Banco de Chile (BCH) Q2 2026 Earnings Call Transcript
Chief Economist and Institutional Relations Officer - Rodrigo Aravena
Operator: Good afternoon, and welcome to Banco de Chile's Second Quarter 2026 Results Conference Call. If you need a copy of the financial management review, it is available on the company's website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer; Mr. Pablo Mejia, Head of Investor Relations; and Daniel Galarce, Head of Financial Control and Capital. Before we begin, I would like to remind you that this call is being recorded, and the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements.
I will now turn the call over to Mr. Rodrigo Aravena. Please go ahead.
Rodrigo Aravena: Good afternoon, everyone. Thank you for joining this quarterly conference call, where we will discuss the overall performance of the bank as well as the main trends observed in the business environment. We have completed an outstanding quarter, performing well in several key strategic areas such as profitability, demand deposit market share in local currency, and asset quality, while maintaining both the largest coverage ratio and the soundest capital adequacy among relevant peers. We also achieved important milestones in non-financial areas, such as the increased adoption of digital tools, the materialization of new commercial alliances, productivity gains, and advances in ESG, which we will discuss in more detail throughout this presentation.
As in previous conference calls, before reviewing our performance during the quarter, I'd like to briefly discuss the macroeconomic environment we are facing. Please turn to Slide #3. The Chilean economy has evidenced lower-than-expected dynamism. As shown in the chart on the upper left, activity declined during the first 5 months of the year, leading to a weak expansion of 0.1% year-on-year in the second quarter after a 3.5% contraction in the first quarter. As a result, the GDP declined by 0.2% year-on-year in the first half. That said, we expect this negative growth to be temporary and activity to rebound from the third quarter onwards. There are several reasons behind this assessment. The first is the composition of growth.
Since the contraction in activity has been driven mainly by supply side sectors, which tend to be more volatile and more exposed to temporary factors that reverse faster. Mining, for instance, has been one of the main contributors to lower activity after contracting 3.1% and 5.2% year-on-year in the first and second quarters, respectively, reflecting how this sector has decoupled from the rest of the economy as shown in the chart on the other right. Other supply side sectors, including fishing and manufacturing, have also posted decline partly offset by sectors more closely linked to demand, such as retail and services, which grew 2.7% and 1.2% in the second quarter, respectively.
The chart, on the lower right shows the upward trend in investment projects in the country, which according to the Capital Goods Corporation registry have continued to rise to their highest level in recent years with a strong participation from mining, public works and energy. This sector should support both growth in employment, reinforcing our expectation of a recovery over the coming quarters. Please move to Slide 4 to review recent developments in prices and interest rates. After the increase in inflation between March and May when the CPI accumulated an increase of 2.4%, the June figure showed a significant moderation with a nil monthly variation.
As shown in the chart on the upper left, this was mainly related to energy prices, which accumulated a rise of 15.9% over that period following the increase in international oil prices. Even though there is no evidence of significant pass-through or second-round effect in core inflation so far, this dynamic has increased annual inflation higher from 2.4% in February to 4.3% in June, broadly in line with developments observed in other countries. Since the main source of short-term inflationary pressures is energy prices, which is a highly unpredictable variable given the uncertainty related to the geopolitical conflict in the Middle East, inflation expectations in Chile implied in financial asset prices have been highly volatile over the last quarters.
The chart on the lower left shows they have not only moved significantly in recent months but have also remained closely correlated with international oil prices. In this context of higher uncertainty, the Central Bank has maintained a cautious stance, keeping the monetary policy rate unchanged at 4.5%. Although Central Bank Board has not provided an explicit guidance, this monetary decision was made despite less favorable employment data and weaker local activity figures, reflecting continued concerns about inflationary pressures, mainly from the supply side. Please move to the next slide to review our baseline scenario for the year.
We have revised our economic growth forecast downwards, as you can see on the last column of this table from 2.1% in the previous quarter's conference call to 1.3%. Importantly, this revision does not reflect a weaker outlook for activity going forward, but instead the impact of subdued GDP growth in the first half of the year, mainly due to the performance of mining. The new forecast is consistent with growth close to 2% in the second half of the year, with domestic demand making a larger contribution than net exports, which would help the economy to gain some momentum. In fact, for 2027, we believe GDP growth would approach 3%.
The recovery should be supported by the potential reversal of temporary factors that affected supply side sectors such as mining, manufacturing and fishing as well as by a recovery in disposable income as inflation is expected to decline in the second half of the year. A further factor that should gradually and sustainably support stronger dynamics in the country will be the implementation of the Reconstruction Bill. Among the main measures approved by both chambers of Congress are the reduction in the corporate income tax rate from 27% to 23%, which would bring Chile closer to OECD tax rate.
The implementation of tax invariability regime for investment, reducing future tax uncertainty and substantial improvement to the permits and licensing framework for investment projects reducing bureaucracy and shortening the time for implementing new projects, which is particularly positive for long-term investments. Recent shocks, including the expected high intensity of El Nino and geopolitical conflicts, remain a key source of uncertainty for inflation outlook. Our 4% estimate for the year assumes a moderate decline in oil prices and no significant additional depreciation of the exchange rate. Under this scenario, we do not expect changes in the Central Bank policy rate, which currently stands at 4.5%.
The main risk to our scenario comes from the external environment, particularly the evolution of the geopolitical conflict and its implications for both global GDP growth and inflation. Other factors should also be closely monitored, including growth in China, our major partner, which has slowed in recent months as well as the evolution of tariffs. In Chile, the lagged response of the labor market remains one of the key variables to watch going forward. Before moving to the bank analysis, I'd like to review the main trends observed in the local banking industry. Please move to the next Slide #6.
As illustrated in the chart on the slide, the banking industry recorded net income of CLP 2 trillion in the second quarter and a return on average equity of 21%. This performance continued to reflect the sector's capacity to generate solid profitability, supported by the positive impact of the temporary pickup in inflation on revenues. Turning to asset quality. Non-performing loans for the industry remained stable at 2.5% with a coverage ratio of 159%, including additional provisions, consistent with figures seen in recent quarters. On the credit side, the loans to GDP ratio continued at 74% as of June 2026, showing no signs of recovery.
In more detail, industry total loans reached CLP 255 trillion, growing 4.3% in nominal terms and 0.4% in real terms. Commercial loans continue to underperform, decreasing 1.1%, while consumer loans grew 1.7% and residential mortgage loans rose 2% in real terms. Looking forward, we have slightly modified our benchmark scenario for the industry as GDP growth has been revised down and inflation is expected to be at 4%. We now expect industry loan growth to be around 4% in nominal terms by year-end 2026 from the 4.5% forecasted last quarter.
Also, we maintain the NIM guidance for the industry in the range of 3.6% to 3.8%, while NPLs are projected to end the year between 2.3% to 2.4% and credit loss expenses are stable at 1.2% to 1.3%. Now I will turn the call over to Pablo to discuss Banco de Chile results for the quarter.
Pablo Ricci: Thank you, Rodrigo. Please turn to Slide 8. This slide summarizes our strategy that is committed to excellence and is proven by results. Our strategy rests on 3 pillars that we execute consistently, customer centricity, efficiency and productivity and sustainability. These 3 pillars shape the way we work, the way we deploy resources and the way that we generate value for our stakeholders. In the center of the slide, you can see how these pillars translate into 6 core priorities. And on the right-hand side, we show how all these strengths come together to sustain our solid profitability track record. Our midterm targets are displayed at the bottom of this slide.
Our aspiration is to hold the leading positions in profitability in local currency DDA balances and in commercial and consumer lending together with a cost-to-income ratio that's below 40%, and Net Promoter Score that's above 73% and a top 3 ranking in corporate reputation. To sum up, our strategy is disciplined, consistent and resilient. And importantly, it is already noticeable in our operating and financial performance. Please turn to Slide 9, which summarizes our key financial and commercial highlights for the first half of 2026. The metrics at the top of the slide provide an overview of our performance, which we will discuss in greater detail over the rest of the presentation.
Total loans reached CLP 40.3 trillion in June 2026, increasing 2.3% year-on-year. Operating revenues totaled CLP 922 billion in the second quarter, increasing 20.9% year-on-year, supported by both a 5.8% net interest margin as a result of higher inflation and net fee income growing 10.7% year-on-year during the second quarter. On the risk side, our cost of risk, excluding additional provisions, stood at 1.15% with an NPL ratio that remained stable on a sequential basis at 1.6%, while our CET1 ratio remained solid at 13.9%. Thanks to the strength of our operating margin and our firm cost discipline, our efficiency ratio reached 31.3% this quarter.
All in all, this generated a bottom line for the second quarter of CLP 391 billion, equal to a return on average capital of 29.1% and a return on average equity of 27.9%. In the middle of this slide are the highlights of some of our commercial and operational advances achieved during the first half of 2026. First of all, we would like to highlight that our commercial momentum remained at healthy levels. We originated 8% more consumer loans year-on-year and 18% more installment loans to SMEs compared to the first half of 2025, supported by our digital initiatives and strengthened commercial capabilities across channels. Customer acquisition was also positive as digital current accounts expanded 34% year-on-year.
Total current account openings increased 17% and FAN Emprende openings rose 12% over the same period. On efficiency, our cost control and productivity initiatives, together with continued technology and digitalization efforts kept real year-on-year expense growth below inflation, consistent with our long-standing commitment to operational efficiency. We also continued expanding our value proposition through new business initiatives. We launched B Startup, a new service model for start-ups and science technology-based companies, supported by strategic alliances with UDD Ventures and Amazon Web Services. Furthermore, we established new partnerships with Linze for vehicle financing, with Despegar to enhance our loyalty program, and with Fingo to enhance our SME value propositions through digital factoring solutions.
We will discuss how we expect to benefit from these initiatives in greater detail on the next slide. Before moving forward, I want to review our updated guidance for 2026. Based on weaker-than-expected macroeconomic performance during the first half, we've revised our nominal loan growth to around 6% from around 7% last quarter. We also expect our net interest margin to remain at approximately 4.6% by the year-end, while cost of risk is expected to be in a range between 1.2% and 1.3%, which recognizes the establishment of additional allowances in the second quarter.
However, this should be partially offset by tight cost control and solid revenue generation, which we expect to drive further improvements in our efficiency ratio to around 37% by December 2026 from the 38% forecasted last quarter. As a result, our return on average capital and reserves is expected to be in the range of 21% to 22% by December 2026. This incorporates the additional allowances established in the second quarter but excludes the potential effects of further nonrecurring events in the coming quarters. Please turn to Slide 10, where we highlight several strategic alliances and new initiatives that are expanding our reach and strengthening our value proposition.
Starting on the left-hand side, we entered into a new partnership with Linze that integrates Banco de Chile's vehicle financing directly into the digital automobile purchase process. Through this alliance, customers can select a vehicle and access financing within the same digital journey, delivering a simpler and more convenient experience while maintaining our high security standards. This allows us to get involved in the auto loan market by widening the value proposition for our personal banking customer base while attracting new customers looking for car financing. We also formed a strategic alliance with Despegar, the largest online travel agency in the region to reinforce the value proposition of our travel loyalty program.
This partnership provides our customers with an enhanced travel platform powered by Despegar that combines a customer-centric booking experience with our loyalty program benefits, making it easier to plan and book flights, hotels, travel packages and car rentals. In addition, we recently established a commercial alliance with fintech Fingo to expand access to factoring solutions for smaller SMEs through a streamlined digital model. This initiative combines Banco de Chile's commercial capabilities with a more agile and efficient operating model, supporting customer acquisition, business growth and productivity. On the right-hand side shows B Startup, a new tailored service model designed to support start-ups in science and technology-based companies throughout their development.
B Startup combines a specialized commercial team; financial products designed for specific needs of start-ups and a service model that blends digital capabilities with dedicated relationship management. The initiative also connects clients with a broader innovation ecosystem through alliances with leading incubators, accelerators, and strategic partners such as UDD Ventures and Amazon Web Services, through which our start-up clients can access acceleration and scaling programs as well as cloud-related benefits and support to help them grow. Together, these initiatives reflect how we're leveraging partnerships to broaden and strengthen the value propositions for our diversified customer base.
While it's still in the early stages, we believe that these alliances have meaningful potential to support business growth, enhance customer experience, reinforce customer loyalty and improve efficiency over time. Please turn to Slide 11 to discuss the evolution of our loan portfolio. Total loans reached CLP 40.3 trillion as of June 2026, growing 2.3% year-over-year. This figure includes a one-time effect related to the migration of our outsourced credit card processing platform during this quarter. Until May, early payments made by credit card customers were booked as other demand deposits until the credit card billing due date. Beginning June 2026, those payments are immediately deducted from the credit card loan balance.
Therefore, this change resulted in a one-time decrease in both credit card loans and other demand deposits by approximately CLP 210 billion, which affects the year-on-year loan growth comparability. When excluding this effect and looking at the portfolio on a pro forma basis, total loans would have grown 2.9% year-over-year, which represents a clear view of the evolution of our loan book. By product, growth varied across our portfolio. Consumer loans increased 0.6% year-over-year, but 5.3% on a pro forma basis when excluding the migration effect mentioned earlier, supported by enhanced value propositions for targeted customer segments. Residential mortgage loans grew 3.4% year-over-year due to our aim to improve lending margins in some segments.
As recent quarters have shown, momentum in some areas can help offset weaker activity in others, supporting more stable portfolio performance and a balanced risk profile. The chart at the bottom right reinforces this point by showing the diversification of our commercial portfolio across multiple economic sectors. This broad exposure helps mitigate sector-specific risks and support asset quality through different phases of the economic cycle. Overall, the combination of business scale, a customer-centric approach, disciplined risk management, firm cost control and balanced lending exposures across all business segments and economic sectors provide solid fundamentals for profitable long-term growth and consistent performance. Please turn to Slide 12.
A resilient low-cost funding structure supported by our leading local currency deposit franchise and strong capitalization is one of our most important competitive advantages. As shown in the chart on the left, loans are the core component of our balance sheet, representing over 70% of total assets. On the funding side, demand deposits play a central role, accounting for 26% of total funding, complemented by time deposits, long-term debt issuance and our solid capital base.
This is further illustrated in the top right chart where the relationship between demand deposits and total loans stands at 36% as of June 2026, the highest ratio among our major peers, representing one of the main drivers for a competitive funding cost and high margins. This reflects both the strength of our customer franchise and the confidence of depositors and our financial soundness. In fact, as of June 2026, we continue to hold the leading market share in local currency demand deposits among private banks, reaching 19.7%, as shown in the bottom left chart.
This position is a direct result of the depth of our customer relationships and the continued success of value propositions we provide to both individuals and companies. Finally, our capital position remains among the strongest in the industry. As shown in the bottom right chart, our Basel III ratio reached 17.6%, including a CET1 ratio of 13.9%, comfortably above regulatory requirements and ahead of all of our main competition. This provides significant financial flexibility to support business growth when economic activity reactivates, absorbs potential volatility in the short term and continues creating value for shareholders while maintaining a prudent risk profile.
Overall, the combination of a leading deposit franchise, a diversified funding structure and a best-in-class capital position remains a key differentiator for Banco de Chile. Together, these competitive strengths reinforce the resilience of our balance sheet and support our capacity to grow through different market environments. In fact, at Banco de Chile, we like to say that our liabilities are our most important assets as this allows us to generate higher and more stable returns at a lower risk level. Please turn to Slide 13. Operating revenues reached CLP 922 billion in the second quarter, denoting a 20.9% increase compared to the same period last year and a significant increment from the CLP 749 billion recorded in the previous quarter.
As shown in the chart on the left, this performance was largely explained by higher inflation during the quarter, together with sustained growth in customer income supported by loan expansion, solid cross-selling resulting from higher fee income generation. Based on these drivers, our operating margin measured as total operating income over average interest-earning assets reached 6.8% as of June 2026, comfortably above our main competition. More importantly, this leadership is not a one-off, but instead, it has been sustained consistently throughout our recent history, reflecting the structural strength of our business model that combines the resilience of customer income with our ability to benefit from favorable changes in market factors.
The bottom right chart presents our net operating margin, which incorporates the expected credit losses. Here again, we lead the industry, reaching 5.7% as of June 2026, ahead of our main peers. This is particularly relevant because it demonstrates that our superior margins are not the result of taking higher risk. Even after absorbing credit costs, we maintained the leading margin. Overall, this evidence reflects the quality and resilience of our income generation capacity, which is based on diversified revenue, a competitive funding structure and prudent risk management that allows us to deliver industry-leading margins consistently through the cycle. Please turn to Slide 14.
In further detail, I'd like to highlight the key drivers of our net interest margin leadership and earning generation capacity. Our NIM reached 4.9% during the first half of 2026, well above peers, supported by improved lending spreads, increased net fee income and well-oriented adaptive asset and liability management, which enabled us this quarter to maximize the earnings contribution from the higher inflation environment. The chart on the right provides a breakdown of our net financial income. As you can see, net financial income totaled CLP 736 billion during the second quarter, increasing 25.3% year-over-year. This performance was driven by 2 sources of income.
First, non-customer financial income increased significantly as the management of our financial gaps in the banking book allowed us to capture the benefit of higher inflation during the quarter. As a result, at the bottom of the chart, UF variation reached 2.5% in the second quarter compared to 1% in the same period of 2025, providing an important boost to revenues. The chart on the bottom left shows the evolution of our UF gap position in the banking book, which reached approximately CLP 9.1 trillion at the end of June.
This position reflects both our structural inflation index exposure, which hedges the real value of our shareholders' equity and the active management of market opportunities by our treasury team through directional positions in fixed income securities and increased revenues from sales and structuring related to hedging solutions offered to corporate customers. These actions enable us to offset lower revenues from our trading portfolio due to less favorable evolution of interest rates in the second quarter of 2026 compared to last year. Second, customer income remained highly resilient at CLP 473 billion, reflecting stronger income from loans, supported by improved lending spreads, particularly in retail banking.
This extends the positive trend we have observed since the post-pandemic normalization of margins and is particularly relevant in light of subdued loan growth. By product, the main contributor was consumer loans, which recorded an increase of CLP 9.7 billion year-over-year, driven mainly by wider spreads and higher average balances. To a lesser extent, commercial loans contributed by rising CLP 3.5 billion over the same period, also supported by improved spreads and a slight increase in average balances. Overall, the combination of resilient recurring customer income, active balance sheet management and leading funding base continues to be the main support for our superior margins, allowing us to consistently outperform peers across different interest rate and inflation environments.
Please turn to Slide 15. Fees continue to be an important and recurring source of revenue for us, supported by our expanding customer base and the increasing contribution of our subsidiaries. One of the main drivers of this performance is our growing customer base, which continues to deepen the use of our products and services. In the second quarter, we reached 2.9 million active customers and 2.6 million FAN accounts, while current accounts expanded 7.1% year-over-year and total fees grew 10.7%. This reflects the continued success of our digital value proposition and the ongoing enhancement of our FAN ecosystem.
