Banco de Chile (BCH) 2015 Q4 法說會逐字稿

Good morning, everyone, and welcome to Banco de Chile's Fourth Quarter 2015 Results Conference Call. If you need a copy of the press release issued on Wednesday, it is available on the Company's website. Before we begin, I'd like to remind you that this call is being recorded, and that the information discussed today may include forward-looking statements, regarding the Company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the Company's press release regarding forward-looking statements.

I will now turn the call over to Ms. Victoria Gabens, Investor Relations Officer. Please go ahead.

Thank you very much. Good morning, everyone. It's a pleasure for me to share with you our comments on Banco de Chile's fourth quarter and full-year 2015 financial results. Today with us, we have Arturo Tagle, Chief Executive Officer; Rolando Arias, Chief Financial Officer; Rodrigo Aravena, Chief Economist and VP of Institutional Relations; Pablo Mejia, Head of Investor Relations; and Daniel Galarce, Head of Research.

We will begin with an introduction and comments from our CEO followed by a brief overview of the 2015 economic environment and financial system results and then continue with an analysis of Banco de Chile's fourth quarter and full-year 2015 results.

I will now turn the call over to our CEO, Arturo Tagle.

Good morning, everyone. Thank you for joining us today to discuss our year-end results. 2015 was another year of challenges for both the economy and the financial industry. The past couple of years have been marked by a slowdown in the economy, mainly led by a lower copper price, a deterioration in investment expectations and low levels of consumer and business confidence. In spite of this weak economic environment and important reduction in inflation, we were able to maintain operating income flat year-on-year through effective commercials strategies that made it possible to post solid growth in loans, demand deposits and fees, and efforts to recover spreads during the last part of the year. These positive figures were complemented by effective risk management, which allow us to maintain the loan loss provision ratio aligned with 2014, closing the year with a figure of 1.3%.

In terms of cost control, we achieved a good efficiency ratio of 44%. Although this is slightly higher than 2014, it continues to compare favorably to our peers and to the banking industry. As a result, and based on our consistent long-term strategy, we could post another year of attractive results by reaching a bottom line of CLP559 billion and a return on average equity of 21%. Once again, we led the Chilean banking industry in net income with a 25.3% market share in 2015. These results, based on more recurring revenues and not inflation, generated net distributable earnings of CLP463.5 billion, which is basically the same amount obtained last year. This permitted our Board of Directors to propose an attractive dividend per share in 2016 of approximately CLP3.4 per share, in line with last year. At the same time, and in the same meeting, the Board modified the level of provisions for minimum dividend from 70% to 60% of distributable income. This change will help us maintain an adequate capital ratio for future growth and it's also especially relevant in light of the implementation of Basel III in Chile, which may require higher levels of capital. These good financial results would have not been possible if it weren't for many other accomplishments that we achieved during the year.

First, thanks to our commercial initiatives, loans reached CLP24.6 trillion, equal to 18.3% market share, an annual increase of 26 basis points. The retail segment was the main driver of this growth. Mortgage loans led this increase, rising an impressive 18% year-on-year. Strong demand for housing created by the expected impact of the tax reform on prices in a scenario of especially favorable interest rates explain this phenomenon. Complemented with our successful commercial strategy, we gained 47 basis points of market share in this product, ending the year with a stake of 17.6%.

In consumer loans, we grew 12% year-on-year which translated into market share of 21%, up 48 basis points when compared to December 2014. Despite the complex economic scenario, we posted record sales in consumer installment loans through our traditional and our Internet channels. As for SMEs, we continue to promote pre-approved grades which allow us to grow commercial loans in this segment by 10% year-on-year. We also continue to strengthen our relationship with these customers by carrying out many seminars and events across the country.

In the wholesale segment, we grew 9% year-on-year. Part of this growth was due to the successful acquisition of a commercial loan portfolio of CLP564 billion from another local bank. We closed this deal in record time, thanks to our deep knowledge of customers, proven expertise of our staff, and our business scale. Based on these attributes, we were able to purchase this portfolio without incurring additional operating costs. Apart from the additional growth, this acquisition provided us with loans that have attractive spreads.

Regarding liabilities, we issued a record amount of approximately $1.9 billion in senior bonds. This is in line with our aim to diversify the financing structure of both duration and markets. Similarly, this strategy allows us to position ourselves better for the new liquidity requirements that will soon be implemented in Chile. In addition, we continue to develop and implement initiatives to improve the value offering provided to our customers. Hence we strengthened our mobile banking platform by adding new apps to the suite of Banco de Chile applications. Our focus on innovation in mobile contact channels has not only been appreciated by our customers, but also by international publications and organizations. This includes [11] Global Finance magazine, Global Banking and Finance Review magazine, who recognized Banco de Chile for innovation and as the best digital bank in the country for 2015.

We also enhanced the range of benefits offered to customers by entering in two strategic alliance with Delta and Sky Airlines, which allows our customers to accumulate points that can be redeemed to purchase tickets for international and domestic flights. This alliance are in line with our strategy to continue strengthening our credit card business and deepening our relationship with clients by providing them with a complete set of products and services while reinforcing loyalty. In mutual funds management, we increased our average assets under management by 13%, maintaining our leadership position in the industry with over 20% market share. This was achieved by providing our customers with personalized advice on choosing their investments, reinforcing service model through traditional clients and the strong risk-adjusted performance of our mutual funds. Our results were also recognized through several awards that place us as the leading fund manager in Chile.

We also moved forward in various initiatives to reinforce banking penetration in Chile. With these goals in mind, we continue strengthening (inaudible), a debit account for our Consumer Finance segment that provides these customers with services that weren't previously available for them and were made accessible on extensive network of more than 2,000 service points. Also, this was a very positive year for Investment Banking. We took part in many important local construction, which were recognized with several awards, including best investment bank in Chile by LatinFinance, the best international bond placement, best IPO operation and IPO Agent by Deloitte and our local newspaper, Diario Financiero.

Finally, we have continued implementing various initiatives in line with our commitment to the communities during the year. In particular, I would like to mention our collaboration with Teleton, a non-profit organization that has various rehabilitation centers throughout the country and holds an annual charity event since 1978 and that we've actively supported since it began. This year, over 9,000 Banco de Chile employees participated voluntarily in this event. We also continued contributing towards other social activities and organizations focused in promoting entrepreneurship and accessibility to a quality education in Chile. Now, Rodrigo Aravena, our Chief Economist, will briefly discuss the macro environment.

Thank you, Arturo. Please turn to slide number 5. According to market consensus from the Chilean Central Bank (inaudible), the Chilean economy grew around 1.6% in the fourth year of that year. And therefore, if in the past expanding nearly 2% in 2015 as seen on the top left chart. Consequently, the GDP a below (inaudible) economic growth for second year in a row. For 2016, the Central Bank estimates a GDP expansion between 2% and 3%, a private estimate from the economic [resistance] survey are closer to 2% and the main reason behind this weak economic growth include low copper prices, the slowdown in [demand] with partners and domestic confidence measure remaining in pessimistic territory.

As the second chart shows, the labor market continue to display its resilience in the fourth quarter, that employment rate stood at 5.8% in December, a low figure relative to the (inaudible). However, wages continue to show a moderation in the margin, real wages increased 1.5% year-on-year in November after growing around 2.5% in real terms during the first quarter. Consequently, there has been a slowdown in the real wage bill.

As the bottom-left chart shows, the slowdown in China and the emerging world in general was reflected in Chile's rebalance during 2015. Total exports fell 16.3%, while imports fell 12.8%. By sectors, the steep decline was driven by copper exports, which accounts for half of total, with an 18.2% yearly contraction. Both agriculture and manufacturing exports declined 10.9% and 15.2% respectively. In this context, the Central Bank states the current account deficit reached 1.7% of GDP for 2015, well below the rest of Latin American countries.

Please turn to slide number 6. Since a [large] portion of goods included in the CPI basket are imported, inflation has been hovering above the Central Bank's 4% (inaudible) as a result of the weaker (inaudible) rates. As the top left chart shows, the consensus of the economic expectation survey expects annual inflation to fold to 3.5% a year after posting 4.4% increase last year. Despite below trend economic growth (inaudible) slightly because [second-run] effect from the weaker currency and in [deflation] effect will likely remain this year. As it was the case of (inaudible) the price of copper fell in 2015. Apart from (inaudible) peso, see bottom-left chart, [such global chains] induced low government (inaudible) well around 2006, the state-owned mining company contributed 5.44% of the GDP to the government. In 2015, such figure is expected to be only 0.3% of GDP by the [future] of Budget Office from the Ministry of Finance. Accordingly, the government will reduce its annual spending growth to 4.4% in 2016.

Finally, even though the economy is growing slowly, the persistence of [having] inflation above the 3% target led the Central Bank to increase its monetary policy rate 50 basis point during the last quarter, up to 3.5%. The baseline scenario of the Central Bank for 2016 outlines in its monetary policy report of December considered to additional 25 basis points hike during the year, in line with the market consensus.

Now, I will pass the call over to Pablo Mejia, our Head of Investor Relations, to give a review of the banking industry result and to present Banco de Chile's fourth quarter financial results.

Thank you, Rodrigo; and good morning, everyone. My comments will follow the presentation starting on page 8. The local banking industry posted a 6.4% year-on-year real growth in total loans during 2015. In nominal terms, this was a decrease of about 11% year-on-year -- increase, sorry. Similar to us, the strong growth in mortgage loans was the main driver of this increase due to the implementation of value-added tax on new homes and attractive low interest rates.

As for results, the industry posted a 11% year-on-year decrease in net income. This was mainly explained by operating expenses increasing 5.2% year-on-year due largely to the effect of FX and inflation and administrative expenses and personnel expenses. Credit risk posted a moderate growth, mostly offset by lower countercyclical allowances and higher recoveries of non-performing loans. Based on these figures, the industry posted a year-on-year decrease in profitability from a return on average equity of 18.2% in 2014 to 14.9% in 2015.

Please turn to slide number 10 for our quarterly and full-year results. We had another year of good results, although lower than 2014, but still impressive when you consider the current economic environment and lower inflation. Net income for the year reached almost CLP560 billion, equivalent to a return on average equity of 21%. On a quarterly basis, net income reached CLP140 billion, 5% above the prior quarter and 9% above the same quarter last year. It's important to mention that there have been a few extraordinary events during the last quarter, such as the positive effect of the increase of the corporate tax rate and deferred tax assets in the third quarter of 2014, the negotiation with unions in the fourth quarter of 2014, and countercyclical provisions in both the second half of 2014 and the third quarter of 2015. Nevertheless, our results this year demonstrate momentum across a variety of key business drivers as you'll see in the rest of this presentation.

Please turn to slide 11. As Arturo mentioned, we've continued to show strong growth in loans and deposits throughout the diversified business model, with the exception of our Consumer Finance loans. Total loans grew 12.3% year-on-year and 2.2% quarter-on-quarter, allowing us to gain market share and commercial consumer and mortgage loans. Overall, our market share at the end of the year reached 18.3%, almost 80 basis points above last year. Demand deposits also grew an impressive 20.1% year-on-year and 14.2% quarter-on-quarter. Thanks to this growth, we're able to continue to diversify the customer base while offsetting lower non-customer income, mainly inflation posting operating revenues in line with 2014, CLP1.6 trillion. This increase can be seen on the charts to the right.

It's also important to point out the excellent of evolution of our fee income which continued growing at attractive rates. The strong growth in fees is thanks to our leading -- please turn to slide 12 where we'll show the strong growth in fees. The strong growth in fees is thanks to a leading position in customers and upper-income segments and our ability to be the primary bank account for most of our retail and wholesale customers. This has provided us with stable and growing fees. As you can see on the chart on the left, net fees are mainly generated from our retail and subsidiary division, but mostly retail related.

These two segments represent 87% of our total fee income, while the remaining 13% is generated from our corporate wholesale area. This mix provides us a superior position versus our peers and the source of revenue. On the chart on the right you can see that the main fees that drove this growth were mutual funds, up CLP12 billion year-on-year, thanks for previously mentioned business drivers, PDAs, credit cards and ATM fees up CLP10 billion due to an increase in current account holders and the renegotiation of inter-bank ATM fees, which took effect the third quarter of 2015 and was retroactively applied. Insurance up CLP5 billion year-on-year, thanks to our growth in retail products together with new commercial business initiatives and financial advisory fees up CLP5 billion, thanks to important wheels associated with M&A and debt structuring.

Please turn to slide 13 our loan loss provisions. As mentioned earlier, we continue to post good levels of risk in 2015 as a result of our focus in prudent risk management approach. Loan loss provisions remained steady when compared to last year at 1.3%. On the chart on the right is the breakdown of loan loss provisions. The level of provisions increased only by 7% year-on-year compared to the 12% expansion hosted by our loan portfolio. This increase was due to, first, we set additional allowances amounting to about CLP31 billion during the third quarter of 2015. These allowances are made in view of the slowdown in the local economy. It's also important to note that these allowances do not relate to any specific customer industry, but instead to an overall outlook on the evolution of the economy. When compared to 2014, this increased our loan loss provisions by CLP8 billion.

Second, local regulatory changes affecting the methodology for mortgage loan provisioning with a one-time net impact of CLP5 billion on loan loss provisions. Third, a net effect of CLP4 billion due to the exchange rate shifts affected our US dollar denominated allowances for loan losses. And fourth, the net effect of greater loan volumes, change in mix and risk behavior in loan loss provisions was equivalent to CLP1 billion when compared to 2014.

In terms of our coverage ratio, we maintained the highest level amongst the closest companies with a multiple of 2 times. This ratio increased to 2.5 times when we take into consideration additional allowances. We are confidence that our unique credit risk management philosophy which is deeply present throughout the entire credit risk cycle should continue to assist us in maintaining reasonable levels of non-performing loans in this economic cycle.

Please turn to slide number 14 on operating expenses. As you can see on the chart in the left, operating expenses remained relatively stable year-on-year, growing only 2%. This was due to higher non-recurring personnel expenses in 2014 for about CLP45 billion associated with the collective bargaining agreement with our unions. Excluding this, operating expenses grew on an adjusted basis 8% year-on-year. The main factors that explain this increase are best perspective inflation on salaries as they are adjusted twice a year by CPI variations. This explains an important part of the salary increase, all the rest is explained by real wage growth based on , performance bonuses, variable compensation benefits associated to the bargaining process I previously mentioned, a slight rise in head count. Likewise some administrative expenses are also denominated in US and therefore are affected by inflation. Second, effect of the appreciation of the dollar versus the peso and certain IT service contracts and third, advertising expenses explained by recent campaigns, which we have undertaken in order to announce new strategic alliances.

In terms of efficiency, our ratio increased moderately from 43.4% to 44.1%, but still compares favorably to our main peers at 47.2% and the industry as a whole.

Please turn to slide 15, before moving on to questions. I'd like to emphasize the attractive level of our profitability during the last years. Despite difficult economic cycles, we have generated high returns for our shareholders, posting levels that are substantially better than our peers in both the return on average equity, return on average assets. Currently, return on average equity and return on average assets have reached 1.4 and 1.5 times the industry average, respectively. We are confident that we are a bank that is capable of maintaining these ROEs of around 20% in the long-term, because first, we have room to continue improving our loan mix. Second, we believe that we can continue to increasing the profitability of both our retail and wholesale book by further improving our relationship with customers and thus increasing share of wallet. And third, there is still room to continue improving our productivity levels, which should translate into sustainable improvements in efficiencies.

Thank you for listening to our presentation. If there are any questions, we would be happy to answer them.

Thank you. The floor is now open for questions. (Operator Instructions) Thiago Batista, Itau BBA.

Yes. Hi guys. Thanks for the opportunity. I have two questions. The first one, if you could give for us the main trends that you see for Banco de Chile in 2016, especially in terms of loan growth, asset quality and profitability? And the second question is about the tax shield of the [self-debt]. Could you give us an update on when do you believe the self-tax shield will end? I think in the past, you comment that probably would be in 2019 or 2020. Could you give an update on when do you believe you repay all this self-debt?

Thanks, Thiago, for your question. Arturo Tagle speaking. First of all, regarding growth, we expect a lower growth rate for total loans in the banking industry next year. Probably we will see total bank loans growing something around 7% speaking in nominal terms. And in our case, we pretend to be slightly above that range, above that 7%. Again, having focused on the retail segment, we think that still we will see quite high increased rates in mortgages because of there is a lot of promises to buy homes that will have the advantage of the tax advantage that have not been converted yet into loans. So, we will still see something above 10% growth in mortgage loans next year. Saying all that probably in commercial loans, we will see Banco de Chile something similar to what is going on in the industry, having a conservative approach to commercial loans. Probably we'll be growing like the market -- the similar rates of the market.

Regarding risk, again 2016 is going to be a year of higher risk compared to our long-term expected rate of loan loss provisions, That means that probably, we will repeat something similar to the 1.3% that we showed in 2015 and 2014. Again, we have been repeating that we see some lag between the behavior of especially SMEs, medium-sized companies to what is going on in the economy because with a GDP growth of near 2%, probably it could be normal to have a higher risk indices in the bank's portfolios in general compared to what we have been seeing in last two years. Banco de Chile is not immune to what's going on in the economy so probably we will have again rates of 1.3% or similar to that. We have been saying in the past that in the long run, Banco de Chile considering our portfolio and the combination of retail and wholesale loans that we have in our asset side. In the long run, we should be closer to 1.1%.

Regarding your question of the subordinated debt of the [shareholder ourselves], still there is around $15 million in total in bad loan by the Central Bank. When it will end? Well, it's a good question. but it depends on the result of the bank. In just an arithmetic calculus, we can say if we were able to repeat the results that we have been showing in the past. The self-debt will disappear by 2019, but I do not want to mean an estimate on that, just emphasizing that it's mathematical calculus on what could happen. But again, with returns on equity of around 20% of Banco de Chile, there could be a three more years paying that, three more -- I mean, because these funds comments are each year, so three more years means that in April 2019 they should end.

But again, let me emphasize again that it's just an estimate and it's not a projection that we're making regarding that.

Okay, thanks a lot, Arturo. Very clear.

Jason Millan, Scotiabank.

Hello, everyone. Thanks for taking my question, which is on the outlook for bank regulation in Chile. Arturo, can you talk about the expected changes on the regulatory front this year and specifically in terms of capital and provisions and your BIS ratio under current regulation decline to 12.6% this year. How is Bank de Chile positioned for these expected changes?

Okay. Regarding regulations, let me refer first to the one that is the thing that we are going to see in the next few months, which is related to liquidity. I think that's the main thing that we're going to see in 2016. The Central Bank has announced new relations regarding liquidity, getting closer to what Basel III says about liquidity. They said that they are going to start measuring liquidity in something similar to the liquidity coverage ratio although there is no levels announced that the benchmark should meet. But definitely, that will mean an extra cost for banks, especially banks that are rich in demand deposits like the case of Banco de Chile. We are considering that, we have been adapting to that since last year. So we feel that we are very well prepared for that although again it may mean some cost for Banco de Chile.

Regarding the capital requirements, there is not yet an amendment to the banking law that should have been probably in the first half of this year. So we expect to have a discussion in Congress during the year. Probably in the second half, we may have an amendment to the banking law in order to implement Basel III in Chile. Then, taking that into consideration, that by the end of the year, we should have something known by the banks and by the regulators. We should think of a gradual implementation of Basel III which allows me to say that probably, the capital situation of Banco de Chile is quite comfortable for the next three years, I mean, 2016 and 2017. Anyhow, we are preparing for the new regulation with the new provisioning and the announcement that recently we have made regarding the most likely dividends in the future. So, we started January this year provisioning dividends of 60% of the total distributable income compared to the 70% that we had in previous year. So that probably will be what we will see in the future regarding dividends starting 2017, but there's no plans to increase capital in the short run and again, I insist that we have enough capital to fund the growth that we planned for this and next year.

Thank you, Arturo, maybe just a follow-up on the loan growth expectations for the system of around 7%, I guess economic growth has been coming down. I don't know if I've heard you specifically talk about 9% in the past or do you think that your loan expectations for 2016 are now lower, is that based on the fact that economic growth expectations have I guess come in weaker or have declined?

Yes, at least for the last three or four months, we have been talking of a GDP growth for this year of around 2% and that means probably that we will see a real growth of total loans of around 4%, but that may change as you may feel in our comments comes from what we have seen in mortgages in the last quarter, and as I said for the previous question, there's still some growth that we will see in the mortgage sector, even considering that and considering that the slowdown in some sectors of the economic activity, everything around mining, for example, our expectation for total loan growth is still around 7% nominal. And probably Banco de Chile in commercial loans will be around that.

We saw fees grow double-digits, that was very strong growth, is that also expected to slow with this lower mortgage origination and growth in general? And costs were very well contained in the current context, I guess less than 2% as per your presentation. What kind of expectations in this outlook? So should we have similar, can you keep fees at this kind of growth level and what are your expectations on those lines?

Yes. We are putting a lot of efforts and focus on fees. You know that in the retail business, many of the fees are frozen because of regulations. So when you look at in detail to where are we [projecting] fees, they have come mainly from mutual funds, selling new type of insurances and in the wholesale segment from restructuring debt and advising companies in financing structures. Again, in 2016, we will keep the focus on fees. Probably again, we will see some increases in fees in mutual funds and distribution of insurances. We are diversifying and widening the type of insurance that we sell and increasing the number of customers. So, when you see fee increasing in lines of credit, credit cards, checking account, is because we are increasing the number of accounts, not increasing prices. Probably this year, we won't see the same growth in fees that we saw last year, but again we pretend to keep our operating revenue just in spite of a lower inflation because of the increase in volumes of loans and the increase in fees. So again, we pretend to have something similar in total operating income next year.

And regarding expenses, let me clarify again that the 2% increase in total expenses is considering the one-time big expense that we had in 2014 regarding the bargaining with the unions was a four-year contract with [all of] unions that had a significant cost in 2014. Even considering that, our cost increased about 8% last year. And again, we have kept focus on efficiencies, trying to automize our operations, with that internally that we pretend to [wear] more paperless banks. So we'll keep our cost mainly increasing like the CPI increase and slightly some higher expenses in technology because of the increase in the exchange rate. But probably, our efficiency ratio could be slightly higher than last year. Last year, I remember you, it was 44%. So having efficiency ratios around 45% could be normal in the future Banco de Chile.

Thank you very much.

Ernesto Gabilondo, Bank of America.

Hi, good morning, gentlemen and thanks for taking my call. Could you provide us your expectations in NII growth and net interest margin basis points pressure considering potential lower inflation levels, also if you can provide your expectations for net income growth would be very helpful.

Secondly, a follow-up question with a subordinated debt that matures in 2019, will you have some fiscal benefits? So, what should be the effective tax rate in 2016 and if it should be the normalized level in the coming years? And finally, if may I, I will appreciate your expectations in NPLs and cost of risk for this to you. Many thanks.

Yes. Regarding net interest margin first, you may have seen that in 2015, the net interest margin fell by around 0.5% mainly because of the lower inflation. So, if you look in total pesos that came from interest margins, we were able to keep it constant, because of the increase in the volumes of loans, but as a percentage, net interest margin fell like 0.5%, I mean 50 basis points.

In 2016, again, we will see or at least we're expecting lower inflation compared to last year. That will mean again that the net interest margin could fell a bit although not in the scale that we saw in last year. So, probably seeing something like 0.1% to 0.2% lower net interest margin in the case of Banco de Chile, could be within our range of our expectations.

Regarding net operating revenue, again, let me repeat that in 2015 and 2014, we had very similar, extremely similar, let me say, net operating revenue in those two years. This year, 2016, probably again, in spite of the reduction of the net interest margin because of the increases in volumes and some increase in fees, again, we'll see something similar in terms of net operating revenue. With respect to the question of effective tax rate and the impact of what is the debt, of course you are right, the subordinated debt had an impact on the effective tax rate of Banco de Chile and it will continue being that way, although the increase in the corporate tax rate after the tax reform last year, again probably we will see an effective tax rate of 13% this year and will continue increasing the following years because of the increase in the general corporate tax rate. So, probably reaching 15% or around 15% in the following years. So if it was 12% in 2015, probably it could be 13% in 2016.

Great. Your expectations in NPLs in terms of risk?

NPL.

NPLs, you said? Well, as I said, the provisions for loan losses, we expect them to be around the same ratio that we saw in the last two years, that is 1.3%. And regarding NPLs, the ratio of NPLs to total loans probably would be similar to what we have in this, the end of 2015.

Okay, great. Many thanks.

Thank you.

Victor Galliano, Barclays Capital.

Hello, yes. My main questions have been answered, but just if we could talk a little bit more about credit quality and obviously you are in the strongest position of any of the big banks of Chile to deal with a worsening down cycle in credit quality, but perhaps you could talk a little bit about what you see in the different areas in terms of consumer, in terms of SME and perhaps even in terms of mortgage, especially if we have a protracted low copper price going forward, that could really dent I think consumer confidence and business confidence in the economy. What your sense is? Have you done some kind of stress scenarios here and what you see in terms of where credit quality could go? Thank you.

We have a diversified portfolio and we are present in every economic activity in Chile. So as I said before, we are not immune to what happens in the economy. We are working under the scenario that GDP growth is 2%, but of course, a different story could be, if GDP growth is below that range. We have been surprised on the good behavior of the debtors in Banco de Chile and in the banking industry in general. 2015 was a surprise for us in terms of unemployment, and let me say that we see a tremendous positive correlation between unemployment and the behavior of consumer loans, of course. And if Chile keeps unemployment rates in the range of 7%, probably we won't see any big surprise in terms of the quality of the consumer loan portfolio. A different story could be if we start seeing unemployment rates significantly above that.

Regarding SMEs, again, we have a very positive surprise last year, because the behavior of SMEs was even better than we expected and especially considering the low GDP growth that we saw last year in the previous two years. My feeling and our understanding is that SMEs in Chile were well capitalized after several years of very good results and they are better prepared than in previous crisis like the Asian crisis in 1998, or those kind of events. But again, if GDP growth and the economic activity in general is below what we have been saying, SMEs will suffer some impact. Having said that, I repeat that the most likely situation regarding the quality of our portfolio is probably again that Banco de Chile will be establishing new provisions at the ratio of 1.3% to total loans, but it could be higher, and it could be sensible to what happens in the economy in general.

Regarding some sectors of course, the activities in the north of Chile that have been in the past very benefited from the development of new mining projects -- huge mining projects and projects that are not -- they are now or have been finished or have been suspended some of them. Of course, what we are looking closer is what's going on on the unemployment general activity levels in the northern part of Chile. At the same time, because of the higher exchange ratio, exchange rates, some export activities are having good times and some agricultural activities and non-traditional exports are having good times and are having a better performance than we had in the past in our portfolio. So I'm moderately positive regarding the quality of the portfolio.

And just one quick follow-up, I mean would you consider allowing your coverage ratio to come down a little bit? I mean you've got 200% coverage and that doesn't include the extra provisions. Would you consider would Banco de Chile consider lowering this to? 180%, 170%?

If we were to see extraordinary but impact in some sectors and some part of the portfolio, we would consider to use the extraordinary provisions, the additional provisions that we had. But if nothing extraordinary happens, probably you will still see a coverage ratio of two times like something that traditionally Banco de Chile has had in the past.

Okay, fair enough. Thank you very much.

Thank you.

[Horte Opazo, Wise Investments].

Sorry, guys. My question has been answered. It's okay. Thanks.

[Jose Remesure], Itau Office Management.

Thanks for the conference. My question is related to credit risk. Is there any sector that you are concerned about and also what's your exposure to the construction and real estate sector and also the mining sector and mining dependent companies?

Yes. As you said, of course, we have some concerns what may happen in the construction sector because of the boom that we have had in the past probably would not continue in the future, but our major concern could be related to the office space and for business purposes where our exposure has been decreased in the last two or three years. So we don't have a big exposure there and that could be a sector to be careful about. Although regarding housing, what we see is that most of construction companies are moving to build social constructions, social housing solutions. So most of 2015, we saw a lot of new projects have been started in those sectors that will have good times because of some subsidy projects imposed by the government. So probably, there is not a big issue regarding construction companies that have a focus in housing.

Regarding mining, the mining sector, we don't have a big or large exposure directly on mining companies. Mostly. we have exposure on suppliers of the mining industry and in transport or whatever, those that have been related to the construction of mining projects and we have been already feeling the impact of the lower levels of activities for suppliers of mining companies. But there is no big concern regarding specific exposures in the suppliers for the mining industry. In the last year, they already suffered an adjustment of -- cost adjustment that the mining companies are doing.

But that's why I said that most of our concern could be in SMEs in the northern part of Chile. That is considering the expectation of the deterioration of assets that we already commented and the provision in ratios that we are expecting for next year.

Okay. And related to this, how are you seeing these new bankruptcy laws that was flat last year or in 2014 in this new economic environment?

You are raising a very important point. It's still a question mark regarding the total impact of the new bankruptcy law, especially regarding the possibility of individuals applying for bankruptcy. In fact, only in the last part of last year, we saw more people coming in and applying for the bankruptcy rules under the new bankruptcy law. So it's hard to predict at this point what really may happen and it will depend also on how the authorities manage the application of this law. So, still many things to be seen regarding what will be the real impact of the new bankruptcy law and my major concern are not regarding the bankruptcy of companies, which is I think the new law contains very good tools to solicit these situations, so although what is really new and where there is a more question mark is what could be the impact on the bankruptcy of the individuals if we see a higher level of unemployment.

So my answer is just something to be seen, is hard to predict at this point.

Many thanks.

Thank you. Okay. If there is no more questions, let me make a few closing remarks. First of all, thank you for all your questions and for attending this call. And before ending the call, I would like to emphasize our five main competitive advantages that make a difference and are an essential part of how we create value for the customers and our shareholders.

First, we have the most recognized brand in the Chilean financial market, allowing us to attract and retain customers more easily. Second, our size and business scale allows us to offer a wide selection of products and services to all our customers, and reach better efficiency levels. In other words, we have an important knowledge of our customers in what they need at every stage of their life cycle. Third, our risk rating ranks us the strongest Private Bank in Latin America, thanks to a well-known risk management procedures and track records in results and profitability. This provides us with better spreads than our competition, when placing bonds, which contributes to [plus] improved profitability.

Fourth, our superior risk management undoubtedly distinguish us from other banks in Chile and in the region. This has allowed us to grow profitably in all segments and we serve with good loan loss provisions and NPL ratios. And fifth, our leadership in demand deposits have provided us with a clear advantage in cost of funds thanks to our long and prestigious history, excellent customer base and our focus and consistent strategy, All of these competitive advantages will surely allow us to continue growing and providing our shareholders with sustainable and attractive returns. Thank you all for listening and participating in our call, and we look forward to sharing our next quarter results with you. Goodbye.

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