Banco de Chile (BCH) 2016 Q2 法說會逐字稿

Good morning everyone and welcome to Banco de Chile's second quarter 2016 results conference call. If you need a copy of the press release issued on Tuesday, it is available on the Company's website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations; Ms. Isabel [Ajendez], Investor Relations and Daniel Galarce, Head of Financial Control. Before we begin, I'd like to remind you that this call is being recorded, and that 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 Miss Isabel [Ajendez], Investor Relations Officer. Please go ahead.

(technical difficulty) second quarter 2016 financial results. We will begin with a brief overview of economic environment and our corporate strategy, followed by an analysis of Banco de Chile's second quarter 2016 results. I will now turn the call over to Rodrigo Aravena.

Good morning. It's a pleasure for me to share with you our comments on the economic environment in Chile and our corporate strategy. The recent evolution of the global economy has revealed the existence of less favorable external conditions for Chilean economy. Since Chile is the most urbanized country in the region, changes in the external scenario have a first order impact in the evolution of domestic economy.

In particular, we think there are two main trends to be highlighted. The first of them is the (inaudible) in the global economy, which led to a reduction in the global activity forecast by the IMF for both 2016 and 2017, mainly due to world's perspective to advanced economy, according to the last world economic outlook.

According to the IMF estimate, Latin American countries will have a contraction of 0.4% this year and only a modest recovery of 1.6% next year, led by the weak cycle in Brazil, while growth in China, which is the main trade partner of Chile will also fall from 6.9% last year to 6.6% and 6.2% in 2016 and 2017 respectively.

Additionally, it's worth mentioning that the IMF considered (inaudible) in its baseline scenario mainly due to the uncertainty caused by the Brexit amount otherwise. The second thing is the persistence of lower commodity prices relative to previous years, amid this scenario copper prices have also fallen as seen in the top right chart, this year [higher] copper price has [doubled] $1 per pound, which is 14% lower than 2015 average and it is also 28% below to the peak posted in January of last year. Since mining is one of the most important sectors in the GDP and plays a relevant growth in (inaudible) lower prices have contributed to review the GDP growth and to lift their fiscal deficit.

In this context, GDP remains weak, hovering around 2% as seen in the bottom left chart. This year, it has accumulated 1% - roughly 7% expansion, as a result of a 2% growth in the first quarter, and a 1.3% increase in the second, it followed the 2.1% and 1.9% expansion in the previous years.

The breakdown shows that mining sector has remained in negative territory, while several consumption indicators have also lost dynamism, even though they are still in positive territory. The good news is that the unemployment rate has remained lower than expected as seen in the bottom right chart. It posted a 6.9% rate in the second quarter of this year, 40 basis points higher relative to one year ago.

However, several indicators began to show signs of deterioration in the labor market. The job creation has been led by self employment rather than wage employment , and the real wage bill growth is decreasing.

Additionally, it is worth mentioning that job creation is still led by the housing sector, due to the higher demand, as a consequence of the VAT tax rate increase considered in the tax reform. Since this is a temporary effect, a higher unemployment rate is likely.

Now please turn to slide 4. Now I would like to share with you our baseline scenario for the main macroeconomic variables. [Connectivity], with basic GDP to remain in the range between 1.5% and 2% for the remaining of this year, and we also expect a slight recovery to 2% in 2017. It's important to remember, that potential GDP for Chile is nearly 3%, the main reasons behind this below trend expansion include the slowdown in some trade partners, lower copper prices and the less (inaudible).

But, we expect a modest rebound in 2017, as a consequence of the weaker currency, and a slight recovery in some trade partners such as some Latin American countries. On the inflation side, we expect the CPI to convert to the 3% target in the next quarters, from the current 4.2% annual rate, which is consistent with the below trend growth and higher unemployment rate. However, it's important to mention that the weaker exchange rate has been the main reason why the CPI has to remain above the Central Bank rate since the second quarter of 2014. So the dollar strength can cause a deviation of these expectation.

In this scenario, the Central Bank has maintained a interest rate at 3.5% this year. In the last meeting, the Board revealed a more neutral bias, although it also mentioned the need of increasing the rate in the future. However, we don't see changes in the [resonance] rate in the short run as a consequence of the higher risk in the global economy and the lack of a rebound in the domestic activity. Furthermore, we acknowledge the possibility of rate reduction in the case that the economy fails in showing recovery [statements].

Please turn to slide 6. Now, I would like to share with you the main aspects of our [long-run] equity. In recent years, we have been able to accomplish our goals, despite having to deal with significant challenges such as a highly competitive financial market, newer relations that have resulted in working cost, more demanding customers and all of this in a less dynamic, economic environment.

Nevertheless, the root of our success within this environment has been the effective execution of our consistent customer centric strategy that has been [acquired] over the years. As you can see on the slide, each one of our

(inaudible) aims to achieve this objective by [accompanying] our customers through their entire life cycle. By strongly focusing on this concept, customers choose us over other banks as we provide better products, services and advice and inspire more confidence thus maintaining our leading position in retail and wholesale banking.

More specifically, as shown on the slide 7, one of the fundamental pillars of our strategy is to provide first voice service to our customers. In order to win this goal, we have implemented diverse actions such as a creation of a (inaudible) that is more focused on the customer than the product, developed an incentive program for our account managers, which takes much more into consideration service quality and recommendation than before and undertook changes in organizational structure in our branches in order to provide our customers with closer and [speedy] services.

These changes have improved responsive time while bringing about a decrease in complaints from customers. As a result, we have seen important advances in our net promoter score over the years ranking us first among our peers. Similarly, we have reduced customer attrition to regular levels, substantially better than our peers.

Furthermore, we are aware that in order to compete in this industry, it's necessary to continue simplifying and redefining processes while incorporating new technologies where possible. For this reasons, we have been working to quickly implement innovation and online panels as part of this core study. Accordingly in recent years, we have the improved the stability of our platform and launched a new world class mobile app, that have been a huge success, as you can see on this chart on the right.

In addition, we are in the final phases to launch a new website for both companies in personal banking. And at the same time, we have implemented technologies and simplifying internal processes to become a [paperless] bank. These appliances should improve the delivery of products and services to our customers, while making their transactions more [permanent], effective and secure.

Also, all of this development should translate into improved cost efficiencies over the coming years based on the automation of (inaudible). The successful transformation of our [future] to become more focus led, and the customers have been only possible thanks to the commitment and dedication of an exceptional group of asset heads, whose professionalism, team spirit and deep sense of [duty] allow us to continually create value for our asset holders.

In line with this, we are constantly trying to make Banco de Chile an attractive place to work for our employees, while promoting career development. As you can see on the slide, through many different sites, we are ranked very well in climate and satisfaction, thus this provides us with motivated and committed employees.

Also, this can be only be achieved by developing our employees through in-house training programs, which are very value for our staff.

Finally, we also are very proud to say that we were once again recognized as the best financial institution to attract and (inaudible) and recognized as the most reputable Chilean financial institution by Reputation Institute.

We are certain that this initiative are necessary to continue being the leading bank for the retail and wholesale segment, as Pablo will discuss on the following slides.

Thank you, Rodrigo. My comments will follow the presentation slide on page 9. We earned Ch$161 billion in the second quarter of 2016, thanks to a very diversified business model, more normalized level of inflation and our focus on exceeding the customer's financial needs. As always, driving to further detail throughout the presentation these factors allowed us to continue growing customer revenue, despite headwinds from a more unfavorable environment. It's a greater dynamism experienced in the previous year, we achieved attractive growth rates in retail banking by growing the loan book by 13% year-on-year and deposits 11% year-on-year and we also remain stable as a result of the labor market that shows signs of deterioration but still good absolute figures.

On the other hand, efficiency reached 43% and profitability continued above the 22% level with the market share net profits of 26%. So while the activity of the first half of the year has continued to slow and an outlook that doesn't show a clear improvement, our commercial efforts focus is to grow selectively in segments that provide an appropriate balance between risk and return.

Please turn to slide 10. Operating income this quarter reached an impressive level of CLP476 billion, up 14% year-on-year Thanks to both non-customer, and customer revenue growth. Non-customer income grew by 32% year-on-year, it was mainly driven by the sale of AFS securities, which results were recognized previously and other comprehensive income for approximately CLP59 billion. This was partially offset by the effect of lower inflation in the quarter when compared to the same period last year. Effective the contribution, we received from the US after exposure and due to early redemption of two series of long-term corporate bonds that had been initially issued at a discount amounting to approximately CLP7 billion.

However, even though this early redemption impacted negatively our net interest income figure for this quarter, it will reduce interest expenses in the future by about CLP11 billion, since the refinance is bound to lower interest rates. Additionally during the quarter, we recorded a decrease in net revenue associated with the US dollar asset position that hedges our exposures in US dollar denominated loan loss allowances by roughly CLP3 billion, given the appreciation of the peso against the US dollar.

(Inaudible) was recorded in loan loss provisions, which will be discussed in more detail on the following slides. And then, overall customer income grew 6.3% year-on-year. Specifically interest revenues grew by about 5.4% year-on-year and fees by 9% year-on-year. The expansion and interest revenues was led by a 9% year-on-year growth in loans mainly related to retail banking together with attractive growth in DDA average balances by almost 9% year-on-year and the positive effect of higher nominal interest rates. Additionally, in spite of the high competition and an overall slowdown in loan growth, we continue to improve lending spread this year and in the quarter at 2.94%, this figure is particular a positive if one takes into consideration that mortgage loans have been the main driver of growth in the last 12 months. In terms of fees, the greatest dynamism has been the retail segment. In particular, we experienced growth in credit cards, ATM usage and mutual fund management.

As you can see in the upper left chart, our business strategy has permitted us sustainable and consistent growth in customer revenues quarter-after-quarter. While this growth has slowed due to lower dynamism in the industry we managed to perform a solid and diversified base of income generation that allows us to be more resilient against economic cycles of low growth that we are currently facing.

Please turn to slide 11 on retail banking trends. As mentioned, we are Banks that differentiates itself from our other competitors, by focusing on providing personalized experience to our customers. Along these lines, we have taken important steps to implement improvements among others, a new and innovative platform that uses internal and external information to optimize product offering and also to determine appropriate pricing to each customer. This business development undoubtedly provides us with an important two old things, which are share of wallet in the long run. We are also continually analyzing new potential customers and pre-approving them with banking products, that's increasing the productivity of our sales forces. This coupled with improved digital contact channels as mentioned earlier in the presentation, provide the basis of profitable growth potential in future years. By capitalizing on our relationship with our current customer base and taking full advantage of new customers, we will continue to see attractive growth figures in target segments.

Thanks to these initiatives, we have grown a retail loan book and demand deposits by 13% year-on-year and 11% year-on-year respectively. The credit expansion was mainly driven by the growth in retail commercial loans, personal banking loan product as you can see on the table on the right. The most dynamic growth products has been credit cards, growing 18% year-on-year. We have boosted (inaudible) new benefit to our loyalty programs. Today, we have agreements with Iberia, Delta and Sky Airlines, which provides our customers with excellent alternatives to accumulate travel rewards with credit card purchases. These programs allow us to further consolidate our value proposition.

Please turn to slide 12 on wholesale banking trends. In wholesale banking, trends have been much weaker than what we've seen in retail banking. A less dynamic economy, together with low comprehensive levels due to diverse reforms data and to the commodity cycle have delayed investments, and in turn reduced demand for loans by companies.

As such loan growth for the segment has only grown by 3.9% year-on-year and decreased 0.4% quarter-on-quarter mainly due to less active foreign trade and to a lesser extent leasing loans. Nevertheless, we continue to strengthen our relationship with these customers increasing demand deposits by about 5%, improving our non-lending revenues based as a percentage of interest income, you can see on the chart on the bottom right.

Turning to slide 13, loan loss provisions this quarter reached CLP93 billion, an increase of 57% year-on-year. This increase was due to establishment of additional allowances amounting to CLP52 billion in the second quarter of 2016.

In turn, our Board took a prudent approach and booked these allowances to address potential portfolio deterioration as a result of persistent economic growth below potential level, which in turn is expected to continue for an extended period of time as a result of weak internal business and consumer confidence levels, low copper prices, and external uncertainties.

This has led to some of a subdued investment, lower private consumption and labor market figures that have worsened slightly, all in the context that it has left the government with no room to implement expansion of fiscal market policies to boost the growth.

Another element supporting the decision to establish these additional provisions is well known lag between the economic growth and loan loss provisions, as you can see on the lower right graph. There is an inverse correlation between GDP growth and loan loss provisions. We're in the year I was important changes, such as 2004 to 2008 period is a clear lag on loan loss provisions.

On the other hand, this was partially offset by non-recurring allowance release of CLP9.6 billion due to the regulatory change that reduced credit conversion practice for steering contingent loans from 50% to 35% and mix and growth of CLP5.8 billion, principally related to an update of one corporate customer and the previously mentioned FX effect on US dollar denominated loan loss allowances by roughly CLP3 billion.

As shown on slide 14, operating expenses increased CLP33 billion from a year earlier. This increase was driven by a variety of factors including non-recurring items, expenditures intended to support our normal course of business, and ongoing costs associated with the current operation.

Personnel expenses increased approximately CLP10 billion or 12% year-on-year. On a recurrent basis, salaries rose nearly CLP3 billion or 6% year-on-year, due to both the effect of inflation on the payroll and a small expansion of less than 1% in head count. The rise in head count has been concentrated in front-office positions in line with our customer-centric strategy and the ambition of providing a tailored service to our clients.

We also recorded two important non-recurring personnel expenses. First, higher severance payments related to organizational restructuring and second, a special bonus granted to the start of one of our subsidiaries for the completion of a collective bargaining process. In terms of administrative expenses, this line item grew by CLP11 billion year-on-year or 15.1%. About 60% of this expansion is explained by IT-related expenses, including maintenance, internal development, information security devices and software licenses. These expenditures reflect our commitment to operational excellence, and as mentioned earlier, they are intended to enhance the stability and security of our course platforms for innovating in leading-edge mobile apps to remote channels.

To a lesser extent, admin expenses were influenced by market and product delivery cost increase of CLP1 billion year-on-year due to advertising campaigns that have been [defunct] and distributed in a more uniform way in 2016, when compared to 2015, and the renewal of customer credit and debit cards with new and improved security features.

Other operating expenses rose by CLP10 billion year-on-year, mainly due to non-recurring legal contingency provisions of CLP7 billion in 2016 and CLP2 billion related to a profit chain system embedded in a credit card partnership with a telecom company. Adjusting expenses by these extraordinary items leads to a 12% year-on-year growth figure for the second quarter 2016, and 10% year-to-date. We expect that these expenditures associated with strengthening internal platforms, remote channels will gradually provide improved operational efficiency and increase customer profitability across all business cycles.

Also we've combined these actions with a permanent focus on cost control, and an initiated to different project aimed on improving, not [diminishing] internal costs which is a paperless project that focuses on reducing printed document, streamlining workflows, electronic tracking and digital documents and existing progress associated with hard copies. This initiative along with many others should continue to allowing us to keep our efficiency level at the adequate rate or also better serving our customers.

Our capital level as shown on slide 15 remains strong ending the quarter with a ratio of 13.4%, an increase of 53 basis points over last year. This increase was due to stronger Tier I capital base as a result of capitalization of earnings; and two, other important factors. First the CLP52 billion of additional provisions considering Chile's Tier II capital. This results in an addition of 32 basis points to the best type of capital. Second, there was a regulatory change that reduced the conversion factors pursuing contingent loans from 50% to 35%, raising that ratio by 32 basis points. These gains were partially offset by the decrease in OCI due to the sale of AFS Securities mentioned earlier.

In line with higher capital requirements, expected from regulatory due to Basel III, we've anticipated these events by incorporating some changes in our capital management. First of all, we've recently adjusted OUR dividend policy from 70% of distributable earnings to 60%. This change is already affecting the level of provisions, for minimum dividends we recognized in equity and therefore, improving our capital adequacy ratio. On the other hand we've also begun to explore new sources of Tier 1 capital as permitted by Basel III . In fact it is expected by the market representation of Basel III in Chile, should allow banks to use additional Tier I instruments such as perpetual bonds and prepared stocks. This new framework gives us room to reinforce the capital adequacy in the future. We have avoided issuing the subordinated bonds for the last three years as Basel III defines much more restrictive standards for Tier II capital and current Chilean regulation. All of these potential choices, together with the solid position in terms of Tier 1 core capital permit us to feel confident with respect to the implementation of Basel III in Chile as we've (inaudible) we'll focus, that we'll fully comprise with the new capital standards. Nevertheless, we are still waiting on pending definitions in terms of weightings for risk-weighted asset calculation, the treatment of deferred tax assets and Basel arrangements for capital buckets.

We expect to have a clear idea this year on these merits as long as the implementation of Basel III and an extent to which reform is approved by Congress and then acted by the Chilean government. However, Basel III is not only related to capital requirements but also to new liquidity standards. In this regard, retail deposits are a more stable source of funding and therefore very appreciated under Basel III offering. In line with this view, we have increased our focus on retail deposits by adjusting operational structure branches and incentives per account managers. These actions have permitted us to maintain a solid market position in retail deposits, well pertained from more competition for these kinds of liabilities in the future.

On the other hand over the last five years, we have carried out funding diversification strategy intended to increase of the duration of our liabilities by creating long-term bonds in Chile, but particularly abroad. Thanks to this, we have been able to reduce maturity gap between assets and liabilities by approximately 90 days.

Also long-term bonds have replaced volatile deposits from wholesale customers and borrowings from financial institutions. Although, the Chilean regulator has not defined a specific threshold for [current] liquidity standards, we're taking all the required steps to comply with the new requirements.

Please turn to slide 16. On this final slide, you can see how Banco de Chile has once again outperformed its peers in four different aspects of this first half of the year. Thanks to various initiatives mentioned throughout the presentation, including projects to improve our value proposition, the key segment, process optimization, sales effectiveness, service quality among others.

On the top left, you can see that we lead among our main peers with a 7.2% operating margin. This is due to a mix of factors including diversified loan portfolio, a high cross sell model, low cost of funds due to the non-deposit leadership, excellent risk rating and the effect of business strategy. Second, loan loss provisions ratio, excluding additional provisions remains at very good levels, once again reflective our effective risk policies and capacities to adapt to the challenging economic scenario.

Third, efficiency ratio of 45.1% compares well against our peers and there's room to improve, we have several new project initiatives in which it was recently mentioned. And finally the at the bottom right you can see a comparison of our return on average equity for Banco de Chile and her peers for the first six months of the year.

Undoubtedly, we continue to lead the industry in terms of ROE of 21% due to superior competitive advantage and it demonstrates capacity to implement this strategy. Before we turn it over to questions, I'd like to say that this first half of the year has been challenging due to higher (inaudible) and the less dynamic domestic and external economic environment.

Despite the first favorable scenario, we have continued to consolidate our leadership position, improve our customer experience and reduce attrition. This has been possible through the effect of changes we have realized in our service models and the varied use of business intelligence. We are confident that a consistent customer centric strategy will allow us to continue outperforming our peers and creating greater value for all of our stakeholders. Thank you for listening to the presentation, if there's any questions, we'd be happy to answer them.

(Operator Instructions)

(Operator Instructions) Ernesto Gabilondo, Merrill Lynch.

Can you summarize all the non-recurring items for the quarter. And I have three questions. How do you see loan growth considering the slower demand in mortgage loans, and a tougher competition in corporates.

On my second question, as to the redemption of your corporate loans, to what extent can we expect an improvement in the CapEx funding in the coming quarters.

And finally, despite a challenging macro and a higher unemployment rate. We have seen positive trends in asset quality. So, what can we expect in terms of NPLs in case of risk going forward. If you can share your expectations per loan segment, it will be very helpful. Thank you.

Can you repeat the second question, please?

Yes. The second question is that after the redemption of your corporate notes. I'd like to know if you're expecting an improvement in the CapEx funding in the coming quarters?

Okay, just one second, please . I'll just (inaudible) the non-recurring. So we have CLP59 billion in available for sale higher income. We have also the negative effect of the bond, which was CLP7 billion, which goes along with the second question, the bond, 10-year bond. So over a period of time, those CLP11 billion were reducing in the cost of funds, is over a 10-year period. So it's a significant effect that we'll see over the next quarters. That was just an effective management of our funding position.

Fourth, we have the Spectra in operating expenses, which total about CLP11 billion, CLP12 billion, which if we break that down, we have CLP7 billion of extra expenses in contingencies and provisions we have about CLP3 billion in collective bargaining expenses from one of our subsidiaries, and then we have just under CLP2 billion in severance indemnities, and that is about CLP12 billion lower. And then your third question was loan growth?

Correct.

So, loan growth for the industry, we're seeing something for next year around 6%, 7% - for this year around 6%, 7%, and possibly we should be around that level for this year. But what we've seen currently there is very strong competition in the wholesale segment, which we've seen a little bit of reduction in foreign trade loan and leasing and that's reduced our markets share in this first six months of the year. So if we continue to see that it maybe -- it may make a little bit more difficult for the second half of the year. And the good side is that we've seen a gain in market share in the first six months of the year, below 12 basis points in consumer loans. So that gain in market share is good for improvement service models, pre-approved loans and the better use of business intelligence. Net-net, probably we should be around the 6% , 7% that we're expecting for the industry, may be slightly lower because of the higher tariff competition in wholesale. And the equation of a focus in mortgage loans.

Okay, perfect. And about the NPLs and cost of risk, given that the first half it was slightly with positive trends, but considering the challenging macro and the unemployment grade, how are you perceiving both indicators?

In our view, we believe that the economy is weakening and due to the fact such the weaker labor market, the poor business and consumer confidence. As a result, probably the second half of this year and 2017 will be more difficult as you mentioned. So we should see a rise in NPLs and loan loss provisions. So loan loss provisions, probably for the second - for ending the year somewhere around [1.3] and something slightly higher for [2007] because of this slower growth, because you have to take into consideration that Chile is growing something like 1% below the less, below trend or what we're expecting, last year even.

Tito Labarta, Deutsche Bank.

Hi, good afternoon. Thanks for the call. Just want to get a little more understanding on the additional provisions you booked, I understand some concerns about the economy weakening, are there any sectors in particular way you're concerned about. Do you think you would have to do any more additional provisions, I just want to understand a little bit more, what drove the increase in the additional provisions and anything specifically you comment on that. Thank you.

Well, the additional provision amounting to about CLP52 billion this quarter was the decision of our Board of Directors based on the forward-looking approach intended to deal with the less optimistic outlook of the local economy, the volatility in the market and figures are starting to worsen, such as the labor market. So if we look at it over as we say in the presentation of, let's say, the last ten years, a more normal level of provisions would be a little bit higher than what we've seen today. If you look at the year-to-date figure, it's probably 0.9% which is quite low and if you start comparing that to the prior year, it's starting to become levels that are record lows with a mix that's much, much focused in Banco de Chile in retail lending and wholesale lending. So the Board decided to make this provisions in view of that factor.

Okay. Is there any specific coverage level that you're targeting or -?

The range for Banco de Chile that we have approved at this moment, have additional provisions that can run between zero and 1% of total loans. And today that level is around 0.85%.

Victor Galliano, Barclays.

Couple of questions from me, just in terms of the efficiency ratio, clearly okay there was some one-time items there, but on a clean basis, what would you say you are targeting over the medium run? Are we looking at an efficiency ratio of 42%, we're looking at 40%, what would be the optimal, should we say, efficiency ratio?

And also looking at effective tax rate, it seems to be rising relative to previous quarters in the last two quarters. What can we expect here in terms of effective tax rate for the full year, in view of the fact that I think your tax shield from the subordinated debt payment to the Central Bank is beginning to reduce. Thank you.

Just one second please. In terms of efficiency ratio, we think in terms of our medium range in line with these projects that we're implementing and more normalized level of expenses without this one-time that we mentioned in the presentation, is something around the 44% level. We think in terms of the expense that we've incurred during the quarter or the year of expenses, they are more involved with long-term projects. So the investments that we should see in mobile banking should probably reduce the expenses in branches. And the use of business intelligence should improve the productivity of our sales forces.

Okay. So we're very pretty close in terms of target?

We think that we're at a normalized level of efficiency that can be maintained, it's around the 44%. We think it's unsustainable to be at levels much below that, (inaudible).

Okay. fair enough. Thanks.

Hi, this is Daniel Galarce. Regarding the effective tax rate, given the inflation of the tax shield probably into 2018, 2019. We will have an effective tax rate of approximately 3 percentage point less than this, that is our corporate tax rate. This is basically the effect of inflation on the effective tax rate.

Okay. So it's 3% less than the statutory rate.

Exactly.

Okay.

This is the long-term effective tax rate for us. Okay?

Carlos Macedo, Goldman Sachs.

Just I wanted to get some clarification, I know you made these provisions anti-cyclical and you've done in the [fourth], third quarter last year. How would you go about using these provisions in case you need them, just trying to get an understanding at the 1.3% that you mentioned the costs were less with 2017, consider the use of these provisions at some point, just sort of understanding exactly how the -- what the mechanics are behind that?

In the history, we haven't released additional provisions. But in order to use these provisions, we have to have, go back to what's [occurring] the level of loan loss provisions is much higher than the contingency of the current economic cycle, I would give a reason on why to release provisions. While in this case, the tendency of additional provisions figure is much lower than the current economic cycle should be. So it implies that the Board of Directors decided to realize these additional provisions.

Okay. In any case, you get to a point where it's clear that the level of risk is much higher than a normal cycle. You make it clear that you're using this excess or additional or one-time provisions, right?

It would be one of the factors if the Board of Directors would take into consideration that they would release for additional provisions.

Do you have how much in these additional provisions you have in your balance sheet now. I mean, it's just capital on the other side of the balance sheet, you have the total balance of additional provisions?

It's about CLP215 billion - just over CLP210 billion.

About 0.85% of total loans.

(Operator Instructions) We have no further questions at this time. This concludes the question-and-answer session. At this time, I would like to turn the floor back to Banco de Chile for any closing remarks.

Thank you for listening to our call for this quarter. We look forward to speaking to you in our third quarter results. Thank you.

Thank you, this concludes today's presentation. You may now disconnect your line. Have a nice day.