Banco de Credito e Inversiones

SGO:BCI

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, everyone, and welcome to Bci's First Quarter 2020 Results Conference Call. Before we begin, I would like to remind you that this call is being recorded. And that the information discussed today may include forward-looking statements regarding the company's financial and operating performance. We undertake no obligation to update and maintain updated any such forward-looking statements after the date of this conference call.

All projections are subject to risks, uncertainties and other factors that could cause actual results to differ materially from our current expectations. Furthermore, please refer to the detailed note in the company's presentation disclaimer regarding forward-looking statements.

I will now turn the call over to Mr. Andrés Atala, Bci's Head of Investor Relations. Please go ahead, sir.

[Andrés Atala S., executive]

Thank you, and good morning to all of you, and welcome to our first quarter 2020 conference call. My name is Andrés Atala, Bci's Head of Investor Relations. Today, I'm joined by José Luis Ibaibarriaga, Bci's CFO; Mr. Jorge Gonzalez, CEO of City National Bank of Florida; Mr. Hugo Loynaz, CNB's Chief Credit Officer; Mr. Jose Marina, CNB's CFO; and Mr. Sergio Lehmann, our Corporate Chief Economist.

For this conference call, we have prepared a presentation to go through the main aspects of the bank in a new economic scenario after the COVID-19 outbreak started. We will review the following topics: macroeconomic indicators, strategic priorities for Bci in the face of the COVID-19, key financial results and finally, City National Bank of Florida.

Now I will leave you with our Corporate Chief Economist, Mr. Sergio Lehmann, who will take you through the main macroeconomic figures.

[Sergio Lehmann, executive]

Thanks, Andrés. First quarter of 2020 has realized the negative impact of COVID-19 through the world economy. U.S. GDP already contracted 4.8% at annualized rate in the first quarter. Meanwhile, China showed a negative growth of 6.8% year-on-year. It's expected a world recession in 2020 with a significant contraction in the second quarter and a steep recovery from the fourth quarter of the year and through 2021.

The world business and trade have been hit hard, confidence and sentiment indexes are in historical minimum and services sector plant due to a deep contraction of private consumption. Worldwide economies have delivered massive fiscal and monetary stimulus to face the transitory shock. Some developed countries, such as U.S. and Japan, deliver fiscal stimulus above 10% of GDP, and emerging economies at around 5% of GDP.

Large forecasted fiscal deficit will be a challenge in the middle term. Labor market is under negative pressure worldwide and mainly in the U.S., very large job claims in April anticipate a huge increase in unemployment rate, which we could reach 15% to 20%. The U.S. Treasury and the Federal Reserve have delivered several fiscal and financial programs to companies and households. In the monetary stance, the federal funds range rate is at 0.25 and have delivered a massive QE to face the COVID-19 outbreak in the economy and financial markets.

In Chile, economic figures in January and February show some normalization after contraction due to social unrest in fourth quarter '19. It's expected a large decline in economic activity during the second quarter and a later recovery in the last quarter of the year. We expect a minus 2.2% GDP contraction in 2020 and a 4% GDP growth in 2021. Chile's economic basis are still solid to face the shock. Fiscal stimulus provided is at 6.9% of GDP aimed to protect formal and informal workers, fiscal backed debt to SMEs, among others, and funded with a mix of government debt, reallocation of resources and use of sovereign funds.

In the monetary side, the inflation would ease from the second quarter due to demand contraction and gasoline prices downturn. CPI reached around 2.5% at the end of the year and market expectations are around 3% in the medium term.

The Central Bank of Chile cut the monetary policy rate to a technical minimum of 0.5%, same level than the world financial crisis in 2008. It would remain at such level for the last -- for at least the fourth quarter of 2021, depending on economic developments in the middle term. In response to global downturn and monetary measures, 10-year Chile's nominal sovereign rates have fallen to near historical lows.

There are coordinated economic measures to face this shock. On the fiscal side, the government has provided cash injection to the unemployment insurance fund, deferred tax payment and fiscal backed loans to SMEs. Plan to protect income to formal and informal workers, among others.

Regarding monetary policy, the Central Bank of Chile delivered nonconvention monetary stimulus such as purchase of bank debt, liquidity injection in Chilean pesos and U.S. dollars and massive credit facility program to the private sector.

Regulatory authorities is provision requirement to banks and delayed transition to Basel III capital requirements. Now I will leave you with our corporate CFO, José Luis Ibaibarriaga, who will continue with this presentation.

[José Ibaibarriaga Martínez, executive]

Thank you, Sergio. First of all, I hope that you and your family are safe. A lot of things have changed since the last conference call, and we will try to concentrate and focus in the main issues that you may be waiting for.

We will go over Bci first quarter highlights. The new and complex scenario has allowed us to confirm the strength of our culture and business, where we want to reinforce our long-term strategy based on customer experience, sustainable growth and strong culture. Regarding our employees, we have taken several measures since the beginning in order to ensure and put them safe as a first and main concern. Example of this is that today, 75% of our employees are working through their homes and 95% of the central offices. Likewise, we have made public the commitment to maintain their jobs of all employees during this crisis.

Subsequently, we work on several support measures so that our clients could face the financial effect of the pandemic. As everyone understood, the economic is slowing down. One of our priorities for the first -- for this year is to reduce expenses in order to reinforce our efficiency ratio. We strongly reaffirmed this commitment, especially considering the greater pressure on incomes that this global health crisis will generate, not only for the bank, but for the industry and the economy in general. Since the COVID-19 outbreak started, we have maintained the bank 100% operative through our digital channels: web, apps and social media.

At the same time, 111 of our branches are opening, allowing us to maintain a complete coverage throughout the country. We want to mention that our customer continue to show the preferences for our simple and digital products in line with our digital transformation plan. Some example of this are that currently 81% of the personal banking clients have entered in a digital channel in the last 30 days.

In the case of companies, this ratio reached 67% with a multiple developments that have been released in our app and web. We have increased our use by 20% year-over-year. Also, we have seen historical demand deposit figures with online transactions reaching 95% of the bank's operations.

The uncertainty is on how deep and long this situation will remain, make us more concerned about the customers and their economic situation. So we were -- we there to make a difference again, where we have active a series of a special measure by giving them the necessary facility so they can face their financial situation. Among several measures to support our customers, we have created an exceptional solution for times that require exceptional measures.

All customers who have mortgages with the bank have the possibility to defer their loan installments for 6 months, refinancing those at UF plus 0% interest rate. Without formalities or associated cost with a grace period until May 2021. Then we will initiate the payment on set refinancing in 60 installments, which will be added to the original dividend.

We believe that this measure has been a great value since around 50% of our mortgages customers have already done so. So a simple process in our website that takes only a few minutes. We have also reinforced our commitment to our more than 80,000 SMEs customers through solutions that provide relief and flexibility. Some example of these measures are access to additional working capital with up to a 6-month grace period, and they have stated -- and if they have a state guarantees, they can have up to 48-month term with preferential rate conditions.

Reorganized commercial loans, postponing the payment up to 6 months with the same interest rate condition of the previous loan. In addition, the government announced the extension of the FOGAPE fund offering state guarantees for lending to SMEs the finance company with sales up to 1 million UF or around $35 million.

The government support is between 60% to 85% of the loans given by banks, with loans to smaller companies receiving higher levels of guarantees. These loans will have a maximum amount of 3 months of sales, a preferential interest rate of 3.5% and a term of 24 to 48 months. There will also be a 6-month grace period, which also includes other current loans with the same bank. The use of these lines will be limited and not -- and cannot be used to distribute capital to owners, pay dividends or make new fixed asset investments. Bci fully adheres to the COVID-19 traded program in order to help companies, having the liquidity and working capital growth to go through this crisis, where we seek to provide this product in a massive, simple and digital way with the aim to be part of the solution of this situation.

In the case of City National Bank, the federal government passed the coronavirus aid relief and economic security program, which Jose Marina will address later in this presentation. Regarding our loan portfolio, it is well diversified by customers, line of businesses and economic sector. In terms of loan portfolio concentration, the 20 largest loans accounts for less than 10% of the total loans.

As for our loan distribution, 48% are associated with wholesale banking, 40% to personal banking, 8.7% to SMEs, while finance represent around 4%. Since the beginning of this crisis, we have placed the following risk measures. We have carried out an internal due diligence to 99% of the wholesale banking portfolio. We have implemented multidisciplinary teams among risk, commercial and strategy divisions, which has been coordinated and working collaboratively to face this contingency through proactive measures.

We have established additional provisions in order to anticipate future risk and thus have conservative financial statement, which allowed us to face potential scenarios that our risk model may not currently recognize. We would like to point out that in the particular case of this COVID-19 situation, unlike other ones, it is a health and non-financial crisis.

Having said that, we believe this is transitory where the impact on risk will depend on how deep and how long and how fast the economy will recover. This quarter, the bank has good result in terms of operating revenues by growing 9.7% underpinned by higher treasury income, a higher U.S. variation in the quarter and an increase in fee incomes.

Regarding provisions, the increase is partly explained by the depreciation of the Chilean pesos since around 20% of the commercial loans in Chile are dominated (sic) [ denominated ] in foreign currency. Also, this quarter, additional provision of CLP 10 billion were made in March as a way of addressing a complex economic scenario that the COVID-19 outbreak has triggered.

The good results in terms of operating revenues were partly offset, but said increase in provision and write-off expenses and increase in the tax expenses as a consequence of the U.S. dollar appreciation. In the domestic market, the net interest margin has a positive evolution compared to 2019 increased by 11 basis points this year. This is -- this increase is explained by, in line with what we saw last quarter, higher inflation underpinned the growth of our financial margin.

The new loan mix after the incorporation of financial services, has positively impacted the bank's margins. The spread of new loans in the commercial segment increased this quarter due to the implementation of our corporate profitability plan, impacting NIMs positively.

The inflation effect was partly offset by the new regulation that came into force in January, where banks have to automatically use available checking account funds to pay off a client associated overdraft. In addition, renegotiation of last year mortgages loans has also had an impact in the NIM. For what is expected to be the challenging year for the banking industry in terms of profit, it is even more critical to keep expenses controlled. The bank is constantly seeking cost savings in order to improve efficiency.

Indeed, our corporate efficiency plan will continue to be one of our key focuses this year. In first quarter 2020, the efficiency ratio reached 46.59%, decreasing more than 140 basis points year-over-year. It should be noted that this ratio decreased -- decreases to 46.39%, excluding City National Bank of Florida.

Lastly, I must be added that financial services has been able to maintain its efficiency level under 35% despite of a more complex business scenario. Bci has maintained high liquidity indicators, which anticipate and manage the end of year liquidity that is normally observed with greater demand in both local and foreign currency. This type of strategy have allowed us to successfully overcome the contingencies that were generated since last October.

Managing to keep the flow of liquidity constant to the different business area, local subsidiaries and the bank in general. Also, this strategy has enabled us to capture market opportunities generated by the strategic decision throughout the financial industry. Our liquidity coverage ratio is well above the regulatory limit, as you can see in the chart.

I also want to address the bank's capital position, where we are facing this crisis with sound capital ratio and a solid capital base, well above regulatory limits, reflected in one of the highest credit rating in the banking sector of emerging market.

Regarding Tier 1 ratio, we maintain our commitment to be around 10% in the medium term as we have mentioned in our calls. Likewise, we believe that for the next month, we will have a transitory pressure in capital ratios. This pressure is a natural consequence of the different initiatives that we are implementing to support our clients either through deferring or postponing payments as well as support relative to government programs, just as COVID-19 lines and the Paycheck Protection Program in U.S.

Now I will leave you with Jorge Gonzalez, our CEO of City National Bank of Florida.

[Jorge Gonzalez, executive]

Good morning, everyone. We thank you again for the opportunity to join you on this quarterly earnings call, where we're going to be reviewing City National Bank's performance over the last quarter. Again, as you mentioned, my name is Jorge Gonzalez, I am the CEO of City National Bank. I hope everybody is doing well as we all try to navigate these unprecedented times.

Bci acquired City National Bank back in 2015 in order to grow and diversify outside of Chile, and we truly are fortunate to have such a supportive and dedicated parent company. Obviously, much has changed in the global economic landscape since we last spoke a couple of months ago, when we -- at that point in time when we reviewed our strong 2019 results. And given our collective renewed focus, today, we're going to be addressing 4 key themes during the call. First, we're going to review our first quarter results and the impact of the COVID-19 on those results in terms of provisions as well as loans and deposit fluctuations. Second, we're going to spend some time reinforcing our strong liquidity, capital and asset quality positions as we embark into this period of increased uncertainty. Next of all, we're going to demonstrate to you how we have assisted our clients and employees during these very challenging times while we successfully operate the bank remotely, and we will discuss loan segments directly impacted by the COVID-19 pandemic and provide you with relevant details on the segments that are most impacted. And finally, we're going to conclude by discussing our revised strategic objectives for the remainder of the year.

With that said, Jose Marina, our CFO, will start the discussion by reviewing our first quarter balance sheet fluctuations and demonstrate to you that we are embarking on this journey with ample capital that is protected by strong asset quality and liquidity. So let's go ahead and move on to the next slide. Jose?

[Jose Marina;CFO, executive]

Thank you, Jorge, and good morning, everybody. Before we get into the more relevant slide, we wanted to briefly update you on our balance sheet fluctuations in the first quarter. We had $208 million of loan growth in the quarter that is partially due to approximately $134 million of draws on the lines of credits during the month of March.

Now it's important to mention that line of credit draws have since subsided with outstanding balances actually decreasing in the month of April. We generated $77 million of noninterest-bearing deposit growth, building upon the 9% growth that we achieved in 2019 through the deployment and cultivation of sales effectiveness process.

Our interest-bearing customer deposits declined slightly due to temporary outflows that have since been recaptured in April. You will see in subsequent slides that we have strong on and off-balance sheet sources of liquidity.

Finally, I'll also point out that the strong capital ratios and substantial increase in those ratios year-over-year. As you can see, our total risk-based capital ratio is 14.18% and our Tier 1 leverage ratio to 10.81%. We will further discuss our excess capital position shortly.

On the next slide, you can see that 22% of our assets are comprised of liquid investment securities. We also have an ample amount of cash, which totals $442 million. On the right-hand side, I'd just like to point out that nearly 1/3 of our deposit base is comprised of sticky noninterest-bearing deposits substantially comprised of long-standed commercial operating accounts.

Move to the next slide. This slide provides some further detail on our investment portfolio and demonstrates that our portfolio is substantially comprised of highly liquid and safe mortgage backed securities. 10% of the portfolio is in corporate bonds, consisting of some of the large bank names in the U.S. The portfolio had substantial unrealized gains as of March 31, totaling $52 million.

On the next slide, you can see that we have $5.2 billion of committed liquidity sources representing 32% of total assets. Our untouched cash and unencumbered securities totaled nearly 20%, while we have $793 million of available liquidity at the Federal Home Loan Bank.

We also had $969 million of available liquidity at the Federal Reserve Bank discount window, bringing our total available liquidity sources to $5.2 billion. This slide clearly demonstrates City National Bank's strong on and off-balance sheet liquidity sources.

On this next slide, we clearly demonstrate our strong excess capital position. Our Tier 1 leverage ratio of 10.81% provides us with a significant capital buffer, as you can see. We have an incredible $441 million of excess capital to reach a still solid 8% Tier 1 leverage ratio, which is still well above the 5% threshold to be considered well capitalized in the U.S.

These capital buffers do not take into account our strong pre-provision earnings capacity that serves as our primary capital book, which we will discuss later.

Now I'm going to pass it along to Hugo Loynaz, our Chief Credit Officer, who is going to discuss our asset quality and loan portfolio composition.

[Hugo Loynaz, executive]

Thank you very much, Jose. I'm very pleased to join all of you on this earnings call and discuss our credit profile with you. This slide illustrates that we are entering this period of uncertainty with exceptional asset quality. Our NPLs are at historically low levels at only 37 basis points. Our charge-offs are insignificant to a portfolio that is over $11 billion. We have achieved these results through our strong credit culture that has been in place since the Great Recession.

On the next slide, you can see that 71% of our loan portfolio is real estate secured and that the segment of our portfolio that is real estate secured is well diversified, with nearly half of real estate loans comprised of residential and owner-occupied CRE loans.

Also of note, our conservative lending approach result in a low weighted average LTV for all real estate secured loans of only 55.6%. On that note, I will pass it back to Jorge Gonzalez to discuss how City National Bank responded to the pandemic.

[Jorge Gonzalez, executive]

Thank you, Hugo. First of all, I must say that the last couple of months has been like -- unlike any in my career, I'm sure that applies everybody on the phone. The bank has been operating remotely since mid-March without any disruption whatsoever. This is really not an accident, the seamless conversion to a remote operating environment is due to our ongoing commitment to develop effective business continuity plans on an annual basis.

From a customer standpoint, our banking centers remain open -- all remain open with services primarily being provided through our drive-throughs. Clients can visit our banking center lobby with appointments following social distance protocols to protect both our employees and our clients.

We've also implemented 90-day deferral programs for both the commercial and consumer loans, and we have been very active participants in the Paycheck Protection Program, which will be addressed here further in a further slide.

Finally, the health and well-being of our employees and their families is always our top concern. And to that end, we have enhanced our employee health benefits to include COVID-19 testing for all of our employees and their families. And we're also persistently communicating with all of our employees as they work remotely, and we sent home higher risk employees very early on in the process.

As we turn to Slide 32, during these challenging times, our employees and myself have made a personal commitment to assist clients and our community in this time of extraordinary need. To this end, I am extremely proud of our team's effort to generate over 8,000 PPP loans to date totaling over $2 billion of support to our clients and the community, and I'm going to address that a little bit further on the next slide.

We've also provided loan deferrals to over 700 commercial clients and over 300 mortgage clients. These payment deferrals of both principal and interest are for 90 days and can be extended for an additional 90 days as the banks deem -- as it's deemed necessary by the bank.

We're also doing everything we possibly can to provide the necessary support and reasonable support to our customers during this period of time. By working with customers and providing them access to PPP loans during this time of need, we intend to make already loyal clients lifetime clients for City National Bank.

So as we turn to Slide 33, before we proceed, I want to briefly expand on our PPP achievement. Through May 3, we had secured over 8,000 SBA approvals to help protect about 200,000 jobs and generated about $2 billion of PPP loans for the institution. Our vendors in all areas of the bank have really been working around the clock over the past month in order to provide all of this assistance to our community during these challenging times.

This is absolutely an excellent achievement, and I am immensely proud of the City National Bank team for achieving these accomplishments that have and will continue to have a greater profile on our clients and our communities.

On that note, I'm going to pass it back to Hugo to discuss the COVID-19 impacted loan segments and other financial matters.

[Hugo Loynaz, executive]

Thanks, Jorge. As we mentioned before, City National Bank is absolutely committed to assisting our loyal customers and the communities that we serve. We fully realize that this is a difficult time for just about every business and individual in the communities that we serve, and we are fully committed to provide our customers with the assistance that they need during these challenging times.

We realize that any and all assistance that we provide to our clients will create a tremendous amount of goodwill towards City National Bank that will nurture the lifetime client relationships, as Jorge just mentioned. We have approved $2.7 million of loan deferrals to date. That represents 24% of our loan and lease portfolio. About 70% of our deferrals are in commercial mortgages, which has a weighted average LTV of under 56%, and 82% of deferrals are real estate secured.

Also, the bank has recourse on 86% of the loans on deferral. On that note, I'd like to discuss the loan segments most directly impacted by COVID-19. As you can see on Slide 35, about 21% of our loan portfolio is in segments directly impacted by COVID-19. The 3 largest segments are CRE retail, hotel and travel, and restaurants. These 3 segments comprise 3/4 of our impacted loans, so we will discuss each segment over the next 3 slides.

We have over $793 million of exposure in CRE retail with over half of the exposure in anchored shopping centers. Those would be shopping centers anchored by something like a Walmart or a Publix, as you can see on the wheel at the top left of this slide. The overall weighted average LTV of this segment is extraordinarily low at about 57%. Most importantly, you can see that the vintage of the portfolio in the bottom right is more concentrated in production from 2014 and prior, with very low production originating in 2018, '19 and '20 years. Therefore, this is a well-seasoned portfolio with very low weighted average LTV. The vintage distribution and the LTV metrics are optimal for minimizing any potential losses.

Hotels is the next segment that we will discuss. You can see from the graph on the top left, that 92% of our hospitality exposure is real estate secured with an even lower weighted average LTV of only 53%.

On the lower right-hand side, you can see that the vintages of the real estate secured exposure is very well distributed over the past several years with very little production over the last 3 years. Just like the retail segment, this vintage distribution and low LTV is again optimal for minimizing any potential losses. The segment of the wheel on the top left that is in red, representing 8% of our hospitality exposure, consists of non-real estate security exposures, primarily related to a large time-share company with a long-standing record of success.

We are monitoring the activity of all of our clients in the hospitality industry very closely, in order to provide them with the relief that is needed and to keep abreast of developments in their business activities.

On Slide 38, the final COVID-19 segment that we will discuss is the restaurant segment. As you can see in the wheel on the top left of the slide, about 27% of our exposure is real estate secured. That exposure is broken out in the chart on the bottom right of the slide. And as you can see, the vast majority of vintages, again, originate from 2016 and prior, resulting in a very well-seasoned portfolio with an LTV below 50%. The red segment of the wheel represents our national franchises exposure that is 48% of our total restaurant-related loans. You can see the detail of that exposure in the chart on the bottom left with all the exposure to value, quick service brands, which perform well during economic downturns.

We are certain that disruption in this segment is temporary, and these things will perform well once the economy reopens. The yellow segment of the wheel represents restaurant exposure in our markets, with much of the exposure also consisting of names you may recognize in Florida. Like our national franchise exposure, we are staying in close contact with all of our restaurant exposure clients and actively monitoring their activities.

Now I'm going to pass it back to our CFO, Jose Marina, to discuss our first quarter loan loss provisioning and income statement impact. Jose?

[Jose Marina;CFO, executive]

Thank you, Hugo. On this slide, we can see the activity in our ALLL in the first quarter. We proactively accounted for the impact of COVID-19 through our macroeconomic factors estimating changes in GDP and the unemployment rate for the first quarter based on consensus estimates at that time. Changes in macroeconomic factors accounted for $12.2 million out of the $13 million of loan loss provisions that we recorded in the quarter. The $3.5 million of charge-offs are not COVID-19 related and were processed in February after being reserved for in the prior year.

It is important to mention that as a wholly owned subsidiary of Bci, CECL is not applicable to City National Bank until 2023. As a result, we remain under the incurred loss model that preceded CECL. Regardless, City National Bank will actively provision in future quarters as the economic impact of COVID-19 continues to develop, and we continue to estimate that impact on our loan and lease portfolio.

Next, I'd like to briefly address our first quarter results. Naturally, our net income declined by nearly $10 million over the linked quarter to $32.9 million as a result of the provision expense recorded. However, you can see that our net interest income increased by $4.2 million or 4% quarter-over-quarter, and we will demonstrate exactly how that was achieved in the following slide.

Finally, I'd like to point out that our core earnings, which excludes our provision expense as well as our intangible amortization expense, including goodwill amortization, totaled $65 million for the quarter and also serves as a significant buffer to any future provisions.

So I just touched on NIM on the prior slide. But here, you can see the story more clearly. As compared to the linked quarter, our yield of earning assets declined by 4 basis points, while our cost of funds declined by 10 basis points, leading to an increase in NIM of about 7 bps, which translates to $4.3 million of additional net interest income over the linked quarter.

We have taken additional measures to reduce our cost of funds in April following the Fed's actions in order to minimize -- maximize our net interest margin. So as we've stated in prior calls, expanding our noninterest income is one of our strategic priorities. We have been able to increase our noninterest income by $3.3 million or 20% year-over-year, and now noninterest income growth is in the 15% of operating income as compared to 13% in the prior year. Our continued expansion of noninterest income will make us less dependent on net interest income during this low-rate environment.

Regarding the key metrics, we have already addressed many of these metrics in prior slides. In summary, I'll remind you that we have exceptionally high capital ratios, reflected by low levels of nonperforming loans and ample liquidity. On that note, I will turn it back to Jorge Gonzalez, our CEO, who will discuss with you our realigned strategic priorities for the remainder of the year and may conclude the conference.

[Jorge Gonzalez, executive]

Thank you, Jose. Yes, we spent a significant amount of time in Q4 of last year developing a comprehensive strategic plan for 2020 in our relentless pursuit of continuing to make City National Bank Florida's iconic bank. Obviously, the reality of the COVID-19 have made us revisit our 2020 priorities as we all now find ourselves in a situation where we have to redefine success in this new environment that we live in.

With that said, I would like to briefly review our primary 4 key strategic priorities for the remainder of the year. First and foremost, we're going to be focused on active portfolio management. Identifying challenges early on and monitoring those clients that are most impacted will be key. Our PPP acknowledgements were only going to help this effort. Second, we will continue to enhance our sales effectiveness process as an organization. We believe that we've attracted key prospects to the bank via this program and they have created -- and we've created a lot of goodwill with existing customers by timely processing their PPP applications and securing them funding from the SBA. We will be focused on cross-selling new clients brought to the bank and increasing the share of wallet for existing clients as well. Definition of success by our participation in the PPP program will be determined by our ability to cross-sell these clients and make them lifetime clients of City National Bank, greatly enhancing the bank's long-term value.

Next, we're going to optimize our expense infrastructure and really identify cost saving opportunity. And finally, we planned for the successful integration of Executive National Bank. We're actively working towards obtaining all necessary regulatory approvals, and we're working in conjunction with Executive National Bank to monitor the business activity during these challenging times.

Finally, I'd like to restate the fact that we're entering this period of uncertainty from a position of strength. We have all the characteristics of a fortress balance sheet with ample liquidity, significant excess capital, a strong credit culture that results in strong asset quality. We're currently focused on all of the relevant objectives that will not only preserve City National Bank's value, but it will enhance value once we emerge from this period.

Our commitment to assisting our clients and the goodwill that we have created through our active and outsized participation in the PPP program will undoubtedly enable us to emerge from this period as a stronger and even more profitable institution.

Now I'm going to turn you back over to the Bci team for final thoughts and a wrap-up. Thank you.

[José Ibaibarriaga Martínez, executive]

Thank you very much, Jorge, Jose and Hugo. Very good and deep explanation. In summary, as we have mentioned, both in Chile and in City National Bank, the bank has a strong financial position to face this crisis, both in capital position, liquidity. We have focus in key areas, developing a special plan for our customers, employees and suppliers. Obviously, we are putting a special focus in a risk management area and expenses, and we have established additional provisions, both in Chile and in City National Bank in order to anticipate future risks and thus have a conservative financial statement, which allows us to face potential scenarios that a risk model may not currently recognize.

And finally, it's important to mention that in more than 80 years, we have developed a strong culture, and we have experienced complex situations. And in all of them, we have maintained a vision of preserving a long-term relationships, helping our customers, employees and the country, supporting them in order that Bci become part of the solution of this crisis.

I am really proud to say that in all these cases, we have managed to become stronger. And right now, it will be no different. Thank you very much for your participation. And if you have any questions, we will be more than glad to answer them. Thank you.

[Operator]

[Operator Instructions] Today's first question comes from Sebastián Gallego with CrediCorp Capital.

[Sebastian Gallego, analyst]

I apologize, I have several questions today. Initiating with the U.S. I have key questions for CNB. First one is just if management and at CNB can provide more color or a bit more color on the reopening on the status of the COVID-19 and how do you see the reopening going for Florida in the specific areas where you operate? Given the fact that in the U.S., it's probably different across each state.

Second question. Deposits [Audio Gap] pretty much loan-to-deposit ratio. I'm not sure if you mentioned that. But we have seen, as you mentioned, some outflows, particularly from deposits, and you have been probably given a lot of relief to some of the clients. How do you expect the LTV ratio to evolve? And what are some of the measures that you're taking, specific measures that you're taking to protect that deposit base given current situation? And the final question for the U.S. or CNB is regarding LTVs and overall, the real estate segment. How do you see the real estate segment in Florida and overall within your operation, the outlook for this segment, considering that at the end of the day, as you mentioned, LTVs are low. You have a lot of secured loans with real estate. But I just want to get a sense on how do you see the real estate sector under the current environment and the likelihood of selling some of the real estate, probably collateral that you have on hand for some clients at this point. Probably those are the questions from the U.S. If I may, I can ask some questions for Chile.

[Jorge Gonzalez, executive]

Sebastián, this is Jorge Gonzalez. I appreciate the questions. I'm going to tackle the first one and then my CFO is going to tackle the next two. Relative to the reopening, you're right, Florida is a fairly diverse market, and the governor of Florida has really implemented a reopening plan that varies per different parts of the state. So relative to the markets that most impact us, which are basically South Florida, that's the majority, probably that's where 70% of our business is located. We're starting to see plans of reopening for the middle of May towards the latter part of May. We've seen the infection rates here level off. There's plenty of capacity in the hospitals. And there's the sense of urgency that was being felt 3 or 4 weeks ago is not exactly what's being felt today. So there's announcements that are currently being made relative to the reopening of certain sectors and in week 3 and week 4 of May, obviously, that's going to spill into the early parts of June. So we hope that the back to work programs and the reopening of the economy, I think that by the middle of June to late June, we'll see that in a much more prevalent way. So for right now, that's what we're seeing. Obviously, the service sectors are going to be a lot slower than others. As you think about hospitality and sectors like that, it's going to be much slower to reopen for obvious reasons. But at least the -- a good part of the economy we expect here in the next 30 to 45 days to start picking up some steam. Now assuming that there's not any pullback or any unnecessary or unforeseen spikes in infection rates as we're -- as everybody is monitoring in this period of time. So Jose, you want to tackle the next one?

[Jose Marina;CFO, executive]

Yes. So Sebastián, regarding liquidity, back in March, when this situation commenced, we invoked a liquidity monitoring committee of all the main areas of the bank. We immediately developed talking points, emphasizing the strength of the bank in terms of some of the items we talked today about our capital position, our strong liquidity position, our strong asset quality position. So that in case any customers were concerned, we had that information ready, and we deployed that quickly. We contacted top clients as well. Top 100 was an active contact plan for our top clients as well. And we have -- we are monitoring our liquidity on -- really on a daily basis, any fluctuations. Some of the outflows that we had in April were primarily a couple of larger customers that had just -- they were not concerned about the bank. It was just the business as usual fluctuations. Some of them had -- the result of price, they had to move some money around, but it wasn't specific to the bank. I will tell you in April, they indicated in -- during the course of the presentation that our deposits increased substantially. It was actually some of those customers that withdrew funds bringing back even more money than they withdrew. So our -- we continue to monitor liquidity daily, but the situation -- the tides have turned, where there was maybe some anxiety in the middle of March on the behalf of [ morals ], as it was. I think we're seeing now inflows on the deposit side, and we will continue to monitor. Our loan to deposit ratio at the end of March was about 93.5%, which is very similar to what we had in the summer, which was about 92%, a little over 92%. So our liquidity situation remains strong. And I pointed out, all of the ample liquidity sources that we have, which total about $5.2 billion when you just include our on balance sheet and committed off-balance sheet sources. So the liquidity is very strong.

[Hugo Loynaz, executive]

Sebastián, this is Hugo Loynaz. As to your question on loan to values, I certainly cannot predict future values at this juncture. But what I can definitely tell you is that we are entering this period of uncertainty with very strong loan to values on every one of our property types that we think have been impacted. Additionally, as we mentioned in the presentation, many of our deferral clients, which are within those sectors, obtained PPP loans. So that's going to benefit their cash flows during this period of uncertainty. So as a period of uncertainty, which hopefully, as Jorge mentioned, we start opening up the economy. And some of that uncertainty goes away. We'll have a more, I guess, we'll have more data to support valuation at that stage. But for now, again, entering we're with very strong loan to values. We've been able to provide clients with PPP funds and we'll participate in other programs as they become available.

[Sebastian Gallego, analyst]

All right. Just a final question on Chile, basically on financial services. We have seen a strong deterioration on NPLs. And broadly if you can provide some -- an outlook for financial services considering that the subsidiary has been already affected since the social crisis began in Chile?

[José Ibaibarriaga Martínez, executive]

Thank you, Sebastián. Financial services continue to be really a strategic business for us. Yes, from the October crisis, where a significant part of the Walmart supermarkets were closed. That by the way, the people that do not know, we operate 100% in Walmart locations. As they were closed, there were difficulties for our customers to pay their loan. And then today, with the COVID, as you may know, we have a lot of restriction. So supermarket is one of the areas which are open, but with a lot of sanitary restriction that makes more difficulties, difficulty to our customers to pay. Having said that, we have created a digital payment system, which is taking traction, and we have developed another companies where customers can pay. Overall, this deterioration has created an amount of money, which is important for City -- for financial services, but it's completely unmaterial for Bci as a consolidated. We are -- our expectation is that the situation is improving as the numbers are -- and you may see an improvement in the next month, depending in how deep this crisis goes and how long it takes to get out of the crisis. If we -- as you may know, certainly, the GDP of Chile is going to decrease around 4-point -- or 2.5% or 4.4%, depending of which economists you believe on. And unemployment will go around 12%, finally this year in 10%, and that is going to affect. We are making forecasts, and this is an answer that will help me to answer many questions that you may -- other person can make. We are making several forecasting. We are monitoring daily the situation as we have so much uncertainty. We are redoing our forecast with the information that we have in a daily basis. That case is for Bci, it's for City National Bank and for financial services. So to answer your question is, we have a deterioration due the crisis in October, but basically because people couldn't pay because the physical place to pay was closed. Two, we recognize that the economy is deteriorating and will have impact in the financial services business. How much? Today is difficult to say because we don't know how much deep and long this crisis with last. So -- but finally, we believe that the result of this quarter is a transitory and not permanent effect. And we are convinced that the potential of financial services and the great value of this business we have in the long term.

[Operator]

Our next question comes from Gabriel Nóbrega with Citibank.

[Gabriel da Nóbrega, analyst]

My first question is regarding provisions. Thank you for the detailed presentation where you talked about provisions in the U.S. and in Chile as well. However, it caught my attention that the $10 billion extraordinary provisions, which you did in the quarter and attributed to COVID-19 seems relatively low. So I was just wondering, when do you expect to start increasing provisions because I imagine that the peak of NPL is going to be something more for the end of the year as you were postponing a lot of loans. So I was just wondering if you have a sense of when you are going to start increasing provisions and the magnitude as well. And as for my second question, it's actually a follow-up on the U.S. real estate market. I was just wondering if you have any -- if you have seen anything in terms of asset quality, being that with lower rates, maybe tenants are asking for lower rates, trying to renegotiate loans. Also on the real estate segment with a very high dollar especially for Latam countries, maybe you're already seeing individuals giving back apartments, maybe something on that front.

[José Ibaibarriaga Martínez, executive]

Jorge, you want to start or I answer the question of the provisions.

[Jorge Gonzalez, executive]

I mean, I think the answer on the provisioning is we're keeping a close eye on what's happening relative to the reopening of the economy. We understand exactly what asset classes we have to keep a very watchful eye on. We expect Q2 is going to be a quarter whereby our provisions are probably going to increase. But we really have to get a handle on what's happening with these loans that are being deferred by asset classes as the economy starts to reopen because until we have more visibility, more -- some more data points to go on, it's going to be challenging for us to be able to get a good handle on it.

[José Ibaibarriaga Martínez, executive]

Yes. And in Chile, Gabriel, what we are doing is we are going to different scenarios. As you may know, as we are reprogramming or refinancing the nonperforming loans are not necessary the real risk that the models are given. So we are making different numbers, and we are making the necessary provisions in order to anticipate the increased -- the risk increase that we may have. We are doing provisions, as we said, in the U.S. and here, according to what is the situations -- the economic situation development. So you will see increase in the provision as much as I as we anticipate that the risk is going to be. When and how much? Again, we are making different scenarios, and we are doing it in a weekly basis. And as soon as we anticipate risk, we are going to put those provisions.

[Hugo Loynaz, executive]

Gabriel, this is Hugo Loynaz, Chief Credit Officer. As far as your question on asset quality in the U.S. Again, all these loans that have been impacted, were performing, were pass rated loans, no issues with the loans, until COVID-19 impact occurred. It's very early in the process. So we've not had any issues whatsoever on any one of our clients giving us property back, something like that. It's very early. And most clients, in fact, as I said, have supplanted their cash flow with government assistance and most believe that this pandemic will soon end and things will get back to normal, hopefully, within the next few months. So again, nothing close to what has happened in 2008, for example.

[Gabriel da Nóbrega, analyst]

All right. That's perfectly clear. And if you allow me a follow-up, you've been talking about making different scenarios on a day-to-day basis. Could you maybe share with us what is being stress test, that you are considering? What should be the peak of NPLs in your worst-case scenarios and maybe how provisions behave in that scenario as well?

[José Ibaibarriaga Martínez, executive]

Gabriel, it's complicated to give you numbers. But I completely understand the uncertainty that we are going through. We are making those scenario. What I can tell you is that both City National Bank and Bci as a whole is really well positioned to enter to this crisis. From a capital ratios, from a liquidity, we are very well positioned. In the worst-case scenario that we have done the bank, and not only Bci, I think that most of the important bank in Chile will not have any real deep situation to go through. We are -- we entered to this crisis with a very strong financial system, with a very strong ratios in City National Bank and in Bci. I prefer not to give you any numbers because I believe that is irresponsible to do it as things are so uncertain, and the situation is changing so dramatically day after day. So excuse me, Gabriel, but I strongly believe that it's not serious to give specific numbers according to what we are living today.

[Operator]

Our next question comes from Neha Agarwala with HSBC.

[Neha Agarwala, analyst]

Just wanted to follow-up on your NPL numbers. With the deferral of loans, when do you think we'll see an impact on the NPL ratios? And I believe we will see higher provisions in the coming quarters, like you did in the first quarter. Despite the impact on NPLs coming later on in the year. So any color on the impact on NPLs and cost of risk in 2020 as well as 2021 would be helpful as to when we can see impact on these numbers? And my second question is on your capital ratios, this quarter, there was impact from FX. The Tier 1 is now 9.7%. How do you see that evolving in the coming quarters? And are you comfortable with the level of capital? And what does your stress tests tell you internally in terms of how bad can the situation get in the worst case? And what would be the impact of capital in a very bad scenario?

[José Ibaibarriaga Martínez, executive]

Thank you. You -- Neha. Regarding the NPL ratio, what you're going to see in the next quarter is more provisions -- voluntary provisions rather than NPLs deterioration as a lot of reprogramming and refinancing are going on. So you should expect both as a consolidated or Chile or City National Bank, additional voluntary provisions, not a deterioration of NPLs. And regarding capital, yes, we are expecting a Tier 1 ratio decreasing for this year. Basically for the help that we are putting in refinancing mortgages in the consumer side and in the commercial side. We want, as we said, this is a severe crisis that we are going through and Bci want to really be part of the solution, taking all the opportunities that we have in order to contribute taking and supporting all the programs that the government, Central Bank and the regulators are doing at the same time, as you hear, Jorge and his team, the support that we are giving to the customers in the U.S. by putting $2 billion in loans. So yes, we are expecting that Tier 1 ratio is going to go down as much as 9-point something, 9.1%, 9.2% and coming back next year. We still have the guideline to be in a Tier 1 ratio in 10% in the medium term. But today, as we talk with the Central Bank and with the regulator, it's the time to make some flexibility in our capital ratios in order to help our customers and the country to recover.

[Operator]

Our next question comes from Yuri Fernandes with JPMorgan.

[Yuri Fernandes, analyst]

I had 2 questions. The first 1 is regarding renegotiation. If you can provide any kind of color on the amount of loans that we were renegotiated so far, in number of clients or in volumes, that would be helpful. And also if you can comment historically, how much higher is the NPL for renegotiated loans? I understand that here, we have the fiscal package, is a totally different situation. But just for us, you have some kind of color like on what to expect on the renegotiated portfolio? And my second question is regarding the margins. It was a very good quarter for NII. It grew 12%, a lot of help for inflation and the U.S. operation. But my concern is looking ahead, inflation should come down. We have a risk, I don't know, of [ Japan education ] of the banks, mainly countries with negative rates. We see that in the U.S. I know that in Chile, lower rates in the very short term, they are good. But what should we expect for margin in the future? Like we have a very tough environment of banks, we need to build big provisions. But could we be missing the revenues? Could revenues be an issue too?

[José Ibaibarriaga Martínez, executive]

Thank you, Yuri. As you hear in City National Bank, we have more than 8,000 customers that have gone through this PPP program and 700 additional customers with additional type of renegotiations. In Chile, in the mortgage side, we have around 50% of our customers who have asked for this renegotiation program or around 60,000 clients. In the consumer side, we have around 10% of our personal banking loans already done. That is around 18,000. And all the SMEs and all this package that the government has approved last Saturday, we are receiving all the information for our customers to go through, and we are starting to address that program. We believe that we are going to be very active as we have very simple digital processes to address that. And the aim is to give all our customers a solution. So early to tell because we had just started with the program. Next conference call, we can have much more detailed information about that. And regarding the margin, yes, we will see a decrease on inflation in the next quarter and next quarters, inflation is really down today for this year and next year. The margin from the business, we don't anticipate is going to decrease too much as customers are going to be not due. So from a margin point of view, we are not seeing a major deterioration. And from the cost point of view, we are seeing that the interest rates are coming back. Liquidity is back again in the market. Spreads are coming back to lower side. So we have opportunity in that side, too. So we are not seeing an important deterioration in margin. I think that the main focus in City National Bank and us is in the loan portfolio, and we feel pretty comfortable that we started this crisis in a very good position.

[Yuri Fernandes, analyst]

If I may, just on the NPLs, do you have any color on how much higher the NPL on renegotiated books historically are?

[José Ibaibarriaga Martínez, executive]

Honestly, Yuri, I don't know that answer here. Do you have information, Andrés? Yuri, I don't have specific numbers here, historically, to address a crisis like this. All our models, remember that taking consideration significant crisis like '91, like 2008, like -- and we have gone through and those models have that, but our models do not recognize a crisis where the world is basically frozen. And this crisis, some economists says that it is close to the crisis of the '29. And obviously, I don't think that any financial institution has a model that recognize that crisis. So it's difficult to answer your question because our models, which has a lot of information, do not have a crisis like we are living today with all the world having a deterioration from October to today, around 6 points of GDP growth in the world that it cost around 6 billion -- $6 trillion. That is the deterioration that we have, [ $6 trillion, million ] in 6 months. So it's difficult that any model predict that today. That is why I can't give you a projection of that.

[Operator]

This concludes today's question-and-answer session. At this time, I would like to turn the floor back to Mr. José Luis Ibaibarriaga for any closing remarks.

[José Ibaibarriaga Martínez, executive]

Thank you very much. Thank you for all the interest. The question we are living difficult times, we really hope that you and your families are safe. And we can go through this epidemic as soon as possible, and as always, we are open with our Investor Relations team to answer any additional comments that you may have. Thank you very much for Jorge, Hugo and Jose for participating in this call.

[Operator]

Thank you. This concludes today's presentation. You may now disconnect.