Feb 4, 2015
Executives
Rodrigo Aravena - Chief Economist & SVP, Institutional Relations Pablo Mejia - Head, IR Victoria Gabens - Investor Relations Officer Daniel Galarce - Head, Research
Analysts
Thiago Batista - Itau
Operator
Welcome to the Banco de Chile's Fourth Quarter 2014 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, Mr. Victoria Gabens, Investor Relations Officer and Daniel Galarce, Head of Research.
Before we begin, I would 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 Ms.
Victoria Gabens. Please go ahead.
Ms. Gabens, your line is open.
Victoria Gabens
Good morning, everyone. It's a pleasure for me to share with you our comments on Banco Chile's fourth quarter 2014 financial results.
Please turn to slide number 2. To begin, we'll discuss the development in the economic environment and the results of the banking industry, followed by a review of Banco de Chile's results.
Please turn to slide number 3, which contains the economic highlights. We'll start with the upper left graph.
You can see that Chile's activity remained weak in the last quarter as shown by the monthly economic activity indicator on the upper left, although there was a recovery in the last month of the year. Available data suggests that the activity posted a 1.7% expansion in 2014 due to the expected 1.6% expansion in the fourth quarter from 0.8% in the previous quarter.
Therefore the economy achieved is second consecutive year with the below trend growth. Several indicators demonstrate the domestic demand led to slowdown, specifically the 4.5% contraction in capital goods imports in the fourth quarter.
This indicated that growth faced stayed in negative territory although there was a moderation of its pace of reduction. You can also see a moderation in private consumption growth as both the retail and super market sales reduced their annual growth in the last quarter to 0.8% and 1.2% respectively.
On the other hand, there was a significant improvement in the contribution from net exports, which is led by the high dynamism of exports mainly due to the positive impact of the weaker exchange rates. It is also worth mentioning that the unemployment rate was 6% in the fourth quarter confirming that labor conditions remained tight in spite of the weak economic growth.
Please continue to slide number 4. As you can see on the other left hand chart, headline inflation has remained above the upper bound of the Central Bank range, 4% since the second quarter of 2014 despite the slowdown in local activities.
Particularly as part of an upward trend until October of last year, we have posted a 5.7% annual rate due to the higher tradable inflation led by the weaker exchange rate. However, headline inflation has fallen in weaken months as a consequence of lower international energy prices, which is an important component in Chile's CPI basket.
Couple of measures including CPI score and CPI excluding food and energy have been increasing, which [inaudible] relative to second run effects over other prices. Factors such as the below trend economic growth and the fall in oil prices could help to mitigate this risk.
As a result of the weak economic growth and good long-term inflation expectations and the lack of a significant improvement in the most relevant leading indicators such as consumer and business confidence, this bank reduced the overnight rates by 100 basis points in the second half of 2014, finishing the easing cycle in October when the rate was decreased to 2% as you can see in the upper right-hand chart. Therefore monetary conditions are currently in expansionary territory since the interest rate is close to 0% in real terms.
In this context, the Central Bank has maintained a neutral bias in the last press releases, suggesting they're change in the interest rate as not the most likely scenario, at least not in the short term. On the bottom left, the graph shows how the exchange rate weakened through the most past of the year.
This can be attributed to several factors including the stronger multilateral dollar and more expansionary monetary policy in Chile and lower copper prices. Particularly the Chilean Peso lost 13% of its value against the dollar in 2014.
Public Finances remain strong. According to special figures, there was a fiscal deficit equivalent to 1.6% of estimated GDP in 2014, slightly below the official estimates released in October.
In 2013, the deficit was minus 0.6% of GDP. The breakdown shows that this was largely due to the weak 1.5% increase in fiscal revenue, led by the 8.2% real annual contractions in copper revenue.
On the other hand, fiscal spending grows by 6.5% as a consequence of the 7.4% increase in its capital component. However, the structural balance of the central government was only minus 0.5% of GDP and both fiscal savings represented 12.9% of GDP, suggesting that Chile still has enough room to make countercyclical policy.
It is important to highlight that there is a broad consensus that economic growth will improve this year. According to the last Central Bank's estimate economic growth would increase to a range between 2.5% and 3.5%, while analysts in the private sector are expecting a 2.6% expansion this year.
This is according to the economic expectations survey conducted by the Central Bank. However, both of these figures continue to suggest that Chile will grow below the potential.
Finally, the key factors behind the recovery are the [inaudible] interest rate reductions, the expansionary fiscal policy and the positive contribution to the net exports due to the weaker currency and the recent improvement in terms of trade despite the falling copper prices. Finally, it is important to mention that Chile is taking important risk this year, especially the downside risks and China's economic growth and the possibility of unexpected negative effects coming from the beginning of the tightening cycle in the U.S.
Please turn to slide number 6 for review of the main figures for the chain banking system. As of November 2014, loans in the banking industry grew 4.8% year-on-year in real terms.
This growth was lower than the average recorded over the last few years in line with the slowdowns, which has affected investment and consumption. Nevertheless, the mortgage loans continue growing at a solid double-digit rate of 10.5% year-on-year.
This is not the case as we look at consumer and commercial loans, which grew at 3.5% and 2.8% respectively. Looking forward, we expect that loan growth to pick up at the end of 2015 in the range of 5% consistent with our base economic scenario for Chile.
Despite the slowdown, which affected loan growth and different industries negatively in 2014, net income grew substantially in the banking sector as you can see on the chart on the right. As of November 2014, net income reached 2.3 trillion pesos within ROE of 18.8%.
This strong result was primarily due to the higher than normal inflation rate experienced in Chilean, which affected the U.S. GAAP position bank hold positively.
Term gapping due to favorable changes in interest rates that were partly a result of consecutive cuts to the overnight rates together with good risk indicators and a one-time tax benefit on deferred tax assets. Now, I will pass the call to Pablo, Head of Investor Relations who will discuss Banco de Chile for year 2014.
Pablo Mejia
Hi, thanks for joining us. Please turn to slide number 8, where you can see our quarterly and yearly results for Banco de Chile.
In spite of non-recurring operating expenses, Banco de Chile reached an excellent result of 128 billion pesos for the fourth quarter of 2014 as you can see on the chart on the left, which actually was the average quarterly net income achieved in 2013. Average quarterly net income for 2014 was 148 billion pesos.
On an annual basis, net income increased 15% year-on-year and reached $591 billion pesos as you can see on the chart on the right. Proactive management of our net asset position in U.S.
and accounting benefit from the tax [inaudible] deferred tax assets played a fundamental growth and it's exceptional results. However, these factors were complemented with important programs and improvements in various aspects of the bank including important developments in effect in technology and innovation in online platform and the implementation of business intelligence tools, which also drove the retail segment.
Additionally, we've maintained the prudent risk management focus which kept loan loss provisions under control and recorded good levels of efficiency and if we move on to slide number nine. There is a review of our operating income.
For the fourth quarter of 2014, operating income amounted to 440 billion pesos, a 12% increase from the fourth quarter of 2013 and this result was mainly due to Europe structural gap, thanks to the Europe variation that rose from 0.95% in the fourth quarter of 2013 to 1.9% in the fourth quarter of 2014 and also higher income from loans, which prevented a 5.9% year-on-year growth. For 2014 full year results, operating income totaled 1.6 trillion pesos a 13% increase from 2013.
The main drivers for the increase were first, a larger loan portfolio, second high demand deposit base which partly offset the negative effect of lower margins due to consecutive cuts in the overnight rates, third higher revenues from assets and liabilities management and a positive effect on operating income due to hedges, we maintain on credit provisions for loans denominated in dollars. Each of these factors will be discussed in more detail on the following slides.
Please turn to the next slide number 10, which focuses on loan growth. Loans have grown 5% year-on-year and 2% when compared to the prior quarter which is an approximately 22 trillion pesos as of December 31, 2014.
As you can see on the chart on the left, loan growth was mainly concentrated in retail banking, in line with its strategy, the strength in this business area. As such growth in this segment grew 12% year-on-year and 4% quarter-on-quarter.
Today, retail loans account for 54% of our loan book, which is substantial increase when compared to how we began the year at 50%. On the table on the right, you can see that this increase is concentrated mainly in mortgage loans, which grew almost 15% year-on-year.
This is followed by consumer loans for the middle and upper-income segment, which grew 12% year-on-year and to a lesser extent the small and medium sized companies, with a growth of 9% year-on-year. However consumer loans in CrediChile, our consumer finance area, expanded a modest 3% year-on-year.
These results were achieved through business strategy, which is based on understanding and anticipating our client's needs. In order to achieve this, we have used business intelligence tools to gather new information and data, allowing us to create specific clusters and offer each of these a personalized value propositions.
This has resulted in a high-loyalty and retention rates from customers. In addition, virtual banking was significantly improved over the course of 2014 by introducing a new way of accessing products and benefits without having to go to the bank.
Special bank sales executives and effective contract total cost are both part of this new retention model and has shown very positive results in the short time period. It's also important to mention that we have made significant progress in improving customer experience.
Part of the board has developed over the year, which focused on identifying and establishing emotional relationships with the customer and we'll now allow us to strengthen these bonds in order to increase loyalty and retention. When looking at the wholesales segment on the other hand, the Chile has decreased it's volumes by 2% mostly because of stronger competition from smaller banks and less dynamic economic environment due to the uncertainty and the end of the investments cycle in mining [ph] and to higher base of comparisons due to the fact in 2013, we granted short term loans to specific wholesale customers for approximately 560 billion pesos.
To exclude this, our loan portfolio in this segment would show approximate growth of almost 4% year-on-year. Despite this result, we concentrated our efforts on cultivating relationships with wholesale customers by increasing significantly on site visits which enabled us to manage risks more effectively and integrate a more strategic advisory orientation through our products and services that we offer.
Please turn to slide number 11 on financing. Funding remains one of our most important comparative advantages, thanks to our leadership and zero interest savings and demand deposits and first trade and risk rating.
Demand deposits accounts for 25% of total liability and have grown by 16% year-on-year, thanks to our efforts to improve relationships with customers, in order to not only be in there first search for loan purposes, but to also be their main bank for all financial services. As a result demand deposits and re-sales were 17% due to the commercial initiatives but strength and relationships which we started mentioning in the previous slide.
Some of these initiatives include 60,000 growth through current accounts and 110,000 growth to payroll and pension direct deposit agreements and new innovative motive by our asset also helped in strengthen ties amongst others. In the wholesale segment, we also grew strongly in relationships fairly with our customers by increasing significantly the amount of onsite business and improved the family of its platform resulting in a more effective product and service offerings.
We also grew 16% mainly composed of bonds and are a more stable source of funding. As a consequence, debt issues, which is a more stable source of funding as I mentioned, represents 18% of funding and time deposits dropped to 35% from levels that were well above 40% in the past, as a result of our growth in both DDAs and bonds.
Please turn to slide number 12 on operating margins. This slide brings together what we have mentioned on the prior slides.
First you can see down the blue line, which is the total operating margin for 2014, outperformed the levels achieved in 2013 and 2012. This was mainly accomplished by higher non-customer income with purple line.
During 2014, we successfully managed U.S. GAAP position on their balance sheet to take advantage of the higher inflation to generate more revenues.
In addition, we profited from term gapping, repricing of liabilities, and revenues from hedges that have a negative [inaudible] income and provision expenses. These revenues compensated the lower margin generated in our fee business, represented by the red line, which is mainly related to regulations and the negative effects of the degradation of this exchange rate since this directly affects our obligations related our loyalty program denominated in dollars.
Interest income from customers, the green line fell approximately 20 basis points year-on-year due to lower margins from our demand deposits, which is a result of important decreased experienced by the overnight interest rates. It's important to highlight that despite the fact that the overnight rates dropped during the year, we almost completely offset the lower DDA margins by growth.
So revenue generation from DDAs remained relatively flat year-on-year. In terms of loan spread, we also were able to maintain them flat year-on-year.
Thanks to our sustainable business model which aims to maintain a solid risk return relationship. On the bottom right, you can see that as of November 2014, we ranked second in operating margins.
This is very impressive due to the fact that we're not the most retail-focused banks in the industry and we still have room to grow in this area. Please turn to slide number 13 on the loan loss provision.
This past year we have faced various external factors that influenced risk expenses including economic deceleration, slower investment and potential changes in unemployment rate and composition. Nevertheless, our loan loss provisions have increased mostly because of extraordinary effects rather than credit deteriorations.
For the quarter, Banco De Chile presented 24 billion Pesos in loan loss provisions, 9% above the same figure of 2013 in the same quarter a year. On an annual basis loan loss provisions grew 18% year-on-year, but which is mainly explained by loan growth, which expanded on average 7% year-on-year in 2014, concentrated in the retail portfolio and this explains approximately 12 billion pesos of the variation recorded in loan loss provisions, in second place because of higher additional provisions during 2014 a total of 22.5 billion pesos were destined towards additional provisions compared to the 10 billion pesos established in 2013.
The higher charge is consistent with both our prudent risk approach, the outlook regarding potential risks in different economic sectors, especially if economic recovery takes longer than expected. Third, because of a negative impact from the exchange rate on U.S.
denominated allowance. This accounts for 8 billion pesos and was driven by a special depreciation of about 15% in 2014.
And finally because of net deterioration of approximately 10 billion pesos, which involves the release of allowances to loan losses of around 9 billion pesos in 2013 as a result of the improvement of the financial condition of a specific corporate customer. This resulted in increase of our loan loss provision ratio from 1.2% in 2013 to 1.3% in 2014.
If we adjust this ratio by removing the additional provisions and the tax effect, this results the ratio of around 1.18%. In this matter, we continue to post solid figures when compared to the industry with non-performing loans reaching only 1.2% substantially below most of our competitors.
Additionally, it is important to mention that we remain as one of the safest banks in the loan industry with the coverage ratio of almost two times. Please turn to the next slide number 14 on operating expense.
For the fourth quarter of 2014, the operating expenses totaled approximately 217 billion pesos increasing 28% when compared to the same quarter last year. This increase was mainly due to non-recurring personnel expenses for about 45 billion pesos, which was associated with the collective bargaining agreements that took place with our unions in December of this year.
We're very pleased with this process, but it took place as we were able to reach an agreement well before the final deadline. The benefits agreed upon were extended to ununionized workers, which inspired a positive work environment and strengthens the relationship with the entire workforce.
For the full year, our cost base was affected by various extraordinary items including; first, the effect of non-recurrent personnel expenses related to the bonus paid in the bargaining agreement mentioned earlier; second, an increase in personnel expenses of about 5%, which is completely in line with inflation probably adjusted for inflation every May and November, this year adjustments followed over 5%. And third, administrative and other costs increased 9% year-on-year costing 330 billion pesos in 2014.
It's important to note that most rental and service agreement contracts in Chile are also index inflation, so the higher the number inflation during the year also affected admin expenses. Additionally, we also incurred higher expenses related to IT and communication expenses, branch network and then a lesser degree to outsourced services associated with internal development.
In terms of our efficiency in that, we posted an excellent efficiency ratio of 43.4% despite the one-time charge related to the bonus with our labor unions, if we look at November figures, which still include the charges. What we have to this point December figures aren't available yet for the industry.
We led the industry with an efficiency ratio of 40.9%. Obviously, this figure along with the figures posted by our competitors are significantly influenced by the high operating revenues due to the positive effect of inflation has on our numbers, but even if we exclude this effect, the ratio would remain very good at a level near 44%.
Please turn to slide number 15. As you know, we've had an attractive and consistent level of profitability during the last year.
Even when we raised capital we have quickly put back capital to use and generated higher returns, substantially more than that appears in both return on average equity, and return on average assets. Currently both of these indicators have reached 1.3 times and 1.4 times respectively of our peers.
In the long term, we believe that we can maintain a sustainable ROE, above 20% because first we have room to continue to improve our loan mix to become a bank that's more focused in the retail segment. Second, we believe that we can continue increase in the profitability of our wholesale book by further improving our relationship, thus increasing the number of products per customer.
And third, there is still room to continue improving that productivity levels which should translate into sustainable improvements in their efficiency ratio. In terms of 2015, we expect a good year in terms of core revenue growth in line with our expectations as the modest recovery in the economy.
Nevertheless normalized based on inflation will have an important effect on our bottom line and out of the industry. This is particularly true for the first quarter of 2015 which we estimate inflation to be negative for the quarter, as measured by the U.S.
Please turn to slide number 16, where we would like to highlight some of the main accomplishments of this past year. First, Banco de Chile has been able to successfully adapt the new more demanding customers, which seek easy and fast access to financial services and products through various online platforms.
In 2014 we launched three mobile apps, which allow our customers to remotely access the financial information and make transactions quickly and securely. These applications have put us in the forefront of the Chilian banking industry in terms of innovation.
For second year in a row, we were awarded first place in the [inaudible] ranking for renowned corporate reputation. This consolidates our prestige and reaffirms the trust the customers and the community have with us, which is also reflected in our excellent risk classification.
We have made organizational and culture changes in the bank about the new and more demanding customers, which is why we have created a new strategy to approach our customers and established real relationships in order to give them a better and more personalized customer experience. This initiative has brought us to implement the best service standards and practices and also listen and understand our customers.
The new information taken from this rewarding experience has allowed us to integrate our strategy in the products and services that we offer. Another achievement was our fundamental role in the largest M&A operation in the history of Chile.
As subsidiary, Banco De Chile global market was in charge of conducting this merger [inaudible] consolidated Banco De Chile as a key player in the local corporate market. Other achievements include the implementation of new business intelligence tools, which have allowed us to improve our efficiency in branches in sales productivity, a better value proposition which speaks of personalized products and services offered to the client.
And finally efficient funding management where we have continued to diversify our liability structure by taking that approach. These accomplishments together with the secondary offerings layout here and consequently resulted in a stronger presence in the stock market, increased in trading volumes by 86% year-on-year and ranking us first in terms of the most traded financial institution stock in the Chilian Stock Exchange.
To wrap up, we've succeeded achieving these goals because of our customer centric strategy and focus on risk management, the capacity to adapt new and more demanding environment. Now, if you have any questions we would be happy to answer them.
Operator
[Operator Instructions]. And your first question comes from line of Thiago Batista from Itau.
Thiago Batista
I have two questions, the first one I got in the loan growth. In Banco de Chile during last year with relatively weak loan portfolio expansion.
So my question - I think because of the economic slowdown. So my question is how much do you believe that the loan portfolio could expand during this year.
And of the segments could lead to these expansions. And my second question is about the earnings in 2015.
I know that during this year, we'll see many different trends. So much volume inflation probably evaluated by their fees higher tax.
So it's really very tough to predict the earnings of the Bank. In my numbers have low single-digit expansion.
I want to see, if it is really feasible to see some expansion there of the bank during this year.
Pablo Mejia
Can you repeat the second question, please?
Thiago Batista
Yes, I know. The second question is about the earnings.
It's quite difficult to predict the earnings of Banco de Chile during the year because of the different trends. In my module, I've low single-digit earnings growth for this year.
I want to see if it is really feasible to Banco de Chile to show some EPS growth.
Pablo Mejia
Well, thank you for your questions, for the first question for the expansion in 2015 of loan volume. I think it's important to mention that we're seeing loan growth for the industry somewhere around 5% in real terms where mortgage loans will lead that growth followed by commercial loans and consumer loans.
Where we don't see much growth is in the lower income segment, which is an area that has been, which was affected by the lower interest and maximum interest rate, caps and certain things that occurred in 2012 if you recall regarding how individuals, how you can use negative information in Chile basically making the lower income segments more risky. For Banco de Chile, we expect to grow in 2015 at a level slightly above the industry.
We expect that it should be a more balanced growth for 2015, not so concentrated like we had in 2014 in retail. We shouldn't - we're expecting that this shouldn't be repeated where we should see market share in commercial loans and in consumer loans there should be more centered in the middle-income and upper-income segments.
Mortgage loans, we should grow somewhere more in line with the industry as we're very comfortable with our market share if you look back three or four years ago, we had the market share that was closer to 14% and we put a strategy to grow in mortgage loans because the customer at the mortgage loan is the much more loyal customer with a higher retention rate. Today we're much more comfortable with the level that we have, which is around 70.5%.
So, we don't expect to grow much higher than the average in the industry. In terms of earnings, I think it's important to say that for 2015 we're expecting that inflation should return to more normal levels of around 3% to slightly lower in line with our expectations but GDP should probably be around 3% as well and investment consumption should also not put pressure on inflation.
We expect that overnight rates remain stable for the next while, and during the second half of the year 25 basis to 50 basis point drop, than the 3% that we have today, and in terms of our results I think the most significant factors affecting 2015 is the lower inflation, which affect the U.S. GAAP in our balance sheet and lower overnight rate which affects DDA margins.
If we just look at these two factors, which are the main factors affecting I would say the next year for 2015, it should put pressures on them and they should look closer to what we recorded in 2013 which under our archive section. So you can see in our press releases is 4.7% net interest margin with an inflation of 2%.
In terms of risks, we're seeing in the economic scenario from employment that remains in levels of around 7% to 7.5% which was focused to Chile, but there are still uncertainties regarding when we'll see the pickup in growth.
Operator
[Operator Instructions]. Our next question comes from the line of [inaudible] from Bank of America.
Unidentified Analyst
I have a couple questions, the first one on asset quality, from the comments in your release you get the impression, it's very clear actually that you guys are taking a very conservative approach tightening underwriting standards moving to the upper levels of the different segments that you serve. And in general, the other market has also been doing the same.
Do you think in addition to that you guys have been building extra reserves with the additional provisions that you've been booking, I presume, taking advantage of higher than expected inflation in revenues. So it just points to a very conservative approach, are you guys worried that we're going to see some significant deterioration in asset quality in 2015 and is that why you guys are taking this sort of more conservative stance.
That's the first question. And the second question is what is, what should we look at as the impact form, potentially lower central bank rates on your results.
Is it going to lead to pressure on loan spreads or should it be positive for loan spreads? Thank you.
Pablo Mejia
Okay. In terms of asset quality, I think I have mentioned it a little bit, our base scenario expects unemployment to remain relatively strong at the 7% and 7.5% level, which is still good for Chile, but there is still a lot of incentives in these figures.
So that's the main risk that we could see. So if you look at the quality of job as first job quality than there was in the past, because the job creation is more concentrated in staff employees and salary employees, and obviously with the lower GDP growth that we've had this isn't positive scenario together with all the new regulations that have been happening in Chile for companies.
So you have the regulations regarding the tax changes, you have the regulations for the labor loss, so there is a lot of still uncertainties in Chile, which have caused us to take more conservative steps. And we're still waiting to see how companies will react to this in order to have better understanding of risks.
So there is still a lot of uncertainties. And I would say additionally that additional provisions have been booked, generally they're booked in near the end of the year when we evaluate that we have sufficient levels of provisions and the risks that we're assuming.
This year was a little bit more of an exception that there was in the beginning and the end of the year, because there was a lot of uncertainties building up. If we look at the end of 2013, we were expecting a year that was strong growing about 4% and we ended up the year at 1.7 and that started to become more apparent when we book the first additional provision.
So, there is still a lot of uncertainties. In terms of your second question, the impact of Central Bank rate [ph], in the short-term, it's positive, but I would say in the medium term - in the short term it's positive, something around 10 basis points of net interest margin, but in the medium term, it's negative for us because we have a large position in non-interest bearing liabilities.
So the margin that we received from these non-interest bearing liabilities is flat. So in the medium term, it's negative.
Unidentified Analyst
In the short term, you said 10 basis point impact on them, that is what if rate move by how much?
Pablo Mejia
1%, 100 basis point change.
Unidentified Analyst
Okay. I'll follow-up on the first one, do you think that or is it reasonable to assume that you will be continuing to book these additional reserves.
I know you guys said that these are determined by the Board in the past, and we just have very little visibility into when and the magnitude of what is to be expected. But when I look at the provisions that you posted for the quarter, if I back out those additional reserves your provisions actually were very good, improving like 13% quarter-on-quarter.
So is this - should I take that adjusted for provisions as what we could expect on a recurring basis going forward? It's roughly about 1.2% of average loans?
Pablo Mejia
Really, we think the countercyclical provisions are marginal amount of the total provisions that we book, and in general in the past, in the history of Banco de Chile, [inaudible] levels that range around the 0.5% to 0.6%. So that is the growth in our loan book.
You can do that. For next year, it's difficult to - we can't give that information, because we don't know what the view will be in six months from now.
Unidentified Analyst
Okay. So going back to what you think the recurring level of provisions area, we've heard about the additional provisions, do you expect that in 2013, you'll be able to maintain a roughly 1.2% of average loans as your provision level, which is the number that you posted in the fourth quarter.
Pablo Mejia
In that base economic scenario, if what occurs actually happens. And then there is no surprises, there is no downturn and unemployment or GDP dropped, we expect something around the range of 1.2% to 1.25%.
Unidentified Analyst
Okay, if I may just one final question on taxes, have you decided which the tax sort of regime you're going to go with, and if so what is the expected effective tax rate that we should work with for Banco de Chile in the next two years.
Pablo Mejia
The definition will be made in the general shareholders' meeting in 2017. So the effective tax rate for accounting purposes and only for accounting purposes until 2016 and for accounting purposes it's 27% but that can change based on what we decide [ph] at the Annual General Shareholders' Meeting in 2016.
Unidentified Analyst
I see. But in terms of what we could expect to see in your results.
Do you have any guidance on what the effective tax rate should be or we should be working for with for 2015.
Pablo Mejia
2015, it depends on the inflation. Big effect, so one second, please.
So the income of core increments is about one - because the tax rate will go from 21% to 22.5% so the core increment is something like 1.5% so increase from the normal rate that we had prior to 2014.
Operator
We have no further questions. This concludes the question and answer section.
At this time I would like to turn the floor back to Banco de Chile for any closing remarks.
Pablo Mejia
Okay, thank you for listening and participating in our call. We look forward to sharing with your our next quarter results.
Bye.
Operator
Thank you. This does conclude the presentation.
You may disconnect your lines at this time. Have a nice day.