Banco de Credito e Inversiones

SGO:BCI

Earnings Call Transcript 2024-Q1

[Andrés Atala S., executive]

Good morning, and welcome to the first quarter 2024 Conference Call of BCI. My name is Andres Atala. I'm Head of Investor Relations of BCI. Joining me today are Jose Luis Ibaibarriaga, BCI CFO; Mr. Sergio Lehmann, Chief Economist; and Juan Enrique Pino, Head of Credit Risk at BCI.

We also have the pleasure of being joined remotely by Jose Marina, CNB CFO; and Cristian Saffie from the IR team. We will be presenting our quarterly report shortly, and we'll have time for questions at the end.

[Operator Instructions]

Please raise your hand to continue with this presentation, Sergio Lehmann will go through the Chilean macroeconomic figures.

[Sergio Lehmann, executive]

Thank you, Andres, and good morning, everyone. I'll do a quick macronomic review of the U.S., Peruvian and the Chilean economies. As you know, the global economy has been surprisingly resilient despite significant Central Bank interest rate hikes to restore price stability. But global risk remain high. One particular highlight is the tough geopolitical scenario marked by the Ukraine Russia and Israel Hamas wars.

The U.S. economy has continued to cause surprises with economic figures that are still dynamic. As a result, the inflation decrease has been more gradual than anticipated. Market expectation point to 1 Faton rate cut just next December. And yields have increased between 40 to 80 basis points since the beginning of the year. In Peru, the activities show an acceleration at the beginning of the year, price continued to ease and the Central Bank started a very gradual easing cycle. In April, the multi-policy rate is at 6%. In Chile, the economic activity has improved considerably so far in 2024.

The Central Bank continued to cut the monetary policy rate fixing it at 6.50 basis percentage last April. The Chilean yield curve increased due to external factors. Please move to the next slide. With [indiscernible] estimate released the brew of economic analysis said that the U.S. economy grew by 1.6% quarter-on-quarter annualized in the first quarter of this year below the expectations. It was driven by an increase in personal consumption followed by fixed investment. The external sector and inventories contributed negatively to the GDP. The economy is expected to grow by 2.4% this year, and Florida GDP continued to overperform the national average. The labor market continued to be resilient. The unemployment rate for the U.S. and Florida are around its lower historical levels and still continue to create jobs and wages are increasing by around 4% annually.

Please move to the next slide. Headline inflation has shown a small reverse in the last data. Core inflation on other hand, continue to decrease at and in small space. The estimated inflation will be below 3% on just at the end of this year. As a result, the Federal Reserve has maintained the rate at 5.25% to 5.50 percentage range. Market expectation implied one cut, as I said, in next December. Please move to the next slide. The U.S. yield curve increased, especially in the mid- and long term during the first quarter of this year. And in the last month after expectation has compounded the start of the recent cycle of the Fed process.

Please move to the next slide. Peru GDP fell by 0.6% in 2023, driven by a contraction in domestic demand. For this year, the activity will recover and will grow by 2.3% according to our estimation due to better business and consumer expectation, well controlled inflation and lower interest rates. The Central Bank started an easing cycle in September 2023 accumulating 150 basis points of cutting. Local interest rate in the long term are being hit by international upward trend.

Please move to the next slide. In Chile, the GDP grew by 0.2% in 2023, and this year is showing an acceleration, which is especially clear in the first quarter of this year due to external and service sector. We expect a GDP growth by 2.6% in this year 2024. Inflation has continued to ease. Total CPI will end of this year at 3.8% according to our estimation and would be around the central target during the first quarter of the next year. In response to the Chilean Central Bank cut the monetary policy rate to 6.50 percentage in April, and we expect that it will finish this year, the rate at [ 4.25% ] and will reach its neutral level around 4% in 2025.

Please move to the next slide. The Chilean yield curve has increased in December, especially in the mid- and long-term part of the curve hit by the international upward trend. In the last 3 months, the Chilean peso has continued to be under pressure, helped by better copper prices, but pressured by the interest rate differential with the U.S. and other Latin American economies. By the end of this year, we are expecting that the action rate will be around MXN 900 per dollar.

Now I will leave you...

[José Ibaibarriaga Martínez, executive]

Thank you, Sergio. Good morning, everyone, and thank you for participating in this conference call, in which we will discuss our first quarter results as a result of our corporate strategy. In terms of consolidated financial results, some of the highlights include the following: Bci maintains a robust financial position as evidenced by a strong financial result this quarter with robust liquidity and capital ratios well above regulatory leverage.

In February, we issued an additional Tier 1 AT1 bond amounting to $500 million, which strengthens our capital base in line with implementation of Basel III. This placement was a milestone in the Chilean financial system for being the first public bond trade in the market. Our expenses has grown approximately 13% year-over-year. It is important to note that this includes a nonrecurring items related to FDIC payment and exchange rate effects.

Excluding this, we highlight the implementation of our productivity plan, allowing us to improve a local efficiency ratio by 285 basis points. In our U.S. operations, we navigate an evolving landscape market by shifts in inflation, GDP and the fair reserves interest rate normalization process. Contrary to previous expectations, interest rates have not decreased as anticipated. However, in City National Bank, we have strengthened our liquidity and increased our capital ratios, topics that Jose and his team will go more in deep in the next couple of slides.

Please move to the next slide. This quarter, our digital bank match currently surpasses 4 million users. We have reached 0.5 million active caring accounts, less than a year after expanding our offering with these products. Moreover, it's worth noting that the average after uses in a current account conducts double the transactions compared to a regular March account. March grew in time deposit when including the [ Pentafuturo ] accounts. This growth is 11% quarter-over-quarter.

Furthermore, we have continued to strengthen the payroll accounts, sealing a significant partnership with Bank, a human resources, digital platforms that will fill our growth further. Additionally, with our financial product offering, we highlight that noteworthy 66% quarter-over-quarter growth in auto insurance policy sales, thanks to collaborative effort with BCI insurance brokers. And lastly, we underscore advancements in our payment platforms, we are on a purchases in pesos in the first quarter 2024 represent 48% in the total recorded in 2023. Now let's review the key figures of our consolidated operation in the first quarter of 2024.

BCI operating income recorded at 14.9% year-on-year increase, primarily driven by and increasing net interest income that explained our effective -- on our price strategy, a high result from readjustments from a greater gap of asset denominated in U.S., contributed to offset the lower inflation compared to previous year. And furthermore, net fees experienced a substantial year-on-year increase due to higher fees from intermediation and insurance administration.

Turning to our expenses. Consolidated operating expenses increased by 12.7%. It is worth noting that with our local operation, expenses has seen an increase of 6.6% and the efficiency ratio has shown an improvement of 285 basis points. Our consolidated expenses has been impacted by a nonrequiring event, such as FDIC fee payment of about $5 million associated with our City National Bank operations and higher expenses resulting from the appreciation of the U.S. dollars against the Chilean pesos.

Lastly, a higher tax expenses during this period was predominantly attributed to several factors. This includes a higher net income for the period, monetary correction linked to changes in the CPI and the depreciation of the Chilean peso against the U.S. dollars that affect our investment in City National Bank.

Moving to our loan portfolio. We saw a significant increase of 9.7% year-over-year, mainly attributed to the growth of commercial loans. It is important to highlight that when we exclude the effect of the exchange rate, particularly due to the depreciation of the Chilean pesos, the growth of the local portfolio stands at 5.4%. Despite encouraging lower inflation, our local net interest margin, NIM, experienced a notable increase of 66 basis points year-over-year expansion of loans with our commercial and mortgage portfolio played a significant role in improving the interest margin.

Growth was facilitated by the implementation of an appropriate pricing strategy. Also, income generated by the inflation index assets where we strategically increased the volume of assets dominated in U.S. effectively offset the impact of the lower inflation rate observed during this quarter.

Net interest margin was impacted by higher interest expenses associated with a greater volume of deposits. Nevertheless, our proactive funding diversification strategy played an important role in mitigating these challenges. Regarding fees, the increase was mainly due to higher commission earned on income from mutual funds, administration commissions and insurance brokerage. Meanwhile, commissions from credit card services decreased in this period. Our local operating expenses saw an increase of 6.6% year-over-year. It is important to note that the significant portion around 80% of this growth accounts for personnel expenses. This increase in expenses reflect various factors, including salary adjustment aligned with our strategy of indexing salary to the consumer price index, implementing a salary adjustment in March and expansion of our workforce size, particularly in specialized areas such as data management analytics. These measures are aligned with our employee experience model.

Now on the remaining items, despite the overall increase, these items experienced a marginal year-over-year growth of 3.32%. This growth rate falls below the inflation rate of the same period. This can be attributed to the various initiatives undertaken as part of our annual efficiency plan. such as optimization of the footprint of our branches, levering efficiency derivate from digitalization and our processes have all contributed to this outcome.

In terms of productivity of our branches, we have observed a significant increase of 14.3% year-over-year. This metric is measured at the productivity ratio per point of sales, calculated by dividing the total value of loans and deposits by the numbers of branches. The enhancement can be attributed to the success of our effective strategies and team dedication.

Now we will present key highlights from a liquidity level and regulatory capital metrics. As shown in this slide, our total local deposit base has exceeded at 4.6% growth year-on-year. This growth is underlined by an increase in local noninterest-bearing deposit by 9.1% and an increase in time deposit of 1.9% year-over-year. Regarding our regulatory capital levels as shown in the upper right chart, a common Tier 1 capital has seen an increase of 184 basis point compared to the same period of last year.

This improvement is attributed to the capital increase carried out in October 2023, the higher net income of the period, a reduced loss in other comprehensive income account related to the available portfolio and the positive impact on hedge accounting cash flow derivatives.

Additionally, last February, we issued an additional Tier 1 bond amounting to $500 million, which strengthens our capital base in line with implementation of Basel III.

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

[Juan Enrique Visinteiner, executive]

Thank you, Jose Luis. My name is Juan Enrique Pino and I'm the Head of Credit Risk for BCI, and I'm happy to be here with you once again to give you some more details about our loan portfolio status. Our loan portfolio remains well diversified by customer segments, lines of business and economic sectors. As you can see on the chart on the right side, our local commercial loan book is well diversified across sectors as well. As to the real estate segment, where we have a large exposure under the industry still in distress based on recapped decisions taken several years ago, principally with the largest and most experienced in the industry will end to good projects and against good assets are collaterally strong and loan-to-value ratios are very conservative and proper provisions were built on time were required, both as named specific provisions as well as voluntary provisions.

Let's go to the next slide. In this slide, we can see the performance of the entirety of our local loan portfolio. As you can see, loan volumes remain with a growth momentum, NPLs are gradually stabilizing at levels still below pre-pandemic levels and also below industry levels despite the recent macroeconomic downturn. And our loan loss provision ratio is stronger than ever, thanks to the voluntary provisions built in previous years. We attribute this success to a portfolio mix and to timely and proactive risk management measures.

On the next slide, as to commercial loans, they remain 1 of the main volume growth drivers, as Jose Luis pointed out earlier. While the NPL ratio shows sign of sterilizations at prepandemic levels, which is a result of prioritizing growth in the most resilient industries and in the strongest names. As to the residential mortgages portfolio, while asset growth volumes have continued to increase, the NPL ratio remains trending upwards exceeding prepandemic levels explained by higher unemployment rate and reduce our whole income.

Also, higher interest rates have not incentivized loan restructures at higher rates. Despite all that, BCI remains with an NPL ratio well below industry levels, and it has LTV ratios and an average portfolio tenor that gives space for loan restructures and reasonable terms now that interest rates have dropped to more reasonable levels.

So NPL containment is very achievable despite some more months of deterioration before we start seeing that. As to the consumer loan portfolio, you can see that it has started to regain traction in terms of volume growth and the NPL ratio stabilizing at slightly above prepandemic levels. Is since this as a very attractive segment to boost growth along with rebalancing towards more resilient customer segments. And with the risk appetite more commensurate with a still challenged macroeconomic and VaR. Let me leave you now with Jose Marina, City National's CFO.

[Jose Marina, executive]

Thanks a lot. We have just a technical issue. We'll be in [indiscernible]. Good morning, everyone. Sorry about the mishap.

Thank you, Enrique. Good morning, everyone. My name is Jose Marina, I'm the CFO of City National Bank. It's my pleasure to meet with you here this morning to discuss our performance during the first quarter. I am pleased to inform you that we had solid results this quarter, especially in those metrics that are in greater focus today.

First of all, banks are finding it increasingly difficult to capture deposits nowadays given the historic increase in rates. However, our client deposits decreased by $1.2 billion in the first quarter, which includes a temporary inflow of about $620 million from one client. If we exclude this inflow of our client deposits still grew at an impressive annual rate of 13%, surpassing the banking industry's annual growth rate of 5%, which includes broker deposits.

We maintained approximately $10 billion of available liquidity, representing 38% of total assets and covering 114% of our uninsured uncollateralized deposits. Our net interest income increased $4 million quarter-over-quarter as the NIM expanded by 6 basis points in the quarter due to the cost of funds flattening out and more stabilization of DDA balances. We continue to enhance our already strong capital profile of $754 million of excess capital in our CET1 ratio, even if we applied our unrealized AFS and HTM losses to the capital.

We maintained an investment portfolio with minimal credit risk that provides significant annual cash flow and has lowered its duration to about 4.6 years. Our commercial real estate portfolio continues to perform well with a weighted average LTV of 50%. Florida continues to perform significantly better than the U.S. as a whole. These results reflect our reputation in the market built over 7, 8 years, our relationship-centric model focused on diverse business segments and the strong culture fostered among our employees.

The U.S. banking system has changed rapidly with considerable migration of noninterest-bearing deposits to high-yield products and increasing betas on the cost of funds. However, the industry events in the first half of last year led to depositors migrating from midsize and community banks to major banks. Despite all these segments, our client deposits significantly increased by $1.2 billion or 7% compared to the previous quarter. Our strong client deposit growth enabled us to reduce our broker deposits by $1.2 billion. Although you can see that our spot cost supplying deposits increased quarter-over-quarter, the reduction of broker deposits enabled us to limit the increase in our total cost to 4 basis points quarter-over-quarter, as you will see later in the presentation.

On the right-hand side, you can see that the banking industry as a whole saw deposit slightly increased by $217 billion or 1% quarter-over-quarter. However, these industry figures include broker deposits. This slide shows that our assets remain flat quarter-over-quarter, which just a slight decrease of $25 million. Our loan-to-deposit ratio remains low at about 82%. We remain very well capitalized as evidenced by our total risk-based capital ratio and Tier 1 leverage ratio, which were 14.96% and 10.1%, respectively, as of March 31. Additionally, the unrealized losses in the investment portfolio slightly increased by $17 million compared to the fourth quarter as a result of an increase in the 5-year treasury rate we saw during the quarter.

On the right-hand side of this slide, you notice that our core loans, excluding PPP, slightly decreased by $83 million compared to the prior quarter. Our loan pipeline is more robust in the second quarter, and we continue to focus on high-quality deals with strong spreads and solid deposit relationships. Our strong credit culture and low-risk appetite continues to result in excellent asset quality. The NPL ratio for instance remained low at 65 basis points of total loans. Past dues are also minimal, only 45 basis points of total loans, and we increased our limit coverage by 4 basis points as well.

On this slide, despite more detail on our commercial real estate portfolio, which represents 48% of our overall loan portfolio. Overall, our CRE portfolio has a conservative weighted average LTV at 50%, supported by a strong debt service coverage ratio of 1.8x, and we have full or partial reports on 64% of these loans. It is also well diversified across all segments, as you can see in the chart. Our discipline and comprehensive credit process has historically resulted in exceptional asset quality as evidenced by the minimal [indiscernible] in our commercial real estate portfolio of only 40 basis points of the total CRE loans. It is also worth noting that our portfolio is well provisioned across various segments with ops loans having the highest coverage given the increased risk in that sector.

Our pure-play Florida Bank strategy resulted in only 17% of CRE loans outside of Florida, representing only 8% of total loans and leases. The CRE portfolio outside of Florida is well diversified with the largest exposure in growth states in the southern portion of the country. Additionally, they have a conservative weighted average LTV of 5%, supported by a robust net service coverage ratio of over 1.6x. It is also well diversified across segments. I also want to emphasize the strength of our marketplace, and we will provide more color on that in our next slide.

Our sound current approach is complemented by the best CRE market in the nation, State of Florida. Our business brand climate continues to attract new businesses and is a preferred destination for wealthy divisions. As a result, Miami-Dade, Broward county Palm Beach counties, which represents our core markets ranked to the top 15 nationwide of new business applications, as you can see on the left-hand side of the slide.

Additionally, on the right-hand side of the slide, an analysis done by CoStar shows that the South Florida office market remains the strongest in the nation with the highest rent growth in the U.S. and increases in office valuations in Miami, Fort Lauderdale and Palm Beach. This is in sharp contrast to the larger office markets like New York and San Francisco that have experienced declines in rents and office property valuations over the past 4 years. Ford's economy consistently is outperforming the rest of the U.S., provides a secure foundation for our comprehensive creditors framework.

Our historical minimal losses are a testament to that with cumulative commercial real estate net charge-offs of only $1.1 million since 2016 and effectively no charge-offs in the last 5 years.

On this slide, you can see that our pretax and preprovision normalized net income increased by $6.4 million or 12% quarter-over-quarter, primarily due to higher net interest income of $4.1 million as our NIM expanded by 6 basis points. This quarter included a few extraordinary items being normalized. We realized a $5.5 million gain on the sale of our BCI Capital platform. The decision to exit this national sector financing space set from our strategic focus on getting market share in our core Florida market and our continued commitment to developing comprehensive banking relationships with our valued clients.

We retained all BCI capital wells and leases, but sold a platform and team to another sponsor. We also incurred a $5 million onetime fee for FDIC insurance in the first quarter after the FDA issued a communication indicated that the loss is expected when the special assessment on uninsured deposits was announced in the Q4, has since increased by about 25%. As you may recall, the special assessment that was announced and reported by us in Q4 of about $20 million was intended to replenish the FDIC fund for a loss of the occurred due to the 3 bank failures that took place in 2023.

We proactively increased our special assessment on loss accrual by $5 million, given the communication by the FDIC. We also adjust for goodwill amortization since DCI and most U.S. banks do not amortize goodwill. This slide just presents further details on our normalized income. As you can notice, our normalized net income after tax with 22% or $6.8 million higher than the prior quarter, with our net interest income increasing by about $4 million.

The left-hand side of this slide, we demonstrate how our net interest income increased in the first quarter by $4 million or 4% as our NIM expanded by 6 basis points in the quarter, driven by a significant client deposit growth of $1.2 billion that enabled a reduction in wholesale funding by the virtually same amount. You can see that the increasing trend in our cost of funds has leveled off this quarter with our cost of funds only decreasing by 4 basis points quarter-over-quarter.

Furthermore, we increased our milling spread for new and renewed commercial loans at the beginning of last year and are focusing on deals with relevant deposit components. In conclusion, the deposit pricing pressure that we saw during 2023 has leveled off, allowing the repricing on our loan portfolio to drive NIM expansion. We continue to protect our NIM against rates staying higher for longer in the current writing environment while positioning our balance sheet to benefit for the remainder in 2024 and beyond. I want to conclude by mentioning several strategies implemented in the last 18 months or so that we have executed to navigate the current environment. First, we executed $3.75 million of pay fixed interest rate swaps during 2023, projected to generate about $39 million of net income in 2024 based on the forward curve. These swaps are made on the shorter to medium end of the curve to protect against rates staying higher for longer while also preserving our ability to expand our net interest margin once rates start to decline.

Next, we have increased our minimum spread for new commercial loans and renewals to a minimum of 325 basis points. We are being highly selective on the lending side, not only from a credit risk and spread perspective, but also from a relationship perspective by focusing our lending activities and clients with more holistic banking relationships that include a relevant deposits as well. We are also including such terms as deposit covenants, prepayment penalties and floors on new loans as needed.

Deposits are at the core of a relation banking approach. We have several deposits gathering that is in place, which have been vital to navigate the current rate environment. At the end of 2023, we also executed a sale of $108 million of corporate bonds and a mild loss replacing them with floating rate securities, which resulted in an increase in our margin of about 2 basis points. This strategy aims to enhance profitability and our balance sheet position going forward.

We are also limiting transactional lending and prioritizing residential lending in the secondary market to increase fee income. As we already mentioned, we sold BCI Capital platform to align with our strategic priorities, with prioritizing relationship banking over transactional lending. As we navigate the landscape of bringing higher for longer, we have initiated a pricing strategy and to selectively adjust certain client deposits. This strategic approach is projected to lower our cost of funds by approximately $3 million on an annualized basis.

Our position as the largest pure-play Florida banks located in what we think is the best market in the country, positions us well for success in 2021 and beyond. As demonstrated earlier, economic conditions in Florida continue to be strong. We believe that we have the best talent in the market, complemented with robust digital capabilities. To ensure we continue capitalizing on our unique positioning in the market, we have designed the 5-year strategic plan with the health of a reputable consulting firm. The goal is to ensure that we maintain our competitive edge in the market especially given the dynamic economic landscape in Florida, it is essentially a realignment of our strategic direction to maximize the opportunities available to us and to secure long-term success.

On that note, I will pass it back to the BCI team for final comments. Thank you all for participating this morning.

[José Ibaibarriaga Martínez, executive]

Thank you, Jose. As we conclude this conference call, we would like to emphasize some key points. Firstly, our operation has once again demonstrated the soundness and safety, reflecting in a robust financial position, liquidity along with capital ratio exceeding regulatory requirements.

Secondly, our digital ecosystem remains [indiscernible] our strategy with much solid defined its position and introducing new functionalities to enhance monetization. And lastly, we are dedicated to advancing our vital role as a bank in force during economic growth, environmental protection and social development. We are honored to lead the Merco ESG ranking for the 12th consecutive year, recognizing the top 100 responsibility companies in environmental, sustainability, social impact and corporate governance.

Looking ahead, we are committed to expanding our influence and establishing higher benchmark and sustainable banking. So thank you, all of you for your time, and let's get back to Andres for Q&A session.

[Andrés Atala S., executive]

Thank you, Jose Luis, and thank you all. The first question in this Q&A session is from Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

Congrats on your results. I have 3 questions from my side. The first one will be on NII. So this is a question that every quarter I made to you. So considering lower funding costs from lower rates, but at the same time, lower inflation levels. How should we think about the NIM for this year? If you can please provide the number at consolidated level? And then if you can share the breakdown for Chile and the U.S. will be very helpful.

Then my second question is in terms of your cost of risk. Just wondering if you continue to see cost of risk for Chile around 1.3 million and then I think you were saying probably below 1% at consolidated levels. So you just want to double check your expectations for cost of risk.

And lastly, after this strong first quarter, what should we think about the ROE for this year.

[José Ibaibarriaga Martínez, executive]

Thank you, as always, Ernesto for your participating and always your good questions. The cost of risk, I will leave Juan Enrique to answer. I will answer your 2 questions around NIM and return on equity. I think that we have had an excellent first quarter. Having said that, we are not changing the guidelines of return on equity yet. I think that we have 3 challenging quarters ahead. In the U.S., the figures as Sergio mentioned, are still really strong and the [ Fed ] do not have sent strong messages in order to start reducing the interest rate and that could have some impact. So we are maintaining the return on equity expectation or guidelines, sorry, as we said in the last quarter.

Regarding NIM. In NIM, we're having more or less the same NIM that we gave you in the last quarter. What has changed is a little bit the composition of the NIM. And basically, what's going on is that the U.S. NIM, basically City National Bank are having a slowdown as we've -- as the budget at the forecast set. The main reason for that are 3. As the interest rate on the market has not decreased. We used to have the expectation of a full decreases and the consequences of not having that decreases are 3. One, interest rates remained high. So the loan generation are lower than expectation and the consequence on loans with higher prices and the impact in margin. Two, deposits are as Jose mentions are challenging and deposits are still challenging the cost of fund. And the third is the interest rate that has not decreased and pressuring the deposits.

So the NIM that was a budget to increase in City National Bank in the next quarter, we are not seeing any in this moment. But the good part is that in Chile, we have had a very good first quarter. Commissions are increasing. The loan portfolio has increased and the price strategy has increased too. And we have a slightly higher inflation that if you complemented whether increase in our GAAP strategy will in some way, compensate the lower NIM expectation of City National Bank.

Overall, having said everything, we maintain the NIM in the range that we gave you in the last conference call, but with the changes in the composition that I mentioned, Ernesto.

[Juan Enrique Visinteiner, executive]

Ernesto, as to cost of credit, you're right. We do expect to maintain a ratio of 1.2 in Chilean operations with a variation of 10 basis points up or down based on the evolution of volumes mix, and quality. But basically, we should expect something in the same level of last year.

[Andrés Atala S., executive]

Next one is from Tito Labarta.

[Daer Labarta, analyst]

A couple of questions also, I guess, First, if I look at the breakdown of your earnings by segment, Looks like there was a big jump in the retail, went to like $56 billion from $18 billion in 4Q, offset by a decline in wholesale. Just wanted to understand a little bit the 2 movements there. And maybe any color on what drove the specific movements between retail and wholesale?

And then my second question is just on the capital, right? Your core Tier 1 is now above 11%. You've done a capital -- a couple of capital increases. How are you thinking about capital from here, dividend payouts? And are you comfortable with this level of capital.

[José Ibaibarriaga Martínez, executive]

Thank you, Tito. Regarding the increasing in retail, I think this is important to mention that on this -- at the end of December, of last year, we did a significant and important organizational change where the construction of new line of businesses and services that was in the digital ecosystem was mature enough to incorporate it to the retail business. So the much financial services, all the implementation of the loyalty program and the payment ecosystem, all of that area was incorporated to the retail traditional business.

And with that, we have been able to coordinate and cross-sell all are 5 million customers that we do have in this arena. So what you are seeing is basically -- what we have been talking in several conference calls is to start with a significant monetization strategy on all these vehicles that we have been investing in the last couple of years.

The expectation is that -- you should expect that the retail ecosystem now that includes everything that I have told you, will start increasing commissions and it will start increasing prices we will start increasing the cross-sell. So that is one important thing.

The other thing that is happening in the retail ecosystem is that we are implementing our pricing strategy that -- we did it in the past, in the wholesale arena that today, we have a return on equity in the wholesale area over 26%. That is a huge number. And so the expectation is that, that is basically what's going on. In the wholesale business, we continue leading the commercial loan portfolio in a very good sector with a clear strategy, both in segment and pricing. And what happened in the return of this sector is that we have had one customer that has gone through some issues. We have to make some provisions that decreased the return on equity. Are we worried about it? Well, we will see. We have all the information that we have is that is an important customer that should come back I don't know, in the near future.

But as everyone that is in this conference know, BCI has a very conservative position in everything, and we have built provisions in order to be safe. Regarding the capital ratios, everyone knows that we did a capital ratio last year, both to finance our solid growth in Chile -- as you see, we are leading the growth in Chile in the commercial arena, in the commercial sector and in the U.S., at the same time, to have a solid capital ratio over the regulations in the implementation in Basel III.

We complemented with the issue of AT1 in January of this year was -- I will repeat it, but was a milestone for the financial system in Chile, [indiscernible] issue one this week. I think that we opened an important market in Chile. What -- specifically your question, what is the future? Our projection is that we will continue with a strong capitalization ratio, we -- the estimation that we have for the next couple of years is to continue capitalizing around 70% of the net income, the consolidated net income.

With that, we will have the capital enough to be well above the regulatory limits and to capture all the opportunities that we are having both in Chile and in the U.S. And when I say the U.S. in Florida because as Jose mentioned, the differences between the Florida market and the rest of the U.S. is significantly and we are lucky to be in the most growing state in the U.S.

[Andrés Atala S., executive]

Next one is coming from Daniel Mora from CrediCorp.

[Daniel Mora, analyst]

I have 3 questions from my side. The first one is a follow-up question regarding net interest income, I would like to understand if you can provide more details of what will be the effect of the expiration of the FDIC that already took place in April, and that will have also a second stage in July. -- combining this effect with the decreases in interest rates, expected inflation, the loan growth strategy, do you expect a net negative impact on margins. And I would like you to provide the exact number of the NIM that you expect to reach in 2024. If you can provide the number consolidated or Chile and City National Bank will be perfect. That will be my first question.

The second one is what will be the loan growth strategy in Chile and U.S.A. under the current macro scenario and also considering the interest rate outlook in both countries.

[José Ibaibarriaga Martínez, executive]

Daniel, I didn't hear your second question very well. Can you repeat it, please?

[Daniel Mora, analyst]

Yes, of course, I can repeat it. It's very simple. What will be the loan growth strategy in Chile and U.S.A. under the current macro scenario and also considering the interest rate outlook.

And the third one is related to the slide that you present about the monetization in MACH, considering the strong increase in users and also in transactions where is the monetization coming from. It will be fees charged to current accounts, fee charged to enterprises or offering the base of clients. What is this coming from or granting loans to those clients? What is the monetization coming from?

[José Ibaibarriaga Martínez, executive]

Super. Thank you, Daniel. Yes. I will go to the first answer question to the more longer question. The loan growth in Chile is going to be in the range of 4% to 6%. What we are seeing is that in the commercial area, we are growing faster is going to be in the 6% to 7%. Mortgages and consumer will be more in the 4%, a little bit higher inflation. We are not seeing a significant demand in that sector and we are targeting a segment that is very specific with a very high create risk. So in average, in Chile will be between 4% to 6%.

In the U.S., what we are expecting is to be in the range of 6%, a little bit below our initial expectation. There was to be close to 8% to 10%. The reason for that basically is that interest rates has not decreased. The demand for credit has decreased, and we are very careful in taking the right risk. So we are having a conservative approach. That is the question of loan growth in Chile and in the U.S.

Regarding MACH, what we are seeing in order to monetize the investment in MACH is basically coming from the following. We have opened, as we mentioned, 500,000 current accounts, with that, customers can make almost everything as a normal account. And with alliance with bank that is a payroll company. We are putting a lot of customers -- we are having a lot of customers inside where they are receiving the salaries. And what we have experienced is significant increase in the checking account [indiscernible], the amount of checking accounts and with that, we are having a good revenue source.

And at the same time, we experienced an important increase in the insurance arena with a brokerage insurance broker company, we are giving insurance to this segment very successfully. And in order to be complete the answer, we are not seeing an important amount of margin or revenues in the loan portfolio in MACH as this segment is a segment where we have to be very careful on the risk that it has.

So basically, today, we are having checking account with customers that can make almost everything. We are increasing the number of amount of money that those savings -- checking account has and insurance.

And regarding the your question about net income, first of all, the FDIC line of business was prepaid. That was something that was on a budget, on a forecast. We were with the liquidity enough to do it. Specifically, it's not going to affect us because it was in the budget. Inflation is going to affect us positively. Basically, what we did is that we open the gap between [indiscernible] and Chilean pesos to CLP 45 billion, and that means that 100 basis points more inflation with account for CLP 45 billion and that will impact positively. That was not in our budget that we are incorporated in the forecast and is part of the compensation that I told you before with the NIM.

And the other thing that is happening is that in the commercial segment, we grew in the last quarter of 2023 and the first quarter this year. So those loans will generate margin for the rest of the year. So we'll generate more NIM. Specifically, the NIM will be between 3.5, 3.8 depending on the market condition and it depends Daniel on exchange rate. inflation, basically, and that is why I'm giving you a range and no specific number, but it's going to be around that. And how do we divide it? Basically, in Chile will be around 3.94% and in City National will be around 2% basically. I think that I answered all your questions, unless you want me to go in deep in some one of those.

[Andrés Atala S., executive]

Next one is coming from Yuri Fernandes from JPMorgan.

[Yuri Fernandes, analyst]

Jose Luis, if I may, a follow-up on the FDIC I understood this in the guidance, and I know this is becoming an odd topic, but from the total exposure you have, like how much was paid now, how much would be paid in July. I guess we can get this data from the Central Bank, at least the amount of notion that you have. But I would like to understand a little bit more the impact although, again, I understood it is in the guidance. But when we think about 2025, I would like to understand a little bit how many points of ROE was FDIC. So if you can provide like, okay, this line was costing 0 5, it was invested at 3, 4 or whatever. So the spread was this is the amount of notional. So it would be easier for us to do a calculation of this potential impact. I understand it's not that meaningful, but whatever you can share would be interesting.

And a second one, just on NPL on mortgage , what happened with the NPL Jose Luis is why is mortgage in Chile moving up.

[José Ibaibarriaga Martínez, executive]

No, Yuri. I didn't follow you the second question, sorry.

[Yuri Fernandes, analyst]

They [indiscernible] loans for the [indiscernible] in Chile. Why?

[José Ibaibarriaga Martínez, executive]

Yuri, we have $4.6 billion of which we already paid $2.8 million in the FDIC. The rest will be paid in July. The exact amount of money that is affecting is in the range of CLP 50 billion to CLP 60 billion and that is the amount that you can calculate the impact on the return on equity. It's much lower than the expectation that you have guys before the amount of money that you already -- you tell us in the conference call. So that is the numbers duty. Juan Enrique, can you go through the NPLs, please?

[Juan Enrique Visinteiner, executive]

Sure. So we expect to end the year with an NPL slightly better than the one that we have at the closing of this quarter. But during the year, there might be an increase to them evidence the decrease to reach the levels that I just pointed out for year-end, particularly in the consumer segment and in the mortgage segment. Those are the 2 main experience still an increase in the few months to then recover and go back to the existing levels slightly below.

[Andrés Atala S., executive]

And the last one is coming from Neha Agarwala from HSBC.

[Neha Agarwala, analyst]

Congratulations on the results. Two quick ones. First one on the cost efficiency. So you've made tremendous improvement in terms of your cost-to-income ratio declining. How much more room for improvement do you have? And where would that improvement in the coming years, be coming from -- more from the Chilean business or the U.S. business? And if you could talk about the dynamics a bit?

And my second question is on MACH. So you talked about the monetization, but you're still being very cautious in terms of lending, which is understandable. What is the path for adding lending products to MACH. Are you going to do it on your own balance sheet? Are you going to maybe do it through partners? What kind of loan products can we expect in the next 2, 3 years? Because typically, for these kind of services, lending is an important part for monetization, right, to accelerate monetization. So what kind of lending products can we see in MACH in the coming 2, 3 years?

[José Ibaibarriaga Martínez, executive]

Thank you, Neha. One of the main objectives that BCI has is to increase our return on equity. As we have mentioned in, I don't know, the last 18 months that we have a goal of 40% return on equity with implementation -- full implementation of Basel III. In order to do that, we have a combination between return on equity in Chile and our U.S. operation that is becoming more important. And one of the key factors in order to arrive to this goal is to control our cost. We have been investing significantly, especially in Chile in order to build all these different vehicles, in retail, in wholesale, in wealth management that we have deployment a huge value proposition are the same that building and investing in the U.S. operation.

Now, we are in the process of monetizing or making more efficiency in our operation. We believe that what you saw in the first quarter is the first step of improving in our efficiency ratio in the quarters to come. Yes, we have some one-time effect that we talk about the FDIC thing in City National and the exchange rate. But -- if we exclude that, we have a clearly a trend in order to improve our expenses without our efficiency ratio and without our return on equity. You should expect to continue our improvement in efficiency ratio in the next quarter and in the next year, Neha.

And we have a clear path sorry, we have a clear path, and we have a clear plan that are being executed in all the areas. And regarding MACH, I think that we have a lot of space Neha to monetize MACH. What I mentioned about being careful in the loan portfolio that we are doing it as buy now pay later type of loans. But we want to be careful. We are in a period of economic cycle that Sergio mentioned that is -- we will be growing this year around 2 points something. But the consumer side of the country is not growing, demand is not there, too. So we have to be careful and what we are trying to do is monetize in the rest of the opportunities that we do have.

And yes, obviously, we are going to monetize about loans, but we feel that today, we are in the cycle where we have to be careful. We are testing. We have a lot of data, and you know perfectly well how much we have invested in data analytic and we feel that we have a huge advantage in Chile regarding our main competitors in that asset that we have built and obviously, we are going to use it. But for now, I don't want to create expectations to you that we are going to be monetizing on a significant part of MACH through loans.

[Andrés Atala S., executive]

Now we have the last one with from Andres Soto from Santander Investment.

[Andres Soto, analyst]

I have 2. The first one is regarding this new branch model that you recently launched. I understand you are planning an investment of $70 million. And for this year, you are targeting 19 branches. So I would like to understand what is this about? And if you expect this to be translated into better efficiency, improved Net Promoter Scores, what is your end goal with this investment?

[José Ibaibarriaga Martínez, executive]

And the second one, Andres?

[Andres Soto, analyst]

Sure. It is a very short one. If you have any estimated impact for the standardized provisioning model for consumer loans.

[José Ibaibarriaga Martínez, executive]

Okay First of all, did you went to the branch, Andres?

[Andres Soto, analyst]

Not yet. Looking forward to it.

[José Ibaibarriaga Martínez, executive]

I will answer it when you go there. You should go -- you should go. It's a huge experience. We are just starting. We have -- it's a complete new experience and the goal and the final goal is to really adapt the experience that we are building in the digital channels to the physical channels. And it moves -- if you go there, the way that is structured is very fluid, it's very private, it's very friendly. It's like -- it's like the expectation that our customers are having in many other things.

We are adapting it because, obviously, our customers expect to have those kind of branches. We are experiencing we have just 2 Andres, so we cannot have many conclusions yet. But yes, our expectation is that we are we should increase our Net Promoter Score.

Yes, we should create and bring more customers. And the final goal is to be more profitable and be more efficient by given best services. And honestly, we invite you to all of you, if you have the chance to go to this branches. Let us know we can go with you because what is there is basically the aim of BCI to transform and to adapt to the different changes that the society and the customers are having.

So more than glad to go with you and share and receive your feedback et cetera, et cetera. We have a target 19, as you well mentioned. This is going to be gradual. These branches are we need to create the [ muscle ] to adopt it and make it is not -- it's actually complete changes, and you have to make it while it's working in some cities, we have to -- we don't have to 2 branches in order to close on and change the others. So we have to change it while it's working. So it's a complete engineering task to do it. And that is a long answer.

The short answer is adapting to the society and the customer expectation to increase our profitability on our Net Promoter Score. And any one of you that you want to go, please let us know and we go together and receive your feedback. And two, do you want to have that answer Juan Enrique please.

[Juan Enrique Visinteiner, executive]

Sure. So the impact of the new regulation is expected to be significantly below the numbers that were originally mentioned. It's going to be about $20 million or CLP 20,000 million. And as you know, that has to be recorded in January of 2025. As you know, there are voluntary provisions that materially exceed that amount.

[Andrés Atala S., executive]

Thank you, Andres. And maybe final words from Jose Luis for this ending.

[José Ibaibarriaga Martínez, executive]

Thank you everyone for participating. Thank you very much for the team that prepared this meeting and Sergio, Jose, Juan Enrique and all the investor team too. Thank you very much, and have a nice weekend.

[Andrés Atala S., executive]

Nice to see you all. Bye-bye.