from the line of Nicolas Chialva with Itau BBA.

Good morning, and thank you for hosting this call. I've got two questions. The first one relates to the different projects that are on the table. Now, the change [covenant] regulations on the Chilean banking system, as for example, lower tax on interest rates, creation of [a positive] credit bureau, the possibility of discounting the payment directly from the rental salary, moving unregulated credit (inaudible) under the umbrella of the Superintendent of Banks, and probably just more intervention in fees charged by banks.

So in regarding to all of these processes, I would like to know what is your overall assessment of the potential intentions in current regulations regarding -- sorry, the potential changes of current regulations on Banco de Chile financial statement.

The positive and negative impacts of all the bills that have been under discussion in the Parliament. Some of the negatives you have mentioned of course, are some limitations under the maximum interest rate. Although regarding that, and let me say that the percentage of portfolios subject to that ceiling, that to the very ceiling, is very small. So the total impact for that is not going to be large although we have been saying that in terms of the increase of penetration of banks and Banco de Chile of course, in the low income segments and the smaller niches, or the micro-entrepreneur.

When we lower them, what we expected before, but in terms of our total -- our actual portfolio, our current portfolio, we don't expect a large impact. There's another negative impact that is related to the insurance that can be sold together with the mortgage loans that is starting from next year, in the case of Banco de Chile. We won't be able to charge any fee on selling life insurance related to mortgages, and that has an impact too, of course.

Although there are some other bills that do have a positive impact. The main of that is related to the Credit Risk Bureau. We expect that (inaudible) in having a better Credit Risk Bureau with a wider range of information and having information from nonbanks. That will give us an expectation of higher growth in the retail sector.

So adding and deducting those impacts, we are not expecting a large effect on our net income. I must say also that there are some regulations related to the Consumer Protection Agency which are already meeting some extra operating expenses which are already reflected in our financial results of the first half. Extra headcount in the values of our customer assistance, more paperwork related to new loans and new taking a consequences and things like that.

Although there will not be such a significant to [report] something significant in our -- next year financial results. So again, I think there are important in terms of our -- the future and potential growth of financial systems but it won't have a large impact on the figures that we -- today we obtained in the Banco de Chile financials.

Okay, thank you very much on that. My second question relates to the growth and your experiencing in the (inaudible) segment, specifically on the mortgaging fund, credit card businesses. I would like to know how is the cost selling to new mortgage clients, nowadays? Is it evolving as you have expected? Are you taking any additional measures, initiatives to foster cost-selling to these clients? How is your order expansion going, nowadays?

It's a very good question. We have reviewed our figures for growth in the second half of the year, so if we were saying by the end of 2011 that several loans were to go something like 8% in real terms, now they are saying that probably we will see something near 10% for the whole 2012 year. And that almost true for every type of loan, although more important for commercial loans and housing loans. In terms of housing loans, we are expecting that this year several loans for the Chilean financial system is going to be near 8% in real terms again.

And our expectation is to continue growing slightly above the average figures for the systems. So we will continue gaining market share although that's not [written] that we saw last year.

In terms of cross-selling, let me say that although you may know that the profitability of an individual mortgage sold and view alone, is not very important, because it's a very competitive market. The largest income is the related to the time of the total period which [discussed], will remain with is, have been proven in this bank with our past statistics that customers which have their mortgage loan with us will remain with us for a significantly longer period than those who are not -- have not the mortgage with us.

So it is as you correctly said, the cost-selling impact that most -- the largest impact is that the customers may have the average number of products with us but he will remain with us for a longer period. That makes the life-cycle of our customers and the profitability in the total life-cycles much better from the bank's perspective.

So we will continue pushing for growth in the mortgage markets, although I must say in line with Pablo's comments on credit risk policies, that we are moving carefully in those policies in the acceptance rule.

Okay, thank you very much on that, but there is something that you said, I would like, if you would allow me another question, you said that you expected to continue growing above the system on loans and I've seen during the last month, that the posted growth has not been a bit in the industry.

So I am a little concerned on the funding sources to continue beating the market on loan growth. Do you share my concerns or are you going for the [battle] on your ability to fund that growth without increasing cost of funds?

I'm not sure if you are taking into account the impact of the consolidation of Corpbanca with these longer figures, which explains why the risk on the -- dropped in market share of Banco de Chile. The total impact of that consolidation is like 2.3% of the market in total loans. Additionally, there was a one-time impact on the commercial portfolio of another bank, and the impact of the exchange rate also has been making -- fluctuates our figures.

Although what we have seen -- what we are seeing in the long-term trend is that we will be able to continue growing, at least above the average for the system. We are not going to see figures like what we saw last year of course, but we are quite confident in terms of what we see in the relations in which we are working today, that we will be able to beat the market in terms of our market share.

Okay, thank you very much. Have a good day.

All right bye bye

The next question is from the line of Chris Delgado with JPMorgan.

Hi, good afternoon. I'm just kind of on that same topic, with just loan growth. I wanted to get a sense of what gets you guys really comfortable, keeping your loan growth above the system? We have just been talking to some of your competitors, and they have mentioned, given all the regulatory changes happening in Chile, they were kind of taking more weight in [C-type] method. I just want to get your thoughts on that and then I have one follow-up question.

Can you repeat the question, please?

Yes, so kind of given all the regulatory changes going on in Chile, we have spoken with some of your competitors and they have kind of given us the impression that they were taking more away in C-type approach in kind of being more conservative with their loan growth. So I just want to get a sense of what makes you guys more comfortable in order to grow faster than the system?

What we have said is that we are being more conservative than we were, of course. Although, considering the expansion of our network branches in the previous years. And since those, in some areas they are entering the market. We are being able to increase our share in recent markets above the growth of the market. It's again not something close to what we saw last year that when you are seeing the whole banking system growing conservatively, and we are a little bit above that others go.

And in terms of commercial loans, what we see is that in some regions, especially we are seeing a lot of service which are expanding the economies in those cities, especially areas relating to mining where we see every type of commercial loans, and not directly related to the mining service, but everything in terms of activity in those areas is growing, so it's related with those SMEs and middle-sized companies.

In terms of [progress], we think that we are going to be able to reach the market in terms of other scopes. Again, a moderate growth of near 10% of year, which is quite interesting considering what is going on in the global environment.

Yes, that's not right. And then, just kind of my other question relates more going back to the regulation again. Just kind of, again with the changes in the mortgage insurance and upcoming things, how do you guys kind of see your fee income evolving kind of year end? Is it similar to last year --?

Yes, really in terms of for this year, we are studying something very similar to last year. And again, growth of last year which was above 20% in terms of term loans, we incorporated in net terms more than 50,000 account holders, checking account holders. And that has meant that (inaudible) are both some limitations that we may have today, we're going to be at a similar level.

And let me just emphasize that what we are going to see in terms of life insurances probably seen next year not this year. And again, we expect to compensate that with growth. We're not going to see an important increment in fees next year.

Okay, great. Thank you.

The next question is from the line of [Fabio Zagatti] with Barclays.

Hi. Good afternoon. This is in fact Carlos Herrera. I'm -- maybe I missed a part of the call, I didn't understand very well, what you guided about asset quality. Could you reiterate for me what is your outlook for the NPL ratio towards year-end?

And also, another question on asset qualities, on the conference call of your most approximate -- or your closer competitor, they are fine-tuning their models to approach the consumer segment and they have been increasing their [error] fees systematically through the last quarter. What are you doing differently than your peers to contain asset quality and what makes you so comfortable to not being in the need of [furtherly] reboundary, overhauling your systems in the consumer segment?

Again, repeating what I said in terms of credit quality, what I mentioned could have been confused is that the ratio of loan loss provisions to total loans is going to stay near 1.1% -- between 1% and 1.1%. It is probably higher than we had last year, it is the meaning of what we and some other access to the market are seeing is that there is more risk in the consumer market.

But what makes -- and let me first mention about the NPLs, in terms of our nonperforming loans coverage, we still are going to be near or up to two times and that -- both indicators -- other results not of a short term actions but the result of a consistent conservative policy for accepting new customers and granting new consumer loans.

So although there is an impact and we are recognizing higher levels of provisioning of the rest of year as we have seen also in the first half of this year. We are going to continue seeing better performances than some of our peers, because of this long-term credit risk policy.

So in the case of delinquency ratio, you will expect some deterioration towards the year end, but mostly related to the depressing in the credit mix -- in the portfolio mix?

I don't see -- since the unemployment rates are quite low, the activity indicators are quite good. We don't expect higher increases in delinquencies, and a higher deterioration of the consumer portfolio.

Thanks.

(Operator Instructions). We have a question from the line of [Claudia Denavincio] with (inaudible) Bank.

Thank you. I'd like to know concerning all the measurements you've taken to improve efficiency, do you have like a year-end target for your efficiency ratio maybe some highlights or color regarding your bank's growth for this year?

If I understand your question, you are talking about our efficiency ratio for the rest of the year with respect --.

Just, it's like --.

I'll tell you, as you know from the other conferences that we have had, is continue growing down in terms of our efficiency ratio. But in gradual terms, as we have got during the last year. And we think that the ratio that we have today is something that we can maintain during the rest of the year, and from there on, continued going down according to our and target and the strategy for the long term.

Thanks. But do you have maybe sort of a target or something like that, or maybe perhaps some idea of how many basis points you expected to create for this year, or just --?

Well, let me tell you something. We are thinking that in the long run, an efficiency ratio target should be close to 40%, between 40% and 42%, but is the matter of going there in the long term.

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

Before closing this conference, let me just add that, probably because of the low inflation that we have seen in the last months, probably third quarter -- our third quarter is going to be more or less in terms of net income compared to what we saw in the first two quarters. Although we kept our confidence and our positive view on what it's going to be the whole 2012 year.

So having said that, let me thank you all for your presence in this second quarter 2012 conference, and I would like to emphasize that the second quarter of this year has continued demonstrate how Banco de Chile has been effectively implementing its business strategy in order to create value for our shareholders, even in our less dynamic environment.

We truly believe that we have constructed an institution that has the capacity to continue growing based on a sustainable strategy and focus on expanding our retail segment and have enhanced the profitability of our whole sale segments, effectively control operating expenses and maintaining high levels of customer service.

Thank you very much and we look forward to sharing with you the third quarter results. Goodbye.

Thank you. This does conclude today's presentation. You may now disconnect your lines at this time and have a nice day.