Banco de Credito e Inversiones

SGO:BCI

Earnings Call Transcript 2023-Q1

[Andrés Atala S., executive]

Good morning to everyone. Welcome to our first quarter 2023 conference call. I'm Andres Atala, Head of Investor Relations. And today, I'm joined by Jose Luis Ibaibarriaga, BCI CFO; Francisca Perez, our Principal Economist; and Juan Enrique Pino, Head of Credit Risk of BCI. We are also joined remotely from Miami by Jorge Gonzalez, CNB's CEO; Jose Marina, CNB's CFO; and Gary Fitzgerald, the Head of Real Estate Lending.

At the end of this presentation, we will leave room for questions when we kindly ask you to raise your hands as always. And to continue with the presentation, Francisca will go through the Chilean macconomic figures.

[Francisca N. Perez, executive]

Thank you, Andres. I will do a quick macroeconomic view -- review of the U.S., Peruvian and the Chilean economy, okay? World inflation has started to ease. Main Central Banks have raised the monetary policy rate on an unprecedented scale and will finish around the second quarter of this year. Financial conditions have been strengthened and some regional banks in the U.S. and banks in Europe had liquidity problems, which were solved quickly by the regulators. China showed a better performance in the first part of this year.

In the U.S., the Federal Reserve yesterday increased its monetary policy rate by 25 basis points and then it will keep that level until the end of the year at least that we'll see. Inflation is lowering, but there is persistent in core components. Also the GDP growth around 1% this year will grow. In Florida, the unemployment rate is lower than the national average and GDP growth is one of the largest among U.S. states. In Peru, the political crisis had an impact on economic activity on prices in the last part of 2022 and the first part of this year. The effect should be transitory, prices will start to ease in the second part of this year. The Central Bank will keep its rate until the third quarter will -- and then will start easing in the cycle.

In Chile, the economy has shown a greater ability to adapt to the high interest rate. In 2023, we forecast a decrease of 0.5% of the GDP, mainly explained by lower internal demand. Inflation is going down at a slow pace, so the Central Bank will keep its rate at 11.25% until the CPI is up with more certainty. We expect that the easing cycle will start in the third quarter. The yield curve didn't show a significant move in the first quarter and the volatility of the CLP has decreased, but it is still above historical levels.

Next, please. The U.S. economy grew 1.1% in the first quarter, well below market expectation. It was driven by personal consumption but offset by inventories and fixed investment. There are expectations for a mild recession in the second half of this year. The economy is expected to grow around over 1% in 2023. The labor market continued to create growth and are managing to absorb an increase in the labor for participation. Although, it's decreasing, it is more slowly than previously expected.

Next, please. Headline and core inflation have been dropping, but at a lower rate than expected. Service prices are still not dropping as anticipated and have been more consistent. This is estimated that inflation will be around 3% at the end of this year. The Federal Reserve yesterday increased federal fund rates to 5.25% range. This will be the end of the tightening cycle and now they should have a pause. We expect the first rate cut at the end of the year, but the central -- but the Federal Reserve said it will maintain until the first part of next year.

Next, please. The U.S. yield curve is stagnant in the first quarter after some regional banks showed liquidity problems. But as I said, the regulators already went there really fast. And the real exchange rate continued to be easening after reaching a maximum historical level. Next, please. For the Peruvian economy, the GDP growth, 2.7% last year, driven by private consumption. And as I told you in the last part of 2022 and at the start of this year was marked by the political and institutional crisis and the impact on the economy activity and prices due to disruptions in some value chains. Considering the effects of these variables on the economy, we will forecast the economic with growth around 2% this year.

The next one. The Chilean economy grew 2.4% in 2022 and monthly, that half showed a decrease of 1% in the first quarter of this year, although uncertainty above the economy has declined since the referendum of September 2022, it is still high due to the new constitutional process and pension and tax reform. We're expected a GDP contraction of 0.5% for this year. The labor market has had a large increase in the unemployment rate, which hit 8.8% in March. In turn, the labor force participation rate has gained and started to increase after a long pause.

The resilience of the economy is also evident in the inflation rate, which despite dropping was still over 2 digits in March. In response, the Chilean Bank has held interest rate at 11.25% since October of last year, a very contractory rate. The monetary authority has said that it is still not to see the conditions cycle of interest rate costs. We believe that this low rate cut cycle will start in the third quarter. The next one, please. CLP volatility has been falling down since September of last year. It has helped also the higher copper prices and a less strong U.S. dollar. We don't expect the Chilean peso to be as volatile as last year, and we are expecting to finish this year around CLP830 per dollar.

Now, I will leave you with Jose Luis, who will continue with the presentation.

[José Ibaibarriaga Martínez, executive]

Thank you, Francisca. Good morning, everyone, and thank you for participating in this conference call in which we will discuss our first quarter results, some of the progress we have made in our strategy and coming challenges. Our strategy has made significant progress in our constant stage of transformation and innovation, and we would like to highlight the following.

Our U.S. operation had a very strong first quarter. City National Bank has established as a leading operating in Florida market. As we all know, the recent events of March has put many financial institutions to the test. However, the City National Bank team was able to demonstrate once again the strength and resilience of our organization, combined with our extensive sources of liquidity and solid capital base, which has enabled us to navigate this period of uncertainty successfully. As City National Bank's team will address this in further detail in this presentation, the proximity to our clients and our [ listing ] relationship approach has allowed us to build a long-lasting relationships with our customers and stakeholders.

Related to ESG, our commitment to sustainability as an organization is evident. We are pleased to inform you that BCI was recently recognized as the most sustainable company in Chile according to the Ranking Merco. In terms of consolidated financial results, some of the highlights from the first quarter include the following. BCI Bank maintains a strong financial position as soundness is reflected once again in our liquidity and capital ratios. This quarter, we have seen a decrease in gross margin growth, mainly to a lower inflation and lower dynamism in the retail division.

Our expenses increased only 4%, well below inflation despite major investments in talent and technology, focusing on our digital ecosystem. On the other hand, risk expenses increased mainly in the customer loans book, which Juan Enrique will cover further in this presentation. As you can see on this slide, BCI is the largest financial institution in Chile with more than USD91 billion in assets. As part of our international strategy, we continue strengthening our international presence, which account for 34% of the bank's loan portfolio.

Likewise, regarding our international rating, Moody's, Fitch and Standard & Poor's have recently published their first report on BCI, as well as Fitch and further rate in the local scale, reaffirming our rating and emphasizing the solvency and sound position of our local and international operations. We have developed a unique payment platform to unify the payment experience for a diverse customer base. All the group issuers, BCI, MACH and BCI Servicos financeiros are already connected to the payment platform after enabled BCI financeiros through much insight. This allows more than 5 million customers to make payments between people and payments to merchants in all their own wires and trans-bank wires.

Furthermore, we continue to launch products and services within our ecosystem. Recently, we launched international transfer for MACH customers. We also launched our new loyalty program, BCIPlus for MACH customers. And soon, we will expand it to reach to all BCI customers. BCIPlus, our new loyalty program gives customers cashback instead of points. Now is available to MACH customers and we will launch it to all our customers. Lastly, we are developing the first one-stop shop for SMEs in Chile. On this platform, our SME customer will not only meet their financial services need, but will also access other value-added services in a single platform, allowing them to manage and grow their businesses. Today, we have reached around 6,000 companies through this value proposition.

Now, let's go through the main figures of our consolidated operations compared to the result of the first quarter 2023. BCI operating income decreased 1.3% year-over-year due to a lower financial margin and fees caused by lower inflation and a steady interest rate hikes. Regarding operational expenses, we have maintained below inflation despite key investments, although provisions and write-off were slightly lower. Year-over-year delinquency increased in the consumer and mortgage loan portfolio to the -- due to a weaker economic scenario. Finally, the higher tax rate was mainly due to the evaluation of investment in City National Bank of Florida and the monetary correction associated with the change in the CPI.

Moving to our loan portfolio, the 6% year-on-year increase was mainly driven by the growth of commercial and mortgage loans, as you can see on this slide. The local decrease in NIM of 35 basis points year-over-year was mainly driven by the higher cost of fund and lower inflation resulting from inflation indexed asset revenue and the higher financial costs related to the steady interest rate hikes. The migration from demand deposit to time deposit also contribute to this decline. However, the company's funding diversification strategy mitigated some of this effect, thanks to implementing an appropriate pricing strategy.

Regarding fees, the fees decrease, fees in this quarter was mainly to higher expenses related to service fees such as credit card memberships and loyalty programs. Fee income also decreased this quarter mainly to the retail and wholesale businesses due to the lower transaction volumes. Local operation expenses increased by 2.3% year-over-year, which is well below inflation despite the fact we are strongly investing in our digital ecosystem. We also want to highlight the increase in the productivity driven by our new branch model and optimization of branches.

Regarding expenses, the increases mainly in higher employee expenses associated with waves indexed to CPI variation and adjustment of waves in March and September, in line with the expense -- employee experienced model. As you can see in this slide, our total local deposit grew 5.5% year-over-year. Similar to last year's trend, there has been a shift from demand to time deposits, in line with the interest rate evolution. This is reflected by the decreased local noninterest-bearing deposits by 21.5% and increased time deposit by 34.6% year-over-year.

As of March 2023, CET1 capital increase of 8.9% compared to the same period of last year and 0.5% increase compared to December 2022. The main contribution factor were the capitalization of return ending from 2022 and lower loss in available for sale portfolio due to the expected drop in interest rate. As a result of CET1 ratio stood at 9.48%, which is 8 basis points higher than previous quarter.

Now, we will discuss our asset quality and loan portfolio composition with Juan Enrique Pino.

[Juan Enrique Visinteiner, executive]

Thank you, Jose Luis. Good morning, everyone. As you can see in the slide, our overall portfolio remains strong and growing, particularly driven by our commercial loans and to some extent by the mortgage loans, as well as cost Luis just mentioned. Our NPL ratio remains trending upwards and normalizing in line with the industry and with the pre-pandemic levels, which we keep as a visual reference for you in this and the coming slides. We remain with a very high level of voluntary provisions in our loan book and in each and every relevant portfolio as well.

As to commercial loans, which have been driving the loan growth in the last quarters, we have continued -- the demand for new good quality loan has been recovering since mid last year, more than offsetting the scheduled amortization of the government-guaranteed loans granted during the pandemic years. Additionally, we continue to see the positive impact from the various government-guaranteed loan programs, as well as liquidity injection initiatives into the economy for previous years reflected in fairly good trade performance of some more impacted segments during the pandemia such as SMEs.

Lastly, our wholesale lending portfolio in general has behaved quite resilient due to both the effects of the pandemic as well as to the current economic slowdown. At the same time, certain more effective sectors were either not meaningful in our portfolio or were highly secured and within discussion to allow for taking more flexible credit terms to help them out of the crisis.

As to the mortgage portfolio, you can see here that the residential mortgage portfolio has maintained the resilience in the current scenario with its size growing and its NPL ratio trending to more normal levels but still performing below pre-pandemic levels. The higher inflation rate of last year took a toll on segments of borrowers with higher leverage ratios. While we're doing all in our hands to help them reduce the burden and go back to being current, our level of [ PDOs ] is absolutely within normal levels.

We remain highly confident that the high quality of our mortgage lending portfolio will remain strong because of our fairly strong LTV ratios and our conservative credit policies and because of the strong culture in this country of families in owning their homes and in staying current in the residential debt. Finally, home prices have remained stable or growing. So in general terms, the equity that families hold in their homes is higher than their down payment plus what they have already amortized in debt, which is an incremental incentive to stay current.

As for consumer loans, the consumer lending portfolio remains impacted by the effects of higher inflation and unemployment rates and in general, by the economic slowdown. As predicted, credit performance indicators have moved fast back to pre-pandemic levels and beyond. However, we can see that during this first quarter, the slope of PDOs and NPL scores have started to stabilize and have remained in line or better than industry levels. This is a result of several actions taken in previous months and some even a year back to moderate great terms to certain groups given the tighter prevailing market conditions, which affected particularly in lower recon segments and families more prone to higher leverage ratios, where higher inflation and interest rates keep them harder.

It's too soon to tell whether we have reached the ceiling, but we're confident that if we have not, we're very close to getting there. These upward trends in NPL ratios is more visible in the affiliate Servicos financeiros, which is significantly more concentrated than BCI in lower income segments. This is an attractive segment for BCI in the long run despite the fact that it is more volatile and the macroeconomic stress, this portfolio represents less than 2% of the bank's assets. Lastly, it's important to note that the bank has established more than CLP400 billion in additional voluntary provisions in all of our segments in order to face more challenging scenarios.

Now, I'll leave you with Jorge Gonzalez, City National Bank CEO; as well as Jose Marina, the bank's CFO; and Gary Fitzgerald, the Head of Real Estate Lending.

[Jorge Gonzalez, executive]

Good morning, everyone. My name is Jorge Gonzalez and I am the Vice Chairman and CEO of City National Bank. And as you just heard, I am here accompanied this morning by Jose Marina, our CFO; and Gary Fitzgerald, who heads up our Real Estate Banking group.

I'm truly excited to be here with you this morning to discuss the performance during the first quarter. Notwithstanding the challenges experienced in the banking landscape since we last spoke, I am pleased to inform you that we had strong results this quarter, especially in those metrics that are in greater focus today. So before we go any further, I want to provide you with a brief overview of the methods that are most relevant in today's current environment.

First of all, we grew client deposits in the first quarter by $862 million, while also reducing our uninsured uncollateralized deposits by 10%. We also maintained approximately $12 billion of available committed liquidity sources that cover 125% of our uninsured and uncollateralized deposits. We continue to enhance our already strong capital profile. We maintained an investment portfolio with minimal credit risk that provides significant annual cash flow and our CRE portfolio, our commercial real estate portfolio continues to perform very well with a low weighted average loan-to-value of 52% in one of the best economic markets in the country.

These results are a reflection of our reputation in the market that has been built over 77 years, are truly relationship-centric business model that focuses on diverse business segments and the strong culture that we [indiscernible] across our 1,000 dedicated employees. The performance was also a result of a very proactive approach to this unanticipated situation. As we [ got ] into the event, we worked in parallel to ensure that our client-facing personnel understood the overall strength and liquidity, capital, asset quality as well as the overall strength of our balance sheet.

Over a 4-day period of time, our relationship managers connected with thousands of clients in order to ensure that our clients are well informed and understood the difference between City National Bank and those banks that are under stress. We reassured them about the safety and soundness of CNB. We provided clients alternative solutions such as ICS, which enables us to offer them up to $150 million of deposit insurance per tax ID.

During times like this, effective and timely communication to our employees and our clients is exponentially very important. Our efforts were successful because of our strong reputation in our markets that we serve, the long-standing tenure of our clientele, the diversified business segments in which we operate, our long-standing conservative approach to the business and the very nimble and proactive approach that we undertook to manage this very fluid environment. Our efforts to communicate with our bankers and clients along with other stakeholders in a timely and effective manner, provided us with the best opportunity for success. As we demonstrated during the COVID pandemic, [indiscernible] institution that comes together and turn challenges into opportunity.

So with that, I'm going to turn you over to our CFO, Jose Marina, who's going to go ahead and review our quarterly results in more detail.

[Jose Marina, executive]

Thank you, Jorge. Good morning, everyone. And it's my pleasure to be with you this morning. Despite overall deposits shrinking in the banking industry and depositors migrated from midsize and community banks to major banks, we were able to increase our client deposits by [ $860 ] million or 5% in the first quarter. After March 8, which is the day before Silicon Valley Bank news surfaced, our client deposits increased by $147 million if we normalize one outflow from a corporate client to a temporarily positive funds from a liquidity event in February. Basically, we experienced business-as-usual activity after the Silicon Valley Bank failure.

During the past 2 months, deposit capture has become increasingly challenging among banks as interest rates have drastically increased and depositors migrate to higher yielding treasuries and money market funds, resulting in an overall contraction in deposits within the banking industry. Despite this backdrop, we were able to increase our client deposits by $862 million or 5% in the first quarter, as you can see on the left-hand side of the slide. On the other hand, on the right side of the slide, you can see the banking industry as a whole saw deposits contract by over $600 million or 3.4% quarter-over-quarter.

It is also important to note that the banking industry figures include broker deposits while City National Bank deposit bars on the left-hand side exclude broker deposits. This means that even when including broker deposits, overall deposits in the system significantly decreased during the quarter. As you can see, we also increased broker deposits during the quarter by about $1 billion. So our total deposits, including broker deposits increased by $1.8 billion in the quarter. Consistent with the industry trends, you can see that our noninterest-bearing deposits declined by $425 million in the quarter, declining from $4.6 billion to about $4.2 billion. This continues a trend that we've been seeing since the second half of 2022. This rebalancing of deposits as rates increase is adversely impacting net [ deposits ] in the industry, as we'll see later in the presentation.

Our spot cost of client deposits increased 45 basis points quarter-over-quarter but remains at a reasonable level of 178 basis points, especially considering that as of March 31, the Federal Reserve had raised the target fed funds rate from 25 basis points in early '22 to 5%. We will discuss our deposit betas more later in the presentation. Overall, however, our client deposits increased while the posits in the overall U.S. banking system are declining. So, we have distinguished ourselves from the pack.

As you can see on this slide, we have ample sources of liquidity available to us. As of March 31, the bank had $11.3 billion of committed available liquidity sources representing 42% of our assets. Included here is our Federal Home Loan Bank of available capacity, cash balances and unpledged securities. We also have available to a significant capacity at the Federer Reserve Bank discount window and the new Bank Term Funding program. It is important to mention that all of these liquidity sources are committed and collateralized by loans and our securities.

Additionally, we only had drawn $2.2 million from our availability at the Federal Home Bank, which is the primary funding source for U.S. banks and we have not drawn upon the discount window, our new Bank Term Funding program. In conclusion, we have ample sources of liquidity available to us and you'll see on the next slide that our available liquidity coverage 125% of our uninsured deposits.

This slide shows the improvement quarter-over-quarter in the percentage of insured and collateralized deposits, which increased by 10 percentage points to 59% at the end of the first quarter versus 49% at the end of 2022. This [ bank ratio ] is a result of our success in enrolling clients in ICS program that Jorge previously mentioned and organic insured deposit growth. Insured deposits increased from 39% to 49% and collateralized deposits remained at 10% quarter-over-quarter. I should mention that collateralized deposits consists of government deposits that require pledging of collateral to the state of Florida. Therefore, although these deposits are not MPIC insured, they act like insured deposits since they are collateralized.

Finally, it is also important to reiterate the available liquidity sources of $11.3 billion exceeds our $9 billion of uninsured deposits. So, our liquidity sources represent 125% of our uninsured deposit levels. Before we discuss our investment portfolio, I feel it's important to demonstrate how our portfolio is differentiated from Silicon Valley Bank's portfolio.

On this slide, you can see our tangible common equity ratio in the blue bar of 7.6% on the left-hand side of the slide as of December 31, which already includes unrealized losses in the available-for-sale portfolio. If we layer in the unrealized losses in our held-to-maturity portfolio, it reduces our TCE ratio by 1 percentage point to 6.6%. On the right side of the slide, we can see the TCE ratio for Silicon Valley Bank. Their HTM losses exceeded their tangible common equity, resulting in a negative adjusted tangible common equity ratio. As you can see, our tangible common equity ratio adjusted for unrealized HTM losses illustrates a completely different picture, highlighting the safety and soundness of City National Bank.

On this slide, you can see that our common equity Tier 1 ratio was 12.86% as of March 31. When we include the impact of the available-for-sale and HTM unrealized losses, the resulting CET1 ratio is 9.23%, which is well above the well-capitalized regulatory threshold of 6.5%, a $515 million capital buffer. This strong result further illustrates our strong capital position.

The investment portfolio at City National Bank aims to complement the balance sheet need from an asset liability management and liquidity perspective. 97% of the portfolio consists of U.S. government and agency securities. The portfolio consists of low risk and highly liquid securities backed by the U.S. government. Additionally, the portfolio provides cash flow of approximately $800 million annually. We have also gradually shortened the duration of our portfolio, which is currently at 4.5 years.

On this slide, we can see the evolution of the unrealized losses in the investment portfolio for both the available-for-sale and HTM portfolio as well as our swaps. As you can see, the aggregate net losses improved by $116 million quarter-to-quarter pretax or $87 million after-tax. The OCI component, which includes the available-for-sale portfolio and swaps improved by $65 million pretax or $47 million after-tax. This slide shows our assets increased by nearly $1 billion or about 4% quarter-over-quarter, resulting in the bank surpassing the $26 billion mark in total assets.

Our loan-to-deposit ratio remains low at 76.6%. We remain very well-capitalized as evidenced by our total risk-based capital ratio and Tier 1 leverage ratio, which were 13.69% and 9.29% as of March 31, respectively. On the right-hand side of the slide, you can see we had a moderate loan growth in the quarter of about $408 million or 2.5%. We will discuss the composition of our loan portfolio and dive into the CRE portfolio in the upcoming slides. Our strong credit culture and low-risk appetite continued to result in excellent asset quality metrics. Our NPL ratio for instance remained low and virtually unchanged quarter-over-quarter at 29 basis points of total loans.

Now, Gary Fitzgerald, the Head of our Real Estate Banking Group will review our loan portfolio with a special emphasis on our commercial real estate portfolio.

[Unknown Executive]

Thanks, Jose. Good morning, everyone. I'm very pleased to be here with you today to discuss our loan portfolio metrics and I will specifically focus on our commercial real estate portfolio, which is my area of expertise. On the left-hand side of the slide, we can see that our outstanding loan portfolio is very well diversified with 46% of our portfolio classified as commercial real estate. 21% of the portfolio consists of commercial and industrial loans and another 21% consists of residential loans. Owner-occupied CRE loans represent another 9% of the portfolio. These loans are distinguished from other CRE loans since the repayment of these owner-occupied loans comes from the operation of a business, not the operation of the real estate itself. The weighted average loan-to-value of all real estate secured loans is a very low 54%.

On this slide, we present the detail of our CRE portfolio by property type. Overall, all CRE categories have strong loan to values of 58% or below, with a low weighted average of 52% and supported by a strong debt service coverage ratio of 1.9x. Additionally, our disciplined and comprehensive credit process has historically resulted in exceptional asset quality. As you can see, we have minimal nonaccruals in our CRE portfolio, only 0.3%. This slide further shows detail on our CRE retail segment, which is our largest segment by collateral type and geography.

On the left-hand side of the slide, you can see that we have a well-balanced retail portfolio with anchor and credit tenants, which are the lowest risk profile sectors accounting for 56% of total exposure. On the right-hand side of this slide, you can see that the portfolio is well-diversified throughout Florida, with Miami-Dade being the largest concentration of 34%. 27% of the portfolio is outside of Florida as a result of us financing transactions for our best clients outside of the state. Again, this is a very strong portfolio with sound client selection, as evidenced by the low weighted average loan-to-value of 57% and high debt service coverage ratio of 1.78x.

The office segment is one that has been garnering attention due to the lingering effects of the COVID pandemic. When you look at our CRE office segment, it is balanced and conservatively underwritten portfolio focused on A&B properties with a diversification throughout Florida. It is accompanied by great fundamentals with 58% weighted average loan-to-value and a solid 1.69x debt service coverage. The weighted average loan-to-value of the Class C segment is even lower at 54%.

Our sound credit approach is complemented by the fact that we are located in the best real estate market in the United States, Florida. On this slide, we present an analysis done by CoStar on the 12-month growth rate of office spaces throughout the U.S. with the top 80 office markets. As you can see on the left-hand side of the slide, 7 of the top 10 office markets with the strongest rent growth are in Florida with 4 being in the top 5, including Miami ranked #1. On the other side, you can see that the largest office markets in the country ranked towards the bottom of the top 80 markets in terms of rental rate increases. This separation of Florida, as compared to the rest of the country is the result of continued migration of businesses and individuals to Florida that we've seen for the last several years.

In conclusion for our CRE exposure overall, the fact that we operate in the most dynamic market in the U.S., along with the risk mitigants in terms of low loan to values, healthy debt service coverage ratios and diversification within each segment reduces the risk of our commercial real estate portfolio as compared to the banking sector as a whole.

The diversification strength of our CRE portfolio is a result of our comprehensive credit risk management framework. We underwrite deals with a holistic approach, focusing on our risk appetite, relationship banking and continuous oversight. We have a very well-defined process supported by top leading technology and specialized professionals. Our historically better-than-peers' asset quality is a testament to the effectiveness of our underwriting processes, stress testing capabilities and underwriting and renewal, our proven ability to manage the portfolio and our low credit risk appetite.

Now, I will pass it back to Jose Marina to continue reviewing our quarterly results with you.

[Jose Marina, executive]

Thank you, Gary. Moving to our results, our net income for the quarter was $58.7 million. While this represents a $5.2 million reduction year-over-year, you will see in the next slide that our net income actually increased on a pretax basis after adjusting for PPP fees and loan loss provisions. Our profitability metrics continue to be strong, with an exceptional efficiency ratio of 47% and ROE of 11.32% and ROA of 93 basis points.

On this slide, you can see that our net income increased by $2 million or 2% year-over-year before taxes provisions and PPP fees, despite the current challenging environment. The main driver of the improvement was a $7 million increase in our core net interest income, which excludes PPP fees. This increase reflects the impact of our loan-to-deposit growth over the past year. Our noninterest expenses increased by $5 million year-over-year, as we continue to attract new talent and invest in our future.

On this slide, you can see the evolution of our net interest income compared to the most recent quarter and the first quarter of 2022. The dark green part of the bar represents our net interest income, excluding the impact of PPP and MSLP fees. You can note that our core net interest income increased by $7 million or 5% over the same quarter of 2022.

Our growth in earning assets has driven our core net interest income growth. Net interest income declined over the linked quarter due to the impact of increase in deposit costs, which is consistent with the banks of our size during the first quarter, given the reduction in noninterest-bearing deposit balances and the impact of increased deposit price. On the right-hand side of the slide, you can also see the evolution of our net interest margin. Our core NIM, excluding PPP and MSLP increased by 29 basis points quarter-over-quarter, partially driven by our increased cost of funds.

As I just indicated, the need to reprice deposits and the migration of noninterest-bearing deposits to interest-bearing products, drove our cost of funds higher, thereby reducing our margins. This is a trend that is pervasive in the U.S. banking industry given the declining noninterest-bearing deposit balances in the industry and the increased deposit pricing due to increased deposit competition given the market dynamics.

Our overall NIM for the quarter was 2.43%, including the impact of PPP fees, which increased our NIM by about 3 bps. Finally, you can see that our betas for both cost of funds and cost of clients preparing deposits is at 43% and 55%, respectively. Deposit beta is increasing across the industry due to increased deposit competition in a shrinking aggregate deposit base, as deposits are increasingly inclined to chasing yields and treasuries in money market funds. We will continue to be vigilant in managing our cost of funds, balancing the need to continue growing our deposit base, while also optimizing our net interest margin.

We actively manage our balance sheet and opportunistically executed $2.25 billion of pay fixed swaps during the first quarter in order to protect against higher short-term rates for a longer period of time. The swaps we executed are in terms between 1 and 3.5 years in order to provide some near-term protection to higher short term rates, while also maintaining our position to benefit once short-term rates start to decline. As you can see, $1 billion of the swaps were placed over the loan portfolio, $750 million over wholesale funding and $500 million over the investment portfolio. Based on the forward curve, these slots will add around $20 million of additional net interest income during 2023. We are constantly evaluating and looking for opportunities of this nature to enhance our NIM and effectively manage interest rate risks.

As you can see on this slide, our interest rate risk position is balanced, while our net interest income is expected to modestly decline with continued modest rate increases, our net interest income is expected to modestly expand, when the rates start to decline. As we've done, we will continue to employ interest rate swaps to manage our interest rate risk profile and maintain a reasonably balanced position.

As we approach the end of this morning's presentation, we wanted to summarize the improvement we saw quarter-over-quarter in various liquidity and capital ratios, related ratios, many of which we have already seen during this morning's presentation. First, our TCE ratio, excluding and including HTM, improved by 14 basis points and 31 basis points, respectively, and remains strong. Second, we were able to reduce our uninsured deposits by 10 percentage points and are available to [ quickly cover ] 125% of our uninsured and uncollateralized deposit balance.

Next, we pledged a more significant amount of our investment securities in [indiscernible] in order to be ready to draw on our liquidity. Our loan to deposit and loan in securities to deposit ratio improved by about 5 and 6 basis points, respectively.

Next, we modestly increased our broker deposits to total deposits of 16%, as we migrated away from Federal Reserve Bank borrowings to broker deposits during the quarter, thereby explaining the slight decline in our overall wholesale funding ratio. Finally, we increased our client deposits at an annualized rate of nearly 20%.

On that note, I will pass it back to Jorge Gonzalez for some final comments.

[Jorge Gonzalez, executive]

Thank you, Jose and Gerry. I want to conclude today by recapping some of the main conclusions from our presentation today and briefly touching on our outlook for the rest of the year. As you've seen this morning, we have fortified our already strong liquidity and capital positions and also maintain a deposit base in the banking environment where deposits are declining.

Our investment portfolio holds highly liquid investments with minimal credit exposure and decreasing duration. Additionally, our commercial real estate portfolio is well diversified with low loan-to-value, strong debt service coverage ratios and a robust credit risk management practice, coupled with a very strong fluid economy. Finally, we have maintained strong profitability despite the impact of significant interest rate increases.

As we look ahead, we expect increased regulation and additional focus on emerging risk factors. Having said that, we believe we continue to be well positioned to navigate the environment, continue to increase market share and benefit from the market disruptions in the overall economic health of our markets.

While our success in the first quarter speaks for itself, we want to continue to be diligent in monitoring our deposit base and also we want to continue to communicate with our bankers and our clients in a very effective and timely manner.

So on that note, I'll pass it back to the BCI team for final comments. Thank you for participating this morning.

[José Ibaibarriaga Martínez, executive]

Thank you very much, Jorge. As I wrap up in this conference call, I really would like to highlight some key points. First, the soundness and safety of our operation has been demonstrated once again as evidenced by our strong financial position, liquidity and capital ratios well above the regulatory limits. Second, our digital ecosystem continue to be a key driver of our strategy, with much consolidating a position on delivering new functionality at its almost 4 million users. And finally, we remain committed to making progress in our essential roles as a banking -- and in driving the economy, protecting the environment and promoting social development.

Thank you, all of you for joining today, and we will come back -- go back to Andres for questions session.

[Andrés Atala S., executive]

Thank you, Jose Luis. Thank you for listening everyone. To start, we have Yuri Fernandez from JPMorgan.

[Yuri Fernandes, analyst]

I have one question here regarding our margin pressure this quarter, is expected, right, inflation is coming down in Chile, I think it's good news, and also in the U.S., you mentioned like this deposit mix as a headwind. So my question here is what is the outlook for [ NIMs ]? I think you had like a 40 to 60 bps potential like headwind this year. We already saw a 40 bps decrease this quarter. So my question is, are you going to see a further pressure? Should we see margins more stable now? Like what should we expect here for margins, that's the first one.

And I have a second one regarding fees. I think Jose Luis mentioned like you are investing more in payments, you have some new initiatives. But since they were like lesser this quarter, they were down, I think, 11% I think related to higher cross sales, lower wholesale. So what is driving this like lesser fees? And what is the outlook for the year for this?

[José Ibaibarriaga Martínez, executive]

Thank you, Yuri. In line with our previous guidelines in the previous conference call, we projected a lower NIM of between 40 to 66 basis points as you mentioned. This quarter, we have already reflected this effect, and given the current macroeconomic condition associated with the monetary policy rate and inflation, combined with this portfolio growth, our estimation for this year, is that we are going to be more or less in the same range, a little bit below 4% for this year. And in summary, I think we maintained the guidelines that we gave you early.

And regarding fees, what we have been experiencing is a decrease in fees associated with lower transactions in credit cards area and lower insurance fees associated with lower consumer loan portfolio. What are we estimating? We are estimating that with all the investment that we are doing and we are starting to deliver to the market in the ecosystem, we expect the fees are not going to continue decreasing, and we are starting to see it slightly increase that will perform much strongly in next year, when we have delivered all the -- basically, all the ecosystem payment with the fees that will come from the e-commerce.

[Yuri Fernandes, analyst]

Thank you, Jose Luis. Just a follow-up, so maybe like growing fees above the loans, right? And a final remark, like congrats on the deposit evolution, I think that was impressive given the challenging outlook. So congrats on the good job you delivered that.

[Andrés Atala S., executive]

Then we have Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

A couple of questions also. One, I guess, just to follow up a little bit on the margins. I mean on the deposits, just because you are seeing more growth on the time deposits than on the demand deposits. But how long do you -- any color you think how long that can continue, and how much more pressure that can put on your funding costs just to think a little bit about the pressure from that? And then my second question is more on the asset quality front. I mean, one, we saw consumer NPLs deteriorating a bit. If you can give some color on that. But then also, I mean, you gave some good color there on the commercial real estate portfolio at CMB. But just thinking about how that can evolve from here, because that's a segment that's seeing pressure in the U.S. Do you expect any significant increase in NPLs, and what should that mean for your provisioning outlook, both on the consumer side and the corporate side going forward?

[José Ibaibarriaga Martínez, executive]

Thank you, Tito. So I will address the margin, and Juan Enrique, can you answer the asset quality, and maybe Jose can address the CRE vision. So margin, Tito, will be a challenging situation during this year. We have a short-term sensibility measurement and basically in the U.S. issue and in interest rate. In the interest rate issue, basically, a 100 basis point of decrease in the interest rate will increase our margin around CLP44 billion. And in the U.S. and the inflation gap, 100 basis points will be impacting us around CLP37 billion. So basically, what are we expecting? We are expecting a decreasing margin during this year, according to what has been our guidelines, we are not changing guidelines for the full year. Basically, we will have around 10% less in net income. We are going to grow around a little bit more than middle single growth.

And so margin expenses risk is basically what we -- guidelines or tell you the guidelines as in the last quarter. So we are not seeing a significant change in any of these main key drivers. I don't know if you need more detail Tito?

[Daer Labarta, analyst]

I guess just -- I mean, I understand the margin pressure. I was just thinking about just the shift from demand to time deposits. And I mean any color you can give on that, do you think that trend continues, for how long can that continue? Anything that you can boost the demand deposits, both for Florida and Chile?

[José Ibaibarriaga Martínez, executive]

I will tell you in Chile first, and Jose can tell us what is going on in Florida. But in Chile, Tito, as you know, obviously, with the inflation that we do have that is 11.1% in the last 12 months [Technical Difficulty] is moving and changing obviously because it's [Technical Difficulty] that you obtained from there. So until inflation do not decrease that we expect to decrease on basically to around 5.5% as Francisca mentioned. Obviously, it's going to be a challenging situation. But coming back at inflation, we believe that time deposit is going to increase again, as has been always.

And regarding Florida, Jose, can you give us some highlights?

[Jose Marina, executive]

Of course. So obviously, we've seen some rebalancing of the deposits with some migration from the noninterest-bearing deposits to interest bearing. It's happening across the industry, looking at banks our size, that reported results over the last couple of weeks. Generally, what we've seen is an average of around 8%, 10% decline in noninterest-bearing deposits during the quarter, given the rate environment that we're in. We do think we've seen most of that migration take place to date.

And regarding the increase in time deposits at least here in City National Bank, most of the increase that you see is because, what I mentioned during the call, where we replaced some of the federal loan bank borrowings during the quarter with best brokered CDs. So that increased the CDs. We're not seeing too much from a client perspective going into CDs.

[Jorge Gonzalez, executive]

And Pete, as it relates to asset quality of City National Bank, obviously, we remain very vigilant, given the noise and the narrative out there in of the marketplace. But I can tell you that as we continue to do deep dives into every component of our loan portfolio, we're still -- we're not seeing any stress. But more importantly than that, the economic fundamentals of the marketplace that we are currently serving, continue to be very strong.

I will tell you that the Florida marketplace is vastly different than the last cycle, in terms of just the sheer lower amount of leverage, the amount of capital visibility, the immigration, and there's so many different components in this marketplace today that didn't exist back in 2007 or 2008 or any prior cycles, which I think are going to bode very well for us going forward.

So we continue to be very disciplined in how we deploy capital. We continue to be very mindful of the noise that's in the marketplace. But as of right now, we're not seeing any stress and in stressing that we do with our loan portfolio, continues to yield very good results.

[Jose Marina, executive]

I'd also add to that, Jorge, that we have a minimal amount of commercial real estate loans that are maturing this year, subject to repricing risk. So only 6% of our portfolio of our term CRE loans are maturing repricing this year. So there's a minimal amount of risk, and we've looked at those loans as well, and we feel very good about those specific loans.

[José Ibaibarriaga Martínez, executive]

Thank you, Jorge and Jose. Juan Enrique, can you address the asset quality in Chile, please? A color that's helpful.

[Juan Enrique Visinteiner, executive]

Sure, Tito. So as to NPLs -- and as I mentioned earlier, on the consumer loan side, as I said, we're seeing a stabilization of the NPL ratio. It's at about 2.6 on an individual basis and 3.8%, including Servicios Financieros. We believe it may still go slightly up in the next months, but stabilizing, let's say, in the next 2 to 3 months, assuming that the macroeconomic scenario remains, as we all predict. So we believe we're reaching the peak as to [Technical Difficulty] one point, it's lower than pre-pandemic [Technical Difficulty] suggests that we should not be surprised if we went back to at least pre-pandemic levels. So the reason why we're seeing a lower level is because of the denominator effect. This is a portfolio that is very, very strong, very resilient, and that as you can see, we have been growing over time and that has an impact on the ratio through the denominator. So we are [Technical Difficulty] little bit surprised if NPL ratio continues to increase [Technical Difficulty] 1.2, something like that.

[José Ibaibarriaga Martínez, executive]

And Gary, can you -- I think that you answered the question of Jorge about the CRE issue. So Tito, do you need more details about it?

[Daer Labarta, analyst]

No, that was good color. Maybe just one last on the provisioning, correcting your cost of risk, any concerns on that increasing from here [Technical Difficulty] that's given what you're seeing on the asset quality, [indiscernible] relatively stable?

[José Ibaibarriaga Martínez, executive]

We believe it should remain relatively stable, as you have seen significant amount of [Technical Difficulty] provisions that [Technical Difficulty]for the future. So we should not be expecting a meaningful increase in provisions. Of course, there's still a gap in what I mentioned in [Technical Difficulty] and with the predictions that I just mentioned on the consumer lending and mortgage lending.

[Andrés Atala S., executive]

We have the final question from Daniel Mora. Daniel Mora is from Credicorp.

[Daniel Mora, analyst]

I have a couple of questions. The first one is regarding margins. You already mentioned that you expect between [Technical Difficulty] or below inflation, if you expect to decrease the U.S. gap to just the impact of the net cycle that we are going to [Technical Difficulty]. The second one is regarding NPL side, I was [Technical Difficulty] NPLs to stabilize in the upcoming 2 to 3 months, what will be the guidance of the cost of risk for this year, and what will be the worst case scenario for you in 2023? And the third one is regarding CMB, if we see the other comprehensive income, we see a negative figure of $447 million, that represents roughly 22% of the total equity in the United States. What will be the strategy for this in the coming months or quarters? Do you [Technical Difficulty] investments or do you -- will wait for rates to decrease to [Technical Difficulty]?

Final question, sorry, I have just one more, with all the guidance that you have been providing, what will be the ROE for 2023.

[José Ibaibarriaga Martínez, executive]

[Technical Difficulty] As I mentioned, it will be to 60 basis points, a little bit lower 4%, as you mentioned. And what are we doing basically in order to mitigate the [Technical Difficulty] NIM and commissions. Basically, we have established a [Technical Difficulty] a couple of years ago and is creating a lot of benefit to us, as we are pricing each customers according to the risk with a return on equity of the money that we are putting there. So if you see [Technical Difficulty] to customer NIM, you will see that customer NIM is increasing. Obviously, financial NIM is going to decrease according to the level of inflation [Technical Difficulty] the strategy that is approved [Technical Difficulty] that according to what is the pressure [Technical Difficulty]. So that is -- basically the most important things that we are doing, except is regarding our price strategy that is generating a lot of value for us.

Juan Enrique do you want to talk about the cost of risk, And what is the worst case scenario, please?

[Juan Enrique Visinteiner, executive]

Sure. So regarding cost of credit and particularly the consumer loan portfolio, which I believe it was the intention of the question. We normally do not go ahead with predictions. But given that we already said we thought we were reaching a peak in the upcoming 3 months. We believe that the -- what you're seeing [Technical Difficulty] should be a good proxy for extrapolating that for the remainder of the year. It will be a different [Technical Difficulty] of credit, but overall, we shouldn't be -- they shouldn't be much different from what you're seeing in this first quarter.

As to the worst case scenario, assuming again, no change in credit conditions, we are not seeing something meaningfully different from what I just mentioned. Of course, a very negative scenario would be a change in macroeconomic conditions, particularly inflation going up back again for unemployment rate moving out of the consensus rates that we have established [indiscernible].

[José Ibaibarriaga Martínez, executive]

Jose, can you answer the question regarding the City National please?

[Jose Marina, executive]

Of course, car. So Daniel related to the OCI, I'd say a couple of things. Number one, when you look at our capital prior to the effect of OCI, we have over $2.5 billion of capital. So that $447 million of OCI is about 17% of our capital position. And when you look at our tangible common equity ratio, I know we showed it here compared to Silicon Valley Bank, when you compare it to other banks of our size, we compare very favorably. So our unrealized losses are in line with the market overall.

I think you've also seen the duration of our portfolio continue to decline. I think in September, it was [ 5.25% ]. You saw in the presentation at the end of the year, it was about 4.99%, and now it's about 4.5%. I think naturally, the duration will continue to decline with obviously, the reduction in the portfolio, as well as rates start to decline as well. So we do have the ability to put on swaps [Technical Difficulty] in order to bring down the duration a little bit further and mitigate that risk. But our intention right now is not to sell any of the investments at the moment and let the OCI continue to reduce organically [ natural ].

[Andrés Atala S., executive]

Thank you, Jose. I would like to finish -- thank you, giving the thanks to Jorge, Jose and Gary for this presentation. We understand that all of you have been watching what's going on in the financial system in [Technical Difficulty] and the strategy that has lead Jorge with a team [Technical Difficulty] Jorge and your team for that. Lastly, this presentation is on the web, the presentation, the script, the record. So any additional questions that you may have, feel free to call us. Please, as always, we will come back to you [Technical Difficulty].