Banco de Credito e Inversiones

SGO:BCI

Earnings Call Transcript 2022-Q1

[Andrés Atala S., executive]

Good morning, and welcome to our first quarter 2022 conference call. I'm Andrés Atala, Head of Investor Relations team. And I really hope that you and your families are doing well and staying safe.

I'm joined today by José Luis Ibaibarriaga, Bci's CFO; Mr. Juan Enrique Pino, Head Credit Risk Management; Mr. Jose Marina, CNB's CFO; and Mr. Sergio Lehmann, our Chief Economist.

During this presentation, we will ask you to please keep your microphones and cameras turned off. And then we will leave you room for question at the end of the presentation, where you will be able to raise your hand using the button that you can see below your name.

In this opportunity, as of this quarter, we have adopted the IFRS 9 financial instruments, that previously IAS 39. However, the Financial Market Commission, the CMF excluded the application of methodology to calculate the expected credit risk loss for loans, which will continue to be calculated using the expected loss models, defined by the CMF, our local regulator. Besides this modification, there were other regulatory modifications that we disclosed in our annual financial statements, concerning accounting criteria and the presentation of the financial statements. These modifications of our accounting policies and of the presentation of our financial statements, required the 1Q 2021 and the fourth quarter of 2022 figures and the complete year to be stated of the books, which is the pro forma to comply with the comparability principle of the IFRS due to the implementation as of January '22, of the new accounting regulation requirements of the CMF in its compendium of accounting regulations for bank. If you have any further queries about this new format, please do not hesitate to contact our IR team.

As usual, in the Slide #2, we will see -- we will cover in this presentation, the main aspects of the bank for the first quarter, broken down into the topics shown below.

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

[Sergio Lehmann, executive]

Thank you, Andrés, and good morning, everybody. The global economy has been hit by the invasion of Russia to Ukraine and the resurgence of COVID-19 in China, higher inflation, which will require more aggressive policy rate increases. The global economy projection were cut by the IMF in most of the regions and the inflation forecast was revised up. .

In the U.S., the economy fell by 1.4% in the first quarter due to a reduction in inventories and exports, consumption and investment were still showing a positive dynamic. Economic activity in the first months of the year was influenced by sanitary condition and from the external side, the significant appreciation of the U.S. dollar.

The expected a recovery in the next quarter and then some positive data for the coming months.

Inflation on the other hand has continued to rise. And given this, the Fed could raise the Fed fund rate more aggressively than previously expected. Long-term rates have increased incorporating dispute.

In Chile, the economic growth has been showing a deceleration at the beginning of the year. It is expected a more abrupt adjusting in the coming months, and to be expressed as an annual contraction by the second half of this year, given the economic adjustment in progress, driven by the contractionary monetary policy already in place and a reduction in the public expenditure. We're expecting, of course, this year, a decline in private investment and consumption and the political uncertainty remains high.

Inflation in Chile was 9.4% year-on-year in March, one of the largest in recent decades and mostly explained by local factors. Inflation will go up by around 11% in the coming months. And in this case, pushed by external factors, but could eased by second half '22. In response, the monetary policy rate has been importantly increased and market interest rates has moved higher.

The Chilean peso was one of the most depreciated currency in 2021, mainly due to domestic risk related to the political scenario. It regained value at the beginning of this year but has recently reached historical depreciated values given a more challenged external scenario.

On the next slide, we present the main economic figures in the U.S. and Florida. As we mentioned, the U.S. GDP fell by 1.4% in the first quarter of this year, mainly due to a reduction in inventories and exports. Households construction and investment remain dynamic, signaling that an economic adjustment appears to be urgent. The national labor market is still improving but has not reached pre-pandemic levels yet.

Florida's labor and GDP trends has been even better than in the rest of the U.S. during the last 2 years. Inflation, however, is the main economic challenge ahead. Inflation pressure recognized higher energy and food prices and supply issues. But in addition, we identify demand factors given the high economic dynamic. The Federal Reserve will substantially increase the federal fund rate during 2022 and 2023. It's expected 50-basis-point rise today and get close to 2.5% at the end of this year, a contractive rate.

Please move to the next slide. In Chile, economic growth has been starting to show a deceleration in the first months of this year. We are forecasting a recession beginning in the third quarter until the first quarter of 2023. A fall in wholesale consumption and government spending together with high political uncertainty which maintain investment tighten are the main causes.

On the next slide, we see Chile's labor market. Figures are improving and recovering from the pandemic crisis, but most indicators still haven't reached pre-pandemic levels. The unemployment rate has diminished, but the labor for participation remains constrained, although it showed a good recovery trend. Job gains have been across sector, mostly in construction and services.

Please move to the next slide. Inflation reached 9.4% in March 2022, one of the largest figures in the recent decades and well above the Central Bank target, which is 3%. Inflation in Chile was mostly determined by local factors in 2021, but recently have started to recognize the impacts of higher commodity prices as a consequence of the Russia-Ukraine war. The monetary policy rate has reached rapidly from 0.5% in June last year to 7% in March. We expect higher inflation in the coming months, near to 11% in midyear and then it could de-accelerate gradually.

Monetary policy rate will continue to move higher to 8.25% in the coming months. Then at the last quarter of the year, we expect that the Central Bank will initiate a gradual normalization process. Risk over inflation remained anyway elevated and 2-year inflation expectation are well above the target of 2% of the Central Bank.

Finally, on the next slide, we analyze local financial market movements. The Chilean peso regained value in the first quarter of this year, but in April, concerns over the Fed action, China's quarantine and the impacts over the global trade started to push the Chilean peso and has reached the highest level of the year. Volatility on the FX market has increased recently and long-term rates remain elevated to a monetary perspective and structural issue.

Now I will give you -- give the word to José Luis Ibaibarriaga.

[José Ibaibarriaga Martínez, executive]

Thank you, Sergio, and good morning, everyone, and thank you for participating in this conference call. We will now go over Bci main first quarter three highlights.

With the gradual return to normality after the pandemic, our multidisciplinary panel made up by representatives from all areas are taken into consideration, international best practices, design the new Bci experience. This capitalized one of the lessons learned from 8 years of labor flexibility programs to project a working model that will continue to make a difference in the lives of people and society. In the forthcoming years, 70% of our employee will adopt a hybrid work model.

We are proud to inform you that Bci has been recognized as the most responsible company in Chile according to the recently published Merco ESG ranking in which our bank also leads in the clients and society ranking. In January, we were the first Chilean bank to adhere to the responsible banking principles of the United Nations Environment Program Finance Initiatives.

In the same way, we want to highlight that in January, Bci became the first Chilean bank to issue a public green bond overseas. Bci has been recognized once again for the corporate experience obtaining first place in the banking sector of the PXI-Praxis independent survey.

In terms of consolidated financial results, we are -- here are some highlights for this quarter. We closed the first quarter of 2022 with a positive result with a solid 25.98% year-over-year growth in our operating income. I will especially like to mention the strong results of City National Bank reaching USD 22 billion in assets and a net income of $64 million. We have managed to keep operating expenses under control and continue to invest in key initiatives. This quarter, we booked $74 million in voluntary provisions.

Please move to the next slide. Today, Bci is the largest financial institution in Chile for equity, assets and loans. We have successfully diversified our operations at wealth management in Chile and City National Bank of Florida, including our branch in Miami, they account for almost 32% of the total bank loan portfolio. One of our priorities this year is to continue bolstering our international presence. In Peru, we have a top-notch team and a cutting-edge technology platform. And yesterday, we have recently secured authorization from the Peruvian regulator to start our operations.

This quarter marked continued growth with more than 3.3 million registered users, up nearly 60% year-over-year and 2.9 million active digital cards. In terms of experience, our customers continue to rate us as delivering an outstanding user experience and a high-quality service which is reflected in our net promoter score of around 70%. Additionally, one of our key sources of monetization remained strong with 31% year-over-year growth in noninterest-bearing deposits, helped by the recently launched new separate saving account called Cuenta Futuro.

In terms of transaction growth, we should highlight that the number of MACH digital card purchases grew nearly 2.5x year-over-year, while reaching nearly 70% growth in terms of total amount. Likewise, in recent months, we defined MACH Pay as the brand of our digital payment platform. And we signed a partnership with [Imed] a digital platform that allows us to connect health care centers to the ecosystem.

Please move to the next slide. Now let's go through the main figures of our consolidated operations. The bank posted a consolidated income of $240 million in the first quarter, which was 20% increase year-over-year. The bank has good operating revenue result, which grew 26%. The main effect we saw this quarter were: loan growth combined with high inflation, the bank has maintained expenses control which have increased 8.2% year-over-year in nominal terms below inflation. This quarter, the bank has had a risk higher expenses. And this considers the booking of additional provision of around $74 million. Despite these higher risk expenses, nonperforming loans remained at record lows and Juan Enrique will address this later in this presentation.

Regarding our balance sheet, the bank's equity has been affected by hedge associated with increases in Chile and U.S. rate together will have inflation. At a local level, the main line items followed a similar trend to the consolidated result in terms of year-on-year changes, as we would show here.

To give you more details of local operation, the next few slides further address the main financial indicators. Bci locals loans amount to USD 39.1 billion in the first quarter, increasing 13.6% year-on-year and mainly driven by growth in the commercial and mortgages portfolio.

Commercial loans growth consider several effects: One, Dollar appreciation this quarter, taking into consideration that nearly 16% of the local portfolio is in U.S. dollars. The Wholesale division continued to experience strong growth as corporate clients searched for funding in terms of corporate loans as the bond market presents lower liquidity. And finally, sounds 29% growth on our factoring business.

Mortgage loans continued to have a sound growth of 16.5%, as you can see in the bottom right chart. And a significant part of this growth is from last year's growth combined with higher inflation. We believe that a slowdown is expected in the next few quarters, due to the rise in interest rate and inflation as well as commercial conditions.

Consumer loans have started to show a sign of reactivation on a year-over-year basis, increasing by 5.6%. Nevertheless, we believe consumer loan growth should continue with mid-single digits since market liquidity should fall after the end of the government support initiatives.

The local NIM increased by 2 basis points, mainly explained by higher inflation. Meanwhile, net fees rose 20% year-over-year. This positive result is explained by higher fees in the retail business regarding fee income card services, which are the highest source of fee income increased to pre-pandemic levels. This was mainly driven by card related fees.

In the OpEx -- in OpEx terms, we managed to maintain OpEx growth below our annual inflation in Chile. The bank ended this quarter with an efficiency ratio of 44.5%, 771 basis points below last year. Although we expect to have a lower efficiency ratio, we have not lost sign of the long term by investing with the aim of becoming leaders of key initiatives such as the new digital ecosystem and our international platform. The positive result in the net income has been reflected in the return on equity and the return on assets, as you can see in this chart below. As of March, the consolidated return on average equity was 13.2%.

Please move to the next slide. On the left side of this slide, we present the evolution of our funding mix. Our deposit base including both noninterest-bearing deposits and demand deposits grew 20% while demand deposits increased 26% year-over-year, after a strong increase in noninterest-bearing deposits in 2021. This quarter, we have started to see a migration to demand deposit as rates raise.

From a structural funding perspective, we have continued to engage with international investor in most important market abroad. Bci became the first Chilean bank to issue a public green bond outside the country of CHF 200 million with a term of 5.25 years. We also became the first Chilean bank to issue secured overnight financing rate bonds, an alternative recommended replacement rate for the LIBOR rate in U.S. dollar.

With regard to Basel III implementation, so far, we have complied with 100% of the schedule associated with the delivery of the new regulatory report for credit, market and operational risk, ending this quarter with 9.66% CET1 ratio under Basel III, as you can see in the top right chart. This decrease is mainly due to a negative effect on equity accounts as stated with increases in local and U.S. rates, together with upward adjustment and inflation expectations.

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

[Juan Enrique Visinteiner, executive]

Thank you, José Luis, and I hope everyone is having a great day. As you can see in this slide, our loan portfolio has continued to increase. which was mostly driven, as José Luis said earlier, by commercial loans and residential mortgages. In the same period, the nonperforming loans rate decreased to record lows accounting to 1.07% of total loans by the end of first quarter 2022. This is mainly explained by the significant liquidity program that the government provided in several forms to individuals and to companies as well as by support programs implemented by Bci since the startup of these COVID crisis.

As the government liquidity support initiatives approach their end and individuals and companies return to the new normal, we believe it is reasonable to assume that a credit portfolio performance should return back to pre-pandemic levels or eventually slightly worse. As a result of that, we have continued to build voluntary provisions in our portfolios, where portfolio specific provisions are linked to the level of PBOs and NPLs or in portfolios where our assessment of the payment capacity of borrowers may be somehow clouded by the transitory effect of the large level of liquidity injected by the government into the economy. However, we do believe that some support initiatives have been so strong that they may have many borrowers to improve structurally and not only the priority. So the net effect may be better than originally expected.

Let's go to the next one, please. So the commercial loan portfolio has had a very positive growth in the first quarter of 2020, mostly due to business expansion and the business recovery. This has more than offset the portfolio decrease from scheduled payment amortizations of loans granted more than a year ago when the COVID crises was hit in the economy heart. As to NPLs, we continue to see a very positive trend. Nevertheless, we have carried on building voluntary provisions in anticipation to what we believe should be the post-pandemic levels. As to loan loss provisions ratio, we have made efforts to reflect in our internal credit ratings, the tighter financial conditions of some borrowers, which were more easily identifiable as potentially impacted by the crisis. While at the same time, we have been building voluntary provisions with those that are less identified

Let's go to the next one, please. So here, we see the home mortgages. The residential mortgage loan portfolio has maintained its resilience in the current scenario with the portfolio size increasing and the NPL ratio is still performing well below pre-pandemic levels. As for loan loss provisions, we have built up a level of voluntary provisions in order to offset what we believe is, only transitory drop in NPL and also to reflect the potential impact of both weaker unemployment rate and higher inflation rates.

Let's go to the next one, please. As to consumer loans, after a decline in portfolio size during 2020 due to the great liquidity in the market, we have started to see a gradual recovery in the size of this portfolio since the second half of last year. Customer support measures by both Bci and the government, along with the digitization of payments and collections and a very active set of portfolio management and collection actions have all enabled an improvement in the NPL ratio. In the case of Bci's affiliate leader Servicios Financieros -- after reaching the record low levels, we are now starting to see a change in trend, but still within historically low levels.

Let me pass you on now to Jose Marina, who will be addressing our affiliate in Miami City National Bank.

[Jose Marina, executive]

Thank you, Juan Enrique. Good morning, everyone. My name is Jose Marina, and I am City National Bank's Chief Financial Officer. I'm excited to be here with you this morning to discuss our first quarter results. We started 2022 with strong performance. Our total assets increased by $232 million over the past quarter, surpassing the $22 billion mark. As of March 31, we have $22.1 billion total assets, representing $2.4 billion or 12% of year-over-year growth. This growth was achieved by growing both our loans and deposits in a significant manner.

City National Bank has a long track record of outstanding organic loan growth. The combination of our organic growth engine with the strong macroeconomic conditions in Florida, resulted in new loan commitments of $1.9 billion for the first quarter of 2022, which is $1.2 billion higher than the first quarter of the prior year. This resulted in about $1 billion of loan growth, excluding PPP, which is significantly higher than the industry growth rate. We grew significantly while preserving our strong asset quality. You will also see that deposit growth continues to be robust for client deposits increasing by $402 million or 2%, a growth rate that is 3x higher than the banking industry as a whole in the quarter.

Our significant loan and deposit growth translated to strong results as well. In fact, our core net interest income, which excludes the impact of PPP and MSLP fees increased by $9 million quarter-over-quarter and $24 million year-over-year. Overall, net income of $64 million for the quarter is 22% higher than the prior year.

We will conclude our comments this morning by discussing the fundamentals that are in place that have positioned us to continue our success in 2022. But first, let's review our first quarter results.

On this slide, you can see our assets increased by $232 million for the quarter reaching $22.1 billion. Again, this represents a year-over-year growth of $2.4 billion or 12%. Our asset growth was purely organic as we did not close any acquisitions over the past year. It is also important to note that even after growing our non-PPP loans by 8% quarter-over-quarter, our loan-to-deposit ratio remains very low at 75% due to the impact of deposit growth, which we will discuss shortly. The key point is that we deployed excess liquidity in Q1 via loan growth but still have a low loan-to-deposit ratio to sustain continued growth.

You can also see that we've deployed a significant amount of our -- on this slide, you can also see that we deployed a significant amount of our cash position via loan growth. Our cash balance as of the fourth quarter was $1.3 billion and represented 6% of total assets. Thanks to our loan growth, we were able to decrease our cash position by $761 million, to $578 million, which still represents 2.6% of our total assets.

Our investment portfolio slightly increased quarter-over-quarter, but still represents 28% of our assets. On the right-hand side of the slide, you can see that [90%] portfolio is still secured by agency securities only 5% in corporate securities.

We have increased our deposits by $2.6 billion year-over-year at 16%, including $402 million of quarter-over-quarter growth and 9% annualized growth rate. We continue to focus on cross-selling deposits on all of our new loans as well as during our loan renewal process. A substantial amount of our growth is in noninterest-bearing deposits, which now account for 41% of our deposit base. Our noninterest-bearing deposits increased by $350 million in the quarter.

We have also been able to sustain our spot cost of deposits virtually unchanged over the prior quarter, as you can see. On the right-hand side of this slide, you can see how our deposit growth rates over the last quarter and over the prior year compared to the banking industry as a whole. City National Bank's growth rates significantly exceed those of the industry for both time horizons, demonstrating that our cross-sell efforts have paid significant dividends. As a result, we have ample liquidity to continue to funding our strong loan demand.

The combination of our long-proven loan production capabilities, combined with the strength of the Florida market resulted in a $1 billion of loan growth, excluding the PPP during the first quarter. This represents an increase of 8% over the prior quarter or 32% annualized growth rate. As you will see in the next slide, this growth was driven by a strong quarter of loan production. On the right-hand side of this slide, you can see our loan growth rates, both over the last quarter and over the prior year are significantly greater than the banking industry as a whole.

As we saw on the loan growth slide, we had an especially strong first quarter with loan production of $1.9 billion, which is $1.2 billion higher than the first quarter of 2021 and very close to the $2.1 billion that we had in the fourth quarter of last year, which was our best quarter in the history of the bank. In total, we have added over $4 billion of new commitments over the past 2 quarters.

On this slide, you can see that our outstanding loan portfolio as of the quarter end is also very diversified with only 43% of our portfolio classified as commercial real estate. You can also see on the right-hand side of the slide that there is ample diversification within the commercial real estate category with no one category representing more than 22% of commercial real estate. It is also important to note that the real estate secured loan categories have a very low weighted average LTV of only 55%. In fact, CRE, owner-occupied CRE and residential all have weighted average LTVs of 61% or below, indicating the loan portfolio has been assembled in a very conservative manner.

Finally, you can see that our CRE concentration ratio which measures our CRE exposure over our regulatory capital is 269%, well below the 300% guidance for ourselves established by regulatory authorities.

On this slide, you can see the evolution of our PPP loans and fees. We funded $1.85 billion of loans in 2020 with over $57 million of fees. During 2021, we originated an additional $790 million of PPP loans under the PPP 2.0 program with $29.5 million in fees. We also proceeded to forgive $1.7 billion of PPP loans and recognized $45 million of fees last year. In the first quarter of this year, we have already forgiven $219 million in PPP loans and recognized $7 million of fees in the process. So we have $484 million of PPP loans outstanding as of March 31, with over $11 million fees yet to be recognized.

Now I'd like to discuss our asset quality trends. You can see that our loan deferments have declined all the way down to $12 million, down from $21 million at the end of 2021. As you can see on the bottom left of the slide, all remaining departments are in residential mortgages. It is also important to note that the weighted average LTV of the residential loans on deferment is a very conservative 58%. Our NPLs have also declined significantly during the course of the year from 0.96% as of December 31, 2020, to 46 basis points as of March 31. Our past dues have also declined substantially to only [ 20 ] basis points of our total loans, as you can see on the top right. As a result of these improving asset quality indicators, we have not taken any additional loan provisions in 2022. Overall, the department trend is strong. The remaining departments are well secured and already strong asset quality indicators continued to improve.

Moving to our results for the quarter. Our net income totaled $64 million, an increase of $12 million or 22% over the prior year. This improvement was mainly driven by an increasing core net interest income, excluding PPP and MSLP as you will see on the next slide. You can also see in the chart at the bottom that our ROAA and ROAE for the year are both strong at 1.18% and 11.82%, respectively. Our efficiency ratio was also strong and is below 45%.

In summary, we are generating strong results in 2022, and our core earnings trend is very favorable. On this slide, you can see the year-over-year evolution of our pretax, pre-provision earnings which increased by 17%. As you can see, the main driver of the improvement is a $24 million increase in our core net interest income, again, which excludes PPP and MSLP phase. The $24 million increase in core net interest income reflects the impact of our 28% loan growth and our 16% deposit growth over the last year. Noninterest income also increased $3 million year-over-year, which we will further discuss shortly, while noninterest expenses remained flat.

Left-hand side of the slide, you can see the evolution of our net interest income compared to last quarter and the first quarter of 2021. The dark green portion of the bar represents our net interest income, excluding PPP and MSLP. And you can see that our core net interest income increased over -- by over $8.6 million over the last quarter and by $24 million again or 21% over the prior year. Our significant growth in earning assets has driven our net interest income growth, excluding PPP and MSLP. PPP fees totaled $7 million in the fourth quarter, decreasing by about $2.3 million as compared to the prior quarter. Overall, net interest income increased by nearly $5.4 million over the prior quarter.

On the right-hand side of the slide, you can see that our net margin evolution as well. Our core NIM, excluding PPP and MSLP increased by 12 basis points over the prior quarter to 2.72%. Our overall NIM for the quarter was 2.18% or 2.81% excluding the impact of PPP, which had a 7-basis-point impact on our NIM.

In conclusion, our net interest margin has increased as we have decreased our cash position via loan growth and the net interest income trend is very favorable.

Noninterest income has increased by about 18% year-over-year or $3.4 million. Our deposit service charges continue to grow as a result of our cross-sell and deposit gathering efforts. We have also generated higher swap fees as our back-to-back swap program regains traction as an excellent way to generate fee income and provide clients with competitive rates for longer-term loans.

As you know, the market is expecting about 10 more rate hikes over the next year on top of the one that already took place in March. It is, therefore, important to mention that our balance sheet is asset sensitive and that we are well positioned for the eventual increase in -- continued increase in shorter-term rates.

As you can see on the slide, 40% of our loan portfolio reprices within 1 year. 41% of our deposits are also noninterest-bearing deposits, which also serves to provide great value in a rising rate environment. It is also important to mention that City National Bank entered into $325 million of forward starting swaps of over borrowings during 2020 when rates were at historically low levels. These forward starting swaps have a duration of about 6 years and will start funding in 2022, in 2023 at an average cost of 55 basis points, providing significant value once rates increase. In short, our balance sheet is well positioned and will benefit from the rising rate environment.

As you saw during this morning presentation, we started 2022 in extremely strong fashion, and the bank is well positioned to keep this performance throughout the year. As we carry this momentum into the remainder of 2022, there are 5 distinguishing factors that provide City National Bank with a strong opportunity to continue this performance versus our peers.

First, we are operating in a state with one of the best economic environments in the nature. Affluent individuals and sizable businesses are relocating from the Northeast and other parts of the United States to Florida on a daily basis. We have the scale, products and market expertise to continue benefiting from these favorable economic conditions.

Second, City National Bank has an unparalleled talent throughout the organization. We are focused on continually augmenting our talent base with the best talent in the market that we serve, offering a work environment and culture that maximizes employee retention. To that end, City National Bank has been named one of American Banker's Best Banks to Work for out of the last 6 years, including the last 2 years in a row. Our results are a direct reflection of our people.

Third, we continue to invest in technology and our digital transformation initiative. We continue to build upon our recent digital investments that enabled many of our key accomplishments during the last year to 2 years. Over the last 2 years, we have deployed Salesforce and the nCino loan origination system in our institution, and we are currently working and deploying new modules within these tools during the course of 2022.

Fourth, we are in one of the first -- in one of the best MSAs in the nation with tremendous potential for growth outside of our core Miami market. Specifically, we have relatively limited market share in the Palm Beach, Fort Lauderdale, Orlando and Tampa markets, offering tremendous opportunity to increase market share in these attractive and growing markets. Finally, we have a strong brand in Florida that has been developed and earned since we first started operating in Miami over 75 years ago. As a result, we're excited not only about delivering strong results in 2022, but also in the years to come.

In conclusion, we achieved tremendous growth in the first quarter of 2022 that generated strong earnings growth. Our deposit and loan growth, both for the quarter and year-over-year, far exceeded the banking industry. We also continue to augment one of the best deposit franchises. Our asset quality metrics, which are already strong, continue to improve, and we are generating significant earnings growth. The strong loan growth that we are generating now, and we'll continue to generate will ensure that our strong results will be sustainable.

And now let's turn the call back over to the Bci team for some final thoughts and comments.

[José Ibaibarriaga Martínez, executive]

Thank you, Jose. Thank you all the team. In terms of environmental, social and governance ESG criteria. We have made significant progress with the execution of our strategic plan, integrating ESG factors at the top of our strategy, strengthening teams and investing in processes and technology to measure the footprint of our environmental, social and corporate governance initiatives. This plan is based on financial inclusion, the environmental suppliers and investors highlighting the following: MACH is a huge driver of sustainable growth for the bank, with a clear focus on continuing to promote a series of initiatives aimed to increasing financial inclusion. At Bci, we are fully committed to being a zero-carbon footprint business, and our objective is to reduce our footprint to 0 by this year.

Regarding our employees, we recently launched the new Bci experience, a different way of working in which 70% of our employees will work in a mixed or fully remote format. In terms of our ESG funding efforts through our sustainability financing framework, we have successfully placed green bonds of more than $250 million.

We would like to wrap up with some closing remarks. First, we have successfully diversified our operation by adding new line of businesses and also by expanding geographically to match with more than 3.3 million users has consolidated its position as the main alternative for online purchases in the local market, thus reflecting Bci's commitment to contributing in financial and digital inclusion with simple and accessible solutions. Our operating income increased on a year-to-date basis due to a sound results, both at BCI local operations and at City National Bank of Florida, as you recently hear from Jose.

We have booked more than $74 million in additional provisions to anticipate future risk. And we will continue investing with great conviction with the aim of becoming leaders of key initiatives such as new digital ecosystem.

Thank you for participating in this presentation. If you have any questions, we will be more than glad to answer them.

[Andrés Atala S., executive]

Yes. Actually, thank you very much, first of all, for all the presentations. Actually, we have the first question, José Luis from Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

My first question is on loan growth and asset quality. I would like to hear from you, how are you seeing the impact of higher interest rates, high inflation, economic deceleration impacting the loan growth and the asset quality in Chile, especially in the mortgage portfolio? And also, I think it will be interesting to know the same variables impacting the loan growth for the bank in Florida, which was very strong at the beginning of the year, but going beyond that, we'd like to hear your thoughts.

And then for my second question, is on the digital transformation and MACH. Just wondering, when do you expect to obtain the banking license for the bank? When do you expect to be at breakeven? And when should we expect more detailed disclosure like, for example, an income statement?

And finally, I would like to ask you about your sustainable ROAE, and if you can break it down for the Bank in Chile and the one in Florida.

[José Ibaibarriaga Martínez, executive]

Ernesto, thank you very much for your question. I will try to issue the loan growth. In Chile, the quality of the growth is, if you can address it Juan Enrique. Then, Jose, if you can address the growth in the U.S., I will appreciate. And I will address the return on equity and digital transformation first. So I think that we can address the 3 questions.

First, Ernesto, regarding return on equity, we have a plan that we have been shared with all of you, is that we believe and we are in track to have a return on equity in average of 14%, combining our operations in Chile and in the U.S. at the same time that we will continue investing in diversification as you recently hear that we obtained approval in Peru. So the loan unsecured 14% that we will maintain it, and that is where we are.

Regarding digital transformation, we have not yet asked for any digital license for MACH as a bank. We are working heavily in creating and transforming MACH as a digital bank, and we are delivering step by step in that arena. The numbers that we have today, as you here has been -- is very incredible. With growth on 3.3 million users. The card has been using heavily. And we expect that the new product and services that are in a pipeline you are going to start seeing in the near future.

So -- and regarding your specific question of specific numbers of MACH. Obviously, we do have it, but we do not have -- we don't give specific numbers of any specific line of businesses so far. And regarding loan growth, you hear Sergio, which we are seeing higher inflation pressures and a consequent movement in the monetary policy rates. Based on this new macroeconomic scenario as well as -- as you know, other variables, we are carrying out a [ reforking ]process that we believe that will bring modification to the guidelines that we already give. But we are thinking that in terms of mortgages, loans, we will have a decrease in growth. We grew 16% year-over-year until the first quarter. We believe that we are going to be in the middle single growth because of inflation and because the interest rates of the mortgages loans are increasing.

Regarding commercial loans, we are expecting a middle single growth in 2022 in our local operations, excluding the FOGAPE loans.

And regarding consumer loans, we have started to show a sign of recovery on a year-over-year basis, and they are expected to take off since the liquidity in the market to fall after the end of the government support initiatives. So basically, what I'm trying to say, Ernesto, is that in Chile, we will grow around middle single digit growth in the loan portfolio.

Juan Enrique, if you can address the quality of that growth and the growth -- the risk on the portfolio -- and then Jose can give us some guidance of growth in City National Bank, please.

[Juan Enrique Visinteiner, executive]

Sure, my pleasure. So Ernesto, I think you're right on your concerns on the impact of inflation and increased interest rates in the quality of the portfolio. We do believe that somehow that should be evidenced in the performance of the portfolio going forward. We think we have built enough cushion for that with additional reserves. The loan loss provisions to that portfolio have nearly doubled with additional reserves, basically providing for what we believe should be the impact of the combined effect of higher unemployment rate, higher inflation rate and higher interest rates. So yes, we should -- and you're right in expecting some deterioration in the performance of those portfolios. We hence, believe that has already been captured in the additional reserves, but those portfolios should be monitored very closely.

[Ernesto María Gabilondo Márquez, analyst]

Just on this follow-up, as you mentioned, you have created these additional provisions, so how should we think about the cost of risk at a consolidated level?

[José Ibaibarriaga Martínez, executive]

So we are expecting cost of risk to go back to pre-pandemic levels and below and slightly above, sorry, Ernesto. The time for that is uncertain. We expect that, that will take eventually all the rest of this year and part of the next year. And we should see that particularly -- across our portfolios, but primarily in consumers and SMEs.

And as the portfolios manifest themselves, we should see a swap between voluntary provisions going into portfolio-specific provisions.

[Jose Marina, executive]

And Ernesto, on the City National Bank side, obviously, we had a very strong quarter of loan growth, 8% for the quarter, 32% annualized. Obviously, that's also not sustainable for a full year as well. So what I'd say is the second quarter looks to be probably just about as strong or nearly as strong. I would expect -- we are expecting a slowdown in net loan growth in the second part of the year as rates increase in the longer term [ home loan ] I think increased substantially during the course of the year. So we do expect to slow down there. So whereas maybe the first part of the year, we're increasing at this 30% pace that we're at right now, maybe the second part of the year closer to low single digits and maybe average, closer to where we were last year, around 20% or so. .

So yes, we do expect a slowdown in the loan growth, especially in the second part of the year. I will say also, when you look at our loans, 35% of our loans adjust within 3 months, but also, I would say, a good part of those loans, say about 1/4 of those loans are also on our back-to-back swap program. So for the borrower, they're paying a fixed rate. And we swap those out through our back-to-back swap program. So from a debt service coverage perspective, the borrower risk is unchanged on those loans with rates going up. For those loans that are floating, we stress that service coverage for rising rates. So we feel very good about the asset quality impact of any -- of rising rates over the next year or so.

[Ernesto María Gabilondo Márquez, analyst]

Jose, and you were also saying that you were well positioned for rising rates and that 40% of the loan portfolio reprices over the next year. So just wondering what is the sensitivity? So for example, you have an increase in interest rate of 50 or 100 basis points, what will that mean in terms of Chilean pesos? I think it will be better in terms of Chilean pesos to think about it at a consolidated level?

[Jose Marina, executive]

Well, I mean a lot of it is going to be tied back to our ability to maintain deposit costs, and we have been able to do that even with the Fed increasing deposit rates in the first quarter in March by 25 basis points. We see our cost of funds stayed flat at 21 basis points. We do expect our NIM to expand during the course of the year, and we're already seeing that in the first quarter. I don't know -- I put a dollar amount on it, but I would say the expansion on our NIM compared to last year and the -- and 15-basis-point range, I think, is very reasonable.

[Andrés Atala S., executive]

The next question is coming from Nicholas Walker from Goldman Sachs.

[Nicholas Walker, analyst]

My first question is pigging back -- piggybacking of what Ernesto said on the NIM with higher interest rates and inflation, what do you expect for net interest margins and at the group level? And what is your sensitivity there? And my second question is on -- just on the political side. Any update on the constitutional convention or any other noteworthy political risks that you see?

[José Ibaibarriaga Martínez, executive]

Thank you, Nicholas. Regarding NIM, we have several movements that must to be considered. On one hand, this year, as Sergio explained, we have had higher inflation than expected, which positively affect this indicator. Likewise, in terms of loan growth, we've already seen an upturn in consumer loans.

On the other hand, we are already seeing the effect of the monetary policy rate, where there has been a migration from noninterest-bearing deposit to time deposits, which will generate higher cost of fund.

But finally, I think that in the case of City National Bank, there are non-requiring effect in 2021 associated with the income that come from the PPP program, which was explained in the presentation, has explained recently answering the questions. Overall, we believe that this year, we will have this kind of effects, more inflation, more cost. So it's difficult to explain to you while -- we believe that in U.S. is going to be going up as Jose explained.

And in Chile, we have different movements that we believe that it's going to be flat or slightly up. And regarding the political scenario, I don't know, Sergio, if you can give us some view about that.

[Sergio Lehmann, executive]

Sure. Thank you, Nicolas, for the question. Yes, as you know, the political uncertainty in Chile is still high. The conditional process is still in progress. You should have -- we should have a proposition at the end of this month or the next which is going to be key. And as you know, we have a referendum in September.

In our base scenario, we should have a bad constitution given that it's going to be very complicate and very hard to transform or to get to a legal framework in Chile, also its going to be very complicated to do that work. But it shouldn't be disruptive. I mean that scenario, our base projection considers that the Chilean economy is going to be basically having a low growth rate in the coming years.

It's going to be key anyway, the referendum in September, is going to be important that we should have some general scenario in case of reaction according to [ pulse ] reaction should gain this referendum. And in that case, we should have at least some generalization way in order to basically come from this possibility with for example, reelection of [ financial institutions ] in order to reassume this process. Today that is high. Anyway, we are expecting that it shouldn't be disruptive the proposition, given that the plenary is in some way, containing some radical proposal from the commissions.

[Andrés Atala S., executive]

The next one is from -- is coming from Daniel Mora from CrediCorp.

[Daniel Mora, analyst]

I have several questions. A couple of them are follow-on of previous questions that asked by my colleagues. The first one is regarding the consumer loan growth. I foresee like an ultra to positive tone on the growth in that this loan portfolio is evolving in the last month. But I would like to know, considering the outlook of inflation, the outlook of interest rates and the outlook of economic deceleration, do you still see an acceleration or -- of the loan demand in the consumer segment, considering this outlook? You already mentioned that you're expecting a mid-single-digit in this portfolio. But I would like to know, if you are incorporating all these factors in this forecast?

The second question is regarding cost of risk. As Juan Enrique said, you're expecting this indicator to return to pre-pandemic levels or slightly above. But considering the current coverage ratios above 300% when considering the additional provisions. So do you expect to maintain these coverage ratios in the coming years? It will be a stable coverage for the loan portfolio? That's my question.

And the third one is regarding the CET1 ratio. We observed a decrease to 9.66%, well due to some effects of interest rates impacting the equity accounts. What will be the short term or the target for this year for the CET1? Do you expect to return to the 10% level? Or what could be the normalized level for this.

[José Ibaibarriaga Martínez, executive]

Juan Enrique, I will talk about consumer and CET1, and then you talk about risk, please.

Daniel, what we are seeing today in the consumer loans, arena, and if you see the last couple of years, we have been, in some way, losing market share because we are increasing the origination part, and we are trying to bring the most valuable customer to Bci.

In order to do that, we have built a data analytic area that has given us a lot of information in order to what kind of customers we really want to have because we are aware that going to this economic cycle, we don't want to grow and grow -- and basically buying risk.

So yes, we believe that we are going to have a marginal growth in the consumer loans, as we say, middle single growth because we are very active in developing models in order to bring those customers that are the best customers that is in the market. Yet, every single bank will tell you the same. But we believe that we have demonstrated in the past that we have not been growing because we are working in bringing those customers and you are seeing in the risk arena that we have been delivering a very successful strategy.

So the answer is, we are going to grow in the consumer side. Basically, the growth is coming from credit cards. And specifically -- a specific segment of our customers.

Regarding CET1 indicator, first, it's important to mention that we have delivered 100% of Basel III implementation so far. We believe that we are not going to have any issue delivering it in the next couple of years in order to have a full implementation in 2024. And what we saw in the first quarter is that interest rate in U.S. and inflation rates in Chile increases more than expected. And what we are seeing is that the CET1 target of 10% who is not going to change, and we maintain that guidelines. We have a decrease during this year, that is basically far over the regulatory requirement, but it's below the internal goal of 10%.

We will move back to 10%, if not at the end of this year, surely next year. But the main issue and the important issue is that we maintain the CET1 10% objective one; two, the decrease is transitory because it has been impacted in some hedge that we do have and that is impacting equity, but we are going to see the positive effect in the profit and loss statement. So this is a transitory issue. And yet the growth, the loan growth in Chile, as I mentioned, is going to be lower than the net income/equity growth that we will see in the next quarters, as you will see in the next presentations. I don't know, Daniel, if I answer your 2 questions?

[Daniel Mora, analyst]

Perfect. Very clear those 2 questions.

[Juan Enrique Visinteiner, executive]

Daniel, as to your third question, which was related to the ratio of loan loss provisions to the portfolio. You correctly mentioned that today, that ratio stands at 3.45. It's 100 basis points above the level that we had pre-pandemia. It's an unusual ratio. As we have said, there are many reasons that explain that. If your question is, is that a sustainable ratio? No, we don't believe it's a sustainable ratio. We believe that ratio should be normalizing towards the pre-pandemic level in the next year or so.

[Andrés Atala S., executive]

And it's Yuri Fernandes from JPMorgan, the last raised hand that we have here.

[Yuri Fernandes, analyst]

I have a follow-up on OCI. I guess, José Luis was very clear on the trend, right? Like 10%, common equity Tier 1 ratio is the goal, maybe true stuff a little bit. I guess we had dividends now in April that may impact a little bit ongoing common equity tier 1. But I just want to understand the trends of the hedging expenses, right? Because I guess this was the main driver of the equity impact this quarter.

My question, José Luis, is that when rates hopefully, when they start decreasing in Chile, if we should start to see the inverse impact, right? So maybe a positive mark to mark on your equity because of lower rates or something like that. Just trying to understand the trend because, I guess, maybe this pressure will be ongoing in transitory for 2022, but once rate speak and start decreasing how your shareholders that should be impacted by rates? I guess that's the first question.

And I have a second question regarding the interchange cap. Some of your peers, they mentioned the potential impact for the interchange cap. I guess you have a lower exposure for credit cards, but if you have any kind of guess on how your fees will be impacted this year for this interchange cap?

And finally, a very quick one. Just if you can share your cost of capital for the Chilean unit and the U.S. business so we can kind of compare versus the ROE you are estimating for those 2 units? Congrats on the results.

[José Ibaibarriaga Martínez, executive]

Thank you, Yuri. Regarding the CET1, yes, we have some impact on the equity due to the unexpected increase in the all the curve of inflation in Chile of 2.5 and 3.5 years, which we have some positions there. What we are seeing is -- obviously, if the core start to decrease, we are going to have a positive impact in the equity.

But it's honestly, it's very, very, complicated to tell you how it's going to move. So I just prefer to tell you that in April, we are going to see some negative effect. We believe, and this is, we believe, that we are arriving to a level that is difficult that it increase more and we have much more possibility that come back, but it's very complicated to tell.

Regarding the interchange commissions, we have not disclosed yet any specific numbers, but -- let me tell you that the impact in Bci is completely marginal. The impact that finally, we believe that will be implemented is not material for us by any means. So I think that the regulator did a good job, put something reasonable there in order the market has the incentives in order to create a lot of competition in the market.

And regarding the cost of capital, we do not disclose that yet, but more than happy that Andrés and the team will contact you to see in detail your specific question. What are you looking at? I can tell you that with a [ 14% ] return on equity is over our cost of capital, and we are very glad on that. But -- Andrés will call you, Yuri, and try to understand your specific question and answer it. And anyone that wants to have the specific question more I'm glad to do that.

[Andrés Atala S., executive]

Yes. So we're done. Thank you very much to everyone for being here. For your questions, of course, we are always available for your further questions. So have a nice day, and please take care of yourself and your families. Thank you very much.