Banco de Credito e Inversiones
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Good morning, everyone, and welcome to Bci's Second Quarter 2018 Results Conference Call.
Before we begin, I would like to remind you that this call is being recorded and that the information discussed today may include forward-looking statements regarding the company's financial and operating performance. We undertake an obligation to update and maintain any such forward-looking statements after the date of this conference call. All projections are subject to risks, uncertainties and other factors that could cause actual results may -- that may differ materially from our current expectations. Furthermore, please refer to the detailed note in the company's presentation disclaimer regarding forward-looking statements.
I will now turn the call over to Andres Atala, Bci's Head of Investor Relations. Please go ahead, sir.
Thank you. Good morning, everyone, and welcome to our second quarter 2018 conference call. My name is Andres Atala, Head of Investor Relations. And today, I'm joined by José Luis Ibaibarriaga, Bci's CFO; Daniel Kushner, CFO of City National Bank of Florida; and Sergio Lehmann, Corporate Chief Economist.
The figures in this presentation were prepared based on Bci's consolidated financial statement in accordance with the International Financial Reporting Standards methodology and the regulations of Chile's Superintendency of Banks and Financial Institutions.
Now I will leave you with our Corporate Chief Economist, Mr. Sergio Lehmann, who will take you through the main macroeconomic figures.
Thank you, Andres. The Chilean economy is showing better figures than previously estimated. GDP growth would be around 4.8% year-on-year in the first half of 2018, mainly due to a very dynamic second quarter.
Nonmining activity is growing strongly, and mining activity is very dynamic. Manufactured production has recovered after negative periods in recent years, while private consumption has gained traction. Economic confidence and business sentiments are positive, driving a large recovery of private investment, which is expected to grow around 4.5% this year.
The unemployment rate has moved upward to 7.2%, due a large increase in the labor force and modest growth of employment. Private formal employment is showing better figures but is still growing slowly, given the current positive economic cycle. Real wages in response are growing modestly.
Inflation increased in last quarter, and steering into the monetary policy, inflation tolerance, 2% to 2.4%. Energy and food prices have generated some inflationary pressures, and inflation expectations are around 3% in the medium and long term, the target of the monetary policy. The Central Bank of Chile has kept interest rates at 2.5%, but it could start a gradual normalization during the last quarter of 2018.
In the fiscal area, Moody's downgraded Chile's credit rating from AA3 to A1, equivalent to the ratings given by S&P, due to a systematic increase in fiscal debt in the last few years, which is, anyway, very low in comparison with any emerging economy and is 23% of GDP in gross terms. This change didn't cause any significant movement in the financial markets since it's mostly incorporated. The treasury office forecast that the fiscal deficit will be 1.7% of GDP in 2018, slightly better than previously estimated. It plans to move to a gradual -- or gradually to a structural deficit of 1% of GDP in 2022.
The foreign conditions are becoming less positive given rather global trade tensions, which has led to a drop -- a significant drop in the covered price and, as a consequence, the depreciation of the Chilean peso, close to 8% during the second quarter of 2018. Domestic conditions, however, are improving and so 2018 GDP growth, which is expected to be 3.8% year-on-year.
Now I will leave you with Mr. José Luis Ibaibarriaga.
Thank you, Sergio. Good morning, everyone. And again, I'm very pleased to be here with you again.
This quarter, we would like to highlight the following. First, the acquisition of 100% of TotalBank last June through City National Bank of Florida, which has enabled us to become the third-largest Florida-based bank. This acquisition is in line with our aim of having 30% of our assets offshore by 2020. After this merger, Bci attained first place in the Chilean banking industry in terms of total assets, and second in terms of loans.
Net income grew 9% this quarter with excellent results in our subsidiaries. We continue to make significant progress with our Digital Transformation plan. An example of such progress is the launch of our digital mortgage loan journey, for which we are the only bank in Chile to offer 100% digital mortgages loan approvals.
Our capital increase of CLP 430,000 million was approved during the Extraordinary Shareholders' Meeting held last July, which reaffirms our commitment to having strong capitalization ratios. We launched our new corporate identity with our ultimate goal to -- of becoming the bank of choice.
Please move to the next slide. As of June 2018, Bci had assets of over $60 billion and almost $44 billion in loans, with City National Bank of Florida accounting for 23%. Our loan market share is 17.15% including City National Bank of Florida, and 14.18% in the domestic market, growing 93 basis points in the market share compared to 2017.
During the first half of 2018, Bci had a strong bottom line of $319 million. This included a nonrecurring effect of Credicorp stock sale.
The return on average equity was 12.68% during this period. This return on average equity was hit by a negative onetime effect on December of last year of nearly $50 million due to our active position in deferred taxes based on the tax reform in the United States.
As we have mentioned in past conference calls, one of the most important priorities is to develop a top-of-line digital customer experience in order to compete, gain edge to achieve deeper customer relationships and higher revenue per client.
Regarding our Digital Transformation plan, this quarter, we continued to make significant improvements. As you may know, we're the first bank to offer online checking accounts. And now we are the first and only bank in Chile to offer 100% digital mortgages loan approval for new properties, and in alliance with real estate companies, with more than 400 mortgages approved fully digital for this product so far.
In terms of disruptive innovation, we have more than 350 (sic) [ 350,000 ] users of the person-to-person transfer and payment MACH application. That -- this app allows us to make secure payment in less than 15 seconds and more than 132,000 MACH prepaid credit cards. This is the first app 100% free, which solves important people's needs. On one hand, they can withdraw their cash when they want to, but also have access to the functionality of a prepaid card when using MACH online and abroad. It should be noted that 70% of the population in Chile do not have a credit card and the prepaid MACH card will facilitate their lives by giving them access to the world of electronic commerce that was, until now, unreachable.
In terms of customer journeys, 25% of the total checking account sales are fully digital. Regarding SMEs, 60% of the total operation are undertaken through digital channels.
We have also seen advances in our processes with our leaner and less-complicated process, which is reflected in lower operating costs. In our new digital mortgages loan were processes that were formally manual, like drafting the title deed, have been automated. This has had an impact by cutting process time. It has reduced the consistent data reflection rate and has lowered the time needed by lawyer in the mortgages loan sales process. In this scenario, employees' productivity has increased by 3x and errors have declined to minimal levels.
Please move to next slide. As part of our second pillar, we aim to drive sustainable growth while maintaining prudent risk. In line with this, our latest announcement of the acquisition of Walmart Financial Services is proceeding according to plan where the local antitrust regulation, the Fiscalía Nacional Económica, already made approval last April, and we estimate that we will receive the remaining approval from the local regulator during the second semester.
As you can see, operating revenues accounted for $489 million this quarter, which was an increase of 6.48% compared to the second quarter 2017. These results were positive affected by a better performance in the commercial areas.
In the domestic market, Bci has had 15.1% annual loan growth, which was well above the industry's 7.5% growth. This growth was mainly driven by commercial and mortgages loans.
In commercial loans, we grew at a rate of 16.6% year-over-year. The growth in this segment is a reflection of a better macroeconomic outlook and greater economic dynamism, as Sergio addressed early in his presentation. In this environment, Bci has been able to anticipate the competition due to a sectorial and regional focus plan.
In the retail segment, we are facing a more competitive environment for customer loans where we have grown slightly below the banking sector this year. If -- this is worthwhile mentioning that in the same quarter last year, we had a higher base growing at a 12% rate.
Regarding mortgages, we have had sustainable growth, attaining a rate of 15.6%. Our objective is to become the main bank for our clients for all products and services that we provide. Based on our experience, our customer with a mortgage at Bci has a return of 3x as much as one without the mortgages in a 12-month period. It should be noted that this greater organic growth, besides the inorganic growth resulting from the acquisition of TotalBank, has allowed us to be the largest bank in Chile in terms of assets.
As we mentioned in previous presentations, our product mix has impacted our net interest margin to the -- due to the growth of mortgages loans by $1.2 billion year-over-year. We estimate that after acquisition of Walmart Financial Services, our net interest margin could increase by around 30 basis points.
Despite this net interest margin as -- and as part of our strategy, we continue to place a special focus on our cross-selling plan. We want to highlight that Bci's fee income ratio continued to grow this quarter and was 24.15%, in line with the aforementioned strategy.
Let's continue with the provision expenses. Our provision expenses increased by 35.97% compared to the same quarter last year. This increase is mainly explained by greater provisions for commercial loans. This was specifically due to our forward customers in the segment who fell under insolvency and re-entrepreneurship loan. Despite this increase, if we compare the provision expenses in the first half of this year discounted from the additional provisions that we have made, the increase in the same period last year was only 4% and below the loan growth.
The nonperforming loans was 1.75% this quarter, an increase of 4 basis points year-over-year. Regarding consumers loans, we have been greater nonperforming loans in the last few months, reaching 1.86%.
And lastly, you can also see that the mortgages nonperforming loans ratio has maintained a positive trend following -- falling to 1.21% this quarter.
This quarter, operating expenses were $255 million, growing or roughly 2.26%, excluding City National Bank of Florida.
As we anticipated in previous quarters, you can see an increase in our efficiency ratio since 2016. This increase can be explained by our Digital Transformation program and the higher expenses related to the recent acquisition as well and in cybersecurity.
For this year, we aim to improve our efficiency between 100 to 200 basis points. We also aim to maintain our target of a 24% efficiency ratio by 2020 by implementing our efficiency plan, working on both sides of the equation.
Net income amounted to$125 million this quarter, which was a 4.03% increase compared to previous years. As usual, we want to highlight the contribution of our subsidiaries, which complement our customer value proposition, representing 41% of our consolidated net income.
On Slide #20, you can see the consolidated return on average equity. The return on average equity this quarter was 12.68%, below our 2017 results. This is mainly explained by 3 factors. Return on average equity of second quarter 2018 does not include the extraordinary profit of March 2017 of $54 billion due to the change in the accounting criteria related to Credicorp's shares. That increased our return on average equity to 16.21% in second quarter 2017.
Return on average equity of the second quarter 2018 considers a tax reform in the U.S., which led to a negative effect of $51.2 million in December 2017.
And operating expenses grew 11.6% year-over-year, mainly due to higher expenses related to technology as well as severance payment as part of the headcount management program. In addition, it should be noted that there have also been higher expenses related to the acquisition and cybersecurity.
As you can see in the chart, in June our Tier 1 ratio decreased to 9%, below our commitment of 10%. This is explained by our organic and inorganic growth in U.S. and by local commercial loans that were more dynamic than previous years due to the recovery of the local economic environment. Despite this temporary decrease, our estimation after the capital increase will be to close the year with a Tier 1 ratio over 10%.
Now I will leave you with Dan Kushner, CFO of City National Bank of Florida.
Thank you, once more, José Luis, for the opportunity to join you on this quarterly earnings call to review CNB's performance over the past quarter.
Good morning, everyone. My name is Dan Kushner. I've been City National Bank's CFO for the past 10 years. I'm accompanied today by José Marina, who joined our team from TotalBank; and Francisco Iborra, who's accompanied me on many of these calls. We are pleased to join José Luis, Andres, Sergio and the rest of the Bci team on this call.
As I've mentioned before, we are proud of the growth and transformation that has taken place at CNB over the last few years. We believe that we continue to build the premier South Florida franchise, and the most recent milestone in this growth occurred in June with the closing of the TotalBank transaction. CNB is uniquely positioned in the Florida market and will continue to grow and outperform peers in one of the most dynamic markets in the U.S.
We've achieved remarkable success since the acquisition by Bci in 2015, and that success has gained additional momentum now that we have closed the transaction to acquire TotalBank from Santander. On this call, we will focus on second quarter results. But before I cover the details of what has been another strong quarter for City National Bank, I'd like to comment on this most important of milestones for CNB.
The agreement to purchase TotalBank from Santander, which is our first acquisition, was signed on November 30. And after having received approval from U.S. and Chilean regulators, we closed the transaction less than 7 months later on June 15.
This transaction solidifies our position as a preeminent local bank focused on the South Florida market and demonstrates our ability to acquire and successfully integrate a bank that adds value to the City National Bank franchise.
It is important to emphasize that Bci and CNB collaborated to ensure that the appropriate resources were in place to successfully plan and execute the closing of the transaction and the subsequent systems integration. This meticulous approach ensured that our proven ability to generate loans and core deposits in our core markets was not disrupted during the acquisition process, leading to another strong quarter of organic business production.
Our strong and consistent organic growth since we partnered with Bci, supplemented by the recent TotalBank acquisition, positions City National Bank as the third-largest Florida-based bank. I will comment further on the transaction later in the presentation.
As I mentioned, Q2 was another strong quarter for us, and we continue to focus on the drivers that made us successful: our focus on regulatory excellence; maintaining strong asset quality; sustained growth and profitability; continued diversification along business lines and geography; exploring and creating new businesses; and the continued focus on human capital by attracting and retaining top talent. This has consistently produced strong results over the years. And City National Bank continues to represent a uniquely positioned growth platform.
Please turn to the next slide. Q2 was another strong quarter, and our performance across different business line maintains momentum, with the TotalBank acquisition supplementing our strong and proven organic growth capabilities. Allow me to point out some of the financial highlights of the most recent quarter.
As for the balance sheet, total assets grew by $5.2 billion or 27%, reaching $14.1 billion compared to June of '17. $2.6 billion of the growth is due to TotalBank acquisition. But in addition to this, our organic growth continues to come from our different lines of business.
Net loans and leases grew by $3.9 billion compared to June of 2017, with the TotalBank transaction accounting for $2.1 billion of the increase. For the quarter, loan growth was $2.6 billion, with organic growth contributing $0.5 billion of this growth.
Our business lines continuing to generate significant organic loan production. For the first half of the year, we generated over $1.5 billion of new loans, a 15% increase over the prior year.
The growth also continues to be diversified in nature with the CRE concentration ratio at 275% as of June 30, well below the 300% guideline in the United States.
The investment portfolio, consisting primarily of investment-grade government-backed securities, represents 16% of assets or $2.3 billion at June 30. As part of our balance sheet optimization exercise, we divested ourselves of the $500 million TotalBank investment portfolio after transaction closing, and we'll be rebuilding this portfolio during the third quarter in accordance with City National Bank's investment approach and guidelines. We will be reinvesting the proceeds from the sale of the TotalBank portfolio as the market permits.
Deposits increased by $4.2 billion or 63% compared to March 2017, reaching $10.9 billion. The TotalBank transaction accounted for $2 billion of that growth. So most of the growth over the past year has been generated organically. For the second quarter, deposit growth was $2.7 billion, with $0.7 billion generated organically. DDAs continue to account for a significant amount of the bank's deposit base at 31% of total deposits. Deposit growth exceeded loan growth both for the most recent quarter and on a year-over-year basis, and we will continue to make organic core deposit generation a focus of our daily efforts.
As for our earnings for Q2. Second quarter net interest income of $80 million represented a 33% increase versus the same period in 2017. Since the transaction closed on June 15, the net interest income only had a contribution of $3.4 million from TotalBank.
Net income after taxes for Q2 was $27 million, a 39% increase over 2017. Year-to-date, net income was $52 million, which increases to $59 million once normalized for the transaction costs.
As to our key metrics. Tier 1 capital is $1.4 billion. Total risk-based capital ratio is at 13.27%, and Tier 1 leverage ratio is 12.31%. Bci contributed $570 million of capital prior to the closing of the TotalBank transaction in order to facilitate the acquisition and sustain CNB's growth.
Our asset quality remains very strong. We continue to have the appropriate reserves to successfully navigate any unforeseen economic issues. We stringently abide by our prudent lending guidelines in order to ensure that our strong asset quality position is not compromised. NPL to total loans are at only 35 basis points. NPLs to capital is at only 2.66%. The allowance and loan mark to NPLs is at about 180%, and our CRE concentration ratio is at 275%.
Efficient growth is also one of our primary focuses. Our efficiency ratio is approximately 53.9%, which is inflated by about 5 percentage points due to $13.4 million of transaction-related expenses incurred during the first half of 2018.
We continue to perform well, as indicated by our profitability ratios. Return on average assets was 0.94%, and adjusted for transaction expenses would be 1.06%. Return on average equity was 8.65%, and would be 9.77% after adjusting for the transaction expenses.
Please turn to the next slide. The majority of our revenue, 75%, is still generated by our loan portfolio, in particular CRE loans, which comprise 40% of generated revenue. This is followed by commercial loans at 18%, and investment income and cash generating 15%.
Fee revenue continues to be an area of opportunity as we move forward and, in July, have launched our wealth management unit to continue looking for opportunities in the secondary loan market to generate fee income in the future.
Moving to the balance sheet. Loans comprise 71% of our assets as of June 30. Investments are currently at 16% of total assets. Intangible assets comprise about 2% of total assets and increased by over $200 million as a result of the TotalBank transaction.
On the liability side of the balance sheet, deposits are our primary source of funding at 77%, other borrowings at 10% and are primarily comprised of FHLB funding.
Turning to the composition of our credit portfolio. 70% of our loans have real estate collateral. Both commercial and industrial portion represents 20% of the portfolio, is substantially secured by other company assets. The real estate portion is well diversified, and the commercial real estate segment is further diversified by property type, with no 1 property type representing more than 21% of the commercial real estate segment. The collateral is diversified, as illustrated by the chart. We closely monitor our portfolio in order to ensure it remains properly diversified, and we adjust concentration limits based on market conditions.
Customer deposits constitute 80% of our funding liabilities, and DDAs continue to be the largest component, comprising 34% of customer deposits and 31% of all deposits, including the brokered deposits. Deposit generation continues to be a priority for us, and we are focused on initiatives to maintain deposit growth as one of the bank's strengths moving forward.
Please turn to the next slide. I'd like to point that the composition of our loan portfolio at June 30 remains similar to it was -- to what it was prior to the acquisition of TotalBank. CRE remains at 50% of the portfolio, which includes the owner-occupied portion. C&I decreased to 22% from 24%, and residential increased by 4% to 21% at June 30.
The makeup of our deposits also remained very similar compared to the first quarter. After closing the transaction, noninterest-bearing DDA accounts increased by 1% to 31% of total deposits, while money market accounts increased by 4% to 27%. Of note, brokered deposits declined from 12% to 9% of total deposits, while CDs also declined by 4% from 23% to 19%. The bottom line is that our deposit composition continues to be best in class, led by a solid and ample base of noninterest-bearing deposits.
Please turn to the next slide. City National Bank has grown its loan to deposit base consistently over the past 4 years. The organic loan to deposit growth rates for the first half of 2018 are 23% and 28%, respectively, which is in line with growth rates over the past 3 years. Additionally, deposit growth has exceeded loan growth year-to-date, which is consistent with our growth strategy. Given the strong organic growth in recent years and the recent acquisition of TotalBank that has led to both loans and deposits more than doubling over the past 3.5 years, we expect growth rates to subside while absolute growth in terms of dollars remains strong.
Tier 1 capital has grown as a result of the bank's strong earnings and was supplemented in 2018 with Bci's $570 million capital contribution to facilitate the TotalBank acquisition and ensure the bank has sufficient capital to meet its organic growth needs in the short and medium term.
The bank's net income trend is clear and consistent. The $52 million of net income in the first of 2018 is diversely impacted by the TotalBank transaction since the bank incurred $13.4 million of transaction-related expenses to date. Additionally, the TotalBank transaction was closed 2 weeks before the end of the quarter, so the acquisition is not yet accretive to the reported results. The bank's normalized net income increases to $59 million once the transaction expenses are adjusted.
Please turn to the next slide. Let me focus on the TotalBank transaction for a moment. As I mentioned earlier, we are successful -- we successfully closed the transaction on June 15. During the period between signing and closing, TotalBank deposits and loans remained in line with expectations. Acquired loans and deposits from TotalBank remained stable since the acquisition date, with no customer attrition of any substance. We've also been able to retain the key TotalBank employees that we identified as key for both the short term and medium term.
As you've seen from our financials, the impact of the acquisition gives us the necessary scale going forward to better compete in our marketplace. We are now executing our balance sheet optimization plan, having sold off the TotalBank investment portfolio and unwinding the acquired borrowings along with other optimization initiatives.
The detailed and meticulous planning that took place during the approval period led to the successful integration of TotalBank's systems during the first week of July. This is a testament to the commitment and focus of our teams on both sides, and we could not be prouder.
Going forward, we now need to focus on maintaining momentum in capturing the identified synergies from the transaction. We are reaching out to the majority of loan and deposit clients. In the coming months, we'll be closing 12 overlapping banking centers and will have 31 banking centers remaining.
Please turn to the next slide. Year-to-date, net income of $52 million increases to $59 million as adjusted for transaction expenses. As we capture synergies going forward, we expect the impact of the acquisition to have a significant positive effect on our earnings. On this slide, we have a summary of TotalBank transaction on the day it closed on June 15. You can see TotalBank's final balance sheet at close and the purchase transaction adjustments that were recorded in June following the transaction.
City National Bank had $66 million of intangible assets prior to the TotalBank transaction and generated another $202 million of intangibles as a result of the transaction, including over $150 million of goodwill that will be amortized over the next 10 years.
As previously mentioned, just about all of TotalBank securities and borrowings were sold and unwound after the acquisition as the bank executed its balance sheet optimization strategy.
Finally, Bci contributed $570 million of additional capital right before the TotalBank transaction to facilitate the $529 million transaction. City National Bank has sufficient capital to meet its organic growth needs in the short and medium term.
Please turn to the next slide. Finally, let us give you a summary of CNB's performance during the previous years. As you can see from these figures, we have consistently produced strong results over the last 5 years and expect to continue to do so.
Let me conclude by commenting on what we expect for the remainder of the year and our key priorities going forward. Continued focus on regulatory excellence, as this is a fundamental to our business and also asset quality. We will continue to invest in our risk management process.
Now we have closed the transaction, we'll focus on maximizing the value of the acquisition by optimizing synergies and focusing on client-retention initiatives.
Diversification along business and geographic lines will continue to be a key part of our strategy, including: continuing to generate new business opportunities, such as we did with leasing and wealth management; consolidating our position in Tampa and Orlando, among other things.
Our value proposition is well received by the overall marketplace as a big bank alternative, and CNB represents a uniquely positioned growth platform due to: our current market positioning as it relates to scale and our business model; our relationship-based value proposition; our ability to continue recruiting the best talent in the marketplace; and the strength and continued support of Bci.
The management team remains focused, and we are confident that CNB will continue to produce results for Bci as we expand our teams and our business.
In closing, CNB continues to be well positioned as we focus on building the iconic Florida banking institution. We thank all of you for your time today and look forward to the next time we join you on the next earnings call.
And now let's turn the call back over to the Bci team for final thoughts and a wrap up.
Thank you very much, Dan. Now we will continue with our third strategic priority. So please move to the next. This quarter, we continued to carry out programs and initiatives to enhance collaboration since we understand it is a key driver for the transformation we are undergoing. We have redefined collaboration: the new corporate competencies, which is used to select, develop, retain and recognize and train our employees.
According to a recent Merco talent survey, which identifies the 100 companies with the greatest capacity to retain and attract talent, Bci was formally recognized as being among the top 5 companies that attract and retain talent in Chile.
Finally, in line with our new brand strategy, we unveiled an updated logo and slogan while keeping the classic Bci colors. The slogan was updated from the previously known "Somos diferentes," or we are different, to "Seamos diferentes," let's be different, which represents our intention of involving customers and community in the construction of this transformation.
So let's move to some closing remarks. And before ending the presentation, I would like to state the main highlights of the second quarter of 2018.
In the domestic market, we managed to increase our total loan market share by 93 basis points.
We are very pleased with the purchase of 100% of TotalBank through City National Bank. With this acquisition, we managed to position ourselves among the 100 largest bank in the United States. This would not have been possible without our teams at City National Bank and TotalBank, who managed to develop a flawless and successful integration process.
On the other hand, our app MACH is transforming our payment methods in Chile through a 100% digital origination free account and with an only 3-minute enrolling process, which was created by Bci in order to promote financial inclusion.
At last, regarding Walmart Financial Services acquisition and the capital raise are according to our plans. We are estimated -- estimating that we will receive the approval from the acquisition during the second semester and that the capital raise should take place in the final quarter of this year.
Thank you very much for your -- for participating in this presentation, and if you have any questions, we will more than happy to answer them.
[Operator Instructions] Today's first question comes from Gabriel Nóbrega of Citi.
I'm just trying to understand the dynamics of your loan book. And moreover, how is demand looking out? And also, as we move forward, which segments of your loan book do you believe that could see the most growth? And I'll make a second question after that.
Sorry, Gabriel, I -- we are not hearing you very well. Can you repeat the question? And if you can do it slowly because you have a lot of noise.
Okay. So I'm just trying to understand what's your loan demand? And I want to see in what -- in which segments of your loan book do you believe that you could grow more?
I will repeat the question so I'm sure that I understood. You want to know what is the loan demand for this year and open by sector -- by segments?
Yes. Yes, exactly.
Okay. Okay, we are expecting to finish with a loan growth of 11%, which is open, basically, in -- around 14% in mortgages, around 11% in commercial and consumer for this year.
Okay. And if I can just do a follow-up. If you're expecting 11% for the end of the year, and we saw that in the quarter, your loan growth was actually around 23%, when do you expect this deceleration in your loan growth to begin to happen?
What I answer earlier is just the loan growth in Chile. I'm not taking in consideration the growth in the U.S. That is why maybe you have different figures. In the U.S., the figures have been growing, it's around 17% in this period of time. So that are the figures.
Okay. And if I can just make a second question. We saw that in the quarter, your NPL ratio over to the current individual loan book has redeteriorated around 15 bps, and I'm just trying to understand what could have caused this deterioration in commercial and also consumer loan books. And as we move forward, is there any points in any of these segments that may worry you?
Okay. In the case of Bci, I'm talking about Chile again, we have seen a greater default in the order of 18 basis points compared with the same period of previous years. And according to our analysis, we see that the portfolio is well managed, although there are certain difficulties in payment behavior in this portfolio. This is mainly explained by some customers was -- is explained by basically 3 customers. We are not -- in the commercial segment, we are not expecting any big deterioration in that segment according to the knowledge that we do have today. In the consumer side and in the mortgages side, we are not expecting any deterioration bigger than what we have today. We believe that we have built a really robust risk process, and so we are not expecting any major deterioration. Having said that, there's always an impact in the commercial area that you are not -- you cannot predict.
Okay, that's very clear. And just my final point, I just wanted some clarifying points and see if I understood it correctly from your presentation. You said that via your digital transformation, which you're putting into place, you could improve your efficiency by 100 to 200 bps this year. Is this correct?
Yes. We are really working in the efficiency ratio as you are aware. We are going through a major digital transformation, which has an impact. At the same time, we are heavily investing in cybersecurity. All of you know that, that is an really important issue for the industry, and we are pooling all the resources in there. And we have onetime effect on some expenses due to the fact that we are buying TotalBank this year. And if we obtain the approval from the regulator, we will have some expenses on the acquisition of City National Bank -- of Walmart. Having said that, we expect to improve our efficiency ratio this year in the range of 100 to 200 basis points.
Our next question is from Thiago Batista of Itaú BBA.
I have 2 questions. The first one on the profitability of the bank. When you look at the last quarter, the ROE of Bci was about 12%, 13%, with the Tier 1 ratio slightly below 10%. So with, let's say, a higher-than-average leverage. After all the capital increase and the conclusion of acquisitions, what is the level of profitability that you believe makes sense for Bci or the precise target? The second question is about if you can give us some color on the process of approval of Walmart Financial -- of acquisition of the Walmart Financial. I believe, yes, but it is fair to assume that this will really concluded this year? And what type of approval are you for waiting for?
Okay. So Thiago, for Walmart Financial Services, as we explained, we went through the first approval. And now we are in the process that the Superintendency approved the transactions. We do not have times, specifically, but we are expecting that we close -- or we obtain the approval during the second semester of this year. Regarding the profitability of the bank that -- I think that was your question -- your first question, we are expecting an important growth, both in Chile and in the U.S. for the next year. If you heard the explanation of Dan of how City National Bank has grown in the last couple of years, it's really remarkable. And at the same time, they have done it with a risk control that is excellent. Our expectation is that in the U.S., we are -- we will grow slightly at a lower rate than we have done. And in Chile, we expect to grow accordingly to the market for the -- for next year. And basically, it's more or less 2x the GDP growth plus inflation. So what are we -- and with that, and decreasing -- our expenses increase because they have inflation, we expect that our profitability will increase next year. And we are trying to increase our return on net equity of around -- between 1.5% to 2.5% of what are we going to close this year, in line with the strategic plan that we have for 2020 to arrive to a range between 16% to 18% of return on equity -- average equity for that period of time.
And this concludes our question-and-answer session. At this time, I'd like to turn the floor back to Mr. José Luis Ibaibarriaga for any closing remarks.
Thank you very much to all of you. As always, we are open to receive any specific questions. The Investor Relations team, we will address that as fast as we can. So thank you very much, and we'll be in touch.
Thank you. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.