Banco de Credito e Inversiones

SGO:BCI

Earnings Call Transcript 2021-Q1

[Andrés Atala S., executive]

Okay. All right. Let's get started for this first quarter 2021 Earnings Conference Call of Bci. Good morning to all of you, and welcome to our call, as usually do. My name is Andrés Atala, Head of Investor Relations team, and I really hope that you and your families are doing well and staying safe in this strange period.

Today, I'm joined by José Luis Ibaibarriaga, Bci CFO; Mr. Juan Enrique Pino, Head of Credit Risk Management; Mr. Jose Marina from CNB's -- our CNB CFO; Mr. Hugo Loynaz, CNB's Chief Credit Officer; and Mr. Sergio Lehmann, our Senior Economist.

During this Zoom presentation, as usual, we will ask you to please keep your microphones and cameras turned off. We will leave room for questions at the end of the presentation, when you will be able to raise your hand using the button that you can see below your name, and of course, turn on your cameras also.

This presentation covers the main aspects of the bank for the first quarter, broken down into the topics shown here in this slide.

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

[Sergio Lehmann, executive]

Thank you, Andrés, and good morning, everybody. The world economy has been hit by new waves of COVID-19 in the first quarter of 2021. Nevertheless, global economic sentiment is improving given expectation of better sanitary condition and massive supports of full recovery.

IMF projects 6% world GDP growth in 2021, 0.5% over estimation at the beginning of the year. Progress in vaccination process and economic stimulus are the key factor behind better economic figures, which are already seen in the U.S. and China, the main drivers of the world economy.

But recovery would be asymmetric among countries and by sector due to unequal sanitary and financial conditions. United States' GDP will grow around 6.5% in 2021, generating larger job gains. In Florida, it is expected a similar pace.

In Chile, a soft economic recovery took place in the first quarter '21, limited by stricter COVID-19 sanitary restriction, but is expected larger growth in the coming quarters. A fast vaccination process and a more positive external outlook reflected in high commodity prices are key for expecting better economic performance ahead.

However, political developments and coming election will play a significant role on economic confidence and financial market perspective in short and middle term. More recently, we have seen an increasing political risk given the adoption by the Congress of measures like a third 10% pension fund withdrawal, which are not technically well evaluated.

Despite -- next -- let's move to next slide. Despite COVID-19 second wave, U.S. economic figures have continued recovering with a GDP growth at 6.5% annualized quarter-on-quarter in the first quarter '21, driven by private consumption. Fiscal stimulus and a rapid vaccination process will generate a positive impact on internal demand in coming quarters, and IMF estimates a 6.5% year-on-year GDP growth in 2021, one of the largest in recent decades.

According to official figures, Florida GDP has continued to recover at the end of 2020 with a similar pace than U.S. aggregate. Jobs gains are accelerated in U.S. and Florida, but total payrolls are still below pre-pandemic levels.

Please move to the next slide. In Chile, economic recovery remains significant in the first month of 2021 despite COVID-19 second wave, showing better adaptability of the economy to mobility restrictions. The first quarter GDP growth rate would be around 0.5% year-on-year over expectation.

At the beginning of the second quarter '21, we expect a lower economic activity on a month-on-month basis, but it would be very positive in annual basis. Then economic figures could improve strongly due to the significant progress in the vaccination process, one of the faster worldwide.

Retail sales sector is growing, but service sector is still lagged. Recently, IMF improved GDP growth outlook to 6.5% in 2021, and labor figures, however, are showing a smooth recovery and it could take some years to reach a pre-pandemic levels. Informal jobs are rising. Unemployment rate is currently at 10.4%.

Inflation in Chile is well contained, but expected to transitorily increase due to demand and supply shocks. On a year-on-year basis, inflation would go up in coming months, but it could soft in the second half of the year, ending around 3.3% in December. It is under discussion at projects in the Congress to reduce transitorily the value-added tax to a group of financial goods, including food and gasoline. In that case -- or in the case of being approved, inflation at the end of the year would be below that level.

Long-term nominal interest rates have significantly risen in Chile due to better economic perspective, rising external interest rate adjustments and increasing volatility in the financial markets. But the Central Bank of Chile adopt measures that have contained the impacts on rates and liquidity. We expect that coming election and new constitution debate will contribute to this, the current political tension through the installation of dialogues and agreements, given the high quarter requirement for a new legal framework.

So thank you. Now I'll leave you with José Luis Ibaibarriaga.

[José Ibaibarriaga Martínez, executive]

Thank you, Sergio. Good morning, everyone, and thank you for participating in this conference call. We will now go over Bci's first quarter highlights. I would like to state, again, that this scenario has allowed us to reaffirm the strength of how we do business and our long-term strategy based on customer experience, sustainable growth and a strong culture.

Here are the main highlights of this quarter. First, we continue to be close to our customers, providing them with financial support under the newest round of the FOGAPE program, the FOGAPE Reactiva. We have generated around USD 300 million in loans, while the second draw of PPP loans reached more than $245 million this quarter.

Two, our efforts and investment in the digital transformation process has allowed us to respond quickly and simple to our clients' needs, while allowing 94% of our corporate building to continue working from home. This responsiveness to the needs of both our customers and our employees along with a strong engagement indicator led us to our being recognized once again as 1 of the 3 best companies to work for in Chile. This shows, in practice, how we can all dare to make a difference, even at the most challenging times.

Three, as one of our key priorities, we have placed a special focus on efficiency plan. This has been reflected in our expenses line, which reached a decrease of 2.32% year-over-year.

Four, the bank maintains a strong financial position. Bci's soundness is again reflected in our liquidity and capital ratios, both of which are well above regulatory limits.

Five, in terms of consolidated financial results, some of the highlights from the first quarter include the following: on the positive side, the financial margin increased 18.5%, mainly driven by lower cost in deposits due to an increase in noninterest-bearing deposits; in addition, regular provision decreased as a result of resilient customer behavior, reflecting the unusual additional liquidity support received by our clients, along with improvements in the payment process; this quarter, we recorded $59.4 million in additional provisions, which raised our coverage ratio more than 700 basis points year-over-year to over 232% (sic) [ 222% ].

Please move to the next slide. As you can see in the snapshot of the bank, we ended this year once again as leaders in terms of consolidated assets with over USD 78 billion. We have successfully diversified our operation by adding new line of businesses and also by expanding geographically, where City National Bank of Florida plus our branch in Miami, currently account for almost 28% of the bank's total portfolio.

Also, this quarter, Moody's confirms Bci's A2 rating, while changing its outlook from stable to positive. This decision was based on Moody's assessment of potentially higher government support for the bank, the consolidation of acquisition and investment over the past several years and the positive impact of our digitalization and innovation strategy, which further support the bank's diversification in new products and service lines.

On the other hand, Standard and Poor's downgrade Bci's credit rating from A to A minus in parallel with the country's sovereign credit rating, given that the likelihood of extraordinary government support has diminished.

Please move to the next slide. Let's go through the main figures for our consolidated operations. This quarter, the gross margin fell 4.5%, mainly driven by the exchange rate and financial operating income due to a higher comparison base. Last year, the financial rating areas -- trading areas took advantage of market volatility and opportunities, achieving record results that helped boost financial income.

Furthermore, this is -- there is also a higher comparison base effect in term of fees since COVID-19 lockdowns starting in mid-March 2020 in Chile. So first quarter was still a relatively normal quarter in terms of activity and debit and credit card fee income.

On the positive side, the financial margin increased 18.5% year-over-year, largely due to our nearly minus 40% year-over-year decrease in interest expenses, as mentioned earlier. In terms of risk expenses, regular provision has decreased as a result of resilient customer behavior, which reflects the unusual additional liquidity support received by our clients, along with improvements in payment process. Nevertheless, this quarter recorded higher additional provisions year-over-year as Juan Enrique will address later in this presentation. On the other hand, operating expenses fell by 2.32% year-over-year, maintaining a positive trend.

Finally, tax expenses was lower this quarter after the projected year-end exchange rate was adjusted downward by around CLP 25 to CLP 690 per dollar, which led to a lower valuation of investment in City National Bank.

At the local level, the main line of items follow a similar trend as the consolidated result in terms of year-on-year changes, as shown here. Bci local loan portfolio amount to USD 37 billion in this quarter, a decrease of 1.6% year-over-year. Bci consolidated commercial portfolio constructed (sic) [ contracted ] 4.3% on a year-over-year basis. This is in line with the increase by activity by the FOGAPE program on further loan payoffs.

Additionally, in the first quarter of 2020, the wholesale segment was particularly active in terms of loan generation. This higher volume was mainly explained by large companies seeking to increase their liquidity to work -- for working capital in the year of high uncertainty and volatility.

Excluding Financial Services and City National Bank, Bci consumer loans decreased almost 16% year-over-year, reflecting weaker macroeconomic conditions. We believe that the government initiatives implemented throughout the year to support households plus the withdrawal of pension funds both acted as a substitute for loans in providing greater liquidity. Mortgages loans kept up the growth momentum, increasing 13.1% year-over-year as customers took advantage of the exceptionally lower interest rate.

Please move to the next slide. Bci has maintained high liquidity indicators, as shown in the chart, the bank's LCR reached 268% for its local operations, well above regulatory limits. In terms of noninterest-bearing demand, deposits continued to grow strongly, at a rate of 3.8% quarter-over-quarter and 41.9% year-over-year. This reflects the high growth of retail checking accounts and continued strength of the bank's value proposition for companies.

Time deposit in turn decreased 32.5% year-over-year and 11.5% quarter-over-quarter due to lower interest rates. In the domestic market, the net interest margin increased by almost 40 basis points despite the recent significant decrease in the consumer loan book. This higher margin was mainly due to lower funding costs following the increase of noninterest-bearing deposit vis-à-vis time deposits.

On the fee side, the significant decrease is mainly explained by the decline in fee income, which in turn reflects a drop in core services as a result of the economic slowdown after the COVID-19 outbreak. Lower-than-expected fee income from the retail business was the tangible follow-up of the lower economic activity affecting both Bci and Financial Services.

Now I'm going to pass this call over to Juan Enrique, who will discuss our asset quality and loan portfolio composition.

[Juan Enrique Visinteiner, executive]

Thank you, José Luis. Hi, you all. My name is Juan Enrique Pino, the Head of Credit Risk Management, and I'm happy to be with you once again.

As you can see in the slide above, our local loan portfolio is well diversified by customers, businesses, business lines and economic sectors. On the left-hand side of the slide, we present, as usual, the local loan distribution among different customer segments, while on the right side, we show the portfolio diversification among the different sectors.

I think it would be interesting to learn that the exposure that we have to sectors such as entertainment, hotels, health and restaurants combined is below 4%. And as you can see in one of the notes below, the SME portfolio is highly collateralized or supported by government guarantees in more than 80%.

Let's go to the next slide, please. Here, we can see the trend of performing loans. By performing loans, we understand loans that have not become pursuant, that do not have even 1 day of pursuit. At the local portfolio level, performing loans are still above pre-crisis levels in all segments. Currently, the majority of deferrals and restructures with grace periods have expired. In fact, they expired in the second half of last year. So loans have returned to the regular payment schedule.

In the consumer lending segment, we can see that the resilience in the level of performing loans is related to the great liquidity that has come to families and individuals based on subsidies provided by the government as well as the withdrawals of funds from the pension funds that each individual had been saving. These measures along with improvements in the payment process that Bci has implemented, making it way more digital and requiring less friction and less physical presence, has facilitated customers from staying on time in the payments.

Let's go to the next slide, please. Here we see the NPL trend, nonperforming loans, for 90 days or more in past due. As mentioned, financial support measures for customers have contributed significantly to mitigate a further deterioration of delinquency indicators. In the first quarter of this year, local NPL rates decreased on a year-to-year basis despite increasing slightly to 1.5% relative to 1.44% -- 1.42% back in December.

The NPL ratio in the commercial segment was 1.73%. In terms of amounts, absolute amounts of nonperforming loans this quarter have decreased relative to previous quarter by 5.37%. As to the consumer segment, the NPL ratio was, at the end of this first quarter, 2.25%. The amount of nonperforming loans decreased 28.79% year-over-year, while the consumer loan portfolio fell 15.8%. When Financial Services is excluded, the NPL ratio declines to 2.04%.

Mortgage loans show a different trend. This particular segment has shown to be highly resilient to the current scenario, resulting in a very low NPL ratio of 0.8% in this first quarter.

Let's go to the next slide. Here we can see a zoom into Financial Services, which is the consumer lending division that Bci acquired from Walmart 2 years ago. As you can see, the portfolio has contracted 17.14% year-over-year following industry trends for the entire financial retail segment as well as some selective lending approach during this difficult year implemented by Financial Services.

The NPL ratio for this division continues to be under downward trends that started in the third quarter of 2020, reaching 3.14% at the end of March relative to 3.18% by the end of 2020. This improvement is due to 3 factors: the more conservative measures in the granting of loans, the implementation of payment facilities to support customers with a good payment behavior performance and a collection strategy based on effectively communicating to customers' digital payment channel. And of course, there's a fourth reason, which is the high liquidity provided to families by different government initiatives as Sergio mentioned before.

Let's go to the next one. So since the beginning of the pandemic, we have booked additional provisions in order to anticipate future risk, increasing our coverage ratio, and thus, building conservative financial statements that would allow us to face potential scenarios that our risk model may still not be fully capturing. In the first quarter of 2021, we continue to record additional provisions based on a quantitative and qualitative risk analysis and information from macroeconomic forecast on the depth and extension of the crisis.

Some of the key macroeconomic variables considered included the recovery of the labor market and the deterioration of the economy cycle for a longer-than-expected timeframe. Since the last crisis started, we have recorded nearly $270 million in additional provisions, both in Chile and in the U.S.

This conservative approach to additional provisions has allowed the bank to increase its coverage ratio from 150.12% in the first quarter 2020 to 222.33% in the first quarter of 2021, leaving it well prepared for a potential rise in nonperforming loans as a result of the pandemic.

Lastly, we believe that the current risk cost is not aligned with the expected outcome based on the analysis and risk models for this year, in which the level of uncertainty that emerged in 2020 continued to rise in the current period. Specifically, the quality of the portfolio has tended to improve due to the greater liquidity generated by the different benefits granted by Bci as well as by the government, such as the mortgage loan deferrals, government support payments and pension fund withdrawals.

Let's go to the next slide. As you can see, this slide show by each of the portfolios the same trend that we were looking overall for the -- in the previous slide. The green line shows the trend in the risk index, which is the stock of provisions divided by the size of the portfolio. And the red line includes -- it's the same ratio, but including the voluntary or additional provisions that Bci has been building over the last 12 to 13 months.

As you can see, our intention has been to have a risk index that not only puts us in the pre-pandemic levels, but way above those pre-pandemic levels as that's our estimation of how the portfolio should be performing over time. And that today is not fully captured, given the different initiatives taken by the government as well as by Bci to support customers during this hard period.

So let me move -- let us go back to José Luis to continue the presentation.

[José Ibaibarriaga Martínez, executive]

Thank you, Juan Enrique. One of the bank's key priority in 2021 is to control expenses in order to reach a target efficiency and return on average equity in the term -- in the medium term. OpEx decreased by 2.8% year-over-year. As a bank, we are strongly focused on improving our efficiency, which is why during the first half of 2021, we are working in different areas to stabilize and reduce our spending level compared to first quarter 2020.

We have implemented a powerful and robust cost optimization plan, increasing cost control in the different government support programs and incorporating the benefits of our digitalization strategy, which has allowed us to advance in the simplification of processes and implementation of initiatives to perform the bank's cost -- to transform the bank's cost structure. Despite the decrease in spending, efficiency was affected by a lower gross margin in this period, resulting in an efficiency ratio of 47.95%.

Now I will leave you with Jose Marina, City National Bank's CFO; and Hugo Loynaz, the bank's Chief Credit Officer.

[Jose Marina, executive]

Thank you again, José Luis, for the opportunity to join you on this quarterly earnings call to review City National Bank's performance over the past year.

Good morning, everyone. My name is Jose Marina, and I am City National Bank's Chief Financial Officer. Hugo and I are pleased to join José Luis, Andrés, Sergio and the rest of the Bci team on this call.

As you may recall, we had many significant achievements in 2020. We led the nation in Main Street Lending Program participation, closed over $1.8 billion of PPP loans representing 3x our fair market share in Florida, increased our commercial client count by 28% and increased our deposit base by $3.5 billion, among other accomplishments.

You will see that we have carried that strong momentum into the first quarter of 2021 by increasing our deposit base at an even brisker rate, providing significant additional support to our clients through the second round of PPP and continuing to improve our already strong asset quality metrics. So let's jump into it.

During today's presentation, we're going to discuss the evolution of our balance sheet during the first quarter, including the evolution of our PPP loans, review of our asset quality metrics and discuss our strong operating results. We will conclude by discussing our priorities for 2021.

As a Florida-based bank, City National Bank is operating in one of the best markets in the country. Given the state's business-friendly approach, including low corporate tax rate and the lack of personal income tax rate, Florida and South Florida, in particular, has seen an increase in the migration of business and individuals moving into the state.

While this trend was already occurring pre-COVID, the pace of migration has accelerated as a result of the pandemic. With many of the companies having their workforce work from home for extended periods of time, both companies and their employees have realized that they do not need to remain in costlier physical jurisdictions in order to be effective.

As a result, both companies and individuals in jurisdictions with higher cost structures, such as New York and California, are increasingly moving their operations and households to lower cost states, with Florida being a primary beneficiary of this migration. In fact, we have a dedicated strategy around capturing this business that is migrating from Miami all the way up to Palm Beach. In short, City National Bank is operating in one of the best markets in the United States.

Now let's move to the evolution of our balance sheet during the first quarter. As you can see, our total assets increased by $1.1 billion or 6% in the quarter, with our loan portfolio contributing $190 million of that growth. We are approaching $20 billion in assets as a result of our continued deposit growth, which we will discuss shortly.

Our loans, excluding PPP, declined slightly in the quarter by $56 million, while our PPP loans increased by $245 million, which we'll discuss further on the next slide. We are currently focused on generating quality commercial and residential loans and expect to grow our loan portfolio in the second quarter based upon our strong loan pipeline. You can also see that our total risk-based capital ratio and our Tier 1 leverage ratio remains strong with the decline in the leverage ratio to 9.77% due to the continued asset growth.

On this slide, you can see the evolution of our PPP loans and fees. As you can see, we funded $1.850 billion of loans a year ago with $57 million in fees. During the course of 2020, we forgave about $197 million of those loans and recognized $23.6 million in fees as income, leaving us with $1.650 billion in loans and $33.5 million of fees outstanding at the end of 2020. During the first quarter of the year, an additional $341 million of PPP loans were forgiven, and we recognized an additional $13.7 million in fees.

As indicated earlier, we have been active in the second round of PPP and funded $586 million of new loans through March 31, with $22 million in fees. As a result, we closed March with nearly $1.9 billion in total PPP loans outstanding, nearly $42 million in PPP fees that will substantially be recognized over the next year, as these loans are forgiven.

Our participation in PPP and MSLP, along with our cross-sell efforts, resulted in $5 billion of customer deposit growth year-over-year, a growth rate of 45%. Our acquisition of Executive National Bank in the fourth quarter of 2020 only added about $400 million of deposits. So our deposit growth has been substantially organic. After a strong 2020, we increased our deposits by $1.4 billion or 9%, which is a 36% annualized growth rate. Over $500 million of the growth in the quarter was on noninterest-bearing deposits, which now accounts for 38% of our deposit base.

Most of the growth was in noninterest-bearing deposits, which increased by $2.1 billion or $2 billion, excluding the $130 million contributed by Executive National Bank over the last year. Noninterest DDAs, again, represent 38% of our deposits.

We have also been able to reduce the spot cost of our deposits down to 19 basis points, a reduction of 9 basis points since December 31. We will continue to identify opportunities to reprice our deposits downwards in upcoming quarters. The continued deposit growth reduced our loan-to-deposit rate -- ratio from 76 -- to 76.7% as well, down from 82% at year-end.

The continued surge in deposits has resulted in an increase in our investment portfolio, which has grown by $1.1 billion over the past year, with half of that growth occurring this past quarter. Our investment portfolio now represents 23.5% of our assets. We will continue to deploy liquidity into our investment portfolio in a disciplined and prudent manner. It is also important to note that we have also been maintaining over $1 billion in cash as well.

To close out this slide, I will just add that our substantial deposit growth over the past year provides us with the funding to increase our loan portfolio and expand our margin in the coming years and further support our communities.

Now I'd like to discuss our asset quality trends. You can see that our loan deferments have declined all the way down to $119 million, which is just over 1% of our loans, excluding PPP. As you can see in the bottom left of the slide, 76% of the deferments are in residential mortgages with another 20% in the hotel CRE sector. So these 2 buckets account for 96% of our remaining deferrals.

It is also important to note that the weighted average LTV of the real estate secured loans on deferral is a very conservative 53%. Our ALLL coverage ratio, excluding PPP loans, has remained steady at 1.46% since year-end. Our NPLs also declined in the quarter by about $9 million, down to $74.7 million. And our past dues also declined substantially down to 32 basis points of our loans, excluding PPP, as you can see on the bottom right-hand side of the slide.

As a result of these improving asset quality indicators, our loan loss provision for the quarter was only $1.5 million. Overall, the deferment trend is strong. The remaining deferments are well secured and already strong asset quality indicators continue to improve.

Moving to our first quarter results. Our net income for the quarter totaled $53 million, a 60% improvement as compared to the prior year. Looking at core earnings, which excludes loan loss provisions, intangible amortization and other nonrecurring items, our core earnings declined by $4.2 million as compared to the linked quarter, but increased by nearly $15 million or 23% as compared to 1 year ago.

The $4.2 million decline in earnings over the linked quarter is due to the $14 million of MSLP fees generated during the fourth quarter of the year. Excluding that onetime benefit, core earnings actually increased by $10 million over the linked quarter. The fifth -- you can also see that we incurred a $4.2 million loss on the unwind of $100 million of Federal Home Loan Bank advances that was offset with $4.8 million in gains on the securities portfolio as we executed a balance sheet deleverage strategy. As you can see, we generated strong results in the first quarter, and our core earnings trend is very favorable.

On this slide, I'd like to focus on our net income before loan loss provisions. As you may recall, we recorded $101 million of loan loss provisions in 2020 and a minimal $1.5 million provision this past quarter. You can see on the chart on the right-hand side of the screen that our net income before loan loss provisions increased by 18% over the linked quarter and 14% over the prior year. You can also see in the chart at the bottom that our ROA and ROE for the quarter are both strong at 1.12% and 10.3%, respectively.

Our efficiency ratio also remained strong at 47%. We will discuss net interest margin on the next slide. On the left-hand side of the slide, you can see the evolution of our net interest income compared to the prior year and the linked quarter. The dark green part of the bar represents our net interest income, excluding the impact of PPP and MSLP. And you can see that our core net interest income increased by nearly $7 million over the linked quarter.

Overall, net interest margin income declined by over $5 million, as previously discussed. As a result of the $14 million of MSLP fees realized in the fourth quarter, PPP fee accretion increased from $11.5 million to $13.7 million due to the increase in forgiveness. On the right-hand side of this slide, you can see our net interest margin evolution as well. Our core NIM, excluding PPP and MSLP, increased by 12 basis points over the prior quarter to 2.74%. Our NIM for the quarter was 2.88%, including the impact of PPP, which had a 14 basis point impact.

You can also see that our cost of funds declined by 11 bps in the quarter, down to 31 basis points and will continue to decline modestly. In conclusion, our core net interest income trends are very favorable.

On this next slide, you can see that we were able to increase our noninterest income by $3.8 million or 25%, excluding swap fee income, primarily due to our deposit service charges increasing by $1.5 million due to the new treasury management clients that we onboarded during the course of 2020 through our PPP and MSLP cross-sell efforts.

The increase in other income of $2.1 million is due to MSLP service fee income, gain on sale of assets from our leasing company and the positive covenant fees that we have implemented on our loans. We continue to remain focused on enhancing our noninterest income, which is one of our top priorities for the year.

On that note, I'd like to conclude by briefly discussing our top priorities for 2021. First and foremost, we are focused on active portfolio management in order to maintain our asset quality and minimize provisioning needs during 2021. Identifying and executing on cross-sell opportunities is also a key component of our portfolio management strategy, deepening client relationships through cross-sell is part of City National Bank's DNA. As we saw, our asset quality metrics are continuing to improve during 2021.

Secondly, we currently have excess liquidity due to the extraordinary deposit growth generated in 2020 and through the first quarter of 2021. And we are focused on identifying opportunities to generate new high-quality loans to further enhance our margin.

Third, we will continue to invest in technology and our digital transformation initiative and continue to build upon our recent digital investments that enabled many of our key accomplishments during the recent year.

Fourth, we continue to be focused on fee income growth. Cross-selling treasury management, wealth management and mortgage banking services will continue to enhance our fee income. As we just saw, we've had significant fee income growth in the first quarter.

Next, we will continue to remain focused on deposit growth. Again, we are a relationship bank and will continue to require a depository relationship on all new loans that we fund. We will not take our eyes off the ball when it comes to quality deposit growth. To this end, we were able to increase our deposits by nearly $1.4 billion in the first quarter.

Finally, we are also focused on delivering an optimal client experience, combining our best-in-class personal service with our best-of-breed technological tools.

In conclusion, we have gotten off to an excellent start in 2021. We continue to augment one of the best deposit franchises. Our asset quality metrics, which were already strong, continue to improve, and we are generating significant earnings growth. We will continue to build on this momentum for the remainder of the year.

And now let's turn it -- let's turn the call back over to the Bci team for some final thoughts and wrap up.

[José Ibaibarriaga Martínez, executive]

Thank you very much, José and Hugo.

Next, I want to mention something that we are passionate about and in which we invest a lot of our resources. In the payment ecosystem, we continue to work hard on the development of new and current vehicles, such as Financial Services, Bci Pagos, our joint venture with EVO Payments and MACH. We want to become a significant player in the acquiring and payment solution market in Chile.

From a strategic perspective, our payment method strategy is a powerful complement to our data strategy where we reach more than 5 million customers. As you may know, we have already established Bci Pagos. And we are waiting for the final approval from the regulator. We expect to be able to begin operating in the next quarter.

This year, MACH reached more than 2.9 million accounts and launched new functions with over 2.3 million cards issued. Additionally, over 110,000 e-commerce merchants, brick-and-mortar businesses and in-app services already accept MACH. This outstanding growth is in part a result of high user satisfaction. MACH has a Net Promoter Score of over 70%, as indicated in this slide.

Regarding future plans, we are working to develop MACH into a digital bank, adding more products and services for our customers. For this project, we are working with Mambu, which is the cloud banking platform used by the main digital banks.

We continue to carry out programs and initiatives within our sustainability plan. This quarter, we continued to strengthen our ESG framework with the following concrete progress. Bci was again recognized by the Great Place to Work Institute, which highlights companies that promote excellent labor practices. This year, the bank has positioned as one of the third best companies to work for the -- to work for in the country. The Corporate Reputation Monitor has just recognized us for the tenth consecutive year with the first place in the most responsible companies in Chile.

With the aim of driving sustainable development through the massification of nonconventional renewable energy, this year, we issued 2 green bonds for over $64 million, in line with our commitment to continue offering financial solutions that help mitigate the consequences of climate change.

These are 4 -- these are the fourth green bonds issued by the bank where the aim is not only to raise fund, but also to generate a positive impact on the environment and social development.

In summary, the bank is in a strong financial position to deal with this crisis. Our key focuses has been risk management and expense control. We have booked additional provision in order to anticipate future risks that -- and thus have a conservative financial statements, which will allow us to address potential scenarios that may not currently be covered by risk models. We have focused in key areas such as capturing the digital transformation value; focusing value flows and commercial efforts on key pockets of opportunities; freezing the cost baseline; boosting our corporate plan to optimize, automate and digitalize services, models and processes; and finally, maximizing the profitability of capital by efficiently allocating capital and maximizing return to cover -- to the target.

Thank you very much for participating in this call. And now we're more than glad to answer any questions that you may have.

[Andrés Atala S., executive]

Thank you very much, José Luis, and the rest of the team. [Operator Instructions] I see that our first question is from Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

Can you hear me?

[José Ibaibarriaga Martínez, executive]

Yes. We hear you really well.

[Daer Labarta, analyst]

Okay. Great. I guess two questions. Just thinking, you have very good performance in your net interest income and you mentioned here a little bit of benefit from the PPP fees. So how should we think about net interest margin going forward? You also had relatively high inflation in the quarter. So if you can give some color on sort of how we should think about the evolution for the rest of the year in the net interest income and net interest margin?

And then second question in terms of our provisions, also a very good quarter, very low level of provisions there. How should we think about the evolution of the provisions going forward? And ultimately, what that means for your ROE, right? You already had 15% ROE. Is that a sustainable level? Or should that normalize a bit to where you were before? Any color you can provide there would be helpful.

[José Ibaibarriaga Martínez, executive]

Thank you, Tito. Juan Enrique, you answer the question of provisions later. I take the NIM.

Going forward, we believe that NIM should maintain in current level, although there are some several positions that could affect this situation. On the one hand, there is a rate effect with lower interest rate on the commercial loans and consumer loans compared to first quarter 2020. This also was driven by the FOGAPE loans that has a 3.5% interest rate that generate pressure in rates and, therefore, in the NIMs. However, we expect to generate an important volume of FOGAPE Reactiva loans that has a higher rate than its predecessor, compensating part of this aspect. This is offset by lower funding costs, following the increase in the noninterest-bearing deposits vis-à-vis time deposits, which has helped to have a better-than-expected NIM.

And regarding inflation, Tito, it is something that we are monitoring very closely since the third withdrawal will have an impact in consumption, generating greater inflation pressure. But at the same time, there is a law that want to decrease or reduce the VAT taxes to a group of essential goods, including food and gasoline that could create inflation or less pressure in inflation, as Sergio mentioned. So likewise, in the funding side, we believe that the balance of the checking account could maintain high levels for the coming months.

So at the end of the day, we believe that we should expect a second or the last -- the rest of the year with a similar NIM that we have today with a net situation that I already explained.

So Tito, did I answer the question? If that is -- if the answer is yes, we pass it to Juan Enrico -- Juan Enrique.

[Daer Labarta, analyst]

Yes. That was very clear.

[Juan Enrique Visinteiner, executive]

So Tito, on the provisions question, it's a tricky one. As you have seen, the performance of the loans as they have started to enter into payment conditions has been extraordinarily good despite the fact that the crisis has been deeper and longer than what originally expected, and that's the reason why we have started to build voluntary provisions. So we do expect that specific provisions on consumer portfolios and commercial portfolios should reflect -- should start growing as its deterioration manifests. We don't think it is sustainable to see levels of nonperforming loans that are significantly below pre-pandemia levels. However, we still do not have a plan as to compensate the buildup of specific reserves with the release of voluntary reserves. For that, we will need to see a sustainable trend. And we will have to see several months of that trend sticking before we take any decision as to a compensation between the 2 pieces of the provisions.

Now that's with regards to the quality of the portfolio. Now we will certainly build additional provisions as we continue growing portfolios. We see very interesting opportunities of continuing to grow our local portfolios. We're growing in mortgage lending. We have and we see good opportunities in consumer lending, and we are finding many corporate customers coming back on track on investment opportunities and growth opportunities. So certainly, provisions will move up along with the growth of our portfolios as well.

I don't know if that answered your questions, Tito?

[Daer Labarta, analyst]

Yes. Juan Enrique, yes, that was also pretty clear. So I guess maybe just a follow-up then. So yes, current levels, you mentioned a bit unsustainable. Maybe back to pre-pandemic levels is more reasonable. And I guess the follow-up on that, just -- so for ROE, probably this level, the ROE this quarter, probably a bit on the higher end. As those provisions normalize with a stable margin, maybe ROE can come down a little bit from current levels. Is that the right way to read that?

[José Ibaibarriaga Martínez, executive]

It should until we start offsetting the buildup of specific reserves with the release of voluntary reserves. But for certain, there will be a lack between both 2. So yes.

[Andrés Atala S., executive]

Okay. Our next question comes from Sebastián Gallego from the CrediCorp team.

[Sebastian Gallego, analyst]

Yes. Can you hear me?

[José Ibaibarriaga Martínez, executive]

We hear you well. Please go ahead, Sebastián.

[Sebastian Gallego, analyst]

Perfect. I have a couple of questions today. Just a follow-up on the sustainability of the results. I just want to get a sense on how sustainable are the results coming from CNB. We saw very good results, as José mentioned, and I just want to understand or go deeper if this type of results are sustainable for the upcoming quarters.

Second question is if you can clarify the actual guidance on ROE for 2021 considering the moving parts and the trend probably into 2022.

And the final question will be on Financial Services. We have seen a very good performance on NPLs, but we have seen also the effects on loan growth coming from liquidity. What are the -- what is the outlook for building up again that portfolio at Financial Services?

[José Ibaibarriaga Martínez, executive]

Okay. Thank you, Sebastián. You are always really active in this call, and we appreciate that. Jose, can you answer the question of sustainability of City National Bank result in the long term, please? And then I will talk about guidance of return on equity and Financial Services.

[Jose Marina, executive]

Of course, José Luis. So Sebastián, talking -- looking at the components of our results, if you look at our net interest margin, as we discussed, we're -- we had an impact from the PPP fees in this first quarter of about $40 million and we ended the quarter with another $42 million of PPP fees yet to be recognized. And actually, with the additional PPP loans that we funded since March 31, that's about $47 million of PPP fees that will be recognized substantially over the next year.

So I think our NIM results over the next year will be similar because we'll be having a similar amount of PPP income. And we're going to continue to manage our cost of funds, which is down to 31 basis points, and we think we're going to be able to continue to reduce that by a couple of basis -- a few basis points each quarter. But obviously, there's only so much further we can reduce that.

But -- and what we're focused on right now is as these PPP loans are forgiven, we're -- as I indicated during the call, we're really focused on creating organic loan growth in order to replace this liquidity that's coming back from the PPP forgiveness with good quality loans and maintain our margins.

So I think our margin will be maintained at similar levels over the next year as a result of the almost $50 million of PPP fees that we have to be recognized, which will be mostly recognized over the next year as the forgiveness process continues.

So I think from a margin perspective, they're going to be very steady. And yes, I think you've seen the growth that we've had in our net -- in our noninterest income. And that's another area that we focused on. And then we always have a very strong efficiency ratio in controlling our expenses. So I think our results are sustainable over the medium term.

And the last component of that is our provisioning. Asset quality has been -- has maintained very strong. All of the indicators are very favorable, whether they be indicators in the portfolio, looking at our past dues declining, our NPLs declining, but also macroeconomic factors when you look at the unemployment rate decline, the expected continued growth in GDP, the continued migration of people and businesses down to Florida, which we read about almost on a daily basis. So I think the outlook from a provisioning perspective is also very, very sound and stable.

So did that answer your question?

[Sebastian Gallego, analyst]

Yes. Thank you very much, Jose, very clear.

[José Ibaibarriaga Martínez, executive]

Thank you, Jose. Your second question, certainly, is regarding return on equity. The guidance that we have given is that we are targeting a 14% return on equity in 2023, of which City National Bank will -- has a target of 12% of return on equity in 2023. We are in line with that according to our quarterly forecast. So I could say that we maintained that, and we are very optimistic that we are in the right trend.

Regarding Financial Services, loan growth in the commercial -- in the consumer area, as Sergio explained, and due to the government support and the withdrawal on the pension front, there is an excess of liquidity that is pressuring loan consumers down. And in the case of Financial Services, it's nothing different.

We have had an incredibly good result in the first quarter basically due to an excellent cost control, but at the same time, excellent risk ratios that has been created by 2 issues. One, customers are using the excess of liquidity to pay, and we are using all the digital tools in order to facilitate payments to our customers. And the second thing is that we are not growing too much for this excess of liquidity. And with the third, with goal on pension fund, we're estimating that demand on the loan portfolio in that segment of the population will be lower.

So this is something that we are looking very carefully, and we will see, Sebastián, how and how much the government supports with bonuses and how much of the third mutual fund withdrawal will affect the loan portfolio on the Financial Services vehicle.

[Andrés Atala S., executive]

Our next question comes from Mr. Yuri Fernandes from the JPMorgan team.

[Yuri Fernandes, analyst]

I have a first question regarding your previous net income soft guidance, I recall getting the -- in the previous -- in the first Q, if I'm not mistaken, your target, maybe a 20% year-over-year increase on your net income, right? And now in the first Q, it was a very good quarter. I know maybe tax rate was pretty low, but still, this was about 50% of the net income of 2020. And as José Luis mentioned, asset quality has been tracking better than expected. That means there are pros and cons, but overall, very flattish outlook for NIMs.

So my question is, could we see like an upside here for this recovery on net income? Like this 20% you had previously kind of becoming a little bit conservative given the outlook. That's the first question. And I can address a second question after this.

[José Ibaibarriaga Martínez, executive]

Yuri, as you mentioned, we have had a very good first quarter both in Chile and, as you hear, in City National Bank. Yes, we are seeing that the forecast for this year will be higher than the 20%. We are fairly or a little bit over a net income expectation for this year. But we have to be careful as the second semester of this year, we are expecting lower inflation, we're expecting a lot of liquidity in the market that maybe will not generate too much demand in the consumer side.

So the answer is, yes, all your analysis was correct. And our forecast, we have reviewed it from the 20% that we told you a couple of months ago to 30% or a little bit over 30% in net income compared with 2020.

[Yuri Fernandes, analyst]

Super clear, José Luis. I have a second question, if I may, regarding MACH. When I look to the valuation of Bci, and I know you have a bank in the U.S. that if we look to comps for these mid-cap banks in the U.S., the multiples, they are higher than the multiples of Bci as an equity as a whole. And you have MACH, right? So my question here is a more philosophical question in the sense how should we, investors and analysts, look to this business -- or better, how do you look to this business? Because as you said, you have close to 3 million customers, you could move from a wallet model to a digital bank model and start monetizing this more easily. So what is our approach, José Luis, when you look to MACH and like the potential of this to unlock value for Bci shareholders? What is or like how do you assess the value of this platform here for the bank?

[José Ibaibarriaga Martínez, executive]

Yuri, this is an incredible, good question. If you see the multiples of the banks today in the U.S. and wherever you take the City National Bank multiples, we believe that are not recognized in the -- in Bci's stock prices. And the same thing happened with MACH.

The thing is, Yuri, that from a strategy point of view and a long-term strategy, both City National Bank, MACH and EVO Payments and Financial Services and -- oh, and Peru that we are creating a bank there, all of our investment has a long-term view. And we strongly believe that all the assets that we already have, have a strong value creation for the shareholder that sooner or later will be captured in the stock prices. But in the short term, I agree with you that the market has not captured it.

So the short answer to your question is we have a long view. We have a strategic view in all these assets. And sooner or later, the market will start recognizing what it means to have 5 million customers with a data analytics tools, with MACH, EVO Payment, the credit card of Bci and debit card of Bci plus Financial Services is a huge asset. And then City National Bank, if you recall, a couple of years ago, City National Bank was a bank of $4 billion. Today, it is a $20 billion asset. And just to make a really simple comparison, City National Bank today is as big as Bci in 2011.

So Yuri, I will love that the price stock of Bci really recognize of these assets. I think it will take some time for you guys to really value all the assets that we are generating in all these vehicles. So hopefully, it will come soon and not later, the value.

[Andrés Atala S., executive]

Our next question comes from Claudia Benavente from Santander Investment.

[Claudia Benavente, analyst]

I have two questions. There are like some banks that have already started switching their consumer book provisioning model to an expected loss basis or close to an IFRS 9. Where is Bci standing in this front? And my second question is, if you may provide like an estimate for the impact on inflation should the bill on lowering this -- the VAT happens?

[José Ibaibarriaga Martínez, executive]

Claudia. The second one was -- excuse me? I didn't hear you very well.

[Andrés Atala S., executive]

The VAT.

[Claudia Benavente, analyst]

The...

[José Ibaibarriaga Martínez, executive]

Okay. So the first one is the consumer models, if -- how we -- when we are going to move to higher assets? And the second one is the impact of the VAT. Okay. Can you answer the first one, Juan Enrique? On the second one, Sergio, if you want?

[Juan Enrique Visinteiner, executive]

Yes. Yes. Sure. So yes, you're right that the expected loss should be the driver of building up provisions going forward, Claudia. But today, we're bridging that with voluntary provisions as -- and as we get the approval from the regulators to use internal models, we're going to switch and be more proactive in the recognition of the risk in the specific provisions of the portfolio. But that's not for the next months. That's eventually something that is going to be implemented towards the end of the year or eventually next year.

So in net-net, the impact is reflected today by looking at both provisions together, the specific ones and the voluntary ones. And yes, we look forward to having a moment in which our models will be forward-looking, and then we will be fully recognizing in the portfolios the entirety of the provisions. That's for the first question.

[Sergio Lehmann, executive]

Claudia, with respect to the effects on inflation of VAT reduction, it's very difficult to have a final answer because we don't know exactly how much it's going to be transmitted to final prices. But given different simulation, we estimate that it's going to be between 0.5% and 1.7%. In average or as a best scenario, we estimate that at the end of the year, the impact on inflation, it would be around minus 1%. So in that case, the inflation rate at December, in the case of being implemented, this project is going to be close to 2.5%.

[Andrés Atala S., executive]

Our next questions come from Mr. Jose Miguel Ureta.

[Jose Miguel Ureta, analyst]

Congratulation for the results and an excellent presentation. I have two questions. The first one regarding the -- your portfolio of investments and why -- what will be the impact of the interest rate hikes that we have experienced on that portfolio?

And the second question is regarding your international expansion plan. If that will change given what has gone on politically in the region and specifically in Peru, would you put a pause on it or you will go on as initially planned?

[José Ibaibarriaga Martínez, executive]

Jose Miguel, I will start with the second one regarding the expansion in Peru. We will continue. We are waiting for the final approval from the regulators to do so. We are building a second floor bank with the aim to help around 400 Chilean companies that are in Peru plus several customers, Peruvian customers that we have a long relationship with them with the rep office that we already have there for almost 15 years. And the -- and remember, Jose Miguel, that all the decisions that we are making here is in a long-term view. So yes, we are seeing some uncertainty in the last couple of weeks with the election in Peru.

Having said that, if you review the Peru behavior, GDP growth, inflation, investment in the last 15 years and you compare with the kind of political stability that they have had, in some way, this association in the country has been able to grow, have some institutions are working. So we believe that in the long term, Peru is going to be a really good investment for us. In the next couple of years, it will be something that will start growing slowly. So far, we maintain the aim to grow -- to go the -- grow in Peru.

The other question, Jose Miguel, regarding the fixed income strategy of the portfolio, it's important to mention in 2020, we have saw historical low rates. And the withdrawal of the mutual funds and the political scene has had an impact in the fixed income market. Based on the ramp, in recent weeks, we have seen a change in the slope of the curve with long-term rate increases both in swap rates and in local fixed income.

So regarding the distribution of the investment portfolio and the asset allocation of each of one of the assets, it is something that we consider a strategic information and it's complicated to give you and give the market any further disclosure. I think that this is a strategic situation that banks and all financial institutions are very close monitored -- looking at it. And we feel that we have a -- so we have an impact that we are not seeing that we are going to suffer. The LM strategy, we have accounting hedges to mitigate that great risk of investment.

So we feel pretty comfortable. We are very -- monitoring very closely. Expectation is that interest rates are going to increase, as you have seen in the short curve of the slope that has increased. So despite of the normalization of the interest rate that we will see in the near future that could start sooner.

So what else can I tell you, Jose Miguel? The specific strategy is confidential and obviously, we can't disclosure to you here.

[Andrés Atala S., executive]

The next question comes from Daniel Mora from the CrediCorp team.

[Daniel Mora, analyst]

I have just one question. Can you provide more color regarding Bci Pago? Is this the initiative in the America net current business? I would like to know what will be the strategy in the short term and also the market share target that you have for the next quarters.

[José Ibaibarriaga Martínez, executive]

Thank you, Daniel. Bci Pago is part of the payment ecosystem that we are building. As you are aware, there's a lot of movement in this scenario where we are moving for the third -- 3 players to 4 players. And we are moving very fast in the acquiring area with EVO and this association with Bci Pagos. We have a target to have around 100,000 commerce with us the first 9 month. We expect to be operating in a couple of -- well, we are very close to start operating. We need to be in the market soon. As you know, there are some players that are already there. So it's important really to go fast. And we are waiting for the final approval of the authorities, which we believe we are very close.

So with that asset, we will have all the different tools that we will need to play in the payment system. And the market share, I think that is complicated to give you a short answer because it will depend what is the market and is -- whatever has Transbank today or you go to the very bottom of the segments that today do not have any payments tools to receive the payment.

So the answer, more than market share is that we want to have more than 100,000 companies working with us around 9 months after we started. And this is different from the MACH issue that I told you before.

[Andrés Atala S., executive]

Our last question comes from Mr. [ Francisco Chumaket ].

[Unknown Analyst]

Jose mentioned more than $1 billion in cash at CNB. Would like to understand what is a more sustainable level of cash for that operation and what is the plan with that probably excess cash but not invested cash? Are you open to more M&A in the near term?

[Jose Marina, executive]

Well, the cash is obviously the result of the almost $1.4 billion of additional deposits that we brought in during the course of the quarter. We're deploying that cash into loans and investments in a disciplined and prudent manner, recognizing that interest rates may be going up in the future.

So I think we're going to end up in a little less than a -- on a recurring basis, a little less than $1 billion of cash were a little bit elevated due to the higher-than-anticipated deposit growth that we had at the end of the quarter. But I don't think it's going to be significantly less than $1 billion. Again, deploying that excess cash into the investment portfolio if we need to, but again, in a disciplined and prudent manner without taking any undue risk from an interest rate risk perspective.

In terms of M&A, that's always something that we have our radar on. Obviously, we have a strong history of strong organic growth. However, we will maintain our eye on opportunities that may arise as we did by closing the Executive National Bank deal in the past year and TotalBank 2 years before that. So complementing our organic growth with opportunistic M&A will continue to be part of our strategy going forward.

[José Ibaibarriaga Martínez, executive]

Okay. Thank you very much for your participating and being so active in question. So we appreciate that, and we always are hoping to continue talking with you. Our Investor Relations team more than glad will answer any specific questions that you may have after this call. Thank you very much, Jose, Hugo, Sergio, Juan Enrique and all the teams that create this conference call and make it possible. Have a nice day.

[Andrés Atala S., executive]

Thank you.